BT 2016 Annual Report Download - page 46

50 BT Group plc
Annual Report 2016
Major contracts
We have a number of complex and high-value national and
multinational customer contracts. The revenue and profitability
of these contracts are affected by things like: variation in cost;
achieving cost savings anticipated in contract pricing (both in
terms of scale and time); delays in delivering or achieving agreed
milestones owing to factors either in or out of our control; changes
in customers’ requirements, their budgets, strategies or businesses;
and our suppliers’ performance. Any of these factors could make
a contract less profitable or even loss-making.
The degree of risk varies with the scope and life of the contract
and is typically higher in the early stages. Some customer contracts
need investment in the early stages, which we then expect to
recover over the life of the contract.
Major contracts often involve implementing new systems and
communications networks, transforming legacy networks and
developing new technologies. Delays or missed milestones might
have an impact on us recovering these upfront costs. There is
substantial performance risk in some of these highly-complex
contracts.
Potential impact
If we don’t manage and meet our commitments under
these contracts – or if customers’ needs, budgets, strategies
or businesses change – then our expected future revenue,
profitability and cash generation may go down. Unexpectedly
high costs associated with delivering particular transformational
contracts could also hit profitability. Earnings may drop. Contracts
may even become loss-making through loss of revenue, changes
to customers’ businesses (due to, for example, mergers or
acquisitions), business failure or contract termination.
We’re still delivering lots of contracts with local authorities through
regional fibre deployment programmes including the Broadband
Delivery UK programme (BDUK). As with our other major contracts,
if we failed to deliver these contracts successfully it might lead to
reduced future revenue, profitability and cash generation.
As well as carrying a higher reputational risk, these contracts present
specific risks around deployment, delivery and our ability to recover
public funding. We also have an obligation to potentially either re-
invest or repay grant funding depending on lots of different factors
– including how many customers take up a new service.
Link to strategy and business model
• Deliver superior customer service Trend:
• Transform our costs
• Invest for growth
What’s changed over the last year?
Tough market conditions and competitive pressures continue in
many global regions, while in some we’re seeing bigger growth in
volume of business because of our previous investments. The risk
landscape changes accordingly, as does our focus of risk support
and review.
Of particular note for 2015/16 has been the way the BDUK
programme has helped UK broadband fibre implementation
mature, cutting the associated delivery risks. But these risks have
partly been replaced by new challenges from the next tranche of
smaller contracts (with their associated geographic and technical
risks). While our broadband contracts carry a different risk profile
to other major corporate contracts, we apply our governance and
reporting processes to make sure we identify risks and mitigation
activities and report them to management.
How we’re mitigating the risks
At both group and line of business-level we have governance,
risk management and reporting processes in place. Independent
audits and the checks and balances in individual contracts
provide assurance through an independent review programme.
To track progress, we monitor how we’re doing on these risks and
mitigation actions and report it to senior management. A separate,
dedicated team provides assurance for our BDUK projects.
The BT Academy helps support skills development and learning
initiatives. These help our Contract Management Profession to
better identify and manage risk. We also update new training
collateral whenever we learn something new. The scope and
availability of training options continues to improve through BT-
wide learning and development initiatives.
Supply chain
Our supply market is global, and there are often several links in
our supply chains. So guaranteeing the integrity and continuity of
those links is critical to our operations and therefore a big risk
to our business.
Global markets expose us to global risks, including climate change.
We weigh up and respond to any risks which crop up where geo-
political and market forces could affect our suppliers’ ability to
support us.
A global supply market means better sourcing opportunities, but
brings challenges if suppliers become more geographically and
culturally diverse from our customers.
Our dealings with suppliers – from the way we choose them, to
the contracts we sign, to how we pay them – follow our trading
and ethical policies. For more detail, see Our suppliers on page 39.
Potential impact
If something goes wrong in our supply chain the level of impact
can vary. But most of the time it means higher costs for us, and
potential damage to our customer service, investments and
ultimately our brand. We could lose a lot of money if a big or
important supplier went out of business, especially if that meant
us having to change a technology or system. And if we couldn’t
find an alternative supplier, it might compromise the commitments
we make to our customers. And that might lead to breach of
contract, lost revenue or penalties.
If any link in our supply chain falls foul of the law, or fails to meet
our ethical expectations, that could damage our reputation –
possibly leading to legal action and lost revenue.
Link to strategy and business model
• Deliver superior customer service Trend:
• Transform our costs
What’s changed over the last year?
We’ve spent time assessing several emerging geo-political threats
and the impact they’d have on our supply chain. They include
Greece’s position in the Eurozone and the UK’s position in the EU.