Friday, 23 January 2009

BT Global Services - Part 2

(By Richard Holway) I thought I’d follow up on my BT Global Services (BTGS) article yesterday. See - BT warns - shares slide.

After ‘conversations’, can I make it clear that only one of the two further contracts ‘under review’, with possible ‘hundreds of millions’ of further writedowns, is an NHS contract – clearly BT’s LSP contract.

I also made some points about BT’s ability both to bid correctly and execute successfully on some of the contracts in question which took them way outside their ‘comfort zone’. Everyone seems to agree that this is at the very heart of the current problem. If BTGS had stuck to its knitting of core network management, whether in the UK or overseas, the situation could have been avoided.

The Times leader today says “It appears that for the past three to four years, the global services arm underpriced contracts, overestimated the cost savings it could make and then failed to deliver them”. I think that’s pretty much exactly what happened.

BTGS current problem throws into stark focus one that has faced others. You bid for and win a very large contract where the costs to complete it are ‘unknown’ (particulary so if you have little previous experience of contracts of that size and complexity), the timescales are ‘flexible’ and even the final price could vary as customers add more functionality. In the early days it is easy to take profits based on cost savings to be achieved later on or to base the contract’s final revenues on assumed extensions. Even to assume new contracts with other customers will be won to ‘share’ the costs.

It is, as some of the media suggests today, quite possible for senior management to get awarded big bonuses based on ‘assumed’ rather than ‘actual’ performance. Well bankers have been doing this for years!

Any Hotviews (or even Hotnews!) reader will know that I have been questioning BTGS alleged performance for many years. To suggest the problem has arisen in the last 18 months and is all associated with Francois Barroult and his ‘too bullish’ expansion is a bit wide of the mark! The problems go much deeper and further back than that.

My views on BTGS have been the same for most of this decade. BT must decide what it is for.

If it is going to play in the top ranks of global IT services (which it has pretended that it can do) then it needed a huge injection of management talent and global scale. To achieve this, my view was that it should have done a ‘reverse takeover’ of a big global player like EDS, CSC or Capgemini. When BT’s stock was riding high, it could have done that. It can’t now.

It’s only sensible option now is to decide on the only other option - that it is going to concentrate on network management. In which case it should work hard and rapidly to divest itself of its activities – and associated liabilities – that relate to its previous IT services ambitions.

I hope that the current ‘coming clean’ with the associated cleansing of the BTGS balance sheet is a precursor to that.

Extra reading:
Can I suggest readers take a look at:

The Times – BT takes £340m writedown as it admits division overstated profits

The Financial Times – BT issues further profits warning and Problems at Global services blamed on failure to cut costs.

Both papers comment further in their main editorials. See Will a call go out for a bonus recall? In The Times and Lex in the FT.

They will not make easy reading for any senior management associated with BTGS in the last 5+ years.

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