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"Mission accomplished" on IT transformation, says Telstra

  • 02 November 2009
  • Written by 
  • Published in Strategy
Telstra has revealed that its IT transformation costs have risen 60 percent above its 2007 estimate of $2.5b, but says this is not an over-run and that cost reductions elsewhere have seen the overall $12b five year transformation project come in with $0.2b of budget.

For each of the past five years, ever since former CEO Sol Trujillo announced Telstra's ambitious transformation plans in November 2005, Telstra CFO John Stanhope has been giving the investment analysts a progress report at Telstra's annual investor days.

This year he told them: "[My annual update] something that I'm going to enjoy doing because this is the last time I'm going to stand here and talk to you about the IT transformation...These programmes really are now business as usual and it has been a success and the benefits will continue to be felt but we're no longer to report out on them separately."

The three principle components of the $12b transformation were the Next G network, the Next IP network - an upgrade of Telstra's core networks to all IP operation - and the IT transformation. While the fruits of spending on the first two have been reasonably visible, and much less the subject of criticism - the latter has been the subject of numerous reports of delays and difficulties.

According to Stanhope, everything has worked out well: the project is complete and will provide reasonable returns on the investment. "The IT transformation has provided us with a much needed simplification and upgraded our operating support systems and our business support system environments. It was the once in a 20 year investment that we needed to do around our IT architecture."

He claimed that "The IT Transformation is still somewhat misunderstood," saying it had been "incredibly complex to implement; and that "despite adding to scope and [finding] more complexity than first thought, the outcome is financially positive and the functionality delivered."

Stanhope gave a breakdown of changes in the capex costs of the various components of the IT transformation, showing an overall 60 percent $1.5b increase in the November 2006 budgeted capex figure of $2.5b, and saying: "I want to emphasise it's not an overrun in our spend, but back in '04/05 there were things that we did not have in scope that we've brought into scope...We actually delivered $1.3 billion lower spend in other areas in our transformation program, meaning that a total overspend in our $12 billion programme of around two percent of the original budget we set back in November 2005... So there's been no transformation costs blow out at Telstra."

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According to Stanhope, "Of the $1.5 billion increase in the IT spend in IT transformation only $200 million relates to added complexity. $400 million relates to a business decision to capitalise business infrastructure and the balance relates to scope changes that we brought in deliberately into this transformation programme." He said, originally BigPond had not been including in plans to transform Telstra's billing system and had been added subsequent to the original budget being drawn up."

He said spending on the Next G network had been greater than budgeted adding "Remember, wireless is now 99 percent [population coverage], back then we were talking about 96 [percent]," and that Telstra had spent less than expected on wireline network fixes and platform rationalisation.

And Stanhope had more good news for the analysts. Not only had Telstra delivered a five year, multi-faceted $12b transformation project to within two percent of budget, but returns on the $3.9b (60 percent above initial estimates) IT transformation budget were "the sorts of numbers you would be looking for to get [for] your return on investment... around $300 million of benefits, revenue and costs savings, this financial year. Around $800 million in 2011, again a mix of revenue and costs savings, and in excess of $1 billion in 2012."

It all sounded very neat and tidy, but one analyst remains sceptical. Daniel Blair of Southern Cross Equities, in a note to clients just after the investor day, observed: "Telstra were at pains to point out the entire transformation programme (including IT programme) is now 'basically complete'... [But] with on million customers still to migrate, this is not 100 percent accurate."

And topping his list of "downside risks" to his valuation was "Execution of its transformation objectives: of particular relevance is delays both to the delivery and benefits of the IT transformation."

Nevertheless, Blair is re-iterated his buy recommendation, saying: "Telstra represents compelling value at the current share-price [$3.29] We believe there is downside protection at these levels." He has a price target of $4.03 within 12 months.

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