ITEM 3. KEY INFORMATION
3.A Selected financial data
The information set forth under the headings:
|
|
|
Selected financial data on page 292; and
|
|
|
|
Information for shareholders Exchange rates on page 302
|
of the Annual Report 2018 is incorporated herein by reference.
3.B Capitalization and indebtedness
Not applicable
3.C Reasons for the offer and use of proceeds
Not applicable
3.D Risk factors
Principal risks and uncertainties
The principal risks and uncertainties that affect us could have an impact on our business, brand, assets, revenue, profits, liquidity or capital
resources. The principal risks we described last year have evolved, and so has our response to them.
Our Enterprise Risk Management framework gives
reasonable (but cannot give absolute) assurance that weve identified and addressed our biggest risks. However, there may be some risks that are either currently unknown, or currently seen as less important but with the potential to become more
so in the future.
Events outside BT present both risks and opportunities. We focus our efforts on predicting and reducing risks while aiming to take
advantage of any opportunities that may emerge.
We recognise the uncertainty that political and geopolitical risks present, and have continued to operate
a specific Brexit programme across BT that looks at how we might be affected and what our response should be. This programme is keeping a close watch on developments, and reports to a steering group chaired by our group CFO.
OUR PRINCIPAL RISKS
Compliance risks
Significant control failure
Its crucial that we
maintain high ethical standards. We respect human rights and we dont tolerate fraud, bribery, any form of corruption or any illegal or unethical activity.
We follow local and international law, including anti-corruption and bribery laws. The UK Bribery Act and US Foreign Corrupt Practices Act (FCPA) have
extraterritorial reach, so cover our global operations. We also have to make sure we follow trade sanctions and import and export controls. We comply with the Modern Slavery Act and follow international standards on human rights, such as the
International Labour Organisations Principles and the UN Guiding Principles on Business and Human Rights.
We also face the risks associated with
inappropriate and unethical behaviour in local and other markets by our people or associates, such as suppliers or agents, which can be difficult to detect. There is also a risk that our controls, which are designed to prevent, detect and correct
such behaviour, may be circumvented. Controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and there can be no assurance that any design will succeed in achieving its
stated goals under all potential conditions, regardless of how remote.
Financial controls, and the assurance that exists over them, play an important
part in our ability to prevent and detect inappropriate behaviour. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore even those systems determined to be effective can
provide only reasonable assurance with respect to financial statement preparation and presentation.
Potential impact
If our people, or associates like suppliers or agents, breach anti-corruption, bribery, sanctions or other legislation there could be significant penalties,
criminal prosecution and damage to our brand. This could have an impact on future revenue and cash flow depending on the nature of the breach, the legislation concerned and any penalties. If we were accused of corruption, bribery, human rights
abuses, violating sanctions regulations or other laws, it could lead to reputational damage with investors, regulators, civil society and customers. A breakdown in our financial control framework could result in financial misstatement.
4
Whats changed over the last year?
Weve seen an increase in Speak Up (BTs confidential hotline service) reports and conflict of interest registrations. In 2017/18 Speak Up reports
increased by 63% on the previous year. This is indicative of a culture where people are more aware and confident to tell us about their concerns.
In
terms of anti-corruption and bribery enforcement generally, weve continued to see a steady flow of significant cases from both the UK Bribery Act and the FCPA. In the US 11 companies paid a total of $1.92 billion to resolve FCPA cases in
2017. Theres also been an increase in legislation (either enacted or proposed) to address and report on human rights abuses by companies.
Processing our customers data
We control and
process huge quantities of customer data around the world, so observing data privacy laws is something we take extremely seriously. Its essential that individuals and businesses can trust us to do the right thing with their data.
We make sure our customers data is secure, and protected against both internal and external threats (eg cyber attacks). Being trusted with our
customers data goes further than that though. It means preserving the integrity of the personal data we process, and only keeping the things we need to provide customers with the services theyve signed up for. It also means being
transparent around how we use customer data, who we share it with, making sure the way we process personal data is legal, fair and in line with customers rights and wishes, and ensuring that we fulfil the legal obligations we have when
customers want to exercise their rights under data legislation.
