BT's latest dismal financial results and the announcement of a further 15,000 job cuts highlight the severe problems its Global Services division has experienced with some flagship contracts.

The company reported an annual net loss of £134m, largely owing to contract, financial review and restructuring charges of £1.3bn run up by its Global Services division, which provides managed network and IT infrastructure to large commercial and public-sector organisations.

Problems with two specific blue-chip contracts signed by Global Services - the NHS and Thomson Reuters - forced BT to write down £1.2bn alone following a litany of issues and delays with the system and application upgrades it attempted to implement within the two organisations. Restructuring charges of £280m and other costs contributed to a total write-down of £1.6bn.

"Clearly, BT Global Services made a bad call on two accounts. But the good news is that the write-down is 99 per cent against those two contracts, and the rest of the business is good," said a principal analyst at research company Ovum, Richard Mahony.

"Big global contracts underperformed: BT [Global Services] underestimated the costs associated with large service infrastructures, and also overestimated the speed and volume of cash that would come from those contracts," added another Ovum principal analyst, David Molony.

Ovum estimates that the profit margins associated with all managed service contracts in those segments have also fallen, from around 20 per cent a couple of years ago to between six and seven per cent now.

The 15,000 jobs cuts planned for the next 12 months will fall mainly in the UK. They come on top of the 15,000 staff BT shed last year and represent around 10 per cent of the telco's remaining workforce.

Over the past few years, the telco has spent an estimated £10bn converting its telecommunications infrastructure to support converged IP-based voice and data traffic. The so-called 21st century network (21CN) also uses a flexible software-based management platform that enables a wider variety of services to be delivered at less cost.

"A lot of services, like customer contact, provisioning lines, line upgrades and turning new services on and off, can now be automated, and delivered remotely, and on demand," said Mahony. "That is much more network-centric and means BT does not need the same number of people."

"We expect to deliver a net reduction in operating costs and capital expenditure of well over £1bn in 2009/10. This will enable us to generate free cash flow, before any pension deficit payments, in excess of £1bn in 2009/10 and beyond," said BT CEO Ian Livingston, in a statement.

"If BT can get this automation right it will not only improve its margins, but should improve also the quality and consistency of its delivery, thereby positively impacting customer satisfaction levels (which, incidentally, remain reasonable in any event),” wrote Gartner research vice president Scott Morrison in a research note.

BT Group's other three business divisions posted healthier results. Net profit for BT Retail in the financial year was £324m; BT Wholesale £145m; and BT OpenReach £296m.

"Clearly, the broadband business is performing well, and BT Retail is driving up average revenue per user (ARPU) through bundles," said Mahony.

The telco will attempt to stop the Global Services rot by splitting the division into three separate business units designed to address the separate needs of multinational, corporate and enterprise customers in different geographical regions more closely. It will be less focused on chasing corporate "mega deals" and more conservative about the size of IT services contract it can safely manage.

"We don't know the detail yet, but it shows that BT does recognise that there are local requirements and different types of customers, whereas before they were just trying to shoot them all into one global service proposition," said Molony.

Livingston also highlighted BT's fledgling fibre-optic broadband network as the shining light in the company's portfolio, promising to "examine" the feasibility of doubling the pace of its super-fast broadband rollout next year, providing the cost of doing so comes "within existing capital expenditure plans ". The telco has pledged to spend £1.5bn on expanding its fibre-optic network to 10 million UK homes by 2012.