redefining firm competencies, innovation and labour … · · 2016-10-27competitors is associated...

INNOVAR, revista de ciencias administrativas y sociales. No. 21, julio - diciembre de 2003 183

Resumen

Este articulo trata acerca de cómo las instituciones del mercado laboral y, mas específicamente, los cambios en las practicas de la

movilidad laboral, moldean la manera en la cual las empresas establecidas de tecnología intensiva redefinen sus competencias

tecnológicas.

A través de un estudio detallado llevado a cabo en BT, el argumento central propuesto es que la habilidad de las empresas en

implementar cambios estratégicos importantes en IyD, involucrando cambios de flexibilidad laboral, estarán fuertemente influenciada

por las estrategias de los propios empleados en cuanto a formación de habilidades y estructura profesional. Esto, a su vez, esta influido

por el modo especifico en el cual las instituciones del mercado laboral se definen y se regulan. Se presenta un marco el cual integra

la cuestión de mercado laboral y la innovación, especificando las contribuciones distintas que tal mercado hace hacia el proceso de

innovación.

Palabras clave

Innovación, movilidad laboral, telecomunicaciones, empresa, competencias.

Redefining Firm Competencies,Innovation and Labour Mobility:A Case Study of R&D inBritish Telecom*

Matias Ramirez* *

* This is the result of the author’s work and research whilst inEngland. The author would like to thank Jonathan Michie, FredGuy and Mark Tomlinson for their helpful comments on earlierversions of this article. Article received in March and approvedin June 2003.

** School of Management and Organisational Psychology, BirkbeckCollege, e-mail: [email protected]

I. Introduction

It is widely acknowledged that over the past decade

and a half, radical new forms of production have emerged with the pervasive expansion of information

and communication technology (ICT) (Freeman and Perez1988, Best 1990). This has acted as a catalyst for deep-seated changes in the process by which innovations areconceived and have caused important dislocations withthe institutional structures within which innovations weretraditionally generated. Long standing organisations suchas British Telecom (BT), that routinely were consideredtechnological leaders and innovators in their industries,have therefore faced enormous challenges to restructure

competencies and generate greater dynamism into theirorganisational routines. This paper contributes to thisdebate around organisational and institutional change bylooking at how labour market institutions and morespecifically changing practices of labour mobility in anR&D environment can shape the manner in which largeestablished technology intensive firms redefine theirtechnological competencies. The central argument posedis that the ability of firms to implement important strategicchanges in R&D, involving new forms of labour flexibilityand mobility amongst knowledge workers, will be stronglyinfluenced by the employees’ own strategies of skillformation and career structure. This in turn is influencedby the specific manner in which the labour marketinstitutions are defined and regulated.

The concept of the co-evolution and mutual shapingof firm organisation and labour market institutions isaddressed using a framework developed in the paper thatinterfaces elements of two typologies drawn from, up untilnow, relatively disparate literatures in the areas of

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organizational change and labour markets. Inherent in theframework’s proposition lies the notion that the coherencebetween the innovation strategy of a firm and the labourmarket institutions will underpin the ability of firms to ca-rry out successful strategies of innovation.

2. Re-positioning BT in theIndustry and Labour Mobility

The telecommunications industry has been at the heart ofthe technological and institutional transformations thathave underpinned the ICT paradigm. In terms oftechnological change, the so-called intelligenttelecommunications network, whereby software basedcomputerised functions support the electronic processingof digital signals, has been the radical breakthrough thathas transformed how communications is organised(Mansell, 1993). Powerful customer premises equipment(CPE) in particular represent a paradigmatic rupture inthe evolution of the industry, creating the possibility forusers to shape the process of innovation through designconfigurations based on more open networks (Kavassaliset al. 1996). These developments have laid the basis foran infinite range of diversified services to suit differentcustomer needs.

For firms such as BT, the new technological regimehas posed acute opportunities and challenges. Thedanger for incumbent telecoms firms is that by relying onthe traditional source of income; voice telephony and theownership of the network, the organisation in effect isreduced to becoming a mere bit transporter for the valueadded services of other low cost competitors. As table1 shows, up to 1999, BT was still far more reliant onits traditional voice business than in value addedservices. Developing technological and organisationalcompetencies in the area of network solutions thereforerepresents a key challenge. Technologically this hasmeant creating expertise in a whole new series of areassuch as wireless Internet access, directories and searchengines, Internet TV, electronic payment systems,advertising, education and training (Analysis, 1997).

The second major development, opening theindustry to competition, emerged as a consequence of achange in regulation policy by governments, which overmuch of the last century had supported the monopolystatus of service suppliers. The UK government in parti-cular adopted what is generally known as a “fast track”privatisation programme (Batt and Darbishire, 1997).With the shorter life cycle of products, BT has beenheavily criticised for being unable to keep up with thenewer, more agile and more entrepreneurial new entrants.The Economist for example lamented, “despite BT’sexperience in running networks, it lacks entrepreneurialagility, the speed of decision making and the gung-hoculture of investment to match the moves of companieslike WorldCom” (4/4/1999).

This criticism emerges from the fact that one of thecharacteristics of the giant telecommunications monopolyfirms in the past was that the routines that arose from themonopoly period were shaped by the overriding objectiveto provide an efficient universal service rather than a fastroll out of differentiated services. As a consequence,monopoly public telephone operators (PTOs) developedeffective but highly bureaucratised routines that uphelddetailed operational protocols (Batt, 1995). Hence one ofthe main problems for the large PTOs such as BT hasbeen to overcome the bureaucratic nature of the formerlarge monopolies.

