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Page 1: Cost Transformation

Crisis or Catalyst?Lessons from the frontline of cost transformation

For commercial organisations

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“On a GDP per hour worked basis ... the UK is above Japan, on a par with Canada and Italy, and below France, Germany and the US.”

Office for National Statistics1

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Foreword

There’s no denying it – the last two years have been challenging no matter what business you’re in.

And now the government has given companies new challenges to think about. VAT is set to rise – the British Retail Consortium thinks this could depress demand by £3.6 billion over four years and cost 163,000 jobs2. And public sector budgets aren’t just going to be pruned, they’re going to be slashed. The amount spent buying goods and services – £220 billion in 2008/09 – is an obvious target, and is bound to be scaled back. Suppliers will be asked to do more for less, and this will have knock-on consequences for the economy as a whole. Overall, the Office for Budget Responsibility thinks as many as 400,000 private-sector jobs could be lost3.

Expectations of what business will be able to achieve are nonetheless very high. The Government wants Britain to be “open for business” – to be a world-class trading nation in every sense. It wants to “create the most competitive corporate tax regime in the G20”4, which will certainly help but there’s no escaping the fact that a great deal more will need to be done. As of 2008 – the most recent year for which comparisons are available – Britain was 15 to 20 per cent less productive than competitors including USA, Germany and France.

If we are truly to position ourselves ahead of the pack, productivity, performance and levels of customer satisfaction won’t just have to be improved, they’ll need to be transformed. In short, we need to use Britain’s financial crisis as a catalyst for change.

Even today, though, 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. BT reduced total underlying costs by £1.8 billion in 2009/10 and also reduced its workforce significantly. BT 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. 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 industry can be emulated

We share the Government’s desire to get our economy back in good shape. 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

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Transformation requires tough choices

Concerted cost-squeezing is as familiar as it is regular for any business. 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 and commercial 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- and private-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. This 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 obligations to customers make cuts to services impossible

Though there may be activity your firm can stop or scale back – and that option should not be automatically ruled out – cost-cutting opportunities will often be limited. If a business 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, a business can then look for opportunities to share services, whether front or back office, with other firms. 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, firms can cut unnecessary demand on their operations. 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 businesses 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.

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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, firms will achieve immediate savings. By adopting alternatives like conferencing as their new standard way of doing things, they will gain not just short-term savings, but 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: businesses 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. Companies 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, businesses 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, firms 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 companies. Whether the common link is shared customers, common processes, geography or some combination, even the most specialist business will find others 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 firms 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 a business can realistically look ahead to a new era of higher-quality products and services delivered at lower cost.

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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 McKinsey5,6, 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 a business’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 their company’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 business 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 business 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 their firm is succeeding, become committed to the new way of working.

The need for transformation is a difficult message to communicate. Peoples’ concerns will inevitably be heightened when they are told their employer is in crisis and that significant reductions in costs must be achieved. Until they hear otherwise, they will fear for their jobs.

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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 a business 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 thrive.

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.

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

BT is one of the world’s leading providers of communications solutions and services. With four main lines of business – BT Global Services, Openreach, BT Retail and BT Wholesale – it operates in more than 170 countries around the world.

A highly successful company, its transformation from a UK fixed-line business into a global, networked IT services company had been going well. In March 2008, the company declared a profit of £2,506 million on revenues totaling £20,704 million, the result of 24 consecutive quarters of year-on-year growth. BT Global Services was regarded as BT’s growth engine and the company was confident it had the right strategy and people in place for the future.

Things were looking good, but then the financial crisis struck. BT as a whole faced the same challenges as many other large and complex businesses:

• it occasionally spent money where it didn’t need to

• to keep things moving, it spent money getting around obstacles rather than stopping to fix them

• and more was spent providing customers with excellent or bespoke service, but without always double-checking there was a business case to do so.

The company took swift and decisive action to turn things around. Across the Group as a whole, the workforce was cut by around 35,000 people over 18 months. Around 60% of these were agency and third party resource. Looking only at the financial year ending 31st March 2010, the workforce was reduced by around 20,000, with the majority of the reduction comprising agency and third party resource.

