House of Commons - Business and Enterprise Committee

Risk and Reward: sustaining a higher value-added economy - Business and Enterprise Committee Contents

Memorandum submitted by e-skills UK

INTRODUCTION

e-skills UK welcomes the opportunity to submit evidence to the Trade and Industry Select Committee's Inquiry examining the role of government in promoting high value-added activity by UK business. As the Sector Skills Council for IT and Telecoms, we recognise the need for the UK to create a higher value added economy to remain competitive. Our remit is to help to ensure that UK businesses have the technology skills they need to continue to make a significant contribution to UK productivity and compete globally. We do this through addressing the needs of three related communities:

— Business managers and leaders: the 4 million people performing business management and leadership roles in the UK, who need to be able to understand and exploit the power of IT in driving competitiveness and productivity in their businesses.

We have focused our submission on those areas where we have specialist knowledge and have answered only those questions most relevant to us and where we can add value.

What is meant by a high value-added economy? Which business activities qualify as such?

A high value sector is one which makes a significant contribution to the economy and therefore shows above average productivity and growth, both in employment and output terms. In the increasingly technology based economy, such sectors are likely to be both ICT and knowledge intensive. For example, the IT and Telecoms industry is higher value added being knowledge and technology intensive and showing above average employment growth and productivity:

— Productivity per worker is high in IT and Telecoms; 52% higher than the national average in the IT sector and 58% higher in the Telecoms sector, making them the 5th and 4th most productive sectors respectively on this measure.

— Over half of the IT and Telecoms professional workforce (55%) is currently qualified to degree level or above, compared to just 28% of the workforce as a whole, and this is set to rise still further.

However, its importance goes beyond this direct contribution as the presence of a strong IT and Telecoms sector underpins the growth of all technology intensive industries which make up the higher value added economy.

For example the software and computer services sub sector,[17] underpins much of the UK's creative industries, providing high value intellectual capital, including software applications, computer games and electronic publishing content. Software and Computer Services is the biggest and fastest growing sector within the creative industries.[18] This sub sector employs 596,800 people in the UK (33% of total employment in the Creative Industries) and exhibits the highest GVA growth of all the creative industries at 9% per annum and the largest increase in employment with an average growth rate of 6% per annum. It contributes over a third of total creative industry exports and around the same proportion of total GVA for the industries.[19]

However, this relationship between technology intensity, knowledge intensity and high value added is not confined just to IT and Telecoms and the digital creative industries. e-skills UK' s work on the digital industries in the North West[20] categorised high value sectors used a definition of digitally dedicated and digitally enabled industries:

— Digitally dedicated industries; these have as their primary business purpose, the development and/or application of digital technologies. There will be a high degree of digitality throughout the main business processes and the acid test would be that without digital technology the business could not operate. Examples include software development and website creation and the majority of the electronics sector.

— Digitally enabled industries: although the development and application of digital technologies is not their primary business purpose, these sectors use digital technologies extensively to gain competitive advantage, Examples include many of the audiovisual industries, eg architectural design, video production and high tech manufacturing. These businesses would use digital technologies across most or all of the range of business processes and not, for example, solely for information management or process control

In conclusion therefore, the higher value added economy will be composed largely of sectors which are both knowledge intensive, employing above average numbers of individuals qualified at higher levels and with specialist skills needs. They will be either digitally dedicated or digitally enabled and use digital technology including ICT to gain competitive advantage.

How UK business compares internationally in areas such as research and development, creativity and design.

The DTI's R&D scoreboard[21] contains extensive data on the top global R&D investing companies and points out that the top 1250 are dominated by companies based in a few major economies. 82% of R&D is accounted for by companies based in the USA, Japan, Germany and the UK and 70% is from companies in the top five sectors of technology hardware, electronics, software, pharmaceuticals and the automotive industry.

Software and technology hardware account for 2 of only 3 sectors out of the 39 listed in the scoreboard which have R&D intensities[22] over 8%. These three together account for 45% of global R&D among the top 1250 companies. Software (along with pharmaceuticals) has the highest average profitability amongst the 15 largest sectors. Therefore, the IT and Telecoms industry (and its close relation, the electronics sector), are very significant sources of R&D investment and profitability and are increasingly rapidly in importance in the R&D global league table.

