Examination of witnesses (Questions 920
WEDNESDAY 13 JANUARY 1999
BONFIELD CBE AND
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.
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
(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
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 capitalthe 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
(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.
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
(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.
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
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
(Sir Peter Bonfield) I am not sure if we have got
a real measure in terms of how effective our research would be
(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
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
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.
(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
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.