As a communications provider we currently operate under a stringent reporting regime to
tell the UK Information Commissioners Office (ICO) if we become aware of a personal data security breach. We must also tell any affected individuals as quickly as possible if the incident is likely to have a significant impact on them. On
25 May 2018 EU General Data Protection Regulation (GDPR) will come into force. We are in the process of implementing more stringent procedures around data protection in order to comply with the GDPR requirements, which may lead to higher
regulatory compliance costs.
An individuals fundamental right to privacy is reflected in the fact that data privacy laws are in force in more than
100 countries. The nature of those laws vary across different parts of the world. Increasingly we (and other multinationals) have to show that were handling personal data in line with a complex web of national data laws and
societys ethical expectations.
Potential impact
Failing to stick to data protection and privacy laws could result in regulatory enforcement action, significant fines, class-action, prison sentences and the
regulator telling us to stop processing data.
On top of that, we could see huge reputational damage and big financial losses. Those losses could come
from fines and damages if we fail to meet our legal requirements, as well as costs resulting from having to terminate customer contracts and the subsequent customer churn. Companies whove had high profile data incidents have seen a significant
impact to their share price and suffered ongoing costs from their
non-compliance.
Whats changed over the
last year?
The GDPR is deemed one of the biggest shake ups in data law for over a decade. Its been created to update the existing law to ensure
that individuals data is protected and secured and gives people a greater say as to how their data is used. It also increases their rights as to how their personal data is kept, used and retained by businesses. The sanctions for breaching the
GDPR are significantly higher than under the previous regime, which could result in a substantial fine in the event of a breach.
5
Scrutiny from national regulators is increasing as companies are monitored to ensure theyre working towards
compliance with the new law. In addition within the last 12 months several large companies have suffered further well-publicised data incidents and the general trend towards bigger financial penalties has increased.
Health, safety and wellbeing
Our people are crucial to
our business and if they feel safe, healthy and happy they will perform better for our customers and our shareholders. Working to reduce the risk of harm to our people helps us comply with health and safety laws wherever we operate.
Many of our people, especially our UK engineers, work for much of the time in community settings where we have limited control over the working environment.
Much of the network is carried above ground level and temporary work at height is a major risk for us over the course of a year our people will undertake millions of climbing jobs. All of our people work in a fast-paced and highly competitive
sector where change is constant and psychological pressures are significant. Managing physical and psychological hazards is therefore complex.
Potential impact
We work to make sure our people go home
safely every day. Any health and safety failure could result in injury to our people or members of the public, financial penalties, and/or reputational damage.
The wellbeing of our colleagues is important if were to transform our business while continuing to recruit, retain and engage our workforce to deliver a
great customer experience and grow the business. An adverse reaction to change could impact talent retention, resulting in a loss of critical skills and greater need for external recruitment, which would add cost to the business. Poor engagement
also raises the risk of general industrial unrest and action.
Whats changed over the last year?
Changes in technology and working practices help to reduce the physical risks to our people. For example, the shift from copper to fibre in the network means
our work involves less heavy manual labour, reducing the risk of musculo-skeletal disorders as a result. Conversely, people increasingly seek to attribute common health problems to past work activity with the aim of securing compensation, and the
regulatory environment is getting harsher.
In parallel, a change in our workforce is increasing risks in areas such as driving. Weve had a mature
workforce with little labour turnover for many years. That cadre is reaching retirement age at the same time as demand for our products and services is increasing, and so were recruiting large numbers of younger people. The new intake has a
different risk attitude, combined with less experience, so we need to make sure we put in additional safeguards with less reliance on expertise and individual judgement.
The pace of upgrading the network, fixed and mobile, has continued to accelerate. That increases our civil engineering workload and the hazards and risks
associated with that type of work. The Grenfell Tower fire has raised awareness of fire issues weve reviewed cladding across the BT estate and were examining a range of other aspects of fire safety.
