W Coy)
Co-ordination of Group Tobacco R&D
Arrangements for Funding Group Research
E.A.H. Collocott and A.L. Heard
Until April 1985, the Group had a Central R&D
Establishment at
Southampton whose principal role was to carry out
fundamental
research; as a minor activity, applied research
and development or
technical service work was done for the non-CAC
countries or
Millbank Departments and this latter work was
funded directly.
Funding for the fundamental research was based on
a
turnover-related formula from CAC countries
(excluding Brazil) and
those BATCo operating companies who could pay with
a balancing
figure of L2 - 2.5 m from BATCo. All other
research and
development work in the Group was funded by the
local country
(extensive in the case of the large CAC countries
and minimal in
the small less-sophisticated BATCo operating
companies).
Since April 1985, we have no Central R&D
Establishment. The
Southampton laboratory has become part of BATUKE
and it, together
with the five CAC R&D Centres, shares the load of
Group research,
recognising the particular special expertise of
each Centre in
terms of project emphasis.
Since the change was implemented each R&D centre
has, in a limited
way, strengthened the research element of its
activities but
overall Group staff numbers have fallen from 901
to 823, there
being very little offset of the reductions in
Southampton. In
addition to wor'. done strictly for "Local" needs,
all the Research
Centres undertake a proportion of their work which
is deemed to be
relevant to the Group as a whole; the size of this
"Group-relevant" effort has been quantified for
each Centre. By
combining the level of domestic R&D expenditure
with the
percentage of it attributable to Group-relevant
projects for each
R&D Centre, the total 'pool' of Group-relevant
activities can be
assessed. This cost can be distributed back across
these centres
on a sales turnover basis (see Appendix I).
Such a "pool and redistribute" system will suggest
cross-charging
arrangements to compensate the relatively high
expenditure
Centres. Problems are instantly created by such a
system. For
instance, in the case of BATUKE R&D, "diversity"
of turnover
within BATCo suggests that this total should be
reduced to reflect
those countries truly able to benefit from
research. Deciding
which countries to include can easily become a
time-consuming
issue. At one extreme, (i.e. turnover of all BATCo
companies)
BATCo should contribute more to the pool than the
cost of the
BATUKE R&D Centre. At the other extreme (turnover
only of BATUKE)
the same laboratory should receive funds from
other CAC
laboratories. Another source of debate implicit in
such a system
concerns the actual percentage of Group effort in
each Centre - at
present this is decided on a classification system
established and
operated by the Research Co-ordinator with
practically no debate.
Its purpose is not linked to funding but to the
more important
task of identifying and communicating R&D of
relevance to the
Group as a whole. If a funding formula were
directly linked to C=)
this parameter, the prime aim would suffer.
Finally, if a "pool
and redistribute" system were to be implemented,
we would need to CO
set up accounting systems linking all the
participating countries __4
and satisfying the complex tax considerations
relating to each. cc)
110
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By far the more attractive alternative would be to
let costs lie
where they fall within the Group, and this looks
sensible in view
of the fact that although each R&D Centre does
Group-relevant
work, practically none of this work is done for
Group reasons or
benefit: it is done in response to the perceived
needs of its
parent company. In other words, this research is
both Company
strategic and Group strategic. (Fortunately, we
have full
agreement that the results of this research will
be shared freely
within the Group - and this is happening.) This
provides the
strongest argument in favour of not
cross-charging, but each
Centre funding its own R&D activity.
One refinement is needed if a truly equitable
system is to be
established. We need to look closer into the set
of projects
classified as Group relevant and identify that in
Southampton, in
addition to work which is required by BATUKE and
BATCo and is
deemed Group relevant, there is a sub-set of
projects which could
better be described as done for Group strategic
purposes but which
have no sponsor, i.e. they are not seen as company
strategic by
the parent company. These projects are directed by
the Research
Policy Group (the Directors of the Group R&D
Centres)
The topics currently unsponsored lie within
clearly identified
work areas most of which have a long term
commercial benefit for
the Group: the following table identifies these
areas and the
extent to which individual projects in these areas
are sponsored:
BATCo/BATUKE
Work Area Unsponsored Sponsored Total
VOOO VOOO Z10OO
Smoke Formation 750.8 122.2 873.0
Smoke Control 459.8 376.2 836.0
Biology 163.0 409.0 572.0
Process Science 287.2 71.8 359.0
Market mapping 58.0 115.0 173.0
Leaf Studies 14.5 275.0 290.0
Sensory & Behaviour al 43.0 128.0 171.0
Scientific Support 50.0 274.0 324.0
1,826.3 1,771.7 3 ,598.0
In financial terms, this unsponsored activity
still at Sou thampton
costs approx. Z2 m. (The activity is not strictly
unique to
Southampton; Brazil has a similar act ivity based
on Leaf a nd
Processing Science costing LO.55 m wh ich is done
for Group
purposes and would not be included in a
strictly'Brazilian
programme.)
CZ)
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- J -
Our opportunities for funding this unsponsored
Group strategic
work are:
1. avoid it by disposing of the facility with its
overhead.
