BT battles on

Faced with a traditional business in decline, BT's CEO Ben Verwaayen (opposite) has fought to bring purpose to the floundering giant. But is it just running to stand still? Andrew Saunders reports on the company's unending struggle.

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Last Updated: 31 Aug 2010

This year marks the 20th anniversary of the privatisation of BT. The first of many throughout the 1980s, this pioneering sell-off created one of the country's biggest Plcs and marked the start of a new era of British capitalism. But there'll be no party and the anniversary flags aren't flying from the top of Telecom Tower, because there hasn't been much to celebrate recently.

Three years ago, the company was a rudderless dinosaur whose core business - telephone calls made over fixed rather than mobile lines - was in long-term decline and whose market share was being squeezed by the competition.

It was also under the regulator's cosh for stalling on the roll-out of broadband internet access. Worst of all were its record-breaking debts of £30 billion, resulting from a series of spectacularly bad deals overseas and the eye-wateringly expensive 3G mobile licence auctions (which netted some EUR130 billion for delighted finance ministers all over Europe).

BT shares that had been changing hands for more than £10 each a couple of years earlier were now being dumped at less than a third of that, and they had further to drop. The City demanded action and loss-making international assets were disposed of, including £4.8 billion sell-offs in Japan and Spain.

The $10 billion Concert flop - a disastrous joint venture with AT&T, formed in 1998 - was abruptly brought to a close, 6,000 jobs were axed and even profitable divisions such as the directories business Yell were hived off. A further £2.5 billion was raised through the sale and leaseback of some of BT's vast property portfolio. But it wasn't enough, and £6 billion more had to be raised through a rights issue.

The price of shareholder approval for the rights issue was the demerger of BT's mobile phone business, which became mm02. Recovery prospects for a floundering giant deprived of its growing mobile business looked bleak and in the embattled boardroom, heads rolled. First out was chairman Sir Iain (now Lord) Vallance in May 2001, followed shortly after by chief executive Sir Peter Bonfield in January 2002. So when the present chief exec - Dutchman Ben Verwaayen, then working in the US - was recruited by Vallance's successor Sir Christopher Bland, circumstances couldn't have looked much blacker.

But the way the former vice-president of Lucent Technologies tells it, it was a golden opportunity. 'BT had been the industry benchmark for a long time. It's hard to believe that now, but it's true. It was smart, international and fast - better than everyone else. Then somewhere along the line that stopped, and it went into geo-political, imperialistic stuff. So when BT asked me to come and help, it was, like, wow! My instinct told me I should do it.'

An instinct heightened perhaps by the fact that Lucent was losing nearly $9 billion a quarter and its share price had halved during Verwaayen's four years with the company.

When he got off the plane on this side of the pond, he found in BT a sclerotic organisation with only a very distant connection to the customer.

'We have 22 million customers and our biggest challenge is not to hide behind big numbers. If one person isn't important, nor are two or three or 100 million. Do we do what is good for the customer, or do we please the boss? Too many people want to please the boss. BT has smart people - it has always had smart people. But smart people can do stupid things, and that's the riddle. How do you stop smart people doing stupid things?'

This is typical Verwaayen - sharp, reductive and challenging - and it is not the kind of thing we used to hear from BT in the Vallance/Bonfield era. He loves to debate, and clearly relishes the intellectual stimulus of (reasonably) civilised dissent. 'The single biggest change I made was to come in here and say things like they are. I am Dutch, I do that and I want others to do it too. I want people to say to me "that's bollocks" if that's what they think.'

He doesn't sound like the old guard and he doesn't look like them either.

This is no suave business aristocrat who never gets his hands dirty; Verwaayen is short, his hair's a mess and if he's not quite scruffy, then his suit is certainly more M&S than Savile Row.

Pacing around his huge corner office at BT HQ in the City, he looks like a geek who's escaped from the windowless bowels of the IT department and is just waiting to be found out and sent back again. It's not true of course, as the glinting eye and the thermonuclear waves of energy radiating from the man prove. But his unforced ordinariness helps him connect with BT's hordes of front-line staff. 'I know how they feel and I speak their language. The problem always lies in the bureaucracy.'

It's a no-nonsense approach that is echoed in the latest TV ads fronted by the nation's blokiest bloke, Jeremy Clarkson, BT's first corporate celebrity since the glory days of Maureen 'You got an 'ology?' Lipman and Bob 'It's good to talk' Hoskins.