The pace and scale of change within the business has also continued to accelerate and were aware this has a psychological impact on our people. The risk
of epidemic disease is constant; this year our main focus has been on pneumonic plague and influenza.
Competition and technology risks
Our markets are characterised by intensifying competition from established players and new entrants. This competition compounds some of the external challenges
that we see in the market place, notably:
|
|
|
fixed broadband and mobile connectivity nearing saturation, with most segments of the UK telecoms markets now
growing below the rate of inflation
|
|
|
|
customers seeking fast migration from higher-margin legacy products to fully digitised, converged, secure,
faultless solutions
|
|
|
|
efficient markets demanding clear differentiation for premium pricing, driving price deflation of basic
connectivity and data
|
6
|
|
|
high exit barriers, prolonging and intensifying competition even when selected companies in the sector are
struggling to generate economic returns.
|
Technology change is also a key characteristic of our sector. We need to be able to identify
emerging technologies, assess how customers will adopt these technologies, and invest accordingly, frequently a long-time before the demand materialises. We also need to respond to changes in the use of existing technology, such as the exponential
growth the sector has seen in data consumption and network capacity requirements.
Potential impact
Intensified competition can result in lower volumes and/or prices than we currently forecast. If we do not respond effectively to competition then we can lose
market share, revenue and/or profit.
In addition, new technology developments can lead to accelerated obsolescence of our current products, increased
investment requirements, new sources of competition and/or the deterioration of our competitive position. This in turn can result in lower volumes and prices, stranded assets and higher costs. A failure to invest optimally in technology today can
have implications for our market position and ability to generate future returns.
Whats changed over the last year?
Set against a challenging economic climate, in which the outlook for the UK economy has deteriorated, our leading competitors have been very active over the
last 12 months. Important developments included:
|
|
|
a move into fibre through a partnership with an existing provider
|
|
|
|
expansion of existing UK fibre networks
|
|
|
|
the launch of
zero-rated
mobile data propositions.
|
Technological developments and changing customer preferences also continue to create risk to our business model. For example:
|
|
|
While mobile data usage continues to grow, prices per gigabyte of network traffic have continued to fall. The
ongoing profitability of our mobile operations hinges on our being able to successfully monetise mobile data growth in the face of strong competition.
|
|
|
|
Support for a large-scale deployment of FTTP infrastructure among key stakeholders has increased. However, there
is still material uncertainty as to whether a viable economic case can be found for large-scale deployment. The economic case for FTTP remains challenging given superfast broadband coverage now exceeds 90% and the majority of end users are currently
only willing to pay a low premium for additional speeds.
|
Communications industry regulation
Regulation affects much of what we do.
In the UK, where Ofcom
identifies competition concerns in communications markets, it can set rules requiring us to provide certain services on specified terms to our customers. Ofcom reviews markets regularly and can introduce, extend, relax or remove rules as a result of
its findings. It has powers to conduct specific investigations about market behaviour, including price levels. In addition, Ofcom can set out rules for spectrum auctions and to ensure consumer protection in the sector.
Ofcom will investigate our compliance with regulatory requirements and can impose fines and restitution on us if we fail to comply.
Following the Governments rejection of our voluntary commitment, a broadband universal service will now be delivered through a regulatory obligation. We
acknowledge the impact that this will have on industry and the risks attached to a regulatory broadband USO. We will work hard with Ofcom to find a solution that works for our customers and society, and that minimises the distortions for industry.
Ofcom also has powers to regulate the terms on which were supplied with certain services by others for instance, mobile call termination
and can sort out disputes between us and other communications providers about the terms on which services are supplied. Appeals of regulatory decisions also give rise to risks (and opportunities).
7
Outside the UK, regulation defines where and how we are able to compete through licensing rules and defining the
terms on which we are able to access networks of incumbent operators.
Potential impact
Some of our revenue comes from supplying wholesale services to markets where Ofcom has found us to have significant market power. Most of this revenue relates
to services where regulation requires us to cut average prices each year by a specific, real-term percentage for a three-year period.
