If Canada is interested in maintaining its prized social safety net and a vibrant, buoyant economy, it must learn to lead the e-business market on a global scale.
According to Gaylen Duncan, president and CEO of the Information Technology Association of Canada (ITAC), the economic threat facing this nation is very real and very close.
“Argentina used to be a world leader and now it’s like Mexico,” Duncan cited. “As a country, you can lose it (a healthy economy) if you take up the wrong [national] policies…this is a huge problem, and if we don’t fix it we’re in serious trouble.”
A report aimed to propel Canada to the forefront of the Internet economy has revealed Canada is well positioned to take advantage of e-business opportunities but that it is not aggressively rising to the challenge.
Dubbed Fast Forward: Accelerating Canada’s Leadership in the Internet Economy, the 47-page report is the culmination of the Canadian E-Business Opportunities Roundtable – of which Duncan is an active member – and is co-chaired by John Roth, CEO of Nortel Networks, and David Pecaut, managing director of the Boston Consulting Group (Canada). The report shows Canada has the highest share of global e-commerce revenues after the U.S. with an Internet economy representing $28 billion in revenues and 95,000 jobs.
Conducted by the Boston Consulting Group (Canada) in late 1999, the study maintains Canada is poised to lead the Internet economy, given its sophisticated infrastructure, highly-connected population, early Internet policy initiatives and skilled workforce, but the nation simply hasn’t embraced the opportunities before it.
Despite the doom and gloom, Duncan believes the report is optimistic and he carries a healthy confidence that Canada can meet its potential. “If we get it right, we can surpass the U.S.,” he said. “We’re ahead of them now with regards to infrastructure and such, but we simply haven’t adopted the technology.”
The Canadian Internet economy could climb to $156 billion in revenues and create 180,000 incremental high-value jobs by 2003, provided an aggressive restructuring of current modus operandi is implemented. But the report cautions that this projected growth is by no means assured. Canada currently lags the U.S. in both B2B and B2C e-commerce. While Canadian e-business revenues are beginning to represent a material share of Gross Domestic Product (GDP), our 1998 total Internet economy was worth an estimated $28.5 billion, contributing 1.5 per cent of the total GDP. By comparison, the value of the U.S. Internet economy in 1998 was $414 billion and employed over 1.4 million people, largely in high-value, knowledge-based jobs.
“Edward Greenspan in the U.S. is responsible for the policies of the entire U.S. economy and he is currently sitting on top of the largest run of economic growth in the history of the United States,” Duncan remarked. “The only way he could explain that growth [is that] the investment in IT is providing the productivity that is driving the economy.”
If the Canadian Internet economy could achieve the same growth rate as that of our southern neighbours, that could translate into an annual GDP growth of about 0.6 per cent.
Stumbling Blocks
The report warns of several significant barriers the nation must overcome in order to achieve the status of a major global player.
The identified barriers include a lack of urgency amongst Canadian business leaders to make the Internet a strategic priority, a growing shortage of skilled IT talent to fill critical positions, a false sense of security in Canadian retail circles who’ve been sheltered from U.S. competition to date by the high costs of cross-border shipping, and taxes.
“If we want to maintain our social safety net we need a vibrant economy, if we don’t do certain things [to ensure the economy is healthy] that revenue won’t be there anymore,” Duncan said.
One constraint that appears to be strangling the ability of existing Canadian businesses to capitalize on new opportunities is investment decisions based on traditional return on investment (ROI) models. The report found investments are traditionally evaluated in terms of expected gains in marketshare or revenues, or by potential cost savings. While the Internet offers unprecedented opportunities to expand geographic reach and deliver huge savings through efficiency gains in inventory reduction, shorter cycle times, and less manual administration, many Canuck businesses have difficulty appreciating this methodology since it involves an entirely new way of doing business.
Adding to the Canadian e-business conundrum is the limited size of the national market. “We are a small market that’s not going to expand that dramatically anytime soon,” said Dr. Claude Lajeunesse, president of Ryerson Polytechnic University in Toronto and a member of the Roundtable. “We have to learn to extend our reach beyond Canada and meet the challenges of extending outside of Canada as well.”
