Telstra's IT sins

commentary When Telstra launched its IT transformation in 2005, then chief operations officer Greg Winn said "IT is the root of all evil in the telco industry".

It is almost impossible to know the true cost of Telstra's IT transformation because of the mix of operating expenses, capital costs and depreciation

Four years later the IT sins of Winn, Accenture partner Tom Lamming and former CEO Sol Trujillo are been visited upon the new CEO David Thodey.

Thodey has an IT system that is effectively half pregnant.

After spending billions of dollars to remove complexity and replace old systems with new systems, Telstra is now resigned to being stuck with the old systems as well as having to pay to run the new systems.

The project has not gone off the rails to the extent that it threatens the last surviving plank in Sol Trujillo's financial guidance: free cash flow of $6 billion to $7 billion in the year to June 2010.

But the IT problems left by Trujillo, Winn and Lamming will haunt the company for years through high IT running costs.

Thodey has made the Trujillo cash flow target his own but he must know that a lot of other promises made by Trujillo and his team will not be met.

He has apparently sought the advice of outsiders as to how to salvage value from Trujillo's transformation legacy. He has instilled a sense of urgency in the IT department run by John McInerney to stabilise the systems and run them as efficiently as they should be.

In 2005, Telstra said it would transform it Business Support Systems (BSS) and its Operational Support Systems (OSS) by replacing legacy systems with new systems.

BSS includes customer relationship management (CRM), sales and marketing and billing. OSS includes network and customer assurance, service fulfillment and network inventory.

A core promise was to migrate all customers, both consumer and business, to a single CRM and billing platform across the entire company.

That promise has been abandoned. There is no way Thodey will allow customers of Telstra enterprise and government to endure the same pain imposed on fixed line customers by the introduction of a new billing and CRM systems.

Another key objective of the transformation was to replace the two legacy billing systems for fixed line and mobile customers called Flexcab and Mica. These account for 80 per cent of Telstra's IT systems.

Telstra now admits that Flexcab will be around for at least another four years and possibly longer. Mica is still in place.

As well as having to bear the cost of both legacy and new systems, Telstra has paid IBM hundreds of millions to build a mediator between the old and new systems.

The new Kenan billing system and the Siebel CRM system have to talk to the OSS systems through the IBM-built mediator.

It is now clear that the huge surge in customer complaints late last year and earlier this year were caused by Trujillo's demand that Telstra meet the target of switching over 7 million customers to the new systems and by the end of 2008.

While the target of giving call centre staff a single view of the 7 million customers was achieved, getting there caused enormous damage. The migration of customers is now being done according to capability and not some silly reputation saving target.

One of the lesser known problems created by the IT transformation is the huge cost of data storage.

To enable the building of new systems while keeping the old, Telstra bought 125 Sun servers at about $2 million each in 2005. The trouble is those have a life span of about three years and when they go out of warranty the maintenance costs go up by 20 per cent.

The word in the industry is that Telstra is asking the big data storage vendors such as NetApp to bid for the whole Telstra storage platform to cut ballooning costs.

The official line from Telstra is that the $10.7 billion IT transformation is over budget by about 2 per cent or about $200 million. A result it regards as very good considering the scale of the project.

Telstra has blamed the blow out in costs on the greater project scope. But as noted earlier the scope of the project has been shrunk rather than expanded.

The company rejects the suggestion from well informed observers that the Kenan billing system and the Siebel CRM systems have been modified so much that they cannot be upgraded. But there is a niggling feeling that the complexity of Flexcab is being repeated with Kenan.

The word out of Telstra is that the IT transformation is 75 per cent complete. But there has been no mention of the implementation of new OSS systems.

One of the original promises made by Winn was that the progress of the IT transformation including its costs would be transparent. He said the market would be updated regularly.

But apart from a breakdown of operating and capital investment costs in August 2007, there has been no detailed breakdown of costs.

Critics say it is almost impossible to know the true cost of Telstra's IT transformation because of the mix of operating expenses, capital costs and depreciation. They reckon everything is structured to push costs above the line rather than below the line.

Telstra works within the same accounting rules as every other company and its figures are audited. But that does not mean the IT costs are transparent.

Software platforms built by the company are capitalised and written off over time. Other capital investment includes the purchase of hardware such as the Sun servers. Previously hardware was leased, which hit the bottom line.

But there is no breakdown of the IT depreciation, which should be a cost against the IT department. Instead depreciation is one big lumpy number for the entire company.

Service contracts with partners such as Accenture, Infosys and IBM are not separately disclosed. IT training costs are lumped in with other expenses.

Accenture had up to 18 partners working on the Telstra IT transformation under Lamming's guidance. Seasoned observers reckon Accenture has earned more than $1 billion in revenue from Telstra over the past three years helping to drive the strong performance by Accenture's Asia Pacific division.

A key plank of the Telstra's IT transformation was to cut IT operating expenditure by up to $800 million between 2008 and 2010. Those numbers are looking very shaky and few broking analysts believe them.

It is about time chief financial officer John Stanhope gave a breakdown of the IT transformation costs since 2005 and the outlook for IT costs both above and below the line.

It would also be illuminating if he revealed whether the ongoing cost of IT has gone up or gone down since Winn highlighted that it was the root of all evil.

This article by Business Spectator's Tony Boyd is reproduced on ZDNet.com.au courtesy of a reciprocal publishing agreement.