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BT Dips on Green Report

Ray Le Maistre
10/12/2010
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Look out BT Group plc (NYSE: BT; London: BTA) and Cable & Wireless Worldwide plc (London: CW) -- the British government has been advised that, as part of a broader efficiency drive, it could reduce its annual telecom services spending by hundreds of millions of pounds, a move that would hit the UK's two main corporate service providers hard.

Billionaire Sir Philip Green, a prominent UK retailer (with questionable tax arrangements), was commissioned just two months ago to compile an efficiency report for the government. Green's report concludes that the UK government is wasting billions of pounds each year, partly because the numerous government departments are failing to achieve their potential economies of scale by not engaging in coordinated purchasing agreements.

(For more general background on the report's findings, check out this Guardian story.)

Specifically, the report notes that "fixed line telecoms is the best example of where the Government fails to leverage its scale." Citing an external report that estimates annual UK government fixed line telecom services spending to be more than £2 billion (US$3.16 billion) per year, the report suggests that annual bill could be 30 to 40 percent lower if the government bought its own network capacity.

"We have requested an urgent review of fixed line telecoms cost," notes the report.

Any such reduction would result in annual fixed line telecom spending cuts of £600 million to 800 million ($948 million to $1.26 billion).

Cuts of that magnitude would hit BT and C&W Worldwide, the two main providers of fixed line services, hard. And investors recognized this today, as BT's share price dipped nearly 3 percent to 142.9 pence on the London Stock Exchange, while C&W Worldwide saw its stock drop 2.8 percent to 73.7 pence.

Overall, about 10 percent of BT's annual revenues, which totaled £20.9 billion ($33 billion) in the most recent financial year, come from the public sector, though this would include local government agencies as well as the central government departments under scrutiny in Green's report. (See BT Reports Q4.)

C&W Worldwide's revenues from the public sector totaled £285 million ($450 million, about 12 percent of total sales) in the fiscal year ending March 31. However, that is the operator's most lucrative line of business, delivering gross margins of 59 percent, higher than any of the operator's other customer groups.

The importance of government work to C&W Worldwide's bottom line was highlighted earlier this year when, shortly after the new UK coalition government was elected, an "emergency budget" that put government departmental spending on hold was enough to cause the operator to issue a profit warning. (See C&W Worldwide Updates on Q1.)

Mobile phone procurement also came in for criticism in Green's report, which noted that while 98 percent of the annual £21 million ($33.2 million) spent on devices was with one provider, the government departments had 68 separate contracts (negotiated separately and ending at different times) with that one supplier. "This makes the process very inefficient and again fails to leverage scale," notes the report.

It should be noted, though, that acting on the report's findings, and actually cutting UK government spending on anything at all, is not going to be easy. In fact, it's likely that management consultants would be employed, at additional cost, to make detailed recommendations that would likely take years to implement, if indeed they ever get acted upon at all.

So while, in theory, BT and C&W could find themselves rebidding for current business, it's less likely that their public sector revenues will decrease by anything approaching 30 to 40 percent.

— Ray Le Maistre, International Managing Editor, Light Reading

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