Verwaayen's appointment caused rumblings in the City, where he was a complete unknown, but in the industry the man who used to run KPN (the Dutch equivalent of BT, which went on to face its own EUR22 billion debt mountain after he moved to Lucent) has gone down well.

'There's no doubt that he's a great leader of BT,' says Julian Hewett, chief executive and founder of telecoms analyst Ovum. 'He's extremely bright and direct. If he thinks I've said something stupid, he'll say so, even though I'm someone he's supposed to be nice to.'

Verwaayen, he insists, was a welcome breath of fresh air. 'Vallance and Bonfield were more like old-fashioned mandarins, and partly because of its civil service background, BT was paralysed by the inability to take a decision. When Ben arrived, he immediately pushed responsibility down through the organisation; people started to just get on with it - and, by God, they needed to.'

Fast-forward to summer 2004, and Verwaayen, plus his finance director Ian Livingston - formerly of Dixons and at 40 one of the youngest FDs in the FTSE 100 - have certainly brought some stability to BT's war-torn accounts. As well as staunching huge cash losses - getting on for £1 billion a year at worst - that vertiginous £30 billion debt mountain has been reduced to a much more gently sloping £8 billion, with further repayments on the way.

'It has been a period of incredible change,' says Livingston of his three years at BT. 'When I started, cash was going out of the door. But in the last two years our earnings per share have risen 19%, our free cashflow has gone from minus £700 million to plus £2 billion, and from having been seen to be holding back the spread of broadband, we've now got the widest coverage in the OECD.' But at the time of writing, BT's share price remains resolutely below £2, its lowest level for a decade.

The growth of broadband is Verwaayen's personal hobby-horse. A couple of years ago, domestic broadband internet access was the preserve of the seriously geeky, and BT's competitors were screaming at the regulator to allow them access to its network of regional telephone exchanges and the wires between them and people's homes - 'the local loop'. Since then, broadband use has rocketed to about four million connections and competition thrives - BT's own share of the retail broadband market is only about a third.

Verwaayen is very proud of the growth. 'When I started, broadband access was on a level with Albania. Now we have built the market and I think we can talk about having the best broadband coverage in the world. There is no other country in Europe where 365 internet service providers thrive.' But Ofcom doesn't agree. Despite efforts to improve its relationship with the new regulator, BT is in trouble once again, most recently accused of predatory broadband pricing.

The new, more user-friendly and - dare we say it? - humbler face that BT wants to show the world is reflected in its new logo. The old piper - introduced in 1991 at a reputed cost of £50 million - has blown his last call, replaced by a very noughties 'connected world' image. It's only the second such revamp since privatisation, and in marked contrast to the first, it's an in-house job that cost a mere £5 million.

So it's customer focus all the way these days, a far cry from the BT of old. Back in the duopoly of the late '80s, there was only one small rival - Mercury - and BT had the floor more or less to itself. With nearly 250,000 employees, staffing was still at public-sector levels. When marketer-turned-author Will Murray joined BT in 1987, the atmosphere came as something of a shock. 'It was no longer either state-owned or a monopoly by then, but it behaved as if it were still both. I came from a retail background and BT was like another planet. Managers would complain if their office wasn't big enough, and in every meeting there was wine and beer on the table.'

By the time Murray left, a decade or so later, he was running the £2.5 billion corporate marketing division and the culture was no longer so representative of its civil service heritage. In fact, he thinks a world-class telecoms company had been built. 'It was a great place to work, the best years of my life in some ways.'

But trouble was brewing overseas, where BT had become involved in a bid for US communications giant MCI that they eventually lost to a successful £22 billion offer from WorldCom. 'I saw the amount of time and effort that was squandered on the American adventure,' says Murray. 'It was very disheartening. The senior managers were chasing ego and reputation.'

One of the most senior of those managers was Vallance - back then just plain Iain - who as chief executive and then chairman tasted both glory and disaster in his 20-odd years at BT. He saw the company he had guided through privatisation, restructuring, regulatory U-turns and nearly 200,000 redundancies topple in the debt debacle of the late '90s. He's now a non-executive director of RBS and Siemens.

'In 1996, if you'd asked anybody in the business which company was number one, the answer would have been BT,' says Vallance. What went wrong? 'We were looking for growth,' he says simply, 'both at home and overseas.'

The domestic growth opportunities that the board identified were mobile phones and data traffic, but they also realised they had to look outside the UK. 'We knew that the more successful we were domestically, the more we would come under the regulatory heel,' recalls Vallance. 'There was that frisson.'

