Worldcom Case Study

The Worldcom failure was a shock to many, but reality is, there were many "warning signs" that indicated trouble as early as 1999. Critically analyzing and leveraging these signs may have helped investors, board members, and executives prevent the fall of this major telecommunications company.

Worldcom leaders bred a culture of cutting corners to meet business needs. Customers, employees, and shareholders were all pawns in the game of making money. Worldcom was an "ethically challenged company."9 A mentality of cashing in and a Machiavellian approach to meeting numbers permeated Worldcom from executive management to customer service representatives. So, how can you spot the next Worldcom? Look below for major clues.

1.Management promoted a culture fixated on "the numbers"

◦During analyst meetings, Ebbers would only discuss the share price. He had been known to show a graph of an increasing share price of WorldCom and ask: "Any questions?"10

◦Going back as far as two years ago, employees were told to capitalize obvious expenses in order to meet aggressive targets. For example, one employee was told to capitalize plane tickets when visiting company sites.11

◦In March 2001, revenue numbers weren't at a satisfactory level, therefore Sullivan, in hopes to improve current profit margins, provided David Myers, Worldcom Controller, with "alternative financial numbers along with an implicit command to substitute them for the company's actual financial data."12

◦Worldcom allocated significantly higher reserves for bad debt that would ultimately be used to boost operating income to meet income targets for that period.13

◦Since revenues were booked when the bill was issued as opposed to when the payment was received, Worldcom habitually overcharged and added undesired services to meet numbers. In total, billing errors had the potential of adding a significant amount to Worldcom's bottom line. For example, at one point, Infolink "owed" Worldcom $300,000 in billing errors.14

2.Customers, employees, and shareholders were an afterthought

◦Customer dissatisfaction was at an all time low. Several of Worldcom's business units were ranked among PlanetFeedBack's15 top ten worst companies in terms of customer service and billing errors.16 Worldcom received a significantly lower than industry average rating from customers. Worldcom ranked number one in "slamming complaints."17 The FCC found that since 1997, Worldcom has surpassed both AT&T and Sprint in terms of complaints.18 Customer service representative were told to "do whatever you had to do in order to get the sale" which included withholding information about monthly fees and minimums.19 Worldcom, who had fewer customers than other major carriers,