Where other
telecoms providers ask Ofcom to resolve disputes with us, there is a risk that Ofcom may set the prices at which we supply services, make us provide additional services and/or impact how we structure our business. In some circumstances, Ofcom can
adjust past prices and make us pay back amounts to wholesale customers.
Regulation outside the UK can hit our revenue too. For example,
overly-restrictive licensing requirements or ineffective regulation of access to other networks mean we might not be able to compete fairly. Regulation can also define and control the terms of access to necessary regulated inputs, which raises our
costs.
Whats changed over the last year?
Ofcom has concluded market reviews in relation to wholesale narrowband access, wholesale local access and wholesale broadband access. They have also decided
not to impose a temporary remedy requiring BT to provide a restricted form of dark fibre (at and below 1Gbit/s) in the leased lines markets, but will consider this again in their upcoming business connectivity market review. We have summarised this
on page 52 of the Annual Report 2018 incorporated herein by reference.
We successfully appealed Ofcoms Business Connectivity Market Review (BCMR)
statement to the Competition Appeal Tribunal which found in our favour and remitted the decision back to Ofcom. It has also started its next market review on BCMR.
In the retail market, Ofcom also expressed concerns in relation to the prices charged to voice-only customers. Weve responded to Ofcoms concerns
by agreeing to cut those prices. Weve also introduced an automatic compensation scheme for slow repairs, missed appointments and delayed installations. Ofcom has also revised the General Conditions and the changes will come into force in
October 2018.
Alongside the standard cycle of market reviews, weve been working hard to deliver on the Commitments made to Ofcom in March 2017 as
part of its Digital Communications Review. Weve made significant progress in this area, and have now introduced changes to our internal processes to ensure that we comply with both the letter and spirit of the commitments.
Political risk
Across our operations we are exposed to
the effects of political and geopolitical risks, in particular:
|
|
|
In the UK, internet access is increasingly seen as an essential part of peoples lives. As a result,
political debate continues to focus on network coverage, quality and speed of service, as well as broader issues of online safety and security. As well as providing a critical element of the UKs national infrastructure, both fixed and
wireless, were also engaged in supporting high-profile programmes such as BDUK and the Emergency Services Network.
|
|
|
|
The result of the UK referendum to leave the European Union (Brexit) significantly increased
political uncertainty. This continues to impact political debates around the United Kingdom, such as the possibility of a second Scottish Independence referendum and the complex situation in Northern Ireland including border matters.
|
|
|
|
Outside the UK, political and geopolitical risk can impact our business through changes in the regulatory and
competitive landscape an example is the US Administrations changed approach to trade policybut also as a direct threat to our people and assets as a result of social unrest or a breakdown in the rule of law.
|
Potential impact
Political uncertainty can have direct
financial consequences across the economy, impacting for example foreign exchange rates, the availability and cost of capital, interest rates and also resulting in changes in the tax regime. For BT specifically, the most significant impact of
political risk is its potential interaction with some of our other Principal Risks. In the UK, were seeing an increasing overlap between political debate and the regulatory environment, with the potential that our Communications Industry
Regulation risk increases as a result.
8
The impacts of Brexit are still uncertain while the UKs future trading and transition relationship with the
EU is determined, albeit the agreement in principle on a number of withdrawal measures was welcome, notably the commitment to protect the rights of EU citizens living in the UK and vice versa. There is the potential for our costs to increase, for
example through any changes required to our systems to reflect new taxes or customs duties or other processes. Our regulatory risk could increase if there were to be future divergence with the EU regime. Our suppliers may face disruption as a result
of challenges in their own organisations and supply chains. Also, delivering a great customer experience and great network will become more challenging if it is harder for us to recruit and retain skilled talent and to source sufficient construction
workforce. The UK economy may also suffer as a result of this uncertainty.
Geopolitical risk outside the UK can most clearly impact our Communications
Industry Regulation risk, but also our Security and Resilience risks where it poses a threat to the continuity of our operations.
