WHY TELECOM'S ODD COUPLE IS TRYING SO HARD
At a retreat in northern Virginia, a half-dozen executives from British Telecommunications PLC and MCI Communications Corp. huddled in early September. Just weeks after the two phone companies formalized a $5.3 billion alliance, they were thrashing out a plan for a new joint venture. As they got deeper into their discussions, they realized just how difficult their task would be. Worldsource, a competing alliance led by American Telephone & Telegraph Co., is also aimed at offering multinational corporations global voice, data, and video networks. AT&T's recent deal to buy McCaw Cellular Communications Inc. furthers the giant's reach. While the MCI and BT execs size up that 1,000-pound gorilla, "we have to sit down and design a new company," says Chris Earnshaw, who was named head of the BT-MCI venture last month.
That's a tall order. Earnshaw, a furrow-browed 39-year-old, faces a rival with more than twice the combined revenues of BT and MCI. An engineer who joined British Telecom in 1972 when the company was part of the postal service, Earnshaw has to meld the cultures of two vastly different companies. The stakes are huge. Not only did British Telecom agree to buy 20% of MCI for $4.3 billion, but the two also plan to pour some $1 billion into the joint venture. The objective is to make the new company one of a few global supercarriers in the fast-growing market for international corporate network services.
Earnshaw may not seem an obvious choice to head the venture. Although he soared through the ranks before managing BT's global networks, he "has never been involved in marketing or sales, has never lived outside Britain, and has never been involved in a joint venture," says a former BT exec. Michael L. Hepher, BT's group managing director, concedes that Earnshaw doesn't have the perfect resum for the job but says he nominated him for his "mental agility" and accomplishments. Indeed, Earnshaw is credited with launching the company's 800-number network in 1985, bringing together multidisciplinary teams to help digitalize BT's long-distance network, and cutting its worldwide network staff by 25%, to 30,000, in a year.
SPRING DEBUT. As CEO of the still-unnamed BT-MCI venture, Earnshaw will oversee 1,000 employees drawn from BT and MCI as well as hired away from other telecom players. Based in northern Virginia, the company should be up and running by spring. BT will contribute its Atlanta-based Syncordia, which manages communications networks for companies, and its Cyclone Project, a $1 billion-plus effort to create a high-capacity multimedia network (table). MCI will offer access to its world-class "intelligent network," an international voice and data system. The new company, which will sell its network services through BT and MCI, hopes to turn a profit in three years.
Earnshaw's biggest challenge may be cultural. BT employees, Hepher acknowledges, remain too bureaucratic, and BT products continue to be driven by what its engineers dream up in the lab rather than what its customers want. MCI, on the other hand, has tried to stay entrepreneurial and customer-oriented. Indeed, it's hard to find two companies with such different histories. BT was separated from the postal service in 1981, and three years later, it was privatized. Yet it remained stubbornly customer-unfriendly. It continued, for example, to send out bills that didn't break out the cost of individual calls through much of the 1980s. Although competition has gradually been introduced in Britain, BT retains 90% of the phone market.
MARKETING COUPS. MCI, on the other hand, began life 25 years ago as a scrappy underdog. It took on AT&T, first in the courts and then in the market, eventually grabbing an 18% share and $11 billion in annual revenues. Lately, it has been known for marketing coups such as Friends and Family, which offers discounts for calls to a group of friends and relatives. Just as important, MCI has successfully fought bureaucracy. "There are only two levels of management between [MCI Chairman] Bert C. Roberts Jr. and the branches," boasts Timothy Price, president of MCI's business-services division.
But as BT has been forced to face competition, it has changed its ways. It has shed 75,000 employees since 1990, including many old postal-service bureaucrats. Vivienne Peters, CEO of London-based Telecommunication Users Assn., credits that move for "enormous" improvements in service and transmission quality. BT has also halved its layers of bureaucracy and hired outside talent.
Still, the BT-MCI venture faces many hurdles, including a potential culture clash. Earnshaw says he hopes to avoid that by not trying "to bolt two cultures together," building a new one instead. Another hurdle: BT has never liked such alliances in the first place, says Hugh Small of Arthur D. Little Ltd. in London. "And when it has formed them, it wants to dominate."
To match AT&T's reach in Asia, BT and MCI may have to learn to get along with a third partner, too. Worldsource partners include Japan's KDD, Singapore Telecom, and Korea Telecom. BT had been courting Nippon Telegraph & Telephone Corp., but an NTT spokesman says the company "decided to shelve the idea for the time being" because of financing and legal issues.
Meanwhile, BT and MCI execs are getting to know one another--even if the mother tongue sometimes gets in the way. After attending the recent powwow, Kathleen R. Flaherty, an MCI senior vice-president who will be the joint venture's marketing head, says she needs remedial British. "I've had to get used to somebody being 'cheesed off' at something," she jokes. And Earnshaw will have to learn to speak American. But even though BT and MCI may not share a common language, they share something even bigger: a common foe.THE MCI-BRITISH TELECOM ALLIANCE
-- Experience in managing international voice and data networks for
multinationals through its Atlanta-based Syncordia.
-- A billion-dollar-plus effort to create a high-capacity multi-
media network, dubbed the Cyclone Project.
-- Control of 90% of the British telephone market, where 13% of the world's
multinationals are based.
-- Financial muscle. BT in 1992 had free cash flow of $1.9 billion and a
debt-to-equity ratio of just 13%.
-- Innovative marketing, such as Friends and Family, the discount plan that
helped MCI gain 7 million customers.
-- An "intelligent network" that routes calls and makes possible such
innovations as Friends and Family.
-- The No.2 position in the U.S. long-distance market, where 40% of the
world's multinational corporations are based.
-- An aggressive, customer-oriented culture that BT, a former state-owned
monopoly, hopes will rub off.
DATA: SOCIETE GENERALE TURNBULL SECURITIES LTD., COMPANY REPORTS
Julia Flynn in London, with Mark Lewyn in Washington