BT is ringing in change

“I don’t think there was another public corporation whose accounting
standards were as low as British Telecom’s,” Doug Perryman, its then finance
director, said when we interviewed him in 1984. “The finance function was stuck
like a limpet on the side of a battleship, but having nothing at all to do with
driving it,”

Compare that to how BT looks today. It has just emerged from a huge
reorganisation; earnings per share have doubled and net debt has halved since
2002; and the City is on board.

Financial Director and our sister publication Accountancy Age have
interviewed many of BT’s finance directors through the years. Revisiting what
they said offers a fascinating look at how one of the UK’s most famous
institutions has transformed its finance function.

The current group finance director, Hanif Lalani, is appreciated for his
candour and open approach to taking stakeholders and investors through the
group’s strategy. It is a tactic he has employed avidly to help the group shake
off its public sector image.

He understands the radical transformation through which the group has had to
travel to remain a competitive player and one of the

benefits of working for the same group for so long is that he knows “exactly
what levers to pull, what action to take, who to call and what to do to make
things happen”.

Despite his loyalty to the telecoms business, he isn’t blinded to its
failings. He acknowledges that the stand-up-and-speak-your-mind culture still
doesn’t exist – yet it’s something he strives to nurture in his 1,400-strong
finance team.

Feedback from the equity markets demonstrates a strong faith in his
leadership and the performance of the finance team. Shareholder returns over the
past two years have been around 20%, he says.

During the past three years, mostly under the aegis of Lalani, the company
has wiped out more than £60m in finance costs through centralising the team and
removing duplication and repeat processes in each department. “We have
streamlined the way we work, taking out £65m-worth of costs over the past three
years,” he says.

Costs have been reduced through outsourcing and offshoring certain aspects of
finance, such as the low-cost, high-volume transactional processes.

“It’s very easy for a big organisation to become divisionalised and
silo-based, for every division to have finance within the team. We moved away
from doing everything everywhere to doing it once for the organisation,” says
Lalani.

As well as systems changes, he has focused on the development of his team,
bringing in finance staff from different industries and companies in order to
instil new blood into a team more used to doing things in a public sector way.

“It was important to mix the two: those that we trained in-house and those
from outside. I want a highly motivated finance team that thrives on change and
wants to make changes because we’re in a fast changing industry.”

He has created a fresh finance business and is, in short, a modern FD, as
happy explaining the figures to the investors as he is talking you through the
sophisticated new technologies the group offers. If BT can hold its nerve within
the fast moving industry and Lalani can continue to foster a private sector
environment in a business long used to public sector sluggishness, the group
will remain a strong and determined player.

Today, BT is a completely different company in terms of the strength of its
finance team and the quality of its financial planning to when Doug Perryman
first joined the company 25 years ago – then, just 60 of 250,000 employees were
qualified accountants.

Additional reporting by David Rae

Robert Brace turns a corner
“It was run like government departments, on a cash basis,” said Robert Brace,
who was FD when we interviewed him in 1999. “Finance was focused on financial
accounting. It was only in the early 1980s that BT recruited some qualified
accountants and actually installed double-entry bookkeeping. They did it very
well, BT’s privatisation was really successful, but that’s only one step towards
becoming a fully fledged finance operation.

“I remember being told by some experienced managers that [improving
productivity] was probably the wrong thing to do,” Brace told us. “If we
increased profits, the customers would be upset, the government would be upset,
MPs would be upset, the DTI would be upset, Oftel would be upset and then Oftel
would tighten the regulatory price cap and take all the profits away again.

“The skills mix has changed, the financial accounting is really good, our tax
guys are really good, our treasury guys are really good,” he boasted. “We just
did a £600m, 30-year bond at 5.75%, which we think is really good. And it’s not
just having a high credit rating, it’s actually executing well. It all went in
an hour-and-a-half and the government gilt auction that afternoon was
undersubscribed for the first time in history.” Brace seems to enjoy the cut-and
thrust of the markets: “I don’t know why they came out with a 30-year gilt
immediately after us, but they did – we knew they were doing it, that’s why we
went in the morning.

