BT Group plc
Annual Report
& Form 20-F
2010

	2		Financial summary
	4		Chairman’s message
	5		Chief Executive’s statement
	6		Our business
	11		Our business and strategy
	15		Our markets and customers
	18		Our resources
	22		Our lines of business
	34		Our corporate responsibility
	36		Our risks
	38		Other information
	41		Financial review
	58		Board of directors and Operating Committee
	60		The Board
	62		Report of the Audit Committee
	64		Report of the Nominating Committee
	65		Report of the Committee for Responsible and Sustainable Business
	66		Report on directors’ remuneration
	78		Directors’ information
	79		Business policies
	82		Shareholders and annual general meeting
	84		Statement of directors’ responsibilities
	85		Report of the independent auditors – consolidated financial statements
	87		Consolidated financial statements
	145		Report of the independent auditors – parent company financial statements
	146		Financial statements of BT Group plc
	149		Subsidiary undertakings and associate
	150		Quarterly analysis of revenue and profit
	151		Selected financial data
	153		Financial statistics
	154		Operational statistics
	156		Information for shareholders
	168		Cross reference to Form 20-F
	171		Glossary of terms
	174		Index

		2010				2009a
		£m				£m				Change		Five year record
Revenue												Adjusted revenue (£m)
– adjustedb,c			£20,911				£21,431			2%
– reported			£20,859				£21,390			2%
EBITDAd												Adjusted EBITDA (£m)
– adjustedb,c			£5,639				£5,238			8%
– reported			£5,162				£3,191			62%
Profit (loss) before taxation												Adjusted profit before taxation (£m)
– adjustedb,c			£1,735				£1,454			19%
– reported			£1,007				£(244	)		£1,251m
Earnings (loss) per share												Adjusted earnings per share (pence)
– adjustedb,c			17.3p				14.1p			23%
– reported			13.3p				(2.5)p			15.8p
												Full year dividend (pence)
Proposed full year dividend			6.9p				6.5p			6%
												Free cash flow (£m)
Free cash flowc			£1,933				£737			£1,196m
												Net debt (£m)
Net debtc			£9,283				£10,361			£1,078m

 

Performance against our outlook for 2010

Outlook

Outlook

Outlook

May 2009

updated

Outcome

achieved

Adjusted revenue decline

4%-5

%

3%-4

%

2

%

Total underlying costa reductions

>£1bn

>£1.5bn

£1.75bn

Adjusted EBITDAb before leaver costs

–

c.£5.7bn

£5.8bn

Capital expenditure

c.£2.7bn

c.£2.5bn

£2.5bn

Free cash flowc

>£1bn

c.£1.7bn

£1.9bn

Full year dividend

–

c.5%up

6% up

Net debtd

–

<£10.0bn

£9.3bn

		Full year results ahead of our outlook
		Revenue down 2%
		Total underlying costsa reduced by £1,752m, down 9%
		Capital expenditure reduced by £555m to £2,533m
		Free cash flowc of £1,933m, an improvement of £1,196m
		Net debtd reduced by over £1bn
		Proposed final dividend of 4.6p per share, giving 6.9p for the full year

		Revenue		c.£20bn
		Operating cost savingse		c.£900m
		Adjusted EBITDAb after leaver costs		in line with 2010
		Free cash flowf before specific items		c.£1.8bn
		Net debtd		<£9.0bn

 

As we promised, 2010 has been a year for delivery. After the challenges of the last financial year, we focused our efforts on starting to improve BT Global Services’ performance and reducing our cost base so that we could emerge stronger from recession. While the economy is still challenging, I am delighted to say our determination has paid off and we have delivered results ahead of our original expectations for the year.

Dividends

Last year we said we wanted to rebase the dividend to a level which we were confident was sustainable and from which it could grow. The Board is committed to delivering progressive dividends, while balancing the need to invest in the business, support the pension fund and reduce our net debt. Given our good performance in terms of free cash flow generation this year, the Board is proposing a final dividend of 4.6p, making a total of 6.9p for the full year. This represents 6% growth over last year, in line with our indication of around a 5% increase.

Pension fund

In February we announced that BT had reached agreement with the Trustee of the BT Pension Scheme on the triennial funding valuation of the pension scheme and a recovery plan for the £9bn deficit. I was disappointed, given the significant amount of work done by the Trustee and the prudent assumptions we had agreed, that the Pensions Regulator had substantial concerns with certain features of the agreement. We and the Trustee continue to work with the Pensions Regulator to progress this matter. Since the valuation date the scheme’s investments have increased in value by £4bn.

Regulation

In the current economic environment it is imperative that we avoid protectionism and establish a truly level playing field for businesses. We continue to work with governments and regulators in the UK, the EU and around the world for open and fair wholesale access to telecoms networks, whether fixed or mobile, and to premium pay TV content to drive competition and avoid inequalities and excessive pricing in the broadband market. Our own access network is open to all-comers on an equivalent basis and it is because of this that the UK has one of the most competitive and vibrant telecoms markets. This benefits everyone, be they our competitors or our customers. We seek consistency and ask only in other markets what we offer in the UK market.

Environment and the community

We are proud to be involved with the London 2012 Olympic and Paralympic Games and see this as an opportunity to contribute to a great event not just for London but for the whole of the UK and the rest of the world. In keeping with our tradition of helping others, BT people will be volunteering and contributing to the Games and our network will provide a lasting legacy beyond.

     We firmly believe in investing in young people and I am delighted that BT is stepping up its commitment to the Modern Apprenticeship scheme.

     BT is committed to a sustainable environment and has set one of the most aggressive corporate carbon reduction targets in the world. We have made considerable progress, reducing the carbon intensity of our global business by 54% compared with our 1997 baseline. By 2020 we aim to have reduced our emissions by 80%.

The Board

I was delighted that Tony Ball, chief executive of BSkyB from 1999 to 2003, joined the Board in July 2009. He brings great experience of international telecoms and broadcasting.

     Patricia Hewitt, who joined the Board in March 2008, has taken on the role of Senior Independent Director, which had been previously held by Maarten van den Bergh, who stepped down from the Board in July 2009.

     I would like to thank Deborah Lathen, who stepped down from the Board in January 2010 at the end of her three year term. She brought helpful insights into the international telecoms market and regulatory matters, for which I have been very grateful.

     I continue to work with the Nominating Committee to ensure we have the appropriate skills and experience at Board level to guide the business through its next stages of development.

     Hanif Lalani, Chief Executive of BT Global Services and formerly Group Finance Director between 2005 and 2008, stepped down from the Board in January 2010 and left the company in March 2010. Jeff Kelly was appointed as Chief Executive of BT Global Services and as a member of the Operating Committee in January 2010. Jeff had 25 years’ experience at EDS, the global IT services firm, where he most recently ran their US$10bn business in the Americas. Jeff’s task will be to improve the performance of BT Global Services and build on its position as a global leader in networked IT services.

     My thanks go to the rest of the Board who have continued to support me and the executive management through these challenging times.

The future

The year ahead will have its challenges as the world economy struggles to recover from the long recession. No one knows when, or by how much, conditions will improve. However, we believe we can drive efficiency, provide even better customer service and deliver a better future for all our stakeholders.

SIR MICHAEL RAKE
CHAIRMAN
12 MAY 2010

4      BT GROUP PLC ANNUAL REPORT & FORM 20-F

      

A better business, a better future

In the last year, we’ve taken decisive action with one aim in mind – to make BT a better business with a better future. We are making good progress. Of course, there’s a lot more to do but we have established a much firmer base from which to invest in the future of our company.

A better business

Our focus on improving customer service is paying off. Faults and complaints have been significantly reduced. We will continue to invest in training, systems and processes to deliver a better customer experience. Reducing the time spent on fixing service issues has been a critical factor in helping to transform our cost base and, as a result, we have been able to free up the resources to invest in new products and technology.

     We have now set clear objectives for the next three years – objectives that will help build a better future for BT.

A better future

The UK’s communications market is one of the most competitive in the world and consumers have benefited from this. Real prices are down more than 50% in the last 20 years and are among the lowest in any major advanced economy.

     We see significant opportunity to provide consumers with not just great value but with a wide range of broadband-based services. For example, BT Vision, our television service, where we will be offering new channels, content and interactivity. The UK’s small and medium-sized businesses will also benefit from our investment in communications services that will enhance their efficiency and capabilities.

     Improving the financial performance of BT Global Services remains an important priority. We’ve started to turn the corner with five quarters of improved profitability and an impressive list of new deals. Globalisation is here to stay and we will build on our position as a global leader in networked IT services by enhancing our product portfolio, and improving customer service and contract delivery. We will also make targeted investment in areas of potential profitable growth such as in the Asia Pacific region where we already have a strong market presence.

     BT is the largest communications wholesaler in Europe. Our BT Wholesale business will continue to move into new markets, winning deals with organisations like mobile operators, who are choosing BT to run a large part of their infrastructure.

     Nowhere is competition more intense than in the broadband market, where we are making one of the largest private sector investments in Europe, spending £1.5bn to bring fibre to at least 40% of the UK in 2012. If conditions are favourable, we see no reason not to extend this to around two-thirds of the UK by 2015 which will take our total investment to £2.5bn.

Our people

Our people have worked hard to improve service and efficiency, often changing working practices to be available when and where our customers need us. We have also reduced the number of people working for BT, doing our best to protect the jobs of our permanent employees. With retraining and support, some 5,000 people have found new roles in the business. No small feat and one we are proud of in today’s economic environment.

     In the last year, we have made some tough, but necessary, changes that are helping us to create the sort of company BT needs to be, at the same time as providing new opportunities for our people.

The right foundations are in place to make BT a better business with a better future – for our customers, for our shareholders, and for our people.

     There is a lot more to do but we are heading in the right direction. Thank you for your support in this journey.

 

IAN LIVINGSTON
CHIEF EXECUTIVE
12 MAY 2010

 

OUR BUSINESS

BT is one of the world’s leading communications services companies, serving the needs of customers in the UK and in more than 170 countries worldwide.

What we do

Our main activities are the provision of fixed lines, broadband, mobile and TV products and services as well as networked IT services.

