Table of Contents

Report of the Directors
Business review

Over the past year we have worked hard to ensure that our customers are at the heart of everything we do. We have been focused on providing enhanced, value for money services that offer less complexity and more capability, flexibility and speed.

Introduction
BT is one of the world’s leading communications services companies, operating in over 170 countries worldwide. Our principal activities include the provision of:

	networked IT services globally;
	local, national and international communications services;
	broadband and internet products and services; and
	converged fixed/mobile products and services.

Our vision
Our vision is to be dedicated to helping our customers thrive in a changing world. Dedication to our customers is vital in a competitive market. By designing everything we do around our customers, we can help them succeed on their terms.
      We aim to be a global leader in converged communications services. Convergence – bringing together fixed-line and mobile technologies, IT and communications, networks and services – is at the core of what we offer our customers. At BT, we call this ‘unified communications’.

Our strategy
Our strategy is to increase shareholder value by:

	driving profitable growth in new wave markets;
	defending our traditional business;
	transforming our networks, systems and services for the twenty-first century; and
	creating long-term partnerships with our customers.

Driving profitable new wave growth
At a time when next generation products and services are radically reshaping the communications industry, customers have more choice than ever before. But more choice can mean more complexity. Which is why we aim to offer straightforward and comprehensive services, backed by levels of customer service that set us apart from our competitors.
      In the 2008 financial year (2008), 39% of our revenue came from new wave and next generation products and services – primarily networked IT, broadband and convergent mobility solutions. This is up from 36% in the 2007 financial year (2007). New wave revenue grew by 9% in 2008, mainly driven by growth in networked IT services and broadband.

Global networked IT services
We are a business operator running our customers’ mission-critical networked IT services, to allow them to focus on their core business. We do this to create value in partnership with our customers, including co-investing and co-innovating so that they can create long-term value for their customers. We are a global leader in our target markets, competing with the world’s best. In recent years we have proved our ability to deliver both local and global networked IT services contracts for large corporate customers and other organisations – including the government and public sectors – around the world. We have a comprehensive portfolio of services, supported by tens of thousands of highly skilled professional services people. Revenue from networked IT services for 2008 was £4,841 million, up 10% on the previous year.

Broadband in the UK
We continue to enhance the availability and attractiveness of broadband in the UK. At 31 March 2008, we had 12.7 million broadband lines, including 4.3 million LLU (local loop unbundling) lines. Broadband is available through our wholesale business to 99.6% of the UK’s homes and businesses.
      In the highly competitive retail market, our market share of consumer and business DSL (digital subscriber line) and LLU broadband connections was 35%, compared with 34% in 2007. With 4.4 million broadband connections, we continue to be the UK’s most popular broadband retailer. During 2008, revenue from broadband services grew by 10% to £2,219 million.

Convergent mobility solutions
In the converged world, individuals and businesses increasingly need to connect and communicate wherever they happen to be, using whatever device they choose. We offer a range of mobility services in both the consumer and business markets. BT Openzone, for example, is one of the leading Wi-Fi (wireless broadband) services in the UK and at the heart of our ‘wireless cities’ initiative (see Wi-Fi in the community on page 20). Customers signing up to our broadband packages get Wi-Fi minutes included and we offer Wi-Fi roaming via 3,000 premium BT Openzone hotspots in the UK and Ireland and a further 40,000 around the world.
      In 2008, group mobility revenue was up 18% at £348 million, compared with £294 million in 2007. At 31 March 2008, we had a total of 360,000 mobile connections. We also further extended the European coverage of our mobility offering in 2008 through MVNO (mobile virtual network operator) agreements with Vodafone in Spain and Italy.

Defending our traditional business
We continue to face challenges in our traditional markets as a result of increased competition, a shift in our customers’ buying patterns and a challenging regulatory regime. In response to these conditions, we aim to make our traditional services – mainly calls and lines – ever more compelling for customers. For example, by combining voice services in attractive new ways, we can continue to add value to our customers’ lives and businesses. Revenue from traditional services was £12,661 million

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Report of the Directors Business review
DSL broadband connections quarter end (million)					MPLS coverage and support at March 2008
			LLU
			External
			wholesale
			broadband
			BT’s retail
			broadband

in 2008. This represents a rate of decline of only 1% compared with 3% in 2007.

Transforming our networks
Our strategy is to build innovative, software-driven global networks that provide platforms for the rapid delivery of flexible and resilient new services that transform the customer experience and enable us to operate more cost effectively. Our global 21CN (twenty-first century network) is helping to define communications networks for the future and we are investing in a flexible systems infrastructure throughout BT. At 31 March 2008, 40% of the core 21CN infrastructure had been built.

At the heart of a networked Britain
BT has the most comprehensive fixed-line communications network in the UK, with around 5,600 exchanges, 670 local and 120 trunk processor units, more than 125 million kilometres of copper wire and over 10.8 million kilometres of optical fibre, and an extensive IP backbone network.

Our global footprint
We have one of the most extensive IP-enabled networks in the world, stretching from Europe to North and South America, the Middle East, Africa and the Asia Pacific region.
      In 2008, we focused on enhancing the quality of our flagship MPLS (multi-protocol label switching) network service which provides coverage and support in 172 countries from more than 800 BT managed PoPs (points of presence) and more than 2,500 PoPs in partnership. We installed an average of more than 3,100 new customer sites a month on our MPLS network during 2008. As a result, MPLS revenue for 2008 grew by 25% to £815 million.
      Global customer service is provided via service and network management centres around the world, 24 hours a day, seven days a week. In November 2007, BT won the World Communications Association award for ‘Best Customer Care’. Widely recognised as a leading global industry event, the scheme celebrates business excellence and outstanding service.

Creating long-term partnerships
Our customers are at the heart of what we do and improving customer service is a critical focus for us. Understanding our customers’ needs and responding to them quickly and with insight helps to set us apart from our competitors.
      We explain elsewhere in this Business review how we are, for example, focusing on areas such as networked IT services contracts (see Networked IT services on page 15) as part of this long-term partnership strategy. At 31 March 2008, around 80% of our global services business unit’s major contracts were for five or more years, and 70% of consumer revenue was under contract.

How do we measure our success?
For 2008, the KPIs (key performance indicators) against which we measured the success of our strategy were: customer service; earnings per share before specific items; and free cash flow.

Being number one for customer service
Our goal is to become number one for customer service. We believe that this is the vital differentiator in all the markets in which we operate. In order to measure our progress, we have changed our main customer measures to reflect more directly the real experience our customers have from start to finish. The key measures we now use are ‘right first time’ and ‘cycle time’:

	‘right first time’ is the most important measure of whether we are keeping our promises to our customers and meeting or exceeding their expectations; and
	‘cycle time’ is the time between the start and finish of each and every customer experience – for example, the time elapsed between a customer’s initial attempt to contact BT and receipt of the relevant service and payment of the bill.

We are focusing on getting things ‘right first time’ because this will streamline the customer experience and reduce ‘cycle times’. We set ourselves the group-wide target in 2008 of improving ‘right first time’ by 11%. In fact, we achieved an increase of around 9% and, for the 2009 financial year (2009), our target is to achieve an even greater year on year improvement.
      All parts of BT are required to implement ‘right first time’ plans for their customers, and a number of ‘right first time’ initiatives have been introduced. These range from the prioritisation of sales queue activities, clean order entry and validation, accurate billing and closer working with suppliers throughout our global operations, through to a drive in our retail operations relating to the provision and repair of products and services. In our consumer business, for example, a rigorous emphasis on ‘right first time’ has driven major improvements in the experience of customers using our broadband technical help services. Thanks to the introduction of new processes, a restructuring of the call centre and the delivery of customer-focused training programmes, our front line advisers have been able to deal with customers more effectively. Customer dissatisfaction levels have fallen as advisers have been able to handle a higher proportion of customer contacts, without the need to pass them on to colleagues.
      Although the principal emphasis during the year was on ‘right first time’, we also paid close attention to ‘cycle time’. In particular, we have been driving ‘cycle time’ improvements through individual product lines.

Earnings per share
Basic earnings per share before specific items was 23.9 pence in 2008 compared with 22.7 pence in 2007 (an increase of 5%)

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	Report of the Directors	Business

2008 external revenue by line of business (%)
		BT Global Services
		BT Retail
		BT Wholesale
		Openreach

and 19.5 pence in the 2006 financial year (2006). For details of how we calculate earnings per share, see page 47. Earnings per share before specific items is a non-GAAP measure. For further discussion of non-GAAP measures, see page 55.

Free cash flow
Free cash flow in 2008 was £1,503 million, compared with £1,354 million in 2007 (an increase of 11%) and £1,612 million in 2006. For details of how we define free cash flow, see page 49. Free cash flow is a non-GAAP measure. For further discussion of non-GAAP measures, see page 55.

Transforming BT
BT is engaged in a process of radical transformation – from a fixed-line business to a software-driven global communications services company. In 2008, we invested £402 million in this transformation. Increasingly, communications infrastructures are no longer just the physical network; what is becoming more important now are the layers of software that make it possible to manage the network without the need for physical intervention. The development of ‘common capabilities’, or reusable components, is increasingly enabling us to meet customers’ needs quickly and flexibly. 80% of our new products already use common capabilities.
      A year ago we announced a new structure designed to enable us to transform the way we offer services to our customers. Today, we are one of the world’s first communications companies to have achieved the integration of its networks, IT, processes and technical product design. This enables us to create end-to-end processes, remove unnecessary complexity and bring BT people closer to our customers. See Our IT systems and networks estate on page 30 for more information about our systems and networks.

