NEXT GENERATION COMPETITION

Ben Verwaayen

Chief Executive, BT Group plc

 

CBI CONFERENCE

Tuesday 9th November 2004

                                                                                                                           

 

The UK has lived through many disruptive changes in competition and has done extraordinarily well.  This is a flexible country.  But we are now facing a next generation of competition, which is transforming our business models and the competitive pressures we face. 

 

The UK has some great strengths but we need to choose to play to them.

 

So I want to talk about what globalisation means today, what it means for my adopted home in the UK, and how the choices we make now, today, this year, are going to decide whether Britain and British industry come out as winners or losers.

 

Speed is key.  Time is not our friend.  Waiting for five years just won’t do.  We have to make tough choices:

1.choices about how we develop our knowledge base and therefore about education

2.choices about how we boost UK entrepreneurial spirit

3.choices about how we develop our business models, and

4.choices about how we network ourselves both within the UK and with the rest of the world.

 

My remarks are as much a memorandum to myself and to my company as directed to you and to the politicians.  BT is not yet world-class in everything we do - and we have to be.  I know that in this audience there will be some individuals who will have been frustrated by BT, whether as individuals or as businesses, just as others will have been delighted by our service. 

 

So I am not pretending in this speech that BT has got everything right – we have got a lot to learn.  But it matters that we do get it right because we have an absolutely key role to play in the competitiveness of your businesses and of the UK as a whole. 

 

Learning is the whole theme of my speech today: that business and politics in the UK have to think about what and how and with whom they learn, how we create a “learning economy”.

 

As a UK business leader I am part of “UK plc”.  I relish it.  But my management experience has embraced both “old Europe” and the USA.  For many years I ran the main telecommunications network in the Netherlands.  I then went to the USA as Vice Chairman of the management board of Lucent, one of the world’s leading vendors of telecommunications equipment.  That role took me all over the world to see customers and  suppliers.

 

Now I have had the experience of working in this country, operating in the UK public policy environment.  It has some unique challenges I must say, but also  some real strengths.   As I said at the beginning, we have an opportunity to seize.

 

I still travel of course.  In the last month I have been both to the west coast of the USA and to Asia.

 

You don’t need to be a genius to smell the coffee. 

 

There is a transformation in the rate of change of the global economy.  The Americans instinctively feel it.  It’s largely coming out of the east.

 

In Europe we too need to open our eyes, to feel the urgency while avoiding paranoia.

 

These genuinely global developments have been made possible by the industry I work in.  It is the power of broadband networks, fixed and wireless, and the way they are now converging.  It’s changing the face and nature of competition.

 

It won’t be long before the most wide spread camera in the world is the one built into the mobile phone.  New software developments mean all kinds of digital systems can work together.  Cameras can work with televisions.  Radio stations can play through the PC.  Collaboration becomes easy.

 

Physical processes – sending documents, recording sound, meeting people to work (or play) – these become digital processes.

 

Education is increasingly on-line.

 

Business models can be disaggregated into pieces all across the world and still function as an integrated unit.  It’s a virtual world, where distance doesn't exist.

 

Let me give you a concrete example.  Recently I saw the making of the latest Dreamworks movie.  I was in California, but people were simultaneously working on the animation in real time there, in Bristol and in Israel. 

 

You don't need a huge mainframe computer to be linked to others.  Individuals can work with others in their own field of expertise to create something new.  It changes the definition of a team, and that can be very positive, being able to add the one key player wherever he or she lives.

 

And this is not just about people communicating.  Everyone can work with everyone – and everything with everything: machines will also communicate – with human beings and with each other.  These are tools – for companies, for organisations, and for individuals

 

What this means is a profound change in the way innovation happens. 

 

Throughout the 20th century, knowledge developed within specialities or within geographic localities (Silicon Valley for example), where the depth of expertise in any field was the basis for furthering it.

 

In the 21st century, the biggest breakthroughs are coming from two new linkages – first, between areas of expertise - biotechnology and electronic engineering, or agricultural and software development – but second, between widely differing regions.

 

It’s a “new renaissance”.  And all these linkages are being brought about by the rapid deployment worldwide of intelligent, industrial strength broadband networks.

