BT takes drastic action to protect margins

When the news broke in November 2008 that telecoms and IT services giant BT was to lay off 10,000 workers around the world, it seemed to confirm the worst fear about the state of the UK economy: that the collapse of the financial services industry would lead inevitably to mass unemployment.

But on closer inspection, the financial woes that have led BT to effect this cull have nothing to do with the credit crunch.

BT’s report for its second financial quarter ending 30 September, in which it announced the job cuts, showed group revenues were up 4% to £5.3 billion, confirming solid, if unspectacular, growth. Profits were down, but only by 1% to £744 million.

Three out of four of BT’s business units, BT Retail, BT Wholesale and its network access division OpenReach, met or exceeded targets. Even in BT Global Services, the IT services division whose underwhelming performance caused the profit dip, customer spending was up.

“The issue with Global Services is not revenue; revenue grew 15%,” said BT CEO Ian Livingston, pointing instead to the division’s 5.5% profit margin, way short of its 15% target. “That profit performance is not acceptable, and is not due to recessionary factors. It’s about us, it’s about operational delivery,” he said.

As Ovum analyst David Molony remarks, it almost seems BT wanted the job cuts to sound as drastic as possible, perhaps as a sop to investors.

“About 6,000 of the job cuts are with suppliers, not BT staff, and half of the remaining 4,000 have already gone,” he explains. “They could have said that 2,000 BT jobs would go before the end of the year and it would not have attracted as much attention.”

For the financial markets, Molony says, the real story was the Global Services margin drop. “Having set this 15% target, they had been struggling to keep the margin at around 10%. But when they came out with the 5.5% figure, it really shocked the market.”

In fact, 5.5% net margin is not atypical among European IT services companies. Just ask Cap Gemini and Atos Origin who chalked that up for their half-year to 30 June.When it comes to high margins, only the Indian IT services companies are in the 15% and upwards range.

So what is BT going to do to push margins in that direction? Its first move had been to replace Global Services CEO Francois Barrault with Hanif Lalani, group finance director (the position Livingstonhimself previously held).

Molony believes Lalani is the right man for the job. “With all due respect to Barrault, he was a salesman. And he did well to get some big name customers such as Procter & Gamble,” he explains.

But Lalani is already proving his ability to drive down the cost of customer engagements. “Lalani is a very driven and determined guy, and he is putting in 18-hour days sorting out the contracts,” Molony says.

Under Lalani’s leadership, BT Global Services is now pouring through all of its customer contracts, ironing out inefficiencies. According to Molony, this period of stocktaking is also a good time for BT Global Services customers to make sure they are getting value for money.

Nobody is expecting a quick turnaround at BT Global Services, least of all Livingston. The division’s profit margin “probably will get worse before it gets better”, the BT CEO told investment analysts in a conference call.

But he is keen to let everybody know that BT is serious about cutting costs – even if that adds to the atmosphere of economic dread.

Pete Swabey

Pete Swabey

Pete was Editor of Information Age and head of technology research for Vitesse Media (now Bonhill Group plc) from 2005 to 2013, before moving on to be Senior Editor and then Editorial Director at The...

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