Stolen Without A Gun

by Walter Pavlo Jr.

“My advice is go for the absolute biggest, most expensive car the dealer will let you drive off the lot,” Mann said. “That way, if you fall behind on the payments it's his problem, not yours.”

The goals, set by higher-ups to measure performance and determine compensation keep accounts that were ninety or more days late under seven percent of total receivables and bad debt write-offs under two percent.

National accounts were mostly major corporations like American Express, General Electric and IBM—blue chip companies that always paid their bills, millions of dollars a month, like clockwork. Carriers, on the other hand, were a crapshoot. The biggest ones were MCI's archrivals, AT&T and Sprint. They were forever fighting over who owed what to whom for using one another's networks.

The upstarts—the next rung down the food chain—were an even bigger pain. Most were just marketing outfits that resold MCI's long-distance capacity at retail—to small customers—and thus were responsible for hundreds of connect and disconnect orders a day.

Long-Distance Discount Service, known as LDDS, and from late 1994 as WorldCom, was among the biggest at $15 million a month in MCI billings. The concept for the company had been dreamed up in a Days Inn coffee shop in Hattiesburg, Mississippi by a former milk man and high school sports coach named Bernie Ebbers.

MCI's phenomenal revenue growth had propelled the price of its stock, pleasing Wall Street and enriching MCI executives who had been granted stock and options as part of their compensation. Some of the fastest growth was coming from resellers like Ebbers' acquisitive company, and that meant swelling commissions for the sales people. So the Carrier Sales department was encouraged to do whatever it took to land and hold on to these accounts.

The company made sure the reps knew how much they were appreciated by throwing lavish affairs for top producers where Tim Price, MCI Sales' chief, would address the troops like a sweaty televangelist stoking the fire in everyone's belly.

Sales, in turn, pulled out all the stops to get everyone and anyone they could on the network, porn touts, psychics, and other boiler-room operations included. Nobody knew the risks of easy credit better than McCumber, which, Pavlo realized, was why the carriers were being dumped on him, and why the easy money, the nationals, were being pulled.

“Taking over carriers sounds like a beast.” McCumber nodded. “Screw up and it could cost us our jobs Speaking of which, we need to do a RIF.” He flicked the ash from his cigarette into a potted plant. “What's a RIF?” “A Reduction In Force under Termination Code 40 of MCI's Human Resources Manual,” McCumber rattled off. “We fire people in the fall to save a few months' salary, then re-hire in January. It's an annual ritual around here so MCI can make its year-end earnings numbers and clear out the dead wood.”

Sales and Finance were natural adversaries, as they often are in business. At MCI, the competition was fierce. The carrier sales reps would sign up any customer with a heartbeat, and then pressure the Network Services people to flip the switch and give them a dial tone before the credit application even hit Finance's desks. It was the job of Finance to look for any good reason to turn down the business–everything from bank references to criminal background checks.

Once customers were on the network, it was Finance's role to dog them into paying their bills on time. The reps were always promising Finance that new customers were “good as gold,” and when they turned out to be slow paying instead, would try to badger Finance into giving them “just a little more time” to catch up.

Shaw and Pavlo worked for the same company but that was about all they had in common. She'd never met Rhoda, but MCI sales reps were skilled in the art of the schmooze, keeping track of spouses' and kids' names, birthdays, favorite wines, and so on. Pavlo was impressed.

The tickets Shaw was offering were for a golf tournament sponsored by MCI, the Heritage Golf Classic, held each spring at Hilton Head's Sea Pines Plantation. MCI was always throwing splashy events to show its “gratitude” to the reps and their customers. The Heritage was the most lavish of them all, a form of legal bribery known as the corporate promotional event.

Pavlo had heard tales of wretched excess at these events, rivaling the kinds of Romanesque parties thrown by big Wall Street outfits in the 1980s, events with nicknames like “The Predator's Ball,” where MCI's Bill McGowan had been a regular.

Mann was the late-payer with the boiler-room operation, one of Shaw's fastest-growing accounts. Pavlo had been monitoring Mann's account—TPC—and it was back up to a $300,000 tab, not quite big enough to cause panic. But if he did start squeezing Mann to get caught up, the guy might bolt and Shaw would be out her commissions. Big ones at that.