     In the UK we are the largest communications services provider, serving the consumer, business and public sector markets. Globally, we supply networked IT services to multinational corporations, domestic businesses and government departments. We also provide access to our network and services to more than 1,000 communications providers in the UK and others worldwide.

Our customers benefit from a range of products and services:

Multinational corporations

4		Global networked IT services
4		Worldwide virtual private network via our multi-protocol label switching service
4		State-of-the-art videoconferencing and telepresence services

Small and medium enterprises

4		Fixed line and mobile call and broadband packages
4		IT and communications solutions

UK consumer

4		Fixed line calls and broadband packages
4		Largest video-on-demand service in the UK
4		Biggest wi-fi network, with more than 1.5m hotspots
4		A new fibre-based access network

Wholesale and carrier

4		Local loop unbundling, allowing communications providers to install their equipment in BT exchanges, and use these lines to connect to end users
4		White label managed services for customers who want to enter the communications market without the need to invest
4		Managed network solutions for communications providers
		> More on page 11

We aim to drive shareholder value by making BT a better business with a better future. We are
making BT a better business by focusing on three areas:

4		Customer service delivery
4		Cost transformation
4		Investing for the future

				Customer service delivery
				Our goal is to provide excellent customer service in every market in which we operate by putting our customers at the heart of everything we do.
				> More on page 11
				Cost transformation
				We continue our drive to reduce costs across our business and deliver absolute levels of cost reduction.
				> More on page 11
				Investing for the future
				We are investing in our networks, systems and services to ensure they enable our customers to take advantage of the digital revolution.
				> More on page 12

      

Our strategic priorities

We will build a better future for BT through our five strategic priorities:

Broadband-based consumer services

> More on page 12

The ‘Brand for Business’ for UK small and medium enterprises

> More on page 12

BT Global Services – a global leader

> More on page 12

The wholesaler of choice

> More on page 13

The best network provider

> More on page 13

We measure our progress through three key performance indicators: earnings per share, free cash flow and customer service.

Adjusted earnings per sharea,b (pence)

Free cash flowb (£m)

Customer service improvementc (%)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

REVIEW OF THE YEAR

 

11		OUR BUSINESS AND STRATEGY
11		Who we are
11		What we do
11		Our aim
12		Our strategic priorities
13		How we measure our progress
14		2010 outlook
14		2011 outlook and future plans
15		OUR MARKETS AND CUSTOMERS
15		Our markets
15		Competition
16		Customers
16		How we are structured
16		How we sell our products and services
18		OUR RESOURCES
18		Brand and reputation
18		People
20		Networks and platforms
20		Global research capability
21		Suppliers
21		Property portfolio
22		OUR LINES OF BUSINESS
22		BT Global Services
25		BT Retail
28		BT Wholesale
31		Openreach
33		BT Innovate & Design
33		BT Operate
34		OUR CORPORATE RESPONSIBILITY
34		Helping tackle climate change
34		Developing sustainable customer solutions
34		Enabling skills for an inclusive society
35		Charity support
35		Our corporate responsibility risks
35		Recognition of our contribution
35		Further information
36		OUR RISKS
36		Principal risks and uncertainties
36		Competitive activity
36		Global economic and credit market conditions
36		Regulatory controls
37		Major contracts
37		Security and resilience
37		Pensions
38		OTHER INFORMATION
38		Regulation
39		Our relationship with HM Government
39		Legal proceedings
40		Acquisitions and disposals
41		FINANCIAL REVIEW
41		Principal accounting policies, critical accounting estimates and key judgements
42		Summarised group income statement
43		Financial results
48		Financial position and resources
51		Liquidity
52		Funding and capital management
54		Alternative performance measures

10     BT GROUP PLC ANNUAL REPORT & FORM 20-F

 

This is the Annual Report for the year ended 31 March 2010. It complies with UK regulations and is the Annual Report on Form 20-F for the US Securities and Exchange Commission to meet US regulations. This Annual Report has been sent to shareholders who have elected to receive a copy. A separate summary financial statement & notice of meeting 2010 has been issued to shareholders who have elected to receive a shorter document. Both documents are available on the company’s website, www.bt.com

     In this Annual Report, references to ‘BT Group’, ‘BT’, ‘the group’, ‘the company’, ‘we’ or ‘our’ are to BT Group plc (which includes the continuing activities of British Telecommunications plc) and its subsidiaries and lines of business, internal service units, or any of them as the context may require.

     References to ‘a year’ are to the financial year ended 31 March of that year, e.g. ‘2010’ refers to the year ended 31 March 2010, except in relation to our fibre-based broadband roll out plans which are based on calendar years, not financial years. Unless otherwise stated, all non financial statistics are at 31 March 2010. Please see cautionary statement regarding forward-looking statements on page 156.

  Denotes non financial targets. Being a responsible and sustainable business is integral to the way we work. Our non financial key performance indicators measure our progress. These also include direct costs to BT related to our environmental and social performance, in line with the principles of the connected reporting framework.

BT is one of the world’s leading communications services companies, serving the needs of customers in the UK and in more than 170 countries.

Our main activities are the provision of fixed lines, broadband, mobile and TV products and services as well as networked IT services.

     In the UK we are the largest communications services provider, serving the consumer, business and public sector markets. Globally, we supply networked IT services to multinational corporations, domestic businesses and government departments. We also provide access to our network and services to more than 1,000 communications providers (CPs) in the UK and others worldwide.

Our aim is to drive shareholder value by making BT a better business with a better future.

     Three areas – customer service delivery, cost transformation and investing for the future – are essential building blocks to making BT a better business. They are linked: the better we serve our customers, the less time and money we spend on reworking and fixing faults. By continuing to transform our cost base, we open up new opportunities to invest in BT’s future.

     We are committed to acting as a responsible business for shareholders, customers, suppliers and our people, developing innovative solutions that both benefit society and support our long-term development. Investing in the communities in which we operate and driving down our CO₂ emissions are critical parts of this commitment.

Customer service delivery

Every part of BT is taking action to make substantial improvements to the delivery of our services by putting our customers at the heart of everything we do.

     This means keeping our promises to our customers, being easy to contact and straightforward to deal with, keeping customers informed, and taking action to address the reasons why they complain.

     We track the real experience of our customers from start to finish, and will remove duplication and inefficiency to drive down service provision time.

     We have significantly reduced failures, faults and complaints over the past year and will invest in training, systems and better processes to continue this improvement. In the last year, we have reduced business and consumer complaints by 50% and 33%, respectively.

Cost transformation

We continue our drive to reduce costs across our business and deliver absolute levels of cost reduction. During 2010, our cost transformation activities have delivered a step change in the cost base of our business, with a reduction of £1,752m in total underlying operating costs and capital expenditure. All of our lines of business and internal service units have made a contribution to the delivery of these savings. See Transforming our cost base on page 44 for further analysis.

     Savings have been delivered from targeted cost reduction programmes which focus on eliminating the cost of failure across the group, an overhead value analysis programme which provides a structured approach to reducing costs on a project-by-project basis, and process re-engineering which reviews processes end-to-end across the group to remove unnecessary steps. These actions have allowed us to operate more efficiently and consequently reduce our input costs.

 

REVIEW OF THE YEAR OUR BUSINESS AND STRATEGY

 

     The Board took action as a result of these issues and BT Global Services has been restructured including changes being made to the senior management team (see BT Global Services – How BT Global Services is changing on page 22).

     Over the past year we have worked to improve efficiency and delivery, and to build a stronger business. We have made significant progress. We have improved the way we bid for and manage contracts, reduced costs and delivered better service for customers. These changes are delivering results with an improved financial and operational performance, and this is already showing in BT Global Services’ financial results, with a sequential improvement in adjusted EBITDA and a £430m reduction in operating cash outflow in 2010. But there is still much more to do and we will continue to drive this transformation.

     We are seeking to strengthen our market position by enhancing our product portfolio and improving customer service and contract delivery, as well as through targeted investment in areas of potential profitable growth, such as in the Asia Pacific region where we already have a strong market presence. In this way, we can build on BT Global Services’ world-leading position.

4 The wholesaler of choice

BT is committed to supplying CPs in the UK and overseas with vital communications infrastructure. We have the broadest portfolio in the industry and are trusted to underpin the UK’s infrastructure. We aim to be the wholesaler of choice in the UK, where we have more than 1,000 CP customers and we are the established leader for carriers, and to extend and develop our international wholesale business. Over the next year, we also aim to consolidate further our position as a leading provider of managed network services (MNS) in the UK’s fixed and mobile markets.

     Our traditional wholesale markets are in decline, but we expect to see the addressable market grow in the medium term due to growth in digital content, consolidation, convergence and capital constraints which make our white label services attractive for operators who do not want to invest in a fixed line infrastructure. We believe the capacity demand on our networks will quadruple by 2013.

     We are simplifying and reinventing our portfolio through internet protocol (IP), enhancing our capabilities and expanding our addressable market to become a next generation wholesale business. We are investing in our products and services for the future, developing advanced, software-driven platforms and services that, for example, exchange traditional and IP traffic and capabilities to deliver video content which is growing exponentially.

     In the mobile space, we are facilitating mobile network operators’ entry into the fixed line market and have MNS contracts in place with all five key operators. We are enabling the growth of 3G mobile data volumes in a market that is consolidating through mergers and infrastructure joint ventures.

4 The best network provider

Super-fast fibre-based broadband is critical to BT’s future success and will be critical to the UK economy. We will play a major part in this new communications environment and are making good progress in deploying this new technology.

     At the same time, we will also continue to focus on our market-leading Ethernet footprint – which expanded from 600 nodes, or access points for customers, in 2009 to more than 800 in 2010.

     Being the best network provider is not just about expanding coverage. We have also improved reliability and reduced costs through our cost saving and efficiency programmes. Our plan is to continue to deliver operational savings through further focus on the efficiency of our work. We have reduced the number of IT incidents across the network by 33% over the last two years.

We measure our progress through three key performance indicators: earnings per share, free cash flow and customer service.

