Opinion
Why Telstra needs to sack 10 per cent of its workforce
Elizabeth Knight
Business columnistTelstra’s decision to cut almost 10 per cent of its workforce might be the headline grabber, but why it needs to cut this deep is what shareholders should be focusing on.
The telco isn’t shredding its workforce to make super-profits. It’s doing so to meet the profit guidance it has given to shareholders.
The company needs the $350 million cost savings these job losses will provide to compensate for a key part of its business that is under serious pressure.
Telstra chief executive Vicki Brady has announced large-scale job cuts.
As far as customers are concerned, Telstra’s decision to scrap its commitment to annual reviews, tied to the consumer price index, of its post-paid mobile phone charges opens the door for discounting but also for bigger price hikes.
It seems Telstra took the view that this across-the-board annual CPI-linked price change was a blunt marketing tool, and it would rather have the flexibility to charge more to those customers prepared to pay up big for a premium network and less to more price-sensitive customers.
For now, Telstra’s mobile phone customers can breathe a sigh of relief that the annual July price rise won’t be happening, but in future, we could see some plans become more expensive and others discounted.
For Telstra boss Vicki Brady, there are levers she needs to pull to enable Telstra to meet its already scaled-back 2024 profit forecast of $8.2 billion to $8.3 billion in earnings before interest, tax, depreciation and amortisation.
Back in 2021, the company announced $500 million in cost reductions to be achieved by next year. But four years is a long timeframe in any business, and in a company involved in an industry where technology is rapidly changing, making medium-range predictions can be fraught.
The massive rise in inflation over the past couple of years, which has caused a cost-of-living crisis, has also affected the cost base of many companies, including Telstra.
So, making good on those $500 million in flagged-cost savings had become all the more difficult.
The good news for Brady is that the mobile division is continuing to motor on nicely.
It is a sad but historical reality that companies under pressure to cut costs will wield the axe at the low-hanging fruit – which, in most cases, is labour costs.
At this stage, very few of these job losses can be attributed to the rise of AI, even though it would be easy to assume AI was the culprit given the intense focus on its ability to replace people. Eventually, Telstra will be able to use AI to do the jobs of humans, but it is early days yet.
Instead, Telstra is suffering from underperformance in its large enterprise division, which serves big companies and governments.
The division has become increasingly vulnerable to businesses moving to internet-based services provided by software companies rather than using traditional voice calls.
Optus’ equivalent business enterprise division is having a similarly poor experience.
This is now clearly a structural problem for telecommunication companies and needs to be addressed.
Inside the enterprise division lives Telstra’s Network Application Services – a business that Telstra had hoped would become a major growth engine. It will now ditch two-thirds of that unit’s products.
The first wave of Telstra redundancies – 377 jobs – will come from this area, but over the following 12 months, the cuts will be more broad-based.
When Telstra announced its full-year results in February, the enterprise division’s soft earnings were called out, but the latest announcement makes clear that Telstra boss Brady has conceded it’s not just a cyclical problem.
All this talk of addressing the rot in the enterprise wasn’t enough to reassure the market, and the telco’s shares tumbled as much as 2 per cent.
After announcing the cuts, Brady gave some comfort to investors by providing improved guidance for earnings in 2025.
To retain the market’s trust, the Telstra boss – who has been in the top job now for almost two years – needs to nail this number, or even better it.
After culling 2800 jobs over the next year, that will be a difficult trick to repeat.
The good news for Brady is that the mobile division is continuing to motor on nicely.
She needs this motor to purr like a kitten.
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