BT 2010 Annual Report Download - page 46

REVIEW OF THE YEAR FINANCIAL REVIEW
44 BT GROUP PLC ANNUAL REPORT & FORM 20-F
Transforming our cost base
We have continued our drive to reduce costs across our business and
deliver absolute levels of cost reduction. During 2010, our cost
transformation activities have delivered a reduction of £1,752m (9%)
in total underlying capital expenditure and operating costs.
aUnderlying costs exclude specific items, leaver costs, depreciation and amortisation, foreign
exchange movements and acquisitions.
bComprises payments to telecommunications operators.
Operating costs
Operating costs decreased by 11% in 2010 to £19,116m (2009: 15%
increase). Adjusted operating costs decreased by 4% in 2010 to
£18,689m compared with an increase of 7% in 2009. Adjusted
operating costs in 2010 include the impact of unfavourable foreign
exchange rate movements of £342m and the impact of acquisitions
of £32m. Excluding these, underlying adjusted operating costs
reduced by 6% compared with 2009. The reduction reflects the
successful delivery of the group’s cost saving initiatives by all lines
of business. The group has reduced total labour resource by around
20,000 in 2010, mostly in the area of indirect labour, including
agency and contractors.
The components of the group’s operating costs are shown in the
table below:
2010 2009a2008a
£m £m £m
Staff costs before leaver costs 4,862 5,412 5,231
Leaver costs 142 204 127
Staff costs 5,004 5,616 5,358
Own work capitalised (575) (673) (724)
Net staff costs 4,429 4,943 4,634
Depreciation 2,304 2,249 2,410
Amortisation 735 641 479
Payments to
telecommunications
operators 4,083 4,266 4,237
Other operating costs 7,138 7,336 6,408
Adjusted operating costs 18,689 19,435 18,168
Specific items 427 395 529
Contract and financial
review charges – 1,598 –
Operating costs 19,116 21,428 18,697
aRestated. See page 94.
Movement in total underlying costsa
(£m)
10,000
11,000
12,000
13,000
14,000
15,000
16,000
17,000
18,000
19,000
20,000
2009
Actual Direct revenue related costsbOther operating
costs
Capital
expenditure 2010 underlying
9%
862
364
319
19,429
571 18,041
2,517
15,160
3,088
16,341 Foreign
exchange
and
acquisitions
Capital
expenditure
Operating
costs
Staff costs
2010 2009a2008a
£m £m £m
Staff costs
Wages and salaries 4,182 4,499 4,242
Social security costs 447 432 417
Pensions costs 304 544 626
Share-based payments 71 141 73
5,004 5,616 5,358
aRestated. See page 94.
Wages and salaries decreased by 7% to £4,182m (2009: 6%
increase), largely due to the impact of labour resource reductions
and lower pay inflation. Leaver costs, included within wages and
salaries, were £142m (2009: £204m, 2008: £127m).
The pension charge for 2010 was £304m, compared with £544m
in 2009 and £626m in 2008. The decrease in the pension cost in
2010 reflects the impact of the changes to benefit accruals from
1 April 2009 following the review of UK pension arrangements
which are discussed in more detail on page 19. This is partially
offset by an increase in social security costs as BTPS ceased to
contract out of the Second State Pension. We expect the BTPS
operating charge for the BTPS in 2011 to increase by about £100m
as a result of the lower discount rate and higher inflation
assumptions.
Share-based payment costs decreased by 50% to £71m,
compared with an increase of 93% in 2009, reflecting the
significant number of UK Sharesave cancellations which took place
in 2009.
Depreciation and amortisation
Depreciation and amortisation increased by 5% to £3,039m in
2010 reflecting the impact of higher value and shorter-lived
software assets brought into use during the past two years.
Depreciation and amortisation was broadly flat in 2009 compared
with 2008.
Payments to telecommunications operators
Payments to telecommunications operators reduced by 4% to
£4,083m, compared with an increase of 1% in 2009. The reduction
in 2010 reflects the impact of mobile termination rate reductions
and lower volumes, which were partially offset by unfavourable
foreign exchange movements. The increase of 1% in 2009 was
primarily due to foreign exchange movements.
Other operating costs
Other operating costs principally comprises indirect labour,
property, energy, network, maintenance and IT costs, consultancy
and other general overheads. Other operating costs decreased by
3% to £7,138m in 2010, largely reflecting the impact of reductions
in third party labour and discretionary expenditure. In 2009 other
operating costs increased by 14% largely due to unfavourable
foreign exchange movements, the impact of acquisitions and the
slow delivery of cost efficiency savings in BT Global Services.