Technology privatisation - negotiations begin

Report on the first meeting with the BBC about the sell-off on 2 December 2003.

Background

Senior BBC managers outlined the rationale for the sell-off, which consists of a trade sale to a new owner, linked to a 10-year contract for provision of services to the BBC, and an obligation for the purchaser to take on all existing staff.

According to management the combined sale and procurement exercise would "maximise the value" of BBC Technology to the Corporation. A new owner, they said, would achieve savings of £20m-30m in the BBC's IT spend, by offering economies of scale, a figure based purely on the percentage of BBC income spent on IT, compared with average expenditure in other companies.

A bench-marking exercise had been conducted, in which Technology's prices for provision of IT services and telephony had been compared with other companies. Management declined to reveal which companies had been involved, but said that at least one other broadcaster had been included.

The benchmarking process had led to the conclusion that the BBC was spending roughly 2% more on IT and telephony than it believed was necessary, as a proportion of its overall income. BBC Technology had been set targets for price reductions which the company's management believed would require "heavy redundancies", thought to be up to 350 job cuts, if they were to be met.

Instead of approving this redundancy plan, the BBC's commercial board had instead asked for alternative solutions to the perceived IT pricing disparity which would not involve wholesale redundancies, and this decision had led directly to the proposal for a sell-off.

Most of the preparatory work to date on privatisation had been conducted by the BBC itself, said management, not by companies in the Ventures group, where all of BBC Technology's activities reside, and it had been driven by the Corporation's obligation to achieve value for money on behalf of licence fee payers.

Although the original benchmarking exercise had not covered areas of Technology outside IT and telephony, parts of the company like Broadcast Engineering had been included in the sale after interested parties - presumably meaning prospective bidders - had said they were "particularly attractive" as a springboard into a new market sector.

Technology's current contract with the BBC, the Technical Services Agreement (TSA) embracing roughly two thirds of turnover and due to expire in 2006, would be terminated early with the sale of the company in order to deliver the £20m-30m to the BBC as soon as possible.

Although this contract had been awarded to BBC Technology in 2001 without open competition, the BBC claimed that its renewal would have to be handled under European procurement laws, and even if the company had slimmed down its workforce to cut prices, there was no guarantee that it would go on to win the new TSA. This, said the BBC, was one of the main benefits of adopting a sell-off strategy in which the contract would be automatically awarded to the new owner.

Management said they were committed to protecting staff, and pointed out that Technology's entire board of directors would transfer to the new owner.

The actual sale of BBC Technology would require explicit permission from the government, through the Department of Media, Culture, and Sport (DCMS) - so far the BBC had been authorised only to place an open invitation for tenders in the Official Journal of the European Communities (OJEC).

It was expected that the whole process would take up to a year to conclude, and the BBC was committed to full and proper negotiations with the union.

Staff movements

Most of the 1,400 existing staff within BBC Technology (all officially employed by BBC Technology Services Ltd) would be included in the company's sale. However, a number of staff outside the company would be moved into Technology before the sell-off in order to prevent internal BBC competition with the new owner, and to enhance its chances of success, said management.

These staff had not been fully identified yet, but included up to 50 IT staff in News and the Nations.

There would also be some transfers in the opposite direction, with staff moving out of Technology prior to the sale. Roughly 70-80 staff associated with the playout of the BBC's TV channels would be transferred to BBC Broadcast Ltd, while up to 10 Strategic Network Support staff would move into the BBC.

All other restructuring exercised inside BBC Technology had already been halted in advance of a sell-off.

BECTU's initial response

The union outlined its initial reasons for opposing the sell-off:

• It makes a mockery of the "One BBC" slogan, and had already provoked deep-seated opposition throughout the Corporation.
• People working for BBC Technology had consciously chosen to work for the BBC, and did not want to be handed over to a generalist IT company.
• Claims that IT costs were too high had not been supported by previous benchmarking exercises conducted within BBC Technology.
• Any new owner would inevitably implement redundancies, regardless of any reassurances the BBC might give.
• Other privatisations of BBC activities had all led to poorer, less reliable, service, and some companies had failed to honour promises about terms and conditions of ex-BBC staff.