Outlook
In our outlook statement in our 2007 Business review, we said that we had confidence that we could continue to grow revenue, EBITDA before specific items, earnings per share before specific items, and dividends in 2008. We have successfully delivered growth in all these areas.
      In addition, we stated we were confident in our ability to improve shareholder returns and accelerate the strategic transformation of the business. In 2008, we paid out £1,236 million in dividends, and BT Operate and BT Design are now fully operational. By 31 March 2008, we had returned £1.5 billion as part of our £2.5 billion share buy back programme. We have maintained our solid investment grade credit rating (Standard and Poor’s: BBB+; Moody’s: Baa1; Fitch BBB+) and continued to invest in capital expenditure and acquisitions to underpin the growth of the business.
      In 2009, we expect to continue to increase our earnings per share before specific items and leaver costs, despite the year on year reduction in the net finance income associated with pensions. We also expect to continue to deliver revenue growth as we continue our transformation. Our continued focus on driving efficiencies across the group is expected to generate further gross cost savings of some £700 million which will contribute towards growth in EBITDA before specific items and leaver costs.
      Capital expenditure is expected to reduce to around £3.1 billion in 2009. We expect to continue to generate good cash flow from our operations, with free cash flow anticipated to be at a similar level to 2008.
      We remain committed to delivering value for shareholders and expect to increase dividends in 2009.

How BT is structured
BT has four customer-facing lines of business: BT Global Services, BT Retail, BT Wholesale and Openreach, all supported by two internal functional units: BT Design and BT Operate.
      BT Global Services is a global business operator; BT Retail, BT Wholesale and Openreach operate mainly within the UK, where BT is the largest communications services provider to the residential and business markets.

BT Global Services
Revenue in 2008 increased by 8% to £7,889 million, compared with £7,312 million in 2007. Non-UK revenue grew by 21% in 2008 and new wave revenue grew by 10%. Total orders were £8 billion in 2008.

BT Retail
Revenue in 2008 increased by 1.6% to £8,477 million, compared with £8,346 million in 2007. New wave revenue, mostly broadband, grew by 20%, while traditional revenue, mainly calls and lines, decreased by 3%.
      There are four parts to BT Retail:

		Consumer: at 31 March 2008, we had 15 million UK consumer customers with around 19 million residential customer exchange and broadband lines;
		BT Business: at 31 March 2008, we had around one million business customers in the UK, who between them had 7.5 million business customer exchange and broadband lines;
		BT Ireland, which operates across the major business, SME, consumer and wholesale markets throughout the Republic of Ireland and Northern Ireland; and
		Enterprises, which comprises a number of individual businesses: BT Conferencing, BT Directories, BT Payphones, BT Redcare (monitoring and tracking facilities), BT Expedite (a specialist retail division offering retail integration solutions and services) and dabs.com (a leading internet-based retailer of IT and technology products).

 

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Report of the Directors Business review
60%		of Fortune Global 500 companies have contracts with us

BT Wholesale
In 2008, BT Wholesale’s main focus was as a market-facing line of business. Overall, revenue decreased by 8% to £4,959 million, mainly due to a decline in low margin transit and premium rate services revenue, price reductions in broadband and volume decreases resulting from LLU migrations. However, at the same time, we are increasingly positioning BT Wholesale as a provider of innovative, managed network solutions, signing a number of major deals in 2008.

Openreach
Openreach is responsible for the crucial ‘first mile’ of the network in the UK. It was set up in January 2006, following a strategic review of the telecommunications market by Ofcom, to offer all communications providers – including other BT lines of business – fair, equal and open access to our access and backhaul networks, in order to underpin the future development of the industry.
      Revenue in 2008 grew by 1% to £5,266 million, driven by external volume growth across Openreach’s portfolio of products and services.

BT Design and BT Operate
BT Design is responsible for the design and deployment of the platforms, systems and processes which support our products and services. BT Operate is responsible for their operation. Together, they help BT deliver software-driven products over next generation networks. They also help BT to achieve cost efficiencies. BT Design and BT Operate serve BT’s customer-facing businesses and do not generate external revenue.

Our customers
In the following review of BT’s business and activities we look at the ways in which we are meeting the needs of our different customer groups:

	major corporate customers (global corporations, multi-site organisations in the UK and overseas, and governments in the UK and overseas);
	consumer customers in the UK;
	small and medium-sized enterprises (SME) in the UK (typically companies with up to 1,000 employees, although some of our customers in this market are significantly larger); and
	other communications providers in the UK (including our wholesale customers and those who receive access network services provided by Openreach).

For financial reporting purposes, we continue to report by lines of business (see Financial review ).

Major corporate customers
Our target customers are corporate customers and government organisations around the world. These include major financial institutions, oil and gas companies, manufacturers, pharmaceutical companies, retailers, and all other organisations with significant global requirements, together with large national and international public sector and governmental organisations in particular local markets. Revenue from this customer group grew by 7% to £7,573 million in 2008 and accounted for 37% of total group revenue.
      Our strategy is to get closer and become more important to our major corporate customers by offering high-value services and propositions that can directly improve their business performance. We take on the management of our customers’ mission-critical networks and IT assets and processes. This helps them to grow, reduce their costs, manage their relationships with their customers, optimise their supply chains, develop risk resilience and operate competitively, sustainably, securely and within the relevant regulatory frameworks.
      In an intensely competitive market, we have set ourselves apart from straightforward network product and service providers by developing propositions, through our professional services business, that consistently add value to our customers’ businesses, including investing and innovating in partnership with them. In addition to local, national and international communications services and higher-value broadband and IP products and services, we have developed a comprehensive portfolio of services focused on unified communications, CRM (customer relationship management), systems integration, security services and applications, outsourcing, managed mobile services and applications hosting.
      We have contracts with over 60% of the Fortune Global 500 companies – including Credit Suisse, Fiat Group, Volvo, BMW, AstraZeneca and Inbev – and over 65% of the FTSE 100 companies. In addition, we work closely with government organisations such as the UK Department for Work and Pensions (DWP) and National Health Service (NHS), the European Commission and NATO.

Global operations
BT is a growing company, offering global propositions and delivery, backed by facilities and people across the world. Although we currently generate most of our revenue in the UK, North America and continental Europe, we have been investing to expand our presence elsewhere. Revenue outside the UK grew by 18% in 2008.
      Our aim is to be wherever our customers need us to be. As they are progressively expanding into new countries and territories, it is increasingly important for us to have a presence in all their relevant markets. Our extensive global communications network and strong partnerships enable us to serve customers in the world’s key commercial centres, using a

 

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	Report of the Directors	Business

		18% revenue growth outside the UK

combination of direct sales and services capabilities and strategic partnerships.

North America
We have been operating in North America for 20 years. Having successfully integrated four acquisitions in the past three years, we now have more than 3,600 professionals serving over 1,000 customers. Major customers include Microsoft, PepsiCo, American Express, Continental Airlines and Bristol Myers Squibb.
    In addition to providing our customers with the full range of infrastructure, outsourcing, contact centre and mobility services, we are recognised as a market leader in the provision of managed security services. We offer a broad, flexible range of services including consulting, device management and monitoring.

Asia Pacific
Revenue in the Asia Pacific region grew by a spectacular 66% in 2008.
    In the year, we made a further commitment to the Chinese market (forecast to grow by almost 10% in 2008 ¹ ) by opening a technology and service centre in Dalian and a research and development centre in Shanghai.
    We also signed an agreement with Shenzhen-based ZTE Corporation, a leading provider of telecommunications equipment and network solutions, to provide contact centre and MPLS connection services to support ZTE’s worldwide business expansion.
    In March 2008, we completed the acquisition of Frontline Technologies Corporation Ltd, one of the leading providers of end-to-end IT services in the Asia Pacific region.
    Over the past year, we have grown to be one of the most extensive foreign network operators in India, where we have both national and international licences. During 2008, BT India acquired i2i Enterprise Pvt Ltd (subsequently renamed BT Global Communications India Pvt Ltd), a provider of data communications services in India. In addition, we own a 35% stake in Tech Mahindra Ltd, which provides IT services and solutions to the telecommunications industry. In 2008, we jointly opened a shared services centre in Noida in the National Capital Region in the north of the country. Predictions are that the Indian economy will grow by around 8% in 2008 ² and it is critical that we play a part in this expanding economy.

Europe, Middle East and Africa
Our expansion in the more mature continental European markets continued with the acquisition of: the IT infrastructure division of CS Communication & Systèmes, a French IT systems and network services provider; Net2S SA, a technology consulting and engineering service provider based in France; and INS Group SA, a Belgium-based network and systems operator.
      In 2008, we launched mobile services in Italy and Spain, reinforcing our ability to meet the fixed and mobile communications needs of our business customers in both countries. And we introduced a number of new services in the German market, including Onevoice Mobile Access, BT Hosted Contact Centre and, in partnership with Reuters (now known as Thomson Reuters, following Thomson Corp’s acquisition of Reuters on 17 April 2008), a new variant of the Reuters Market Data System.
      We have been active in the dynamic Central and Eastern European (CEE) market since the late 1990s and our CEE organisation provides services to more than 370 multinational companies. In 2008, we announced an expansion of our operations in Hungary. A new centre of excellence in Debrecen will provide regional customer service for European corporate customers and support for our commercial and technical activities.
      The launch – in partnership with telecoms service provider Etisalat – of Radianz services in the United Arab Emirates enabled significant expansion of our financial services capability in the Middle East. In South Africa, where we have had a presence for 15 years, we announced a two-year business expansion plan.

Latin America
We have been rapidly expanding our Latin American presence to support the needs of our multi-site customers. Today, we have more than 1,000 people serving more than 350 companies and government organisations in 22 countries, including Argentina, Brazil, Chile, Colombia, Ecuador, El Salvador, Mexico, Peru, Uruguay and Venezuela. A 24/7 operations centre in Sao Paulo, Brazil, supports customers in Latin America, Europe and Asia.
      Following the acquisition of Comsat International, we signed contracts with, among others, Caixa Econômica Federal, the Brazilian state-owned bank, and the Colombian Ministry of Communications.

Networked IT services
We have demonstrated that we have the expertise to help our customers succeed in a world in which business applications are increasingly networked and networks are increasingly vital to productivity and competitive advantage. In 2008, we secured networked IT services orders in the UK and around the world with a total value of £5 billion.