 

It opens tremendous opportunities for hundreds of millions of people, who so far have been left out.

 

It is the basis of the outsourcing phenomenon.

 

Outsourcing is far more than just call centres – in fact  the focus on call centres trivialises the debate.  Outsourcing means any kind of working with information in a place where it can be done more advantageously than at the source of the information.

 

And globalisation is much bigger than just outsourcing.  It is also beta sourcing – the creation of software infrastructure that is enhanced and developed by individuals, wherever in the world they live, for the good of the user community as a whole.

 

It is off-shoring – where expertise is provided and business processes are carried out remotely – at one level it is all of Citibank’s business cards being ordered on-line, then printed overnight in India, and air-freighted to wherever they have to go.  But this can apply just as easily to knowledge activities.

 

It is supply chaining, where the logistics are separated, physically and in organisational terms from the company of origin.

 

It is in-sourcing, where others take care of after sales, customer care and returns.

 

All of these innovations open up a new set of opportunities for companies around the globe dramatically to improve their productivity.

 

It is unstoppable, where services are coming across networks.  And it should be morally unstoppable as well, since it's opening trade opportunities to economies which so far have been excluded, helping millions of people aspire to a better standard of life.

 

It means that aid is starting to change into trade

 

And it is way too simple to say this is all based on low wages. 

 

If that was the case it wouldn't be economies like India and China leading the charge, it would be Malawi and Haiti.

 

What we are seeing is a new triangle, with Knowledge at the top, and Entrepreneurial Skills and a Competitive Business Model as the other points.  Broadband communications then hold the triangle together because it’s only the ability to network that gives the other necessary conditions of Knowledge, Entrepreneurial Skills and Competitive Business Model any meaning at all.

 

Only if all those elements are present in a local economy does the model work.

 

Only then is quality of service and innovation appealing enough to get radical shifts.

 

But then it is creating a seismic change.

 

In 1988 the total export of services in the India IT sector was 50 million dollars.

 

Today it is 15,000 million dollars - a growth of 300 fold in 15 years.

 

A decade back if you worked in IT you could expect to earn 65% more than the average wage.  Now that premium has disappeared – and of course it is theoretically possible for every single IT job in the world today to be done in India and China with people to spare.

 

The pace of wealth creation is accelerating.  The pace of global growth is increasing.

 

There has been more off-shoring of basic R&D in the US pharmaceutical industry to India over the last 12 months than over the whole of the last 100 years.  60% of Cisco’s basic R&D is now outside the USA.  High value customers of Western banks are looked after and nurtured out of India.

 

And of course the search for the ideal combination of knowledge, entrepreneurship and economic model isn't restricted to India and China, though the scale there is overwhelming.

 

In Germany they call it near-sourcing - just moving over the border to the new EU Member States.

 

This is helping not just the big and well publicised companies but  SME businesses too.  In Germany, the famous Mittelstand – the hugely important SME sector - has near-sourced 4 million jobs over the last 3 years alone.

 

Every day many ferry boats leave the harbour of Stockholm.

 

They used to be full of booze-loving Swedes who wanted to enjoy a tax-free drink.

 

The boats are still going but the cargo has a different smell.

 

It is dirty laundry, going to the Baltic States, for washing and ironing, and brought back the next day, clean and fresh, to be picked up by their customers not aware of the trip their clothing has been making.

 

Stockholmers have never looked so good – and another little ripple is added to the wave of globalisation.  And it certainly won’t stop at laundry.

 

So the secret formula is the triangle of Knowledge, Entrepreneurship and Competitive Business Model, with the key added ingredient of Networking capability as the triangle’s central nervous system.

 

Reliable broadband networks mean it doesn’t matter where you do business.

 

Processes can be split in location, while staying whole in their operation.  This move to a global digital networked economy is the profound change which is completely up-ending traditional models.

 

In the UK and Europe, we need to look to ourselves in the same way. 

 

How do we measure up against the economic triangle I have described?

 

How do we rate our:

1. knowledge?

2. entrepreneurship?

3.  business cost base?

4. state of the art networking capabilities?

 

We can only ride this wave of innovation if we’ve got that triangle right in terms of our own economy.

