Channel Partners

October 1, 2002

6 Min Read
TAG: Understanding the Risks & Responses to Vendor Bankruptcy

Posted: 10/2002

the Risks & Responses to Vendor Bankruptcy

By Greg Praske

BANKRUPTCIES OF TELECOM PROVIDERS over the past two years have affected all
channel partners. Some have suffered interruptions in their commissions. Some
have had their contracts rejected. Some have pursued new sales opportunities
among the bankrupt company’s customer base (A silver lining in a dark cloud

Bankruptcies have become a fact of
life in telecom. With the WorldCom Chapter 11 filing, we now are painfully aware
that financial triage isn’t limited to the small startups. You can’t take your
eye off any provider. Even a behemoth ILEC like Qwest Communications
International Inc. is not above reproach. Further, agents should not assume that
they’re protected from the fallout from bankruptcy because of the carriers they
are representing; they have to consider the possibility of bankruptcy with ALL
of their providers. For instance, if WorldCom puts together a sound
reorganization plan and emerges from Chapter 11 without its previously huge debt
load, it’s freed financial status may put pressure on AT&T Corp. and Sprint
Corp., possibly forcing them to seek ways to eliminate their own debt.

So, what should you, the agent, be
doing to protect your business? Let’s first look at your exposure in the event
of a bankruptcy filing:

* Lost customers.
Bankruptcies generate a lot of attention. Lost jobs create suffering, and
suffering generates headlines. When fear grips a provider’s employees, customer
service suffers. When customer service suffers, your customers are more likely
to leave. Your customer naturally wants to protect their service just as you
want to protect their business. But, does your agency contract allow you to help
your customer? Does the customer’s contract allow them to make a change without
penalty? What will you say when the customer asks why you recommended this

* Accrued commissions. When
your provider files, its management submits a plan to the bankruptcy court in
which they categorize your commissions. Some classify agent commissions the same
as employee sales commissions and thus should be paid without interruption.
Other providers, however, classify commissions as a debt that then gets caught
up in the bankruptcy process. If your earned (but unpaid) commissions are
considered general debt, you will have to get in line with the other general
creditors seeking payment. Most likely you will not receive those commissions;
at best, you’ll get pennies on the dollars.

* Post-petition commissions.
Your provider has made a Chapter 11 filing but plans to emerge from bankruptcy.
You may or may not immediately resume earning commissions. This may depend, in
part, on whether the provider has debtor-in-possession financing to enable it to
pay those commissions.

* Rejection of your contract.
Bankruptcy law allows the provider (or the purchaser of your provider) to reject
or accept any contracts including your agency contract. In some cases, agents
are singled out for contract cancellation based on waning production, which all
too often is a result of declining service delivery prior to the company’s
bankruptcy. In other cases, the purchaser doesn’t value the indirect channel and
rejects your contract along with most or all others to maximize its cash flow.

* Acceptance of your customers’
contracts. Even if your contract is rejected, the provider usually will keep
the customer contracts including their termination liabilities. The net result
is that you are effectively precluded from earning commission on that account.
The decision, then, is whether you continue to service the account when you are
not being compensated for maintaining it.

* Preference claims. It’s not
unusual for a creditors’ committee to assert a preference claim in an attempt to
recoup any payments made within a 90-day period prior to a bankruptcy filing.
Channel partners have a valid defense that commission payments are made within
the ordinary course of business and, therefore, are not a preferential transfer.
Defending against a preference claim is yet another expense agents may have to

Channel partners must consider these
issues in determining whether to work with a particular provider. To ignore them
is to risk losing your business. That said, what could you do to mitigate your

* Take care of your customer.
In the end, that’s what matters. If you’re in the business for the long haul,
the key to your success is the relationship with the customers. The providers
may legally own the customer contract. But, if you’re looking out for the
interests of your customer, especially in difficult times, then you’ll own the
relationship with the customer — for a long time.

* Stay abreast of financial
health of your providers. Are you tracking developments daily? If you don’t
read financials, then enlist the help of someone who does.

* Open a dialogue. Discuss your
concerns with other channel partners, providers, subagents and master agents. As
an industry, we need to devise strategies to mitigate our exposure. Ask your
providers and prospective providers what they can offer to protect your
business. If you’re a subagent, ask your master agent what steps they’ve taken
to protect it business. Factor these answers into your decisions on selecting

* Understand that you’re
extending credit to your providers. If a provider takes a position that your
commissions are earned at the time the customer uses the service, you may be
extending 90 days credit or more. Is it appropriate that you extend credit
without any security? Upfront bonuses, deposit accounts, escrows and prepayments
can provide you security. Does your contract specify when commissions are
"earned" and "due?" Consult an experienced telecom attorney
and consider reworking your contracts.

* Re-evaluate customer service
agreements. There was a time when providers were the more stable, secure
party to the agreement. Now, many of us channel partners are the stable
organizations in our communities. More than ever, we own the relationship with
the customer. That relationship needs to be respected and protected — legally.
Thus, if the agent contract is breached, then that should breach the contract of
the customers we bring to the provider.

The economic downturn represents a
double-edged sword for channel partners. On one hand, downsized vendors need
indirect sales organizations to maintain momentum, which has opened up
ever-growing opportunities to represent products of all makes and models with
better terms than ever before. On the other, telecom bankruptcies are likely to
continue. While the number of filings is subsiding, the magnitude appears to be
growing. It is critical for partners to take advantage of their newfound
influence in negotiating protection for their businesses.

Greg Praske is the CEO of
Association Resource Group (ARG), a Washington D.C.-based master agency for
voice, data and conferencing services. In its 11 years in the business, ARG has
endured three vendor bankruptcies while retaining more than 99 percent of its
customer base. Praske is a CPA by training with 15 years in association
management before co-founding ARG in 1991 with Bill Power.



Resource Group


Communications International Inc.




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