Select Committee on Science and Technology Minutes of Evidence


Examination of witnesses (Questions 920 - 939)

WEDNESDAY 13 JANUARY 1999

SIR PETER BONFIELD CBE AND MR CHRIS EARNSHAW

  920.  How much of your profits in three years' time will come from products that have not yet been produced?
  (Sir Peter Bonfield) I am not sure. People may look at us as a telephony company but we are into a lot of other things. In terms of the Internet, data, mobility, the solutions type of areas then I would think that we could probably see that 35 per cent of our business in five years' time will be a different type of business than we are in now.

  921.  You mentioned collaborative research. Obviously collaboration would involve the universities and 20 is a large number. Is that because you want to please everybody? It is a fifth of all universities as it were. Collaborative research with other companies in this country and abroad, what balance is there there? You are a Director of Zenica, Sir Peter. Increasingly the pharmaceutical industry is out-sourcing its research and either buying it in or putting out ideas which may not be close to the market for further work in a smaller company which has not got the same earnings per share pressure.
  (Sir Peter Bonfield) There is quite a significant list but it is very well focused and we try and enter into agreements which cover more than one year so that we are not switching it on and off and so both parties get substantial benefit from it. Generally each university will focus on a specific theme or one may be focusing on multi-media service management and another may be focusing on high-speed networking. It is certainly not easy to secure that funding. We do work very closely and do look to benchmark the quality of output. I would make the point that our research programme involving the universities is not primarily about developing product, it is about developing competency, it is about developing skills and know-how which subsequently gets downstreamed into product development. I make that point because I think the measures of success in research are somewhat different to measures of success in product development where speed to market is very important, but measuring the output in terms of intellectual output, in terms of patents, looking retrospectively at the relevance of those to your business, how many will actually apply to your business are some of the effective measures we use in research.
  (Mr Earnshaw) I think pharmaceutical companies are different. These are very much higher expenditures in terms of the percentage of the revenue, longer patent coverage and that sort of thing. Where we do start to see a change in our industry is that as we are moving much more into the software area, the multi-media area; there are a lot more cross-licences, ie taking licensed products in, building things on and then putting them out into the marketplace and that is something we are trying to exploit. Although we have done a reasonably good job at trying to exploit the intellectual property rights that we develop and the patents and everything else, we have been relatively slow to do that. We have now taken the initiative to do that and are now starting to spin-off into other companies, smaller companies, IPRs which we and these other companies think they can exploit better than we can. We have just started that programme much more offensively with Chris now and I think we are going to start to see some good outcomes.

  922.  And the national versus the international balance in all of that?
  (Sir Peter Bonfield) That is still primarily UK dominated at the moment, but we will change that.

Dr Gibson

  923.  The recent White Paper from the DTI suggests that clusters is a phenomenon we ought to investigate. Your labs are separate from the knowledge base in terms of the pure research that you are supporting. Do you foresee there might be a point in having your laboratories closer to your academic base?
  (Sir Peter Bonfield) This idea of clusters I think is actually a very good one. It definitely is the case in the United States that there are clusters of small innovative companies around relatively innovative universities and I think that it does work that way, but it also happens here and it happens in other parts of Europe. Our main research and development operation is in Martlesham and we are certainly building extensive links now into the Cambridge region. We are putting a high-speed network in to link these things together to try and build on those types of clusters and then there will be businesses that will spin-off from that cluster. So I think that is a very valuable thing to study and I am sure it does work with some encouragement.
  (Mr Earnshaw) Sir Peter mentioned the opportunities with Cambridge. We have, quite deliberately, R&D centres in other parts of the UK as well. We have substantial groups of people in Belfast, in Glasgow, in Cardiff and on the outer ridges of London and the reason for doing that is to build relationships locally as well as access the intellectual capabilities of those particular neighbourhoods.