Total underlying operating costs and capital expenditure were reduced by around ten per cent – some £1.8 billion – without harming the business or its customers. The company’s energy bill alone was reduced by a sustainable £17 million per annum.

And a focus on reliability and getting things right first time had a big impact, not just on customers but on the company’s bottom line. In the region of £250 million was saved. In Openreach alone, the number of engineering visits made fell by a million over two years.

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The crisis at BT Global Services

BT Global Services – the part of BT that provides services to large corporate clients worldwide and public sector bodies across the UK – was in particular trouble.

Its 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.

However, a combination of higher costs, the slow delivery of cost-reduction initiatives and worsening economic conditions had caused its 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.

Existing cost-cutting programmes were accelerated, tight controls were imposed on discretionary spend and ‘root and branch’ reviews of operating expenses and capital expenditure were started.

Significant changes to BT Global Services’ senior management team followed. The aim was to send a clear signal to the organisation: big changes were on the way.

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

BT Global Services’ 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 everyoneUse 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 business as a whole. Travel was avoided if at all possible. When people 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 firms, 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 handled. 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 super-fast 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.

To achieve the reductions, a standardised approach to resource planning was enforced across the company. Controls were introduced – for example, a fixed ratio to demonstrate entitlement to PA support – and a freeze on external recruitment was imposed. The number of layers in the company’s management hierarchy was reduced and honest assessments were made of where BT had surplus people and where it was over-reliant on contractors. In 2007-08, they had formed 32 per cent of the company’s entire workforce.

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 cut by around 21,000 over an 18-month period, reducing the ‘cushion’ of non-direct labour in BT’s workforce from 32 to 25 per cent. 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 to achieve other savings.

Beyond this, the challenge was to reduce the scale and complexity 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, and 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.

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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. The most senior managers were brought together every 30 days to focus on the key problem areas, discuss issues, work them through and identify solutions. 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.

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 its goals, the behaviours that were expected and the actions they needed take.

Throughout, members of the 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.” 7

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.

The processes used to deliver and maintain products and services were also reviewed. Over time, these had become complex – the result of piecemeal changes made as BT’s portfolio evolved. If the company was to deliver the optimum customer experience at the lowest possible cost, this had to change. Adopting lessons from across other industries (particularly from large manufacturers), ‘factories’ that built and managed different services for customers were combined. Processes were broken down into simple and clear overarching components. Clear targets for improvement were then set, each linked to the company’s performance and reward framework.

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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.

In all three, it was important for things to be done not just as quickly as possible, but right first time. Aside from the impact on customer satisfaction, this has a big influence on efficiency. 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.

To maintain momentum, BT’s CEO-level operating committee takes weekly reports on right first time, and a monthly report is presented to the company’s Board. The impact on customers is checked through surveys and customer forums. And regular employee surveys check levels of awareness – that everyone in BT knows about right first time and what it means for them.

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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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 improvement 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

Full year proposed dividend 6.9p 6.5p 6

Capital expenditure 2,533 3,088 (18)

Free cash flow 1,933 737 162

Net debt4 9,283 10,361 (10)

BT Group results

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

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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.”8

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

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Examples of improvements in the commercial and public sectors

Firms around the world are constantly focused on five main areas:

• Reducing costs

• Making their people more productive

• Making their organisations more efficient

• Giving their customers better service

• Keeping their operations secure.

Significant progress has already been achieved: over the decade to 2007, the productivity of British businesses is said to have increased by 28 per cent9. Standards of customer service have equally risen a great deal.

In this section, we look at some examples of what leading organisations have achieved.

Reducing costs

Some areas of expenditure are common to all large organisations – office accommodation, ICT, travel and subsistence and so on. They have traditionally received a great deal of the CFO’s attention.

By replacing 19 legacy networks with a single, secure one, Britain’s Ministry of Defence saved £700 million over 10 years.

Oil and gas company, Geoservices, reduced its annual bill for phone services by more than €500,000 by moving to IP telephony. It re-invested some of the money to increase the capacity of its network to accommodate further business improvement initiatives.

