Crisis or Catalyst?Lessons from the front-line of cost transformation

Crisis or Catalyst?

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“Delivering the public spending cuts facing the new Government will not be easy. But those who argue it will be impossible without slashing services should take a look at BT.”

David WightonBusiness and City Editor, The TimesMay 20101

Crisis or Catalyst?

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Foreword

Your people are watching you. They know that pain is coming. Some are scared, others will be in denial. Many will have conjured up a vivid picture of Armageddon that is far worse than the measures you have in mind.

At Sandhurst, junior officers have Napoleon’s quote drummed into them: “There are no bad soldiers, only bad officers.” This applies equally when it comes to leading transformational change, especially when radical restructuring and job losses are required.

Sustainable cost cutting is about doing things differently, rather than just making do with less. A new operating model requires your people to change how they work which is mainly about changing behaviours, and far less about processes and systems. But how do you do this when your people may be clinging to what they know because they are worried?

It’s tough communicating the challenge ahead – engaging everyone in driving tactical prioritisation choices, co-designing new ways of working, judging where to apply blunt trauma versus careful surgery, breaking down silos and getting people working on processes end to end, challenging your suppliers and getting everyone focused on a single overriding objective: living within a new budget.

Even today, it is relatively rare for organisational-transformation programmes to succeed. Many surveys put the success rate at less than 40 per cent. In this context, BT is somewhat of an exception. Over the past 18 months, BT has reduced operating costs by £1.8 billion, lowered headcount by over 20,000 and restored its loss-making Global Services business to profitability, introducing seismic changes while keeping its employees on board and maintaining service to customers.

We learnt a great deal from working with our public and private sector customers. In this paper, we explore these lessons and describe in some detail how we applied them to our own business to drive a rapid turnaround. In particular:

1. Transformation requires some tough choices. People will find reasons to avoid it and these must be addressed

2. That people are the key to success requiring visible leadership at all levels

3. It is possible to cut costs while improving services at the same time

4. Good examples of productivity improvements in the public sector can be emulated.

We share a public sector heritage and your public service ethos. We can, and want, to help. More importantly, we have the skills and experience to make a real impact. So, call us – it’s good to talk.

British Telecommunications plc

Crisis or Catalyst?

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Transformation requires tough choices

Concerted cost-squeezing is as familiar as it is regular for any organisation. It is a necessary discipline to hold down costs and improve productivity.

But today’s economic reality demands a fundamental step-change in the cost of delivering public services. Nothing less than a wholesale transformation of the cost base will suffice if dramatic cuts in expenditure are to be achieved while maintaining the quality and availability of services.

Over recent months we have spoken to many public sector leaders about the challenge of cost transformation. Many raised similar concerns about continuing to meet obligations while fundamentally reshaping the cost base. We call these the common ‘yes but...’ myths.

Yes but... we must wait until we have a complete strategy. Short-term cost cutting is enough for now

When the scale of the challenge is so great, it is tempting to conclude that the first step should be a time-consuming piece of work to draw up a strategy. That is not the case. Indeed, when the financial challenge is urgent and severe, there is every reason to start the process of cost reduction straight away. There’s no need for an elaborate three-year plan before you can act. All that’s required is clarity about how you are going to start and sufficient governance to ensure effective decision-making.

This is not to say that work on a longer-term strategy should be put off – just that it needs to be done in parallel with short-term cost cutting. By reducing spending on items such as travel, marketing and advertising, agency staff and so on, an organisation not only sends a clear signal of intent, it buys time to take a more fundamental look at its direction and strategy.

Beware though: implementing cost-saving measures at speed can have unintended strategic consequences. The seemingly obvious decision to stop people travelling to meetings will deliver immediate savings. But if it means business does not get done, relationships erode and projects and careers stagnate, the cost savings will quickly be matched by reductions in productivity. The answer is not just to watch out for and address undesirable consequences, but to try to head them off from the start. By positioning change as a driver for a new operating model, people can be encouraged to respond more constructively, take measures to monitor the impact, spot undesirable consequences and address them.

Yes but... our public service obligations make cuts to services impossible

Though there may be activity your organisation can stop or scale back – and that option should not be automatically ruled out – cost-cutting opportunities will often be limited. If an organisation has been managed well, it should be carrying relatively little fat.

The answer lies in looking not simply at the products or services, but at how they are delivered. A critical step is to understand the unit cost of delivery, whether of internal transactions or services provided to customers, and to work through the hierarchy of options for reducing it. There may be surprising differences in the costs of providing the same service even between individual offices. Here, the adoption of best practice can deliver savings. But it is also important to look again for opportunities to streamline and to rationalise processes, particularly where separate services serve common customers or end users.

