BT 2009 Annual Report Download - page 12

ADDITIONAL INFORMATION FINANCIAL STATEMENTS REPORT OF THE DIRECTORS BUSINESS AND FINANCIAL REVIEWS OVERVIEW
BUSINESS AND FINANCIAL REVIEWS BUSINESS REVIEW
10 BT GROUP PLC ANNUAL REPORT & FORM 20-F
How we are structured
We have four customer-facing lines of business: BT Global Services,
BT Retail, BT Wholesale and Openreach. These are supported by
two internal functional units: BT Design and BT Operate.
BT Retail, BT Wholesale and Openreach operate mainly in the UK,
where we are the largest communications services provider to the
residential and business markets. BT Global Services operates in the
UK and globally.
BT is one of Europe’s largest and most successful
communications wholesalers to other communications providers
(CPs). In the UK we support CPs through BT Wholesale and
Openreach, and internationally through Global Telecoms Markets,
an operating unit of BT Global Services.
We have integrated our networks, IT and testing facilities – which
are managed by BT Design and BT Operate. Specifically, BT Design
deploys platforms, IT systems and processes that support our
products and services, while BT Operate is responsible for making
sure they run smoothly. Neither generates external revenue.
Line of business financial performance
The financial performance of each of the lines of business for 2009,
2008 and 2007 is discussed in this Business review. We measure
the financial performance of BT Retail, BT Wholesale and
Openreach based on EBITDA and operating profit before specific
items. For 2009, we measure the results of BT Global Services on an
‘adjusted’ basis, being before the impact of contract and financial
review charges and specific items. For further discussion of these
items see pages 33 and 47 to 48. A reconciliation of adjusted
EBITDA to group operating profit (loss) by line of business, and for
the group, is provided in the table at the foot of pages 34 to 35.
BT Global Services
Business overview
BT Global Services is a provider of networked IT products, services
and solutions. We aim to be the partner of choice for large
enterprise and government customers in the UK and globally.
We have created a powerful combination of networked IT and
professional services capabilities together with strong customer
partnerships, investing and innovating together to build long-term
value.
The Gartner Group’s research organisation recognises BT as a
global leader in Gartner’s Magic Quadrant for Network Service
Providers, and industry analyst Telemark Services has given BT its
platinum award, reflecting customer satisfaction with our delivery of
global data virtual private network services, regarded as best in class.
Customer service improvements in 2009 included a reduction of
more than 40% in the average time to provide international MPLS
services and a 6% improvement in the delivery of international
repairs within the target time.
We have more than 3,400 points of presence in more than 170
countries. We are the largest supplier of networked IT services to -
UK national and local government.
Despite these strengths, during 2009 the level of profitability in
BT Global Services fell significantly.
As explained in the Principal risks and uncertainties section in
this year’s and previous years’ annual reports, our pricing, cost and
profitability estimates for major contracts generally include long-
term cost savings that we expect to make over the life of the
contract. In 2009, a failure to achieve these anticipated savings
made a number of these contracts less profitable or even loss
making, adversely impacting our profits.
Actions taken
The Board changed the senior management team within BT Global
Services, with a new Chief Executive for the division appointed in
October 2008. The new team’s brief was to address the cost base,
to bring greater focus to the profitability of new contract wins and
to reduce shortfalls in delivery performance on existing contracts.
The new management team undertook an extensive review of BT
Global Services’ financial position, contracts and operations. The
financial review covered the financial performance of BT Global
Services and its balance sheet position. The contract reviews
covered the largest and most complex contracts and were
conducted jointly with external advisors. Having completed the
contract and financial reviews, a charge of £1.6bn was recognised,
which includes £1.2bn relating to the two major contracts that are
the subject of ongoing commercial negotiations. These charges
reflect a more cautious view of the recognition of future cost
efficiencies and other changes in underlying assumptions and
estimates, particularly in the light of the current economic outlook.
£1.3bn of the total charge relates to contract costs which had been
previously capitalised on the balance sheet.
BT Global Services’ management team is implementing a number
of process improvements. Some of these were in place by the end
of 2009, the rest are being implemented in 2010. These include
undertaking more regular contract reviews to assess commercial
risks and opportunities as part of a strengthened contract
governance process that combines operational, financial and risk
reporting. Additional scrutiny of contracts and cost transformation
plans have been put in place and will continue to be conducted on
a rigorous and regular basis involving strong independent oversight
of assumptions and estimates for new and existing contracts. We
are also placing greater focus on profitable sectors, setting
stringent win criteria and enhancing due diligence around our
ability and readiness to meet our delivery requirements on all major
contracts.
Immediate action has also been taken to address the cost base,
with particular focus on external procurement and total labour
resource. We reviewed rates across our contractor base, and
successfully reduced these rates by up to 35%. We have addressed
spend of £450m with suppliers across seven categories of
expenditure, including our contractor base, and have successfully
Q1 Q2 Q3
2007 2008 2009
Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
0
500
1,000
1,500
2,000
2,500
3,000
3,500
BT Global Services order intake (£m)
BUSINESS AND FINANCIAL REVIEWS