Whats changed
over the last year?
This has been a complex year, given the 2017 General Election, EU Withdrawal Bill, Brexit negotiations and other policy measures.
A second Scottish Independence Referendum became less imminent as the SNP has a significantly reduced number of Scottish seats (albeit a majority still). In December 2017, the Government reached agreement in principle with the EU on divorce measures
around people, money and Irish border principles; negotiations early in 2018 focused on finalising withdrawal issues and also moved on to transition and trading arrangements. What trading relationship the UK/EU will end up with and by when is
unclear.
In the UK, the conclusion of Ofcoms Digital Communications Review (DCR) has resolved some of the uncertainties that affected BT 12 months
ago. The agreement we reached with Ofcom at the conclusion of the review has led to the creation of a new, independent board for Openreach, which is working well. Openreach is doing its own independent work to plan its fibre rollout, in open
consultation with the rest of the industry. The Government has now established a Future Telecoms Infrastructure Review, which we hope can provide additional certainty for companies and investors about how the policy and regulatory framework can
promote long-term decision-making and, as a consequence, underpin future 5G and fibre deployment.
Pensions
We have a large funding obligation to our defined benefit (DB) pension schemes. The largest of these, the BT Pension Scheme (BTPS or Scheme), represents over
97% of our pension obligations. The BTPS faces similar risks to other UK DB schemes: things like future low investment returns, high inflation, longer life expectancy and regulatory changes may all mean the BTPS becomes more of a financial burden.
Potential impact
The next valuation of the BTPS is
scheduled to take place as at 30 June 2020 and an increase in the pension deficit may have an impact on the level of deficit payments we are required to make into the Scheme. Indirectly it may also have an adverse impact on our share price and
credit rating.
Any deterioration in our credit rating would increase our cost of borrowing and may limit the availability or flexibility of future
funding for the group, thereby affecting our ability to invest, pay dividends or repay debt as it matures.
Whats changed over the last year?
The actuarial valuation of the Scheme as at 30 June 2017 was announced in May 2018. This provides certainty over the level of cash contributions
required until the next triennial valuation is concluded, taking place no later than as at 30 June 2020.
As part of the actuarial valuation, we
discussed the Schemes approach to investing assets with the Trustee. The resulting changes should help protect the BTPS from volatile investment returns and high inflation by investing in a way which provides greater certainty over the
Schemes ability to meet benefit payments over the longer term.
When a valuation is calculated, the funding position is affected by the financial
market conditions at the valuation date. When determining expected future returns on the Scheme assets, different factors are taken into account, including yields (or returns) on government bonds. If assets returns are lower than expected over the
period to the next valuation, or a lower future investment return assumption is adopted at the 30 June 2020 valuation, the deficit would likely increase, potentially leading to a higher level of future deficit payments.
9
In March 2018, we announced the closure of Sections B and C of the BTPS to future benefit accrual (which
represents more than 99% of the BTPS active membership), having reached agreement with the relevant Unions. Although we will establish a new hybrid pension arrangement for
non-management
employees in the BTPS
at closure, the changes reduce the financial risks associated with providing future defined benefit pension accrual. We currently expect to close Sections B and C of the BTPS from 30 June 2018 when employees will join the BT Retirement Savings
Scheme, our main defined contribution arrangement, for future pension accrual.
Financial risk
In common with other major international businesses, were exposed to a variety of financial risks. These include treasury risks, which arise principally
from market risk (including interest rate risk and foreign exchange risk), credit risk, and liquidity risk. They also include tax risk, principally that we need to understand fully the current and future tax consequences of business decisions to
comply with tax rules and avoid financial and reputational damage.
Potential impact
If there is an adverse movement in foreign exchange and interest rates there could be a negative impact on the groups profitability, cash flow, and
balance sheet. Sensitivity in the income statement and shareholders equity arising from interest rate and foreign exchange volatility is shown in note 27 to the Consolidated Financial Statements beginning on page 256 of the Annual Report 2018
incorporated herein by reference.