 

 

Knowledge

 

On knowledge, it all starts with the question: how important is education and how important is relevant knowledge?

 

It is a truism that knowledge provides a competitive tool, especially for economies like ours that cannot compete simply on wages.  Just don’t think knowledge and its effective use is confined to high wage economies.

 

The other day, the Chief Information Officer of BT took a call from our recruitment people in the US.

 

They had discovered a brilliant young candidate who scored 100 out of 100 at MIT.  Curious to see him, our man flew out and asked how such an extraordinary performance was possible.  The young man was understandably proud of his achievement at one of the world’s foremost academic institutions, but he was also honest enough to admit he scored 'only' 84 out of 100 at the Indian Institute of Technology in Delhi.  Sadly someone else offered him more than we could afford…

 

So I think we should be looking very hard at what we are risking with regard to our own higher education – and frankly mainland Europe has more to look at than the UK. 

 

Some of you may have seen the ranking of the top universities in the world for science, produced by Shanghai’s Jiao Tong University.  It’s interesting to see China doing such benchmarking.  Of course you can argue about the detail, some universities will holler at their position, but it showed only two European universities in the world top ten – Cambridge and Oxford.  Imperial and University Colleges, London,  made it in the top 25.  Only two other European universities – the Swiss Federal Institute of Technology in Zurich, and Utrecht in the Netherlands -  made it into the top 40.

 

So politicians and we in business say “We must have a knowledge economy”.  That it is the “only way we can compete” with our cost base and social welfare model.  Yet we can only manage six of the world’s top forty universities, albeit four of them here in the UK.

 

It does not sound like we are very serious, yet it’s people’s futures we are talking about here, and there are no prizes for coming second.

 

There is something depressingly introverted and nationalistic about too many European higher and further education institutions. 

 

So full marks to the LSE for having as many non-British as British nationals on the teaching faculty.  And to London Business School, which is the most international business school anywhere in terms of mix of students and faculty.  (But then let’s also mention the Indian School of Business in Hyderabad, which is brand new, already has a glittering board, and is second to none in terms of infrastructure and buildings.)

 

We have to internationalise our higher education institutions, so students and academics can migrate easily to knowledge centres.

 

That means for a start making a reality of the EU agreements which are meant to facilitate mutual recognition of qualifications and studies across Europe.

 

Knowledge needs the proximity of other knowledge, it likes to cluster.  So we need to welcome and encourage differentiation and specialisation in higher education with all that means for differential funding and resource allocation.  There is simply no point in destroying excellence. If that means more money on a proper long-term funding basis for the top 10 percent of our universities for both academic salaries and PhD funding, we had better find it.  The UK has a tremendous higher education basis on which to build, but we need to make sure we recognise properly what a resource it is.  And make no mistake, that will require certain demands on the institutions so rewarded.

 

We have to make those knowledge centres interlinked with others around the globe and so become magnets for businesses and industries who need the knowledge. 

 

It requires a different thinking about the linkage and dialogue between education, research and business, and how we transfer knowledge from the university base into industry (and just as important from industry into universities).

 

It requires open doors, embracing interaction between all the three levels.

 

It requires priority setting for relevant bases of knowledge, cooperation between different faculties and institutions, and strong and strict measurement of quality of output through such metrics as citation indices - both in research and in education.  We measure ourselves on total shareholder return.  What is the TSR for higher education?

 

It means being willing to invest money in expensive courses which require laboratories and up-to-date technology as well as in courses which do not require such investment – that is we need science as well as arts. 

 

Sometimes governments seem too focussed on education stocks – numbers of graduates, etc – and not enough on whether supply is matching demand.  This requires up-to-the minute calibration of courses and studies – a “just-in-time” approach rather than the current “just-in-case” one which can too easily churn out far too many people whose skill sets are less than relevant.

 

But that means too that we in business need to be less selfish with knowledge ourselves – it’s no good us saying “give me the ‘right’ people but otherwise I don’t want to participate,” we have to steer, give a lead and set an example.  The Lambert Report showed that 80% of UK businesses had no interaction at all with universities – it just won’t do.

 

If we’re to get the stars, the people who then attract the best of the best researchers and create those centres of excellence round which local companies and inward investors cluster, we will have to pay for them of course.