Although there are 119 UK software companies in the 2006 scoreboard, the UK is still relatively less dense in this sector and relatively rich in pharmaceuticals compared to the other leading R&D nations. The UK has the lowest proportion of companies in the electronics and IT sector among the top 5 nations in the scoreboard as the chart below demonstrates.

Figure 1. The R&D sector contribution in the 5 main sector groups for the top 5 R&D countries.

Source: DTI R&D Scoreboard 2006

Globally, the software sector is a strong sector in terms of R&D and highly profitable. However, in the UK, the low proportion of UK companies in the top 50 of the scoreboard (5.3% or just 3), none of which are in software[23] means there is a role for government in promoting and supporting the sector to encourage R&D and creativity to fulfil the potential of the industry in the UK and enable the software and technology sector to support other knowledge intensive sectors.

Although there is room for improvement in the UK's international position in IT and Telecoms related R&D, there are a number of leading and globally active Telecoms companies in the UK and the UK economy also benefits greatly from inward investment in manufacturing and R&D from the leading overseas Telecoms suppliers. Lucent and Motorola have their world headquarters for UMTS[24] and both Nokia and Siemens have significant research centres for 3G (3rd generation) mobile in the UK.

Motorola, Nortel, Ericsson and Lucent Technologies have established significant UK R&D facilities, which in some cases are the largest outside their home countries. Independent R&D organisations also offer substantial expertise to support systems and product design as well as planning and implementing of projects.

As well as the presence of specialised research skills, the strong and early drive towards deregulation of the Telecoms market has proved highly beneficial in promoting the UK as an attractive location for Telecoms R&D. Equivalent levers and policy drivers now need to be developed to encourage the growth of IT software research.

THE EXTENT TO WHICH UK BUSINESS HAS ABSORBED NEW BUSINESS PRACTICES SUCH AS LEAN MANUFACTURING.

The successful exploitation of technology is one of the most important challenges facing UK business. e-skills UK's research[25] into the relationship between IT exploitation and business performance has revealed that companies with higher IT strategic management skills do indeed have better performance and the relationship between ICT investment and productivity is no longer in doubt.

However, the UK has not seen the same level of ICT related productivity gains as the US Research published in 2005 by the London School of Economics[26] and ONS[27] indicates that ICT related productivity gains in the UK have been consistently lower than those achieved in the US since the beginning of the 1990s. For example, in the UK, a doubling of investment in IT is associated with only a 2% increase in productivity in UK domestic firms compared to a 5% increase in US firms.

Investment in ICT does not in itself automatically raise productivity; this also requires that business exploit the potential of ICT. Effective exploitation depends on the adoption of new processes and business models such as e commerce, fully integrated into the business strategy, and the necessary IT skills and knowledge among employees for them to become e-enabled employees. Research[28] indicates that these three factors, ICT investment, new process adoption and e enabled employees, not only all have a measurable impact on productivity but that they are self reinforcing and together produce a comparatively greater gain.

Our lower ICT related productivity gains compared to the US and the demonstrable link between IT strategic management skills and business performance suggests UK business has not yet achieved this virtuous circle. e-skills UK's research suggests we need to do more to get the maximum benefit from ICT and specifically, we need to improve:

— Awareness: the business decision makers across the economy need to understand what ICT can do for the business and its full strategic potential;

— IT strategic leadership: the decision makers have to be open to change and prepared to invest in ICT and the skills to optimise its use, moving ICT out of the back office and integrating it fully in to the business strategy;

— Exploitation: the right actions have to be taken and the right business processes and models effectively deployed to ensure the transformational power of ICT is realised;

— Skills; businesses have to be able to access the right technology skills, internal and external, at the right levels at the right time and price to enable effective exploitation.

WHY SOME SECTORS OF THE UK ECONOMY APPEAR TO BE MORE EFFECTIVE AT EMBRACING VALUE-ADDED ACTIVITIES THAN OTHERS

Our research shows that over the last 7 to 9 years the UK as whole has seen ICT related productivity growth of 3 to 4% and that there is the potential for this to be repeated and possibly increased. However, the extent of ICT related productivity gains varies between sectors and according to type of firm. For example, in the manufacturing sector, among young firms the total impact of ICT investment is as high as 12% compared to 8% in older firms.[29] Employee use in young manufacturing firms is also a significant productivity driver with each 10% of the workforce being computer enabled, these firms see an additional 4.4% return. The evidence suggests that flexibility is the key factor in these results with younger firms having access to newer technologies and more willing to experiment.

