Transcript - Sir Mike Rake, Chairman, BT Group plc and easyJet plc 

Nicholas O’regan, Professor of strategy and innovation talks to Sir Mike Rake about BT s successes and future strategies for growth.

Nicholas: Sir Mike Rake, Thank you very much for coming down to Bristol. BT is back in profit, suggesting that the global restructuring is paying dividends. What are the main plans of a global restructuring efforts?

Mike: Yeah well (Nicholas interrupts)

Nicholas: And in your view what contributes to success?

Mike: Well I think the biggest problem with BT has had was too much strategy and not enough execution, and I think the original strategy in expanding into global services, developing broadband UK, as we saw fixed line deteriorating. And dealing the regulatory settlement we had to be quite open reached to the rest of the business was the right thing to do. 

But I think execution we underestimated the difficult particularly in global services when you’re expanding fast and highly complex and technical areas on a global basis. I think basically the company lost control of the cost and delivery issues around that and the contract management issues.

 And I think it was broader than that I don’t think we were on top of our costs, we weren’t on top of our capital expenditure. What you’ve seen in the last 18 months is we got on top of our costs on top of our capital expenditure.

We’ve gone on top of global service. So we’ve seen, we’ve significantly reduced debt, we’ve significantly improved cash flow and we’ve been able to simultaneously invest in infrastructure around our fibre optics that’s being rolled out.

 We’ve been at the same time able to, you know, start to increase again our dividends and all of this has contributed to a significant success, we’ve managed to really reduce the losses in our global services division.

Nicholas: What are the key strategic challenges faced by BT?

Mike: Well I think BT, we obviously live in a very competitive world, in telecommunications particularly; in the United Kingdom we still have a lot of work to on managing effectively and our global services businesses, from a cost point of view, that we’ve got to do, we obviously have a significant pension situation.

We got 300,000 deferred and current pensioners we’ve inherited from privatisation and we have to deal with those issues. And Obviously we suffered very heavy regulation from the TSR agreement 6 years ago and it’s been important to, BTs basically been operating with two hands tied behind its back in the UK and we’ve now been able break free of that from some degree more sensible regulatory environment, which I think allows us to compete more effectively.

We’ll be expanding heavily in BT retail and BT Vision gaining access to sports for the first time, it allows us to package our products properly for the first time and allow us as a country to compete with others in the television area and at the same time you know to make sure people are getting the advance high speed broadband that people now regard not just as an necessity but almost as a utility.  

Nicholas: So what are the key growth opportunities then for BT?

Mike: I think in growth terms our major growth area be retail, we believe in, we’re going to expand very fast in BT Vision, so the triple play broadband and fix lined television is our big growth opportunity. Particularly as we have a fantastic DVD library. We will have access to sport from the Autumn of this year, So we will be able to put together an extremely competitive package. Other areas, you know broadband is, I think we’ll get some growth. As we roll out fibre, as we really move to get high speed, reliable. Fibre is going to make a big difference and also there will be a growth area in the future.

Nicholas: What do you see as BT’s distinctive competencies?

Mike: You know I think BT’s Brand is actually about reliability and delivery. You know, our own the country’s infrastructure on telecommunications and copper. We’re rolling out, the country needs us too for fibre and I think you see in global services and other areas, whether we get in we always deliver.

You see BT very good in a crisis, when you seen the floods and storms that we’ve seen over the last 12 months you know many times it’s the BT engineers at the fore front with dealing with extremely difficult and dangerous situations to restore you know, telecommunications capability.

 I think you see on areas like the National Health Service contract, BT is one of the providers who didn’t walk away, who stuck in and got it done and delivered some pretty valuable IT networks for the National Health Service.

Nicholas: How does BT deal with rapid pace of innovation in this sector?

Mike: Yeah, you know I think what Bt has several thousand research scientists. We continuously invest in innovation. You know we have in Suffolk, Martlesham we have so very advanced research capabilities which are used in many different respects.

 But it is always you know a challenge of a very large company, is to make sure you create an environment where innovation is encouraged, you know, you have to, through that move much more quickly to delivery of clever ideas.

You got to be more agile than a company like BT has historically been, which means getting the culture right and you also got to be quicker on your feet. You know, Start products, new areas, new services. You got to be quick to get them to market and you got to be pretty quick to stop them if you think they’re not going to work.

Nicholas: Now you mentioned being quick on your feet. What the impact on the pension hole on BT’s strategic flexibility?

Mike: Yeah, I mean clearly at the moment it’s a big overhand on the share price. We work very hard on our pension trustees to agree a deficiency which we think is, solvency deficiency that we thinks it is far more rated than it proves to be.

We’ve got a plan to deal with that. We’re putting another Five hundred million pounds a year into the pension scheme, we can really afford that. But we haven’t yet been able to get the regulator to approve of these schemes which is very frustrating obviously for the company and actually just as frustrating for the trustees, because this creates an uncertainty.

 But we think, you know common sense prevails, we’re soon hopefully get clearance on our pension fund deficit and get along with clearing it.

Nicholas: What do you see as the key challenges facing the UK economy in terms of employment and skills?

Mike: Well I think again its a very good question, there’s absolutely no doubt that in the last ten, twelve years that virtually all the growth and employment has been in the public sector. That is actually very unhealthy.

In some parts of the United Kingdom we have 65-70% people working in the public sector. It’s unsustainable. I think employers have learnt in the last downturn, private sector employers is that it was important not to go on mass redundancies but create much more flexible working patterns. Because I think they’ve seen in the past that too hard too fast, you know, you really damage your ability to the recovery.

What of course that means is people put on short time working as the mode of industry for example improves; it takes a while for new employment to come because you take back the capacity you had. Now i think inevitably and necessarily we’re going to see a significant increase in public sector unemployment, And its going to be the need for the government to encourage private sector in order we can move some of this GDP growth from the states sector to the public sector.

Unfortunately you know we came into this downturn and at the peak at the longest period of upturn with a massive amount of debt, and that of course made the country have much less flexibility than it otherwise would have and therefore the public deficit has been a huge mistake in terms of giving the country the flexibility it needs.

 Fortunately I don’t see any other option. Because if we don’t cut quickly, others will come in and do it for us as we’ve seen with Greece. We have the biggest percentage deficit to GDP of any country in the OECD right now and we have to be seen with getting on with it, it’s going to be very painful and we’ve also at the same time have the courage to do the right things and thats not about increasing direct taxation and business taxation its about encourage business may well meaning increasing indirect taxation and it will mean increasing really significant cutbacks in the public sector across all areas, including back office costs and National Health service, nothing should be exempt from this review.

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