WEDNESDAY 2 DECEMBER 1998

MR JOHN WESTON and MR TREVOR TRUMAN

  580.  It surprises me somewhat, and perhaps the Committee too, that you do not know what proportion of your turnover you are spending on research and development.
  (Mr Weston) We know what we are spending in terms of the money we set aside in the research end. A lot of the rest of it is actually included in our contracting and it therefore requires a special exercise to break it out. It is a piece of information other than for the purposes we are talking about today which does not

  581.  Perhaps I will ask Mr Truman for the percentage. We are not looking so much in terms of pounds but the percentage of turnover that is spent on research.
  (Mr Truman) In terms of research and technology funded by the company, we are at about one per cent, one and a bit per cent of our turnover on that kind of strict definition. That is not, as John Weston has said, including any product development.

  582.  That is not the sort of figure we were expecting to hear; it is way down.
  (Mr Weston) If you would like that number I would like to go away and work that out and provide it for you afterwards because I think it is much nearer to five or six per cent than it is 1.5 but I think it would be better if you had the accurate number.

  Mr Beard: Would it be possible at the same time to indicate the trend of it and indicate how well it is going and whether it is staying stable.

  583.  Not quantifying the figure at the moment, do you tend to spend the same amount on research and development during times of economic hardship and recession, either to the country or to your company, as you do in times of boom?
  (Mr Weston) Can I go back to your question which also included do we get any pressure from our shareholders on the issues and that is relevant in any debate about whether this is driven by short-term or long-term considerations. We have long cycle times in the business. If I take Tornado as an example, we started to develop the Tornado in 1969, we first flew it in 1974, we produced the first production aeroplane in 1980 and we produced the last production aeroplane in September of this year and it will actually be in service for another 25 years after that, so we have some very long cycle times within this business. We are already spending private venture research and development money for products which will not be rolling off our production lines until 2012-2015. I do not think in any analyst presentation or any meeting with shareholders I have ever been asked a hostile question about the amount of money we spend on research and development. So I do not feel myself under any significant investor pressure to spend less on R&D and indeed would not expect that to be an issue unless the company was not performing in which case it is entirely possible it might come under some pressure, but currently we are able to make long-term investments without being under shareholder pressure to reduce.

  584.  What about your own internal treasury? Do they make you cut back on R&D when things are lean?
  (Mr Weston) No. One of the things we try and do at the top of the company is to protect the R&D spend even at times when the bottom line is under pressure. The managing directors of individual business units can sometimes find it difficult to find the resources to actually put into spending the R&D money on occasions when we have got programmes under pressure elsewhere but we do not have any internal pressure that deflects us from making investments in the future. Trevor might like to comment on that as the senior executive who has to put forward the budget and defend it.
  (Mr Truman) That is the position. What we have also done is over the years we have developed steadily improved processes for focusing our research, our technology and our development programmes so of course we want those to be as cost-effective and to deliver as much value as they can so, yes, we have given attention to that but we have been able to sustain a substantial programme of work.

  585.  First of all, if I may say to Mr Weston, if you are surprised to see me here, then I am surprised to be here because I was only appointed to the Committee yesterday. I would want to reverse the question the Chairman asked. Are you under pressure from City firms to invest more? If you look at the comparative figures with some of the continental companies that could broadly be said to be in the aerospace industry then the figures that they declare are higher and it does worry me that the City seems to always want it not to be on a rising trend.
  (Mr Weston) I can equally say that I have never been put under any pressure to spend more. You will no doubt gather from the fact I do not have the figure readily to hand, what the total number is, that it is not a number that we have had to use in either context in terms of defending the position that we currently have. It is worthwhile noting, though, when we look at the research programme that we have that it gets driven out of a number of different areas of business. Each of the individual business units takes a long-term view of where it needs to be positioned in key technologies and draws up a research programme according to that. We have our own internal research establishment at Sourby in Bristol which works with the business unit to make sure that the thing it is working on from a long-term point of view is directed towards what will be a useful product at the end of the day. Under Trevor's auspices we also take a cross-company view to take look at the areas that may fall between the cracks, between the business units if you like, to make sure that we are also looking at some of the things for the future that do not fall naturally within the purview of any one of the businesses. It is an element of the annual planning cycle which we do sit down and review within the highest management circles of company. It is also an area where we spend some time with our customers, probably two or three times a year, at senior level sitting down and looking at what both our perceptions are of where we need to position the technology plan for the future.