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Armed with an in-depth understanding of its cost-effectiveness, an organisation can then look for opportunities to share services, whether front or back office, with other organisations. Every organisation has its own characteristics and often a unique purpose, but the underlying processes it uses and many of its functions will be similar, if not identical, to those of others. If protecting existing products and services is the priority, sharing the means of production may well be the answer.

Demand management can present further opportunities to find savings. Simply by providing better information and sign-posting, organisations can cut unnecessary demand. Even when there is a universal entitlement to a free service, such as a helpline, it may be possible to route calls to lower-cost channels.

Yes but... big savings require automation and the effective use of technology, but we have no spare money to invest

With pressure to deliver immediate savings in the early stages of a cost transformation programme, investment in new technology may well be cut or frozen. But if the focus of the programme is solely about cutting the cost of current ways of doing things – effectively ‘squeezing’, success is likely to be short-lived. What is needed is a move to a new operating model, which delivers a lower cost base, and the platform from which to drive future efficiencies and productivity gains.

Technology will almost certainly play a major role in taking out unnecessary ‘people costs’. The question, therefore, becomes one of how best to free up investment and set priorities for the use of whatever ICT budget can be made available. Renegotiating contracts (see below), sharing capabilities (see above) and weeding out spend that has the lowest return on investment can all create space for priority investments. Beyond that, the growing availability of on-demand, pay-as-you-go services – from contact centre seats through to data storage and applications – can reduce up-front costs and give organisations the flexibility to adjust spending as their circumstances change.

Shorter term, efficiencies can be achieved by taking low-cost steps to reduce errors and drive up quality. By improving the content and presentation of standard letters, for example, the chance that recipients will need to call for clarification can be reduced. Improvements to scripts used by call handlers can reduce call times without compromising quality or regulatory compliance.

Yes but... punitive clauses make it unrealistic to seek savings from contract renegotiations

Suppliers will rarely be keen to reopen hard-won contracts that are being successfully and profitably delivered. However, any supplier serious about long-term partnership and winning new business will recognise the need to work collaboratively with customers faced with a compelling need to reduce their external spend. When times are tough, no contract can be viewed as a sacred cow.

If the apparent hurdle of penalty clauses is to be overcome, creative thinking will be required. There could be upsides for both parties. A reduction in margins could, for example, become acceptable to a supplier if offset by the realistic prospect of additional revenues. The answer is not to shy away from looking at the options. The way in which suppliers behave when times are tough will be indicative of their approach to future contracts.

Crisis or Catalyst?

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Yes but... making big cuts will mean having to give up on other key commitments

There can be no denying that, in the face of an urgent need to reduce costs, there is always great pressure to scale back or freeze other commitments – to carbon reduction, for example.

Genuine cost transformation only succeeds when rooted in a fundamental rethink of how the business works. It provides an opportunity to adopt ways of working that are not only more cost-effective, but also aligned to wider goals. A good example is travel reduction. By banning non-essential travel, organisations will achieve immediate savings. By adopting alternatives like conferencing as their new standard way of doing things, organisations will gain not just short-term savings, but the longer-term benefits such as a lower intrinsic cost of doing business, a better work-life balance for employees (even those at the top) and a smaller carbon footprint.

The lesson is clear: organisations should use cost transformation to make their operations better, not just cheaper. If changes don’t improve the services available to customers or make the workplace better for employees, there is very little incentive for stakeholders and those who have to live through and accept the change to engage positively or proactively.

Yes but... we don’t have the necessary in-house expertise and skills to drive transformation

Transformation programmes typically require the impetus and creativity of fresh minds. The pressure to cut spending on consultants and other professional advisors may cut off the traditional source of specialist skills and external perspectives. There are alternatives, however. Existing suppliers often have a depth of relevant experience and expertise beyond the capabilities deployed on particular contracts. Organisations may not think of them as providers of business advisory services, but they may well find not only a pool of knowledge and skills on which they can draw but a willingness to assist.

The other – often overlooked – source is within. All too often ‘talent’ pools and development programmes are discussed only in the context of retention and succession planning. At times when they are under real pressure, organisations have a real opportunity to engage their most capable individuals and draw them directly into resolving their challenges. By giving ‘talent’ a major role in the transformation, organisations can both reinforce the sense of ownership and secure personal commitment – a major consideration at times when good people might start looking for opportunities elsewhere.