Mr Jones

  924.  Can we look at what Government does and how that influences what you do because the Government sets the economic, legislative and social framework in which you operate. What are the most important ways in which Government can encourage the kind of innovation that we have been talking about?
  (Sir Peter Bonfield) This is a very, very complex question because I think in reality the Government have got to do many things on many fronts because there is no single silver bullet on this. I think the sort of things that need to be encouraged are some of the Foresight programmes and the generating of ideas coming out of that is good. I think the whole question of trying to promote innovation in particular industries, in the information society associated with that, is an excellent idea. We have got to make sure that the business framework encourages these innovative programmes, tax-break systems, encouraging small businesses, encouraging people to come out of universities into small businesses, all of that, because in reality we are trying to get a climate within this nation which is more responsive to innovation and the response to the marketplace and that covers so many facets and I am not sure how you can put your finger on one. It is more of what everybody is doing at the moment.

  925.  You said earlier that you think we are pretty good at innovation and I think I agree with that, but we are not too good at exploiting. I think that is what we have picked up during this inquiry. When we were in Massachusetts we met the people there who come and assess your invention and then the company arrives. You just concentrate on your invention and the venture capital—the lawyers, everything else arrives. What can we do here to make that kind of climate exist?
  (Sir Peter Bonfield) Everything that you can think of that we are probably doing we need to do more of. The general style in the US is different to the style here. I spent probably half my career in the United States. There is more risk-taking, personal risk-taking as well as financial risk-taking, a bigger venture capital marketplace, more honed mechanisms of spin-outs from universities and how the IPR is got out into the marketplace, all this sort of thing. There is a general tax situation which makes it less risky to do these things and fail. There is an overall mentality that to fail once or twice is not too much of a problem as long as you succeed one time, but here it is one failure and you are typecast. So it is all of that and it starts off with encouraging that type of approach in the basic education, encouraging that type of approach in business, as we are talking here, and making sure that all of the reinforcing things enable those sort of things to happen. At the base innovation level I have never been convinced that we are less innovative than any of my US counterparts. There is no doubt that they will take innovation and risk at a much faster pace than we typically do here. Some of them work; some of them do not. That is the whole thing about innovation and risk, I suppose.

  926.  When BT was privatised you were prevented from being involved in broadcasting and media and Ian and I have crossed swords in the House about that in the last Parliament. Looking back on that, and things are changing, was that a good idea to get competition in the market-place or would it have been better to let you fly? I have always looked upon it as a bit like shooting Linford Christie in the foot at the start of the 100 metres.
  (Sir Peter Bonfield) I have got a very specific view on this and I have had for many years. The technology and engineering base is moving so quickly in this industry, the computers and software industry, that to put too many regulations in the end fundamentally always causes problems because the ethos and the legislation around the technology always lasts longer than the technology does. Therefore, if you are trying to regulate a competitive market by somehow controlling access or controlling exploitation of technology, I think you will always end up having some problems. I think it is much better to let the market place operate and control the issue and, if it is a competitive issue, control it through the Competition Acts and Bills rather than the technology. I think it is always very dangerous to try to control markets by control of a specific technology. It always ends up with compromise or the technology making the whole thing obsolete anyway.

Mr Taylor

  927.  I think BT is a much better company for the competition it has got now in the local loop, but let that pass. My question is one I referred to earlier about the national and international research balance. You are a global company. You have got global ambitions. Obviously this Committee is interested in the United Kingdom research and development and innovation base but you have got responsibilities worldwide. How will you manage the research application? You did imply that most of it was in the United Kingdom at the moment but that may change. Can I get you to comment on that and if there is anything the British Government should be considering in relation to making sure that the first-rate research is actually done in this country?
  (Sir Peter Bonfield) If we look at the shape of BT now and the shape of BT, say, in five years, we are a very large UK company now trying to build international business and we have been reasonably successful. We are building those primarily with joint ventures around the world where we typically have taken a minority stake in another company, obtained a licence and then built it out. That typically does not mean much research in that country. We are trying essentially to exploit the developments and research that we have developed with our own operations here and I think that will continue. So in the foreseeable future in that part of our business I do not see that much of that research will be done offshore. There will be an extension to our capability if we get it right with the link with AT&T which is now going through the approval process both here in Europe and in the United States. We have got some ideas on how we can exploit more of our research and development potentially into the US market on the back of that. That might change. Even at the end of our five-year plan the bulk of our research and development will be concentrated here and exploited internationally rather than the other way round.

