Vendor woes force users to be wary

IT executives today are under increased pressure to don a new hat: that of financial analyst.

Companies are crumbling at dizzying speeds - 24 publicly traded telecom companies filed for bankruptcy in 2001, according to BankruptcyData.com. Now a slew of industry kingpins from IBM and Computer Associates to Qwest Communications and WorldCom have been hit with questions regarding their practices. Not to mention vendor accounting tactics that seem to obfuscate rather than enlighten. These issues leave IT executives struggling to figure out financial issues to which they are unaccustomed.

"I like to work with vendors who provide a quality product or services, who behave ethically, and are, of course, financially stable. But, with all the other hats I wear, I don't have much time to research companies," says James Martin, a technology coordinator at the University of Arkansas in Fayetteville.

Judging the legitimacy of accusations - and the significance of preliminary inquiries by the Securities and Exchange Commission (SEC) - is no easy feat.

Some cases seem relatively clear-cut: Enterasys Networks is revising its fourth-quarter 2001 books and conferring with the SEC after discovering (on its own) that two versions of a $4 million contract were drafted for a sale, one version for the auditors and one for everyone else.

Other accounting questions are not so easily explained. IBM came under scrutiny last month after revealing it used gains from the sale of its optical transceiver unit to offset its expenses, rather than accounting for the sale as a one-time event. But IBM denied any accounting irregularity, saying the sale was primarily of intellectual property.

With regulators and financial analysts divided over how to handle complicated financial issues, it's tough for IT executives to find clarity in the mess. Researching a company's financials can help customers avoid tying themselves to a sinking ship.

David Gallant, a network technician at Mass Mutual Financial Services in Springfield, Mass., says although there have been no SEC issues with Hewlett-Packard, he worries. As a large HP OpenView user, Gallant says support and maintenance are critical to keeping the network going, and a company distracted by lawsuits or financial worries may not be able to deliver. "I would think our hands would be tied. We're an HP shop. If something happened to them, I don't think we'd have a lot of choices," Gallant says.

Analysts agree that vendors' accounting issues can't be ignored. The danger is that any potential financial quagmire, even if unfounded, may divert vendor resources from the areas customers depend on to run their businesses, such as product support and research and development.

"If I were buying services from WorldCom or IBM [or other companies under investigation], I would be concerned, and I would be asking questions," says Lisa Stone, vice president and research director at Gartner. "I would be asking my service provider what's behind this activity and I would be watching my service delivery very carefully to make sure that it's not eroded by attention that's being diverted to the ongoing SEC activity."

Christopher Foster, analyst at Technology Business Research, agrees that companies should always look at vendor financials. "I definitely think it's a big concern because if they're not reporting things properly then there may be something to hide," he says. "If there are improprieties then the bankers are going to turn off the cash and once that happens it's a downward spiral."

To protect his company's investments, Keith Johnson extensively researches companies before any contract is signed. "We always look at the financial profile of the company, how long they've been in business and how the company handles its business," says the IT superintendent at the Halton District school board in Ontario.

Because he works for a public organization, Johnson says his decisions undergo review. "I have to answer to my trustees if they see something in the media. They approve my budget, so I make sure I do my homework upfront and ask the vendors the right questions," he says.

Johnson also says he sees more speculation than truth in the scandal headlines. "The business world is so spooked by Enron that the public confidence in vendors has been shattered. The issue is beyond individual companies," he says.

Everyone seems to be on the hot seat, and few are getting any benefit of the doubt, experts say.

The fall of Enron and the flurry of SEC headlines that followed have technology companies and their customers on edge, says Frank Dzubeck, president of Communications Network Architects in Washington, D.C. In this "era where scrutiny rules," he says, certain vendors, such as Cisco and Computer Associates, with a reputation for being aggressive - once considered a smart business strategy - now are being asked to show their work when calculating corporate financials.

While some companies might warrant the extra attention from the SEC, others could fall victim to the paranoia plaguing investors and stockholders.

That means users need to practice due diligence in evaluating vendors, but not overreact, says Mike Schiff, an analyst at Current Analysis. "You know the old adage 'Where there is smoke there is fire'? You've got to be real careful you don't take that too literally. I'd hate to see this turn into a witch hunt."

Dzubeck says a lot of the financial reporting in question now has been in practice for years. "It's a big deal now because companies are in poor financial health. In some cases they may have been doing this stuff all along, but more attention is being called to it because of Enron," he says.

"It's like the Yankees. Everyone knows they're the best team and they're going to win, but no one wants them to," he says. "Cisco, CA, IBM . . . they're in the same league. People just don't like them."