BT's global services arm suffered a 92 per cent plunge in profits between October and December as costs at the division spiralled out of control. The news caused the share price to touch an all-time low.
The group admitted in a surprise update that the struggling division had failed to deliver the cost savings expected, leading to "one-off charges" of £340m. It blamed operational failures at the business, rather than the wider economic downturn for the issues.
Of the Global Services' 17 major contracts, overspending on servicing just three led to the huge writedowns. The group cautioned that two contracts were still under review, which "may result in further substantial one-off charges in the current financial year".
BT boss Ian Livingston said he wanted to "sort things out" by the end of March. While unlikely, the group refused to rule out any contracts being terminated.
Along with the update on Global Services, BT released a preview of its third- quarter earnings. While the rest of the group is expected to outperform, the troubled business networks division's earnings before charges are expected to fall to £17m, down from £215m in the third quarter of the previous year. This was "primarily due to insufficient delivery of cost savings and the continued decline in the higher-margin UK business".
BT said it remains committed to the division and the overhaul will "create a stronger business that can deliver positive cash flow and excellent customer service". It was the second warning relating to Global Services' performance in three months, and sent shares at the group down 9 per cent. They closed 11.2p lower at 111.8p.
The previous warning had prompted the departure of François Barrault, the division's chief executive. He was replaced by BT's finance director Hanif Lalani, who has the job of getting Global Services back on track
Mr Livingston said the first job of the new management was to review Global Services' financial position and its major contracts.
The struggling business is under financial, contract and operational reviews. It is also scrutinising the division "with the aim of simplifying our operating model" and cutting costs.
"These ongoing reviews reflect changed circumstances and a more cautious view of the delivery of cost efficiencies and contract performance, particularly in the light of the current economic climate," he said.
The group said yesterday that the rest of its business had performed ahead of expectations, with earnings expected to be up 5 per cent on the previous year. "The performance of the rest of the group is ahead of expectations for the third quarter but unfortunately this will be more than offset by the issues in Global Services," Mr Livingston said.
BT announced in November it was to axe 10,000 jobs by April after announcing an 11 per cent drop in profits in the second quarter. Of those to be cut, 6,000 would be "indirect" labour, such as contract or temporary workers.
BT Global Services: What went wrong?
BT Global Services has seen a painful turnaround, from the jewel in the crown to the one division that is heavily dragging down profits. It offers outsourced communication networks to multinationals, providing IT infrastructure and managing data across their global operations. It has 17 major contracts, with clients such as Unilever, Procter & Gamble, Novartis, KPMG and Thomson Reuters. It employs 37,000 in 53 countries, although its reach stretches to a further 120. The division recorded £7.9bn in sales in 2007, 8 per cent up on the previous year. Yet BT had to issue a profit warning in October after the division missed its targets, like yesterday, blaming a failure to cut costs and a decline in its high margin business in the UK. François Barrault, head of BT Global Services, resigned, and was replaced by Hanif Lalani, group chief financial officer, who is trying to deliver on the division's promise.