Incumbent high-technology firms such as BT havetherefore faced two main challenges. The first has been toposition themselves strategically in the key areas of busi-ness growth by developing or acquiring competenciesthat will generate new streams of revenue through productinnovations. The second challenge relates to the changesin organisational structures to speed up the rate at whichproducts are rolled out in response to competition andthe faster pace of innovation. Hence, being ahead ofcompetitors is associated not only with devising newsources of innovations, but also having the organisationalstructures and management capability to ensure rapiddeployment and roll out of new products and services.

Labour markets can play a central role in this processof structural change. In particular, the institutions shapingskill formation, industrial relations and labour mobility canfacilitate or create obstacles to structural change (Lazonick1998, Bassanini et al., 2002, Saxenian 1996). This po-ses the need for a specific analysis of labour markets inthe telecommunications industry. Yet over the 1990slabour markets in the telecommunications sector alsoexperienced important changes. As a consequence of theconvergence of technologies and the fragmentation of

Fixed voice service £2.7bn

Mobile services £1bn

Data Services £ 597m

Internet Services £230m

Source: Financial Times, 3/2/2000

Table 1BT turnover 3rd quarter 1999

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GESTIÓN DE LA PRODUCCIÓN Y TECNOLOGÍA

employment following the entry of multiple firms into theindustry, skills have become more transferable and thishas fomented profound changes in the institutionalstructures regulating recruitment and retention of labour.Various skill types emerging as increasingly key to theindustry, for example in the area of software development,are also associated with career structures that emphasizeinter firm mobility and more flexible non-standardemployment contracts, as evidenced by the growing useof contractors in research and development environments(CWU, 1997). This may have a critical impact onknowledge transfer in the industry. From the point ofview of the analysis, it also suggests that institutionalchange in labour markets may shape the type ofstructure firms are able to adopt at a given point intime. For example, one of the principal ways in whichentry barriers have been reduced intelecommunications is throughlabour markets by means of hiringstaf f that have accumulatedknowledge of how to operate thenetwork equipment from specialistsuppliers (Fransman, 1998).

This example can be added to aburgeoning literature that suggests thatlabour mobility can be a vital meansby which firms and technologysystems can expand theircompetencies through the transfer oftacit knowledge (Saxenian 1996,OECD 2001). However, some studieshave also suggested that policyrecommendations encouraging inter-firm mobility as a means to advanceknowledge flows can be a double-edged sword, particularly if this leadsto a very high turnover of specialised labour for firms.Blackler (1995) for example has argued that an institutionalstructure is required for occupational labour markets toexist so that investment in training for skills is undertaken.Organisations may be less willing to invest in training forniche skills if they are not guaranteed a return from theinvestment. Hence, a high degree of mobility foremployees in vocational education and training can leadto a shortage of investment in training. It has also beensuggested that knowledge workers that undertake a greatdeal of inter firm mobility may “learn” less than those thathave longer tenure (Tomlinson et al., 1999). This focuseson the fact that the learning base of firms is largely madeup of routines that emerge from learning-by-doing andlearning-by-interacting between employees. The difficulty

of transferring tacit knowledge that is not embedded innetworks using common protocols and codes ofcommunication is thus emphasized.

The issue of labour mobility is particularly relevant forBT. While a labour market monopsony, BT had no choicebut to undertake its own investment programme to acquirenew skills. Nevertheless, with the entry of multiple firmsinto the market, today this is no longer the case andorganisations can hunt within a broader national andinternational labour market for both general and nicheskills. Specifying the degree of turnover amongst highlyskilled employees in the telecommunications sector isdifficult to estimate accurately. However, an approximatecalculation using data from the UK Labour Force Surveyis illustrated in figure 1. This shows that between 1992and 1998 turnover amongst telecommunicationsknowledge workers grew considerably1.

1. The data were collated from the first quarter of the quarterly UKLabour Force Survey for each year. The following criteria wereused:

a. Includes only individuals that answered that they were Managers,Technical Workers or other Professionals at the time when theywere surveyed

b. Includes only individuals that indicated that they were currentlyworking in a firm in the telecommunications industry.

c. Includes only individuals that answered “NO” when asked if theyhad been working in the same firm one year ago.

d. All missing values were discarded.

e. The sample average of knowledge workers in telecommunicationfor each year was 150. Hence the conclusions are tentative andneed to be analyzed in conjunction with other indicators that showevidence of mobility.

Figure 1Turnover Amongst Telecommunications ìKnowledge Workersî

Source: Developed from the UK Labour Force Survey

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3. A framework for changingindustry and labour marketdynamics

The above discussion has emphasised the need for areinvention of BT in order to remain competitive. Thisincludes the need to generate new organisational routinesthat place greater emphasis on product innovation andthe faster roll out of new products and services. From alabour market perspective, emphasis is therefore placedupon bringing in new skills and developing more dynamicmethods of managing employees, covering areas suchas recruitment and knowledge flows. Yet, as has beenmentioned, the institutions defining the nature labourmarkets are also in a state of flux. In particular, increasedmobility of knowledge workers can be associated bothwith the opportunity to expand firm competenciesrelatively quickly, but also with shorter time someknowledge workers appear to spend within each firmand the growth of non-standard contracts within thehigh skill end of the market. This suggests furtherresearch is needed to analyse the differential impactsthat some recent changes in labour markets can havein terms of the ability of firms to develop newcompetencies. It also suggests the need for a frameworkof analysis that takes into account the dynamics of aco-evolution of industrial organisation and institutionallabour market structures at the level of the firm.

