BT and Openreach demerger: Leaving much to the imagination

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BT Group has agreed to a legal separation of Openreach. So what are the HR implications?

When BT Group announced in March that it had agreed to a legal ‘separation’ of its Openreach network division it ended a long-running political and legal row with communications industry regulator Ofcom. The government body had previously expressed competition concerns about BT running Openreach.

BT brought the row to an end by agreeing to turn Openreach into a distinct company, with its own staff and management, its own strategy and a ‘legal purpose’ to serve all of its customers equally. The separation agreement included the transfer of 32,000 members of Openreach staff from BT to the new business to enable Openreach to develop its “own distinct organisational culture”, according to a statement issued by Ofcom. It’s anticipated that the separation will be complete by the end of 2017.

So what will it entail and what are the HR implications? BT knows the challenges presented by separating a business division. In 2002 it de-merged mobile telecoms provider BT Cellnet – later renamed O2 – into a newly listed holding company, before eventually selling the business to Telefónica in 2006 for £18 billion.

However, this time around things are different and Ofcom’s directives surrounding the separation sound pretty ominous.

For starters, the existing Openreach board – which already has a majority of independent directors – will become the board of the new company and will have control over budget allocation, although the overall budget will still be set by BT Group.

The chief executive of Openreach will be appointed by and accountable to the Openreach board (BT Group can veto the appointment, but only on notification to Ofcom), all of Openreach’s assets will be controlled by Openreach, and BT will be removed from Openreach branding to reflect these changes and the company’s greater independence.

Furthermore, Ofcom said that the separation should commence this year and the regulator will continually monitor the new business to ensure it is effective, with BT providing Ofcom “with additional transparency on the nature of interactions between the new Openreach and the rest of BT Group”.

Unsurprisingly BT isn’t – for the time being at least – disclosing any of the details around how it plans to push through the separation.

But transferring 32,000 employees from one business to another is a major undertaking, so early thought to how that process will work is key, according to Helen Adams, senior solicitor in the employment team at Macfarlanes.

“The first step will be identifying which employees are going to transfer to Openreach,” says Adams. “So that will be all of those employees that are assigned to the Openreach business unit at the moment. However, there will be some shared functions – for example HR and IT departments. They will have to work out which people, if any, are really assigned to Openreach and therefore need to transfer to the new entity.”

Employment experts think it’s highly probable that employees will transfer from BT to Openreach by TUPE as it’s likely that changes to employees’ roles and contracts will be made. To ensure this process occurs as smoothly as possible, Georgina Farrell, head of UK HR at Zurich, says the company needs to focus on three key areas from the outset.

“[Think about] retention of the right talent, the engagement piece – how do you manage the story internally and externally around the rationale for making moves like this – and the shape of the organisation; what does the organisation design look like?” she advises.

Organisation design is something that Paul Sparrow, emeritus professor of international HRM at Lancaster University Management School, also highlights as a potential issue that BT will have to work hard to get right.

“We know from case studies on alliances that even when the intentions across the ‘organisational divide’ are good even the best organisation designs have to anticipate problems,” says Sparrow. “Managers are faced with split loyalties; to the ‘home’ organisation and the new arrangement in which they find themselves. The role for HR has to be one of ensuring and engineering the appropriate organisation design and the behaviours that the design and control system will start to create.”

He adds that Openreach’s new design should be driven by principles such as inter-firm trust; knowledge complementarity and reciprocal needs; behaviours and styles of management that reflect an ability and willingness to

learn; HR policies that support knowledge flow, sharing and transfer; rewarding of risk-taking and flexibility; and similar qualities of talent in both partners to avoid asymmetric learning, instability and partnership dissolution.

Another often overlooked factor when de-mergers of this type occur is change management. “The new company is going to have to have its own culture, its own values and its own way of operating, because it needs to be different to BT, so don’t underestimate the change management side of this,” warns transformation expert and former CHRO at Honeywell and AES Corporation Rita Trehan. “People often think about changing the structure and changing the processes, but they think less about the cultural changes that are needed and what the cultural difference will be, and that’s often where these things fall apart.”

Maintaining regular lines of communication with employees is also vital during these uncertain times for the business.

“At this stage [BT] should be communicating and saying ‘we’re working through this and as soon as we know we’re going to let you know’, because the more transparent and open they can be, the less tension and anxiety they are going to cause within their organisation,” adds Trehan.

But, though BT Group faces an incredibly complex task of decoupling Openreach and ensuring it complies with the terms dictated by Ofcom, Richard Nicolle, employment law partner at Stewarts Law, believes that the company won’t necessarily experience “seismic” issues as a result of the split.

“If it is done correctly – and no doubt there will be HR professionals going through notification to staff, any collective consultation obligations, and so on – I don’t see why this de-merger would give rise to some of the major restructuring issues you typically see in other restructurings,” says Nicolle.

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