Select Committee on Science and Technology Minutes of Evidence


Examination of witnesses (Questions 906 - 919)

WEDNESDAY 13 JANUARY 1999

SIR PETER BONFIELD CBE AND MR CHRIS EARNSHAW

Chairman

  906.  Sir Peter and Mr Earnshaw, thank you very much indeed for coming to the Select Committee this afternoon and helping us with our inquiry into innovation. Before I put the first question to you, Sir Peter, I wonder if you would care to introduce yourself for the record and then we shall invite Mr Earnshaw to introduce himself too.

  (Sir Peter Bonfield) Good afternoon. We are delighted to have this opportunity to give evidence to your Committee. I am Peter Bonfield. I am the Chief Executive officer of BT. I have been there for three years now. I have been in the computer electronics communications business for 33 years and have spent probably about half of that in the United States, the rest in Europe and I have had an office in Japan for about seven years. My background is in engineering. I am also on the Board of Zenica, which is a pharmaceutical company based in the United Kingdom and I am the Deputy President of the British Quality Foundation.
  (Mr Earnshaw) Good afternoon. Chris Earnshaw. I am the Group Engineer and Technology Director. My responsibilities in BT include our engineering activities, the running of our networks and information systems as well as our research and development. I have been with BT for some 27 years. Prior to my current responsibilities based here in the UK I was the Chief Executive of our venture in the United States providing global communication services to multi-national companies.

  907.  Thank you very much. I wonder if I may start, Sir Peter, by asking you whether you think that BT is a company that is in the forefront of innovation and, if it is, what is the philosophy within the company that makes it have innovation as an important component in its business regime?
  (Sir Peter Bonfield) I think it would be difficult to say whether we are at the forefront of innovation, but I do believe that we are a very innovative company and we certainly do benchmark ourselves extensively both against European, American and Japanese companies. I think that we are certainly good at it. I will leave others to judge whether we are in the forefront or not. What we are trying to do in BT, which is a very large company, is to make innovation a critical success factor. We encourage innovation. We are moving the company more and more into devolved business units so that they can move faster into their respective marketplaces. In terms of the innovation through our research and development programmes, which I guess is going to be part of the thrust of these questions, over the past few years we have shifted the emphasis from pure research and development dictating its own direction to being much more driven from the marketplace and from these separate business units. So about 85 per cent of what we would classify as our whole research and development pot would be directed from these units and they encourage innovation, they are close to the marketplace and they actually pay for the research and development. Then separate from that we have a group fund and this we direct very heavily into the universities on the one hand and blue skies research on the other. With that sort of cross-section I think that we are able to maintain our innovation and I think most people would regard us as an innovative company, although we are a large company.

  908.  What do you do, Sir Peter, to inculcate an innovative culture into your employees? They may come to you from schools or university where they have been following set patterns of education and possibly not thought too much about innovation. They may have been told to stay on the straight and narrow and then you want them to go off on lateral courses. What do you do to get this culture into the company?
  (Sir Peter Bonfield) I am not sure that being innovative does not keep you on the straight and narrow. There are various approaches that we are taking. One is to do with the structure of the organisation. We are trying to change the structure of the company to allow more innovation, smaller business units.

  909.  You are talking about allowing and I am trying to talk about encouraging.
  (Sir Peter Bonfield) If you pick people and give them the remit that this is their business, they can go off and do these things; you have put both financial and marketing authority down the line and that creates, just by the organisational structure, more room to innovate. We try and pick people with innovative track records to go into these types of businesses and so we are trying to change the style as the marketplace changes with a different skill of people. The other thing is we try and encourage it with the normal reward mechanisms and recognition mechanisms. So we have got extensive recognition schemes for innovation in engineering, innovation in research, innovation in development and we give away medals and prizes, some of them financial and I think that helps.
  (Mr Earnshaw) You referred specifically to those joining us from schools, universities or whatever. A very significant proportion of our graduate intake (and we recruited 570 graduates last year) do join our technical functions and specifically our research operations. Our policy has been to create space for creative thinking within that area of our business, but rather than leave people there permanently we encourage them to move on in their career into the business units that Sir Peter has referred to and into the specific development programmes that we run in response to the commercial drive from the product teams. So there is a managed process which encourages innovation right from the day they join the company.
  (Sir Peter Bonfield) Innovation is not just in the technical field. There should not just be innovation in marketing, accounting, customer service. This is the sort of style which you can get which encourages different thinking.