  586.  Before I move on to Dr Gibson, can you briefly outline to us the stages and processes in deciding whether any new technology that comes along is worthy of investment.
  (Mr Truman) Before I do that, Chairman, can I just make a brief comment about investment in research and technology in relation to turnover. Just to make it clear that in a very diversified business where some of our business activities are not product generating, they are service businesses, they are to do with aircraft operations and so on and so forth, those are all included in the percentage, whereas in some other businesses there is much more emphasis on hands-on technology, so to speak. That is all included in the mix. As to how we determine what technologies are needed, our main processes in each of our businesses—and each business does it separately according to their perspective and then we aggregate it—we take as the main drivers what the market requirement is, what the benefit that the customer is looking for and then we feed back from that to challenge how we are going to deliver those benefits. We have fairly extensive processes for disaggregating this into what state do the technologies need to be, do we need new technologies, what are the technology programmes that need to feed into these very long-time cycle projects. So we have not only the identification of technology work but we have its timing. We must achieve these things over that period. Quite separately from that, we try to keep alive to the importance of newly-emerging technologies that we have not ourselves generated ab initio that have come from the science base worldwide, that have come from academia or from collaborative programmes, so we try to keep a weather eye on the importance of emerging technologies. When I talk about technologies in that sense, of course some of them are for the design and the development of the products themselves but I should also mention that we do a great deal of work on process. In some businesses as much as half of our research and technology goes into processes, processes for better means of manufacturer, better processes for system integration (something that British Aerospace is especially good at) the development of new tools, new computer tools for example that give us greater efficiency and utilisation. We take an holistic approach to how can we improve the benefit to the customer and our competitive position by the application of technology in that broad way.

  Chairman: Thank you very much. Mr Beard, then Dr Gibson.

  587.  Is innovation in technology in any one business entirely dependent on that business? If you saw a business you thought centrally was falling behind would you from the centre prod it or give it some spur? Thirdly, do you have a review of the state of technology in the company every so often?
  (Mr Truman) The way we have done it in recent years is to start from each business doing their planning because they understand the product and the market that they are working in, but then we have had annually a collective review for two purposes. One main purpose is to illuminate areas where the businesses can effectively work together if there are common challenges that could be attacked more cost-effectively by putting two or more businesses together; that is a way of debating that, and also to have the peer group review as well as my own personal review on the relative priorities, the way things have been pursued, the importance of emergent technologies, the benefits that one business has gained from a particular approach, to give the maximum benefit from sharing that peer group knowledge. There have been from time to time cases where I have felt bound to either put pressure on the business to say I think you have taken an inadequate view in some particular way, or indeed to support the business and say I think this business needs more support, it needs to be allowed to spend more money if that is the case.

  588.  Could you say something about the innovative culture amongst your employees. What features of your company have encouraged that? Is there a way of measuring innovation in some way? How do you gauge that? How would you encourage other companies to do the same? What are the features other companies can learn from you? Your view on any of those questions would be welcome.
  (Mr Truman) John Weston mentioned our principal values and that of innovation and technology. One of the instruments that we have come up with, and we have now done this in three annual cycles, is to have what we call the Chairman's Awards for Innovation. We make quite a big thing of this in the company. It starts off with company-wide opportunities for people to nominate great innovations. The innovation has to have been done. It has not simply to be an idea but something that has brought some benefit. This year in our awards I think we had about 1,000 nominations. We made about 150 awards of various kinds and we have found that this has been tremendously stimulating. These may be technology-based innovations but they can also be workplace organisation, financial structures, all kinds of things, and the most stimulating and satisfying aspect of it has been that it has engaged the interest and the activity of all spheres of the workforce from the shopfloor into the offices, the design people.