1 (fiscal year) www.economist.com/countries/china

2 (fiscal year) www.economist.com/countries/india

 

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Report of the Directors Business review

627	new BT Global Services customers outside the UK were signed in 2008

 

In the UK
The National Programme for IT (NPfIT) in the NHS, for example, is the world’s largest civilian IT project. We are making good progress in the delivery of our three contracts and helping the NHS to provide better, safer care by delivering computer systems and services which improve the way patient information is stored and accessed.
      In London, where we are working with the NHS to modernise IT systems and services across the capital, we installed a further 49 systems during 2008 – bringing the total to 189. Additionally, 50 trusts in London will benefit from significantly reduced call charges, having signed up to connect their voice networks to N3, the national broadband network that we have rolled out as part of the NPfIT.
      On the Spine – the secure database and messaging system BT has built and is managing for the NHS – the first patient summary care records have been created. These records contain potentially life-saving information such as current medications, allergies and previous bad reactions to medicines.
      In August 2006, we began the deployment of one of the world’s largest IP converged private networks for the DWP. In March 2008, the new IP telephony platform – which has been installed in 1,023 sites around the UK serving over 120,000 users – handled, for the first time, more than two million calls in a single day. This IP platform was completed in 30 months. The DWP is one of our three largest central government clients and the contract, which runs until March 2011, supports the DWP’s programme to use IT to reform and deliver public services.
      We are bringing the expertise we have developed in the successful management of these major transformational programmes in the public sector to our partnership with Oxford University’s Säid Business School. The BT Centre for Major Programme Management is the world’s first centre for the study of major programme management.

Around the world
Our contract with Thomson Reuters is one of the largest strategic outsourcing deals in the industry. Under the terms of the deal, we will manage Thomson Reuters data services and the services they offer their customers globally over a period of more than ten years. Building and converging the Thomson Reuters network onto our global MPLS network will involve the convergence of circuits across 14,000 sites and the rationalisation of 189 data centres.
      In March 2008, we signed a major agreement with Thomson Reuters to manage the WAN (wide area network) elements of its global intra-company network. This will transform its existing WAN into a high-speed, IP-based global infrastructure, covering 323 locations in 100 countries across the world.
      In Germany, Media-Saturn, Europe’s largest retailer of consumer electronics, was so satisfied with our unified communication video system that it decided to upgrade almost all of its locations with TelePresence 3000 systems that we develop/provide in conjunction with Cisco Systems.
      In the US, we were chosen as the hosting provider for the Nissan North America Unified Communications and Collaboration Program. This five-year, multi-million dollar contract reinforces our credibility in the unified communications and collaboration hosting space.
      EMAK, a fully owned subsidiary of Al-Kharafi Group, one of the largest general contracting companies in the Middle East, signed a three-year service agreement with BT to build a next generation network as well as data centres. We will also provide professional and security services and run the data centre in Port Ghalib, Egypt.
      Since it was created in 2004, the BT HP alliance has successfully developed and managed services for around 70 customers, winning new contracts worth in excess of US$2.6 billion. Customers include FirstGroup, Aker Kvaerner, Aibel and Anglo American. Additionally, BT provides HP with network and call centre services, and HP provides us with IT services.
      In the third quarter of 2008, BT and HP won a five-year global infrastructure contract worth over 300 million Norwegian Krone with international oil services company, Aibel. BT will act as the prime contractor, helping Aibel to expand its operations and grow its non-Nordic business.
      In February 2008, Nycomed, an international pharmaceutical company headquartered in Switzerland, chose to outsource its infrastructure services to the alliance for five years. As part of the agreement, BT will provide MPLS network services, internet bandwidth for Nycomed’s EMEA (Europe, the Middle East and Africa), Asia Pacific and Americas hubs, and remote access services for 6,500 users.
      During 2008, we secured a number of other major networked IT service contracts across all sectors, including financial services, energy and government. At contract value, these included:

	Date		Customer		Nature of contract
	May 2007		AGIS (the German IT subsidiary of insurance company Allianz)		Five-year contract, part of a strategic partnership AGIS has agreed with Fujitsu Services for desktop, network and communication services. The project has a total value of about €400 million.

 

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	Report of the Directors	Business

	Average revenue per consumer household
	(£)

	Date		Customer		Nature of contract
	June 2007		AstraZeneca (one of the world’s leading pharmaceutical companies)		Five-year, £25 million deal positions BT to become AstraZeneca’s global network partner. Under the new agreement, the BT- managed global MPLS network in EMEA and Asia Pacific will be extended to 32 new sites in the USA and Latin America. The contract now covers over 170 managed connections at 141 AstraZeneca sites in 64 countries worldwide.
	September 2007		Schenker AG (a leading international supplier of integrated logistics services)		Seven-year, three-digit million Euros global contract to connect around 1,000 locations in 57 countries to our MPLS data network and to provide a number of security services.
	September 2007		Novartis (a provider of healthcare solutions)		Seven-year, around US$500 million managed services contract covering 95 countries.
	November 2007		Digital 3&4 (the joint venture between ITV and Channel 4 in the UK)		15-year, £80 million contract to distribute ITV’s and Channel 4’s digital terrestrial TV channels to all major TV transmitters throughout the UK, over our MPLS network. This is a key part of the UK Digital Switch-Over programme.
	November 2007		ITV (one of the UK’s leading independent broadcasters)		Seven-year, £44 million contract to connect all ITV’s UK locations, enabling them to optimise their resources and workflow.
	March 2008		KPMG Europe LLP (the largest integrated accounting firm in Europe)		Five-year, £62 million outsourcing agreement with KPMG practices in the UK and Germany. The deal will deliver significant operating cost efficiencies and productivity improvements to KPMG businesses and a transformed technology architecture on which to build value-added services.

In addition to these major deals, we signed a large number of smaller networked IT services contracts in 2008 with a wide range of customers from different sectors, including Credit Agricole, Tereos and Solvay. Solvay, an international chemical and pharmaceutical group, signed a contract worth more than €2 million to include two fully managed and hosted regional internet gateways (in the US and the UK) for its 13,000 global internet users.

Consumer customers in the UK
In 2008, overall consumer revenue declined by 1% to £5,071 million, mainly as a result of the highly competitive marketplace and call package price reductions. This was largely offset by growth in broadband which helped to increase ARPU (average revenue per user) by 5%.
      Consumer demand for communications and entertainment services in the UK continues to grow. This market is highly competitive and the entry of strong players such as Sky and Carphone Warehouse into our core fixed-line and broadband markets is leading to strong price and service competition.
      The distinction between fixed and mobile, communications and entertainment services is increasingly blurred, and providing combined services that cross this divide is increasingly critical. New business models and new ways of engaging with customers continue to emerge. Faced with this, we believe that consumers will increasingly value reliability, good customer service, value for money and product innovation – all of which BT is well placed to deliver.
      Our strategy in this market is to provide customers with a range of services that help them communicate more effectively, access entertainment and manage their lives. This strategy is underpinned by a number of key objectives, including maintaining our broadband market share, enhancing our voice business and developing BT Vision into an attractive, mass market service.

Broadband
We believe that the broadband experience is about much more than having basic access to the internet; customers want to use broadband to access exciting content and secure, robust services as standard. We are firmly established at the high end of the consumer broadband market and offer a family of high-quality broadband packages, including:

BT Total Broadband, our comprehensive home broadband service, which offers download speeds of up to 8Mb. Other features include free internet voice calls, free Openzone minutes, and a suite of security software. At 31 March 2008, we had 3.3 million BT Total Broadband customers, up by 21% over last year. More than half of them opted for one of our premium packages.

 

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Report of the Directors Business review
The UK’s top five consumer broadband providers in the 2007 calendar year
						Q3& Q4
	Overall ranking	Q1		Q2		(combined)
	1	BT		BT		BT
	2	Demon		Demon		PlusNet	a
	3	AOL		Tiscali		O2
	4	Pipex		Pipex		Tiscali
	5	TalkTalk		PlusNet	a	Orange

Source: Epitiro (February 2008)

Note: these figures are as presented by global benchmarking company, Epitiro

a PlusNet is part of BT’s broadband portfolio

 

		BT Total Broadband Anywhere, launched in May 2008, is the UK’s most complete broadband package. It offers our customers the same BT Total Broadband experience that they receive in the home while they are out and about with a BT ToGo phone. BT Total Broadband Anywhere customers can enjoy their home broadband services on the move – exchanging emails, making VoIP (voice over IP) calls and accessing social networking, shopping and entertainment sites.
		We have joined forces with FON to develop a global wireless broadband access service at no extra cost to our customers. BT FON gives every BT Total Broadband customer who agrees to share a small, secure section of their home broadband connection the chance to benefit outside the home from sharing the connection of another BT FON member, as well as using Openzone Wi-Fi hotspots. We now have more than 90,000 BT FON members.

We have recently won a number of broadband awards, including:
	in March 2007, BT was voted most trusted ISP by Readers’ Digest;
	in October 2007, BT won ISP of the year at the MAC User awards; and
	in March 2008, bt.yahoo was named best portal at the Internet Industry Awards.
We are also playing a leading role in the development of internet telephony or VoIP. At 31 March 2008, we had around two million registered consumer customers for our VoIP services – BT Broadband Talk and BT Softphone.

New entertainment services
Television on your terms
The roll out of our next generation television service accelerated during the financial year – at 31 March 2008, we had 214,000 active BT Vision customers. Usage is growing and our subscribers are watching on average one on-demand programme a day.
      BT Vision – ‘Television on your terms’ – does not require a regular monthly subscription. It provides a ‘pay as you watch’ option. The service is delivered via a set-top box – the V-box –through which customers can access up to 40 free digital TV and 30 free radio channels and pay-per-view services from our content providers. These include some of the industry’s top names and, in 2008, we signed an agreement with CBS Paramount International TV to access their extensive entertainment archive. Since the beginning of the 2007/08 season, BT Vision customers have also had access to live FA Premiership and Scottish Premier League football and to a selection of terrestrial programmes released in the previous week. In March 2008, BT Vision was offering more hours of on-demand programmes than any other UK digital TV provider.