Adjusted earnings per share was 17.3p in 2010, compared with 14.1p in 2009 and 20.2p in 2008 (see Financial review page 47).

Free cash flow in 2010 was £1,933m, compared with £737m in 2009 and £1,823m in 2008 (see Financial review page 51).

 

 

 

 

 

 

We serve the needs of customers in the UK and in more than 170 countries worldwide.

     In the UK, regulation and the open, commercial marketplace have created one of the most competitive telecommunications markets in the world. The market is characterised by demand for increasingly lower prices, ease of use, speed, reduced operational complexity, and the ability to offer end users genuinely differentiated services with improved quality of service.

UK consumer

The market in the UK has been challenging with falling demand for fixed lines and calls. The calls and lines consumer market is valued at around £5.9bn and declined by 1% last year.

     BT’s market share of consumer fixed line revenue is 59%. We expect continuing pressure on our market share of calls and lines in particular as more people choose to buy telephony from their broadband supplier.

     The broadband market has continued to grow through the recession despite the market maturing. Broadband penetration now exceeds two-thirds of UK households.

     In the broadband market BT’s retail share of the DSL and LLU base remains strong at 35%, and our share of net additions was 44% in the fourth quarter of 2010, having remained above 40% for five consecutive quarters.

UK SMEs

We estimate that the total combined SME market for communications and IT is worth about £29bn per annum, of which BT had revenues of £2.6bn in 2010. The economic environment in 2010 has impacted the overall market with falling demand for lines and calls, slower growth in broadband, and lower IT spending. There have been fewer business start ups, a higher rate of insolvencies, and firms have been downsizing and cutting costs.

Wholesale

The UK wholesale and local access market is consolidating through the acquisition of CPs by other providers, and the merging of network and systems infrastructure. For example, Carphone Warehouse bought Tiscali, and Cable & Wireless acquired Thus. In addition, there has been consolidation in the mobile space with mobile operators 3 and T-Mobile sharing their infrastructure, as do O₂ and Vodafone. During the year, Orange and T-Mobile also agreed to merge their UK operations. The industry is also embracing internet-based, next generation communications services that are faster, more flexible and cheaper. There is greater demand than ever for lower input prices, with stronger demand for higher, cost-effective bandwidth. Our wholesale customers are increasingly positioning themselves as service providers rather than network operators. Many of the services they provide are bandwidth hungry, which presents them with a challenge during an economic downturn as they may be unwilling to commit to the high levels of capital investment required by network expansion or upgrade. This presents us with opportunities to supply a range of managed network and outsourced services leveraging our network capacity.

     BT operates in the wholesale market outside the UK, primarily through Global Telecoms Markets, the wholesale arm of BT Global Services. The business provides voice and non voice connectivity and consultancy capabilities to fixed line and mobile network operators worldwide, primarily across BT’s global network assets.

Global networked IT services

Globally, we are in the networked IT services market which is valued at around US$579bn, according to International Data Corporation (IDC). As the market responds to economic conditions, we see continued interest in network operational efficiency, workforce management, security, unified communications (where an organisation’s infrastructure, mobility, desktop and applications work together), global hosted contact centre solutions, virtualisation (where the resources of a single computer are shared across multiple applications), and ‘cloud’ services.

     As a result of the global recession, industry analysts Gartner reported the worldwide IT industry declined by 5% in the 2009 calendar year, but is expected to recover in the 2010 calendar year. We are well placed to take advantage of any upturn in the economic climate.

Competition

The markets in which we operate are very competitive.

4		In the UK consumer market, our voice and broadband offerings compete with a range of players and propositions. Our competitors include a number of well known brands that utilise BT’s infrastructure to provide competing services in telephony and broadband, and also Virgin Media which provides an alternative service utilising its own cable network.
4		In serving our SME customers, we find competition is fragmented and can depend on which services our customers take from us, simple connectivity, or one of our more popular IT services packages. For smaller accounts, we might be in competition with local start-ups or services firms such as Geek Squad. For larger SMEs, we face competition from, among others, TalkTalk (via Opal) and Cable & Wireless Worldwide. However, we retain the largest market share in voice telephony.
4		The networked IT services market is also challenging, both in the UK and internationally. Companies such as Orange Business Services and Verizon Business are targeting multinational corporations.
4		Finally, while we have the largest network in the UK, our BT Wholesale and Openreach lines of business compete regularly against other CPs either selling network capabilities to others or choosing to build their own infrastructure.

 

REVIEW OF THE YEAR OUR MARKETS AND CUSTOMERS

UK consumers can contact us online, through our call centres, or in ‘stores without walls’ which are situated in prime locations in major shopping centres across the UK and provide an opportunity for our customers to interact with us face-to-face. We promote our products and services widely using a full range of media including TV and social media such as Facebook.

     We sell to the UK’s SMEs through our call centres, online, or via account teams, and also through 47 BT Local Businesses – regional franchises with their own sales staff and account management teams.

     CPs can order most of our products and services online, and we have standardised our systems and processes across our next generation broadband portfolio to streamline service delivery.

     Increasingly, our CP customers are choosing MNS. We bring BT’s economies of scale to their cost base, and they no longer have to worry about core network management, building new infrastructure or even running an engineering field force. By outsourcing these tasks to BT, our customers are free to focus on their own customers’ needs.

     Our biggest wholesale customers are supported by client directors who have a thorough understanding of the companies they support and take overall responsibility – providing products and services from our existing portfolio, and developing solutions based on their understanding of their customer’s business priorities.

     Openreach has a range of account management options from which CPs can choose. All new customers go through a specialised ‘customer establishment process’, fully supported by dedicated Openreach people. Once set up, customers mainly order through a secure online portal, where possible by integrating the Openreach order management system into their own operations.

     BT Global Services manages a wide variety of customers, with relationships of varying degrees of complexity. We have created a consistent framework for our relationships. These range from complex relationships with global multinational corporations, where we have developed a client engagement model integrating sales delivery and professional services, through to desk-based account management relationships, channel partner relationships and even web-based self-servicing for some other customers.

 

Our resources
		Brand and reputation
		People
		Networks and platforms
		Global research capability
		Suppliers
		Property portfolio

 

 

REVIEW OF THE YEAR OUR RESOURCES

 

We aim to give our people the skills and the tools necessary to ensure that every customer experience is an excellent one. We offer our people a wide range of learning and re-skilling opportunities. For example, this year more than 5,000 BT people, many of whom have very few formally-recognised qualifications, are undertaking training that will lead to a nationally-recognised qualification awarded by a third party. We also support federated and group apprenticeship schemes.

Tidying waterways bordering the Olympic Park in Stratford is just one of many volunteering activities carried out by BT people

BT people are also encouraged to volunteer in their communities and about 4,000 people around the world have been involved in 2010 for around 28,700 days. The community benefits from their involvement, while they benefit from the opportunity to enhance their existing skills.

Reward and recognition

We conduct a review of salaries every year. Managers are eligible for variable, performance-related bonuses, and the long-term share incentives for our most senior managers are linked to BT’s total shareholder return and cash generation performance measured over a period of three years. For Openreach senior managers, the key measure is Openreach’s performance over a three-year period.

     Employees outside the UK currently receive an annual award of free BT shares or a cash equivalent depending on local legislation and/or regulation. In the UK, employees receive free broadband. Employees in more than 25 countries also have the opportunity to save to buy BT shares at a discount to the price at the start of the savings period. Under the BT Employee Share Investment Plan, UK employees can buy BT shares from their pre-tax and pre-National Insurance salaries. More than 50% of eligible employees participate in one or more of these plans.

     In relation to the 2010 pay review, the company made an offer to increase salaries but has not reached agreement with the Communication Workers Union (CWU) regarding a pay settlement for the team member (non manager) population. The company has reached an agreement with the pay negotiating committee of Prospect, the trade union representing managerial and professional staff, on the pay arrangements for 2010. This agreement was recommended to the membership by the executive committee of the union and it is hoped that the settlement will be accepted by the membership of the union following a ballot which is being conducted in May 2010.

Pensions

Most of BT’s UK employees are members of a pension scheme – either the BT Pension Scheme (BTPS), a defined benefit scheme, or the BT Retirement Saving Scheme (BTRSS), a defined contribution scheme. The BTPS has around 55,000 active members, 185,000 pensioners and 93,000 deferred members. The BTPS was closed to new members on 31 March 2001.

     As a result of a review of our UK pension arrangements in 2009, there have been changes to future benefit accruals under the BTPS. To ensure the scheme remains flexible, fair and sustainable in the long term, benefits built up from 1 April 2009 are now on a career average re-valued earnings basis, members’ contributions have increased, and the scheme has ceased to be contracted out of the State Second Pension. Also, the normal pension age has risen from 60 to 65. Benefits built up before 1 April 2009 remain linked to final pensionable salary.

     BT has reached agreement with the Trustee of the BTPS on the triennial funding valuation of the BTPS at 31 December 2008 and a 17-year recovery plan which is discussed in more detail in the Financial review on page 53.

     The BTRSS was set up on 1 April 2009 and has more than 17,500 active members. It is a contract-based, defined contribution arrangement, which means that what the pension members receive is linked to contributions paid, the performance of the fund and the annuity rates at retirement, rather than to their final BT salary.

Health and safety

The health and safety of our people are of paramount importance, and we continue to seek improvements by focusing on behavioural and lifestyle change. Details of time lost to injury and sickness absence are given in the graph below along with their cost to BT.

     Our lost time injury rate rose for the first time in three years, and we failed to meet our target, due to the adverse winter weather conditions in the UK resulting in an increase in injuries.

Lost time injury rate – lost time injury cases expressed as a rate per 100,000 hours worked on a 12-month rolling average 

Non financial performance
Target 2011		2010				2009				2008
Reduce to 0.18 cases			0.209				0.160				0.188

Financial performance

2010

2009

2008

Cost to the business arising from injuries resulting in time off work

£5.6m

£7.0m

new measure in 2009

We failed to meet our target for sickness absence this year due to the H1N1 ‘swine flu’ influenza pandemic, causing an anomaly in the number of cases of colds and flu.