  589.  So what makes it worth their while to do it? Do they get a million pounds for it?
  (Mr Truman) No they do not get a million pounds. They get a lot of recognition and the winning awards, so to speak, do get a fair amount of chance to disseminate their ideas. There is a lot of interest across the company in the things that are put forward because they are absolutely outstanding.
  (Mr Weston) It would be fair to say when we first started that quite a lot of people said they would not bother to apply for it, there is no money in it. I am delighted to say that has not been the case at all. It is very much a scheme that is designed to encourage innovation in its widest sense so we have got things like our vibrating silicone gyro which is a micro machine piece of silicone that enables us to collapse a commercial navigator which at the moment costs £100,000 plus and sits in a box about so big to something that fits in matchbox and costs you about 30 pence. As well as generating that for the defence industry we are also working with Sumitomo now to flow that out as a motor industry component. That is at one end of the scale. At the other end of the scale one of the first Gold Award winners was one of our guys who used to sweep the shopfloor in our factory in Woodford. He decided we were not looking after the tooling in the final assembly hangar well enough, so he went and found a dusty office, cleaned it out, went and painted it with paint he had bought with his own money and fitted out tooling cabinets and got people to start checking in the tools every night and issuing them with a proper record system, so that was a piece of innovation which was way beyond what we would have expected from somebody doing that sort of job.

  590.  How long did it take to build that culture up? You say there was not a great initial reaction, but did it take five years, two years?
  (Mr Weston) I think it has to be fitted in to what we were trying to do in terms of changing the atmosphere across the company as a whole, so there were a number of things like this which gained quite a lot of momentum in their first year which had we done them 15 years ago might have been much more of an uphill struggle. As Trevor says, we do the gold awards and we have all the silver award winners along to a dinner. We had it this year in Paris and all the senior management turn out for it and it is a bit like an Oscar award evening, I guess, and the degree of excitement and enthusiasm it generates is really tremendous. The ripples there flow out through the company and I think every year we have had a pretty significant increase in the number of entries for it, so I think something just as simple as giving some real recognition at the highest levels in the company that you really value innovation is an important thing.

  591.  How do you ensure that all the scientists and technologists who are going to contribute to the innovations have an understanding of the sort of thing the market wants and the sort of thing that will be commercially useful to concentrate their efforts on?
  (Mr Weston) Can I just go back and give you a rather more comprehensive list, and I do not want to go through them all because I could spend the whole afternoon on it, but could I pick up some of the other things that we do do from the innovation point of view. First of all, I mentioned that we have got it as a value and that means that every one of the businesses when they actually put in their value plan every year, they have actually to cover what they are doing for innovation as part of the planning process, so that builds it fundamentally into the way we go about organising the business and also the way we go about reviewing the business when we go out and review performance. Secondly, as well as the innovation awards, two or three years ago we did an in-depth survey of innovation through the company to try and assess whether our perceived problem, which was how much innovation was actually coming out in the product at the end of the day, was due to the fact that we were not generating innovation or how much it was due to the fact that we were killing it in our management processes. That produced some quite interesting results because I think it confirmed that we had hundreds and hundreds of good ideas spilling out from people who worked in the company, but what we did not have was the management culture which enabled people to understand that if they had a really good idea, how they could bring it to bear, how they could understand what were the hurdles they had to jump to demonstrate that this was a worthwhile investment which was going to produce some real return. That led us to some in-depth analysis as to what did we have to do to provide a culture in which people understood some of those things and made it easier to get ideas out of the idea stage and sift out ones which were not great and maybe enable ones which had tremendous potential to flourish; and I think that is a challenge, getting sufficient rigour to make sure you are not spending money on a whole bunch of things which are just half-baked ideas, but really giving some encouragement to the ones which have potential, and that is not just making it easy for people, but it is sometimes giving them some quite big hurdles to get over and at least having them understand where the hurdles are and what the criteria are going to be on which they are judged. We have also worked very hard on how you actually pick up some of the innovative ideas and then spread them around the company because doing them in one place can be great in that area, but the real potential is whether you can apply them across the whole organisation, so I would not claim that we have cracked that in its entirety yet, but we are now identifying in all the areas that we use in measuring business, and that is everything from the European Federation quality model to what we are doing on the value-based management, and we have actually created within the virtual university of companies a repository of best practice which is available to everybody on the Intranet and we are now working on how we actually get the disciplines in the management planning to make sure that at least those ideas are there, they do get picked up and used across the company. So it is a very difficult thing to institutionalise and you cannot sort of set up an innovation committee and have it perform, but we have tried to take a broad approach to it and I think we do feel that we get an enormous amount of innovation in the company, but it is getting it through into the end result which is the real challenge. Sorry, your question was?