Go!Messenger
In February 2008, in partnership with Sony Computer Entertainment Europe, we launched Go!Messenger, a wireless communications package for the PSP (PlayStation Portable) gaming device. Go!Messenger is based on technology invented in our research labs. It enables PSP users to send video and voice calls and instant messages to each other using a new and intuitive screen keyboard when connected to wireless broadband at home, or to a public Wi-Fi hotspot, including BT Openzone, when on the move. More than 310,000 users have now registered for this service.

Support and security
Because we believe that customers want hassle-free access to new services, we are increasingly offering a range of value-added services designed to make new technology easier to use and more secure. These include:

		BT Home IT Support, which offers broadband customers straightforward, jargon-free advice and support over the phone and in the home for a wide range of computer issues. Launched less than two years ago, the service has already provided more than ten million minutes of advice;
		BT Net Protect, which offers anti-virus and firewall security products; and
		BT Digital Vault, which enables users to store their digital valuables – photos, personal files – in an online data back-up and storage facility. At 31 March 2008, there were more than 594,000 BT Digital Vault customers.

Traditional services for consumers
58% of the UK’s 26 million households receive our traditional calls service. Our call pricing packages are designed to give our customers value for money and greater certainty about their communications spend.
      In February 2008, we made UK weekend fixed line call charges a thing of the past by extending free weekend calls to all our Option 1 customers. For the first time, all 15 million BT households – the majority of British households – no longer have to pay for weekend calls.
      The new ‘Unlimited Weekend’ plan means customers can now get free evening and weekend calls included in the price of line rental with a renewable contract. Our other two plans have been substantially reduced in price – the monthly cost of our ‘Unlimited Anytime’ plan is now 60% lower than two years ago.
      In addition, we challenged other companies to follow our lead when we made calls to our customer service and helpdesks free. At 1 April 2008, 99% of the numbers to our customer service and helpdesks with an 0845 or 0870 prefix were switched to free 0800 numbers. The other numbers will be changed over the coming months.

 

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And customers can enjoy further savings with our competitive International Savings plan, which offers international calls at heavily discounted rates. BT customers made 3% more international calls in 2008 than in the previous year.

Business customers in the UK
Overall, our SME revenue during 2008 grew by 5% to £2,590 million, 31% of which was from new wave activity, compared with 28% the previous year.
      We estimate that the SME sector in the UK constitutes an addressable market of more than £18 billion. The convergence of underlying technologies is creating new growth opportunities. Customers are being offered innovative services that combine elements from previously distinct product sectors by suppliers ranging from IT companies to software vendors and web-based businesses.
      All of this can be a real challenge for many SMEs. On the one hand, they have access to services that were once only available to larger corporations; on the other, they don’t necessarily have the time or experience to stay on top of technological developments. We have the opportunity to put BT at the heart of this market and help our customers navigate its complexities.
      Our strategy is to help businesses succeed by providing them with unified communications, collaboration and commerce solutions that help them to manage their businesses, market themselves and interact with their customers in new and more efficient ways. Increasingly, these are available through a single ordering process and covered by a single service level agreement.
      Our combination of national reach and local presence, trusted brand and innovative portfolio makes the BT proposition very attractive. By putting their trust in us, SMEs can transform the way they work and free themselves to do what they do best.

Broadband for business customers
Broadband is increasingly critical to the success of businesses and BT Business Broadband remained the leading internet service provider for SMEs in the UK.
      In 2008, broadband revenues in the business segment grew by 22% and at 31 March 2008, 60% of new business broadband customers had contracts for a minimum of two years. Because businesses need more than basic broadband access, over 98% of our broadband sales are now made with value-added services attached.
      In the business mobility market, our strategy is to integrate traditional fixed, mobile and IP services to offer a single communications solution to our customers. We also provide a range of managed mobile services to UK and global customers who either outsource their mobile communications entirely or rely on BT to provide specific managed services.
Our portfolio of products and services specifically for SMEs includes:

		BT Business Total Broadband, a comprehensive broadband package with download speeds of up to 8Mb;
		BT Business One Plan, the UK’s first triple-play landline, mobile and broadband calling package designed for businesses. At 31 March 2008, BT Business One Plan had 168,000 locations, and accounted for 16% of call revenues from business customers;
		BT Broadband Voice, a free additional line offer;
		BT Communications Complete, launched in January 2008, a simple, networked IP platform offering everything our business customers need to improve their communications;
		BT Corporate Fusion, a combination of hardware, software and networking technology to integrate mobile communications onto corporate networks;
		BT Fusion, a versatile tariff that includes unlimited calls to UK mobiles and UK landlines made from the office (within range of the BT Business hub) or from a BT Openzone hotspot;
		BT Office Anywhere, a hand-held device that gives users on the move the functions of an office Windows PC. Unlike other smartphones, it comes with VoIP and the option of unlimited VoIP calls to UK landlines; and
		Blackberry ® Internet Service, which offers talk, email and internet access on the move using a Blackberry ® handset.

New services for business customers
We offer a wide range of value-added services designed to make it easier for our business customers to seize the possibilities that new communications technologies bring. These include:

		BT Business IT Manager, a comprehensive IT support service;
		BT Business Essentials, included free as a standard part of BT Business Total Broadband packages, is designed for customers taking their first online steps and includes basic website creation tools;
		BT Tradespace, an online trading community that brings businesses and individual sellers together with potential customers and partners. At 31 March 2008, there were over 65,000 members of the BT Tradespace community, and we were adding around 2,000 each week; and
		BT Business Builder, one of a series of SaaS (software as a service) applications designed to help small businesses with administration and cost control. A free online service, it addresses the core financial, legal and administrative elements of business management.

 

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		234m		Openzone minutes used in 2008 – up 85%

 

Wi-Fi in the community
BT Openzone is one of the leading providers of Wi-Fi services in the UK and Ireland. In 2008, 234 million Openzone minutes were used – up 85% on 2007.
      In October 2007, we launched the world’s first international Wi-Fi voucher scheme, which means cheaper and more predictable costs for travellers when abroad. The Openzone 500 vouchers offer Wi-Fi access across roaming partners in the US, Canada, Brazil, Argentina and Europe and Openzone access to hotels, airports and other hubs for an all-inclusive rate.
      We are also leading the way in building ‘wireless cities’ throughout the UK, in order to ensure that local residents, businesses, tourists and local government employees are always best connected.
      In Westminster, for example, applications include wireless CCTV cameras, which are helping combat crime and anti-social behaviour, as well as assisting with parking enforcement. We are also working with Westminster Council to provide online information – from cinema listings to council services – free to anyone logging on to BT Openzone from within the area.

Wholesale customers
We have two principal groups of wholesale customers – customers of our wholesale business and Openreach’s customers – as well as our global carrier customers.
    Like the industry it serves, our wholesale business is in transition. As the industry migrates from traditional to next generation services and adopts the infrastructure being enabled by Openreach, so we are establishing BT as a leading provider of innovative managed network solutions, which will enable our customers to transform their businesses. Our strategy is to support them through this transition, generating future growth from the delivery of long-term managed solutions. These enable them to avoid the capital and operational risk associated with upgrading to next generation networks and services. In the process, we are managing our own transformation from a high-volume product wholesaler to a next generation communications product wholesaler and solutions provider.
      All of this is being supported by improved service delivery, transformed propositions and a range of new software-driven services. In 2008, for example, by focusing on our customers’ overall experience, we improved our ‘right first time’ performance for the provision and repair of our core wholesale broadband and data connectivity services.
      In the UK wholesale market, we provide network services and managed solutions to over 700 communications companies, including fixed and mobile network operators, ISPs (internet service providers) and other service providers. We interconnect with more than 180 other operators, as well as carrying transit traffic between telecommunications operators.
      In 2008, we maintained our focus on the cost reduction opportunities that arise as our business changes. We reduced the cost base of our wholesale business by 13% through headcount reduction, eliminating duplication, achieving further operational efficiencies and aligning our resources more effectively with the evolving needs of our customers.

Managed network services contracts
During 2008, we signed a number of major managed network services contracts worth a projected total of £1.8 billion over their lifetimes. These ranged from a comprehensive outsourcing deal with the Post Office, to providing enhanced connectivity for other communications providers’ networks:

	Date		Customer		Nature of contract
	May 2007		Post Office		Four-year outsourcing contract for provision of wholesale communications services to underpin the Post Office’s drive to become a fully integrated voice and broadband provider.
	July 2007		T-Mobile		Five-year contract to link T-Mobile’s UK base stations to its network.
	September 2007		Orange		Provision of wholesale landline services to Orange customers, enabling Orange to offer fixed-line voice services.
	December 2007		Virgin Media		Five-year, £98 million contract for provision of voice network management services.
	February 2008		Scottish and Southern Energy (SSE)		Supporting SSE’s planned launch of integrated communications services to its 8.5 million customers in the UK.
	March 2008		Vodafone		Five-year managed access agreement linking Vodafone’s UK base stations with its core infrastructure.

New wholesale products
21CN Ethernet
In January 2008, we started to take orders for 21CN Ethernet, a next generation wholesale Ethernet service and the first product to be delivered over the 21CN platform. 21CN Ethernet will offer up to ten times the bandwidth of the core MPLS network, delivering high-speed data connectivity to corporate customers and mobile operators. Subsequent upgrades will enhance the service’s functionality and footprint. We aim to have installed around 600 nodes by Spring 2009, giving BT the UK’s largest Ethernet footprint.

