Jeremy Warner's Outlook: BT turnaround story may be complete but plenty of challenges still remain
Utilities: why does everyone hate us?; House prices: get a sense of perspective; Greenspan: non, je ne regrette rien
Wednesday 09 April 2008
The turnaround story at British Telecom seemed secure when Sir Christopher Bland quit as chairman last summer to glowing tributes and all-round applause. Since then, the doubts have crept in once more and though Sir Christopher plainly timed his departure to perfection, I'm not sure the same thing can be said about Ben Verwaayen, the chief executive.
Earlier than expected, he's handing the baton over to Ian Livingston, currently head of BT Retail. It was a very personal decision, BT insisted yesterday. He's been there six years, which is a lot longer than most FTSE 100 bosses last these days, and felt that, with the transformation of BT from deeply troubled organisation to thriving business with global capability and a clear strategy for the future, the time had come to move on.
This is a perception not entirely shared by the City, where the shares have fallen 30 per cent over the last nine months, taking them back to virtually the same level they were at when Mr Verwaayen joined. A whole host of problems previously thought fixed, such as the pension fund deficit, seem fast to be resurfacing. The fall in the share price is as much to do with general stock market jitters as any failings on Mr Verwaayen's part, yet it is also the case that a downturn inevitably focuses attention on a company's potential weaknesses, and that's what's happening at the moment.
Under Mr Verwaayen, BT has helped transform the British broadband market into one of the most competitive in the world with levels of penetration and cost unsurpassed by other G7 nations. Yet what's good for the country is not necessarily good for the company. Broadband growth is fast running out of steam for BT at a time when competitive pressures on legacy revenues remain as intense as ever.
It may also be the case that BT is behind the curve in providing Britain with a 21st-century telecoms infrastructure it needs. This will require major new investment, but the pricing structure to justify such investment doesn't really exist. As things stand, BT is planning to cut capital spending in an effort to address costs, not increase it.
The other big area of growth for BT has been in global services, or telecoms and IT outsourcing for multinational corporations. Rapid development of this business, making BT one of the top players in the market, has certainly given BT the global footprint denied by previously flawed acquisition strategies, but it is again questionable how profitable it is likely to be.
In the early years, most of these outsourcing contracts are loss-making. The jury is out on whether they will develop into the highly profitable annuity which ultimately justifies the strategy. Corporations outsource telecoms and IT functions because they find them impossible to deliver effectively at low cost themselves. It is not yet clear that the outsourcers can do much better, or even whether in the long term the outsourcing model is a sustainable one.
Business process used to be an attribute by which companies distinguished themselves. Homogenise them all into the same providers, and large areas of competitive advantage are removed. The danger for outsourcers is that eventually the pendulum of fashion swings again, and companies start to contract back in.
All in all, Mr Livingston faces quite a challenge. When Mr Verwaayen arrived, much of the heavy lifting required to put BT back on its feet – a rescue rights issue and series of disposals – had already been done. Mr Livingston's task is the more complex one of finding the right niche in a world populated by giants for what by comparison looks a sub-scale provider.
Utilities: why does everyone hate us?
The latest round of fines and mea culpas from Severn Trent will only confirm the widely held public view of utilities as a bunch of rip-off merchants. Apparently, there has been barely an article written about Severn Trent over the past few years except in these terms.
Privatised utilities are hated because they are seen as profiteering monopolies. Depending on the company in question, this may or may not be true, but what is certain is that privatisation of these previously state-owned public services, far from making a bad situation worse, has actually considerably improved matters.
Starved of resources and investment, the utilities used to be treated as little more than milch cows by the Government, or another form of taxation. Inefficiency, poor service, lack of investment and customer neglect just got swept under the carpet, or was tolerated as one of those things you had to put up with because these were nationally owned, public services.
Whatever its downside, privatisation has at least introduced some measure of accountability and transparency into previously opaque businesses. Severn Trent has been forced to rebate the monies it extorted from customers and has been heavily fined for its untruths and cover-ups. In the old days, that may well not have happened.
Somewhat unfortunately for Ben Verwaayen, news of his departure from BT coincided with a Uswitch survey that put BT at the top of a customer dissatisfaction list. Yet even if the survey is merited by the facts, at least customers now have the freedom to go elsewhere if they don't like the service. Prior to deregulation and privatisation, you just had to grin and bear it.
House prices: get a sense of perspective
More gloomy news about the housing market, with the latest Halifax survey showing the biggest month-on-month fall in prices in 15 years. Yet though housing is undoubtedly in for a grim couple of years, some sense of perspective is called for.
Even if prices were to fall by the 30 per cent predicted by the International Monetary Fund (IMF), they would still end up higher than they were when the IMF first started saying the UK housing market was riding for a fall back in 2004.
In the last 10 years, house prices in the UK have roughly doubled. This was plainly unsustainable and was bound ultimately to result in a correction. Only estate agents and Northern Rock seemed to believe otherwise.
The situation now is being widely compared to the last house price crash in the early 1990s, with the emergence of widespread negative equity. Who knows, it may turn out that way. Yet the backdrop is quite different. The first-time buyer has been largely out of the market in recent years, unlike the late 1980s when he was very much part of the frenzy that fed the bubble.
Despite what you read, there have also been comparatively few 100 per cent mortgages doled out. The great bulk of recent buyers have put up substantial equity. Still, things are going to look bleak enough. Also yet to be tested is the resilience of the rest of the economy in the face of a sustained fall in house prices. It will be a first if it doesn't result in a more generalised economic contraction.
Greenspan: non, je ne regrette rien
Alan Greenspan, former chairman of the Federal Reserve, has been sounding off on the pages of the Financial Times and The Wall Street Journal to defend his record, which has understandably taken quite a knock as a result of the sub-prime meltdown.
Mr Greenspan stands accused of cutting rates too far in the run-up to the Iraq war and subsequently failing to raise them fast enough, thereby feeding the credit and mortgage frenzy. Yet not many said that at the time, when the broad consensus was that Mr Greenspan had acted with characteristic sureness of touch.
The idea that central banks should be "leaning against the wind" by taking pre-emptive action against the development of asset bubbles and the build-up of excessive credit is all very well with the benefit of hindsight, yet you find very few people arguing in favour of it in the midst of a boom.
Mr Greenspan does himself few favours by so jealously defending his reputation. As a wise man, he should know that it is only the judgement of history that matters. It will be some years before his legacy can be properly assessed.
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