The failure of Treasury counterparties to honour financial obligations could have an adverse impact on the groups
liquidity (for example from the loss of cash deposits) and profitability (for example from increased finance expenses). A deterioration in liquidity could have an adverse impact on the Boards assessment of going concern, particularly if
combined with an inability to refinance maturing debt.
If we fail to comply with tax rules then we could face financial penalties and reputational
damage. Beyond compliance, if we dont adequately reflect the current and future tax consequences in our business decisions, we might make bad decisions resulting in financial loss and potentially financial misstatements, as well as
reputational damage.
Whats changed over the last year?
We continue to face the same treasury risks as in financial year 2016/17.
From a taxation perspective, our business continues to evolve rapidly, creating different tax consequences, for example the bringing together of EE and the BT
Consumer customer-facing units, the Openreach industry consultation on large-scale FTTP, and a review of our pension provision. During the year, new UK legislation was introduced, which restricts deductions for interest expense and which reduced the
ability to offset profits with prior year losses. Accounting changes can also have tax consequences, for example, forthcoming changes to accounting for revenue from contracts with customers and accounting for leases. Global tax rules also continue
to evolve, for example the OECDs Base Erosion and Profit Shifting project, US tax reform, the European Commissions challenge to tax practices under state aid provisions, and EC and UK proposals for the introduction of an interim digital
services tax. All these change the current and future tax consequences of business decisions.
Security and resilience
Our commercial success is firmly rooted in our reputation for the security and resilience of our services. So we strive to maintain the highest standards of
protection and incident management in order to confront the natural perils, network and system faults, and malicious acts that threaten our operations.
By monitoring cyber attacks on our networks and systems and our peers and customers, we see that hacking tools, phishing scams and disruptive malware are
becoming more sophisticated and yet more accessible to attackers. In response, we continue to develop our cyber defence capability and invest more in automatic detection and prevention systems. We recognise that services can also be interrupted by
events such as supply chain failure, software changes, equipment faults, fire, flood, infrastructure outages and sabotage.
10
Potential impact
The consequences of security and resilience risks can include major financial loss, long-term damage to reputation and loss of market share. Regulatory
sanctions, fines and contract penalties might be applied, contracts might be terminated, and costly concessions might be needed, together with unplanned and rapid improvements to retain business and rebuild trust. We might also miss opportunities to
grow revenue and launch new services ahead of the competition.
Whats changed over the last year?
Cyber attackers are learning how to defeat conventional defences such as Anti-Virus (AV), proxy servers, and basic authentication. They are changing malware
signatures faster than AV vendors can deliver matching identity files, launching Denial of Service (DoS) attacks that are disguised as legitimate traffic at the application level, and using increasingly convincing phishing emails to trick users into
giving access to restricted systems. The growth in ransomware attacks has made headline news and caused significant disruption to some of our corporate customers, but we have so far managed to avoid such consequences. Our incident management teams
are gaining experience from these events and applying lessons learned to improve our responses. Were also helping customers by sharing this expertise.
Weve increased the use of Artificial Intelligence (AI) in our cybersecurity operations to process the vast amount of data available. We use our own
Saturn system to visually filter the information and help our analysts perform investigations. Were trialling further AI innovations that will detect network anomalies in large volumes of data, and learn patterns of how malware propagates.
Looking at other drivers of service interruption, 2017/18 has been relatively benign for the UK in terms of extreme weather events. However, accepting
that the risk is increasing, weve continued to enhance our overall flood/storm preparedness. Weve also been working with the Government and other utilities in planning for a Black Start (major shutdown of the national power
transmission system) scenario.
Employee engagement
Our people are central to everything we do and a vital part of our ambition to deliver a great customer experience and sustainable, profitable revenue growth.
Our people strategy supports this ambition by creating an inclusive and enjoyable workplace so that our people can thrive as part of a dynamic business. Great employee engagement is necessary to ensure we meet our strategic aims.