 

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Network improvements in 2008					Service improvements in 2008 – average offered lead times across product portfolio
					(working days)
Network joints remade, replaced or sealed	132,000						March 2008		March 2007		Improvement
Network blackspots upgraded	5,000				Business order provision		2.9		4.8		40%
Defective telephone poles removed/replaced	24,500				Consumer order provision		3.9		8.4		54%
Overhead wires renewed/upgraded	29,000				Business fault repair		0.6		1.3		54%
Targeted improvements to local networks	23,000				Consumer fault repair		0.9		1.6		44%
Overall activity level in exchanges rose by	22%
Exchanges prepared for 21CN at 31 March 2008	1,600

Wholesale Broadband Connect
In April 2008, following trials with communication provider customers, we launched a next generation 21CN broadband service, Wholesale Broadband Connect. The benefits of the new service include faster speeds, guaranteed service level agreements, the ability to trade speed for stability, and enhanced line diagnostics. It will initially be available from exchanges serving around one million homes and businesses and we plan to extend the footprint for this service to exchanges serving ten million homes and businesses within a year of launch.

Traditional wholesale portfolio
We continued to sell a wide range of capacity and call-based products and services, including regulated interconnect services and new, non-regulated products and services. At the same time, we have been refreshing our core traditional portfolio with next generation replacements that will, over time, move these services to 21CN and allow the decommissioning of parts of our legacy systems.

Openreach and the UK access network
Our Openreach access network business provides more than 450 communications provider customers, including other BT lines of business, with equal, open and economic access to the ‘first mile’ of BT’s UK access network. One of the industry’s vital infrastructure assets, this first mile links end users’ premises to local telephone exchanges, via fixed-line local and backhaul connections.
      Openreach’s 21,000 field engineers install, repair and upgrade lines, ensuring that households, offices and other premises have reliable local access to the telephony, internet and other services offered by their communications providers.
      Openreach is committed to delivering a better network and providing a local access and backhaul environment in which its customers’ businesses can thrive. Its focus in the 2008 financial year was to continue to deliver and comply with the Undertakings made to Ofcom, while driving efficiencies, providing the right levels of resourcing and enhancing service levels. Increasingly, it seeks to build mutually rewarding relationships with customers and to work with them on issues such as next generation access (the transition from existing local access infrastructure or technologies to next generation high-speed broadband access services), which are of key importance to the UK as a whole.

Improved service performance
In 2008, Openreach improved the quality of service delivery of all its products, significantly reducing the number of orders and fault reports that did not meet target delivery date. A significant reduction in ‘early life failures’ (faults on newly installed lines) was also realised by improving its quality of execution.
     Improvements in lead times offered to customers (see table above) contributed to improved ‘cycle times’.
     Achieving a step improvement in service performance was dependent upon reducing volatility and input volumes. Through flexible resourcing and processes, Openreach stabilised and improved levels of service, enabling it to cope with unexpected events, such as the floods experienced in the summer of 2007.
     Service involves more than just reactive provision and repair activity; it also includes the process of reinvigorating the access network infrastructure through investment in the local network – which leads to improved reliability, enhanced service standards and reduced cost. In 2008, Openreach invested around £35 million in a proactive maintenance programme, which reduced the number of access network faults by 10%. At the same time, the number of high-bandwidth services carried rose by around 20%.
   In addition to Openreach’s business as usual provision and repair activity, preparing telephone exchanges for 21CN meant it had to replace and recover 2.5 million jumper wires.

Equivalence Management Platform (EMP)
The EMP provides a single interface for communications providers to buy products from Openreach. This is a major change from the previous approach under which each product was provided separately.
   The creation of the EMP is a major achievement: the largest IT capability of its kind in the telecommunications industry. The EMP underpins all Openreach’s interactions with communications providers, and has the capacity to process up to 100,000 orders a day and carry out up to 60,000 line checks an hour. All customers buying LLU now do so using the EMP. As a result, in February 2008, Openreach was able to retire the legacy LLU provisioning system, saving associated running costs.

Delivering on the Undertakings
During 2008, Openreach delivered a number of the Undertakings made to Ofcom, including the launch of wholesale line rental WLR3 analogue product on 30 June 2007. This provides communications providers with all the information they need to book and verify WLR3 orders in real time, 24/7, and with no limit on order volumes. Openreach also delivered equivalence of input for WLR digital services ISDN2 and ISDN30 in 2008.

Openreach products
Wholesale Line Rental
WLR, one of the largest transformations of the UK’s telecommunications industry, enables communications providers to offer telephony services with their own brand and pricing structure over BT’s network.
    At 31 March 2008, Openreach was providing over 22 million WLR lines to BT lines of business and just under 4.7 million to

 

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other communications providers. Of the lines provided to other communications providers, 3.8 million were WLR analogue lines (up 9% on 2007) and 0.9 million were WLR digital lines (up 31% on 2007).

Local Loop Unbundling
LLU enables communications providers to use the lines connecting BT exchanges to end users’ premises and to install their own equipment in those exchanges.
      There are two types of unbundled line:

	a fully unbundled line which gives other communications providers the exclusive use of the copper line; and
	a shared access line, which only gives other communications providers the use of the high-frequency channel used for broadband – the line will also be used by the customer’s fixed-line voice provider.

At 31 March 2008, there were 12.7 million unbundled lines in the UK, up nearly 20% on the previous year. Of these, 8.4 million were for BT lines of business, and 4.3 million were for non-BT communications providers. More than 20 communications providers were providing unbundled services from over 1,850 local exchanges and Openreach was fulfilling more than 69,000 LLU orders a week.
      Although the broadband market in the UK continues to grow along with continued exchange unbundling, this process slowed in 2008 as a result of market consolidation. Communications providers are increasingly focused on improving customer retention and acquisition by offering packages incorporating a selection of broadband, voice, TV and mobile services.

Ethernet
Openreach continues to develop a comprehensive portfolio of Ethernet products to support backhaul and access services for a growing number of other communications providers.
      One of the most exciting upcoming developments is Openreach’s new backhaul product, Ethernet Backhaul Direct. This product has been designed to meet the increasing demand for high bandwidth backhaul capability from customers wishing to connect their local access circuits back to their core networks. It supports broadband applications such as video on demand, which is now driving an increase in internet traffic. Additionally, by realising the cost efficiencies of 21CN, Openreach is able to offer a new, improved pricing structure for this service.
      Openreach has also launched three new Ethernet products: Street Access, Broadcast Access and CCTV Access, which give communications providers opportunities to move into new markets. Additionally, Openreach’s review of Ethernet circuit resilience pricing lowered the price and extended the availability of this option. Rather than a premium option limited to a few products, Ethernet resilience is now a viable and cost-effective option for enhancing service security.

Deploying fibre to the premises
In June 2007, Openreach completed an initial consultation with communications providers about the deployment of high-capacity fibre optic cable to premises and the delivery of wholesale services over these networks to greenfield sites. From August 2008, as part of an initial trial, Openreach will deploy fibre optic cable, instead of copper, to homes on a new 1,000 acre site at Ebbsfleet Valley in Kent. Around 10,000 homes will be built on the site, incorporated in 1.5 million square metres of retail, leisure and community facilities.
      At this site, Openreach will offer the communications industry a wholesale fibre-based broadband product, facilitating competition at a retail level. The service will be capable of supporting speeds of up to 100Mb – the fastest headline speed available to residential customers in the UK. This will make possible a range of applications from HDTV gaming to near-instant music downloads.

Building our twenty-first century network
The key driver behind our 21CN platform is customer choice. 21CN is our next generation platform that enables software-driven, open innovation by BT, our customers and partners and is critical to our transformation into a software-driven global communications services company.
      Following input from end users and communications providers involved in our South Wales pilot, we have evolved our deployment strategy from one focused on mass migrating customers onto the new network, with new services becoming available later, to one that delivers new services to customers from the outset.
      As a result of the new deployment strategy, new services, such as 21CN Ethernet and 21CN broadband, will be offered to customers during periods of voluntary take-up, after which customers will be mass migrated, enabling the closure and decommissioning of certain legacy platforms.
      Through this new deployment strategy, we will be able to deliver new services more quickly, with the associated benefits of increased revenue potential and improved customer experience. To date, 21CN has already delivered some £600 million in cost savings, relating to operating efficiencies and reduced spend on legacy networks, and we expect to deliver more savings in the future taking the total annualised savings to at least £1 billion.
      The 21CN programme has also been expanded to accommodate the increasing focus on software-driven services, as well as the potential of emerging technologies and the demand from enterprise customers for additional functionality. As a result, we will introduce the BT innovation platform during the summer of 2008, which will enable us and others to develop

 

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	£625m efficiency savings in 2008

 

and integrate a wide array of new applications that will add features and value both to the new 21CN services, and to completely new services.

Keeping our costs down
We continue to benchmark ourselves against the best in the industry to determine where efficiencies can be generated. We remain focused on financial discipline and on delivering efficiency programmes to generate sustainable cost efficiencies.
      Cost transformation programmes delivered £625 million of savings in 2008 and we expect to deliver around £700 million in 2009. Many of these programmes are closely linked to ‘right first time’ initiatives, which have the dual benefit of reducing our cost of failure as well as enhancing the customer experience.
      We have, for example, continued to enhance the ways in which customers interact with BT. The number of transactions completed via bt.com rose by more than 90% in 2008. At 31 March 2008, we had 3.6 million customers receiving e-bills, almost 1.9 million of whom do not receive paper bills. In response, we have planted one million trees over the past three years.
      We remained focused on reducing the number and complexity of our systems and processes (see Our IT systems and networks estate on page 30). Other key programmes relate to innovative procurement and sourcing.
      We continued to explore the possibilities of flexible and agile working. At 31 March 2008, 23% of BT people doing what are conventionally thought of as ‘office jobs’ did not have a dedicated desk of their own. Rather, they used a combination of homeworking and/or flexible workstations which can be shared by multiple users.
      We also made progress in 2008 in our drive to streamline our organisation and eliminate duplication. This will remain a priority in 2009.

Acquisitions and disposals
BT actively reviews its portfolio of assets and acquisition opportunities in its target markets. We will consider acquiring companies if they bring us skills, technology, geographic reach or time to market advantage for new products and services.

