Lessons from the cost transformation behind BT’s turnaround

Trusting and developing in-house finance staff has been instrumental in transforming British Telecom Group’s cost base over the past six years, said group finance director Tony Chanmugam, FCMA, CGMA. In that period, Chanmugam and his team have identified £5.5 billion ($8.5 billion) in cost reductions.

In 2008, the telecom provider was struggling. Faced with a growing pension deficit and a heavy debt burden, among other challenges, BT issued its second consecutive profit warning. But Chanmugam’s tenure, which began in December of that year, has heralded a reversal of fortunes, with the group’s market cap rising from £6 billion ($9.3 billion) to almost £40 billion ($62 billion), and it has outperformed the FTSE and the European telco index by a factor of three.

Chanmugam recently shared some of the lessons he has learned through the transformation with the audience at the American Institute of CPAs’ spring Council meeting in Washington.

Back in 2008, BT’s first task was to take a step back and decide what was important and identify what it could do to change the profile of the business. “We did some good, successful things and some that didn’t work,” Chanmugam said. But the most important thing was to take action and get the transformation underway.

The cost base was critical to this transformation. The first step in reducing the cost base was to move away from outsourcing, including taking all of the group’s finance services back in-house. “Over the last six years, we have taken out about £5.5 billion in costs,” Chanmugam said.

The company was spending about $400 million per year on consultancy services. Consultants not only represented a significant cost, but by bringing the work back in-house, the company found efficiencies by learning the business more intimately. “It’s far better that you provide the services yourself, build up your own capability, and just use consultants for the top end of the value chain,” Chanmugam said.

Trusting staff

Putting trust in existing BT staff was the most important element of the transformation, Chanmugam said, adding that there were some very capable people who hadn’t been given sufficient freedom. To remedy this, BT created a cost-transformation team made up of people in their mid-20s to early 30s, including qualified accountants, and gave them a remit to identify potential savings by thinking outside of the box.

It provided the individuals with valuable experience and served as an effective talent pipeline. Many team members grasped the opportunity and have progressed quickly up the ranks within BT, while other former members are now on the operating committees of FTSE 100 companies, Chanmugam noted. And, of course, BT came out of the exercise with several new ideas.

The wider BT finance team is now half the size it was six years ago, but the quality of the people is materially better, Chanmugam said. This has been achieved through customised training programmes that allow the finance team to have individual road maps to the type of role they need to take in the longer term.

Chanmugam also strives to engender a culture that encourages finance professionals to be navigators and, ultimately, drivers of the business who identify and implement the agenda, rather than being mere passengers. “Getting that mindset through to our community is vital as it provides a sense of fulfilment,” he said.

Rather than focusing on percentage targets for cost reductions, Chanmugam’s approach was to ask questions such as, “How much can you find?” or “What’s the rationale for doing it?” and to look for the logic of how the desired result could be achieved.

Understanding the impact any proposed cost reductions could have on customer service, for example, was critical, and the finance department made a major contribution in helping to understand the volumetrics that underpin the business. The priority was to understand who the customer is, what they expect from the company, and how this can be achieved most effectively.

Securing buy-in

Securing buy-in for the transformation proved to be another important factor. Relying on “the power of the office” to drive cultural change in an organisation is not a sustainable option. In the first instance, Chanmugam relied on the authority granted to him by the CEO, and this allowed him to make the changes required. But, he pointed out, if relied upon too long, that power becomes diminished. Then you have to explain to the workforce the potential benefits of the change. It’s easier to get buy-in if those benefits are tangible and the results can easily be seen.

Over the course of the cost-reduction programme, the finance department learnt that identifying savings themselves, then leaving the individual business line to implement those solutions, was not an effective way of working as it meant there was often a delay in the ideas being put into practice.

So BT created dedicated implementation teams for each task. “We also found that you end up alienating operational people in the business if you don’t get them to be part of the solution to any problem,” he said.

“We still have a lot to do, and there are bigger savings to be had,” he added. “Working on the cost base to grow the business is only one part of the journey. From now on, the focus has to be on a combination of growing revenues, increasing margins, and reducing costs.”

3 questions finance leaders should ask themselves 

During the presentation, Chanmugam advised finance professionals to ask themselves three questions:

1. Regardless of the size of your organisation, the first question for the finance leader seeking to become a driver of business decisions is, “Are you maximising the quality of the people you have working on your team?” Finance leaders have to give employees an opportunity to step up and freedom in which to work. “If any of the people in your team aren’t good enough, take the decision to replace them,” Chanmugam said.

2. Ask yourself what value you can add to the business, and set high expectations. Chanmugam believes companies need to strive for the great. “That way you are always pushing yourself as a business and are more likely to fulfil your potential,” he said, noting that the finance community is integral to stretching the organisation in this way.

3. What’s your legacy? Leaders should also try to understand the legacy they want to leave in their business, as this is the definition of their success or otherwise. For example, Chanmugam is proud of the fact that, within BT, the finance community is viewed as the catalyst for change.

Related CGMA Magazine content:

“Five Strategies From BT Group’s FD”: CIMA Chief Executive Charles Tilley talks key business drivers and sustainable success with BT Group’s Tony Chanmugam, FCMA, CGMA.

—Samantha White (swhite@aicpa.org) is a CGMA Magazine senior editor.