  592.  My question was how do you get that knowledge of what the market wants; what are the commercial targets that you are going for permeating through that very large organisation so that people are not wasting their time, but actually doing something which is going to have a fruitful end?
  (Mr Weston) Traditionally, that again comes out of the value planning or the business planning process because that actually always starts with looking at the market and where we think the market is going, what we think the market drivers are in that and things like Trevor's technology plan, they all have to fit into that as a total pattern. I guess again what we have been trying to do in the last few years in trying to get everybody in the company to think about it, one of the things we have done as part of the change programme is to recognise that we actually need people right down at the bottom of the organisation in their individual cells using a sort of set of tools we have developed to look at how they actually plan the improvement of everything they actually get involved in themselves. One of the things that forces them to do is to identify who their customers actually are and in most cases that is an internal customer, and they have to go and sit down with them and not only agree what are the deliverables that they might normally expect, but what are the aspects by which their internal customer really judges and measures their performance, which generally goes far beyond whatever the deliverable measures actually are, and just some simple things like that can generate a lot of innovative ideas about how they can start satisfying those sorts of things better. It is very much not trying to do it so much on the big picture, but to actually get the motivators and the tools way down into the organisation on a consistent as possible basis across the organisation.

  Chairman: I think we will stop you there, Mr Weston, because if we let you go on much longer, you will answer all our questions before we have asked them!

  593.  You have referred to how you work the development of new technology within the company and also identifying customers' needs, which I assume is customers outside as well as within the company. Can I further ask you how you actually decide which new technologies potentially are worth looking at that are being developed from outside the company?
  (Mr Truman) We start with such challenges, and we are all familiar with the tendency of new generations of equipment to rise exponentially in cost and the next generation is so many per cent more than the last one if you are not very careful, so if we just take that as an example, the challenge is looking for ways of breaking that curve, how we can break that climbing curve. We start then looking at the next generation of product and ask, "What are we going to do about materials? What are we going to do about processes? What are we going to do about the way in which we design the things?" and then we start to say, "Well, if those are the sub-divisions of the challenge, where are the technologies that are going to help us to do that?" Therefore, we are at any snapshot in time doing things across that spectrum, we are coming to the actual point of application of technology that we have been working on for some years, but we are also looking at the early stages of technology for the future, new methods of computing, new methods of simulation, new approaches to materials. We are all familiar with the general concept of making things in composite materials, but we are on probably the third or fourth generation of the technologies that go into those, but we need to see in these technologies some, at least potentially, beneficial path. We do not work on it because it is interesting; we work on it because we can see the path to delivering the benefit to the particular challenge that we have identified.

  594.  Can I take you on from that rather rarefied atmosphere to the deeply practical and ask in the first place whether the current way that the defence industry combines together to meet a government's requirement is helping or hindering the development of your innovation and technology? Is it a challenge, or I suppose we only have challenges, we do not have problems?
  (Mr Weston) You mean how it combines together in partnerships?

  595.  You can have half a dozen companies that will bid together. I am not thinking of the European Fighter Aircraft because that was an appalling way of doing it, there are more modern ways of doing it, that was driven by the EU.
  (Mr Weston) I think the teaming arrangements that you quite often see in bidding for significant defence contracts these days are as much driven by the desire to make sure that you have got a team together which is spanning the best possible capabilities in what the customer is looking for. We are always very careful in the way that those come together and we try to put them together in a way that enables you to manage the result. I am not sure that at that stage you are already at the point where people have started to do the advance research that begins to give them enough understanding to be able to propose a piece of technology under a fixed price contract that we have got some reasonable expectation of delivering with an acceptable risk profile. I do not think there is a huge linkage at that point. I think the point at which we decide what are the critical technologies in each of the sectors is a much earlier part of the planning process.