Sickness absence rate - percentage of calendar days lost to sickness absence expressed as a 12-month rolling average 

Non financial performance
Target 2011		2010				2009				2008
Reduce to 2.21%			2.46%				2.17%				2.43%

Financial performance
		2010		2009		2008
BT sick pay costs		£95.4m		£85.2m		£89.8m

 

 

 

REVIEW OF THE YEAR OUR RESOURCES

 

Suppliers

BT has around 11,000 suppliers across the world, and spends approximately £12bn per annum with them, with the top 100 accounting for more than 65% of this spend. We operate a strategic sourcing process for the vast majority of spend to derive maximum value and ensure the appropriate suppliers are engaged.

     We source products and services from across the world and have procurement professionals located in 16 countries.

     We have a set of purchasing principles which ensure we act in an ethically and commercially responsible way in our business dealings with our global supply base. We work with our suppliers to ensure the goods and services we procure are made, delivered and disposed of in a socially and environmentally-responsible manner. Sustainability factors such as energy usage, environmental impact, and labour standards are embedded in our sourcing and adjudication process, and influence supplier and product selection.

Supplier relationships – a measure of the overall success of BT’s relationship with suppliers, based on our annual supplier survey 

Non financial performance
Target 2011		2010				2009				2008
To achieve a rating of 80% or more based on a response of ‘excellent’ or ‘good’ to the question: ‘How would you describe the quality of your company’s relationship with BT?’			86	%			85	%			78	%
Financial performance
		2010				2009				2008
Total spend with external supply base		£12.0bn				£13.0bn				£12.8bn
Ethical trading – a measure of the application of BT’s supply chain human rights standard

Non financial performance
Target 2011		2010		2009		2008
To achieve 100% follow up within three months for all suppliers identified as high		180 risk		78 risk		234 risk
or medium risk, through our ethical standard questionnaires		assessments		assessments		assessments
		with 100%		with 100%		with 100%
		follow up		follow up		follow up
Value of procurement contracts – where our suppliers agree that we work with them to improve sustainability impacts
Financial performance
		2010		2009		2008
Value of spend where our suppliers agree that BT ensures its purchases are made, delivered, used and disposed of in a socially and environmentally responsible manner (extrapolated from supplier survey responses)		86% of supplier spend		83% of supplier spend		66% of supplier spend

Payment of suppliers

In normal circumstances, BT’s payment terms for contracted suppliers will be to pay each due, valid and undisputed invoice between 60 and 73 days from date of receipt from the supplier. There are variations to this policy, for example interconnect payments to other telecommunications operators, low value spend, various customer-specified requirements and rates are paid in shorter timescales. In 2010, the average number of days between the invoice date and the date of the payment run for the invoice was 49 (2009: 49).

     In the UK, BT provides access to a supplier financing scheme which offers contracted suppliers the opportunity to obtain payments in advance of the agreed terms. In addition, BT subscribes to the Better Payment Practice Code, details of which can be found at www.payontime.co.uk

At 31 March 2010, we occupied around 6,500 properties in the UK, and around 350 general purpose properties in the rest of the world. The majority of the UK properties are owned by – and leased from – Telereal Trillium, which is part of the William Pears Group.

     Approximately 85% of the UK portfolio consists of operational telephone exchanges which contain exchange equipment and are needed as part of our continuing activities. Other general purpose properties consist chiefly of offices, depots and computer centres.

     We are constantly monitoring our use of space. In the last two years, our focus on cost savings and efficiency has led to significant reductions in our total labour resource. This has resulted in vacant space and under-utilisation of buildings within our UK property estate. Accordingly, in 2010 we initiated a property rationalisation programme to consolidate office space within the estate.

     As detailed in the Specific items section in the Financial review on pages 45 to 46, a property rationalisation charge of £121m has been recognised in 2010. The property rationalisation programme is expected to continue over the next two years as further properties are vacated. Including the charge recognised in 2010, we expect to incur a total charge in respect of this programme of around £300m.

     Our group property team manages waste and recycling on behalf of the rest of the business. More detailed information on our performance regarding waste management and recycling is given below.

Waste to landfill and recycling – a measure of BT’s use of resources 

Non financial performance
						UK only
Target 2011		2010				2009					2008
BT Group will reduce the tonnage of waste sent to landfill by 10% from 2010 levels			15	%			17	%			22	%
		reduction				reduction				reduction
		in waste to				in waste to				in waste to
		landfill from				landfill from				landfill from
			2009				2008				2007

Financial performance

UK only

2010

2009

2008

Net benefit to the business of the waste programme

£1.61m

£0.67m

£0.32m

 

REVIEW OF THE YEAR

Our customer-facing lines of business are BT Global Services, BT Retail, BT Wholesale and Openreach. They meet the needs of our different customer groups, supported by two internal service units, BT Innovate & Design and BT Operate.

     The financial performance of each of our customer-facing lines of business for 2010, 2009 and 2008 is discussed in this section. We measure the financial performance of BT Global Services, BT Retail, BT Wholesale and Openreach on an ‘adjusted’ basis, being revenue, EBITDA and operating profit; all stated before specific items. For BT Global Services adjusted EBITDA also excludes the impact of the contract and financial review charges recognised in 2009. For further discussion of these items, see pages 54 to 56. A reconciliation of adjusted EBITDA to group operating profit (loss) by customer-facing line of business, and for the group, is provided in the Segment information, note 1 to the consolidated financial statements on page 102. The financial performance commentaries for each customer-facing line of business also discuss movements in operating cash flow. Operating cash flow is defined as adjusted EBITDA less direct and allocated capital expenditure, working capital movements and other non cash items.

BT Global Services

How BT Global Services is changing

In 2009 a combination of higher costs, the slow delivery of cost reduction initiatives and worsening economic conditions caused the level of profitability in BT Global Services to fall significantly. The Board took action as a result of this, including changing the BT Global Services senior management team.

     The new team’s brief was to address the cost base, bring greater focus to the profitability of new contract wins and reduce shortfalls in delivery performance on existing contracts.

     The management team undertook an extensive review of BT Global Services’ financial position, contracts and operations. The financial review covered the financial performance of BT Global Services and its balance sheet position. The contract reviews covered the largest and most complex contracts and were conducted jointly with external advisors. Having completed the contract and financial reviews, charges of £1.6bn were recognised in 2009, which included £1.2bn relating to two major contracts. These charges reflected a more cautious view of the recognition of the expected and future cost efficiencies and revenues and other changes in underlying assumptions and estimates, particularly in the light of the economic outlook.

     The new management team implemented a number of process improvements in 2009 and further enhancements have been made in 2010, as noted below.

     The operational review was completed towards the end of 2009 and resulted in a revised operating model and restructuring plan to reshape and refocus the business, in order to further enhance BT Global Services’ ability to serve customers and establish a significantly lower cost base.

     In 2009 we said that we expected to incur restructuring charges of around £420m in 2010 and 2011. In 2010, we have recognised restructuring charges of £301m (2009: £280m), predominately comprising network, products and supplier rationalisation charges and people and property costs. Further restructuring charges of around £175m are expected to be incurred in 2011, giving a total charge of around £475m, above our original estimate of £420m. This increase reflects the complexities of our restructuring programme. An analysis of these charges is provided in the Specific items section of the Financial review on pages 45 to 46.

     In 2010 we implemented the new operating model in BT Global Services, which focuses on three customer segments:

4		seamless global connectivity and networked IT services to multinational corporations
4		networked IT services to customers in the UK corporate and public sectors
4		networked IT services to corporate and public sector customers outside the UK.

Other structural improvements have been made to improve the organisation. During 2010 we significantly improved contract management, risk management and performance. We have changed the way we bid for major contracts and also carry out regular in-life contract reviews to assess commercial risks and opportunities and to improve contract performance, creating independent review teams to provide additional assurance on our most significant contracts.

     Sales teams have been realigned to focus on the key customer segments, and service units have been restructured. We have brought together all design, programme and technical delivery people across the wider design organisation to standardise and create replicable solutions. This has helped us to manage and more accurately forecast demand and costs. We have continued to rationalise systems and networks. Strategy, marketing, propositions, commercial, legal and regulatory functions have also been realigned.

     We have made progress this year but we still have more to do.

Business overview

BT Global Services is a global leader in the provision of networked IT services to multinational corporations, domestic businesses, government departments and other CPs in more than 170 countries. We have a strong customer base, global reach, and a powerful combination of networked IT and professional services capabilities.

     We aim to be the global partner of choice for multinational corporations, the number one provider to business and public

22      BT GROUP PLC ANNUAL REPORT & FORM 20-F

      

REVIEW OF THE YEAR OUR LINES OF BUSINESS

sector organisations in the UK, and a leading player in other countries key to our customers. Our professional services consultants use in-depth knowledge of networked IT services, combined with a solid understanding of sector-based business processes, to build on the investment our customers make in networked IT services to help them to realise business benefits, including cost saving, productivity gains, competitive advantage, and improved customer experience and loyalty. We have consultants located worldwide helping our customers choose the right technology solution for their business, and how to use it to deliver what they need.

     We build and run complex networks for our customers to enable them to deliver applications critical to their success. Building on our network expertise, we provide services which include unified communications, mobility, customer relationship management (CRM) and customer contact centres, data centre services, flexible working, IT sustainability, managed security and sophisticated conferencing solutions.

     Our customers benefit from BT’s global scale, but they are sold to, and served by, our teams in their own countries and sectors who understand their specific business challenges and create locally relevant solutions.

     BT Global Services has a worldwide reach and capability. More than 300 of our top customers are headquartered in the US. In Latin America, we operate in 22 countries where we offer communications services including IP infrastructure, outsourcing solutions and business transformation.

     The world’s top stock exchanges, leading broker-dealers and biggest banks depend on BT infrastructure to provide secure, shared connectivity and services.

     BT Global Services sees the Asia Pacific region as a major area for growth and plans to further increase its capabilities to capture the dynamic business opportunities available in the fast-growing region. The new investment will build on the strong market presence already established and will align to growth plans of multinational customers as they continue to expand. Key elements will be extending our professional services, industry sector and innovation resources with enhancements to many products and services and the establishment of technology showcase centres where customers can directly experience BT’s leading edge products.

