A Guide to Dealing with Vexed Vendors

Computer Associates and Nortel Networks have faced a torrent of bad news and management turnover. How do you protect yourself when your vendor is in turmoil? (Baseline)

Computer Associates ousted its chairman and chief executive over accounting concerns. Ditto for Nortel Networks, which booted its CEO and chief financial officer. What will you do if your vendor hits turbulence?

/zimages/3/74217.jpg Its a question worth pondering given Aprils executive high jinks, corporate housecleaning and financial restatements. Whether its Computer Associates horrid month culminating with the resignation of CEO Sanjay Kumar, or Nortels latest accounting problems and the termination of CEO Frank Dunn and CFO Douglas Beatty, it helps to have a plan just in case a vendor unravels.

While CA and Nortel pick up the pieces, the chaos atop their organizational charts serves as a cautionary tale to customers who commit to any one vendor for key business applications only to discover executives at their most important supplier are law- enforcement targets or cleaning out their desks.

When a supplier is in trouble, customer service, support and the product pipeline can suffer.

Here are some ways to protect yourself.

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Why have so many customers stuck with CA throughout years of scandal? The companys software products are solid, and with annual sales topping $3.2 billion, CAs customers need not fear that the company will disappear overnight.

Simply put, skew your supplier portfolio toward large, financially secure vendors.

"If this had been a smaller company, it would have been a much bigger deal," says Rick Takashima, manager of technical services and data center operations at the Toronto Star, one of Canadas largest daily newspapers and a CA customer.

"Weve had this happen before with other companies, and ended up holding orphan applications that we couldnt replace and had to learn to support ourselves," Takashima said. "Its not pretty."

When a vendor runs into trouble, chances are youll have to stay the course because you have too much money and time invested to simply jump ship. Takashima knows the drill.

Takashima says his company was on the hook for software from Harland Simon, a British developer of software used to run the printing presses. The Star invested heavily, but had to acquire the source code and support the application in-house.

"These are not small investments these customers are making," says Cameron Haight, an analyst at Gartner. "These projects are expensive, sometimes in the millions of dollars, and very complex. In the short term, these management changes alone arent going to be enough to get customers to move off the technology."

But suppliers arent taking chances. CAs new chairman, Lewis Ranieri, moved quickly to mollify its customers.

"Rest assured that in the months to come, CA will continue to focus on delivering software solutions closely tailored to your needs," he says in a letter to customers. "I know that CA will provide even more reliable and responsive service to customers."

For now, CAs reassurance is working. "I dont believe these management changes have any impact on the products," says Dave Curry, director of information services for the Seattle Mariners, another CA customer. "I know CA builds great software. But I dont know if Id buy their stock."

Haight says that instead of working through issues such as licensing terms, support for older software versions and pricing terms when a vendor overhauls its management team, negotiate those items before any commitment is made.

Analysts say customers should always negotiate escrow agreements with vendors to get the source code to develop and support an application. In Takashimas case, the programming set-aside gave him the skeleton to support his orphaned software.

Executives should also nail down specific support, licensing and pricing terms with vendors to ensure your needs will be contractually guaranteed. Meanwhile, monitor alternatives from competing vendors and track the financial health of your suppliers rivals.