BT looks to its R&D arm for £200m revenue boost

BT has been forced to scale down plans for its ‘corporate incubator’ Brightstar which was launched a year ago to help its R&D engineers set up new technology companies.

But the group’s technology unit, BTexact, (which owns Brightstar) is now going flat out to generate new sales beyond its traditionalinternal customer, BT.

Late last year, BTexact managing director Stewart Davies suggested that his group could create spin-off technology companies worth in excess of £3bn within five years – of which BT could be expected to own around one third to a half of the equity.However, the crash in confidence in the technology sector has pushed that target into the realms of fantasy, and forced BT to concentrate on generating cash from its technology assets, rather than trying to grow equity.

‘We’ve had to rethink the strategy,’ said BTexact engineering practices director Graham Reid. ‘Venture capital firms are no longer willing to ‘take a punt’ on a new company. These days they are asking the same questions that you would expect from your local bank manager. Where is your market? What is your cashflow? And the time taken to get funding partners interested is getting longer.’

BTexact employs around 3,500 engineers at its Adastral Park site near Ipswich, working on technologies related mainly to communications and internet systems. Annual revenues are £300m, but the majority of this is internal sales to BT.

With BT’s share price languishing at less than half its value 12 months ago, and its debt mountain accumulated during the 3G licence auction, all divisions are now coming under pressure to deliver strong figures. BTexact is thus targeted togenerate 40% of its revenues from external customers within the next five years. Assuming its internal sales remain more or less the same, this would amount to an additional £200m of non-BT contracts per year by 2005.

Some at BT now believe that job cuts among telecom equipment manufacturers such as Lucent or Nortel may create new opportunities for contract engineering work with such suppliers. This may account for some, but not all of the growth.

Patent search

Reid says the strategy now is to team up with existing players, not only telecom manufacturers, but also integrators such as CAP Gemini or Logica, networkoperators and internet hosts.

In a bid to generate new money-spinning ideas, a team at BTexact is also trawling through its estimated 14,000 patents (of which only about 25% are actively in use) to try to find new applications for its ideas – and chase down infringements in the courts. (The company is currently fighting a legal battle over its claim that it owns the patent on internet ‘hidden page’ technology – better known as the hyperlink).

So what technology is BTexact trying to sell? The engineering practice specialises in operational support systems engineering, voice over internet, voice recognition, data networks, electronic security, multimedia and systems integration. Broadband, WAP, and 3G systems are obviously major growth areas – despite the problems that have dogged these technologies over the last three years.

That is not to say the Brightstar incubator idea is a dead duck. The ‘drop-in centre’ for engineers with a good idea is still open for business. There are a number of spin-off operations lined up for launch and the handful of companies that have been spun off are still in business.

Reid said engineers across the whole company have had to take a closer interest in the financial performance of the company and their particular operations within it. ‘You can take that too far,’ cautioned Reid. ‘We still have to give our research people the right kind of freedom to be creative.’