Market View: Where are the innovators?

When you visited the R&D team of a UK company 20 years ago, you’d often find yourself swooping up the drive of a Victorian mansion, somewhere on the outskirts of an industrial city.

Labs would sprawl through leafy established parkland. There was sometimes an air of gentle dilapidation, but this is where UK industry would house its most unworldly, eccentric, and intelligent staff – the innovators. It’s from places like these that, throughout the 20th century, Britain led world engineering through odd collaborations, private passions, public funding and individual ingenuity. Utilities had their own similar labs and innovators, who crucially had the time and resources to play with ideas. Innovation is risk – to succeed one must accept failure. Without benign indulgence by management of delays, mistakes and outright eccentricity, innovation cannot thrive.

This corporate campus world of creative freedom is long gone. Well managed, globally competitive businesses working with the tight margins of the old industrial sector have largely shed their corporate labs. The utilities have seen a massive reduction in R&D. Dieter Helm, here at Oxford, has estimated that in 1987/88 the UK electricity sector spent £400 million in today’s money on R&D.

Directly comparable figures are hard to quote, but is that figure over one tenth of this today? ‘R&D Intensity’ is the ratio between R&D spend and turnover. A research intensive company such as a pharma business might have an R&D intensity of 15 per cent. A typical industrial engineering business might be 2.5 per cent. The R&D intensity of utilities is 0.3 per cent. In the UK the issue is particularly acute, with privatisation a factor, but this is common throughout Europe.

And yet utilities need innovation – the operating environment isn’t standing still. Customer, regulatory, environmental and cost drivers are changing the operating space for utilities. As with other industries, the utilities push innovation down the supply chain, expecting their suppliers and contractors to deliver improved products. But they also push down their pricing pressures, creating an undeliverable objective. There’s no room for risk in a 2 per cent margin, no place for playing with ideas when just delivering the basics is such a challenge.

The UK’s growing ecosystem of innovative start-up companies and spin-out companies is part of the solution, but they themselves face challenges. Engineering innovation is part of the UK’s DNA. We may have lost the corporate labs, but we still have plenty of eccentrics. We also have a thriving tech investment scene. For many start-ups, though, the utility sector is a deeply unattractive market. Slow to act, conservative, risk averse and price sensitive – these are not the market characteristics that appeal to our investors. And industrial innovation does require long term, patient investors.

Another challenge is the multi-disciplinary nature of the problems that need to be solved. Those old labs had a range of skills and disciplines, all capable of working together for a defined need for the company. Start-up businesses are all about focus and specialism – an organisation needs a certain scale to create a solution that may involve a mechanical product, intelligence and software, and an innovative business model or staff behaviour change. Here the UK has another advantage – excellent technical universities.

The UK has three of the top ten technical universities in the world. And they are increasingly prioritising industry engagement and innovation. Imperial College has innovation at the centre of its vast new west London campus. Oxford Sciences Innovation, a £320 million investment company, was founded last year to find the most innovative ideas coming out of Oxford, and build them into world class companies. Oxford Flow is their first investment. Our Pressure Reducing Valves were developed at the University for industry needs, and we’re working with utilities to prioritise the water industry and gas networks. We’re looking for the utility sector’s problems that can be solved with Oxford engineering innovation, and we’re investing our own resources to address those problems and supply products to meet industry needs.

Creating the infrastructure innovations that will last to the 22nd century, but with a shareholder base containing some investment managers looking little further than next year’s bonus, is an ironic challenge for the leaders of today’s utilities. No-one expects them to turn back the clock, and re-open those old labs. Universities and spin-outs have responded to the challenge. But utilities must be more than just customers for proven products if they are to encourage innovation.

Even without investing in R&D, what utilities can do, with little cost and limited risks, is partner with the spin-outs and start-ups. Give us field trials and initial orders. Endorse us so we ourselves can secure more investment. Pay us promptly. Work with us within our timeframes (for a water company a planning horizon is the next AMP cycle – for a start-up it’s the next quarter). Work with us to categorise and prioritise industry needs. Lead your supply chain.

Utilities have a problem – you need innovation, but don’t want to pay for it. Industry focused spin-outs like Oxford Flow, with access to world class multi-disciplinary university innovation and supported by patient investors could well be the solution.