The row is over the role of Ed Carter, an American marketing guru who in the past two years has spearheaded some of BT's most aggressive promotional campaigns in the face of increasingly stiff competition from the cable companies.
Mr Carter's attempts to widen his influence over BT's advertising strategy have brought him into conflict with its long-standing advertising agency, Abbott Mead Vickers (AMV), which dreamt up the widely admired campaign slogan: "It's good to talk." The BT advertising account is hugely lucrative and the largest of any UK company.
Last year the Carter influence resulted in a fundamental shift in the commercials. From attempting to grow the overall phone market they moved to using the actor Bob Hoskyns to promote individual products. Industry sources close to the dispute said it had culminated in a stand-up row over AMV's latest offering, which attempts to revive the "good to talk" catchphrase, using the actor Hugh Laurie.
Mr Carter, one of the brains behind the hard-sell advertising strategy used by BT's US partner, MCI, is said to believe the AMV approach is too esoteric. He is also credited with bringing MCI's "friends and family" promotion to BT, which has proved popular with customers.
Michael Baulk, chief executive of AMV, attempted to play down speculation of a rift, saying: "Ed believes very much in the power of using advertising to sell directly to customers products and services and in that he's right. We believe that what you need to do in addition is to use advertising to build BT's brand values and to build a broader relationship with the British public." He added: "It honestly isn't a question of one versus the other. The best programme for BT is both."
The internal debate has taken on increased importance following figures showing the cable companies have been poaching customers from BT at a much faster rate. In the three months to December BT lost 77,000 residential customers a month to cable, up from 60,000 for much of the rest of 1996. Cable operators believe privately they are on the verge of achieving "critical mass".
Worse still for BT could be the threat from the pounds 5bn cable merger involving Cable & Wireless's Mercury subsidiary, Bell Cablemedia, Videotron and Nynex CableComms, to be completed later this month.
Mr Carter's influence began in 1995 with "Project Mark", a programme to refine BT's customer database using the software consultants SAS Institute. It enabled the company for the first time to identify specific groups of consumers by calling patterns, age or other criteria.
The next phase started last year with the creation of the "win-back" teams, groups of telephone marketing staff who targeted former customers who had switched to cable.
The move led to allegations, denied by BT, that it was mounting a "dirty tricks" campaign against its rivals. So successful was the Carter strategy that BT recently announced plans to employ 2,000 more telemarketing staff. Armed with the the Project Mark information they aim to call most domestic customers at least four times a year.
Mr Carter, who could not be contacted, is variously described by those who know him as "brilliant" and "extremely opinionated". One source said: "The fact that Ed is not directly employed by BT, despite being so influential, means he can be absolutely, often brutally, honest. He's not a man you'd forget if you met him. Apart from the fact that he's 6 feet 5 inches, he is totally and utterly fearless."