This task is undertaken in this paper by interfacingtypologies drawn from two different sets of literatures2.The first, shown on the left of figure 2 below, is based ona typology of firm competence developed by Lam (2000).Lam’s typology draws some inspiration from the work ofLundvall and Johnson (1994) and Blackler (1995)among others. It is based on the idea that knowledge inthe firm can be analysed along an epistemologicaldimension i.e. tacit vs explicit knowledge and anontological dimension i.e. at the level of the individual orthe collective firm. For the purposes of this paper, twoknowledge environments are highlighted. An embodiedknowledge environment is one where tacit, action-orientated skill predominates. This type of knowledgeprovides an environment where there is littlestandardisation of knowledge or work practice.Knowledge therefore remains within the individual ratherthan within an organisation and relies to a great extent onmarket know-how and skills that are potentiallytransferable. This can breed instability within anorganisation, as high movement of labour can create

problems of knowledge retention. Organisations reliant onembodied type knowledge could well characterise somenetwork type forms of organisation such as Silicon Valleyin the US, where there are few institutional limits to labourmobility and the nature of the work in the area relies onrapid problem solving skills. In an embedded knowledgeenvironment on the other hand, firm organisation isunderlined by systemic routines and a strong commonculture. Knowledge is tacit in nature, but it resides inorganisational capabilities, combining stability andflexibility of team dynamics. The stability and formality ofthe structures permits continual and incrementalinnovations.

Figure 2Interfacing firm structure and labour market

institutions

Source: Developed from the UK Labour Force Survey

Learning and interaction beyond

the firm, Inter firm movement,

off the job training, OLMs.

Tacit Knowledge Function Centred

Embedded(collectiveknowledge)

QualificationRule

OLMs

Embodied(Individual

Knowledge)

CompetenceRankILMs

Lam (2000) Marsden (1999)

Collective knowledge, firm

routines, idiosyncratic learning.

2. A fuller version of this framework is outlined in Ramirez (2002),

While Lam’s (2000) typology focuses predominantlyon the firm as a learning agent, Marsden’s (1999)typology, on the right of figure 2 draws on a theory ofmicro labour market institutions and focuses on the roleof labour market institutions in influencing workorganisation and skill acquisition at the level of the firm.At the core of Marsden’s argument lies the notion of theemployment contract as a stable means of aligning jobdemands to worker capabilities and identifying certain rulesthat can be applied in a wide variety of workenvironments3. For the purposes of this paper, two distinct

3. Lam (2000) herself broadened her typology to encompass internaland occupational labour markets.



work environments are of interest. On the one hand thereis an environment where the tasks that employeesundertake are grouped according to technical requirementsarising out of the production needs. Because of theidiosyncratic nature of jobs, qualifications are not a goodguide to assignments, hence jobs are often decidedaccording to some sort of internal ranking system, suchas seniority, where status depends upon the range anddepth of skills of individuals. Hence internal labour markets(ILMs) play an important role in determining the type oftraining employees receive. Similarly career paths are oftenbased on promotions within the firm and associated tofirm-specific skills gained within the firm. Marsden (1999)calls this a competence rank rule. On the other hand, in awork environment defined by Marsden as qualificationrules, assignments are set by identifying competenciesrequired for certain kinds of work and assigning them onthe basis of recognised qualifications. Work is organisedaccording to skill requirements and around functions. Inthis environment, off-the-job training and qualificationsare important, hence training is backed up by developedoccupational labour markets (OLMs).

The discussion has emphasised that a degree ofcoherence is necessary between firm organisation and therules defining the employment system in the firm. Theimplication is that if, as was discussed for the case of BT,the firm wants to fundamentally restructure its operations,there are likely to be necessary implications for how workrules are defined in terms of job descriptions and howindividuals skill sets are developed. This relationship canbe illustrated by juxtaposing Marsden’s with Lam’stypology of firm competence. Figure 2 places Lam’s(2000) and Marsden’s (1999) matrices side by side andthe arrows illustrates the links that would be expected toemerge. The following points outline the basis on whichthese links are made:

• In organisations reliant on an embodied knowledgeenvironment, skill development needs to be dynamicand highly flexible. Firms in this environment willoften not have the time to develop in-house skillsin new areas. Hence there is a need for institutionsthat will create clear guidelines within which inter-firm movement of labour can take place, such asrecognised qualifications or well developedinformation peer group networks that can vouch forindividual skills. In Marsden’s typology, thisflexibility is afforded by developed occupationallabour markets as described by the qualification rule.

• Organisations that rely on collective sources ofknowledge and informal non-written tacit type

knowledge structures can be expected to rely onsome form of firm specific training structure todevelop common dialogues and understanding offirm routines. This would reflect a competence rankrule with flexible internal labour markets.

There are three important implications that follow fromthe framework described in figure 2. The first is that in thiscase we can define two distinct types of firm organisationthat have quite different logics in terms of knowledge flowsand institutional structures supporting them. Secondly, aspecific form of industrial organisation as described bythe left hand typology in figure 2 will be more stableand from the point of view of knowledge transfer, moreeffective, when supported by a specific labour marketinstitutional structure. Thirdly, the logic of figure 2 isthat a change in the dominant firm structure, say fromembedded to embodied, as a consequence of changein the technological paradigm, would also imply theneed for a change in the supporting institutional labourmarket structures. Otherwise a mismatch between firmand institutional structures may emerge. The followingsection will develop the case study of BT to shed lighton these propositions.