Potential impact
We need to transform our business while
also continuing to recruit, retain and engage our workforce to deliver a great customer experience and grow the business. An adverse reaction to change could impact talent retention resulting in a loss of critical skills and greater need for
external recruitment, which would add cost to the business. Poor engagement also raises the risk of general industrial unrest and action.
Whats
changed over the last year?
We limited pensionable pay increases for some members of the BT pension scheme and subsequently initiated a review of our
UK pension arrangements. Following the review, we decided to close the BTPS to ensure that our pension arrangements are fair, flexible and affordable for both employees and BT, which included enhancements to our defined contribution pension scheme.
We continue to work through the people implications of making Openreach a separate legal entity in response to the outcome of the Digital Communications
Review. We also announced the creation of a new Consumer team that brings together the BT Consumer and EE businesses.
Change management
We are implementing a wide-ranging change programme across the entire organisation known as One BT. We need to continue to deliver differentiated customer
experiences, whilst being able to have the financial capacity to invest in integrated network leadership. At the same time, we want BT to be a simple and agile business where our people can thrive.
11
In transforming our operating model, we need to manage this change carefully to ensure it delivers the desired
outcomes. We recognise that such extensive change can also be a distraction and can cause uncertainty amongst our colleagues, so its important that we keep focused on delivering for our customers.
Potential impact
If we do not manage our change
programmes carefully then they will not deliver the business outcomes that we are trying to achieve. That could result in poorer customer experiences, negative impacts on employee engagement, or potential overspend on the projects themselves, and at
the end of the programmes we may not have achieved the efficient processes needed to deliver a great customer experience, the desired cost savings, or differentiated products and services we were trying to launch.
As we describe elsewhere in the Annual Report, weve been working hard on improving our customers experiences, and have seen significant
improvements over the last year. If our transformation programmes do not deliver their intended customer benefits, or divert colleagues attention away from serving our customers, then we may suffer a reduction in the quality of the service we
provide, and as a result incur customer churn and even financial penalties in some cases.
Whats changed over the last year?
Over the past year, our key changes have included:
|
|
|
the launch of a
pan-BT
transformation programme, One BT, which is
designed to help our businesses deliver to their full potential
|
|
|
|
bringing together BT Consumer, EE and Plusnet into a new Consumer business
|
|
|
|
ongoing work to deliver a new Digital Global Services
|
|
|
|
announcing the integration of our Wholesale and Ventures and Business and Public Sector businesses into a new
Enterprise business
|
|
|
|
announcing our plans to introduce a new People Framework, which will include a particular focus on our middle and
senior-management grades
|
|
|
|
as we describe elsewhere in the Annual Report 2018 incorporated herein by reference, weve also been making
changes to our Openreach business to implement Ofcoms Digital Communications Review.
|
Supply chain
We operate in a global supply market. Our supply chains range from simple to very complex. Its critical to our operations that we can guarantee their
integrity and continuity.
Global markets expose us to global risks, including different standards in labour, environmental and climate change practices,
increasing regulation and geopolitical events. We weigh up the impact and likelihood of external market forces on our suppliers ability to support us.
Globalisation means better sourcing opportunities, but brings challenges if suppliers become more geographically and culturally remote from our customers
or if governments put barriers in the way of doing business to protect national or regional economic interests.
Our dealings with suppliers follow
our trading and ethical policies. From the way we choose them, to the contracts we sign and how we pay them. For more detail, see page 49 of the Annual Report 2018 incorporated herein by reference.
Potential impact
If something goes wrong in our supply
chain, the speed and scale of impact can vary. We need to determine the potential damage to customer experience, the likelihood of higher costs and the potential damage to our brand. If substituting a failing supplier meant that we had to disrupt
our business, it could cost us a lot of time and money. If we couldnt find an alternative supplier, it might compromise the commitments we make to our customers, which could in turn lead to breach of contract, lost revenue or penalties.
12
If any link in our supply chain falls foul of the law, or fails to meet our ethical expectations, that could
damage our reputation possibly leading to legal action and lost revenue.