The results are not the same for services however, where the greatest gains from ICT investment accrue to older, rather than younger, firms that use technology to deal with large numbers of customers through better information management. The evidence suggests, therefore, that the use of technology has to be appropriate to the sector if the value added potential is to be realised.

e-commerce is a prime example of a technology enabled business process that can deliver significant productivity gains but which varies across sectors and according to whether it is e procurement or e-selling that is being considered. Positive gains accrue to e-sellers in wholesale and retail but manufacturing firms show net losses, which are more severe in small firms than large, due to the commoditisation and downward pressure on prices that results from selling on line. In e-procurement, manufacturing firms show the greatest productivity gains, more than cancelling out their e-selling losses, wholesale firms also do well and retail firms less so.

In conclusion, there are threats as well as opportunities which require sophisticated sector specific risk management strategies to be in place for business to benefit most from the value added gains that ICT can deliver.

THE PROGRESS THAT HAS BEEN MADE ON UNIVERSITY/BUSINESS CO-OPERATION AND KNOWLEDGE TRANSFER SINCE THE PUBLICATION OF THE LAMBERT REVIEW IN DECEMBER 2003.

We believe that progress is being made but that SSCs have a greater role to play in developing university business understanding and promoting collaborative action. SSCs can act as the voice of employers in their sectors and reduce the need for HEIs to engage directly with large numbers of employers. e-skills UK works closely with HEIs in a number of ways to develop more business responsive provision: Our employer research demonstrated the need for a new type of IT degree which incorporated business, technical, and interpersonal and project competencies. e-skills UK worked with employers and HEIs to develop the Information Technology Management and Business (ITMB) degree framework.

The ITMB degree programme is fully populated with 13 universities, including Manchester, UCL and Sheffield. This has resulted in a tripling of applicant rates at several universities compared to other IT-related courses.

"We have decided to offer the ITMB degree because it enables us to develop graduates with the technical, business and people skills needed for the global service-led economy of the future. What a great idea it is to give students access to insights from leading business gurus and to provide students with real business problems to solve."

(Linda A. Macaulay, Professor of System Design, University of Manchester)

Also of relevance to HE is e-skills UK's work on developing the IT Professional Competency Model (e-skills PROCOM), which provides the strategic framework for all skills, qualifications and learning activities for IT professionals. The PROCOM model was developed through extensive employer consultation and has led to the IT Professional Development Programme (`First Two Years'): a new programme for recruits into the IT profession, this is being developed by employers and universities to accelerate development into high skill job roles.

The Leitch Review of Skills called for the creation of a demand led system in which the needs of employers and individual learners have much greater influence over post 16 education and skills provision. SSCs can help HEIs understand the needs of business by providing them with up to date sector based labour market intelligence.

The Council for Industry in Higher Education looked at how the Lambert Review could be carried forward[30] and to inform government, its agencies, universities and business on how HE could contribute to UK competitiveness. In particular, it recommended that better labour market information provision could help HEIs to meet the needs of business. The CIHE report recommended that SSCs should take the lead in this area and focus in particular on STEM subjects and the options and modules within subjects that employers value.

WHETHER BUSINESS AND GOVERNMENT INTERPRET INNOVATION TOO NARROWLY.

We strongly believe that the focus should be on transformation rather than on just innovation which tends to be viewed as the development of new products and services. Rapid technological change is creating not just new products and services but opening up whole new processes, markets and business models.

Businesses have to use technology to transform the way they operate to respond to this new context and the successful exploitation of technology is becoming a major source of competitive advantage for companies. Although IT is undoubtedly a rich source of innovative potential for businesses when developing new products and services, this is too narrow a concept to reflect its total potential.

WHAT THE GOVERNMENT CAN DO TO FURTHER PROMOTE HIGHER VALUE-ADDED BUSINESS ACTIVITIES AND INNOVATIVE THINKING AMONG UK BUSINESSES.

Ensuring the supply of the appropriate skills at the right level is the single most important contribution that government can make to this area. Higher value added businesses cannot develop without technology and the skills to apply and exploit it. e-skills UK's Sector Skills Agreement for IT 2005-8 highlights the following issues:

— Entry level into the IT workforce is predominantly at graduate level and above. However, there has been an alarming decline in the number of students choosing to study IT-related subjects at A-level and at university (see below).