     In China we have technology and service centres providing software development, service delivery and multilingual customer support.

     Headquartered in Singapore, BT Frontline is a leading regional provider of end-to-end IT services including consulting and implementation, IT security, enterprise software and outsourcing services and solutions.

     In Europe, we are a leading provider of communication services dedicated to the corporate, SME and public sectors in Italy. In Spain, we are a leading alternative enterprise data transmission provider. Our customers in Germany include more than two-thirds of the DAX 30 companies.

     More than 20 of Switzerland’s top 100 multinational companies and international financial organisations use our services, as well as global institutions including the World Health Organisation and the United Nations. In the three Benelux countries, our 870 customers include the EU and NATO.

Operating review

In challenging market conditions we continued to win and re-sign contracts in our three key markets, with a total order value of £6.6bn in 2010 (2009: £7.9bn, 2008: £7.8bn) which reflects the continued interest in outsourcing, managed and hosted services, converged communications and security.

     The lower order intake value in 2010 reflects the market trend towards lower value and shorter contracts and longer sales lead times as customers delay decisions in the current climate.

Order intake
(£bn)

We secured a number of contract renewals and extensions with existing customers, including leading multinationals, in 2010. These included:

4		a global contract with FIAT Group to provide and manage their worldwide networked IT services with an MPLS network connecting more than 500 locations in 37 countries
4		a two-year contract extension with Eni Group, one of the world’s major integrated energy companies, to provide and manage their global telecommunications services across five continents.

Our focus on the important Asia Pacific market was demonstrated by a contract secured to provide a managed services solution for Deutsche Post DHL’s telecommunications infrastructure in 15 countries and more than 1,000 sites across the region.

     During the year we built on our expertise and leadership in the global banking and financial markets sector. New contracts in this sector included:

4		global investment bank Nomura to provide dealing room technologies and implementation of market data infrastructure
4		Commerzbank, one of Germany’s biggest banks, to manage local and wide area network across hundreds of sites.

In the UK we secured a three-year contract extension with the UK Department for Work and Pensions to provide voice, data network and contact centre solutions helping to transform their voice and data network, which regularly handles more than two million calls a day and at peak times has managed three million.

     Other UK public sector contract wins included the Ministry of Defence which awarded us a five-year contract to manage voice and data networks across 196 military bases as part of the defence fixed telecommunications service agreement BT delivers on their behalf and a seven-year deal in partnership with Capgemini to provide IT and communication services to the Environment Agency in England and Wales.

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REVIEW OF THE YEAR OUR LINES OF BUSINESS

We continue to deliver on our National Health Service (NHS) National Programme for Information Technology contracts. We had our busiest year for deployments under our local service provider contract, where we are upgrading NHS IT systems and services across London and the South of England. Our systems and services now support more than 100,000 registered users. The Spine, the secure database and messaging service which BT has built and is managing for the NHS, continues to enable the increased use of key services to transform the NHS. Every day more than 30,000 referrals are arranged through the national electronic referrals and booking system ‘Choose and Book’, as well as the electronic transfer of around 700,000 prescription messages. N3, the secure broadband network BT has built and is managing for the NHS, now has more than 47,000 connections and connects every NHS organisation across England and more than a million NHS employees.

     Our corporate and public sector customers in our target markets outside the UK have signed a number of significant deals during the year, including contracts to provide global hosted contact centre services, network connectivity and voice services in Spain and Portugal for the security company Prosegur Activa, fixed mobile IP telephony for Dutch rail infrastructure provider ProRail to enable their employees to work flexibly, and with South Africa’s leading integrated energy and chemical company Sasol to provide and manage services including managed security. In Brazil we signed a contract with the largest retailer, Pão de Açúcar, to provide high quality network services.

     During 2010 we launched new products and service enhancements reflecting the continued market interest in outsourcing, managed and hosted services, converged communications and security. These included the releases of virtual data centre, hybrid virtual private network, hosted unified communications service, unified communications and collaboration, next generation contact centres and BT OneVoice.

     As part of our ‘right first time’ initiative, BT Global Services has improved sales order quality by 40% and the number of calls unanswered by our call centres has reduced by around 70% in 2010.

Financial performance

		2010				2009		a		2008		a
		£m				£m				£m
Adjusted revenue			8,513				8,628				7,664
Net operating costs			8,056				8,367				6,856
Adjusted EBITDA			457				261				808
Contract and financial review chargesb			–				1,639				–
EBITDA			457				(1,378	)			808
Depreciation and amortisation			815				776				744
Adjusted operating (loss) profit			(358	)			(2,154	)			64
Capital expenditure			599				886				961
Operating cash flow			(482	)			(912	)			(150	)

a		Restated. See page 101.
b		Contract and financial review charges in 2009 include £41m recognised in revenue.

In 2010 revenue decreased by 1% to £8,513m (2009: 13% increase). This decrease is after the impact of favourable foreign exchange movements of £269m and acquisitions of £11m. Excluding these, underlying revenue decreased by 4%. The reduction in underlying revenue reflects the trends seen throughout the year including the impact of mobile termination rate reductions, lower wholesale call volumes in continental Europe, declines in UK calls and lines revenue and the impact of economic conditions.

     Revenue from outside the UK increased to 50% of BT Global Services’ total revenue (2009: 48%, 2008: 40%) reflecting the impact of organic growth as well as foreign exchange movements.

		2010				2009		a		2008		a
		£m				£m				£m
Products and services
Managed solutions			5,281				5,273				4,468
Calls and lines			956				1,055				1,197
Global carrier			822				904				777
Broadband and convergence			334				321				275
Other products and services			1,120				1,075				947
Total adjusted revenue			8,513				8,628				7,664

a		Restated. See page 101.

Revenue from managed solutions remained broadly flat (2009: 18% increase). Within this, networked IT services revenue was negatively impacted by the challenging economic conditions. This was offset by increased MPLS revenue and the impact of favourable foreign exchange rate movements.

     Calls and lines revenue decreased by 9% (2009: 12% decrease), the reduced rate of decline reflecting our focus on winning new business to mitigate the continuing trend of customers migrating to alternative services including managed solutions.

     Global carrier revenue decreased by 9% (2009: 16% increase) due to the impact of mobile termination rate reductions and lower wholesale call volumes in continental Europe.

     Broadband and convergence revenue increased by 4% (2009: 17% increase) reflecting continued demand for business mobility solutions. Other revenue, principally comprising global product revenues, increased by 4% (2009: 14% increase) partially due to foreign exchange movements and global demand.

     Net operating costs decreased by 4% to £8,056m (2009: 22% increase). This decrease is after the adverse impact of foreign exchange rate movements of £285m and acquisitions of £11m. Excluding these, underlying operating costs decreased by 7%. This improvement reflects delivery of our cost saving initiatives during 2010. These initiatives have addressed our total labour cost, resulting in a reduction of more than 5,900 in total labour resource in 2010. They also reflect continued progress in the re-negotiation of better pricing through our procurement channels and the simplification of processes, systems and networks.

     As a result of our progress in addressing the cost base, adjusted EBITDA increased by 75% (2009: 68% decrease). In 2009 EBITDA was a loss of £1,378m, principally due to the contract and financial review charges of £1,639m.

     Depreciation and amortisation increased by 5% to £815m (2009: 4% increase). The increase reflects the impact of unfavourable foreign exchange movements and the timing of higher value and shorter-lived software assets which were brought into use in prior years.

     The adjusted operating loss in 2010 was £358m, an improvement compared with the loss of £2,154m in 2009. The improvement is due to the operational improvements in the

24      BT GROUP PLC ANNUAL REPORT & FORM 20-F

REVIEW OF THE YEAR OUR LINES OF BUSINESS

performance of BT Global Services and the impact of the contract and financial review charges in 2009.

     Capital expenditure reduced by 32% to £599m in 2010 due to the timing of capital expenditure across certain of our larger customer contracts, more stringent investment return criteria and improved procurement and programme delivery.

     Operating cash outflow in 2010 almost halved from an outflow of £912m to £482m reflecting the higher EBITDA, improved working capital and lower capital expenditure. In 2009 the poor operating cash outflow reflected the unacceptable performance of BT Global Services.

BT Retail

Business overview

BT Retail has around 13m consumer lines in the UK, and around a million SME customers. We serve UK consumers and SMEs through four customer-facing divisions: BT Consumer, BT Business, BT Enterprises and BT Ireland.

2010 Revenue by division

We are the UK’s leading provider of telecommunications products and services to the consumer market, where we offer our customers innovative and value-for-money calls, lines, broadband and TV packages.

     BT Vision, our television service, now has over 6,000 hours of video on-demand content available, the most in the UK. Among its selection of more than 7,000 programmes, it has 600 films, from classics to family favourites, with seven new titles added every week. BT Vision will be expanded to include free-to-air HD programming, more interactive services, a wider choice of on-demand programming, and we will provide greater access to premium sports.

     We believe that Project Canvas, our TV joint venture with the BBC, Channel 4, Five, ITV, and others, will transform the UK TV market, combining free digital channels with free on-demand content from public service broadcasters and on-demand and interactive TV delivered over broadband.

     BT Business customers are characterised by their diversity, ranging from start-up or micro businesses with one to 10 employees, to medium-sized businesses with up to 1,000 or more.

     We offer SMEs telecommunications and IT services that were once available only to the largest businesses, helping them cut costs and improve services to their own customers. We take away their need to invest and take the burden out of implementing new technologies, so they can concentrate on their core business. We also offer them a range of specialised services through BT Enterprises.

     BT is also one of the largest single suppliers of leased line internet access to UK businesses through BT Net, which together with our Etherflow service was the first to leverage the resilience and flexibility of BT’s software-driven IP network platform, enabling new features such as our self-service Etherflow portal which makes it quicker and easier for businesses to manage and reconfigure services as their needs change. In addition, BT has the largest wholly owned estate of customer access points in the UK market – more than 800 – which increases availability and reliability while driving down the cost of high quality internet and Ethernet connectivity for our customers.