2008
During 2008, we completed a number of key acquisitions:

Date			Acquisition
May 2007			We acquired Mumbai-based i2i Enterprise Pvt Ltd, which specialises in IP communications services for major Indian and global multinational companies. i2i is a provider of enterprise telecommunications systems in the Indian market, and distributes BT Infonet’s managed network services and products nationwide. This acquisition underscores our commitment to India, currently one of the world’s fastest growing IT and business process outsourcing markets.
June 2007			We acquired Comsat International – a provider of data communication services for corporations and public sector organisations in Latin America – through its parent company, CI Holding Corporation. Comsat International employs more than 700 professionals with in-depth knowledge of Latin American markets and provides services directly in 15 countries. It has a track record in the delivery of complex projects and the management of network solutions for enterprise, public sector and carrier customers.
November   2007			We acquired the IT infrastructure division of CS Communication & Systèmes – the French IT systems and network services provider for up to € 60 million (including debt assumed). The division provides corporate and public sector clients with a range of services for building and maintaining IT infrastructures, including consulting, network integration, insourcing, outsourcing and data centre services.
January 2008			We completed the merger between BT Italia SpA and I.NET SpA. The merger followed the acquisition by BT of Etnoteam’s 13.6% stake in I.NET and the subsequent public tender offer for the remaining shares in public hands in April 2007. BT Italia is Italy’s leading supplier of communications solutions and services dedicated solely to business and public sector customers. I.NET is an acknowledged leader in security and business continuity solutions.
March 2008			We acquired Frontline Technologies Corporation Ltd, one of the leading providers of end-to-end IT services in the Asia Pacific region, for approximately S$202 million. Frontline provides IT consulting, infrastructure services, systems integration and IT outsourcing to local, regional and multinational companies and has operations in China, Hong Kong, India, Indonesia, Malaysia, Singapore, the Philippines, Taiwan, Thailand and Vietnam. Its acquisition enhances our existing networked IT services capabilities in the region.

 

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		£480m invested in acquisitions completed in 2008

 

Date			Acquisition
March 2008			At 31 March 2008, we had acquired over 91% of the outstanding issued share capital of Net2S SA at a price of € 5.27 per share. The transaction values the entire outstanding issued share capital of Net2S at approximately € 68.5 million. Net2S provides technology consulting and engineering services for critical business solutions to large corporate customers. The company is headquartered in Paris and employs approximately 800 people operating mainly in France. It also has a presence elsewhere in Europe, the US and Morocco.

We also completed a number of smaller transactions in 2008, including the acquisitions of: Brightview Group Limited (Brightview) (a consumer internet service provider); Basilica Group Limited (Basilica) (one of the UK’s leading providers of IT solutions to businesses); Lynx Technology Limited (Lynx Technology) (one of the UK’s foremost suppliers of IT services); INS Group SA (the Belgium-based network and systems operator); Square Mile Marina Limited (a marina Wi-Fi network operator); and Fresca Limited (a specialist retail e-commerce service provider).

Post-balance sheet event
In April 2008, we entered into a conditional agreement to acquire Wire One Holdings Inc – one of the leading providers of videoconferencing solutions in the US. Wire One employs over 350 professionals across the US and Europe and provides products and services to over 8,000 customers, including 55% of the US Fortune 100. With over 20 years of videoconferencing support expertise, Wire One is one of the leading providers in the US of easy-to-use, reliable, and cost-effective video communication solutions.

Prior to 2008
The BT of today was largely created by a radical restructuring of the company in the 2002 financial year. This restructuring involved a rights issue (raising £5.9 billion), the demerger of O2 (comprising BT’s wholly owned mobile assets in Europe), the disposal of significant non-core businesses and assets, the unwinding of Concert (our joint venture with AT&T) and the creation of customer-focused lines of business.
      In 2006, we acquired Radianz, a financial services extranet provider, from Reuters for a total consideration of £143 million. We also acquired Atlanet, a Fiat subsidiary providing domestic telecommunications services to Fiat and other non-Fiat business customers throughout Italy, for approximately €80 million, further reinforcing our position in the Italian market.
      In 2007, our acquisitions included dabs.com, PlusNet (an internet service provider) and International Network Services (INS) (the California-based global provider of IT consulting and software solutions).

Regulation and competition
BT operates in an increasingly competitive and dynamic commercial environment, both in the UK and around the world. Communications markets are undergoing significant change with, for example, the accelerating convergence of TV and video services over fixed and mobile broadband connections. The differences between fixed and mobile telephony are increasingly becoming blurred, with many calls from offices and homes now being made from mobiles. Service bundles offering TV, broadband and fixed and mobile telephony are provided by an increasing number of competitors in the market.
      The changing dynamics of the market and of business models are creating new sources of competition and choices for consumers. Under these circumstances, we believe that it is critical that regulation should only be applied where necessary, otherwise there is a real risk that innovation and investment could be stifled.
      The UK has one of the world’s most competitive broadband markets, with over four million lines for non-BT communications providers now unbundled (LLU). The success of LLU has led to Ofcom’s (see below) proposed recognition of separate geographic markets in the UK following its wholesale broadband access market review, a position supported by the European Commission (see Significant market power conditions on page 25). This is a welcome development and means that deregulation would be able to occur in areas where infrastructure competition is strong, enabling us to compete more effectively. Ofcom is planning to carry out two narrowband market reviews in the 2009 financial year.

Regulation in the UK
Electronic communications regulation in the UK is conducted within a framework set out in various EU (European Union) directives, regulations and recommendations. The framework is currently under review by EU bodies and new directives are expected to take effect in or about 2010. UK legislation and regulation will therefore need to be amended to reflect any changes.
      Our policy is to comply fully with all applicable laws and regulations, while competing fairly and vigorously within the rules.

Ofcom
Ofcom (the Office of Communications) was set up under the Office of Communications Act 2002 (replacing the previous telecommunications regulator, Oftel) to provide a single, seamless approach to regulating the entire communications market. Its principal duties are to further the interests of citizens in relation to communications matters and to further the

 

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interests of consumers in relevant markets, where appropriate by promoting competition.
      Ofcom regulation takes the form of sets of conditions laid down by Ofcom under the Communications Act 2003 (Communications Act), and directions under these conditions. Some conditions apply to all providers of electronic communications networks and services; others apply to individual providers, which Ofcom has designated as universal service providers or having SMP (significant market power) in a particular market. The Communications Act also imposes more general requirements on communications providers.

Conditions applying to all providers
General conditions
The general conditions made by Ofcom apply generally to all providers of electronic communications networks or services. Although these conditions are concerned primarily with consumer protection, they also include requirements relating to general access and interconnection, standards, emergency planning and numbering. A separate condition regulates the provision of premium rate services.

Electronic Communications Code (ECC)
The ECC applies to communications providers authorised to carry out streetworks and similar activities for network provision. The application of the ECC is subject to conditions made by the Secretary of State for Business, Enterprise and Regulatory Reform.

Funds for liabilities
Under the terms of the ECC, an electronic communications provider with apparatus on or in the public highway is required to make financial provision to cover any damage caused by work it carries out, and for the removal of its network in the event of liquidation or bankruptcy.
      The conditions require an electronic communications provider subject to the code to provide Ofcom annually with a certificate that, in the opinion of its board, it has fulfilled its obligations to ensure the availability of the required funds. BT has provided this for the period to 31 March 2009.

Other general requirements
Other general requirements contained in the Communications Act include:

	the payment of administrative charges; and
	the provision of information to Ofcom when required.

Conditions applying to BT
Universal service conditions
BT is the designated supplier of universal service for the UK, excluding the Hull area where Kingston Communications is the designated provider. The universal service obligations are defined in an order issued by the Secretary of State. Ofcom subsequently adopted universal service conditions based on these obligations. Our primary obligation is to ensure that basic fixed-line services are available at an affordable price to all citizens and consumers in the UK. Other universal service conditions include obligations relating to payphones and special social needs schemes such as the light user scheme.

Significant market power conditions
Ofcom is required by the EU directives regularly to review relevant markets and determine whether any communications provider has SMP in those markets. Where Ofcom finds that a provider has SMP, it must impose such remedies as it considers appropriate, as specified in the Communications Act. These may include obligations to meet reasonable requests to supply certain services to other communications providers, not to discriminate unduly, to publish prices and notify price changes and obligations relating to regulatory accounting. In some cases, additional obligations such as price controls and cost orientation have also been imposed.
      Following a series of market reviews by Ofcom, BT has been deemed to have SMP in a number of retail and wholesale fixed telecommunications markets, including all or parts of the markets for: fixed narrowband retail services, fixed narrowband wholesale exchange lines, call origination and conveyance, wholesale broadband access, wholesale local access and leased lines.
      In 2008, Ofcom continued to work on its review of the wholesale broadband access market, repeating earlier proposals to define three geographical markets based upon the level of competition in individual exchange areas. For the most competitive market, covering around 1,070 exchanges, Ofcom proposes to remove the SMP obligations, subject to a one-year transition period. Ofcom’s Final Statement on this market review is expected to be published in the first quarter of the 2009 financial year.
      In May 2007, following certain improvements to our WLR product, Ofcom granted consent for certain pricing relaxations in relation to business exchange lines for major business customers. Ofcom is also carrying out a market review of business connectivity. This may result in deregulation of some categories of higher bandwidth wholesale private circuits, and also the extension of charge controls to a number of business connectivity services not currently subject to such controls (see Pricing regulation on page 26). Ofcom is planning to initiate market reviews of fixed narrowband wholesale services and fixed narrowband retail services in the 2009 financial year.

