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Trouble at the top - BT Global Services CEO departs after only 18 months

Richard Mahony

Trouble at the top - BT Global Services CEO departs after only 18 months

With the announcement today of the resignation of BT Global Services' CEO, Ovum explores the ramifications of Francois Barrault's departure.

Francois Barrault was a formidable character in BT Global Services, and whilst he has been at the helm of the group its revenue performance has been stellar. In fact, the business today advised that BT Global Services will report 15% year-on-year growth.

However, it is the EBITDA performance that has most likely created tension between salesman Francois Barrault and the former accountant CEO Ian Livingstone. Accompanying today's announcement was revised guidance that BT Global Services' EBITDA would be in the range of 7-8%, which is below city expectations for the financial year. Ian Livingstone described BT Global Services' performance as disappointing - an assessment that no doubt contributed to Barrault's departure.

For some time BT Global Services has been chasing a well-publicised EBITDA target which was 'north' of 15%, and up until fairly recently the business remained bullish that this target would be met.

An EBITDA of 7-8% and the dramatic overnight drop of expectations is clearly not a sustainable business in the longer term.

So what's behind this fall in EBITDA? Unsurprisingly, the guidance here is somewhat thin. BT Global Services reports that cost-efficiency savings have been slow to come through and margins have continued to be eroded at the larger end of the managed services deals.

Cost savings and standardisation

Items that the business targeted for cost savings included 10% workforce reduction in the back office, and global sourcing efficiencies (around £50 million), along with other process efficiencies, but we have not been told which cost savings are proving troublesome. However, the business is confident that it can reach its EBITDA targets once cost savings are brought back on track. The new BT Global Services CEO, Hanif Lalani, the former Group Finance Director, will provide revised EBITDA targets at a later date.

BT puts much of the poor margin performance down to a lack of standardisation in its business, and it will need to offer more repeatable solutions if it is to meet its margin targets. Such standardisation is a challenge for all telcos and is a keystone in providers' next-generation network plans. BT Global Services is driving standardisation, with a new raft of services and network features through its service-oriented infrastructure (SOI). For those interested, we provided a view on the SOI approach in our report The transformation to enterprise telco 2.0: BT Global Services.

Thinning margins

The thinning margins for MNC managed services is perhaps more worrisome. BT Global Services' own analysis points out that margins for the sizable multinational deals in the top end of the market are around half those in the mid-market. Ovum questioned the profitability of some of the large 'foundation' international deals that BT Global Services signed five or so years ago. The worst case scenario is that BT Global Services has a number of 'toxic' contracts in its order book, which were cash front-end heavy and have failed to meet planned profitability. There is no indication that this is the case, but the business is clearly disappointed with its profitability performance at the top end of the market.

Concern around the profitability at the top end of the market is not uncommon. For example, Orange Business Services has decided that unless circumstances are exceptional it will no longer compete in the £1 billion mega-deal market, citing that the margins on offer were generally unappetising. This is a conclusion that Ovum does not wholly concur with - although we see viable business in the multinational market, it is clear that attractive margins are not found by selling bandwidth alone. The challenge is to mobilise service capability globally and there are some good examples of such attractive contracts.

So what can we expect? We are told that there's not a dramatic shift in BT Global Services' strategy, but the business will apply more scrutiny to commercial risk. Large multinationals can perhaps not expect to receive the same commercial flexibility that BT Global Services has been renowned for.

Clearly, accelerated cost savings are needed by BT Global Services, and we include within this statement the SOI programme, which will offer more repeatable solutions. However, we would expect BT Global Services to partner with more cloud-based services as it looks to accelerate this desire for standardisation in its business. Also expect a revitalised approach to the mid-market as BT chases after fatter margins in this market.

Hanif is absolutely the right man for the job to manage the bottom line. He is well regarded within BT Global Services - however, it remains to be seen whether he has the sales innovation and commercial relationships that Andy Green and Francois Barrault offered.

BT will announce its results for the second quarter and first half year to 30 September 2008 on 13 November. Bar BT Global Services, the business expects other groups in the business will perform well.

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