     BT Business aims to become the ‘Brand for Business’ for the UK’s SMEs. This means partnering with customers to find ways to help them grow their business, whether it be solutions that unify their IT and communications needs, or ways to help them collaborate. BT Business generated £2.6bn revenue in 2010. However, the UK’s SMEs spend in total around £29bn a year on their IT and telecommunications needs, presenting a significant opportunity for BT Business.

     BT Enterprises consists of a portfolio of businesses, including BT Conferencing, BT Directories, BT Expedite, BT Payphones and BT Redcare. Each of these businesses operates as a standalone business, with the support of BT’s brand and customer relationships.

Our BT Openzone business provides wi-fi hotspots to offer broadband on the move, both to retail customers and to wholesale customers such as mobile network operators. BT Openzone has now become part of BT Enterprises.

     We design our products and services for use by as many people as possible. We have redeveloped bt.com to make it more accessible to all, including those with impaired abilities, and we are the only FTSE 100 company to hold the ‘See it Right’ industry accreditation for our inclusion website www.bt.com/inclusion

     BT Retail is also improving the sustainability of its products and services by reducing their environmental impact and improving their energy efficiency. For example, our Home Hub 2.0 has a standby facility to reduce power consumption. We are also reducing the volume of our product packaging as well as using recycled materials.

     BT Ireland operates in Northern Ireland and in the Republic of Ireland. In Northern Ireland we are the leading provider of communication services to consumers and SMEs. We are also responsible for providing regulated wholesale access via Openreach. In the Republic of Ireland, we are one of the largest

BT GROUP PLC ANNUAL REPORT & FORM 20-F      25

 

REVIEW OF THE YEAR OUR LINES OF BUSINESS

providers of wholesale network services. Across Northern Ireland and the Republic of Ireland we are the second largest provider of IT services focusing mainly on government and major corporate customers.

Operating review

In a challenging market, BT Retail has continued to improve its profitability and its customer service performance. We have continued to invest in broadband, and have developed our offers of TV to consumers and IT services to business customers.

     BT Retail has continued to focus on making its business more efficient, with sustained cost reductions by simplifying, standardising and automating processes. Our focus on customer service improvement has contributed significantly to cost savings by removing costs of failure, such as repeat calls.

BT Consumer

The degree of competition in the retail calls and lines markets led Ofcom to remove certain restrictions in 2009 to allow BT to provide bundled products so that it could compete more effectively.

     This has given us the freedom to offer attractive bundled packages of broadband, calls and TV services. We have been encouraging customers to move to call packages, and the proportion of customers on our highest value plan has increased from 11% to 17% during 2010.

     The popularity of buying bundles of services from BT has driven average annual revenue per consumer user (ARPU) up to £309 as multi-product take up among our customers grows.

Average annual revenue per consumer user
(£)

In the broadband market, BT’s retail share of the DSL and LLU base has remained at around 35% for the last three years. Our share of net additions was 44% in the fourth quarter of 2010. We continue to invest in this market to build on our success.

BT’s retail broadband^a market share year end
(million lines)

During 2010 we started the roll out of our ADSL2+ service, delivering speeds of up to 20Mb/s at no extra cost to customers. This technology increases the speed at which customers can download information over their copper telephone line.

     We offer our customers unbeatable broadband coverage, with Home Hubs which give the widest available range in the home, supported by the largest network of hotspots.

     In January we launched BT Infinity, our super-fast fibre-based broadband proposition currently offering download speeds of up to 40 Mb/s and upload speeds of up to 10 Mb/s, which will change the way customers use the internet. We aim to make the service available to at least 40% of UK premises in 2012.

     We have entered into a commercial partnership with OnLive Inc, a Silicon Valley based ‘cloud’ computing video gaming business, which gives BT exclusive rights to bundle its game service with broadband in the UK. This service will enable customers to purchase and play video games streamed over broadband.

     We also offer consumer broadband and home phone services under the Plusnet brand which now has 369,000 customers (2009: 309,000).

     We continue to pursue growth opportunities in the TV market. BT Vision now has 467,000 customers (2009: 423,000), with the average number of views per subscriber per month up 37% year on year. Ofcom concluded its pay TV market investigation in March 2010 by requiring Sky to provide Sky Sports 1 and Sky Sports 2 at wholesale regulated prices. This should enable BT and other pay TV operators to offer premium sports channels in future at lower prices than those currently available.

     We have reached an agreement with Arqiva to supply digital terrestrial TV transmission capacity to support the planned offers of these channels. We aim to bring these offers to viewers in time for the 2010/11 Premier League season. Sky has indicated that it is planning to appeal Ofcom’s decision.

     Project Canvas achieved a significant milestone in December 2009 with the BBC Trust giving provisional approval for the BBC’s involvement which means the partners can continue developing the technology.

     Our customers also benefit from our investment in our wi-fi network. BT has the largest wi-fi hotspot estate in the UK and Ireland. Comprising BT Openzone, BT Fon and Business Hubs, our customers can now get online at more than 1.5m locations including high street chains, hotels, transport hubs, residential and commercial sites. Strong usage growth doubled BT wi-fi user traffic over the previous year. We now carry more than a billion minutes a year.

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In 2010, we signed UK wi-fi deals to provide Orange, Vodafone and O₂ with BT Openzone wi-fi access.

BT Business

The SME market is diverse and fragmented. It has been a challenging sector to operate in over the past year as the economic downturn has had a significant impact on this market.

     We were the first UK CP to make an unlimited calls, lines, broadband and mobile option available to SMEs via our BT One Plan Plus package, bringing them certainty and value for money. This has contributed to the growth of our mobile base, which now has more than 230,000 end users (2009: 188,000).

BT Business mobile end user base (excl. free mobile broadband)
(’000)

BT Business has continued to develop its activities in the SME IT services market which is worth around £19bn. This is a market characterised by fragmented competition with a clear customer need for simple IT solutions. BT Business has consolidated the IT services and companies it has acquired, integrating BT Lynx and BT Basilica into BT EngageIT and driving the performance of Dabs and BT iNet in an extremely challenging environment.

     Dabs offers customers the IT hardware components they need and has built its market share in the business-to-business market with contract wins with VT Group, QinetiQ, and CAN Media Group.

     BT iNet is a centre of excellence for Cisco technology and has won contracts in its markets but especially in higher education.

     BT EngageIT provides IT hardware and software infrastructure solutions to medium-sized business-to-business customers in both the public and private sector. During 2010 BT EngageIT has achieved some notable customer wins including the Environment Agency and UK Anti Doping.

BT Enterprises

BT Enterprises comprises five standalone businesses, all of which made progress in 2010.

     In February BT Conferencing introduced interoperability between the world’s top three videoconferencing systems. It has now installed more than 500 immersive networked telepresence rooms worldwide. Air travel disruption and other global incidents have promoted the use of conferencing services. Businesses are also more environmentally aware and can reduce CO₂ emissions by using BT Conferencing’s services to cut down on travel. We are working to maximise revenue with our existing accounts by finding new applications and new users, and by working with other parts of BT to acquire new customers who are either existing or first time conferencing users. More than half of BT Conferencing’s revenue comes from outside the UK.

     The integration of UFindus, now known as BT Customerstreet, into BT Directories further strengthens our online directory offering.

     In May we introduced a new product range, BT Redcare Agile which meets the high industry security standards. BT Redcare is aiming to migrate customers to IP-based security services.

     In July luxury shirtmaker Thomas Pink, retail fashion chain Warehouse and JJB Sports became the first businesses in the UK to commit to use BT Expedite’s Integrated Store technology to link their high street and online operations. Major new contracts included installing BT Expedite’s latest store electronic point of sale system at New Look, and building e-commerce websites for JJB Sports and Snow & Rock.

BT Ireland

Despite the challenging economic conditions, particularly in the Republic of Ireland, we continued to secure major private and public sector contracts during 2010.

     In July we signed a contract with Vodafone in the Republic of Ireland for the provision of wholesale network services over a seven-year period, and the transfer of BT’s consumer and SME broadband and voice customer base to Vodafone.

     In December we signed a contract with the Northern Ireland government to extend the roll out of fibre-based broadband beyond our existing commercial deployment plans through a combination of public-private sector investment and European Union funding.

     In November we announced a multi-million pound investment in our contact centre operations in Northern Ireland, with the creation of two dedicated digital care sites, enabling our customers to access the highest quality of customer support via e-mail, live chat and other web-based contact including proactive support channels such as Twitter. This development involves advanced training and development of more than 600 BT customer care advisors in Northern Ireland.

     Our achievements in this market were recognised by BT being named Northern Ireland’s Responsible Company of the Year 2009 by Business in the Community for our role in helping build economically sustainable and socially inclusive communities.

     We have delivered significant cost savings over the year as a result of labour efficiencies, property rationalisation and optimisation of marketing spend.

Customer service delivery

We have a range of programmes in progress which are designed to improve the customer experience and take the cost of failure out of the business. Customers are noticing the difference: this year we have seen a reduction of around a third in the number of enquiries about bills. Core service costs (labour and non labour) have fallen 12% over the same period as we enhance self-service capabilities and cut down call transfers. We also increasingly resolve customer complaints and queries on first contact with no repeat calls.

     We will continue to build on this positive momentum, with a sustained focus on systems, processes and people.

     In order to serve our customers better, we are expanding our channels where customers can contact us or find self-help support, including Twitter, bt.com community forums, YouTube and Live Chat.

BT GROUP PLC ANNUAL REPORT & FORM 20-F      27

 

		2010				2009		a		2008		a
		£m				£m				£m
Revenue			8,297				8,663				8,682
Net operating costs			6,447				6,999				7,153
Adjusted EBITDA			1,850				1,664				1,529
Depreciation and amortisation			459				426				445
Adjusted operating profit			1,391				1,238				1,084
Capital expenditure			417				471				579
Operating cash flow			1,640				1,064				1,011

a		Restated. See page 101.

In 2010 revenue decreased by 4% to £8,297m (2009: flat). Revenue benefited from favourable foreign exchange rate movements of £31m, acquisitions of £18m and a one-off benefit of £40m relating to prior periods. Excluding these, revenue declined by 5%.