A further option is to look to borrow and adopt learning and experience from other organisations. Whether the common link is shared customers, common processes, geography or some combination, even the most specialist organisation will find other businesses with which it can share lessons.

There is no easy way – or, indeed, value – in trying to finesse tough messages and difficult choices driven by the need to cut costs. But even the most honest and compelling case for a cost-reduction programme is unlikely to garner widespread support.

Reducing costs may be the imperative, but if organisations are to sustain a lower cost base and remain valued by customers and employees, the focus of change must be wider. They need a new blueprint that not only delivers a lower cost base but also offers upsides – both for those who deliver and for users or customers.

Success is achieved when real operating change is accomplished and an organisation can realistically look ahead to a new era of higher-quality products and services delivered at lower cost.

Crisis or Catalyst?

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People are the key to success

Even today, it is relatively rare for organisational transformation programmes to succeed. Many surveys, including those conducted by the likes of McKinsey2,3 put the success rate at less than 40 per cent.

So what makes the difference between success and failure? As in other areas of business, a 70:20:10 rule applies. Lasting change is achieved by focusing 70 per cent on human behaviour, 20 per cent on processes and 10 per cent on systems. All too often, the human element is not given sufficient emphasis. As experts and consultants have been pointing out for years, people are an organisation’s most important asset. Only when they have been engaged with the transformational challenge can process and technology improvements be brought in successfully to deliver lasting results.

Not understanding the importance of people will result in failure – not because of strategy but because of the human dimension. Organisations don’t change, people do. If staff don’t trust leadership, don’t share the organisation’s vision, don’t buy into the reason for change, and aren’t included in the planning – there will be no successful change – regardless of how brilliant the strategy.

Large-scale change usually triggers emotional reactions – denial, negativity, choice, tentative acceptance, commitment. Leadership can either facilitate this emotional process or ignore it and derail the transformation effort. Transformation is a leadership challenge. The talent in your organisation should be encouraged to step forward and see this as an opportunity for career enhancement. Most of your people can be encouraged to see a rethink of your operating model as an opportunity to address their common gripes about what is wrong with the way the organisation works now.

Your best people have a choice about whether they trust management to succeed or go elsewhere. A new kind of relationship, grounded in mutual trust and respect, needs to evolve between leaders and people, developed out of realistic expectations on both sides. Consult widely on the common concerns about how the organisation works today. Engage your people in articulating the causes of these concerns and involve them in generating ideas for changing the way things work. Get people to focus on whole processes end to end and remove the potential for re-work. Communicate the problem statements and the intended new way of working and then commit to tangible changes in 90 day cycles that they can witness. You are taking your people on a journey: they have to become aware of the challenge, understand the need for change, accept that they have a personal role in bringing this about, become involved with their part of it and over time, as they see that the organisation is succeeding, become committed to the new way of working.

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The need for transformation is a difficult message to communicate. Peoples’ concerns will inevitably be heightened when they are told their organisation is in crisis that significant reductions in costs must be achieved. Until they hear otherwise, they will fear for their jobs. Their worries must be addressed head on. Those at the top must therefore demonstrate visible leadership. An honest conversation with staff is required – one that will help them realise what is expected of them and instil the sense of purpose, pride, belief and fighting spirit that will be needed if a turnaround is to be achieved. Leaders must learn the importance of behaviour-based communication as a requirement for leading continuous change.

Once employees are brought on board to address the transformation challenges, they will not only be happier to implement new ways of working and embrace new technologies, they will offer insights that will help the organisation redesign its processes and become more efficient. Trust in the innate intelligence, capability, and creativity of your employees - and people will astound you - every talent, every idea, every skill is needed urgently if companies are to survive.

When you have developed a new operating model that makes doing the right things the right way easier, you need to consider how technology can make this new way of working come to life and also reduce the people intensity of your processes. The key lesson is that transformation is largely about behaviour, and much less about processes and systems.

Crisis or Catalyst?

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BT’s model for ongoing transformation

Cutting costs while improving services – BT plc, 2008-2010

BT is one of the world’s leading providers of communications solutions and services.

Operating in more than 170 countries, it employed 111,900 people at 31 March 2008. Many worked in or for BT Global Services, the part of its business that provides services to large corporate clients worldwide and public sector bodies across the UK.

BT Global Services’ revenues in the year to 31 March 2008 totalled £7,889 million – eight per cent more than the year before. The growth of its business had been particularly strong outside the UK. Seven market-leading businesses had been acquired during the year – in Europe, the Americas and Asia – and contracts had been won from 627 new corporate customers, increasing non-UK revenues by 21 per cent.

