BT’s Problems Come From Global Services Unit

Q4 brings to an end an annus horribilis for BT Global Services, as it almost single-handedly dragged the BT Group into a year end loss of £134m and a Q4 loss of £1.3bn. With a vaguely menacing cri de coeur, Group CEO Ian Livingston designated the coming year, “a year for delivery”. And indeed so it must prove for Global Services in terms of cash flow and margin.

Cost, cash and risk are the watchwords by which BT GS will be run – words which beg the question, is the unit removing itself from large outsource bids in 2009? Reading between the lines, the unit is still in play for large deals. BT has invested in GS since 2005, and apparently achieved better customer service on its contracts. However, the two really big, bad deals that created the unit’s £1.3bn write-down for Q4 were signed before these internal changes got underway.

To get GS working, it is being restructured, streamlined and moved to a new operational model with its costs reduced. The three new business units are:

• UK Domestic – with revenues of £2.5bn and more than a thousand customers
• Multinational Corporations Business – with revenues of £3.5bn and around four hundred customers
• Global Services Enterprises – with revenues of £2.8bn, which comprises “altnet” business for corporates and the SME market, as well as stand-alone professional services

It has to be said that this is an unusual structure for an IT services provider as it does not consistently separate very large, complex deals from smaller deals, and nor does it separate private and public sector business. For example, it must be assumed that that the NHS contracts sit in UK Domestic alongside more than a thousand far smaller deals. Some of the smaller BT GS customers are to be transferred as accounts to BT Retail where the operational cost base is better geared to service the SME market for telecoms.

Of course there are aspects of smaller BT GS accounts (the IT bits) that might prove a delivery challenge for BT Retail but costs will undoubtedly come down, possibly in the longer term, along with revenue and customer numbers. In summary it is probably fair to say that BT is beginning to sort out its haphazard GS structure, but has not yet got into its stride and might benefit from seeking inspiration from pure IT services players.

On the bright side, BT GS continues to have a largely content customer base (can BT Retail make the same claim?), currently holding top spot in Telemark Services’ Customer Satisfaction Index. By year end the unit may well be delivering better returns for BT shareholders, but whether it will have as happy a customer base is less certain.

Katy Ring is a principal at The Bathwick Group