Phone services to support Nestlé’s 7,000 employees in the UK and Ireland used to be bought locally from a range of suppliers. This made it difficult for the company to control costs. By moving to a single-supplier solution, it reduced capital costs by £30,000 and operating costs by £50,000 a year.

By introducing flexible working, Beachcroft LLP, the largest commercial law firm in the UK, has reduced the amount of office space it needs in Manchester by 25 per cent. By the time the new way of working has been fully implemented, it could reduce its need for accommodation by as much as an additional 25 per cent.

Another legal firm, CPA Global, reduced travel and subsistence costs by more than £30,000 a year by encouraging its top 250 managers to use conferencing services instead of meeting face-to-face. The change had wider benefits: it improved productivity and reduced the firm’s impact on the environment.

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Rexam, the world’s second largest manufacturer of packaging for consumer products, achieved similar results. It used to fly managers from South America to the UK three times a year for business reviews. By using web conferencing, it saves £16,000 a year on travel and subsistence and recovers two days per person per meeting for productive work.

HOK, a global provider of architectural planning, design, and delivery solutions, has gone further. Having installed telepresence conferencing suites in seven offices, it expects the costs of business travel to fall by 20 per cent. On that basis, it will achieve return on investment in just 24 months.

Making people more productive

New technologies are sometimes accused of wasting people’s time. If people spend too much time accessing websites like Facebook and eBay or checking personal emails when they are at work, for example, their productivity will certainly fall. But the opposite is more often the case – new technologies are helping people all over the world get tasks done much more quickly and squeeze more work into each working day.

By using video-conferencing technology to connect offices in Amsterdam, New York, Hong Kong and Tokyo, lifestyle brand, Tommy Hilfiger, has made collaboration between its design and manufacturing teams much more effective, increasing its agility and competitiveness. Virtual fitting rooms in two of the offices allow teams to discuss the development of every piece of new collections face-to-face without having to take long-distance flights.

Utility firm E.ON UK saved an average of £39 per user per month by introducing a cloud-based unified communications system. As well as reducing travel and mobile communication costs, the system gave users an average of 5.8 hours more time to do productive work each month. The system also increased the company’s resilience – making it easy for people to work from their homes and other locations when bad weather stops them travelling to their normal place of work.

By introducing an e-learning system, retailer GR & MM Blackledge (which trades as Bodycare) expected to triple the throughput of staff sitting its existing NVQ programme, while reducing the time taken to equip employees with new skills. The cost of administering training was set to fall by more than 60 per cent.

A field-force automation system has transformed the performance of Northumbrian Water’s field engineers. The way jobs were allocated was improved, boosting the productivity of the engineers involved by about ten per cent. The distance travelled by the company’s workforce fell by around 20 per cent, reducing both fuel costs and carbon emissions.

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Making organisations more efficient

Depending on how they are applied, information and communication technologies can either hold businesses back or transform the way they work.

Historically, each of mining company Anglo American’s seven business units had its own approach to ICT. As a result, the company had 358 different suppliers, 74 data centres and computer rooms, 18 different operating system ‘images’ on PCs, multiple separate service desks – and nothing in the way of a global wide area network (WAN). This increased costs and limited the company’s ability to gain advantage from its global scale. The situation has now been transformed. A WAN connects operations in 30 countries spread across three continents. The number of data centres has been cut back – to four – and the number of servers required reduced by more than 40 per cent. And global IP telephony and video conferencing platforms have boosted employee productivity and performance.

Having connected stores and other premises, fashion footwear company, Schuh, introduced thin-client applications to reduce the costs of providing and maintaining servers and terminals. New applications are helping it get products to market sooner and boost customer service. The retailer’s sales assistants are now better equipped to locate stock, arrange home deliveries and take orders for out-of-stock items. The incidence of under- and over-stocks has been reduced.

At Suffolk County Council, big improvements to adult care services were made by exploiting new technologies to re-engineer business processes. By locating practitioners alongside frontline colleagues, the number of assessments completed at the first point of contact has 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.