Things looked good – BT Global Services was regarded as BT’s growth engine – but then the financial crisis struck.

By October 2008, it was clear BT Global Services was in trouble. A combination of higher costs, the slow delivery of cost reduction initiatives and worsening economic conditions caused the profitability to collapse.

Action had to be taken, and it had to be taken fast. Costs needed to be cut, but without reducing the quality of the services it provided. Customer satisfaction couldn’t be put at risk.

Significant changes to BT Global Services’ senior management team followed and Hanif Lalani, a highly-experienced manager who had been BT’s Group Finance Director since 2005, became CEO. This sent a clear signal to the organisation: big changes were on the way.

The team worked forward in five stages. Its first action was to bring costs under tight central control and create a model for ongoing transformation.

1. ImposedisciplineConstrain travel and discretionary spend. Halt purchasing, centralise decision making, introduce new business rules and freeze recruitment

2. Rationalise supply chainConsolidate with fewer suppliers and renegotiate contracts. Centralise vendor management and require the use of preferred suppliers. Stop and review all CAPEX plans

3. Drive tactical efficiency and engage all peopleUse local headcount reduction targets to drive local prioritisation and efficiency. Demonstrate leadership through ‘town hall’ meetings. Speak regularly to every member of staff and take them on the journey. Implement technology to allow mobile and flexible working and rationalise property portfolio

4. Redesign the operating modelWipe the slate clean. Rethink how the organisation needs to work. Simplify processes, create shared service factories and focus on getting services right first time. Design the organisation structure last

5. Industrialise processesAutomate processes as far as possible, including across organisational boundaries. Enable customer self service, and minimise the manual handling of information

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1. Impose discipline

It is important at this stage to note that BT as a whole had ‘banked’ substantial cost efficiencies before the crunch hit.

For the majority of BT’s employees, flexible working had become the norm. More than 70,000 had been equipped to work wherever was best on a particular day – in one of the company’s offices, at home or on the move. If they needed a desk in a BT building for a while, they would simply find one that was free and use it. The savings had been significant. As some offices were fitted with flexidesks designed to be shared, others were closed. The cost of accommodation fell by around £500 million a year.

The use of audio and video conferencing services had also had a big impact. There is no doubt travelling to meetings is expensive. There are fares and hotel bills to pay, and time people spend on the road is relatively unproductive. BT had tackled this head on, convincing employees to use its conferencing services instead. In just one year, it avoided travel and subsistence expenses worth £111 million. Time worth at least £71 million was made available for more productive use.

Last but not least, BT’s IT infrastructure had been streamlined. An estate of around 3,500 legacy systems that had built up as product lines and business units acted independently was well on the way to being replaced by 14 state-of-the-art generic platforms – about 100 IT systems in all.

Nonetheless, BT Global Services needed to go further.

Decision making was centralised and strict financial controls were introduced. Recruitment was stopped, pay was frozen and end-of-year bonuses were set to zero. Travel was cut to the absolute minimum and discretionary spending was all but brought to a halt.

Importantly, the management team led from the front, imposing the same rules on themselves as they applied to the organisation as a whole. Hanif Lalani and his team avoided travel where they could. When they had to meet customers, colleagues and others face-to-face, they travelled as cheaply as possible, flying with budget airlines and staying in three-star hotels.

2. Rationalise supply chain

The management team also took a long hard look at how, where and on what money was being spent outside the business.

Like many other large organisations, BT spent money where it didn’t need to. Money was spent getting around obstacles rather than fixing them. More was spent to provide customers with an excellent and bespoke service – without always checking it was the best thing for the business.

One problem was that the costs of decisions weren’t always clear to the people who made them. People could see one or just a few pieces of the jigsaw. For them to reach the right conclusions, the picture had to be joined up. The consequences were apparent not just in the way decisions were made, but in how contracts for goods and services were let. To address them, the management of vendors was centralised and contracts were renegotiated. To ensure BT got the best deals, lists of preferred suppliers were updated and their use enforced.

Capital expenditure was subjected to particular scrutiny. Every proposal for new investment was examined in great detail, and cutbacks made as appropriate. Across BT as a whole, the CAPEX budget was set at £2.7 billion for the year ahead – 2009/10. A significant sum, though this was much less than the £3.3 billion that had been spent in the last full year before the crisis struck. Significant savings would have to be made in BT Global Services and elsewhere, but without holding the business back. For example, money needed to be invested to meet the needs of customers – to increase the capacity of BT’s global network and deploy superfast broadband services across the UK.