Mr Beard

  910.  Sir Peter, our inquiry is into the reasons why we seem to be not so good at innovation based on engineering and the physical sciences as we are when industries are based on the biosciences. You are obviously a company which does not fit that rule. Have you any views on why you seem to be the exception compared with the average in Britain?
  (Sir Peter Bonfield) I think that we are fortunate to be in an industry which is going through a massive amount of change and that always helps because it creates a very good stimulus in the marketplace. I am not so sure that in many instances we are not very good at innovation. I think that where we see weakness is in exploiting innovation rather than the innovation itself and I think that part of that is cultural, part of it is how companies reward and drive their own people, the flexibility that we have. Having said that, I think that BT has a track record of actually being quite good in this area and it is an area that we focus on from a management point of view. We think it is important.

Chairman

  911.  Sir Peter, I am sure that your company does compare itself with its international competitors in terms of financial performance and sales and return on assets deployed and so on. Do you have any way of having any benchmarks against your international competitors or even your domestic competitors with regard to innovation?
  (Sir Peter Bonfield) We can do some of the basics of innovation, so we measure patents and IPR and that sort of thing and we know we are good at that. We know how we exploit it. We are going to do more in that area. We can measure ourselves in terms of innovation in the marketplace in terms of some of the products that we get into the marketplace before our international competitors. Where we are less good at doing the benchmarking is innovation in the other areas, the innovation away from the engineering types of areas and this is a specific area where we are trying to get more ideas of how to encourage it and measure it. There are some classic measurements we do. Some of them are okay and some of them are relatively weak and need improving. We do surveys outside of what our customers think of us and some of the questions on that are about how innovative and how responsive we are.

  912.  I wonder if you could give us an indication of how you changed the skills base of your company from one that was predominantly interested in hardware to one that had to cope with modern software? It may be that was a few years ago, but there had to be that change within your company some time ago when you went from hardware to software. How did you set about doing that? Was it a very big re-education programme?
  (Sir Peter Bonfield) It was a very significant change. I will let Chris cover that because he was involved at the time. There has been a major shift over the last ten years from predominantly hardware R&D investment into one dominated by software.
  (Mr Earnshaw) I think we are very proud of the success of that programme which began maybe a decade ago. I think we put a lot of emphasis on selecting people with aptitude for learning new skills and new approaches and we invested heavily in training and re-skilling, but I would not want to leave you with the impression that that has come to some sort of abrupt end. In new technologies it is a continuous process. As Sir Peter mentioned, we do measure these things internally. Each year I look to downstream, for example, from our research division into our product development organisations, significant numbers of people in order that we get refreshing skills from people who have come from the leading edge of technologies and that I see continuing and needing to continue for the foreseeable future.

  Chairman: Thank you very much indeed.

Dr Gibson

  913.  How influential is your record as a public sector company in your attitude to research and innovation? How did you motivate staff in that transition into the commercial world?
  (Sir Peter Bonfield) I think there is no doubt that BT has got a long and very proud record for research and development going back to Dollis Hill and obviously before that. That certainly does help. We have got a very good international reputation that was built on that and those sort of things last significantly. All of that is of major benefit. Since the privatisation in 1984 I think that a couple of things have happened. One is that we have moved, as the market has moved, away from some of the base research in hardware much more into systems and software and the newer areas of our industry and we have done that extremely successfully. The second thing is we have continued to make investments. Since privatisation I think our research and development budget has probably doubled. Our business has grown as well and so you expect that. We have kept that investment going and tried to keep the investment aimed towards the high growth areas of the market and where the innovation is needed. So I think, looking backwards, that is a very major platform on which to build, but then I think that we have built forward successfully on that. BT is still regarded against all those benchmarks as very, very good in terms of the base research in our industry. We are one of the top two or three companies in any survey of our capability.

  914.  But then you had your boffins who were into this long-term research. You have admitted that a proportion of that long-term research changed when you became private.
  (Sir Peter Bonfield) I am not sure if the proportion changed. I think we focused it more, that is true. I am not sure if the proportion actually underneath it has significantly changed, but we now direct much more into a specific market. We do not try and have boffins who are locked away, we try and have boffins who are close to the marketplace.

  915.  How was that for them, the overnight job? I know how it was for you, but how was it for them when you told them their world was changing?
  (Sir Peter Bonfield) I will let Chris Earnshaw comment on it because obviously he was here.