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Giving customers better service

The internet has transformed – and continues to transform – the way businesses interact with their customers. But ‘exposing’ your business and its processes online isn’t the only way to improve customer service.

To improve customer service, retailer WHSmith gave staff in airport and railway station outlets handheld computers that reduced the time its staff spent on back-office tasks such as stock control. The devices double-up as mobile tills, allowing staff to ‘queue bust’ when lines of customers start to form. By avoiding the need to provide standard tills on a ‘peak demand’ basis, the company has more space available to display goods.

The City of Edinburgh Council now receives up to 80 per cent of expressions of interest in social housing 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.

By introducing an automated identity verification system, broker TD Waterhouse has significantly reduced its need to check paper documents when customers ask to open new accounts. A process that used to take seven to ten days can now be completed online in as little as 20 minutes.

SPD, a joint venture between Procter & Gamble and Inverness Medical Innovations, uses a cloud-based contact centre service to improve service while reducing costs. The service allows the company to change scripts and messages much more quickly than it could before. Because it only has to pay for as much capacity as it needs day-by-day, the agile solution costs 30 per cent less than the platform it replaced.

By eliminating the need for service engineers to visit the depot every day to pick up paperwork and minimising distances travelled between jobs, a field force automation solution helped Anglian Home Improvements improve both productivity and customer service. The number of appointments kept has increased and the time customers have to wait for service has been reduced – from ten weeks or more to just a fortnight.

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. Ninety-two per cent of calls are now dealt with by an interactive voice response system.

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Keeping operations secure

Unsurprisingly, companies prefer to keep quiet about security.

The cost of breaches is high. According to the 2010 Information Security Breaches Survey, incidents can cost large companies as much as £690,000. Of this the cost of fixing any information technology damaged is a relatively small part. The biggest costs result from the consequences of the breach – disruptions to business, direct and indirect financial losses and damage to the company’s brand.10

That given, the fear of attracting legions of hackers determined to prove them wrong makes firms reluctant to talk publicly about the successes they have achieved.

Nonetheless, there are plenty of successes around. BT manages networks and IT systems for some of the most security-conscious organisations on the planet, for example – organisations including major banks, defence organisations, pharmaceutical companies and government departments. By ensuring security and resilience are built in from the outset, such companies gain maximum advantage as they put new technologies, products and services to work.

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It’s good to talk…

To find out more about BT’s experience and how the company might help you transform your organisation, please contact your BT account manager.

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Sources

1. ‘International comparisons of productivity’, Office for National Statistics, February 2010, http://www.statistics.gov.uk/pdfdir/icp0210.pdf

2. ‘VAT rise would cost 163,000 jobs, British Retail Consortium, May 27, 2010, http://www.brc.org.uk/details04.asp?id=1744

3. ‘Budget office’s forecasts of 2m jobs questioned’, The Guardian, July 1, 2010, http://www.guardian.co.uk/business/2010/jul/01/obr-2m-job-forecast-questioned

4. George Osborne’s ‘best in G20’ pledge on tax, May 2010 http://www.telegraph.co.uk/finance/businesslatestnews/7741778/George-Osbornes-best-in-G20-pledge-on-tax.html

5. ‘Organizing for successful change management’, July 2006, https://www.mckinseyquarterly.com/Organizing_for_successful_change_management_ A_McKinsey_Global_Survey_1809

6. ‘Creating organizational transformations’, mckinseyquarterly.com, August 2008, https://www.mckinseyquarterly.com/Creating_organizational_transformations_McKinsey_ Global_Survey_results_2195

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

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

9. ‘Public/private sector pay gap widens’, Sky News, June 18, 2010, http://news.sky.com/skynews/Home/Business/Public-Sector-Workers-Earn-30-More- Than-Private-Sector-According-To-Policy-Exchange-Report/Article/201006315651421?f=rss

10. ‘Information Security Breaches Survey 2010’, PricewaterhouseCoopers, April 2010, http://www.ukmediacentre.pwc.com/Media-Library/PwC-ISBS-report-2010-6bb.aspx

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