In the ensuing discussion, several points were raised:

Instructions from government?

Management categorically denied that the Government had instructed them to sell BBC Technology, and there were no plans to sell any other subsidiary.

Technology gave the BBC £19m of profit and price cuts last year

Management said that most of the company's actual profit came from BBC business, but accepted that a number of profitable external contracts had been signed in recent months. Selling the company, they said, represented better value for money due to the price reduction that was anticipated.

Previous internal price benchmarking had indicated that Technology was competitive

Management said they had no knowledge of earlier benchmarking exercises within the company, but agree to follow up union information that these had in fact been conducted.

What had changed since Technology was given its 5-year contract to provide service?

The BBC "had reached a point" where it felt obliged to extract extra value from Technology. Union representatives took this to mean that ambitious targets for externally-generated profits had not been reached.

Why had borrowing limits been blamed for Technology's lack of expansion?

Although BBC Commercial Holding Ltd, Technology's ultimate owner, had an agreed £350m overdraft limit, separate from the BBC's borrowing arrangements, Technology could use only a small part of this, determined by its asset base. However, this affected only the company's commercial work, and management emphasised that capital for BBC-only projects, like the fit-out of New BH in London, would continue to provided centrally.

Some parts of the BBC are allowed to provide their technology needs in-house, and won't be part of the privatised contract.

BBC Worldwide, the largest part of the Corporation to have opted out of Technology's IT provision, had "a different funding model"...and was "further advanced than the rest of the BBC" in converging IT and broadcast activities. Management could not see a contradiction between offering this as an explanation for keeping Worldwide's IT in-house, while at the same time planning to sell off Technology, a company for which the next big development is...er...convergence of IT and broadcast activities inside the BBC.

The offshoot of Technology which handles all its external business has no staff, yet boasts a large marketing operation. Who is paying for this?

Management said nothing that allayed a union suspicion that some of these costs are being met out of revenues earned from BBC business.

Will the loss of the BBC brand have any impact on Technology?

As far as its BBC customers are concerned, they will be locked in to the 10-year contract and will have no choice but to buy services from the new owner, whoever that may be. Without the BBC name, it may be more difficult to do business in North America, a key target market where the magic three letters can still open doors. However, this may be partly offset by easier trade in Europe where, according to management, the BBC name is an impediment to business. The BBC was repeatedly very upbeat about the rosy commercial future for a privatised Technology - surprising since all future profits will be going to the new owner, not the BBC. Business inside the BBC accounts for more than nine tenths of Technology's turnover, two thirds of it covered by the TSA.

How much does the BBC expect to raise through the sale?

Management strenuously denied the £400m sale price that had been quoted in Ariel on the morning of the meeting, and would not confirm the alternative £100m figure that had appeared in the national press the week before. No one actually asked: "How long is a piece of string?", but that's how it sounded to union reps.

Any guarantees for staff at this stage?

BECTU asked if the BBC would build a no-redundancy guarantee into the contract for its ten-year duration. Management said there was no chance whatever of this being agreed. However, the BBC was committed to protected staff terms and conditions, even though TUPE would not apply, and would oblige the new owner to provide "broadly similar" pension entitlements.

More information please

• Two benchmarking exercises, the one which was conducted by the BBC, and another commissioned by Technology itself which was due to be presented to the company's board within a week. Management warned, though, that both would contain confidential information, and circulation of some contents would need to be restricted.
• More data on Technology's trading performance, including segmented figures which would indicate the relative performance of various business units within the company.
• Details of the original redundancy programme, colloquially called "Plan A" by the union, which had prompted the BBC to consider a sell-off in the first place.