(As things worked out, BT did even better than it expected. The amount spent on capital in 2009/10 was £2.5 billion – £800 million less than in 2008/09.)

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3. Drive tactical efficiency and engage everyone

The next focus was the organisation.

There was no alternative – if costs were to be reduced, the number of people employed would have to be cut and the organisation restructured.

BT has a long-standing commitment to manage reductions in headcount without recourse to compulsory redundancies. This had enabled it to keep employees onside as it reduced its workforce from 241,000 in 1984 to 111,900 in 2008 while simultaneously acquiring businesses (and hence employees) around the world. In 2008/09, the number of full-time employees was reduced by 5,000 – most leaving after the crisis struck – and a further 9,000 left without being replaced in 2009/10.

An immediate decision was made to rein back on work shipped out to agencies, partners and suppliers and on the number of contractors employed to fill temporary posts. The number of indirect employees working through agencies or third-party contractors was reduced by around 11,000. There was, after all, no point in paying people outside the business to do things that employees becoming free could do in house.

In parallel, BT Global Services renewed its focus on flexible working, taking advantage of advances in technology to make its workforce even more flexible and productive, make even better use of accommodation and achieve other savings.

Beyond this, the challenge was to reduce the scale of BT Global Services, pretty much across the board. To deliver the savings that were needed, the organisation would have to go on a crash diet. There wasn’t enough time to design a new structure from the top – that would have to wait until later. In the short term, the only option was to impose new – lower – headcounts on managers and leave them to restructure their functions accordingly.

To keep managers focused on the delivery of products and services, a way had to be found to free them of the people-management challenges that would be caused as staff became ‘surplus’. Here, an innovation BT had developed to help it cope with previous changes was used to great advantage. Displaced employees were moved immediately out of their old teams into a central pool – the BT Transition Centre (BTTC) – where professionals were available to give them any advice and training they would need to fill vacancies across the company as they were created. BTTC also acts as an in-house temp agency, so people aren’t idle for long. While they search for a permanent position, they take on short-term projects that might otherwise have been resourced by taking on temporary staff.

Clear and effective communication was essential throughout. At the outset, it was vital that people understood why changes were needed, the urgency of the situation and what they needed to do as a result. As things progressed, they needed to be kept up-to-date, told how well they were doing and briefed on what they needed to do next.

BT Global Services recognised that ongoing engagement with senior managers would be essential given the breadth of transformation and the urgency of turning its business around. What was termed a ‘CEO Acceleration Programme’ was created to deliver the impetus required. Face-to-face meetings involving Hanif Lalani, his direct reports and senior managers were held on a 30-day cycle, focused on identifying the problems, discussing the issues, working them through and looking at how to solve them. The aim was to create a sense of accountability and build momentum, accelerating the pace of change. Surveys were conducted to make sure managers were passing on messages, and their results reviewed as part of the 30-day cycle.

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Later, a wider programme of face-to-face communication events called ‘The Difference is You’ was launched, the aim being to ensure everyone in BT Global Services understood the organisation’s goals, the behaviours that were expected and the actions they needed take.

Throughout, Lalani and his top team remained highly visible – explaining what was going on and answering the questions people had. Honesty, openness and transparency were the order of the day. As McKinsey has pointed out: “Having a leader who is open about a company’s problems is necessary for real change to happen at all.”4

4. Redesign the operating model

The net effect of the first three steps was to stabilise the patient – BT Global Services – and create space for the strategic transformation that would be required to restore the business to long-term health.

The slate was wiped clean. Thinking wouldn’t be constrained by the past – by processes and organisational structures that were right for an earlier age. If BT Global Services was going to be transformed, the job would be done right – based on the best practices available today.

An industry-standard technique – Overhead Value Analysis (OVA) – was used to understand where costs lay in business processes. This was important – new processes couldn’t be based on anecdotal evidence and ‘gut feeling’; they had to be based on facts.

A new operating model was developed as the blueprint for what ‘good’ should be. It was focused on generating cash – not on other measures like return on investment and revenue growth. As a service business, this was vital.

The business was restructured to focus more strongly on customers. Three market-facing units were created – each focused on managing a particular group of relationships. They serve UK customers, multinational corporations and business-to-business markets outside the UK. Supporting them are central teams charged with developing and delivering services and so on.

