BT Global Services chief Francois Barrault has quit and the group has issued a shock profit warning that performance will be "disappointing", resulting in a share price tumble by almost a fifth.
Barrault has stepped down as head of division and relinquished his place on the company's board.
BT's finance director, Hanif Lalani, will take over the management post, while Ray Leclercq, chief financial officer (CFO) of Openreach, will become CFO of BT Global Services reporting to Lalani.
While revenue growth in its IT services division would "remain strong", up 15 percent year on year, earnings before interest, tax, depreciation and amortisation (EBITDA) of around £120 million would be "significantly below expectations", BT said in a statement. Slower-than-expected delivery of cost savings and "the continued decline in higher margin UK business" had impacted negatively on earnings.
"BT is performing in line with or ahead of expectations in all but one of its divisions, so the results in BT Global Services are particularly disappointing," said BT chief executive Ian Livingston, who took over from long-standing chief Ben Verwaayen earlier this year . "We acknowledge that the performance in this part of the group is unsatisfactory and are committed to taking decisive action to rectify the situation."
Richard Mahony, practice leader at Ovum, said the poor earnings performance "created tension" between "salesman" Barrault and "former accountant" Livingstone, which may have contributed to Barrault's departure after only 18 months at the helm.
"For some time BT Global Services has been chasing a well-publicised EBITDA target which was 'north' of 15 percent, and up until fairly recently the business remained bullish that this target would be met," said Mahony. "An EBITDA of seven to eight percent and the dramatic overnight drop of expectations is clearly not a sustainable business in the longer term."
Thinning margins was pinpointed as a contributing factor to the poor performance, which Mahony said was "worrisome". Notably, margins for the sizeable multinational deals in the top end of the market are around half those in the mid-market.
"Ovum questioned the profitability of some of the large 'foundation' international deals that BT Global Services signed five or so years ago," said Mahony. "The worst case scenario is that BT Global Services has a number of 'toxic' contracts in its order book, which were cash front-end heavy and have failed to meet planned profitability," he said. "There is no indication that this is the case, but the business is clearly disappointed with its profitability performance at the top end of the market."
The company was also attempting to cut costs by dramatically reducing its back office work force, cutting 10% of staff, and looking at global sourcing efficiencies to save around £50 million.
BT also blamed lack of standardisation in its business for its poor margin performance. Mahony expects BT Global Services to turn to "more cloud-based services" as it looks to accelerate standardisation efforts.
"It will need to offer more repeatable solutions if it is to meet its margin targets," Mahony said. "Such standardisation is a challenge for all telcos and is a keystone in providers’ next-generation network plans."
Mahony also predicts BT Global Services would look for fatter margins in the mid-market and would provide less commercial flexibility in its multinational deals.
Lalani, the new BT Global Services CEO, is expected to provide revised EBITDA targets at a later date.
KPMG, Unilever, NHS, Ministry of Defence (MoD) and Department for Works and Pensions (DWP) are among its customers. More than 90 per cent of the UK’s financial institutions use secure data networks supplied by BT Global Services.
BT will announce its results for the second quarter and first half year to 30 September 2008 on 13 November. The business expects other groups in the business will perform well.