BT's downsizing plan looks more realistic than Vodafone's

Back in the reign of Gavin Patterson, it transpired that BT still employed thousands of mid-tier managers who filled their days by ticking boxes, sipping tea and telling others what to do. After an accounting scandal at BT's Italian business caused its share price to nosedive, Patterson spent more than a year trying to clean up the mess and fix other problems before he eventually realized an epic shearing of the management layer was needed. In May 2018, Patterson, looking more like a model from a Patek Philippe watch advert than a telecom boss, announced that 13,000 jobs, about 12% of BT's workforce at the time, would go.

These cuts were to be offset partly by 6,000 new hires in other parts of the business. And when BT published its latest set of financial results last week, the number of full-time employees was shown to have fallen by roughly 9,600 since 2018. Yet BT still looks grossly obese compared with some of its main peers. It has around 8,600 more full-time employees than it did before its 2016 acquisition of EE, a deal that swelled BT's headcount by 12,800. Its workforce is about the same size as Vodafone's, but Vodafone makes almost twice as much in sales.

Despite its bloated state, BT's revenues have been sinking. For the last fiscal year, it made about £3.1 billion (US$3.8 billion) less than it for 2016, when it completed the EE takeover. Annual revenues per employee have dropped from nearly £226,500 ($280,600) to less than £213,000 ($263,900) over this period. Philip Jansen, Patterson's successor in the top job, stunned observers last week when he envisaged a BT with up to 55,000 fewer employees by the end of the decade. But such major surgery is doable and probably needed.

Figure 1: BT's headquarters may be emptier by the time it is through with cuts.
(Source: BT)

For one thing, Jansen put total headcount at 130,000, not the 97,148 listed as full-time workers on BT's books, meaning the other 32,852 are either part-time employees or contractors. BT relies heavily on outside help because it is currently building a nationwide full-fiber network. But construction will be finished by the latter years of the decade. The range Jansen provided starts at a reduction of 40,000 jobs. BT, feasibly, could realize 82% of that target simply by cutting part-time jobs and contractors.

As a mainly UK business, it should not require a workforce as big as multinational Vodafone's, even if it did nothing between now and 2030 on automation, artificial intelligence (AI) and ditching old technologies (such as 3G). And cuts on the scale Jansen envisages would boost margins at a company whose net labor costs equaled 23% of its total operating costs last year.

Get real, Voda

The same cannot be said for Vodafone. Like BT, it unveiled its own downsizing plan last week when Margherita Della Valle, new in the CEO role, told investors she aimed to cut 11,000 jobs in the next three years. Della Valle said nothing about what happens next, and it's possible she also imagines Vodafone will be even smaller by 2030. But 11,000 cuts would have little impact on Vodafone's profitability, and they could have some nasty effects.

Vodafone already looks relatively streamlined and efficient alongside BT and other big European operators. Yet to publish an annual report for the fiscal year that ended in March, it generated about €470,000 ($506,500) in revenues per employee the year before, a tenth more than it made in 2016. Of the major European incumbents, only Deutsche Telekom did better, thanks entirely to the cash machine of its T-Mobile US business.

Published figures show Vodafone's staff costs that year came to only 13% of its total operating costs. Taking Vodafone's numbers for median staff costs of £57,500 ($71,200) per employee, the removal of 11,000 jobs would eventually save the company about €727 million ($783 million) annually, at today's exchange rate. This would lift Vodafone's operating profit margin by only two percentage points, to about 14%, if nothing else changed.

Unlike BT, Vodafone is not currently engaged in a labor-intensive fiber rollout. While it does not disclose a number for capital expenditure in its latest financial reports, Della Valle previously said she expected to invest about €8 billion ($8.6 billion) for the recently ended fiscal year. This would give Vodafone a capital intensity of 17.5%, much lower than BT's 24%. Any layoffs, then, would probably chew into resources used for ongoing day-to-day operations.

Even if automation and AI support cuts, Vodafone has been trying to add about 7,000 software engineers to a team comprising 9,000 of them just two years ago. The idea is to make itself less reliant on external contractors and systems integrators. But cutting 11% of total jobs will shrink the pool of employees available for retraining, while recruitment would force up costs as Della Valle tries to lower them.

Shareholders were not buying either Jansen's plan or Della Valle's last week. BT's share price fell 5% on the day it published results, while Vodafone's dropped 7.4%. Yet the main problem for Jansen is not his unrealistic vision of the future BT but a failure to upsell fiber to British consumers and the rise of infrastructure-based challengers. When it comes to Della Valle, a revival plan based on 11,000 cuts will simply not do.

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— Iain Morris, International Editor, Light Reading