4. The Case Study

Most of the data presented in this paper is based oninterviews that took place at Adastral Park, BT’s researchand development (R&D) laboratories in Martlesham. Teninterviews were carried out, the earliest in 1999, with BTemployees in the R&D department. Five follow-upinterviews were also undertaken. The paper firstly presentsa discussion emerging from interviews undertaken withsenior managers holding strategic decision-makingresponsibilities. These provide an overall view of firm levelpolicy and thinking on strategy and human resourcepolicy (HR). This is followed by a discussion of the datacollected from interviews conducted with non-supervisoryR&D employees, principally developers, designers andengineers on the impact of company level HR policies ontheir own career prospects and innovation in BT. Materialwas also collected, including the “Investors in People”document from a leading research department and a se-ries of executive presentation notes from a senior mana-ger describing aspects of BT’s research strategy. Datawere also collected from The Manager, an internal BTjournal. It was agreed to keep the identities of allindividuals interviewed and department names confidential,so will remain anonymous.

The methods for interrogating the data followed the“Coding” process described by Strauss (1987). This is a

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methodology whereby codes or subheadings are formedto link raw data fragments such as paragraphs, phrasesor sentences from the interviews and documentaryevidence to key concepts and themes. The identificationof codes and themes was based on the theoreticalpropositions laid out in the framework presented in figure2. The next step involved outlining a description ofchanges in the innovation process, including changes inindustrial organisation over time, using evidence frominterview data with managers and documentary evidence.Subsequently detailed information was analysed relatingto the nature of changing work organisation, careerdevelopment patterns and firm level employment systemsin BT. Documentary evidence and descriptions of labourmarket institutions was also provided.

Accelerating product life cyclesand intra-firm mobility

Although today it is a private corporation, BT’s strengthin the market place still lies to a great extent on its traditionof providing an efficient, reliable service and the scalingup of technology for its giant communications network.However, as was discussed earlier and as a senior mana-ger in BT’s research department below points out, theroutines BT developed to maximise performance in thecontext of predictable changes in technology during muchof the 20th century, have become totally unsuitable for thenature of technological change today where, as well asreliability, speed and diversity in the roll out of innovationsare of essence:

“the average time to launch something at theminimum was 18 months to 2 years. It was nonsense,because by the time you finished launching it, thething was obsolete. So internally there is a view thatwe had to have a radical rethinking in our systems”.

BT responded to the demand for faster roll out of newtechnology by adopting a series of organisationalinnovations in an attempt to reduce the bureaucracies andlong drawn out processes that characterised its routinesin the past. As far as research and development isconcerned, these initiatives included focussing on thedesign rather than the building of goods and increasingthe synergies between developers and designers at differentstages in the development lifecycle of the product. Thesemeasures mirror initiatives that have been adopted in awide range of industry environments, that break away fromdeveloping products and services sequentially and adoptan iterative method, with permanent exchanges ofinformation between the relevant actors, starting from the

stage of conception4. In this sense, the first significantorganisational innovation that emerged from the interviewsrelates to an attempt by BT to encourage designers anddevelopers to follow their ideas out of the confines of thelaboratories via secondments and exposure to otherdepartments of the company. The manager cited abovepoints out:

“It’s one of our policies to push people through thebusiness. If someone has an idea, we would like thatperson to do the research, take that idea intodevelopment, take that idea into field trials anddeployment and then come back perhaps for the nextgeneration of the product. If this worked they wouldbe so valuable to the business because they knowsomething from beginning to the end, they knowwhat’s it’s like to try and launch science and supportthings”.

The effort to encourage the spillover of knowledgebetween different areas of the firm through intra firmmovement of labour aims to leverage the vision andexperience of researchers throughout the organisation.Individuals following through the development of servicesact as key co-ordinating agents of knowledge, sharingthe tacit knowledge of different departments. However,given the firm specific context in which the disseminationand exchange of knowledge exists, the tacit knowledgegenerated from the exchange of information also improvesexisting firm routines. Using the terminology of Lam(2000), this emphasises firm specific knowledge and canbe related to an embedded type of knowledgeenvironment.

Broader innovation and inter-firm mobility

A second significant organisational change picked up inthe interviews, arose as a direct consequence of the morediverse technological structure of the telecommunicationsindustry. The fragmentation of technologies and theemergence of multiple specialised equipment and soft-ware suppliers have enlarged the technological choicesand options for the introduction of the same basic service.The R&D process has in consequence become lesspredictable and the “make or buy” decision more complex,with greater emphasis placed on understanding andtransferring knowledge from suppliers rather than

4. See for example Chapter Three in Kline and Rosenberg (1986) andAoki (1998).



necessarily developing new knowledge in-house(Fransman, 1998).

Firms such as BT that own large networks made upof mixed generation technologies are therefore beingforced to develop broader competencies to keep up-to-date with a rapidly accelerating range of technologicaloptions. As a consequence, the labour supply foradvanced telecommunication services draws in a broaderscope of skills from that traditionally developed withinthe ranks of the core researchers. BT has undertaken aseries of human resource initiatives to develop thesebroader competencies. The first of these involves directrecruitment of highly skilled scientists and engineers intothe company. A senior manager in the researchdepartment comments:

“We need as many perspectives on what is possible.Some we can get from within the company, but theyare shaped by company culture and thinking. So weget people in from across the industry and business,short-term fellow schemes of people to work withresearchers. This is a relatively new policy. Thereason is because the skills were becoming out ofdate. We believe the half-life of a degree is 3 years”.

