BT chief hopes call from NHS will boost his group's long-term health

Telecoms group tries to pull in new contracts as its traditional revenues decline

Ben Verwaayen, the chief executive of BT Group, will be waiting by his phone next week for an extremely important hospital call. His own health is not in question, as far as we know, but rather, the problem is the future health of BT itself.

The call he is hoping to receive will most likely come from Richard Granger, the IT director of the National Health Service. If everything goes to plan, Mr Granger will break the good news to Mr Verwaayen that BT has beaten off stiff competition from Cable & Wireless to win the NHS's latest telecoms outsourcing contract, worth several hundred million pounds.

The contract , to provide the NHS with a new high speed telecoms network for whizzing patient records and urgent telephone calls between hospitals and doctors' surgeries, will be further proof that BT can look forward to a long and healthy life as a transformed telecoms company, fit to survive in the world of mobile phones and the internet.

The fact that BT and Mr Verwaayen urgently need to win contracts was graphically underlined yesterday when the company unveiled its third-quarter results.

Group turnover was down 2.6 per cent at £4.5bn. However, within that its traditional business revenues, such as fixed line, were down 6 per cent at £3.7bn. Group operating profits were down 2 per cent to £743m.

Because of figures like these, Mr Verwaayen is trying to transform BT's business from relying on traditional services to what it dubs "new wave" sources of income, namely broadband internet connections, mobile telecoms services and IT solutions for large companies and government organisations such as the NHS.

The charts show how BT's new wave turnover in quarter three rose a healthy 31 per cent to more than £800m, with its solutions and outsourcing business, BT Syntegra, growing the most. Broadband internet connections continued to rise and, as of 6 February, stood at 1.93m.

But they also show how rapidly traditional turnover is falling and how gross margins in its retail business fell from £995m in the third quarter last year to £934m this year.

Although BT is fighting hard to preserve as much of its traditional business as it can - in directory inquiries it has fought back from a collapsing market share, which fell from 65 per cent to 25 per cent but is now back at 40 per cent. Traditional business is shrinking and there is very little BT can do about it.

After all, who makes a call these days when you can email? Likewise, who sends faxes anymore? And when you do decide to phone a friend you are just as likely to use your mobile as a fixed-line telephone.

Even BT's fixed-line business is under attack from alternative network operators who have been busy eroding BT's traditional business for years thanks to deregulation. BT is having its lunch eaten from both ends of the table.

"The lunch these people are eating is a very sober one," said Mr Verwaayen, stressing how hard BT is working to manage the decline in its traditional business.

"The transformation of our marketplace is accelerating and BT is driving that change by providing our customers with new technology and services with greater capabilities and lower cost," he said.

But life is rarely that simple. Given its size and its existing control over much of the country's essential communications backbone, trying to enter new areas of business while beating off competition from the likes of C&W is not going to be straight forward for BT. Indeed there are serious question marks over how sustainable the income flows from divisions such as BT Syntegra really are.

Take the NHS for instance. It has outsourced IT contracts worth £5.6bn. Of those, BT has won £1.6bn. But even if it loses the next contract to C&W, it can expect to pick up a quarter of its value. This is because C&W will still have to rely on BT to supply crucial elements of the broadband connections between surgeries, for instance, and local telephone exchanges. No one else can do it. By the time the NHS has finished its IT outsourcing programme BT will account for about 30 per cent of it, or about £1.8bn.

In the short term this is great news for BT. It can claim, quite rightly, to be successfully competing for new wave business against companies such as C&W, while using its incumbent might to dictate the pace that competitors can offer new services to customers and ensure it still gets a piece of the action, win or lose competitive tenders.

But for big public service contracts at least, BT may not remain quite so dominant for long. The Government, it appears, is increasingly uncomfortable with the situation of dominant suppliers.

Peter Gershon, the head of the Office of Government Commerce, recently told the Commons Treasury Select Committee: "No public sector anywhere in the world is going to feel comfortable having one dominant supplier. We have to... create a more diverse supply base," he said.

These comments were made in relation to EDS, the US company that holds more than half of all central government IT contracts, excluding the military. But if Mr Gershon's fears are, as they seem, more widespread than simply applying EDS, then BT may start to feel the hand of government intervention even in its highest growth, new wave business.

It is possible, therefore, that John Reid, the Secretary of State for Health, may end up intervening to make sure Mr Gershon is kept happy.

BT is far from having to fight for its survival, even though "old" BT is weakening rapidly. However, "new" BT is far from a risk-free and robust operation.

The company yesterday gave little detail over how profitable its new wave business actually is. Although Mr Verwaayen's course of medicine for BT seems the right one, the next call from the NHS will indicate just how well the patient is responding to the treatment.