  928.  The Chairman's sneeze gives me one chance to follow that through. When I was Science Minister I had to realise that 96 per cent of the world's research was done outside the United Kingdom so we had to have the best possible scientists to understand what they were doing not just developing our own science base. Is there a comparable pressure in a multi-national company in a very fast-moving industry as to where you access the very best ideas?
  (Sir Peter Bonfield) There is a difference in accessing the ideas and actually where you do your research. If Mr Earnshaw could explain how we access ideas because this is a big issue for us.
  (Mr Earnshaw) It puts even more pressure on you to be effective at collaborating and finding other ways in which you can acquire intellectual know-how. We do look constantly to build relationships with companies and universities in other parts of the world. Whilst it is still very much centred here in the United Kingdom as the hub of our knowledge, we do have links with American universities and increasingly links with American IT and software companies. We do run a process and we call it acquisition of know-how. That will become more and more important. The model we will adopt with our American partner AT&T, subject to the necessary approvals which Sir Peter referred to, is very much a collaborative model where we will share know-how relevant to our global business and look to exploit it on a global scale. We would expect to undertake work for AT&T and probably look to subcontract certain things to AT&T as a favoured partner but very much sharing the output.
  (Sir Peter Bonfield) One of the things we do do quite well is utilise the interface or relationships with our suppliers because we obviously procure a massive amount of equipment software and services from mostly multinational corporations so they allow us extensive links into what they are doing in Japan, the US, Europe and everything else so we have got that window on what is going on. Within Chris's group the people we have got using all the techniques we now have, the Internet, we are quite up to speed on what is going on in the rest of world and, as Chris said, plugged into it that way and also plugged into our own.

Dr Jones

  929.  A little while ago you were talking about the amount spent on R&D and this was stated as four per cent of turnover. According to the DTI R&D scoreboard they put it as 1.9 per cent of sales, a lower figure. That was in 1997. Can you explain the discrepancy?
  (Sir Peter Bonfield) Yes, within our annual report and accounts there is a specific definition of research and development which the accountants use.
  (Mr Earnshaw) It is called the Frascati definition.
  (Sir Peter Bonfield) So there is a specific definition which we think is okay within its definition but it is not our definition of research and development. The larger number we put in, which amounts to £600 million I suppose for BT, includes what we would classify as development because a lot of our developments are software developments where in one instance you can say they are just developing computer systems. For us computer systems are in many instances our products and so there is a difference between the specific definition we have to put in our annual report and accounts, which is a very strict definition, versus what we look at and which is more the definition you ought to look at here.

  930.  If you were comparing yourselves to similar companies in the service sector and you said your research was a similar proportion; is that on your terms?
  (Sir Peter Bonfield) It is on our basis.

  931.  Would you say that BT has been more successful than some of those competitors but only spending the same amount of money on R&D? If so, to what would you attribute your success in the way you have used your research and development effectively?
  (Sir Peter Bonfield) I am not sure if we have got a real measure in terms of how effective our research would be against competitors.
  (Mr Earnshaw) Not perhaps specifically competitors but looking at the industry in general and other industry sectors, one of the things we measure is the percentage of our patents we generate and compare that with our industries. We are pretty successful in exploiting our output in that sense and perhaps have a higher figure than many other industries and industry sectors. The DTI 12 or 18 months ago ran an independent survey on the return on intellectual assets which looked at various industry sectors which gave us some confidence that we are being reasonably successful by carefully focusing our R&D.