”Despite this pride in the way his department improved things at BT, he knew
that efficiency must be rooted in firm and measurable objectives. In the first
instance, Brace saw this as management support. “One of the things I look to
offer my boss, is ‘no surprises’ from a financial point of view,” he said. “We
don’t come up with something that’s significantly different from what the
analysts think, because if it’s going to be, we tell them up front, we tell them
a year in advance. To do that, you must have good processes and you have to know
what’s happening in the business.

”Beneath that, driving all the changes is the heart of BT’s finance mission:
shareholder value. “One of the beauties of the shareholder value focus is that
it works, Brace insists. “It’s very simplistic, it’s what people do in their own
lives – if you spend some money, do you get a return? One thing we insist on is
that when financial information is presented for decision-making purposes,
finance has to have produced it. This wasn’t always the case – the network guys
used to do their own and guess what? It used to support their case. So we said
it had to be objective, it has to be produced by finance and it has to be
reconciled with everything else. That’s quite a tough discipline to instil in a
telco.

”Brace also trashed the notion of benchmarking BT against other telcos. “I
used to have a unit which just did comparisons with other telcos and its real
purpose was to persuade ourselves that we weren’t very inefficient,” said Brace.
“We want to benchmark any company which is in the upper quartile or upper
octile. That’s where you want to aim, because that’s where the competition will
be. We want people to chase us and to a large extent we’ve succeeded in setting
the pace.

”The focus on shareholder value has lead to the use of economic value added
within BT. Brace employed a model designed by Holt to measure returns and
pointed out that, while it is a great measurement tool, it can also be effective
in project appraisal. “We use it for setting the targets for BT in the first
instance, for the major divisions in the second,” he explained. “We then use it
within divisions to test their decision making. We just need to explain to
people that they need to make decisions in the best interest of shareholder
value.”

Front line view
Following Ofcom’s investigation into the telecoms sector, BT reorganised itself
into four distinct divisions: BT Retail, which sells to the consumer market; BT
Wholesale, which rents the underlying network to other network operators; BT
Global Services, which partners with other providers to deliver business
telecoms; and Openreach, which owns the last mile of copper and employs the vast
majority of what were BT engineers to ensure it’s upkeep.

The reorganisation wasn’t just carried out to meet the demands of the
regulator. It also offered a great opportunity to create a more logical and
streamlined business.

“This is not all about settlement of the undertakings with Ofcom,” says Peter
Cross who, when we spoke to him in January, was the CFO of Openreach. “We
describe it as an outbreak of common sense. We think there’s economic and
operational sense for BT and our customers, quite apart from the fact that it
allows us to observe the undertakings to Ofcom.”

Tony Chanmugam, CFO of BT Retail, however, believes that things still haven’t
gone far enough. “If this was a true open market operation that didn’t have any
regulatory restrains in it, the level of prices that Retail would get would be
lower than we would currently get under a regulated environment, simply because
economies of scale are not allowed to impact,” he says.

Rescuing a lost cause
When Doug Perryman became BT’s finance director in 1981 there were only 60
accountants in the entire company – and BT was a company that employed around
250,000 people.

So, one of his first actions after joining the board was to hire 200
accountants to make sure that the organisation never again got into the kind of
trouble that saw its accounts being heavily qualified by the auditors and
virtually no useful figures produced.“

I don’t think there was another public corporation whose accounting standards
were as low as British Telecom’s,” Perryman told us – and he should have known,
having spent four years in the top finance post at the National Coal Board. “Not
long ago,” he continued, “it would be fair to say that there were no meaningful
figures at all on assets – just bundles of purchase vouchers in various
basements around the country.”

Financial Director has come across another senior source from
Perryman’s time at BT, who confirms that this attitude – if not actual policy –
caused no end of problems: engineers sent on assignment would request materials
from the Telecom stores before they went out for a job. On most of the jobs,
only some of the materials would be used, but the stores clerks did not have a
procedure for taking back unused inventory – so the engineers would either have
to store it themselves or dump it. Not surprisingly, a healthy “grey” market in
such supplies developed.

Telecom had all the hallmarks of a division of a division of the civil
service – and it acted like one, too. Financial expertise remained firmly on the
sidelines of management decision-making. Government pressures rendered academic
any realistic investment-funding strategy. The accounts were a shambles and
peppered with serious qualifications.