Similarly, a senior HR manager in the research anddevelopment department comments:

“The speed with which the market moves sometimesmeans you cannot re-orientate people sufficiently inthat time. To suddenly switch that number of peopleis very hard and you don’t get advance warning thatit’s coming. When you go into a new market areawhere we haven’t been in before you may needexpertise in that particular area, that you can buy in,use and once you’re in there you decide. Maybe youwill leave there”.

BT therefore is recruiting a greater number ofknowledge workers directly into high grades from outsidethe firm. This is because scientists and experts based ondisciplines beyond those traditionally linked totelecommunications, i.e. physics or chemistry, are beingdrawn into telecommunications. A second factor is thatoutside recruitment can bring a new “vision” and widerperspective to the firm of how to develop products and tocombine this with the skills and thinking of internal people.A third issue is that in some cases the speed of change,in terms of new markets and technologies is so fast andunpredictable that the organisation does not have the timeto re-train to develop competencies from existingemployees. Significantly, the risky nature of some of thesenew ventures leads the firm to favour a looser relationship

with employees, who can easily come off the pay roll if aninvestment proves to be short-lived. Finally, there is anindication that the shorter product life cycle can leaveknowledge and skills out of date. Hence greater labourturnover and movement of individuals in and out of thefirm is not as damaging as it might have been in a periodwhere projects were of a longer duration.

The discussion so far has highlighted two broadchallenges facing BT. One is to speed up the pace in theroll out of new products and services, the second todevelop the competencies necessary to generate valuedadded services. Two broad initiatives involving changesin the division of labour have been referred to.Encouraging employees leading innovations to followthrough their new projects between different departmentsin the firm aims to encourage synergies in the initialphases of development. As mentioned earlier, this veryclosely describes an embedded knowledge environment.On the other hand, senior managers have suggested thata greater movement in and out of the firm of high skilledemployees may be an important means by which BT canacquire the flexibility and broad competencies to generatenew products and services. This type of structure mirrorsthat described by an embodied knowledge environment.

These twin pressures are consistent with the previousdiscussion regarding BT’s role in the telecommunicationsindustry. On the one hand, BT has to cater for a massmarket that focuses on organisational synergies to speedup the rollout of new goods and services, productresilience and system wide process innovations. On theother hand, BT is facing an enormous challenge to shiftthe focus of its R&D operations, from product resilienceto customisation of value added services. This can bestbe achieved by introducing and continually renewing newsets of skills and entrepreneurial talent.

Following the logic of the framework illustrated in fi-gure 3, this almost schizophrenic role of BT, where it hasto adopt different strategies, and as a consequencedifferent structures within the same departments to caterfor different types of markets, has a number of importantimplications. BT appears to be attempting to work withquite different organisational structures, that as figure 2suggests, have contrasting implications for labour marketsin the firm. While an embedded knowledge environmentis supported by internal labour markets and firm specificknowledge, an embodied knowledge environment requiresthe institutional support of occupational labour markets toencourage knowledge flows of labour between firms. Thequestion that arises is how well can a large firm such asBT accommodate these tensions and support different

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incentive strcutures, if indeed they do exist? The discussiontherefore turns to the labour market institutions and theexperience of R&D workers themselves.

Combining Incentive Structuresin BT

The scenario of intra firm labour mobility and temporarysecondment of R&D staff within the internal BT supplychain was raised as part and parcel of the attempt toincrease the degree of communication and sharing oftacit knowledge between different departments. However,although secondment was identified as a major companyinitiative, when the idea of temporary secondment ofdevelopers and designers was raised with a number ofproject managers in R&D, there appeared to be a greatdeal of scepticism as regards its viability. One projectmanager in a department rolling out new telemarketingproducts commented:

“Secondment is a nice theory and there is a lot of talkabout secondment, in practice it rarely works. Typicallya project will last 6 months, you take somebody outfor 3 months and things have changed a lot. Thingsare moving too quickly so that it doesn’t quite work,its such a schism, that there’s an awful lot of re-buil-ding that has to go on afterward to synchronise theperson back into the team. Plus individuals aren’t

keen to do it unless they are far sighted

enough to see it as enhancing their career;

it’s just a nuisance. I know of very few caseswhere it has been done” (emphasis added).

Secondment is an important concept that has clearlybeen discussed, but appears to face two problems. Firstlythere is the short-term nature of projects. The concept ofembedded knowledge emphasised the importance ofstable teams, the knowledge of which is imbued with awider company culture. However, in firms moving rapidlybetween products and projects, although teams play akey role in problem solving, the most important knowledgeagent is the individual, that can move rapidly betweenteams, contexts and even workplaces. This provides thefirm the flexibility to move resources into new projects asand when required. In the case of BT, despite the attemptto provide longer-term support for products, the relativelyshort nature of each project and the pressure to move onto new areas makes it difficult to provide longer-termresources for each new products and service.

The second obstacle lies in the apparent lack ofenthusiasm of individuals to embrace secondment,because intra-firm mobility is not seen as furthering

employee’s career paths. This suggests that there is ahigh opportunity cost for employees to long-term supportfor products and the development of firm specific skillsthat this implies. Consequently the discussion focuseson the career structures of employees and in particular theincentives for progressing through internal labour marketsand building firm specific skills.

The apparent absence of a career path for R&Demployees willing to develop and follow throughinnovations in BT appears contradictory at first glance.The BT managerial grade structure is shown in figure 35. Itreveals both technical (up to PTG) and supervisory stepsof a hierarchical promotion structure through whichmanagement grades can climb as part of their careerdevelopment. This structure is in fact very similar to theinternal labour market inherited from the old monopolycivil service, where direct recruitment to high gradesseldom occurred. Opportunities still clearly exist for careeradvancement within the firm. In fact R&D employees withlong tenure in BT interviewed confirmed that they hadworked in many different departments within the company.