A successful Internet business can build scale rapidly by accessing a vast customer or supplier base or by migrating large numbers of transactions on-line. But for Canadian businesses to build scale quickly, they must leverage the broad reach of the Internet to move into larger markets or establish themselves in promising new niche markets. This in itself is problematic since many small and medium sized companies (SMEs) lack managers with e-business expertise or the in-house IT staff to handle technical challenges.
Perhaps even more troubling is the conservative investor culture throughout the country. It is crippling future growth, said the Roundtable. New e-business formation is happening in clusters around the U.S., primarily due to the Americans’ notorious love of embracing new ideas and initiatives. For example, the city of Cambridge, Mass., supports entrepreneurship by investing US$5 million of city pension funds in new Internet start-ups, and offers workshops on incorporating, building a marketing plan and assessing capital requirements. However, the environment in Canada is far less dynamic because the venture capital market is dominated by passive and semi-public investors. Specifically, labour-sponsored funds, government funds and hybrid funds – none of which are permitted to take a large ownership stake in the companies in which it invests – make up over 60 per cent of the Canadian capital venture pool. In contrast, only one per cent of U.S. funds are under management by non-private investors.
“That just hammered Roth, myself and most of us on the Roundtable,” Duncan admitted. “There are a whole slew of things behind that number, but it tells you [Canada is] sick.”
Despite the emergence in the Ottawa region of a Silicon Valley North and other e-business clusters in Toronto, Waterloo, Ont., Montreal, Calgary, and Vancouver, there are few other successful cluster activities in the rest of Canada because the linkages among universities, business and the financial community are generally not as strong or as focused as their American counterparts. Factors which create tight linkages – directed research, the cross-pollination among university faculty and business management and technology staff, and active early-stage venture capitalists – are infrequent and too sub-scale to drive new business creation. Moreover, Canadian Internet start-ups in all geographies face a set of common challenges in gaining access to financing, and attracting and retaining IT talent.
Success for any venture capitalist (VC) is measured by the ability to cash out of an investment on a timely basis at an attractive return, the report notes. But Canadian VCs face an unfair playing field when the Americans join the game. Canadian VCs face barriers and impediments when pursuing an exit strategy whereas Uncle Sam’s VCs do not. Plus, the report charges Canadian investment banks are less focused on Internet deals than is the case with their major U.S. counterparts. Proof of this can be found between Jan. 1, 1998 and June 30, 1999, when the four Tier 1 investment banks in Canada completed a meagre two Internet deals compared with the 204 deals conducted in the U.S. The IPO market also reflects this disparity: there were only four Internet related IPOs on the TSE during 1999 compared to 165 on NASDAQ.
Educating The People
Lajeunesse believes the report has already had a profound impact in a number of ways and he hopes the federal government will respond with new funding initiatives for post-secondary institutions.
“There already has been funding from the federal government for research; they’ve been investing and hopefully they’ll continue to do so,” he said. “The Liberal government has shown they want to address our needs and invest more money…judging by (Industry Canada Minister) Mr. Manley’s comments recently I’m optimistic.”
Ryerson hosts a number of courses over the Web, and IT-related programs such as their IT Management course had four times the amount of anticipated student applicants last year. The school is in the process of developing more curricula aimed at teaching students about e-business and the Internet at large.
“Traditionally Nortel and Bell have been our best supporters of research (funding) and they still are,” Lajeunesse continued, “but we are now beginning to see an understanding in other companies…there’s a greater awareness (in the business community) of the need to have strong links to institutions.”
The report gave Canada’s post-secondary institutions a failing grade with regards to e-business cluster development, stating the presence of strong, educational institutions that attract, educate, and inspire potential e-business creators is essential. American schools such as Harvard University in Boston and Stanford University in San Francisco foster an environment conducive to an entrepreneurial spirit. In fact, 12 per cent of students from the 1999 graduating business class at Stanford went on to establish their own business, compared to the 2.4 per cent of business graduates from the University of Western Ontario in London who also followed this less-traditional path. But Lajeunesse countered the money required to attract and retain quality faculty is a tough battle for Canadian schools.
