Cost management - BT case study

All companies, big or small, should continuously assess their cost structures to ensure they deliver returns for shareholders and create a decent value proposition for customers. However, cost optimisation programmes, if not managed properly, can end up delivering short-term non-repeatable savings, while at the same time damaging a company’s customer services and innovation capability in the long term. As one of the founding members of the group cost transformation team, I was personally involved in many of the cost reducing initiatives launched. I would like to share some of my own reflections on the three key success factors of BT’s cost transformation (CT).

Based on our experience of cost assessment in BT Group, we believe a successful and sustainable CT programme needs to focus on reducing the cost of failures and not just cutting costs, building a strong internal capability to execute the transformation agenda, and establishing a strong programme governance framework to manage different initiatives, stakeholders and priorities.

BT Group is a world-leading telecommunication company with around 100,000 employees. In 2008, it was struggling financially due to a growing pension deficit and heavy debt burden. With the group’s valuation woefully low at £6bn, the company was vulnerable to be taken over by competitors or venture capital companies. Due to fixed line telecommunication being a mature industry with minimal growth potential, we turned to our cost base in order to increase profits.|

Under the leadership of the BT Group chief financial officer we launched a group-wide CT programme that helped us to take out about £5.5bn in costs over a period of seven years. We used these savings to invest in enhanced customer services and break into new businesses, such as TV and mobile, and eventually got the company back on track to grow again, so that in 2016 the valuation of the company had grown to almost £40bn – outperforming the FTSE and European telco index by a factor of three.

A core principle of BT’s CT methodology is that recommendations must always be driven by data and evidence; it must be proven rather than just a gut feeling. Sometimes, our analysis would show an outcome different from the senior stakeholder’s gut feeling. When this happened, we would challenge the stakeholder with our factually-based findings and work with them to get to the right answers.

We summarised the findings and applied a lean six-sigma methodology to develop our own in-house toolkit, called overhead value analysis (OVA) and value for money (VFM). Using these toolkits, we followed a programmatic way to identify failure points and clearly estimate how much excessive capacity was in our back-office functions across the entire BT Group. Most importantly, because this approach not only reduced our cost base but improved customer service, it was easy to get buy-in from across the organisation from senior management to frontline employees.

Instead of starting with a cost-cutting target, we focused on eliminating the cost of failure in the process. For example, when looking at BT’s contact centres across the UK, we found that there was a team of 200 people who logged calls from our first line customer service agents and then passed them on to the engineers. We now have the first line agents logging issues themselves and speaking directly to field engineers. This change improved our response time to customers by an average of six minutes, as well as enabling us to reallocate those 200 people, saving £10m. During the various cost transformation reviews we conducted, we identified many other similar opportunities to improve operational processes and reduce costs.

CT is about fundamentally changing the way an organisation operates in order to reduce costs, improve operations/customer services, and become more scalable/adaptable to future growth. A typical CT project started with an analytical driven discovery review that normally takes three to four months, followed by six to 18 months of implementation. In terms of the methodology, it’s been largely based on a define, measure, analyse, improve, and control (DMAIC) approach, which is something that we have very much followed through in most of the review. In addition, we have combined this overall approach with many other best practices, such as stakeholder management, analysis for call handling times, etc. Our typical lifecycle of a programme can be summarised in the following five steps:

1. Initiate and plan the project to make sure that we have a clear problem statement and manageable scope.
2. Baseline the as-is situation and understand the business problem.
3. Analyse the situation using the data and forensic research to identify the improvement initiatives.
4. Develop recommendations and achieve buy-in and sign-off from the business.
5. Implement the changes with fast pace and track progress to realise the benefits.

In most of the cases, we would focus on identifying improvement opportunities in the following areas:

• strategy and structure of the business units;
• processes used to provide services to customers (either internal or external);
• resourcing level of the unit and facilities that the unit occupies;
• people and organisational efficiency of the unit, including productivity and spans and layers of the organisation;
• system and technologies used by the business; and
• capability of getting change implemented at a fast pace and right first time.

In a large organisation, such as BT, it is essential that change – at all levels of the business – is conducted in a coherent manner and happens for the right reasons. Our approach ensures that change initiatives – from strategic, top-down transformation, to local, bottom-up improvements – are fundamentally aligned with the outcomes they deliver, in order to support the growth and cost transformation journey of BT.

The transformation cycle, which begins with the discovery phase, typically lasts three months and starts with a clearly defined problem statement that is solved using the DMAIC approach and a suite of analytical tools. These recommendations were then implemented over as much time as was required depending on their complexity. This phase is characterised by detailed plans and execution milestones, strong sponsorship, governance and benefits, which are baked into the budgets and forecasts with frequent updates and clear escalation paths.

After this phase, we began the bottom-up continuous improvement, where the local teams focussed on small incremental gains. The key is that we then revisited the area and started the cycle again, due to technology and product innovations or enhancements in our analytical methodology.

A key feature of BT’s CT approach is that most of the programmes are led by internal consultants. We believe no one knows our business better than ourselves, and although we do sometimes engage with external consultancy firms, such as McKinsey, BCG, and Accenture, this is only on a limited scale to fill our capability gap.

In BT, CT is a group strategy, and we have strong support from the group CEO and CFO. In order to establish a governance structure that is suitable for the project, it is important to have the freedom to select the steering committee. For example, when the project reviews a business department, the CEO of that line of business is the sponsor and his team leaders sit on the steering committee, which meets every four or five weeks for review and decision-making. Each week, a progress update is sent to the sponsor and steering group members. This governance structure gives the CT team a unique advantage to bypass a lot of office politics and enables the programme to move more quickly.

Once we had established our own capabilities internally, we almost entirely ceased using external consultants. We specifically recruited people to assist with the programme and empowered them to challenge senior staff as well as allocating the project a senior profile, providing them with the kudos required to enable change to take place.

In conclusion, BT’s overall strategy is founded on broadening and deepening our customer relationships. The three pillars of our strategy are: delivering superior customer service, transforming our costs, and investing for growth. The better our customer service, the more we’ll sell and the less time and money we need to spend correcting them. And the better we manage our costs, the better value for money we can offer our customers and the more we can invest in giving customers what they need today and tomorrow. These principles drive our business model.

From 2008 to 2016, we have been heavily dependent on cost transformation to assist cash flow. This has allowed us to reinvest some of the savings generated and given us the oxygen needed to grow the business over the long term. In the years ahead, we will need to drive revenue growth. Improving customer services, combined with the continued transformation of our costs, will provide the platform for long-term and sustainable cash flow growth, creating a virtuous circle that we’ll also use to reward our shareholders and other stakeholders.

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Business and Management, Issue 262, March 2018

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