Figure 3BT managerial career structure (engineering

and technical)

Source: Interview with Society of Telecom Executives (STE) official6

PCGC(Senior Board)

PCGR

PCGS

PCGT

PCGU(Personal contract grade: U)

PTG(Professional technical grade)

NPG4

NPG2

5. All BT permanent R&D employees are on management grades,irrespective of supervisory responsibilities.

6. The STE, the BT manager’s union, changed its name to “Connect”after the interview was conducted.

Nevertheless, the limitations of the BT career path inthe current technological paradigm become clear whenseen in relation to how it impacts individuals developingtechnologies and innovations. The vast majority of



employees at BT’s R&D facilities lie on the grades of NPG2and NPG4. These are essentially technical scales. PCGUand above are managerial grades in the sense that theyinvolve supervision over other staff and responsibility forprojects. This means that the prospects of promotionalong a technical career path are a great deal morerestricted than the supervisory path. A part of the payaward is determined by performance rating. However,given the promotion structures, most employees with10 years in Adastral Park will have reached the top of thetechnical scale. Largely in response to this and to stopemployees with advanced technical computing skillsleaving the company, BT set up the professionaltechnical grade (PTG) grade in the late 1990s thatincreased salaries by roughly 20%. This was inrecognition of the importance of retaining technical skillsin the company. Nonetheless, the more limited careeropportunities for purely technical grades suggests that itis the supervisory, managerial and organisational skillsthat the firm considers as the key firm specific knowledgeagents in contrast to the technical grades.

Numerous comments regarding the limitations of theBT career grade structure were provided by thoseknowledge workers interviewed. These views highlight theincreasing difficulty BT has had in attracting a layer ofyounger employees to commit themselves to a longer runcareer in the organisation at the time of the interviews. Ayoung telemarketing software designer with 5 yearsexperience in BT makes the point:

“There is a clearly defined career path, but it’smanagerial. The next step up is to manage morepeople, but not doing any technical work, so if youwant to do technical work there is no career paththere. I think there is just too much emphasis onbeing a manager, there’s no career path if you wantto be good technically, you’d soon come to an endon that path. When you have a corporate review ofyour performance, innovation is on there, but it’snot very high. What is really rated is communicationskill, how much can you convince everyone else inthe unit how good you are, if you do that you get ahigh mark”.

Similarly an Internet expert comments:

“There is a career ladder in that there are grades thatone can be promoted to, it doesn’t in that there areno specific processes that if you go through will getyou promoted. We don’t have something that saysonce your performance in these particular areas iscompetent, then you’re promoted”.

However the appeal of internal labour marketstructures for career development is influenced not onlyby the nature of the internal promotion ladder. It is alsoinfluenced by the opportunity costs, i.e. the risks andrewards inherent in developing a career outside of the firmthrough inter-firm mobility. Particularly during the heightof the telecommunications boom in the late 1990s, thisoption became increasingly viable and attractive for thebest skilled staff. This can be illustrated firstly in relation topay grades amongst peers. Salary ranges for managementgrades7 in BT lie between £18,000 and £38,0008. Yet thisis well below the wages both contractors receive andcompetitors in the software, telecoms and banking industrywere offering in terms of remuneration. In this context BTwill clearly struggle to lock in its younger and best skilledR&D staff, particularly as skills appear to be highlytransferable. Underlining the impact that mobility ofknowledge workers can have in the firm, a senior mana-ger in the Research department comments:

“We’re tending to lose (in research) about 2% a yearthrough turnover. At meta-level, the organisations BTlooks at are old suppliers, Marconi, GEC, bigtechnology companies and here our benchmark payswell. But in R&D, our competitors aren’t those peopleany more, they are Silicon Graphics, Nortel, Banksand we lose people hand over fist to start-upcompanies. Our guys who developed the best in theIP world all left and trebled their pay. Our best securityguys went to a bank, doubled their pay and got a freehouse. BT cannot match that. You have to accept tworealities. Firstly you have to have a more short-termview, which to some extent is not a problem, half-lifeof a degree is about three years. On the other handthe movement out does create problems. A lot of theguys that come from university now are very keen ontheir CVs. BT gives training but we are not

converting so much of it into product now”

(my emphasis).

A career option for employees interested indeveloping innovations outside of the normal BT careerpath has also emerged through the so-called Bright-starincubator. This initiative was aimed at providing promisingemployees an incentive to develop product innovationsemerging from BT patents through the creation of a start-up firm linked to BT. During the course of the interviews itwas reported that BT had some 1200 patents laying on

7. All BT contracted R&D employees are formally on managementgrades, even if they have no supervisory responsibilities.

8. Based on 1999 figures.

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the shelf not being exploited, suggesting some stifling ofentrepreneurial talent within the organisation. The so-called Brightstar Incubator9 was set up by BT as an attemptto overcome this problem by tapping into the skills andinitiatives of R&D employees. Ostensibly the initiativeprovides the opportunity for groups or individuals withpromising projects to create start-up firms on-site andattract outside venture capital. In so doing the normal BTsupply chain process is detoured and individuals whoare willing to take the risk are given the opportunity toreap large rewards by creating a new firm. While in theincubation period, BT continues to fund the researchers’salaries. However, after the start up is launched, itbecomes independent, although BT retains a stake inthe new company of between 25% and 50%. Brightstartherefore represents an institutional innovation that aimsto encourage a more diverse industrial structure and amore entrepreneurial culture of innovation around thecompany. However this process also ties in to providinga career option for the most talented and promising skillsin BT. As one of the BT employees involved in aBrightstar initiative comments:

“The Brightstar incubator is based on the recognitionthat maybe the traditional routes of trying to get thetechnology downstream weren’t working. So this wasa way of avoiding the normal rules of BT productdevelopment. So you have to give up your secureday job with steady pay to become the part owner ofthe new company with a technology you arepassionate about and potentially make millions”.