 

It goes without saying that we need the best students from here and abroad, but we also need to send our best to other countries to get exposure to their own areas of best in class.

 

We should be encouraging our students to study in Mumbai or Shanghai as well as in Paris and Barcelona - and if you think about it, in a world of tuition fees, it might be economically advantageous to them to do precisely that! - and there will almost certainly be less of a language problem there.

 

They can  then bring back to the UK and Europe some of the energy and dynamism and hunger for change which exposure to China and India would surely bring.  And then we’ve got to make sure we keep them!

 

One way to measure knowledge is to look to patents, published research and citations.

 

If you do that you see major shifts taking place.

 

When China joined the international patents system in 1996, it was at the same level as Europe.  Now it is registering twice as many patents, and beginning rapidly to catch up on the USA.

 

As an aside, the continuing EU failure to come up with a pan-European patent process is feeble beyond belief.

 

Of course an open door to new talents is not simply about university faculties.

 

In the Californian high tech industry there are 3.3 million companies, of which 1.8 million are owned by immigrant entrepreneurs.

 

They contribute billions to the US economy.  Our world will be better with more freedom of movement, not less.

 

Entrepreneurship

 

So to the second point of my triangle, entrepreneurship.

 

We need to keep looking at how we avoid discouraging people from taking risks in creating new businesses.  Young people have tons of ideas, but for whatever reason we do not do enough to turn those into new ventures.

 

We need to ensure that those who take risks see the rewards - and for those who took a chance and fail, allow them to regroup and go for it again, albeit learning the lessons from their failure.

 

It is a matter of mindset. We should learn from the US where success is great but trying is also respected.

 

We need to ensure that our tax system acknowledges the need to protect start ups and we need to encourage family and friends chipping in at the start.  And talking of families, the US seems to do far better in producing women chief execs of start-ups – it really is a family thing.

 

In France, they now offer 100% relief from social costs to start-up businesses which invest more than 15% of turnover in R&D.  Cynics might say that given the burden of France’s payroll taxation, they had no choice, but it certainly sends a clear signal that start-up enterprise is particularly favoured. 

 

But entrepreneurship doesn't stop at the door of emerging businesses.

 

We equally need to stimulate innovation at medium size and larger enterprises.  That means most of us here.

 

That means encouraging people who facilitate and move across established boundaries by thinking in new creative ways.  Facilitators are people within large organisations who create commercial innovation by understanding individual areas of specialisation.  In BT, these are the people who can identify how the digital networked economy can address needs that customers have not realised they have, and so create value in totally unexpected ways, and we are seeing promising models in some of BT’s own new wave businesses.

 

We should learn about the structure and chain effect of innovation, where companies in different sectors can collaborate to create new models for economic success.  For example in Japan they now have airport luggage labels which communicate so that baggage is automatically routed to the right aircraft – wireless telecommunications enabling the airline industry to overcome a perennial problem.

 

We absolutely must not underestimate the importance of innovation in management and in design – which have been under-measured in traditional models.  I would cite Dell as a classic example of management innovation round a suite of absolutely standard products.

 

Making horizontal connections between areas of established strength has to be the major competitive advantage of the UK and Europe in this new world.

 

Competitive Business Model

 

Knowledge, entrepreneurship - the third point of my triangle is a competitive business model.

 

As the Chancellor never fails to tell us, productivity is key.

 

When I was last in India, a very senior Indian politician made a sobering comment which struck home:  In your country, he said (and by that he meant the West, not just the UK), in your country if someone is lazy he is still rich.  In India, if someone is lazy he is dead.

 

That does not mean that I advocate an end to our social model in the UK, but we need to understand the drive behind the changes in the Asian economies.

 

India has knowledge, it has entrepreneurship , and it has some quite remarkable new world-class digital networks, which have been deployed at astonishing speed. 

 

Of course things happen faster where people work longer.  In our society we have to work smarter.  We have no choice but to see how we can improve our output per unit, bring as many people as possible into the workforce, improve our quality and cut red tape.

 

There is an historic role for government to embrace the latest technology, so the internet becomes the normal platform for transaction with the government.  