  916.  He was one of them, was he?
  (Sir Peter Bonfield) There are two ways to look at this. One is to measure the response of our employees to change and every year we do, as many companies do, extensive care surveys and we have measured those consistently over a number of years and certainly the results that we have now compared with results seven or eight years ago are significantly better. I think the other thing that we know is the ability to connect these people into the marketplace and from that point of view I think that they are still as well regarded as they were, so there has not been a drop off in that. The third thing to remember is this has taken some considerable time and so this is not something that was switched off and on overnight. There was a lot of time to get used to the idea.
  (Mr Earnshaw) I would reinforce the point about connecting to the market because what I think excites our people and gives them reward is the fact that they are involved in bringing commercial value to the company and as well as measuring technical excellence; we measure such things as speed to market and we actively encourage our people to improve in those areas. Sir Peter said it was not an overnight transformation and so I do not think there was an overnight culture shock. We have made a number of other changes over the last few years. For example, increasingly we are seeking to do research and development on a collaborative basis with other parties. As well as keeping pace with the growth of the company we are looking to extend our network by working with universities, working with other industrial partners so that we actually get more for the money that we are spending.

Mr Taylor

  917.  With BT it seems to be a very rosy picture. Why do you only spend four per cent of your turnover on research and development?
  (Sir Peter Bonfield) We are a service company and measuring it in terms of our revenue versus, say, a component or a product company comes up with slightly different results. If you benchmark BT against the rest of the service industry, Dutch Telecom, French Telecom, AT&T, I would think that we are about average. Some are a little bit more, some are significantly lower, but we are maybe in the top end of the upper quarter. Compared with the computer company I was with before, they were typically ten or 12 per cent and a lot of it was hardware driven, we are about there, slightly better. As Chris said, we try and then leverage it and if we can leverage that and get more out of it then we will put more into it because it is very much tied to how we read the marketplace. It might look on the face of it like a small percentage, but it is a high number and it is about equivalent to the top end of our industry.
  (Mr Earnshaw) Four per cent is the average across all of our activities. I think if you were to take some of the growth markets that we are involved with, the Internet, multi-media, data, for example, and you were to analyse it against the revenue in those specific segments you would find that it is four per cent. It does average out across the totality at that figure.

  918.  That is a very important point, if I may say so, because that means that you have decided to manage the four per cent of the total amount in a sense that will give a fine tuning to the areas that you prioritise. Just describe that prioritisation process for us, please.
  (Sir Peter Bonfield) We actually operate a programme very similar to the Foresight programme that has been developed in government. We have a group of people (chaired by Chris) who try and do a foresight look at where the technologies are going and where the markets are going and where they are going to converge. We rank the types of programmes that we want in terms of the impact on the marketplace and to a certain extent the impact on our financial capabilities and then measure that up with the capabilities and the skills that we have and then these are the areas that we will put the money into. Most of it is checked very specifically against the market end of it. 85 per cent of it is really closely checked against the marketplace.
  (Mr Earnshaw) What Sir Peter refers to is an integral part of our strategic business planning process for the company overall where we do look at industry trends, we look at threats and opportunities to our business and once a year we adjust the balance of our investment in different sectors within our research programme. In addition to that, again as part of our business planning cycle, we do consciously look at how the market is changing and shift our investment, particularly in product development, into areas where we believe there is new opportunity, looking at where maybe in other cases we might maximise collaboration where we feel that sufficient innovation is being driven through our industry partners or whatever. So we would look to be adding value to our business by that process of focusing.

  919.  There is a sense of urgency in the way you are transferring ideas and I noted down the phrase "speed to market". How does that allow for the blue skies element of research?
  (Sir Peter Bonfield) As Chris said, the way we try and do it is by research and development and the innovation that is planned as an integral part of our business. It is not stuck away with boffins who never see the light of day. This is our business. We need to innovate them. We need to develop them. About 85 per cent of all that expenditure is pretty well defined within the five-year plan. You have got the Foresight programmes to do it. The plan all locks together. We are quite highly driven from that point of view and that is where some of the increased productivity comes out of it. These are very, very specific programmes. We have about ten per cent of that in the blue skies research and here we tend to fund longer-term programmes for universities and we have got a group of about 20 universities, have we not?
  (Mr Earnshaw) Slightly more, but 20 significant programmes, yes.
  (Sir Peter Bonfield) We fund into the universities maybe a bit more blue skies research and then they couple that into a corporate programme that we have which essentially Chris and I overview which is about ten per cent of the pot and that is by and large programmes that come to fruition more than five years out. In this area we will take the risk where we see we have to, but in the end it is our gut feeling that tells us these areas do need funding and we take those risks.


 
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