At MCI, growth was everything, and it was rewarded through the company's commission structure. For someone like Shaw, the rewards were greatest for doubling revenues with a client like Mann.

The Pavlos had recently stretched to buy a new home in St. Marlo, a gated community in Duluth, Georgia, an up-and-coming suburb of corporate strivers. Most of the rooms remained unfurnished.

But it did strike Pavlo as absurd to hear Mann, only a few years his senior, talking about his 6,000 square-foot home in Atlanta's exclusive Baldwin Farms neighborhood; his East Cobb Equestrian Center in Roswell, where his dozen jumpers and hunting horses lived better than most humans; or how the Manns always escaped the hot Georgian summers by retreating to their Toronto home and Canadian lake house.

At the end of 1992 and the beginning of 1993, the Atlanta finance unit had to juggle the day-to-day credit and collections work with the chaos of transferring the national accounts to other offices, and taking over the carrier accounts itself.

Pavlo and McCumber turned their attention to getting to know their three hundred or so carrier customers, most of which made their livings piggybacking on MCI's network and reselling long-distance service under their own names. Phone sex and other caller-pays 900 services made up the rest. Altogether, carriers did about $600 million in revenue in 1993, up an impressive 20 percent over the previous year.

Although these customers represented only five percent of MCI's $12 billion in annual sales, the margins were huge–some more than 50 percent, several times the profit on most corporate and consumer accounts. MCI was charging 900 customers as much as 28 cents a minute for service it could deliver for about a nickel.

the corporate chiefs, eyes always on the stock price and therefore on MCI's earnings reports, had a special fondness for carrier sales. No one wanted to...

For McCumber and Pavlo, one of the biggest challenges in keeping Carrier Finance healthy was dealing with MCI's patchwork accounting system. Telecom billing was a complex nightmare under the best circumstances, involving the aggregation of billions of transactions calculated down to the last second. MCI's meteoric growth rate forced it to allocate the bulk of its capital to building out its national fiber-optic network. Updating and upgrading its billing systems got short shrift. The accounting function was so dysfunctional that in 1988, when the company launched a t...

When Carrier Financial Services was set up in 1992, each of the thousands of daily orders to credit or debit carrier accounts was still being written out by hand as a “journal voucher” to verify the transaction.

Good God.

All told, it took MCI sixty days after month's end to get carrier bills out. Since clients were given another fifteen days to pay, that meant invoices were seventy-five days old before they were even due.

the Sales reps had locked many of the carriers into “ramp up” contracts, which penalized them if they didn't grow fast enough. That meant a long-distance reseller might not receive a $100,000 January bill until March, by which time it might be running a million dollars in monthly traffic. That often left McCumber and Pavlo no way of knowing how much the company's riskiest customers owed until it was too late.

Pricing was an even bigger mess. MCI rarely charged carriers its published prices, known as tariffs. They were merely a starting point for negotiations. Instead, Sales lured carriers with what MCI called Special Customer Arrangements, or SCAs.3 Each carrier contract spelled out incentives for the customer to increase minutes used, and penalties for falling short.

It fell to Finance to cobble together customized spreadsheets to track the plethora of payment plans. For McCumber's and Pavlo's people, that meant creating invoices one account at a time u...

The result was widespread errors. Carriers had learned to raise petty discrepancies as excuses for making partial payments on invoices, or none at all, and to hold on to MCI's cash.

The problems were so systemic that MCI printed an Arbitration Rule Book to send to carriers “to assist you in resolving your billing dispute with MCI.”

Then there was some carriers' bizarre practice of selling minutes for less than they were paying MCI for them. Pavlo called one such customer who was having a hard time keeping up with his payments and the owner told him, without laughing, that his company planned to make up the shortfall on volume.

When carrier clients ran up big debts, MCI frequently renegotiated their contracts to avoid tarnishing its own books with unsightly bad debt write-offs. The customers often walked away not only with lower long-distance rates going forward but forgiveness for past bills. Sometimes MCI forgave old debts altogether simply for a promise of future business.

Since MCI's long-distance rates were themselves moving targets, it was hard to tell whether a customer who was offering low-ball retail prices intended to rip off MCI outright or was merely gaming the system the company itself had created.