BT Global Services also focused on what mattered most to its customers. Performance in three areas was paramount:

• Concept to market – getting new products and services to market as quickly as possible

• Lead to cash – reducing the time taken to fulfil customers’ orders and thereby generate income

• Time to resolve – responding quickly and appropriately as and when problems occur.

To drive up performance in these areas, processes were simplified as far as possible. Factories that ‘generated’ different services for customers were combined. And attention was focused on maximising efficiency by doing things right first time. Money is quickly wasted if the wrong person is sent to do a job or the right person is sent with the wrong parts, for example.

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5. Industrialise processes

The final focus has been to reduce the amount of human effort needed to complete tasks – ideally to zero.

A series of ‘Zero People Intensity’ (ZPI) programmes was launched to reduce the need for people to do low-value, often highly repetitive, tasks and eliminate the error-prone manual ’glue’ that can be needed to get jobs done in situations involving combinations of otherwise-isolated processes and systems.

For example, BT Global Services found that half the orders it received arrived electronically – such as by email. This often created problems. Customers didn’t always know what information to provide, so orders couldn’t be actioned immediately. Questions had to be asked and answers found – it all soaked up time.

But customers’ willingness to interact with BT Global Services electronically also highlighted the solution – to cut out middlemen and delay by allowing customers to interact directly with BT’s IT systems online. New online portals have been developed that do just that – and ensure all the data that’s needed is captured up front.

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1. Before specific items, leaver costs, net interest on pensions and BT Global Services contract and financial review charges in 2008/09. Adjusted revenue is stated before specific items and BT Global Services contract and financial review charges in 2008/09

2. Underlying operating costs and capital expenditure, before specific items, leaver costs and BT Global Services contract and financial review charges in 2008/09

3. Before pension deficit payment of £nil in q4 2009/10 (q4 2008/09: £nil) and £525m in FY 2009/10 (FY 2008/09: £nil), but after the cash costs of BT Global Services restructuring

4. Net debt is reconciled in note 8

5. Underlying operating costs before specific items, depreciation and amortisation.

The difference a year makes

The difference a year makes: BT – 2009 to 2010

• Full year results ahead of our outlook for the year

• Revenue down two per cent in the year, ahead of expectations

• Capital expenditure reduced by 18 per cent in the year

• Free cash flow of £1.9 billion, an improvement of £1.2 billion over last year

• Net debt reduced by over ten per cent in the year

• Total labour resource reduced by 20,000 (majority agency and third party)

• BT Global Services 40 per cent improvement in EBITDA for 09-10

• In 2010 a 10.5 per cent increase in the internal scores used to measure customer service. This compares with a nine per cent improvement in 2008 and 17 per cent in 2009.

Year to 31 March

2010 £m

20091

£mChange %

Revenues

- adjusted2 £20,911 £21,431 (2)

- reported £20,859 £21,390 (2)

EBITDA

- adjusted2 £5,781 £5,442 6

- reported £5,162 £3,191 62

Operating profit (loss)

- adjusted2 £2,742 £2,552 7

- reported £2,123 301 n/m

Profit (loss) before tax

- adjusted3 £1,877 1,658 13

- reported £1,007 (244) n/m

Earnings (loss) per share

- adjusted3 18.6p 16.0p 16

- reported 13.3p (2.5)p n/m

Fully year proposed dividend 6.9p 6.5p 6

Capital expenditure 2,533 3,088 (18)

Free cash flow4 1,933 737 162

Net debt5 9,283 10,361 (10)

BT Group results

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Next steps

BT Global Services may be just one year into a three-year change process, but it is already delivering significant results. Those leading the transformation recognise the business is on an ongoing journey. The focus on cost control and efficiency improvement will have to be maintained over the coming years.

It is rather like a patient that has suffered a heart attack. Immediately after the crisis, you change your habits but, over time, the tendency is to slip back. As Cranfield School of Management’s Graham Clark says in his article ‘Reconnecting After Change’: “the old adage that so often we declare victory too soon is absolutely true around change.”5

For BT, the challenge is threefold:

• To make sure the organisation doesn’t slip back too far. New attitudes and behaviours need to stick. There won’t be a day when the spending caps are lifted, cost controls are relaxed and things go back to the way they were before

• To maintain the commitment of the talent that has helped turn the business around and transfer the passion, drive and determination they have displayed to those who’ll succeed them in the long term

• To keep the focus on customers, efficiency and automation as growth returns.

The organisation is clear: it has turned a corner, managed costs out, improved service levels and is heading in the right direction to achieving a successful turnaround.

