BT Global Services - Part 7

(By Richard Holway 10.00pm 14th May 09) Further to our report this morning on BT’s Q4 FY09 results - BT FY09 results (Part 1) – I guess our readers are most interested in BT Global Services.

As we anticipated in BT Global Services – Part 6, further write-offs on the NHS and Reuters contracts exceeded £1b - £1.2b to be exact. Another £100m related to other contracts and you then add the £340m announced previously to get £1.64b. Most of this relates to “contract costs which had been previously capitalised on the balance sheet” so has no further cash effect.

At the top line BT Global Services revenue increased by 6% to £2,366m in Q4 mainly due to foreign exchange gains (11%) and acquisitions (3%). Without those, revenues declined 6% to £2,103m. Revenues grew 25% outside the UK but the UK declined 4% “before contract review adjustments”

BT Global Services reported “longer sales lead times as customers delay decisions on major projects in the current economic environment. In addition, price erosion and substitution (often to other BT products) continues.”

BT Global Services also announced a new operating model and structure. The full details of this will be announced next week but we do know that, under CEO Hanif Lalani, BT Global Services will be structured into three divisions

UK Domestic – mainly the existing public sector business, including the NHS contracts, with revenues of c£2.5b. The ‘acting’ head here is Mark Quatermaine who has headed up BT GS Public Sector (excl NHS) for some time

Multi National Corporations (MNC) – I understand that most of the BT’s UK financial services network management business eg Lloyds, RBS, Credit Suisse etc – will now reside in MNC, not UK domestic. As will other MNCs like Unilever. The division will be headed by Michael Boustridge, who currently runs BT US & Asia Pac, and has revenues of c£3.5b.

Global Services Enterprises is a ragbag of businesses that BT has acquired in recent years outside of the UK. Together they have revenues of c£2.8b and will be headed by Luis Alvarez. I do get the feeling that this is a bin for businesses that don’t really fit into BT's grand design anymore and are likely to be sold if and when ‘the price is right’.

Eagled-eyed readers will immediately say “But where is Royston Hoggarth?” who was appointed as CEO of BT Global Services UK only last Sept 08? See New appointment at BT Global Services. Looks as though the well-respected Royston has done himself out of a job! It is a bit difficult to see any role other than ‘advisory’ for him in this new structure.

View?
I have asked many times over many years “What is BT Global Services for?” Is it a full line IT Services house in the mould of CSC, Capgemini, EDS? Or is it a network management company there to support BT’s core telecommunications business as it competes with AT&T and Verizon? Bluntly, I’ve gone past caring what the answer is – I just want an answer. Because only then can the solution to BT’s ills be addressed.

Cynically, perhaps the new structure does go some way to address this. MNC is the network management business that BT really needs longterm to support its core. Enterprises contains the bits BT can sell and UK Domestic is all the stuff that BT only does in the UK market for UK-only customers/not globally.

So now the issue is ‘What does it do with UK Domestic?” That’s not an easy one as even here the retention/renewal of BT’s telecomms contracts with several major central government agencies - a significant number of which are up for renewal in 2011 - are intertwined with other activities. UK Domestic is the most profitable part of the whole of BT GS. Looks even better if the NHS contracts have finally been ‘tamed’. But winning contracts in the public sector – eg shared services in local government (where UK Domestic has been quite successful) – require much upfront cash investment. BT really has lost the taste (and ability) to do that anymore.

My view is the same now as ever. BT is NOT, and never was, an IT services operator. BT has rightly abandoned any ambition to be such globally. UK Domestic therefore really doesn’t fit into BT's new model. Hence it is being ring-fenced. Medium term I expect it to be sold. However, selling at the nadir in both the market and its own fortunes, would only garner garage sale valuations.

So, my advice would be; put the house in order, show some decent profits and sell in a couple of years time.