BTPLC Annual Report 2005 - Financial review

Total operating costs increased by 1% in the 2005 financial year to £16,005 million although they were flat year on year excluding the impact of acquisitions after reducing by 3% in the 2004 financial year. Our cost efficiency programmes achieved savings of around £400 million in the 2005 financial year which enabled us to invest in growing our new wave activities.
The increase in total costs in the 2005 financial year reflects the cost of supporting new ICT contracts, including strengthening our networked IT services delivery capabilities outside the UK, higher marketing costs and higher subscriber acquisition costs. As a percentage of group turnover, operating costs, excluding goodwill amortisation and exceptional items, were 86% in the 2005 financial year (2004 – 85%, 2003 – 86%). In all three financial years, net exceptional costs were incurred. These amounted to £59 million, £7 million and £198 million in the 2005, 2004 and 2003 financial years, respectively. These exceptional costs are considered separately in the discussion which follows.

Operating costs

	2005		2004		2003
	£m		£m	^a	£m	^a

Staff costs	4,451		4,415		4,250
Own work capitalised	(722	)	(677	)	(583	)
Depreciation	2,834		2,921		3,011
Goodwill and other intangibles amortisation	22		15		24
Payments to telecommunications operators	3,725		3,963		3,940
Other operating costs	5,636		5,182		5,526

Total operating costs before exceptional costs	15,946		15,819		16,168
Net exceptional costs	59		7		198

Total operating costs	16,005		15,826		16,366

^a	Restated – (see note 1)

Staff costs increased by 1% to £4,451 million in the 2005 financial year and by 4% to £4,415 million in the 2004 financial year. In the 2005 financial year, the number of staff employed increased by 2,200 to 102,100 at 31 March 2005 after decreasing by 4,800 in the 2004 financial year. The increase in the 2005 financial year was mainly due to the additional staff required to service ICT contracts and the acquisitions of Albacom and Infonet. The increase in headcount and pay rates was offset by lower early leaver costs. In the 2004 financial year increased pay rates and national insurance and a £141 million increase in the pension charge offset the impact of the lower headcount and leaver costs.
     The allocation for the employee profit share scheme, included within staff costs, was £11 million in the 2005 financial year. The allocation for the 2004 and 2003 financial years was £20 million and £36 million, respectively.
     Early leaver costs of £166 million were incurred in the 2005 financial year, compared with £202 million and £276 million in the 2004 and 2003 financial years, respectively. This reflects BT’s continued focus on improving operational efficiencies. Leaver costs include the cost of enhanced pension benefits provided to leavers which amounted to £nil, £1 million and £60 million in the 2005, 2004 and 2003 financial years, respectively.
     The depreciation charge decreased by 3% in the 2005 financial year to £2,834 million after decreasing by 3% in the 2004 financial year.
     Goodwill amortisation in respect of subsidiaries and businesses acquired and amortisation of other intangibles totalled £22 million in the 2005 financial year compared with £15 million in the 2004 financial year and £24 million in the 2003 financial year.
     Payments to other telecommunications operators decreased by 6% in the 2005 financial year to £3,725 million after increasing by 1% in the 2004 financial year. The decrease in the 2005 financial year mainly reflects the impact of mobile termination rate reductions offset by higher volumes.
     Other operating costs before goodwill amortisation and exceptional items increased by 9% in the 2005 financial year to £5,636 million after reducing by 6% in the 2004 financial year. This reflects not only the cost of supporting new ICT contracts, but also investment in new wave activities, including strengthening our networked IT services delivery capabilities outside the UK, higher marketing costs and higher subscriber acquisition costs. The decrease in the 2004 financial year was largely due to efficiency cost savings offset by the adverse impact of currency movements. Other operating costs include the maintenance and support of the networks, accommodation and marketing costs, the cost of sales of customer premises equipment and non pay related leaver costs.
     The exceptional items within operating costs for the 2005, 2004 and 2003 financial years are shown in the table below.


Exceptional operating costs

	2005	2004		2003
	£m	£m		£m

Property rationalisation costs	59	–		198
Rectification costs	–	30		–
BT Wholesale bad debt release	–	(23	)	–

Total exceptional operating costs	59	7		198

In the 2005 financial year £59 million of exceptional property rationalisation charges were recognised in relation to the group’s provincial office portfolio. This rationalisation programme is expected to continue through next year giving rise to further rationalisation costs. In the 2004 financial year, net exceptional operating costs included the rectification costs relating to a major incident offset by the £23 million release of the surplus exceptional bad debt provisions made in the 2002 financial year. In the 2003 financial year a property rationalisation charge of £198 million was recognised in relation to the group’s London office estate.

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