TELECOM Eireann's latest set of financial figures will make it a more attractive proposition for its two potential strategic alliance partners.

Most striking is the strong cash flow the company is now generating, allowing it to both fund ongoing investment and pay down its debt.

In what chief executive, Mr Alfie Kane characterises as a "race against time", Telecom is striving to cut prices, reduce costs and grow its business before it faces full competition. All this will be needed to continually bring cash into the business, allowing it first to invest and restructure its debt and later to consider expansion opportunities.

Last year, conditions could hardly have been better for Telecom. Economic growth was strong, boosting demand, and interest rates were low, cutting debt interest payments. This helped Telecom to achieve a sharp reduction in its debt and, if the alliance talks are successfully concluded, it has the prospect of a further substantial cash contribution towards cutting indebtedness.

Strong growth in its operations and cost containment allowed Telecom to boost its operating profit by 44 per cent to £183 million last year. With interest payments also falling, Telecom could afford close to £200 million in additional investment and a large repayment on its debt.

However, Mr Kane emphasises that much remains to be done. Pressure will remain on costs and a further £22 million in payroll savings is anticipated this year. Mr Kane will not comment on how these might break down, but clearly a further substantial reduction in employment is in prospect.

Any slowdown in income growth will only increase the pressure to cut costs to maintain the profitability needed to boost cash generation. Given that investment is likely to run at £250 million a year and that the tax charge is likely to increase, Telecom will have to continue to squeeze its core business for profits. No doubt the Government will also be demanding the return of dividend payments, which were waived last year.

In addition, full competition is only a couple of years down the road. One of Telecom's competitors, Esat Telecom, was not slow to point out yesterday that the company has been quicker to reduce costs in areas where it faces competition than elsewhere.

Over the next few weeks, Telecom's attention will be on trying to conclude a strategic alliance deal with either KPN/Telia - the Dutch/Swedish consortium - or TeleDanmark, the Danish national operator. This would help to transform its finances, as it would get the first £220 million of revenue from the sale of the 35 per cent stake. It would also speed Telecom on to the next phase of its development, with Mr Kane saying he would like to see the company look at equity investment opportunities overseas in coming years.

Like any business in important negotiations, Telecom continues to protest that an alliance is not essential. While no alliance might be better than a bad one, not concluding one would be a setback. Apart from the loss of the cash injection, it would also rob Telecom of the prospective access to new marketing and technology and to an international telecommunications platform.

One problem is that TeleDanmark has yet publicly to indicate how it intends to offer Telecom access to a global telecommunications network. The other bidders, KPN and Telia, are part of an international network through a link up with AT&T. TeleDanmark is not part of such a network, though Telecom chairman Mr Ron Bolger says that the Danes are aware of this and "are addressing it", presumably by seeking a co bidder.

Both bidders will have to decide within weeks whether to lodge binding offers and this will be the next key milestone on the road to Telecom's future.