Fixed Line & Mobile Telecommunications – Sector Summary

• The fixed line and mobile telecommunications sectors were the eighth and sixteenth largest contributors respectively to R&D in the UK1000 in 2008.
• Only two firms were among the top 25 R&D investors within the UK1000, BT and Vodafone, which retained their ranks from the previous year’s Scoreboard (third and fourteenth respectively). Both firms were among the 19 telecoms firms in the G1000
• BT and Vodafone dominated R&D spending in the UK telecommunications sectors. Together they spent 93% of the sector total, and 5% of the overall UK1000 spend.
• R&D decreased in the UK telecommunications sectors in 2008, while sales grew. Of the biggest investors, only Vodafone grew its R&D investment (by 20%) more quickly than its sales.

CASE STUDY Metaswitch: From Enfield to Silicon Valley

Silicon Valley seems a long way from Enfield, but for UK telecoms company Metaswitch these contrasting locations will play a central role in its global expansion plans. Founded in 1981, Metaswitch supplies software and components to many of the largest telecoms companies in the world. Its headquarters, and one of three UK R&D centres, is located in Enfi eld, but over the past two years its centre of gravity has shifted across the Atlantic to the world’s leading technology cluster.

In 2008, Metaswitch secured its first external investment from Sequoia Partners, the Silicon Valley venture capital fund behind Apple and Oracle, and Francisco Partners, a leading technology-focused private equity fund. The following year, the company appointed a new CEO, Kevin DeNuccio, a Silicon Valley veteran whose previous company, Redback, was acquired for US$2.1bn.

Mr DeNuccio is in no doubt about the potential to grow Metaswitch into a global business. “This company has a unique engineering capability, a sound financial position and a broad customer base,” he says. “Building on that strong foundation, we think we can expand the business globally and at least double the revenue streams in the next three to four years.”

The chairman of Metaswitch, John Lazar, says that it is inevitable that the company’s centre of gravity should shift towards the US. Four-fifths of its £61.8 million revenue is earned there, and major customers, such as AT&T, Cisco and Alcatel-Lucent, are headquartered there too. “We have a UK heart and our R&D is primarily based here, but we’re beyond thinking of ourselves as a UK company,” he explains. “We have a growth plan that is global and, in terms of our expansion, I don’t see that being driven from the UK. It’s something that Kevin will drive from the US.”

Although the company is increasingly shifting its business towards the US, it retains a strong commitment to conducting the vast majority of its R&D in the UK. Rather than recruit experienced engineers from other companies, Metaswitch has a policy of recruiting the majority of its R&D staff as graduates from leading UK universities, such as Oxford and Cambridge. “Our approach has always been to hire the best and brightest straight from university,” says Mr Lazar, “but this only works if you have a structure in place where you can train those people and retain them over the long term.”

Irreplaceable talent

Attrition rates among employees are very low – just 3% according to Mr Lazar, who himself joined the company from Oxford University in 1987. “We get top-class engineering people who stay because they are rewarded well, they feel they have a flexible career path and, most importantly, they don’t get bored,” he explains.

In an industry that is more prone to creative destruction and disruptive change than most, recruiting the right engineers to conduct R&D is fundamental to survival. “The difference between one absolutely fantastic engineer and ten OK ones is not just a factor of ten in terms of productivity,” says Mr Lazar. “It’s literally down to whether you can succeed or not.”

Last year, the company invested around one-third of its revenues directly into innovation and maintained this level during the downturn. “It is a core part of what we do to keep the engineering going, to continue to churn out fantastic products and then to use that as a way of sparking growth,” says Mr Lazar. “R&D is the heart of the company and our engine.”

So far, Mr Lazar feels that UK universities provide the calibre of graduates that it needs. The company has rebuffed numerous offers from Indian and Chinese vendors to offshore some of its engineering. “We’ve had people beating down the door saying why don’t you outsource some of the engineering,” says Mr Lazar. “We’ve never done it so far because we honestly believe that what we have here is more productive and more manageable and that is even taking into account the salary differential.”

“We have a UK heart and our R&D is primarily based here, but we’re beyond thinking of ourselves as a UK company,”

The company is currently privately owned, but a public listing at some point in the future may be an option. “If we go public, it’s almost certainly going to happen in New York rather than London,” says Mr Lazar. “That just reflects the way the business is positioned. If we were to list on NASDAQ, we would have a base of investors who understand our space and understand comparable companies.”

Although the company remains fully committed to the UK as a location for R&D, Mr Lazar does have concerns about the environment for innovation. “There is a culture in the UK that to some extent does not value really hard engineering,” he says. “People don’t naturally think of engineering as being sexy. It’s a great pity and it does put us at a competitive disadvantage compared with somewhere like Silicon Valley.”