If we dont meet the expectations of regulators that govern us and
the data we manage, it could result in significant penalties. In the case of EU General Data Protection Regulation 2018, this could amount to 4% of our global annual turnover.
Whats changed over the last year?
We dedicate time
to assessing emerging geopolitical threats and the impact they could have on our supply chain. These include the impacts of the UK leaving the EU in March 2019; the threat of modern slavery and human trafficking; and the growing threat of cyber
attacks on our systems and networks.
We continue to monitor the trend for mergers and acquisitions in some of the global markets we do business in. It
highlights the risk of us becoming too dependent on single or monopolistic suppliers. We also try to make sure that suppliers do not become too dependent on us. Both scenarios are unhealthy for our business.
This year one of our more significant suppliers, Carillion, went into liquidation. However, by implementing our risk and governance arrangements we were able
to manage and reduce the disruption to our business.
Major contracts
We have a number of complex and high-value national and multinational customer contracts. The revenue and profitability of these contracts are affected by
things like: variation in cost; achieving cost savings anticipated in contract pricing (both in terms of scale and time); delays in achieving agreed milestones owing to factors either in or out of our control; changes in customers needs, their
budgets, strategies or businesses; and our suppliers performance. Any of these factors could make a contract less profitable or even loss-making.
The degree of risk varies with the scope and life of the contract and is typically higher in the early stages. Some customer contracts need investment in the
early stages, which we then expect to recover over the life of the contract.
Major contracts often involve implementing new systems and communications
networks, transforming legacy networks, managing customer networks and developing new technologies. Delays or missed milestones might have an impact on us recovering these upfront costs. Theres a substantial performance risk throughout the
term of some of these highly-complex contracts.
Potential impact
If we dont manage to meet our commitments under these contracts or if customers needs, budgets, strategies or businesses change then
our expected future revenue, profitability and cash generation may go down. Unexpectedly high costs associated with fulfilling particular transformational contracts could also hit profitability. Earnings may drop. Contracts may even become
loss-making through loss of revenue, changes to customers businesses (due to, for example, mergers or acquisitions), business failure or contract termination.
One of our highest profile contracts is providing a key element of the UK Emergency Services Network (ESN) on our EE mobile network. The complexities
described above all apply to this programme. This service is delivered with several partners and managed by the Home Office. The Home Office has delayed the launch date and further delays will impact the expected income. Furthermore, the criticality
of this service increases our risk exposure once its live, and given the network provides emergency services communications for the UK, performance in life of the network could have reputational consequences for BT.
Were continuing to deliver contracts with local authorities through regional fibre deployment programmes, including the Broadband Delivery UK programme
(BDUK). As with our other major contracts, if we fail to deliver these contracts successfully it might lead to reduced future revenue, profitability and cash generation. As well as carrying a higher reputational risk, these contracts present
specific risks around deployment, delivery and our ability to recover public funding. We also have an obligation to potentially either reinvest or repay grant funding depending on lots of different factors including how many customers take up
a new service.
13
Whats changed over the last year?
We have extended our Gold Standard quality programme to our Contract Accounting and financial management activities. Our major contracts are
assessed against strict gold standard criteria and those contract teams below the benchmark will be developed/coached for improvement in order to attain the standard.
Tough market conditions continue and the impact of the UK voting to leave the EU has meant some customer programmes have been delayed, which has had an impact
on the business. Customers are asking for more flexibility in their contracts.
The majority of our first phase of BDUK contracts have now completed their
deployment commitments. Were now nearing the contractual end dates of the second phase of contracts (SEP). In addition, we have further extended numerous existing contracts and begun deployment of the third phase of contracts. While these
later phase contracts are smaller in scale and coverage, the deployment challenges are significantly greater in terms of the geography encountered as we reach further into the final 5% of households.
While our broadband contracts and ESN carry a different risk profile to other major corporate contracts, we apply our governance and reporting processes to
make sure we identify risks and mitigation activities and report them to management.