Telstra layoffs the painful price of earlier mistakes (2024)

Telstra's plan to lay off nearly 10 per cent of its workforce was the bitter fruit of mistakes made by the telco around two decades prior.

The telecommunication giant announced this week it expected to cut 2,800 employees, mostly from the underperforming network applications and services (NAS) portion of its fixed-line enterprise business.

"It's very painful, it's a very dramatic response from Telstra," telecommunications expert Paul Budde told AAP.

"Clearly indicated (they were saying), 'oh my God, what the hell is happening here?' Scary stuff."

The network applications and services division, which provides services such as managed data networks and unified communications to big businesses and government agencies, has been struggling since the latter half of last year.

In February, executive Vicki Brady put the business under review, saying it was "clearly a long way from where we need it to be".

Calling revenue fell 17.6 per cent to $210 million in the second half of 2023, while professional services revenue dropped 12.4 per cent to $233 million - but those six-month figures don't fully convey the severity of the plunge off towards years-end.

"The decline did accelerate very, very quickly," Ms Brady told reporters in February.

"It was surprising to see how quickly our sales pipeline dropped, and some of those opportunities moved out."

Now Telstra is planning a "reset" of the division, reducing the number of network applications and services products in its portfolio by close to two-thirds.

"Obviously, it will take us a little bit of time to work through the transition of customers onto more modernised products," Ms Brady told analysts on Tuesday.

Morningstar analyst Brian Han expects Telstra's network applications and services division's earnings to crater to $127 million in 2023/204, from $912 million in 2019/2020.

"Hopes of stopping the revenue decline of legacy products in data/connectivity and network-attached storage have all but evaporated and resizing the unit's cost base is now a priority," Mr Han said in a note to clients this week.

Mr Budde, the chief executive of Paul Budde Consultancy, said while the telecommunications industry has evolved tremendously in the past 20 years, it didn't have to go down this way.

"If you go back in time when all of this has happened, Telstra and all of the telcos were looking in the back mirror, trying to protect a very lucrative telephone and at that stage, data services business, which were extremely expensive and enormously profitable," Mr Budde said.

"So they basically denied internet, denied smartphones, denied broadband - so that gave the newcomers in the market, which are now the Big Tech companies, the ability to basically grow without any competition."

Take Google, for example - it's not just a search engine and Google Maps, but also a huge cloud computing and infrastructure company.

"It is now competing on the value added areas, where companies such as Telstra have totally missed out," Mr Budde said.

Telcos didn't dive whole-heartedly into the internet market until it was too late, and now have been relegated to basically "utility companies" providing the internet pipes that Google and others use to deliver value-added services, Mr Budde said.

"It's a totally different market from 15, 20 years ago, when they were highly profitable, and had enormous margins," he said of the teleco sector.

It wasn't just Telstra that made this mistake - others like AT&T and Deutsche Telekom acted similarly, Mr Budde said.

"The trouble with these companies, they've got legacy, they're 100-year-old companies," he said.

Had they acted with more foresight they could have become the Googles or Amazons of Australia, added.

"But they never took that seriously at that point in time, and now they're paying the price, particularly in the enterprise market - which has always been the market with the highest margins."

Big Tech companies can now offer sophisticated cloud-based enterprise solutions for less than half the price of the legacy telephony systems and data centres provided by telecommunications firms, Mr Buddle said.

Ms Brady said on Tuesday that the changes to Telstra's enterprise business would take two to three years.

"You don't just automatically make the decision today to simplify the portfolio and it happens the next day. It is going to take real planning, work with our customers," she said.

But eventually, the telco's enterprise division should benefit from the changes, just like its consumer and small business divisions did from Telstra's "T22" strategy unveiled in 2018 that made the business simpler and more agile, Ms Brady said.

Australian Associated Press