Will BT's ultimatum finally drive suppliers away?

BT says it won't pay for network equipment until it makes demonstrable cost savings. Can its suppliers cope with this arrangement?

BT is using its muscle to demand a "new deal" from the companies that supply it with network equipment. They must provide it with cost savings, or get no payment -- a move that may cause trouble for some cash-strapped vendors. The move is part of BT's plan to cut its operating costs, and is expected to cut up to £2bn from its annual expenditure in the next five years. BT will offer suppliers a "partnership" where a large part of the payment will be deferred, and depend on the savings the vendors' equipment actually produces in BT's network. This may mean the equipment supplier gets a higher price long-term, partly funded out of redundancies and infrastructure savings that the equipment makes possible. The deal may lead to change in BT's suppliers, said Paul Reynolds, chief executive of BT Wholesale, if some feel they cannot meet the new terms. Marconi in particular would need some support from elsewhere if it were to meet the new terms, said analysts. Up until now, telecoms providers have worked on the basis of buying their network equipment for an upfront cost, said Reynolds. Now he plans to move BT to a "richer model" that the IT industry has been selling to the enterprise: "The customer pays for the total cost and service performance of the system, not just the cost of the boxes." "BT Wholesale has a capital expenditure of £1.8bn per year," said Reynolds, "but our operational costs are £6bn to £8bn." These are the staff costs of running the equipment and "accommodation" -- the space and power costs of the buildings where it is installed. Year by year, BT has been using its muscle to trim the capital cost of equipment, but there are limited returns here. "We could knock another 2 percent off this year," he said, but there were better gains to be made by demanding suppliers' help in reducing the far larger operational expenditure figure: "We intend to pay vendors on delivery of dramatically reduced costs in future." "We want to get 30 percent off our operational expenditure over time," Reynolds said, although he did not specify whether this would come from staff or accommodation. BT Wholesale has 28,000 staff and made 2,000 redundant already -- a rate that would deliver a 30 percent cut if kept up for five years. Overall, BT has a target of losing 5,000 to 6,000 employees per year. Reducing accommodation means moving out of some of the 6,000 telephone exchanges that BT occupies. BT would be unlikely to close any outright, said Reynolds: "We will rationalise kit onto some floors and let the rest out as an office." Some vendors may be too strapped for cash to go with a scheme that defers their payment, said Reynolds, though he did say that the promise of more long-term money from BT would probably help those suppliers when talking to their banks. "The winners will have stronger long-term contracts," Reynolds said. No vendors had demurred so far, he said. BT has dealt with its legacy network problem, said Reynolds, and has moved to a packet switched network: "I will not buy another circuit switch or line card," he said. "We've shifted so that 70 percent of our capital expenditure is in reusable assets." Two years ago, half the telco's spend was on maintaining legacy equipment that had no long-term future. Analysts commented that deals like this had appeared in the industry before. "This kind of deal has always happened quietly," said Tony Lock, senior analyst at Bloor Research. "Now the climate has changed to make service providers want to go public." "I noticed a similar deal by Alcatel and Telecom New Zealand," said Richard Webb, European market analyst at Infonetics Research. "It blurs the boundaries in a similar way to the vendor financing we saw during the dot-com boom, but a bit more subtle. This is 'defensive' vendor financing, as opposed to 'aggressive' vendor financing." Vendors contacted by ZDNet UK all indicated they would look closely at the deal, but had no official response as yet. Analysts contacted all agreed that no vendor could afford to turn away from a supplier as big as BT without a very good reason.

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