Competitive Edge

Hanif Lalani believes BT's core offer – communications – is now more capable of withstanding any economic downturn than ever before.

"I believe we're in a period where the correlation between GDP and communications is becoming much lower. Communications is about convenience and lifestyle and therefore essential. Customers no longer see talking as a very expensive pastime. The same goes for the internet. Whether for business or pleasure, communication has become an indispensable essential."

Having said that, BT shares have been under pressure this year, as investors look at the growth challenges in its division and falls in its wholesale operations in the UK.

Here, rivals such as The Carphone Warehouse and British Sky Broadcasting have cut back on equipment purchases from BT and as part of 'local loop un-bundling' are taking over hundreds of thousands of BT landlines (771,000 in the second quarter of last year).

Lalani acknowledges the challenges but believes BT is configured to cope in each of its business units. "You want to get to a stage where you can make as much of your costs as variable as possible. But you also want to be in an environment where if you have to increase capacity as well as decreasing it, you can do it quickly and with agility.

"If I look at the different businesses, I think that BT Global Services are well placed in an up and a downturn scenario because their customers are going into new markets as a result of globalisation. So they will either want BT Global Services to give them the reach to go to different countries and be able to expand, or they will want to reduce costs through standardisation onto a single platform.

"Whichever direction our customers want us to go, we have the ability to deliver a tailor-made solution to help their business go forward. BT Global Services is now established in 180 different countries. We want to have a platform-based delivery system on which we run the critical applications for our customers, which means that if we do see a downturn in that space, it’s going to be a downturn across the globe rather than in one economy."

Meeting and beating targets

Lalani is optimistic about achieving BT's target of a 15% profit margin from its global division, an ambition which the markets have doubted. "If we look at the last two quarters of the fiscal year, year-on-year the margin expanded by 90 basis points and in quarter four, the margin was 13.7%. So it is very clear that the margins were stronger in the second half than the first, they were stronger year-on-year and they have made tremendous progress towards the 15% and we"re committed to delivering at the 15% over the next few years."

Lalani is equally upbeat about BT Wholesale. "It's a very competitive marketplace; a place where, while the broadband market as a whole is growing, the portfolio mix within it is changing. So people can buy products and services from BT Wholesale or they can buy components from Openreach and build their network around it, delivering a service to customers – which is what Carphone Warehouse is doing.

"I accept BT Wholesale's results of year-on-year revenue and its EBITDA have declined and I expect that to continue for a few more quarters.

I think once we get to that point in time, you'll see an improvement in BT Wholesale, positioning itself well for growth in the following fiscal year." The source for Lalani's optimism is that he sees the division's offer evolving.

"The reason that I speak with confidence is the £1bn-worth of orders they signed in quarter four ending March 2008. These orders are with a number of customers around new services and new platforms, which basically means that as more customers come onto these platforms, whether they're ethernet or becoming giga-ethernet, it allows new services and more white labelling services to go into the market place.

"As a result, the nature of BT Wholesale itself will change and new services will allow transformation into a slightly different business in the coming year. I"m confident they will turn around in the second half of the year, positioning themselves well for growth."

Recession proofing

In the retail division, Lalani does not yet see evidence that its consumer and SME customers are yet thinking of recession, but it could be a possibility in future. "As customers tighten their belts we may see some impact. That will be in things like buying new faxes, new phones, computers and new devices. I don't think it will initially be on the services that go over those devices.

"As we plan our business, we look at our customers and how they'll react in that environment and we build a business plan around it. I can never ever say we are 100% recession-proof but our customers know that communications are so critical that they will not necessarily be their top priority to cut back on."

Flexibility on future plans

In 2005, BT committed itself to invest £10bn by 2010 in upgrading its UK infrastructure in a project it called 21st Century Network (21CN). The plan is not only to collapse 18 different networks into one but also to take out £1bn of costs from its network business. However, the markets have been concerned that 21CN has fallen behind schedule.

Lalani explains that the scheme is not in trouble but has adjusted to reflect changing demand. "The world isn't static. If you talk to customers and to other industry players, they're saying it's great to have a migration from old to new that creates a lower cost and faster delivery environment. However our customers are demanding new services. But they want all of these services and are not willing to wait until you've completed a migration from old to new. So what we've had to do is re-prioritise the way we manage the delivery of new services.

"The programme we shared with the market was: 'How To Be Customer-Led on Delivery of 21CN and Achieve Your Migration'. So a lot of the services which were at the tail-end of the programme have had to be bought forward and the migration has had to fit around the delivery of new services."

Expanding technology

Lalani says: "If I look at the 21CN project, 58% of the core network is available and has been delivered. It will be 80% by the year end. Some 1,600 sites have been cleared; 700 exchanges are ready for MSANs – a multi-services access node – which effectively allows you to just plug in one card on one box to deliver any kind of voice or data application. Historically, if you went into an exchange building, you would have a dedicated box for every product and service you used. So you could be a household having four or five services with four or five boxes dedicated to you. Now you only have one box with one card."

BT has over 6,000 UK exchanges. 700 are ready for upgrading and 500 will be ready by the end of the year; another strategy keeping BT a step ahead of the telecoms industry.