— IT and Telecoms professionals need more advanced skills as traditional entry-level jobs are now sourced from other countries and employers' requirements continue to change. The need to derive increased competitive advantage and return on investment from IT and the effects of geo-sourcing are leading to a stronger demand for broader and deeper skills than ever before. IT and Telecoms professionals in the UK are increasingly required to have a sophisticated blend of not only very strong technical skills, but also high level business and interpersonal skills.

THE SUPPLY OF IT PROFESSIONALS

The career choices made by young people are not supporting the growth in demand for IT and Telecoms professionals. Applicants to IT undergraduate degrees decreased by 46% from a peak of 27,000 in 2001 to 14,700 in 2005.[31] The graph below shows growth in the IT professional workforce and decline in applicants to computer science degrees.

Although there is a worrying decline in take up of Science Technology Engineering and Maths (STEM) subjects generally, the decline in applications to IT-related degrees is even more marked than that in other STEM subjects, including Engineering, Physical Sciences and Biological Sciences as shown below:

However, the decline in take up of other Science, Technology Engineering and Maths (STEM) subjects is also a cause for concern and it also affects our sectors. Of those IT professionals that have a degree, only two in five (39%) have graduated in an IT discipline[32] and employers sometimes prefer science and maths graduates to computer scientists when recruiting IT professionals. The STEM skills, particularly science, and maths, also underpin the development of new technology and its effective applications. For example, Telecoms employers require physicists and mathematicians for technology development roles.

What is needed is a radical review of the skills pipeline comprising:

— IT education in schools and colleges, including support for teachers so that they can provide up to date relevant exciting IT learning opportunities that inspires young people to take up IT as a career

— effective careers information advice and guidance

— HE provision that provides the right mix of strong technical and business skills

As noted in the section on University-Business cooperation above, SSCs are making progress in this area and we believe that as the catalyst between government and employers, SSCs are ideally positioned to deliver this change, with strong government support.

THE EFFECTIVENESS OF MACHINERY OF GOVERNMENT ARRANGEMENTS IN ENCOURAGING INNOVATION AND CREATIVITY.

We strongly recommend that there should be a much greater focus on helping businesses to fully exploit IT and gain the maximum productivity gains from it. In the increasingly technology driven knowledge economy, ensuring businesses understand the strategic value of IT in achieving their goals and have the skills to integrate it fully across all business processes is vital.

e-skills UK has recently carried out research[33] into the correlation between business performance and IT uptake. Key findings are that:

— the higher the IT management skills of senior managers the more likely they were to have adopted technology

— the higher the adoption of technology, the more likely the company is to be a better performing business.

However, although one in three companies investing in IT are able to show significant business improvement, one in four companies cannot, suggesting that there is still a considerable way to go to get the maximum benefits from productivity.

We therefore believe that enabling businesses to maximise the gains from ICT should be one of the primary aims of publicly funded business support, if UK businesses are to compete effectively in the global marketplace. We have developed a number of tools which can be of use in achieving this aim, most notably, the Business IT Guide, a web-based tool aimed at helping owner managers to diagnose and address their businesses IT needs.

Government should also ensure that all business support is employer demand led, based on research, such as that which underpins Sector Skills Agreements, and not designed primarily to deliver government targets. For example, qualifications should be an output of skills support and not the primary driver.

Businesses also need to be confident that they are receiving impartial advice and guidance and are not being "sold" government schemes of little relevance to their needs. The support needs to be flexible and capable of being customised to their needs and to local priorities.

Furthermore, the growing importance of skills to the competitive performance of businesses and the wider economy requires that they are given the highest priority in the business support portfolio. We must also stress the importance of support for higher level skills development; businesses in our sectors predominately require skills at Level 4 and above so the current focus on Level 2 is of little relevance to their needs and there is very low take up of publicly funded skills and learning provision among IT and Telecoms companies.

Businesses see skills as integral to their businesses, not a separate issue and demand led business support should therefore provide an integrated service. We strongly recommend that linkages between skills support and other forms of business support are robust and that the LSC skills brokerage service is brought together with the diagnostic and referral services of Business Link.

6 November 2007