Commenting on his career prospects within BT priorto the launch of Brightstar, the above researcher made thepoint:

“Number one priority for my job has to be somethingI get motivated on, something I’m interested in. Butalso very much how useful those skills are going tobe to me in my career progression. A year ago I wastrying to progress up the technical career ladder. Forme the problem in BT has always been that once youget to PCGU you have to leave the technical side andmove on to the managerial career. Becoming a PTG isslightly higher profile but that’s about as far as I cango on the technical grades. I became an NPG2 9 yearsago, and that’s typically how long it would takepeople to work their way up to, almost to PCGU”10.

Clearly Brightstar offers an alternative career path forthe brightest individuals. Although this option may involvea long term separation of BT with some of its best technicalstaff, by maintaining the new spin-offs on site, BT canpotentially tap into the tacit knowledge of its ex-BT staffand raise the profile of Adastral Park as a high technologycentre, attracting other knowledge workers and innovativeventures. This suggests that the Incubator has a dualrole. One is to by-pass the normal, longer and morebureaucratic route of product development. Secondly,to encourage the most talented researchers to developinnovations that are in some way linked to BT in thecontext of the limited career opportunities for individualsdeveloping potentially important technologicalinnovations in BT.

Although this initiative can be seen as a means toinject some new radical ideas and innovations into theorganisation, the incubator represents a completelydifferent organisational structure, restricting knowledgespillovers into BT. The following point was made regardingthe move to the incubator:

“One of the things that changed upon moving to theincubator (was that) the free flow of ideas on site hasbeen restricted, now we don’t really want to talk topeople as much as before. There is a vested interestin making sure you keep the ideas to yourself becausein this environment it is the ideas that are the driver,while before the currency was good relations with therest of the business, which was based on an inter-flow of ideas”.

The implications are that the release of entrepreneurialtalent involves creating a different structure of organisationwith separate rewards and incentives for the best talents.This is best met outside of rather than within the firm.

9. Incubators of the sort set up by BT have been previously establishedby firms such as Hewlett Packard to encourage entrepreneurialskills.

10. See figure 4 for BT career grades,



Widening the use of contractlabour in R&D

As mentioned earlier, changing labour market structuresis also associated with the growing use of contract labourin high skilled environments. Overall the number ofcontract and agency staff in BT increased from 1000 in1980 to 21727 in 1997 (CWU, 1997). BT’s policy hasbeen not to use contract labour in the Researchdepartment. However in the Development department theiruse has become more widespread. Contract labour, byits very nature, would tend to be associated with a relativelynarrow set of clearly definable skills. The ability ofcontractors to offer clearly recognisable and transferablesets of skills determines their relative position and strengthwithin the labour market. Given their relatively narrowset of skill sets, it would be reasonable to assume thatcontractors would be brought into BT’s R&D area toundertake a set of very specific technical tasks requiringless firm specific knowledge, particularly when thereis surge of demand that cannot be covered bypermanent labour.

Conventional wisdom would also indicate that thenature of the employment contract creates a different set ofincentives for the contractor than the permanent employee.Permanent staff may well be encouraged to improveproduct quality in order to enhance their promotionopportunities and general standing in the firm. Thetemporary nature of the employment contract for contractstaff might be expected to encourage contractors to meetdeadlines rather than improving product quality and at apersonal level to follow a career strategy based onacquiring new skills.

It appears however that this is not always the case.The view of the line manager interviewed clearly indicatesthat contract labour does not negatively impinge on anyaspect of innovation output. If anything, there appears tobe advantage to using contract workers to carry out eventhose jobs traditionally associated to permanent labour.The line manager comments:

“There are 40 contractors in at the moment in thisarea. The main advantages lie firstly in that some ofthese people are very good, to be honest a lot of thecontractors are better than a lot of our permanent staff.Part of the reason for this is that, well, they becamecontractors because they had enough “get up andgo” and they must have courage and fortitude. Youalso have to bear in mind that a lot of our contractorshave been with us for quite a long time, they tend toget involved in the work for years on end, and they

earn fat salaries. So many are longer term and haveput down roots. I don’t have problems with the use ofcontractors, except that there pretty expensive, the ideaof using a resource centre that is systematicallymanaged works fine for me They give me flexibilitythat I can hire and fire from a managed pool”.

Significantly, both the formal skill profile and moretacit firm specific knowledge of the contract workerswas not judged to be a great deal different from that ofpermanent staff. Many of the contractors had BT specificskills because they had been on the BT payroll in thepast.

Nevertheless interviews with permanent contract BTdesigners working on projects with contractors cast somedoubt on this managerial view. Responding to a questionon whether in his experience the project teams were affectedby working with contractors, a designer comments:

I’ve worked in teams where I have been the onlypermanent member of staff, and that has not workedwell. The difference is that at the end of the day thecontractor is motivated by the next contract he canget, and that is determined by the skills he’s got andso he’s more interested in developing skills thanproducts. A lot of contractors, if they’re stuck on ajob for six months, they can find themselves pigeonholed and they wouldn’t be able to get a job doinganything else but that. So you find if you get a lot ofcontractors en masse, trying to deliver software by acertain time to a certain standard can be extremelydifficult. The other factor is that there is no performan-ce review for contractors, no pressure to say you’vedone a good job, we’re going to give you moremoney or promotion. Contractors give the companyflexibility to get rid of people quickly, but it doesn’tmean you will get better software because there arethese motivation problems, where they have aninterest in developing skills that are not necessarilyrelated to the project, because you can put it downon your CV and it will get you that next contract”.

