Telstra: Separation could be a $1bn IT project

Telstra would be forced to break apart the IT systems it implemented during its five-year transformation project at a cost of at least $500 million if it is forced to functionally separate, the telco’s public policy director said today.

Speaking at the Telecommunications Regulatory Reform Forum, Telstra’s group managing director of public policy and communications, David Quilty, told delegates that if functional separation were to occur under legislation currently before Parliament, the requirements could impose “major IT system changes at an estimated cost of $500 million and the potential of upwards of $1 billion.

“These costs would need to be passed onto customers unless there’s an expectation they would somehow be absorbed by shareholders,” Quilty said.

Reform legislation currently being debated in Canberra asked Telstra to structurally separate “on a voluntary basis”, Quilty said. If it didn’t, Communications Minister Stephen Conroy could then force Telstra to functionally separate.

While admitting the difficulty in estimating the potential impact of such legislation while it was still under debate, Quilty believed BT’s experience of functional separation in the UK showed that Telstra would not be able to avoid major IT system changes if it is forced to separate.

He said BT’s retail customer levels had fallen after functional separation was implemented “because BT had to rebuild customer systems from the ground up.

“Arguably BT hasn’t recovered,” Quilty said.

“There’s no reason to believe similar changes could be realistically avoided in Australia.”

BT executives told iTnews last month that changes to IT systems represented the greatest cost to the carrier's separation, but said the operation yielded positive results for both customers and shareholders.

Quilty argued that Telstra’s recent five-year IT transformation investment - which cost $11.9 billion - could be at risk under a separation regime.

“Imposing separation would require these new systems to be prised apart and then effectivey rebuilt, despite the fact that we operate in a customer-agnostic way,” Quilty said.

“There would be customer impacts in any system rebuilding phase,” he said, which could lengthen customer response times.

Quilty acknowledged the need for “greater transparency and equivalence” but believed the issues would be resolved in a commercial manner rather than through legislated means.

He believed any form of separation would prove a major “distraction” for the telco as it sought a commercial outcome with the Government and NBN Co over the sale of its assets to the new network.

“To a large extent our concerns with the legislation are around the potential for it to distract us in terms of those negotiations,” Quilty said.

“I think the best outcome for everyone is if we get a commercial outcome that is in the interests of Telstra shareholders and the wider industry and at the same time meets the policy objectives the Government has laid down.

“At the end of the day I think [any reform] will be reached commercially rather than through the legislation.”

Quilty was highly critical of the timing of the reform legislation.

“My overall question is why? Why should we do this at this point in time?” he put to delegates.

“The industry is moving out of the legacy environment. The NBN will deliver a wholesale open-access network in as little as two years. Why, at the same time the NBN is being built, would one burden the telecommunications industry with disruption that will be rendered obsolete by the time [the process is] finished?”

Quilty invariably branded any separation as “highly destructive”, “wasteful”, “pointless and counterproductive” and as an “additional distraction for everybody, not just Telstra”.

“NBN is the end-game we should all be focusing on,” he said.

“It’s pointless and counterproductive to focus on complex BT-like separation that will only put retail and wholesale customer service levels at risk.”