“There’s no one silver bullet that will allow us to remain competitive with (schools in) the U.S.,” he remarked. “Ryerson is not in competition with the U of T or UBC, we’re competing with American institutions (for faculty)…there is a need to attract and retain the best [faculty] who can then challenge our students to become more entrepreneurial…we’re definitely facing a crunch of recruiting in this area.”
The report also criticized the lack of emphasis Canadian universities place on entrepreneurship and new business creation.
“We’re now competing (for faculty members) with businesses as well as U.S. institutions,” Lajeunesse added. “Look at a corporation like Nortel, [they] hire a lot of people who traditionally [might] go into teaching.”
A National E-Business Strategy
The Roundtable made a series of recommendations to the federal government, the IT industry and the general public, aimed to redirect the nation’s approach to e-business.
Chiefly, putting all levels of government services completely on-line, offering financial incentives to businesses to get wired, and lowering business and legacy taxes are of the greatest priority, Duncan advised. Plus, several aspects of current tax and securities regulations which create barriers to early-stage capital formation on a large scale must be restructured. The report recommends adjusting the “tax treatment of stock options to allow a deferral of taxation until the time of sale of the stock, and permit limited capital gains exemptions.”
Given the increasing mobility of money, talent and ideas, this is a critical issue if Canada is to develop a vibrant economy.
“It’s not just a case of having the government on-line but also of solutions to deliver services at all levels of government from federal, to provincial, to municipal,” Duncan said. “We also need incentives from the government – not grants – and stop taxing individuals who make money. We need to lower the taxes on companies, change the rules at the [Toronto Stock Exchange] for qualifying IPOs and change the rules on capital gains…I think the government is finally beginning to realize taxes are a part of the problem. The number one difference between the provincial government and the federal government is Ontario believes in cutting taxes to make money while the federal government believes cutting taxes will cause you to lose money – I’m on the provincial side of things.”
Rather than leave the proposed solutions in the report to the government, the 30 members of the Roundtable are leading by example. Six teams have been created, each boasting a captain, which will spearhead of the recommended solutions. For example, John Wetmore, president of IBM Canada, is rumoured to captain the Adoption Awareness Building Team whose mandate is to raise awareness in businesses coast to coast as to the benefits – and subsequent necessity – of making an e-business solution a strategic priority.
“It’s similar to how the United Way sets up their campaign teams,” Duncan explained. “We have to go out and deliver the message.”
Although mandates and team members are still being formed, the remaining five teams include Capital Markets, International Investment, Talent Pool, Canadian Trust Market, and Government On-Line.
Duncan added an overwhelming response in the form of volunteers who will deliver the recommendations en masse has come from the private sector since the report’s release on January 17.
The Roundtable and its subsequent action teams have their work cut out for them. They must stir the fires of the Canadian public, re-educate its business community, address the needs of educational institutions, and instil an American fervour in Canadian VCs. Furthermore, they face the unenviable task of convincing the federal government to cut taxes and create a radical change in economic policy, all with a government headed by Prime Minister Jean Chretien who has dismissed the American brain-drain of Canadian IT talent as a myth.
“The Prime Minister has lately switched (his opinion) a little on this issue,” Lajeunesse figured. “Mr. Manley met with the Roundtable once and he certainly understands that there is a tax drain, a revenue drain, a quality of life drain — it’s no longer just a brain-drain.”
The Building Blocks
The Roundtable has identified six priority areas for accelerating Canada’s e-business leadership.
1. Establish Canada’s brand in e-business.
Both domestically and globally by building awareness of and confidence in Canadian companies’ ability to compete in the global Internet economy and by boosting our profile internationally. Canada’s goal should be recognized leadership in e-business, accomplished by achieving the highest rate of Internet usage in the world.