That situation must sound pretty familiar to BT's current management, which is still struggling to find ways to get BT to grow and to manage the effects of regulation. What was different then was the way in which Vallance and chief exec Bonfield went about tackling the issues. Their plans were grand and their vision global, so they did what has brought over-confident Brits from George III to Robbie Williams back down to earth with a bump. They went to America, acquiring 20% stakes in Timenet and then MCI.

At first, things went swimmingly and BT got a landmark agreement for a full takeover of MCI. Then it started to go off the rails - regulatory approval dragged on and MCI issued a profits warning; finally, WorldCom, then riding high on the internet wave, made a rival bid. 'Woof it came, in from left field,' says Vallance, 'an all-paper offer. At that time, WorldCom paper was substantially a financial market creation and we couldn't compete with that.'

The deal collapsed and along with it much of the momentum that had driven BT's expansion plans. 'It took the wind out of our sails. My big regret is that we didn't complete the MCI deal.'

But it was the 3G licence auctions that delivered the knock-out blow, says Vallance. 'It was like issuing licences to be a bank and telling all the existing banks they had to bid for one. If you didn't bid, then a few years down the line you'd be out of a core business,' he says. Couple that to the internet buzz and the fact that many of the European bidders were substantially state-owned - 'so that what happened was really a shifting of huge sums of money from one government coffer to the other' - and no wonder the sums paid for the licences were so vast.

Those in the UK and Germany eventually cost BT £10 billion. 'If I could have done one thing differently, it would have been to sit out the German 3G auction. That's what caused all the trouble. If we'd been cleverer or 12 months earlier, we might have got away with it, but we didn't. We took a risk and got it wrong.'

Its successes in getting the BT train back on the rails notwithstanding, that longed-for growth still eludes BT's current top team. In recent years, BT Group has struggled to show any revenue growth at all, despite rash early predictions by a newly landed Verwaayen that earnings growth of 6%-8% was achievable. A glimmer of hope came in the first quarter this year, when overall revenues crept up by 2.5%, but this is a modest increase, which the top brass is very careful not to call a turning point.

It's not hard to see why growth has been so hard to come by. The lion's share of BT's revenues - around £11 billion of the £18 billion or so it earns every year - comes from what's known in telecoms as the traditional business: essentially, people talking to each other on the phone. This is a good high-margin retail business and BT has a big chunk of the market, although the oft-quoted 73% market share figure is misleading as it includes only residential fixed-line calls, not business use or mobiles. BT's share of all calls made is actually more like 35%.

But it's a declining market, shrinking by around 2% a year, and thanks to increasingly stiff competition from the likes of NTL, Carphone Warehouse and even Tesco, BT's share of it is dropping at more like 7%. So it has to run hard even to stand still, and finding replacement revenues for this vanishing 7% per annum elsewhere in its business is about as much as it has managed to do so far.

That's not a bad effort, says Livingston. 'The traditional business is in decline and prices are going down. Wholesale pricing (the regulated price that BT charges to use its network) is RPI minus 8% or 9%. But the new wave (mainly corporate services mobility and directories) is a £4 billion business growing at 30%, so every year it's a bigger proportion of the whole.' Sooner or later, goes the boardroom wisdom, the rising new-wave revenue line on the graph will meet the declining traditional line, and BT's problems will be over.

In the meantime, the company manages to keep its profitability rising (up 10% to £2 billion for 2004) and maintains capital expendi- ture by cutting costs. 'I am ultra hard on costs - the hardest hitter on the board,' says Pierre Danon, chief executive of the group's biggest division, the £13.5 billion BT Retail. 'When I started, BT Retail employed 52,000 people; now it's 39,000. And how many companies with that many employees do you know of where the chief executive doesn't have an office? I don't; no-one here has an office. When I came, we were spending £30 million a year on sponsorship; now it's £60,000.'

One of the group's most unexpected success stories in the search for growth over recent years has been BT Global Services, selling corporate telecommunications and IT solutions to the likes of the NHS, ABN Amro, Capita and Microsoft. It's a high-profile business and it's growing at 20% per annum. It rose, phoenix-like, from the ashes of BT's doomed overseas expansion. 'We've taken the international business and it's now on the road to being something valuable. It's certainly not an embarrassment any more,' says its chief executive Andy Green. 'I spend my time competing with the biggest IT companies in the world and we are winning contracts.'

But Ovum's Hewett doubts that corporate IT is the answer to BT's problems, although 'it's giving it a growth story that it really needs right now'.