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In Suffolk, where BT works in partnership with Suffolk County Council and Mid-Suffolk District Council, the introduction of hot-desking and other forms of flexible working increased the occupancy of desks from 50 to 75 per cent. Accommodation costs were reduced by 25 per cent.

The Defence Fixed Telecommunications Service programme that BT leads for the Ministry of Defence has brought 19 networks together, saving the MoD £700 million over 10 years.

In Edinburgh, cost savings equivalent to a £9 reduction in council tax per resident were delivered through changes in the way IT applications were supplied. The number of servers needed to deliver applications to public-sector workers was reduced from 700 to 437 and the number of business applications in use across the authority from 4,000 to 400, reducing the costs of licenses and maintenance as well as support. A total of £25 million was saved over ten years.

By making it possible for mobile health workers to access clinical records while they are making home visits, unnecessary referrals for treatment and hospital admission are being avoided. If fully deployed across Northern Lincolnshire, it could save the NHS £450,000 a month.

Workforce reduction, redeployment and retraining

BT and the public sector share their preference for avoiding compulsory redundancies. The transition centre model BT has developed would translate well into many public sector organisations – perhaps across the public sector as a whole. The company’s expertise in e-Learning – a highly cost-effective way of retraining and upskilling staff – could also be used to wider advantage. It’s estimated that central government bodies spend up to £1 billion a year on learning and development and that local authorities spend about half as much – some £540 million a year.

Examples of productivity improvements in public sector

The public sector already has some excellent examples of redefining organisational operating models, engaging their people and then using technology to enable these new ways of working.

Cost control The public sector spends a great deal in areas of expenditure common to all large organisations – on office accommodation, ICT, travel and subsistence and so on. BT’s record shows that big savings can be made provided workforces are properly encouraged and supported. number of business applications in use across the authority from 4,000 to 500, reducing the cost of licenses and maintenance as well as support. A total of £25 million was saved over ten years.

Elsewhere, BT equipped home care staff with hand-held BlackBerry computing devices integrated with the council’s IT systems. By reducing the need for them to visit branch offices, the number of visits they could make each day was increased – from two or three to four or five.

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17.

Cost transformationIn recent years, BT has set up partnerships with six of the UK’s most forward-thinking local authorities – those in Edinburgh, Liverpool, Rotherham, Sandwell, South Tyneside and Suffolk. The focus of these partnerships has been clear from the outset – to reduce costs while maintaining or, ideally, improving the quality of public services. And a great deal has been achieved – looking across the six partnerships, cost savings range between 15 and 25 per cent.

Analysis conducted recently suggests such savings could easily be replicated. If they were, a typical local authority could save more than £30 million per annum by implementing the best of the practices the company and its partners have developed and deployed.

In his 2006 report on access to public services, Sir David Varney6 pointed out that the tradition of providing contact points on a per-department basis made it extraordinarily difficult for people to interact with local authorities and other public-sector bodies and get the help or services they needed. At one local authority a myriad of separate contact numbers has been replaced by just one. The number of calls received has reduced by more than 50 per cent – the result of it being absolutely clear which number people should call. And standards of service have improved dramatically – the result of a real focus on managing each and every interaction as efficiently as possible. Ninety per cent of calls are answered within 30 seconds and 96 per cent of requests and enquiries are resolved at the first point of contact.

In Liverpool, the partnership transformed the ways in which welfare benefits are calculated and paid and revenues are collected. Using new technology, the processes followed were redesigned. Staff were given additional training and significant improvements were made to the ways in which customers were able to access the services on offer. The results have been dramatic. Every month, more than 3,000 claimants benefit from the ‘10 day promise’ the changes made possible – that those who submit a claim or details of a change in circumstances and the evidence to support it will be told how much benefit they are entitled to within 10 days. A 19 per cent increase in the numbers claiming benefit – a result of the recession – has been accommodated at no extra cost. And the accuracy of calculations has increased. The amount refunded to central government as a result of incorrect payments has been reduced from more than £5 million to less than £1 million a year.

Between April 2008 and March 2010, BT reduced the number of people it employs full time by 14,000 – around 12.5 per cent – without recourse to compulsory redundancies. Its transition centre helped more than 5,000 to find new jobs within the company.

In one recent case, the Defence Learning Portal at the Ministry of Defence is estimated to have saved the organisation more than £1 million. Around 500 electricians in the Royal Engineers had to be trained in the Institution of Engineering & Technology’s new wiring regulations. The last time the regulations had been updated, every electrician had to travel to Chatham to complete a one-week course. The process took more than 18 months to complete. In 2009, it was a very different story. Training was delivered using DLP, so electricians could complete it wherever they happened to be posted. They could choose when to sit the course, fitting it around their operational commitments.