     BT Consumer and BT Business revenue decreased by 3% and 9%, respectively (2009: 4% decrease and 1% increase, respectively), reflecting the continued reduction in calls and lines revenue. Both the BT Consumer and BT Business divisions faced challenging market conditions throughout 2010, arising from a combination of the economic climate, particularly in the business market where the level of insolvencies has remained high, and competitive pressure.

		2010				2009		a		2008		a
		£m				£m				£m
Products and services
Calls and lines			5,031				5,422				5,745
Broadband and convergence			1,316				1,313				1,201
Managed solutions			588				599				530
Other products and services			989				986				941
External revenue			7,924				8,320				8,417
Internal revenue			373				343				265
Total			8,297				8,663				8,682

a		Restated. See page 101.

Calls and lines revenue decreased by 7% in 2010 (2009: 6% decrease) reflecting the economy and the increasingly competitive market environment.

     Broadband and convergence revenue remained broadly flat (2009: 9% increase) in 2010, reflecting the successful retention of customers in the maturing broadband market, together with revenue from services such as BT Vision and mobility.

     Managed solutions (ICT) revenue decreased by 2% in 2010 (2009: 13% increase) reflecting the economic conditions in the business market compared with 2009.

     Other products and services revenue, which principally comprises our Enterprises division, remained broadly flat in 2010 (2009: 5% increase).

     Net operating costs decreased by 8% (2009: 2% decrease). Excluding the impact of unfavourable foreign exchange movements of £27m, acquisitions of £16m and a favourable one-off internal rebate of £15m relating to prior periods, underlying costs reduced by 8%. The decrease reflects the reduction in revenue but also the success of our cost saving initiatives which focused on labour productivity and supplier management.

     The above factors contributed to an 11% increase (2009: 9% increase) in adjusted EBITDA in 2010, including one-off benefits of £55m.

     Depreciation and amortisation increased by 8% to £459m (2009: 4% decrease) due to higher value and shorter-lived assets being brought into use in recent years.

     Adjusted operating profit increased by 12% to £1,391m in 2010 (2009: 14% increase).

     Capital expenditure decreased by 11% to £417m in 2010 (2009: 19% decrease), due to improved procurement and management of capital expenditure.

     Operating cash flow increased by 54% to £1,640m, a significant improvement compared with a 5% increase in 2009. This reflects the higher EBITDA, improved customer cash collections and lower capital expenditure.

BT Wholesale provides products and solutions to CPs in the UK and worldwide. It meets the wide-ranging needs of more than 1,000 CPs in the UK, as well as worldwide through a working relationship with Global Telecoms Markets, the wholesale arm of BT Global Services.

     We provide our customers with access to BT’s platforms, skills and technology, making BT’s investments and economies of scale work for their benefit, both in the UK and across the globe.

     We provide communications services and partially or fully managed solutions for customers ranging from mobile and fixed line operators to internet services providers, broadcast organisations and smaller resellers.

     We offer wholesale products but can also manage a customer’s network infrastructure via our MNS solutions, as we do for customers like Virgin Media and KCOM Group. Our white label managed services are designed for customers who have not invested in fixed line infrastructure or want to enter the fixed line communications market for the first time. Customers like the Post Office and Scottish and Southern Energy, as well as Vodafone and O₂’s fixed line businesses, fall into this category.

     We support the mobile industry with fixed line services that connect thousands of base stations across the UK to the mobile network operators’ core networks, without the capital investment and time to market that a self build option would require. We have managed services contracts in place with all of the UK’s mobile network operators to help them manage the growth in mobile data and video content volumes generated by 3G services as well as national wi-fi access through BT Openzone.

 

Products and services

We offer IP-based Ethernet services across the widest national footprint in the UK market, giving customers high-speed data connectivity at a range of speeds. At 31 March 2010, Wholesale Ethernet was available from more than 800 nodes throughout the UK (2009: 600 nodes).

Private and partial private circuits

BT Wholesale is the largest provider of analogue data circuits in the UK which help our customers extend the reach of their services and act as infill solutions for their own networks.

Wholesale broadband

We are the UK’s largest wholesale provider of broadband nationally. We currently enable more than 8m broadband lines in the UK, including CP customers who have invested in their own broadband infrastructure and use our services outside their own network footprint.

     We offer a range of broadband services, delivered over copper and fibre with speeds of up to 8 Mb/s (ADSL), up to 20Mb/s (ADSL2+) and up to 40Mb/s and up to 100 Mb/s over fibre. At 31 March 2010, our up to 20Mb/s service, based on ADSL2+ technology, was available from exchanges serving 55% of UK premises (2009: 40%). In January 2010, we introduced Wholesale Broadband Connect Fibre, a wholesale variant of BT’s fibre-based broadband service tailored to the needs of CPs.

Content distribution network

We are introducing a content distribution network in 2011 that will help our CP customers manage the rapidly rising volume of video content that is being downloaded over fixed and broadband networks. Our network will make this traffic more cost efficient for CPs to manage and will enable a range of new business models for digital content.

Capacity and call-based products

We continue to sell a wide range of capacity and call-based products and services, including regulated and new, non regulated ones. As we refresh our core portfolio with next generation replacements, we will, over time, migrate these services to our IP network platform, decommissioning parts of our legacy systems. One of these new products is IP Exchange, BT Wholesale’s global IP interoperability platform that allows CPs to manage traditional and IP voice calls, on a single gateway, regardless of whether the calls are from mobile or fixed networks.

During 2010 BT Wholesale stabilised its financial performance, as demonstrated by the improving EBITDA trend.

     This was achieved through a realignment of our business’s organisational structure to match more closely the changing needs of our markets, success in winning a range of new MNS contracts, the introduction of next generation broadband and Ethernet services, and focused cost and labour resource reduction. Much of our cost reduction was delivered through improvements in service quality and a focus on improving the delivery of products and services ‘right first time’.

      Year-on-year EBITDA movement
(%)

     We are focused on the continuous improvement of our customer experience. This year, for example, we have reduced the number of high level complaints by more than 35% and since 2006 we have nearly doubled the average time between faults for our data customers, from a fault every two years to a fault every three and a half. We have also improved the service delivery of our new next generation broadband service to a level comparable with our traditional broadband service.

      Revenue under long-term contract
(%)

The majority of BT Wholesale’s largest UK customers by revenue have signed long-term MNS contracts, typically for between three and five years. As a result, the proportion of our business underpinned by long-term contracts has increased from 10% in 2007 to 40% in March 2010. These contracts include a high proportion of products and services with low levels of bespoke development. This allows us to defend product and service revenues, as well as creating new opportunities for growth. Managed services revenue is growing, and accounted for 22% of BT Wholesale’s external revenue in 2010, up from 15% the previous year.

 

2010 External revenue by customer

In 2010 we signed MNS contracts with a total order value of £1.8bn (2009: £1.3bn), including:

4		A 10-year network outsourcing agreement with KCOM Group to provide the operator with a fully-managed, national operational capability and a new streamlined portfolio of next generation products and services
4		A long-term agreement to provide O2 with fixed line broadband services to enable it to offer fixed line services to the SME market in the UK for the first time
4		A long-term contract with Vodafone UK to enable it to introduce unified communications to UK SMEs
4		A five-year agreement to consolidate O2’s core fixed and mobile networks in the UK into one cost-effective network using BT’s IP network platform.

We also signed a major international voice services agreement with Tata Communications that allows both parties to benefit from shared resources and lower costs as part of a global supply agreement.

MNS as a growing proportion of external revenue
(%)

In April 2010 BT Wholesale signed a major MNS contract with Orange UK to take on the management and development of its UK fixed line broadband infrastructure for consumers and SMEs. Over the next 15 months we will migrate Orange UK’s LLU-based customers to the BT Wholesale broadband platform.

     Around half of BT Wholesale’s activity in the UK remains subject to UK and European Union industry regulation and regulatory pricing. During 2010 mobile termination rates across Europe were reduced, eroding some £140m from BT Wholesale’s 2010 revenue, but with no impact on profitability.

			2010				2009		a		2008		a
			£m				£m				£m
	Revenue			4,450				4,658				4,959
	Internal revenue			1,227				1,228				1,252
	External revenue			3,223				3,430				3,707
	Net operating costs			3,171				3,381				3,553
	Adjusted EBITDA			1,279				1,277				1,406
	Depreciation and amortisation			680				686				893
	Adjusted operating profit			599				591				513
	Capital expenditure			325				435				522
	Operating cash flow			844				824				800

a		Restated. See page 101.

In 2010 revenue declined by 4% to £4,450m (2009: 6% decline), an improvement in the rate of decline. The overall decrease principally reflects reductions in transit revenue, largely driven by the decline in mobile termination rates, which has no impact on EBITDA. Excluding transit, revenue declined by 1% compared with 2009.

		2010				2009		a		2008		a
		£m				£m				£m
Products and services
Transit, conveyance and WLR			1,521				1,828				2,113
Managed network services			715				518				295
Broadband and convergence			431				482				624
Calls and lines			306				385				462
Other products and services			250				217				213
Total external revenue			3,223				3,430				3,707
Internal revenue			1,227				1,228				1,252
			4,450				4,658				4,959

a		Restated. See page 101.

Transit, conveyance and WLR revenue decreased by 17% (2009: 13% decrease). This decline has arisen principally as a result of the price impact of mobile termination rate reductions.

     Broadband and convergence revenue decreased by 11% due to the continued trend of CPs switching to LLU provided by Openreach although the rate of decline slowed compared with 23% in 2009 as the majority of the LLU migration took place in that year.

     These declines have been partially offset by an increase of 38% in MNS revenue (2009: 43% increase).

     Calls and lines revenue decreased by 20% (2009: 17% decrease) reflecting lower circuit volumes and the substitution impact as customers migrate to long-term MNS contract arrangements.

     Other products and services revenue increased by 15% (2009: 2% increase).

      

Net operating costs decreased by 6% (2009: 5% decrease), partly due to the decline in revenue and lower mobile termination rates, but also due to the impact of our cost efficiency programmes principally through reductions in our total labour resource.