2. Accelerate the transformation of existing business.
By providing incentives and tools for business leaders to invest in e-business, and achieve the highest rates of Internet usage among small- and medium-sized enterprises in the world and to build the largest Internet-related industry as a percentage of GDP.
3. Foster e-business creation and growth.
By supporting emerging Internet clusters, ensuring risk capital is available at all stages of business development, and by improving the incentives for entrepreneurs to build businesses in Canada.
4. Expand the e-business talent pool.
Enable companies to make better use of stock options to attract and retain employees and by accelerating skills training and retraining to meet the urgent supply needs of the Internet economy.
5. Make government on-line services a priority.
Become the most advanced digital government in the world at all levels of government.
6. Build Canada’s e-business leadership profile internationally.
Establish a Canadian branded, internationally recognized consumer protection mark and forum for dispute resolution. Become a recognized centre for international Internet policy development through widespread adoption of a Canadian trustmark.
The Risks of Inertia
Forfeiting first-mover advantages.
Moving early gives companies a decided advantage in e-business. Being first, or at least early, often enables Internet competitors to capture and maintain a large share of the market. Followers become entangled in an ongoing game of catch-up.
Competing at a scale disadvantage.
As the Internet tears down international barriers, smaller bricks and mortar companies are forced to compete locally for business against global Internet players with scale advantages. As these global players force prices down, off-line SMEs will not be able to compete on cost and will have to differentiate themselves by offering better service or speed.
Getting shut out of traditional supply relationships.
As on-line intermediaries emerge in B2B e-commerce and more large companies shift their procurement on-line, suppliers are at risk of being de-listed by or disintermediated from their customer base. Particularly at risk are small suppliers, or those that can serve a limited geography.
Missing global market opportunities.
Canadian companies that remain off-line are missing valuable opportunities to tap into global markets that once required an on-the-ground presence. For instance, today’s Inuit art lovers worldwide can log on and buy pieces directly from Canadian-based galleries and artists. Those enterprises who are slow to migrate on-line are forfeiting global growth opportunities.
Five Opportunities for Canada to Lead
1. Network infrastructure
Canada’s historic investments in leading-edge research in network technologies are evident today in the quality and breadth of its Internet backbone. Canada also has a growing cadre of innovative new technology companies supplying the Internet. The continued rapid growth of these companies and their progeny has established Canada as an important source of technologies that will accelerate the performance of Internet networks around the world.
2. Multimedia north
As broadband capacity grows, the demand for animation and Web-based graphics will explode. Canada is well-positioned to be a leading multimedia supplier. Internationally, Canada’s animation and design schools are renowned and have fed a growing multimedia industry encompassing everything from Web design to graphic arts to video game development and have built a large labour force of skilled technologists and engineers.
3. Global customer care centres
The Internet is creating a demand for a new type of call centre that integrates on-line and telephone solutions for customer service. This calls for a new type of customer support centre. Given the rapid decline in telecommunication costs, global call centres are now becoming feasible – if they can be staffed by sophisticated response teams with higher-order technical, language and service skills. Canada is ideally suited to become a leader in global customer care for Internet-based businesses. Its sophisticated telecommunications infrastructure and ample experience in the call centre business are factors that work in Canada’s favour. However, countries such as Ireland are targeting the same opportunities, focusing first on European call centres using imported labour with multiple language skills.
4. Remote service provider
Canada has mastered the delivery of services such as health care and education across its vast geography. Canada’s experience in remote delivery of these services are promising for extending existing services to global markets and for developing new programs or services that can be delivered over the Web. Extending these traditionally non-traded services to new markets would enable the export of this Canadian expertise. Canada already ranks second globally in the development of remote learning programs with over 1,800 on-line courses in place.
5. Web tools developer
Many niche markets are still open to new dot-coms that Web-enhance the offerings of leading global Internet players. Canadian companies are creating and commercializing everything from navigation tools to site performance enhancers to new search technologies to payment solutions.