2. Disperse it throughout other R&D Centres.
3. seek BAT Industries central funding in view of
the
strategic nature of this work
4. seek sponsors within the CAC companies to fund
major
specific projects within this sub-set.
5. finance this activity on a Group formula basis
just as
practically the whole of Southampton was funded
when it
was GR&DC.
Considering each option in turn:
The high calibre of the resource (both human and
equipment) linked
to these work areas in Southampton, coupled with
its flexibility
in responding to fundamental and challenging
research needs,
suggests that we should not consider option 1. If
viewed as the
'free(er)-rein' facility for R&D in the Group, it
amounts to a
mere 6% of total R&D expenditure. Finally, the
effect on morale
of further staff reductions would be devastating.
Option 2 was examined during 1985 when project
areas at GR&DC were
either terminated or redistributed. These
activities are the
residual set.
Option 3 is probably the easiest to arrange and
agree but may be
tax-inefficient; it would be open to criticism of
having no means
of direct control of projects from within the BAT
Industries
Centre.
Option 4, the concept of contracting or direct
sponsorship of
specific large projects by CAC companies in which
they have a
direct input to the project planning and progress,
has appeal.
(It is implicit that projects sponsored in this
way would be
classed as Group relevant and thus contributed by
the sponsor
companies to the Group pool.) On the negative
side, it is not
possible to group project teams (with particular
expertise) into
parcels which fit a particular CAC sponsor nor is
the necessary
long term nature of such a contract likely to be
easily agreed,
thus perpetuating uncertainty of future funding
arrangements.
Option 5, the Group formula, with all CAC
countries plus BATCo
contributing, is equitable particularly since for
all the other
R&D Centres the changes in Southampton have
resulted in a net
saving, there being little increase in domestic
expenditure. A
disadvantage of this approach is that when several
clients fund
collectively several projects, the sense of
direction and urgency
and, indeed, accountability for the research
workers, can be
poor. To some extent, this is a symptom of the
previous era of
GR&DC and any future scheme we must learn from
that experience. <=>
On balance, however, this is the system
recommended. 110
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4
This conclusion has been derived independently of
previous
approaches; it is interesting to look back at the
criteria for
funding set out at the Hot Springs meeting 1976
and which has
generally been applied since then, viz:-
1. That R&D work undertaken by operating companies
should
properly be regarded as being done for the company
and
paid for by the company concerned (i.e. no
cross-charging).
2. That member companies should agree ground rules
for the
exploitation of such research and for the exchange
of
information.
3. That a substantial part of the research work in
the U.K
could be identified as being in support of general
group
strategy.
4. And that the cost of this work would be
recovered on the
basis of 0.15% of net turnover.
There are two points of difference that we now
face. In 3. only
30% of the cost of UK R&D (itself much reduced in
size) can be
identified as being in support of general Group
strategy (having
no particular company strategic drive). Secondly,
some
alternative to 4. is needed in order to fund this
Group Strategic
research, of approx. E2 m at Southampton and of
Brazil at EO.55
mn, assuming that the Option based on all
countries sharing these
special costs is accepted.
Appendix 2 gives four options of achieving the
desired result:
i) Sharing the Group strategic costs of
Southampton and
Brazil on an equal basis.
ii) Prorating the Group strategic costs of
Southampton and
Brazil.
iii) Sharing the Group strategic costs only of
Southampton on
an equal basis.
iv) Prorating the Group strategic costs only of
Southampton.
In Appendix 2, scenario (B) is to be preferred
since it recognises
Brazil's exchange control restrictions and assumes
no transfer of
funds into - or out of - Brazil. Furthermore, an
equal-shares
formula for contributing rather than a
turnover-related formula is
to be preferred since it is the most equitable
means of
recognising the high costs already met by the high
turnover
companies.
Projections of BATCo-'s overall position are shown
in Appendix 3
and here it can be seen that the under-recovery
should be
maintained at under E2 m per annum. This shortfall
is largely
made up of non-recoveries from Denmark and the
sub-continent. No
proposal has, at this stage, been incorporated to
further increase 00
contributions from those companies who can pay.
C-1)
BATCo document for Province of BritiSh Columbia I
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5
Conclusions and Recommendations
1. Costs for R&D within the Group should 'lie
where they fall' by
country.
2. one exception concerns BATUKE R&D Southampton
for which
approx. 30% of costs are associated with Group
Strategic
research which has no direct sponsor.
3. This capability equivalent to 6% Group R&D
expenditure should
be maintained.
4. The associated costs, approx. L2 mn p-a.,
should be shared by
USA, Germany, Canada, Australia and BATCo on an
equal shares
basis.
5. The costs generated in Brazil for Group
Strategic research
should be recognised by not seeking Brazilian
contribution to
the above pool.
Distribution:-
Messrs. E.A.A. Bruell
W.J. Dickson
D.G. Heywood
R.A. Crichton
R.H. Pilbeam
ALH/EAHC/DET
lst August 1986
C:)
I'D
CO
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BATCo document for Province of BritiSh Columbia 1
November 1999