Computing's Agenda Setters is a major initiative that brings together opinion leaders to debate the biggest challenges facing the technology industry today. The discussions will form the basis for a report providing best-practice advice for business and IT leaders in the public and private sector. This week, our panel of experts met to discuss the second topic: Does IT matter? They have generated four recommendations on how a culture of innovation can be developed and stimulated in the UK.

Develop a culture of innovation

The first step towards stimulating an environment that is able to innovate is less about practical recommendations and more about looking at ways to create a culture that encourages this.

The problem involves many considerations, not least in looking at ways of removing the fear of failure.

If Europe can produce a culture that views innovation and technology as exciting and interesting, it can start to unlock one of the possible advantages that it has in the global economy - people capable of developing exciting and ground-breaking new ideas.

One of the ways to start doing this, says Jeff Rodwell, a partner and technology specialist at law firm Reed Smith, is to create an environment that encourages people to pursue ideas and bring them to market.

'The UK is a very easy place to set up and do business, but those policies are mostly in favour of larger companies and multinationals. That focus on ease of doing business is not present for the start-ups and the innovators,' he says.

Bundeep Singh-Rangar, chief operating officer of venture capital firm Ariadne Capital, says Europe is under threat from all fronts, as it lacks two important factors: a big, coherent market such as the US and the labour cost advantage of Asia.

'All Europe really has is innovation and the only way to defend that is in intellectual property ownership,' he says.

Shake up education

The next step is a look at one of the most fundamental aspects of the innovation challenge, the role of education in developing people capable of creating new technologies.

At primary and secondary school level, there is general consensus that more needs to be done to improve the image of science and technology and encourage more people to study.

Universities need to review ways to make it easier to enable students to spin off research projects into start-up companies.

Part of this challenge involves changing the image of technology and making it less of a geeks-only area of study.

Steve Flowers, principal research fellow at the University of Brighton's complex products systems innovation centre, says more needs to be done at the basic level of improving the education system, such as improving literacy levels.

'One of the problems with the UK economy is that a large proportion of the population are pretty much functionally illiterate.

'If you look at how the market works, the key people who make the money are the people who are bright and make a big contribution,' he says.

Nick Masterson-Jones, IT programme director at Bacs says the challenge is to drive forward the right sort of education system that's going to produce the skills and knowledge needed.

'I think innovation is tremendously important for the country,' he says.

'I just think that we're driving at the wrong end of it at the moment. Perhaps where we suffer is in terms of getting the right levels of graduates with the right skills.'

Allocate budget for high-risk projects

A key suggestion emerging from the debate is that IT directors should allocate a nominal percentage of their IT budgets for high-risk bets on unproven and potentially disruptive technologies.

The problem facing many start-up firms, with potentially radical new technologies, is the inability to break through the ranks of the incumbent suppliers that exercise an iron grip on the industry.

If public and private sector buyers regularly took sideline bets on new technologies, it would give those few possible ground-breakers the chance to open up a gap in the market.

Singh-Rangar challenges the public sector to lead the way by allocating two per cent of their budgets to technologies from start-up firms.

'The government's purchasing power can be used to negotiate better agreements with suppliers and more robust agreements to deliver better value, so why not allocate a percentage of budgets for only innovative companies, such as start-ups or new R&D companies,' he says.

Paul Heighway, head of IT at airline technology firm Amadeus, says small players need an entry route into the market.

'My impression of the industry is you've got juggernauts and then very small niche players, and very little in between. And it must be terribly hard to get any leverage if you haven't got the financial weight or credibility behind it.'

Paul Coby, chief information officer at British Airways, says small but highly-focused players can make a serious impact on a firm's productivity.

'I love small, innovative companies that are really going to be focused on us. There's a firm called Carmen Systems we met in 1996, formed from a bunch of advanced mathematicians who'd built a crew optimisation algorithm that we started using,' he says.

'Today, this firm's got a range of customers across the globe, and they've become the industry standard. But they started small.'

The government as incubator and sponsor

Another key recommendation is targeted at the role of government in the support of innovation, both as a provider of support through tax credits for research and development (R&D) and the use of its purchasing power.

The uptake of new technologies can be tremendously spurred through incentives from Whitehall.

An environment that supports R&D can be used to attract multinational organisations to set up research centres in the UK, while the other need is to create an appropriate environment for fostering start-up companies.

The latter involves a review of bankruptcy law, which can ease the fear of failure for young entrepreneurs looking to take a bet on exciting new technology, as well as easing the path to financial rewards from a stock market listing.

All this should be bolstered by demand through greater government spending.

Peter Lowe, director for information management and technology at the Home Office, says the uptake of new technologies, such as broadband, is an example of stimulating the market by government spending.

'I think the notion of the government as a purchasing organisation has been proved,' he says.

'As a policy, that's a very interesting one, that rather than try and simply fund, as would have happened before, maybe that purchasing power can be mobilised to actually achieve certain things.

It's certainly happened with broadband, albeit slowly, but that was an experiment. That was the first time anyone had really thought in those terms.'

Singh-Rangar points to the US model, which has created an environment that has encouraged risky young start-up firms.

'If you think of the two countries that lead the world in IT, the US and India, what do you have? You have an amount of government spending, you get tax breaks, and in the US, you get very significant stock options, so a lot of people got very, very rich if their company succeeds,' he says.

What the experts say...

Bundeep Singh-Rangar, founder and chief operating officer, Ariadne Capital

I think Europe's under massive threat from all fronts, is it lacks two big things. It lacks a big market, a coherent market, like the United States, and it lacks the labour cost advantage of Asia. So all Europe really has is innovation and the only way to defend that is in intellectual property ownership.

Paul Coby, chief information officer, British Airways

If the government can create conditions where companies can get started, enabling them to compete against leviathans and juggernauts that have got enormous financial power and enormous ability to influence, I for one would think that was great.

Jeff Rodwell, partner, Reed Smith

Britain is an easy place to do business and set up business, and it's a very deliberate policy. But that orientation is focused on the larger companies, the multinationals. But that focus on ease of doing business is not present for the start-ups and the innovators.

Nick Masterson-Jones, IT programme director, Bacs

I think innovation is tremendously important for the country. I just think that we're driving at the wrong end of it at the moment. Perhaps where we suffer is in terms of getting the right levels of graduates with the right skills.

Steve Flowers, principal research fellow, University of Brighton

I think one of the problems you've got with the UK economy is that a large proportion of the population is functionally illiterate. That's important because these are the people who use all the technology systems that are developed. These are the people who are the large, untapped market.

Peter Lowe, director: information management and technology, Home Office

I think the notion of the government as a purchasing organisation has been proved. Maybe that purchasing power can be mobilised to actually achieve certain things. It's certainly happened with broadband, albeit slowly, but that was an experiment. That was the first time anyone had really thought in those terms.

Paul Heighway, head of IT, Amadeus

And increasingly, my impression of the industry is you've got juggernauts and then very small niche players, and very little in between. And it must be terribly hard to get any leverage if you haven't got the financial weight behind it and the credibility.