But, he adds, it has been accused of aggressive pricing on deals such as the £1.6 billion contract to computerise NHS patient rec- ords, and may be winning deals at the expense of profitability. 'The numbers are big, but will it actually make any money? BT won these deals by coming in lower than anyone else and it's a fantastically challenging business.'

Looking to the future, BT's position is like that of the lost tourist who asks for directions and is told: 'Well, if I were you, I wouldn't start from here.' Fated by regulation and the loss of its monopoly to forever lose ground in its core business, it is doomed to keep running harder and harder just to stand still or slide gently backwards. Which suits the rest of the industry just fine: despite the constant sniping at BT, no-one wants it to disappear and no senior exec at any of its major competitors would go on the record with their views for this article. After all, they all depend on BT's networks to carry their services.

As one slightly less reticent City insider puts it: 'Although you have to lay some blame at BT's feet, it is operating in one of the most competitive markets in Europe. I'm not quite feeling sorry for it yet, but it is very tough. What would you do if you were Verwaayen or Bland? You have to ask: could I think of anything better than what it is already doing?'

Maybe not, but whether it's enough to ensure that BT will actually want to celebrate the 30th or even 40th anniversary of privatisation is another question.

THE BT SHARE PRICE ROLLERCOASTER (pounds)

Jun 1994 2.56

Dec 1994 2.62

Jun 1995 2.73

Dec 1995 2.46

Jun 1996 2.41

Dec 1996 2.75

Jun 1997 3.05

Dec 1997 3.33

Jun 1998 5.15

Dec 1998 6.30

Jun 1999 7.40

Dec 1999 10.53

Jun 2000 5.95

Dec 2000 3.98

Jun 2001 3.47

Dec 2001 2.53

Jun 2002 2.52

Dec 2002 1.95

Jun 2003 2.04

Dec 2003 1.88

Jun 2004 1.99

Aug 2004 1.82

Sep 2004 1.85

Source: Thomson Financial.

1876: Alexander Graham Bell beats rival Elisha Gray by a matter of hours to patent his 'electrical speech machine', launching the communications age with a brief call to his assistant: 'Watson, come here, I want you.'

1912: The national telephone network, which has been growing since the 1890s under the General Post Office and various private companies, is fully unified under GPO control - a monopoly that will last 70 years.

1969: Under the Post Office Act, the GPO is nationalised, becoming the Post Office. Now split into two distinct divisions - post and telecommunications - it has the exclusive right to run telephone networks, and can authorise others to do so.

1978: The company introduces Buzby, an irritating little bird with a nasty phone habit. Voiced by Bernard Cribbens, it's the company's first memorable face.

1981: The British Telecommunications Act transfers responsibility for the newly renamed British Telecom away from the Post Office, creating two separate corporations. Iain Vallance is on the inaugural board, 15 years after joining the organisation.

1982: The first challenge to the long-standing monopoly comes when the Conservative government grants Cable & Wireless a licence to run a network through its subsidiary, Mercury. This duopoly heralds a new era of competition.

1984: British Telecom becomes the first major state-owned industry to be privatised under Margaret Thatcher. The government sells 51% of its shares for a total of £3bn, creating 2m shareholders.

1986: Vallance becomes chief executive, an acknowledgment of his role as the man behind the company's privatisation.

1987: One job is clearly not enough for golden boy Vallance, who becomes chairman while continuing in his role as chief executive.

1988: Maureen Lipman is the new face of BT, playing housewife Beattie in a series of award-winning ads.

1991: The company is renamed BT and rebuilt to focus separately on individual customers, small businesses and multinationals. The new logo - a leaping piper - costs BT £50m and invites ridicule.

1993: The government offloads 50% of its remaining shares, leaving a 21.8% stake. A government White Paper opens up the market further, allowing for other providers and flexible pricing packages.

1994: BT tries to go global with the launch of a $1bn joint venture with US communications company MCI. At this time, BT is entirely debt-free.

1996: Peter Bonfield takes over as chief executive. Bob Hoskins fronts a Ridley Scott-directed series of ads - his 'It's good to talk' line will haunt the actor for a long time.

1997: An attempted merger with MCI fails when BT's bid is trumped by WorldCom's £22bn offer. But global ambition remains high.

1998: BT makes a second high-profile global move, working with American telecom giants AT&T. The £10bn joint venture, Concert,

is aimed at international business clients.

1999: After five years of testing, BT launches ADSL broadband. Rival ISPs accuse BT of foul play, saying the long wait was a desperate move to inhibit competition. Under pressure from Oftel, BT introduces unmetered internet access, lowering the cost for users, which the regulator had criticised for being too high.