Crisis or Catalyst?

18.

Right first timeNo organisation does everything right first time on every occasion, but some get much more right than others. It’s built into their behaviours and processes, and their costs are much lower as a result. It’s tough to eliminate waste from a large and complex organisation, but there are some great examples of success.

At one local authority, it used to take an average of 23 days to process claims for housing benefit. Forms were so complex they were rarely completed correctly. People couldn’t understand which supporting documents to provide. A great deal of time was wasted as clarifications and the right paperwork were sought. By focusing on ‘right first time’, the process has been transformed. Claims are now processed in an average of 3.4 days. Customer satisfaction has increased – from 77.1 to 98 per cent.

Automation

To further reduce waste and improve customer service, BT has focused on automation and self-service. Such approaches are equally applicable in the public sector.

The introduction of online self-service reduced the number of personnel and payroll enquries dealt with by HR staff at one authority by 50 per cent, saving £3 million a year. The introduction of online payslips and expense claims saved £100,000 a year. And the use of an electronic document management system to eliminate paper saved more than £150,000 a year.

At the Guy’s and St Thomas’ NHS Foundation Trust, the handling of routine enquiries about appointment scheduling, patient transport and so on has been streamlined and automated. 92 per cent of calls are now dealt with by an interactive voice response system.

In Edinburgh, up to 80 per cent of expressions of interest in social housing are now submitted online. As well as improving the Council’s efficiency, the transformation means staff have been freed from administering a complex points-based allocation system. Results show that, as people are offered more choice in the selection of their homes, they will remain in the property for longer and create more stable communities.

In Rotherham, 140,000 fewer paper documents are being produced each year as a result of the council’s procurement processes and the time the procurement team takes to process requisitions has reduced dramatically. Before it introduced a new online procurement system, only around 10 per cent of requisitions were processed within four days. Now, more than 70 per cent of transactions are handled in fractions of a second. According to the Audit Commission, savings amounted to £19.3 million over a three year review period7. The process improvements enabled a 20 per cent reduction in staff.

And in Suffolk, big improvements have been delivered in adult social care by locating practitioners alongside frontline colleagues. The number of assessments that completed at the first point of contact had been increased to more than 75 per cent. Standards of service have been improved. A survey showed the number of people who were happy with the service had increased from 82 per cent to 90 per cent.

Crisis or Catalyst?

19.

It’s good to talk…

To find out more about BT’s experience and how the company might help the public sector transform, please contact:

Mark QuartermainePresident and Managing Director, UK Markets, BT Global Services

Email: mark.quartermaine@bt.com

Telephone: 01252 777824

Douglas Johnson-PoensgenVice President, Business Development, BT Global Services

Email: douglas.johnson-poensgen@bt.com

Telephone: 020 7777 6322

Neil SuttonVice President, Global Portfolio, BT Global Services

Email: neil.j.sutton@bt.com

Telephone: 020 8892 6337

Sources

1. ‘Switching taxation to spending has its merits’, The Times, May 14, 2010 http://business.timesonline.co.uk/tol/business/columnists/article7125944.ece

2. ‘Organizing for successful change management’, July 2006 https://www.mckinseyquarterly.com/Organizing_for_successful_change_management_A_McKinsey_Global_Survey_1809

3. ‘Creating organizational transformations’, mckinseyquarterly.com, August 2008 https://www.mckinseyquarterly.com/Creating_organizational_transformations_McKinsey_Global_Survey_results_2195

4. ‘Corporate transformation under pressure’, McKinsey Quarterly, April 2009 https://www.mckinseyquarterly.com/Corporate_transformation_under_pressure_2308

5. ‘Reconnecting after change’, Cranfield University, April 9, 2010 http://www.cranfieldknowledgeinterchange.com/topic.aspx?utm_source=somwebsite&utm_medium=homebanner&utm_campaign=coins

6. ‘Service transformation: A better service for citizens and businesses, a better deal for the taxpayer’, Sir David Varney, December 2006 http://www.hm-treasury.gov.uk/media/4/F/pbr06_varney_review.pdf

7. ‘Back to front: efficiency of back office functions in local government’, The Audit Commission, October 2008 http://www.auditcommission.gov.uk/SiteCollectionDocuments/AuditCommissionReports/NationalStudies/BackToFront8Oct08REP.pdf

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