Operating costs

Operating costs before specific items increased by 2% to £18,168 million (2007: £17,746 million, 2006: £17,108 million), in line with the same percentage increase in our group revenue. Our cost efficiency programmes achieved savings of £625 million in the year, enabling us to hold overall cost growth below inflation.
As a percentage of revenue, operating costs before specific items were 88% in all three years. Net specific item operating costs were incurred, amounting to £529 million, £169 million and £138 million in 2008, 2007 and 2006, respectively. These specific costs are considered separately in Specific items.

	2008		2007		2006
	£m		£m		£m

Staff costs (including leaver costs)	5,358		5,223		4,966
Own work capitalised	(724	)	(718	)	(674	)
Net staff costs	4,634		4,505		4,292
Depreciation	2,410		2,536		2,634
Amortisation	479		384		250
Payments to telecommunications operators	4,237		4,162		4,045
Other operating costs	6,408		6,159		5,887

Operating costs before specific items	18,168		17,746		17,108
Specific items	529		169		138

Operating costs	18,697		17,915		17,246


	£625m efficiency savings in 2008

Net staff costs increased by 3% to £4,634 million (2007: £4,505 million, 2006: £4,292 million), driven by the impact of pay inflation, the cost of additional staff needed to support service improvements and additional headcount arising from acquisitions, partly offset by efficiency savings. In 2008, headcount increased by 5,700 to 111,900, compared with increases of 1,800 and 2,300 in 2007 and 2006, respectively. The increase in headcount in the current year was primarily driven by acquisitions and the focus on service improvements. Leaver costs were £127 million in 2008 compared with £147 million and £133 million in 2007 and 2006 respectively. Our pension expense for 2008 was £626 million (2007: £643 million, 2006: £603 million). The decrease in pension costs in the year reflects the impact of leavers from the group’s main defined benefit pension scheme, the BTPS. In 2007, the increase included the adverse impact of longer life expectancy assumptions.
     Depreciation decreased by 5% to £2,410 million (2007: £2,536 million, 2006: £2,634 million) largely as a result of some traditional legacy assets becoming fully depreciated and the useful lives of other assets being extended. The effect of this has been partially offset by higher depreciation on 21CN assets as they start to be brought into use. Amortisation has increased by 25% in the year to £479 million (2007: £384 million, 2006: £250 million) due primarily to the impact of new acquisitions. Payments to other telecommunications operators increased by 2% to £4,237 million, as a result of increased volumes, after increasing by 3% in 2007.
     Other operating costs before specific items increased by 4% in 2008 to £6,408 million (2007: £6,159 million, 2006: £5,887 million), compared with an increase of 5% in 2007. This reflects not only the cost of supporting new networked IT services contracts, but also increased levels of activity in the network and investment in service levels and the impact of recent acquisitions. Other operating costs include the maintenance and support of our networks, accommodation, sales and marketing costs, research and development and general overheads.
     In 2008, we achieved cost efficiency savings of £625 million through financial discipline and our targeted cost efficiency programmes. This has enabled us to invest more than £300 million in further growth of our new wave activities and customer service improvements.

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