  932.  When you say "carefully focusing", everybody says that. What does it mean?
  (Mr Earnshaw) It means, amongst other things, looking at where we can add value for what we can do ourselves and where we might acquire intellectual know-how through our relationships with suppliers or other partners and by being careful you can actually maximise the return you get.

  933.  If you were to spend more on R&D, do you think you could be a more successful company and that you would make more profits?
  (Sir Peter Bonfield) At the moment I am not sure that we are constrained on the absolute amount that we are currently spending. I think that we are open-minded to put more into it if we can get some output and we are always constrained about the return to our shareholders. There may be some additional flexibility to put in, but I do not think we are massively out. We are open to it and if we can get the return, we will put the investment in.

  934.  So are there constraints on you because of shareholders and the need to pay over dividends? I take your point about your being in a service industry, but they are still in the pharmaceutical industry managing to spend 10 per cent or whatever it is of turnover on R&D, so why can you not convince your shareholders that it would be good for you to spend more?
  (Sir Peter Bonfield) I think first of all I have to convince myself.

  935.  Well, you implied that you thought you could get benefits from it.
  (Sir Peter Bonfield) Well, as I say, at the moment we have convinced ourselves quite carefully with this connection now that we have between our research and development and our business plan that we are about right. Whether we have got it totally optimally right, I am not sure, but it is not that far out I think. In terms of the shareholders in our industry versus a pharmaceutical industry, I think that our shareholders, in looking for a return, like all other shareholders, look at the returns they can get from people within the sector, so are we making the types of returns of other people in the sector, and then I think they want to be convinced that the investments that we are putting in can make the outputs. At the moment with the balance that we have got, we have got excellent support from our shareholders, so if we wanted a bit more, could we get some more support and I have got no issue with that, so I think that from our point of view we think it is about the right balance, but whether we can do a bit more or a bit less, I am not sure; maybe a bit more if we are successful as we grow and we are growing quickly, but that is a different model from the pharmaceutical business. The pharmaceutical business is very much product-driven, the return on those products to the size of the pipeline, the effectiveness of the pipeline, and they are different types of measures and indices, and the shareholders that follow that type of thing are looking for different returns than the shareholders that we have.

  936.  Why?
  (Sir Peter Bonfield) Well, different returns in terms of the financial returns, but different returns in terms of the effectiveness of the risk profile of pharmaceutical R&D versus the risk profile of our R&D. On our research and development, we would get a very, very high hit rate that with the money we have put in, we are going to get the output, whereas in a pharmaceutical company —-

  937.  So they have to have more eggs in their basket, do you think?
  (Sir Peter Bonfield) Yes, typically within a pharmaceutical company, the research programme may be 12 or 15 years from the start of your geno thing to the output. Typically ours is not that long and we are much more accurate in getting the output, so it is a different model.

  938.  So would you spend more if there were more favourable tax regimes, as you have alluded to earlier on, and what would have to happen?
  (Sir Peter Bonfield) The tax regimes I was referring to earlier were more to do with the smaller companies, the entrepreneurs and that sort of thing where they need that extra incentive. At the moment, no, I cannot honestly say that we are saying that we are not going to do it because of the tax regime.

  939.  Earlier on you also said that the proportion of R&D that you might do in the UK might change, or will change actually, but would different regulatory systems and tax incentives have any bearing on that?
  (Sir Peter Bonfield) I guess in all of these things we will try and optimise it, but, to be quite honest, this is not at the top of our head in terms of how we want to drive forward. It is mostly to do with the skill base, keeping the skill base, the innovation required, the risk that we want to take, and we worry about that every morning rather than optimising the tax situation. I think that overall to make an industry successful, you have got to have a tax regime which is not too oppressive, so I think that our corporation tax at the moment is competitive with all these other things that we are seeing. I think the tax situation, referring back to what I said in the US, is much, much more of a critical issue in smaller, entrepreneurial, start-up, risk-taking venture capital things where it can make a huge difference between whether you do it or whether you do not. That is not quite the case with us.


 
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