These comments highlight the dangers of relying toogreatly on short-term labour at this level. Clearly theincentive mechanisms associated with the employmentcontract play a key role, although it is significant that inspite of repeated questioning on the same theme, theproblems signalled by the above employee were notpicked up by the more senior project manager interviewedearlier. In fact it appears that BT is considering the morewidespread use of numerically flexible labour, includingin particular contractors.

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Summary

The discussion has highlighted two contrasting trendsapparent in BTs organisational structure. The first trendemphasises the development of specific routines andsynergies to speed up the pace in the roll-out of newproducts and services. In Lam’s (2000) typology itemphasises an embedded knowledge environment. Hencethe importance of collective or firm specific forms ofknowledge needed to enhance firm competencies andspeeding up the roll out of new services for a masscustomer base was emphasized. The interviews alsoconfirmed the view from managers that organisationalinnovations that resemble the competence rank rules inMarsden’s matrix were being introduced. This stressedintra-firm mobility and secondments of employees withinthe firm to follow through specific innovations.

A second distinct and dominant trend was underlinedby a move to an embodied knowledge environment. Thiswas associated with rapidly broadening firm competenciesand combining firm specific with market knowledge.Investment in the re-training of researchers in newknowledge areas was accompanied with a policyencouraging outside recruitment. This allowedcompetencies to be developed more quickly than internalre-training permitted. More flexible options to encourageemployees with marketable innovations to set up their ownfirms outside of, but linked to, BT were also encouragedthrough the Incubator. Similarly, the growing use ofcontract labour in innovation projects underlines the morearms length relationship a growing number of employeesare having with the firm.

The discussion however also emphasised the difficultyBT was experiencing in developing these dualorganisational structures, partly because of the contrastingincentives this implies for employees. In particular, theopportunities for inter firm mobility of labour amongst thehighest skilled knowledge workers was such, that BTinitiatives directed towards reinforcing firm specific skills,such as secondment of researchers to follow throughinnovations, were not generally taken up by the mosttalented and skilled staff. BTs difficulties in locking in thebest entrepreneurial talents were reinforced by the limitedpromotion opportunities for technical as opposed tosupervisory management grades. This emerges from theformal hierarchical grade structure that large firms such asBT inherited from the past and are required in such largeorganisations.

The discussion therefore underlined the difficulty inexploiting fully firm synergies and organisation learningassociated to an embedded system of firm organisation,

because of the un-viability of, using Marsden’sterminology, the competence rank system amongst thebest skilled employees. By contrast, the trend towardsestablishing looser and more flexible ties between theworkforce, as evidenced by the higher turnover and useemployees on non-standard contracts, appears to be inthe ascendancy. This emphasises the dominance of aqualification rule environment in Marsden’s typology,linked to an embodied organisational structure.

Conclusions

Overall the case study and framework emphasised theimportant role that labour markets can play in shapingfirm competencies. In particular, the case study supporteda key proposition that flowed from the framework, that inthe current technological paradigm, firms embarking onnew strategies to change the nature of their competencies,require changes not only in the division of labour, butalso that the labour market institutions within and outsideof the firm are coherent with the type of knowledge transferassociated to particular firm structures. In particular,strategic changes in innovation strategy need to take intoaccount how they implicate employees’ own strategies ofskills and career formation to be effective.

The need for BT to maintain a stable and committedworkforce imbued with the knowledge of the organisationand its ways of functioning is acknowledged by managersand many existing employees have been re-trained andare highly respected in the new knowledge areas in whichthey work. Nevertheless, it is also apparent that labourmobility is a growing trend, particularly amongst the mostskilled and younger entrants to the labour market. This isa phenomenon over which even large firms such as BThave little control.

The key question that emerges is what impact mightthis trend towards looser and more flexible ties with theworkforce have for the ability of firms to develop differenttypes of innovation? As has been discussed, the greatermovement of researchers in and out of firms, far from



debilitating the firm’s knowledge base, can act as a meansto diversify a firm’s knowledge base, allowing firms suchas BT to be more responsive to rapid changes in the marketin the context of the shorter life span of technologies. Inparticular, if BT is able to attract more start up venturesaround Adastral Park, it may be able to create a dynamicnetwork of skills around which it can renovate itscompetencies, much in the same way that for exampleIntel was able to do in Massachusetts around route 128in the USA during the 1990s. Hence the labour marketcan help to redefine firm competencies.

Nevertheless, the implication of the case study isalso that BTs ability to develop essential competenciesreliant on long-term team building and firm specificknowledge may be undermined by the greater mobilityof labour and shorter time that skilled staff spends oneach project. This is highly relevant for process-typeinnovations associated with product support and productresilience that still play an important role in thetelecommunications service sector.

Thus from a broader policy point of view, thederegulated nature of the UK labour market, the absenceof a common apprenticeship programme accepted byemployers and employee bodies and the highlytransferable nature of skills may have some negative long-term consequences. This issue has been flagged up by anumber of authors such as Prais (1995), Walker (1993)and Steedman and Wagner (1989) as a major weaknessof the UK economic system. This emphasises theimportance of seeing labour markets as an integral elementof the national system of innovation and the developingthe policy implications that flow from this.

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