     Adjusted EBITDA remained broadly flat at £1,279m (2009: 9% decrease), reflecting the delivery of our cost efficiency programmes and growth in managed network services revenue offsetting the decline in traditional products such as broadband.

     Depreciation and amortisation decreased by 1% to £680m (2009: 23% decrease). The slowdown in the rate of decrease was due to certain legacy assets becoming fully depreciated in 2010.

     Adjusted operating profit increased by 1% (2009: 15% increase) due to the slight improvement in EBITDA and the lower level of depreciation and amortisation.

     Capital expenditure decreased 25% to £325m in 2010 (2009: 17% decrease), reflecting improved procurement terms and more stringent investment return criteria.

     Operating cash flow increased by 2% to £844m in 2010 (2009: 3% increase) due primarily to the reduction in capital expenditure, although this was partially offset by the negative impact of intra-group VAT settlements with Openreach.

Openreach was created in 2006 and is responsible for the crucial ‘first mile’ of the UK telecommunications network – the copper wires and fibre connecting homes and businesses to their local telephone exchange via fixed line local and backhaul connections. It offers all Openreach CP customers (currently more than 480, including other BT lines of business) fair, equal and open access to its networks.

     Openreach operates in a competitive environment both from other providers of fixed network capacity and substitution into the mobile market, and many of our products’ prices are covered by regulation. Our performance is influenced by economic conditions, as recessionary periods increase the risk of business failure and loss of line rental, and low activity in the housing market reduces churn and hence connections. In prior years, poor weather had a significant impact on the network increasing faults, but following improvements in sealing the network, it is now only affected by severe weather conditions.

     Our 19,000 field engineers work on behalf of all CPs, enabling them to provide their customers with a range of services from analogue telephone lines to complex networked IT services.

     To meet our customers’ requirements with a greater degree of flexibility and efficiency, an agreement was reached with the CWU to introduce more flexible working hours, effective from April 2010.

     Openreach operates a fleet of more than 20,000 vehicles and is committed to finding innovative ways to minimise its environmental impact. During the year we equipped more than 13,000 vans with satellite location technology that, together with improved business practices, will save time, reduce our carbon footprint and improve our responsiveness to customer needs. The fuel consumed by BT’s commercial fleet reduced by 10% compared with 2009.

Products and services

We offer our customers a range of products that meet their needs – from Ethernet to fibre-based broadband. Our products and services are designed to provide our customers with the tools they need to meet the increasing demands of their customers today, while helping them to plan their services of the future.

Wholesale line rental (WLR)

WLR enables CPs to offer telephony services with their own brand and pricing structure over BT’s network. At 31 March 2010, Openreach was providing 17.9m WLR lines to other BT lines of business, and 6m to other CPs. Of the lines provided to other CPs, 4.8m were WLR analogue lines (up 6% on 2009) and 1.2m were WLR digital channels (up 11% on 2009).

Local loop unbundling (LLU)

LLU enables CPs to use the lines connecting BT exchanges to end users’ premises, and to install their own equipment in those exchanges. In 2009, 84% of UK premises were served by an unbundled exchange. At 31 March 2010, there were 14.8m unbundled lines in the UK, up 7% on the previous year. Of these, 8.2m were for other BT lines of business to support broadband services and 6.6m were for other CPs. More than 30 CPs are providing unbundled services, and Openreach is fulfilling more than 94,000 LLU orders a week.

Ethernet

Openreach’s Ethernet products offer CPs a wide choice of high-bandwidth circuits to build or extend their customers’ data networks. We made major reductions in the connection and rental charges of services in our Ethernet portfolio in February 2009 and January 2010, which have improved the access and backhaul markets in the UK, and support the growth of data-intensive applications.

Fibre-based broadband roll out

Exchanges announced to date for fibre-based broadband services.

 

Fibre-based broadband access

Pilots of our fibre-based broadband access service in Whitchurch, South Glamorgan and Muswell Hill, North London proved the effectiveness of FTTC solutions. We have also continued trials of FTTP at Ebbsfleet to prove the technology in a greenfield location, and have announced further brownfield trials at Highams Park in East London and Bradwell Abbey in Buckinghamshire for this year. Mass deployment of FTTC accelerated during 2010. We aim to make our fibre services available to 4m UK premises by the end of 2010, and to be available to at least 40% of UK premises in 2012, with an expected 25% of these being FTTP and the remainder FTTC.

In 2010 Openreach made significant improvements in the quality of service delivery of its products.

     Faults due to the access network reduced by 11% compared with the previous year as a result of our focused network investment and quality programmes. Over the past three years, fault rates have reduced from one fault every nine years to one fault every 15 years.

     Ofcom’s charge controls on Openreach impacted the LLU, WLR and Ethernet products. Both the LLU and WLR controls expire on 31 March 2011 and importantly, the former allowed Openreach to raise the price of Metallic Path Facilities (MPF) rentals. The controls which apply to Ethernet require downward movement in prices each year for the period until September 2012.

     Ofcom has agreed two variations to BT’s Undertakings which allow Openreach to control and operate fibre-based broadband access equipment for FTTC and FTTP deployments, and has also confirmed its approach that, for the time being, there will be no predicted future price regulation applied to BT’s new fibre-based products.

     Some key customers are taking the decision to reduce ongoing rental costs by moving from WLR and Shared Metallic Path Facility (SMPF) to MPF, taking advantage of the difference in the regulated prices.

     In 2010 our cost transformation programmes have provided the platform to deliver continued efficiencies which have allowed us to resource our fibre-based broadband roll out and, at the same time, reduce our total labour resource as well as enabling future productivity improvements to be made.

     Supplier contract renegotiations, engineering process improvements and more orders delivered ‘right first time’ have all helped to reduce costs further.

A BT engineer during the winter snow

During 2010, we rationalised our civil engineering work, reducing from several suppliers to a single long-term national contract with a Carillion-Telent joint venture.

     The winter of 2010 saw some extreme weather conditions in the UK with considerable flooding and snow. Our engineers demonstrated their commitment by working hard to keep our customers connected. On 20 November 2009, just under 10,000 phone lines and 37,000 broadband lines were cut off as bridges collapsed and extensive flooding affected homes and businesses in an area of Cumbria. Within 12 hours phone services to the majority of customers had been restored and most broadband lines were working again within 36 hours.

		2010				2009				2008
		£m				£m				£m
External revenue			1,211				1,013				888
Revenue from other BT lines of business			3,953				4,218				4,378
Revenue			5,164				5,231				5,266
Net operating costs			3,204				3,235				3,355
Adjusted EBITDA			1,960				1,996				1,911
Depreciation and amortisation			856				778				689
Adjusted operating profit			1,104				1,218				1,222
Capital expenditure			907				951				1,073
Operating cash flow			1,167				1,079				841

 

 

In 2010 revenue decreased by 1% (2009: 1% decrease). The 2010 decrease reflects lower Ethernet prices, a reduced WLR base due to the depressed housing market and the difficult economic conditions. These factors were partially offset by volume growth in Ethernet and LLU which now forms 26% of our revenue, with WLR at 56%, reflecting the change in mix compared with 2009 (23% and 59%, respectively). This was due to the growth in the broadband market and the ongoing migration of end customers from BT to other CPs as well as targeted offers to the CP community to help stimulate and drive demand for our products.

     External revenue was £1,211m in 2010, an increase of 20% (2009: 14% increase) and reflecting the continuing migration of end customers to other CPs’ WLR and in particular, LLU rentals. External revenue represented 23% of our revenue in 2010 compared with 19% in 2009 and 17% in 2008.

     Revenue from other BT lines of business decreased by 6% to £3,953m in 2010 (2009: 4% decrease). These reductions reflect the shift of WLR and LLU volumes from other BT lines of business to external CPs and the effect of lower Ethernet prices, partially offset by volume increases.

     Net operating costs decreased by 1% in 2010 (2009: 4% decrease). Cost reductions have been achieved through a decrease in total labour costs, process improvements and efficiencies and a reduction in the number of faults due to the improved quality of our network and lower levels of connection activity.

     Adjusted EBITDA decreased by 2% (2009: 4% increase) as the reduction in revenue was only partially offset by cost savings.
     Depreciation and amortisation increased by 10% to £856m (2009: 13% increase) reflecting the higher value and shorter-lived

      

software assets being brought into use in 2010 and also our ongoing investment in systems to support new products and services.

     Adjusted operating profit decreased by 9% to £1,104m in 2010 (2009: broadly flat) due principally to the higher depreciation and amortisation.

     Capital expenditure decreased by 5% in 2010 to £907m (2009: 11% decrease), with the investment in our super-fast fibre access network being more than offset by lower own work capitalised following the delivery of significant efficiency savings.

     Operating cash flow increased by 8% in 2010 to £1,167m (2009: 28% increase) due to the lower capital expenditure and the beneficial impact of intra-group VAT settlements with BT Wholesale.

BT Innovate & Design

BT Innovate & Design is responsible for the innovation, design, development and delivery of the processes, networks and platforms on behalf of the customer-facing lines of business and which run BT’s business. These are operated and run by BT Operate.

     BT Innovate & Design has an operating model focused on delivery, with strong cost and quality management, which includes the whole lifecycle of both the network and associated software. In addition, by having the innovation, design and development skills within one team we are able to bring innovation closer to the customer, bringing new ideas, products and services to market faster, cheaper and more effectively for our customers. This is supported through the use of global development centres (in the UK, US, Europe, India and China) which improve collaboration, agility and efficiency in network and software development by bringing together the development teams and customers.

     We continue to reduce our cost base through a combination of cost controls and efficiency measures, whilst improving quality and meeting demand. In 2010 we reduced our unit costs by 31% through a quality delivery process, which focuses on re-use, consolidation and standardisation, the metrication of software which can be used to guide decisions about development, and supplier management.

BT Operate

BT Operate manages BT’s IT and network infrastructure platforms as a single converged operation, providing a seamless IT infrastructure. BT Operate also runs parts of other CPs’ networks on behalf of the customer-facing lines of business, and is responsible for delivery of the products and services BT sells to its customers.