How we are delivering our Undertakings
In response to Ofcom’s strategic review of telecommunications, we proposed a number of legally binding Undertakings under

 

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the Enterprise Act 2002 (Enterprise Act). These Undertakings were accepted by Ofcom and came into force in September 2005.
      The Undertakings are intended to deliver clarity and certainty to the UK telecommunications industry and to support a reduction in regulation over time. Significant structural changes have been made to enable BT to deliver the Undertakings, including the creation of a new access services division (Openreach) and the implementation of restrictions on the sharing of information between upstream and downstream divisions of BT. Since the Undertakings came into force, we have made good progress in delivering our commitments.
      The key Undertakings given by BT are to:

	establish Openreach;
	deliver equivalence of input for key wholesale products, and increased transparency for others;
	introduce new rules on access to, and sharing of, certain restricted information;
	restrict the exercise of influence by other parts of BT on the commercial policy of both Openreach and parts of BT Wholesale;
	ensure fair access and migration to our 21CN for other communications providers;
	publish and make available to all BT people a code of practice explaining what they must do to comply with the Undertakings; and
	create an Equality of Access Board (EAB) to monitor, report and advise on BT’s compliance with the Undertakings and the code of practice. The EAB was established on 1 November 2005. The EAB annual report which does not form part of this report is available online at www.bt.com/eabreport

In Ofcom’s annual report on the impact of the strategic review of telecommunications, published in December 2007, Ofcom reviewed the impact of the Undertakings and concluded that BT’s progress in implementing them had delivered benefits for industry and for consumers. Ofcom also identified a number of areas where changes to the Undertakings are required. These include Openreach’s provision of space, power and Ethernet services, and the process for consulting with industry on the deployment of 21CN. We are working closely with Ofcom on the form these changes will take.

Pricing regulation
BT is no longer subject to retail price controls covering public-switched telephony services. Other wholesale services continue to be subject to price controls:

	Network charge control: we operate under interconnection agreements with most other CPs (communications providers). Our charges for a range of interconnect services are controlled by Ofcom, under the NCC (network charge control) regime. These controls are designed to ensure that our charges are reasonably derived from costs, plus an appropriate return on capital employed. Depending on the degree of competition, charges are cap controlled each year by RPI (Retail Price Index) minus X for services Ofcom considers unlikely to become competitive in the near future, and safeguard cap controlled (ie no increases above RPI) for services likely to become competitive. (X is a number specific to a particular market, indicating the permitted change in controlled prices relative to the rate of inflation.) The current NCC period began on 1 October 2005 and will last until 30 September 2009. BT must notify Ofcom and other CPs if it intends to amend existing charges or offer new services.
	Other charge controls: PPCs (partial private circuits) are leased lines that BT sells to other network operators. On 1 October 2004, Ofcom introduced a PPC charge control to replace the annual determinations previously carried out by Oftel. The control is a four-year, three-part RPI minus X formula covering low and high bandwidth services and equipment. Ofcom will carry out a review of the PPC charge control before the existing control expires on 30 September 2008. In its consultation on the business connectivity market review, Ofcom has proposed to remove our SMP designation in relation to higher bandwidth PPCs and certain circuits provided in Central London. This would result in these services being removed from the charge control. However, Ofcom has also proposed to extend charge controls to PPC trunk segments, wholesale Ethernet origination services and certain ancillary services.

Competition
UK market trends
The UK market has seen another strong year of growth in broadband, with Wi-Fi proving ever more popular both in and out of the home. Broadband networks have supported the launch and increased usage of new services, including peer-to-peer applications, such as the BBC’s iPlayer, and IPTV, including BT Vision. Mobile broadband has also been a focus for many of the mobile operators as the voice and text markets approach saturation. Broadband providers are now expected to deliver an excellent level of service in addition to a range of applications and products which are tailored to the individual needs of customers.

Competition law
In addition to communications industry-specific regulation, BT is subject to the Competition Act 1998 (Competition Act) in the UK and to EU competition law. Breach of UK or EU competition rules could lead to fines of up to 10% of a company’s worldwide

 

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revenue in its previous financial year and/or claims for damages in national courts. A company may also be ordered to cease an infringing activity. Where we operate outside the UK, we are also subject to the competition laws in the relevant countries.
      In 2004, Ofcom launched an investigation into allegations that BT had abused a dominant position in relation to its pricing of consumer broadband products. Ofcom sent BT three statements of objection to which we responded, and argued that our pricing does not amount to an abuse of dominance. Ofcom is expected to issue a decision during the 2009 financial year.

Other significant changes and issues
Ofcom is currently conducting a review of the Openreach financial framework, with the aim of creating a long-term financial environment in which Openreach will deliver efficiency, coverage and high quality services, while ensuring that equivalence of access encourages improved service performance. The consultation is expected to begin in early summer 2008 and any newly proposed regulatory measures should take effect during 2009.
      The implementation of the Undertakings and continuing changes to the market for Openreach products have resulted in changes to Openreach’s cost base. The focus of Ofcom’s review is likely to be the current price ceilings on the copper access products – WLR and LLU – and transaction (connections, migrations) and rental charges.
      This review is, in our view, a significant milestone and we welcome it as an opportunity to create regulatory certainty and financial stability, as well as provide incentives for Openreach to invest and innovate.

Regulation outside the UK
BT must comply with the regulatory regimes in the countries in which we operate and this can have a material impact on our business.

Doing business in the European Union
Communications regulation in each EU country is conducted within the regulatory framework determined by EU directives, regulations and recommendations. This framework is currently under review (see Regulation in the UK on page 24). The manner and speed with which the existing directives have been implemented vary from country to country and national regulators are working together in the European Regulators Group to introduce greater harmonisation in their approach to the assessment of SMP and the imposition of appropriate remedies.
      BT does not have universal service obligations outside the UK, although in certain member states we may be required to contribute towards an industry fund to pay for the cost of meeting universal service obligations in those countries.
The European Commission formally investigated the way the UK Government set BT’s property rates and those paid by Kingston Communications, and whether or not the UK Government complied with European Community Treaty rules on state aid. It concluded that no such state aid had been granted. The Commission’s decision has now been appealed, but we continue to believe that any allegation of state aid is groundless and that the appeal will not succeed.

The rest of the world
The vast majority of the communications markets in which we operate around the world are subject to regulation, and in most of these we have to meet certain conditions and have had to obtain licences or other authorisations. The degree to which these markets are liberalised varies widely which means that our ability to compete fully in some countries is constrained.
      We continue to press incumbent operators and their national regulatory authorities around the world (including in the EU) for cost-related wholesale access to their networks where appropriate and for advance notice of any changes to their network design or technology which would have an impact on our ability to serve our customers.

Our relationship with HM Government
The UK Government, collectively, is our largest customer, but the provision of services to any one of its departments or agencies does not comprise a material proportion of our revenue. Except as described below, the commercial relationship between BT as a supplier and the UK Government as a customer has been on a normal customer and supplier basis.
      We can, however, be required by law to do certain things and provide certain services for the UK Government. General conditions made under the Communications Act require all providers of public telephone networks and/or publicly available telephone services, including BT, at the request of and in consultation with the authorities, to make, and if necessary implement, plans for the provision or restoration of services in connection with disasters. The Civil Contingencies Act 2004 contains provisions enabling obligations to be imposed on providers of public electronic communications networks, including BT, in connection with civil contingency planning. In addition, the Secretary of State has statutory powers to require us to take certain actions in the interest of national security and international relations.

Legal proceedings
We do not believe that there are any pending legal proceedings that would have a material adverse effect on the financial position or operations of the group.
      There have been criminal proceedings in Italy against 21 defendants, including a former BT employee, in connection with the Italian UMTS (universal mobile telecommunications system)

 

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auction in 2000. Blu, in which we held a minority interest, participated in that auction process. On 20 July 2005, the former BT employee was found not culpable of the fraud charge brought by the Rome Public Prosecutor. All the other defendants were also acquitted. The Public Prosecutor has appealed the court’s decision. If the appeal is successful, we could be held liable, with others, for any damages. The company has concluded that it would not be appropriate to make a provision in respect of any such claim.

Our resources
Our brand and reputation
BT has a strong reputation and a trusted brand that is widely recognised in the UK and around the world. Our brand helps to shape our relationships with customers, suppliers and employees.
      As a vital asset, the BT brand needs to be developed, protected and managed with the same rigour that we bring to other assets, both tangible and intangible. And as the world and the markets in which we operate change, so our brand needs to reflect this, becoming more confident, dynamic and forward looking.
      Our brand values are implicit in our advertising strap line – Bringing it all together – which captures both what we can do for customers and our commitment to acting as a single BT team.
      During 2008 we made great progress with the task of integrating the brands and identities of the various IT services businesses that we have acquired in the UK and around the world. As each of these companies adopts the BT brand and identity, they enhance our reputation for expertise in delivering services in local markets, while the acquired companies gain from the global scale and trust that the BT brand brings with it.

Our people
Our aim is to create a team of high-performing, engaged and motivated people who can make a difference for customers, shareholders, the company and themselves.

Building a global team
Our people strategy continued to support the transformation of BT in our drive to become ‘number one for customer service’. As we increasingly operate globally, so our workforce outside the UK continues to grow. At 31 March 2008, BT employed 111,858 people worldwide – 102,544 in the UK and the rest of Europe, the Middle East and Africa; 4,714 in the Americas; and 4,600 in the Asia Pacific region. Significant acquisition activity during the financial year meant that 8,455 new employees were integrated within the BT family. The acquisition, for example, of Frontline involved the transfer of 3,264 people to BT (see Acquisitions and disposals on page 23).
Our success as a business depends on recruiting, retaining, developing and rewarding skilled and talented people who live by the BT values.

Nurturing leadership capabilities
The quality of leadership is also vital to the successful transformation of BT. We are focused on ensuring that leaders at all levels understand what is expected of them, have access to appropriate development opportunities and are able to benchmark their performance against that of their peers.