 

But the message to politicians has to be: Don’t just automate bureaucracy and make it quicker.  We have to change the whole way we approach government, using network technology. 

 

There are non-trivial savings to be made, which will be crucial if we want to maintain our social model and still be able to compete.

Networks

 

In this entrepreneurial new world that runs on digital knowledge and information, a state of the art, intelligent broadband network is the central and critical feature. All the knowledge, all the entrepreneurial skills, any cost advantage are nothing without network connection.  It is the framework which holds together the triangle I have described and gives it life.

 

In Britain as elsewhere we need to rebuild our national infrastructure in telecoms.  Yes, we have a more extensive broadband network than any other G7 competitor and that’s good.  But current networks are simply not broadband enough.  We certainly need more than we have now.  What we really need is a network that does not prevent you using it in the ways you wish.  That means next generation broadband networks.

 

BT's 21st Century Network is our vision for the future. It is not a monopolistic vision.  It is part of a network of interconnecting and competing fixed and mobile networks.  But it will replace the present patchwork layer of BT networks, built over generations of technology, with one nation-wide broadband network.

 

As described at the start of my speech, it will be able to link everyone of us to anyone and anything else, anywhere in the world, in a way that will ensure you are best connected over either a fixed or wireless connection at the highest quality and lowest cost.

 

The UK has the potential to lead the world – other countries are beating a path to BT’s door to understand what we are doing.  But it will require billions of pounds of investment and will therefore need a commercial return. 

 

External comparisons show that BT is already the third highest investor in fixed network infrastructure in the world - last year, this year and next year – and that’s before all the investment being made by other UK players.   The whole UK telecoms sector is 2% of the economy but accounts for 7% of total UK fixed capital investment.  BT alone invests between 3 and 4% of total UK fixed investment.

 

That’s a great story for the UK where we are too used to hearing about under-investment in infrastructure.  But do not take its continuation for granted. 

 

At this moment Ofcom is the most powerful and significant organisation in the UK, as we wait for the next phase of the Telecommunications Strategic Review.  What it decides will be profound for your businesses and organisations.  If it gets it right, we will see investment in this area accelerated.  Get it wrong – even if unintentionally – and the impact will be clear to see in a year or so’s time, with investment cut back and the UK missing out on a leadership position.

 

BT has a shared responsibility of course in getting the right outcome from the Review.  It is a great challenge and responsibility for both of us.  But in a world defined by comparative failure and success, we must have an environment for investment on a big as well as a small scale.

 

The political process needs to embrace, understand and be energised by this debate.  There needs to be both political and business leadership.

 

As an economy, we face substantial change. It is happening as we speak, although the overall picture is not clear to everyone.

 

People may think this will blow over, it is just one of these stories that we heard before.  Indeed people have accused me of saying it before.

 

But sometimes reality has a habit of catching up with and overtaking rhetoric.  I think we are in one of those periods, and we had better face up to the implications.

 

While countries do not go out of business, they can become profoundly poorer.

 

We had better have a fundamental rethink of the value of knowledge and education, accelerate even further the drive for innovation, and ensure we have an investment regime which facilitates the infrastructure for best-in-class centres of excellence in terms of  facilities and people, and then have them linked with the rest of the world.

 

For business people and for our employees, this is still good news, if we open our eyes and don’t shut our borders. 

 

The world will grow as a marketplace through all these developments. The pie will become larger.

 

But that doesn't mean we can automatically count on our share of it.

 

What we  cannot do is be patient.  I am not aware of an economic translation of patience.  It’s no good saying Europe will get there but it will take 15 years as it always does.  We don’t have 15 years.  The urgency is now.

 

But nor can the UK go it alone, however well placed we are in comparison with some others – we have to work in partnership and recognise that this country has things to learn too.

 

We will have to construct a shared vision of a sustainable future – this cannot be a top-down edict to citizens where they purely see sacrifice and fear of unemployment.

 

We can ignore this phenomenon for two, three or four years and probably nothing much will happen on the surface.  But the pain of adjustment will then be even greater.  So I believe that the CBI membership, in partnership with the other national employer organisations, and with politicians, working in concert across the EU and helping to bridge the Atlantic, has a crucial role to play in setting and driving the right agenda. 

 

Thank you.