Telkom wasted R200 million on Bain – Report

The Mail & Guardian reported that Telkom has sunk hundreds of millions of rands into Bain & Company without receiving good value for money.

According to the report, Telkom subsidiary BCX paid Bain & Company around R200 million for cost-cutting and turnaround strategies that will not be used.

Citing relevant documents, the Mail & Guardian reported that BCX has made a decision not to implement Bain’s strategies.

“BCX’s own review of the contracts has raised red flags about Its negotiation, implementation and monitoring capacity, which led to millions being paid unnecessarily,” it said.

“So useless were the strategies Bain drafted for BCX that new chief executive Jonas Bogoshi has set them aside and terminated Bain’s mandate,” the Mail & Guardian reported.

According to the publication, an internal review highlighted big shortcomings:

  • Some initiatives had no detailed and specific deliverables.
  • Bain’s expenses were not agreed upon upfront and are now subject to dispute.
  • Bain’s cost-cutting strategies only realised savings of R201-million – R1-billion short of what was planned.

A BCX whistle-blower told the Mail & Guardian that the problems at BCX are partly to blame on Bain & Company.

“This must be investigated because, if the situation is not rectified, there will be no BCX left in the next couple of years,” the whistle-blower said.

Telkom says it received value from Bain & Company

Telkom spokesperson Noma Faku told MyBroadband that BCX’s termination of the Bain & Company contract was a result of Jonas Bogoshi taking over as CEO on 1 June 2018.

“As part of the agreement between BCX & Bain major changes in leadership at BCX would be a valid reason to terminate the agreements,” Faku said.

“Following a review of the organisational strategy, the leadership was comfortable that the organisation could leverage off the work produced by Bain to that point, as part of the revised strategic direction for the business.”

Faku added that BCX is comfortable that at the time of the termination it had received value for any payments made under the contract.

“No payments will be made in respect of future or unrealized benefits,” Faku said.

She added that the decline in fixed voice revenue is one of the major contributors to BCX’s current financial position.

“Various strategies are being implemented to address the decline, including some of the imperatives identified during the Bain mandate, which remain relevant to the business going forward,” Faku said.

MyBroadband asked Bain & Company for feedback regarding the allegations, but the company did not respond by the time of publication.

Staff cuts at BCX

In November, BCX informed employees and unions that it has started a Section 189 process, which is a fancy way of saying they plan to cut staff.

According to the company around 790 employees across all job categories and in all divisions will be impacted.

These planned staff cuts follow an exodus of senior BCX executives in recent months, which include CEO Ian Russell, CFO Refilwe Nkabinde, and COO Mike Buttner.

BCX lost its entire top structure in a matter of months, which creates uncertainty in a company.

The planned staff cuts will add further to employees’ worries, and BCX now runs the risk of losing its most productive employees who are not keen to hang around to find out if they will be fired.

While staff retrenchments and replacing a full management team are just about as bad as it gets for a company, this is not the scariest part of BCX’s message to employees.

In its communication to employees and unions, BCX painted a picture of a struggling company without a clear way to dig itself out of this hole.

BCX said it has historically provided telecommunications and IT services, where its voice business constituted 50% of revenue in the telecoms division.

A decline in voice revenue has negatively impacted the financial position of the company, and this is not likely to stop.

The weak South African economy is also hurting the company, with a decline in demand for the products it offers.

The changing operating environment has further seen the company’s cost-to-income ratio increasing to a very high 82%. And it is set to increase even further to 87% in the next financial year.

BCX admitted that its facing competition in all areas of the business, with its competitors offering comparable services at more competitive prices.

The proposed regulatory changes related to call termination rates will also hurt BCX’s financial position.

These problems, BCX said, forced it to restructure the company and cut staff to become more competitive and sustainable.

Telkom’s relationship with Bain

This is not the first time Telkom’s relationship with Bain is making headlines.

Telkom and its CEO Sipho Maseko have a strong relationship Bain & Company, and according to the Main & Guardian Maseko introduced Bain’s Vittorio Massone to Jacob Zuma.

In July 2014 Bloomberg reported that Telkom awarded a R91.1 million advisory contract to Bain & Company without following an open bidding process.

Maseko hired Bain to advise the company on its broadband and mobile strategy within days of the CEO’s arrival at Telkom on 1 April 2013.

Telkom hit back, saying it believes that the Bloomberg article is erroneously based on the premise that an “open tender” process is the only procurement process available to Telkom when seeking to procure products or services.

Telkom said that due to its unique position – of being a public company listed on the JSE and being classified as a State-owned company – it has, since 2001, been granted exemption from various provisions of the PFMA and all the treasury regulations issued in terms of the PFMA.

“Telkom is comfortable that its internal governance processes and policies regarding the approval and conclusion of contracts with suppliers are robust and effective,” the company said.

Big spending on consultants

A few months later it emerged that Telkom spent R1.355 billion on “consultants, security, and other” in the 2014 financial year.

Telkom explained at the time that “consultants, security and other service fees increased 2.3%, which was driven by higher costs incurred relating to the company’s transformation programme”.

Some commentators were not convinced this is money well spent. One source close to the company said far too much money is wasted on consultants, and that most of the work can be done internally.

“Telkom has extremely well qualified and capable staff that can do exactly what the consultants are doing, and even better,” said one source.

He added that whenever a new top executive joins Telkom, new consultants often follow.

“The typical mind-set with new entrants is not to trust what Telkom staff tell them, and always check with consultants,” he said.

Now read: Telkom’s R1.35 billion consultant, security bill

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Telkom wasted R200 million on Bain – Report