2000: BT becomes BT Group plc, comprising several subsidiaries - BT Retail, Wholesale, Openworld, Wireless, Global Services and Yell. Pierre Danon joins as BT Retail chief executive. BT spends £4bn on a licence to operate next-generation 3G mobiles in the UK. Debt soars.

2001: The Concert joint venture proves an ignominious failure, losing £20m a week, and closes with the loss of £7bn and 2,300 jobs - 40% of its workforce. With a first-quarter deficit of £2.9bn, BT is the biggest loss-maker in British corporate history. Debts peak at £30bn. As a response, it launches a £5.9bn rights issue, floats off its wireless subsidiary, now renamed mmO2, and sells Yell for £2.14bn. Vallance quits, followed by Bonfield (above). Shareholders are outraged by pay-offs totalling £600,000 and £1.49m respectively. Ben Verwaayen joins as chief executive, with a £7m earnings package. Oftel extends competition by forcing BT to allow competitors to access its network at a lower cost.

2002: BT spends £1m a day for 10 days promoting its broadband service. Rivals such as Carphone Warehouse's Talktalk provide the latest challenge to its domestic telephone position.

2003: In only the second image revamp since privatisation, the piper logo is replaced by a 'connected world' globe, seen as more in tune with the company's ambitions. The cost: a mere £5m. Carphone Warehouse prompts a slanging match when it chooses Maureen Lipman to front its Talktalk ads. Insult meets injury with the catchline 'It's good to talk, but it's even better to talk talk'. Oftel deregulates BT's 192 directory enquiries service. BT teams up with Yahoo! to offer BT Yahoo! Broadband.

2004: BT's position is further eroded when the newly formed Ofcom announces local loop unbundling (LLU), opening up BT's local domestic networks to rivals for the first time. BT announces the 21st Century Network, a plan to replace all its existing voice and data networks with a single internet protocol network, opening the door to greater technological advances and cost-savings of a claimed £1bn p.a. The £10bn project is slated for completion in 2009. BT returns to celebrity-fronted ad campaigns with the £3m Jeremy Clarkson series. Danon announces talks with Sony, the BBC and BskyB over his plans to offer pay-per-view TV down BT phone lines.

PAUL REYNOLDS: The responsibility for implementing the radical IP network falls to the CEO of BT Wholesale, who has been with the group since 1983

PIERRE DANON: The CEO of BT Retail, the group's biggest division, claims to be the hardest hitter on the board when it comes to keeping costs down

ANDY GREEN: BT's Global Services CEO heads a fast-growing division that rose phoenix-like from the ashes of BT's failed overseas expansion

IAN LIVINGSTON: At 40, Livingston is one of the youngest finance directors at any FTSE 100 company. In his three years at BT he has seen 'incredible change'

THE 21ST CENTURY NETWORK

If BT is the broody goose, then the 21st Century Network might just be the golden egg that it's about to lay. Announced on 9 June, 21CN - as the company shorthand calls it - is an ambitious plan to replace all BT's existing multiple networks for voice and data services with a single, overarching system based on the same network technology as the internet: IP, or Internet Protocol.

IP will offer speeds of 2Mbps (four times faster than regular broadband), cost about £10 billion to build and it will be ready (well, available to 75% of the population, anyway) in five years' time. That's not very long for what is the equivalent of a water company replacing all its pipes or Network Rail relaying all its track, but Paul Reynolds, CEO of BT Wholesale and the man who has got to do it, seems to think it's a realistic timescale.

The technical advantages of an IP network are that it is fast, has a vastly higher capacity and will allow the introduction of new services such as videophones and integrated messaging (so you can divert landline calls to your mobile, for example, or have voice messages sent to you as an e-mail). But for BT the prime motivation is saving money - £1 billion to be exact, and that's only what they are prepared to commit to in public.

The savings will come primarily from simplification - running one big state-of-the-art network is much easier than managing lots of old-fashioned systems with all the legacy problems that this entails. And the IP technology requires smaller and far fewer exchanges, which means less maintenance and a much smaller payroll of engineers - it's a safe bet that BT's 100,000 headcount will be coming down again soon.

Its bosses hope the new network will secure BT's future for a decade or two at least, and as Julian Hewett, head of telecom analyst Ovum, points out, there may be another, more old-fashioned fringe benefit to be garnered, too. 'BT is sitting on a great property portfolio; a lot of its exchanges are in pretty nice areas. They could reap an amazing one-off collection from the closure of a huge number of those exchanges.'

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