Even when customers played it straight, the manual nature of the work made it a major feat just to apply their payments correctly. The money they sent in rarely matched the invoices Pavlo's people had sent out. Single checks for millions of...

As the department closed its books each month, millions of dollars typically sat around without a proper home. Such vagabond payments, known as “unapplied cash,” rose...

Finance was supposed to collect millions more from clients listed as “unknown.”7 The mystery billing became necessary when MCI Sales reps, in their zeal to book new business, told Network Services to turn on circuits for customers without fling paperwork.

MCI had been writing off about two percent of carrier revenues a year as uncollectible. Now that they were all under one roof in Atlanta, with 1993 revenues of $600 million, that same ratio would represent $12 million in bad debt. To show the cop was on the beat, McCumber set a goal of reducing it to $11 million for the year.8

Pavlo began leaning on delinquent carriers as soon as the month ended, and even before MCI's bills had been generated. If Sales could hook up customers before they had a billing code, Finance could badger them before knowing how much they owed.

He pushed delinquents to commit to monthly payments or made them obtain letters of credit, property liens, or put up other collateral. He also turned his attention to the decrepit state of the department's accounting processes. Many of Carrier Finance's analysts were still using handheld calculators. Pavlo put together a $50,000 budget to buy computers and train the staff to use them.

Concourse, as the complex was called, had an artificial lake, a luxury athletic club, and an upscale hotel. Its twin, 34-story, green-glass towers dominated the area's skyline.

He now was responsible for collecting three quarters of a billion dollars a year from MCI's carrier customers. His department's running balance of accounts receivable, which was the amount its customers owed it at any given time, was averaging around $400 million.

In the eyes of the world MCI was valued for growth, period. By the end of 1993 it was reporting annual revenue of $14 billion, up from just $5 billion five years earlier. Amid fierce industry competition, however, its earnings had lagged, growing only 50 percent to $581 million.

With long distance prices tumbling 10 percent or more a year, the only way MCI could achieve that growth was by evolving into something different.

MCI tried to close the gap in 1990 by partnering with British Telecom to lay a highcapacity cable under the Atlantic. Then, in mid-1993, MCI announced it was cozying up to its UK partner by selling 20 percent of itself to British Telecom. The move brought in a sorely-needed $4.3 billion in cash for further network expansion.

Early in 1994, MCI announced an audacious $20 billion, six-year initiative called networkMCI, aimed at creating a single communications platform that would deliver computer signals, video and voice calls over a single network—the Internet.2 With so much cash flying out the door, and long-distance rates going ever lower, the pressure to cut costs was incessant.

Criminal elements, meanwhile, were starting to become a serious problem. They were discovering creative ways to exploit MCI's clumsy and inefficient accounting systems with “bust-out” scams. Sales had begun signing up companies who resold MCI's minutes on calling cards in inner-city neighborhoods at rates far below their invoiced costs. The resellers would unload as many of these calling cards as they could for cash. By the time MCI got around to asking for its money, many of these customers were into it for millions of dollars. Then, instead of trying to negotiate down their bills, the resellers would bust out by folding up shop and leaving bankrupt shells with no assets to collect.

Many otherwise legitimate 900 customers, meanwhile, had decided to cope with increasing competition and falling rates by “cramming,” or padding, bills with bogus minutes. Some billed twice for the same call. Others foisted charges on people who'd never used their service.

The Bells, rather than try to sort it all out, adopted a policy of reversing 900 charges for anyone who asked and then deducting them from their payments to the 900 call vendors. Word soon spread through the kinky caller community that full credits were available to those who complained legitimately or otherwise. Within a few months, charge-backs jumped from one or two percent of the typical 900-call company's revenue to half or more.

On the receiving end of all this mayhem, McCumber and Pavlo watched with dismay as con artists began to run wild and clients collapsed. Only a miracle could keep Carrier Finance from blowing past its $12 million bad debt ceiling for 1994.

By the time most resellers found their way onto McCumber's priority list, they were so deep into MCI that the only sensible thing to do was pull the plug on them. Unfortunately, the harsh reality of telecom was that once the product, a phone call, was sold there was no way to repossess it.