Encouraging learning and development
We offer employees a wide range of learning and re-skilling opportunities. A variety of online and instructor-led courses are available through Route2Learn, our group-wide web-based learning portal.
      We have created and operate a learning governance model to ensure that learning and development within BT really do align with our key strategic objectives. Our successful company-wide re-accreditation to Investors in People (first achieved in 1998) is a vital measure of our success in achieving this alignment.
      Key to being ‘number one for customer service’ is developing a passionately customer-centric culture in BT and ensuring that our people have the skills and the tools necessary to ensure that every customer experience is an excellent one. A number of development initiatives designed to improve our ‘right first time’ performance were launched in 2008. For example, by the end of May 2008, BT Design and BT Operate will have taken about 21,000 people from around the world through a one-day event focused on a number of practical ways to improve the customer experience and to drive innovation and cross-organisation problem solving.

Rewarding and recognising achievement
Around 40,000 managers are eligible for variable, performance-related bonuses and the remuneration of our most senior managers is linked to BT’s total shareholder return performance measured over a period of three years or, in the case of Openreach senior managers, Openreach’s performance over a three-year period.
      From 2009, remuneration will also be linked to the manner in which objectives are met as well as to the fact that they are met. This ‘how’ factor will take into account the behaviours managers exemplify – customer-centric leadership abilities – in meeting their objectives.
      We are also developing ways of recognising and rewarding not just individual performance but also teamwork between individuals and between different parts of the business, in order to promote new ways of serving our customers’ best interests.
      We operate a flexible benefits programme in many parts of BT, which gives employees the freedom to choose between

 

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	111,900 number of employees worldwide		+28% Americas		+1% UK, Europe, the Middle East and Africa		+464% Asia Pacific

 

different types of benefits, exchanging salary for healthcare or bonus payments for enhanced pension contributions.
      We continued to provide our employees with opportunities to share in the company’s success. Employees outside the UK receive an award of free BT shares or a cash equivalent depending on local legal and/or regulatory requirements (from 2008, all BT employees in the UK were entitled to receive free broadband instead of an award of free shares). Employees in more than 25 countries also have the opportunity to save to buy BT shares at a discount to the price at the start of the savings period. And under the BT Employee Share Investment Plan (ESIP), UK employees can buy BT shares from their pre-tax and pre-NI salaries. 95% of eligible employees participate in one or more of these plans.
      Most of our employees are members of the BT Pension Scheme (a defined benefit scheme) or the BT Retirement Plan (a money purchase scheme), both of which are controlled by independent trustees. The BT Pension Scheme was closed to new members on 31 March 2001. The majority of new employees are eligible to join the BT Retirement Plan (see Pensions in the Financial review on page 54).

Connecting with our people
Our annual employee attitude survey was conducted most recently in February 2008 and attracted a 72% response rate (over 74,000 responses). The survey generates around 5,000 feedback reports for managers and their teams across the business, helping to promote effective team working.
      Employees are kept informed about our business through a wide range of communications channels, including our online news service, bi-monthly newspaper, regular email bulletins and senior management webchats and webcast briefings.
      We have a record of stable industrial relations and enjoy generally constructive relationships with recognised unions in the UK and works councils elsewhere in Europe. In the UK, we recognise two main trade unions – the Communication Workers Union and Connect. We also operate a pan-European works council (the BTECC).

Embedding flexibility and promoting diversity
We continue to create an inclusive working environment in which employees can thrive regardless of their race, sex, religion/beliefs, disability, marital or civil partnership status, age, sexual orientation, gender identity, gender expression or caring responsibilities.
      22% of our workforce is female, women hold 19 of our top 81 leadership roles and make up 29% of the people in our leadership team succession plans. 10% of our most highly rewarded people in the UK are from an ethnic minority background and 16.5% are female.
      Diversity and inclusion at BT are led by our Global Equality and Diversity Forum. Each diversity group – e.g. gender, race, disability – is championed by a senior manager who is a member of the forum. In addition, each line of business has a senior manager champion for equality and diversity, who is responsible for the promotion, development and implementation of local diversity and inclusion strategies. For example, in 2008 Openreach developed a recruitment campaign to attract more women and people from ethnic minority backgrounds into the engineering workforce. The campaign received a Chairman’s Award from Race for Opportunity and the Investor of the Year award from Women into Science, Engineering and Construction (WISE).
      We benchmark our policies and practices against the standards set by a number of organisations including Race for Opportunity (BT ranking: 3rd), the Employers Forum on Disability (BT ranking: 3rd), Opportunity Now (gender) (BT ranking: 6th), Stonewall (sexual orientation) (BT ranking: 11th) and the Schneider Ross Global Diversity and Inclusion benchmark (BT ranking: 2nd).
      Outside the UK, we are working to ensure that our policies and practices are tailored to address legislation country by country, as well as respecting cultural differences.
      Flexible working – for example, hot-desking, office sharing and working from home – enables people with disabilities, caring responsibilities and those returning from maternity leave to work where once it would have been difficult. All BT employees have the right to request flexible working and it is already well established in our UK operations where more than 11,000 employees work from home. This practice is increasingly important in our global operations where, during 2008, we ran flexible working initiatives in Spain, France, the Netherlands and the US.

Health and safety
The health and safety of our people are of paramount importance and we continue to seek improvements by focusing on behavioural/lifestyle change. In 2008, we concentrated our health promotion activities on mental well-being – impaired mental health is our single greatest cause of lost time and productivity. Our sickness absence rate amounted to 2.43% of calendar days being lost – 20% lower than five years ago. During 2008, we reduced our accident rate by more than 20% to 1.9 lost time incidents per million working hours at 31 March 2008.

Our global research and development capability
We are developing a global R&D (research and development) capability to support BT’s drive to meet customers’ needs around the world. We have a world-class team of researchers, scientists and developers, including over 3,100 people at Adastral Park (England), a research team based in Malaysia and a new R&D centre in China. We have announced plans to establish a joint

 

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£1,252m invested in R&D in 2008

 

research and innovation centre in the United Arab Emirates with the Emirates Telecommunications Corporation (Etisalat) and Khalifa University. And we play a lead role in the India-UK Advanced Technology Centre, a consortium of industry and academic partners from India and the UK.
      We have dedicated innovation scanning teams in the US, Asia and the Middle East who identify more than 600 new technologies, business propositions and market trends a year.
      We embrace open innovation, reaching out beyond the company to find the best people and the best ideas, wherever they are in the world. We are involved in partnerships at every stage of the innovation process, from scientific research to the development of new products and services.
      In 2008, we invested £1,252 million in R&D to support our drive for innovation. This investment comprised capitalised software development costs of £720 million and R&D operating costs of £532 million. This compares with £1,119 million in 2007, which comprised £741 million of capitalised software development costs and £378 million of R&D operating costs.

Embracing open innovation
We work with more than 30 universities around the world and have open innovation partner relationships with the University of Cambridge, UCL (University College London) and MIT (Massachusetts Institute of Technology). Examples of collaborations include our work with Cambridge University to research protocols and architectures for wireless mesh networks, and the work we have done with MIT Sloan on the applications of systems dynamics modelling.
      We are also a member of the Participate consortium – a UK Government-funded project to explore the ways in which a combination of pervasive broadcast and online media can create mass-participation events. And we led the EU-funded NM2 collaborative research project into ‘shapeshifted TV’ – TV that can be personalised to suit the preferences of individual viewers.
      Building on our long tradition of innovation, we filed patent applications for 168 inventions in 2008. We routinely seek patent protection in different countries including the US, Japan, France, Germany and China, and we currently maintain a total worldwide portfolio of around 8,000 patents and applications.

External venturing
We have successfully launched nine innovative, independent start-up companies, six through the corporate venturing partnership unit New Venture Partners, in which we are a limited partner. They include Azure Solutions, which merged with Subex to become the world’s largest revenue assurance company. Real Time Content is the latest company to be launched.

Our IT systems and networks estate
Our dedicated IT and networks professionals have a strong record in the development and delivery of systems and solutions and in managing a secure and resilient infrastructure. In 2008, in addition to the infrastructure work for 21CN, we focused significant systems development effort on introducing new programmes and services over 21CN and improving ‘right first time’ performance.
      We continued the radical transformation of the BT systems estate, with the aim of achieving year-on-year cost reductions at the same time as improving speed to market and enhancing the customer experience.
      By eliminating duplication and simplifying and rationalising our systems, we have been able to reduce the number of systems in use. In 2008, we closed almost 650 systems, bringing cumulative net closures to around 1,350 in less than three years.

Our property portfolio
At 31 March 2008, we occupied approximately 7,000 properties in the UK and approximately 400 properties in the rest of the world. The majority of these UK properties are owned by – and leased from – the Telereal Group, which is part of the William Pears Group. These properties mainly house exchange equipment and are needed as part of our continuing activities. Other general purpose properties consist chiefly of offices, depots and computer centres.
      We anticipate that the deployment of innovative technology which makes possible the consolidation of exchange equipment along with changes to our working patterns, will continue to reduce the size of our property portfolio and the amount we invest in it.

Our wider responsibilities
Sustainability and corporate social responsibility (CSR)
We see CSR as the voluntary action a company takes to contribute to the wider social goal of sustainable development.
      Managing social, ethical and environmental issues in a way that grows shareholder value, builds our brand and helps us and our customers become more sustainable is very important to us.
      This section, together with the broad statement on social, environmental and ethical matters (see page 79), conforms to the Association of British Insurers’ disclosure guidelines on social responsibility. More detailed information about our social, ethical and environmental performance is available in our independently verified 2008 sustainability report at www.btplc.com/betterworld
      We invest significant resources in our CSR programmes and believe that it is vital that we continue to be forward-looking and responsible in our everyday operations and maintain our reputation for excellence.
      During 2008, our UK accreditation to environmental management standard ISO 14001 was renewed, and we achieved certification for our operations in Ireland, Italy and Belgium. Our aim is to gain accreditation around the world.

 

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				Waste (UK only)
		£22.3m community investment in 2008		Tonnes	2008		2007		2006		2005
				Total waste	79,759		94,928		102,005		110,622
				Total waste recycled	39,937		40,007		42,340