Telecoms: The mists are clearing

But for Ben Verwaayen, the man who in January succeeded Sir Peter Bonfield as chief executive of BT, the UK’s largest telecoms supplier, it’s all just a natural maturing of the industry. ‘Let’s take two steps back. The whole sector is going through a number of phases,’ he says.

‘Ten years ago the industry was driven by change from a monopoly market to a free market. The next step was driven by technology. The question was not: ‘What I can do with it?’, the question was: ‘Do I have the latest technology?’

‘The next step was driven by finance, mergers and acquisitions. You didn’t hear the word ‘customer’. The phase we are in now is the transformation from an M&A stage to customer domination.’

But the emphasis on customers will not stop the shape of the telecoms industry from further change, driven by a huge drop in funding available for research and development. ‘In the hype, the capital expenditure in development centres was about $240bn (£156m). That will go down to a sustainable level of maybe $120bn,’ said Verwaayen.

‘At the same time as talking about the power of the customer, the reality is that there will have to be rationalisation on a global basis of the technology sector.’

Verwaayen has been widely credited with bringing a fresh face to BT after the stock market lost faith in Bonfield. His philosophy is to make technology relevant to customers, and from there the trends for recovery will appear.

He is focusing on two areas. ‘When productivity and lifestyle come together you have a real winner,’ he explains. ‘I’m a great believer that broadband will be an enabler for the next phase of growth. Look to everything that has to do with mobility, that’s a real winner. From a corporate point of view, all the web-based technologies are clearly winners.’

Despite his optimism that the industry’s troubles are part of a predictable period of growing up, Verwaayen is concerned about European attitudes which he feels could hinder progress.

‘My main worry is that, if you look at the difference in productivity between Europe and the US, it’s still the readiness to accept new technology into the business model that is the difference,’ he says.

‘We need to work hard to help the industry convey a much clearer message on what the benefits are, instead of selling acronyms and hardware.’ A bullish EDS faces down the shakeout

Bill Thomas must be one of the few senior executives in the IT industry with a smile on his face. The UK managing director of EDS, the largest IT services supplier in the country, can’t wait for next year.

‘The public sector is very active. You can see what’s happening in the health service and criminal justice, and the level of activity in financial services in the UK is staggering. We see a very buoyant outlook for 2003,’ he says.

EDS has been relatively insulated from the technology industry slowdown, compared with its peers in hardware and software.

‘It’s remarkable how long computers last if you don’t do anything to them. Some product suppliers have suffered from that,’ explains Thomas. ‘But the services sector has held up because people are attracted to the productivity improvement. So we haven’t seen the difficulties that pure technology suppliers have.’

Outsourcing, in particular, has been one of the few success stories during the worst slump the industry has experienced. Thomas believes that economic caution will make chief executives more wary of investing in fast-moving technology: what they want is suppliers who take the pain away. There is an irreversible trend towards companies focusing on their core competencies, and then partnering with other organisations to exploit that partner’s core competencies,’ he says.

‘There has been a dawning realisation that buying new software does not improve your business. It’s all about how you change the processes, how you lead organisational change and how you continually improve productivity. We’ll see much greater focus on that.’

Earlier in his career, Thomas was the global account manager for EDS’ relationship with aircraft engine-maker Rolls Royce. He sees increasing parallels between the IT industry and the way aerospace companies have changed in the past 30 years.

Major buyers, such as the Ministry of Defence, handed over large projects to a single prime contractor, rather than managing high-risk ventures in-house. This revolutionised the shape of the industry, and IT could be going the same way. ‘The government made a wise decision that it is not in the business of prime systems integration,’ explained Thomas. ‘That led to a tiered industry. There will emerge people capable of acting as a prime systems integrator at the top. They will bring consortia together, bringing in niche players with specialist capabilities.’

Some observers question the merit of large organisations handing external suppliers the responsibility for a business tool as vital as IT, particularly in major government departments.

But over the past two years, the shift to aerospace-style prime contractor arrangements has been demonstrated by a number of multibillion-pound mega-outsourcing contracts awarded by public and private sector organisations worldwide.

Thomas said EDS and its main rival IBM each have only about 10% of the IT services market, which leaves a fragmented but maturing sector ripe for further mergers and acquisitions along the lines of IBM’s recent purchase of PwC Consulting. The shakeout has only just begun.