  596.  Can I then go on to the restructuring of the European defence industry and ask whether you see that as being a benefit to your company and whether you will still remain as innovative allied with some of the other big European companies with whom you may or may not do a deal?
  (Mr Weston) One of the prime reasons for doing that is having spent 20 or 30 years developing programmes under international collaboration, regardless of the difficulties of doing that, that has enabled us to develop some very good products at competitive prices which have stood that test in the international market place against the best of the international competition. Although that enables us to divide up the development bills and to get production runs to the point where we get economies of scale into production it still means that around Europe we are all investing in fundamental technologies, a lot of the same fundamental facilities, and can we really afford to do that in the current day and age particularly in the face of the competitive threat faced by the consolidation of the US industry? The whole thrust of the consolidation of the industry is all about getting that investment side of the equation and making sure that we are investing in key technologies once and we are only investing once in critical sets of research and development and testing facilities and to a certain extent getting, wherever it is feasible and practical, the economies out of centres of excellence and concentration. That need not necessarily have a negative impact on innovation and I think the challenges in doing that are much more management challenges about how do we take companies with different backgrounds and cultures and mould them together in something where we can get those benefits in a reasonably informed delivery across the organisation. That is going to be a very big challenge.

  597.  I am terribly sorry to interrupt, Mr Weston, but we really have a long way to go and we have only got 25 minutes left to get there. If, as Chairman, at any time I rudely cut you off and there is more you wish to say you might like to make a note of what you wanted to say and then perhaps dictate a letter to us or drop a note to us. There is so much more we want to ask you.
  (Mr Weston) I quite understand, Chairman. Feel free to keep me well disciplined.

  Chairman: I hope you take my words as a form of apology from the Chair for being, not discourteous, but trying to keep some punctuality.

  598.  When I was a guest of your company at Warton recently I saw some of the excellent work you are doing with schools. What about the science base in universities? Can you first of all succinctly describe what British Aerospace is doing with universities?
  (Mr Weston) First of all, we spend approaching £8 million a year in the universities and we try and operate that in terms of working with certain centres of excellence within the spread of the university skills. We have recently been trying to get rather more focus on how we wring the best value for money out of that by co-ordinating that through the virtual university that we have created within the company. One of its faculties is all about co-ordinating the research in the technical and manufacturing areas. We also work closely with both the university and the school systems in terms of trying to make sure that we get as large an interaction as possible to generate as much support as possible for careers in science and technology. We are actually having difficulty at the moment in filling our engineering recruitment quotas from the UK institutions and for the last two or three years have actually been recruiting engineers from across Europe.

  599.  I think the Committee will note that with concern. That presumably is also part of the reason why you are working with schools. Take what I have seen at Loughborough, is that a typical way of doing it? To what extent do you measure or define the difference between blue skies research and applied research?
  (Mr Weston) Loughborough is a very interesting example in that one of the major disciplines that we have in engineering is system engineering, ie the ability to look at a total system, decompose it into its constituent parts and decide how you actually break that down and control the development of the various elements and still make them come back into an integrated system. We were taking engineers from all sorts of other disciplines and spending part of our time retraining them as system engineers and we decided that was perhaps counterproductive and what we ought to do was to find a university that was prepared to run a custom designed course. We went round a number of universities seeking somebody who shared some enthusiasm to do that with us and Loughborough picked up the challenge and put together a course essentially to our specification for system engineers and we said we would guarantee places in British Aerospace to half the output of that course. It has now been running for three or four years.
  (Mr Truman) We have just had the first cohort come right the way through last year.
  (Mr Weston) It commands some very high entry qualifications, rather higher than you would probably expect for an engineering course from Loughborough, and the graduates from it have been in quite some demand. I think it is a bit of a unique example, we have not done that in too many places.