Examination of witnesses (Questions 906
WEDNESDAY 13 JANUARY 1999
BONFIELD CBE AND
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
(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
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
(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.
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.
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
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
Chairman: Thank you very much indeed.
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
(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.
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
(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,
(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.