Wednesday, March 09, 2005

How low can you go?

A couple of days back we had an internal lunch for a few clients with BT Group IR. At one point in the discussion, BT remarked that its internal benchmarking showed KPN to be best-in-class in terms of taking out costs, and that attaining a similar performance has driven BT's own targets. Our own analysis of the incumbents in Europe has similarly shown KPN to be ahead of the pack in this regard, so this is hardly a surprising revelation.

Obviously, there's more to cutting costs than merely cutting jobs, but engaging in some crude spreadsheet play, to get BT up to a comparable level of EBITDA per employee (in EUR), I have to cut the workforce by more than 50%. That's to get where KPN is today, but let's remember that KPN last week announced up to 28% incremental headcount reduction over the next five years, and I would be surprised if it stopped there.

This is not a shot at BT, nor is it a definitive statement of its cost-cutting capabilities. Rather it is an open question to the industry - how small is small enough? This is a question which I don't believe anyone is really positioned to honestly answer, at least in public. The answer relies on some visibility of what the ultimate role of the telco will be, and that's when people start tugging at their collars and getting irritable.

One thing I noted from the Microsoft webcast which I linked to in my previous post was Bill Gates' response to the question (my paraphrase), "What is to prevent you from taking minutes of traffic or market share away from your traditional partners?" BG reiterated that partnering still remains important for Microsoft, because there are elements of the service offering which Microsoft cannot do itself. However, the one and only item he actually mentioned by name was connectivity. I think that's called damning with faint praise.

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