Supplementary Submission
to the Department of Finance and Canada Customs and Revenue Agency
by the CATAAlliance, CIPS, CME, ITAC, and the Software Working Group
Mr. Phil Feely, Director of Program Administration, SR&ED Program, Canada Customs and Revenue Agency (CCRA), has asked us to expand on a number of the comments contained in our December 20, 2000 submission to the Department of Finance. At Mr. Feely's request this report will elaborate on:
In our submission of December 20th, we argued that "academic studies of the spin-offs from investments in R&D for use by companies in their internal operations…have not examined the highly fluid and rapid dispersal of knowledge that occurs throughout the IT sector." Specifically, we noted that in the IT sector, "the creation and abandonment of new innovations in any one firm occurs very rapidly and there is always movement of the development teams and personnel from firm to firm in a community and across the country".
The result is continual and rapid transferal of IT knowledge from one development setting to the next and from business to business. As our submission stated, "We believe that the academic models of spin-offs associated with studies of what happens in old economy industries are not representative of the rapid knowledge flows in IT and that they severely underestimate the breadth of the benefits associated with investments in internal software".
We argued further in our submission and in our presentations on Oct.5, that "we believe that any properly designed study would demonstrate the contribution of internal software to Canada's productivity, and the contribution of spin-offs associated with internal software to the economic growth of cities such as Calgary, Montreal, Ottawa, Toronto and Vancouver."
Our Oct 5th series of presentations documented at least five key mechanisms which contribute to this rapid dispersal of IT knowledge beyond the domain of the developer.
Specifically, as amplification to our submission of Dec. 20th, we will review these mechanisms and some of the examples we outlined in the Oct. 5th presentations. As well, we will include some additional examples that our members have subsequently identified.
1. Joint Vendor/Purchaser developments
In recent years, it has not been uncommon for companies to turn to sophisticated vendors of information systems only to find that their company's development environment requires that major advancements be made to the vendor's technologies. When this occurs, both the company's internal development processes and the vendor's products are enhanced through the joint SR&ED effort. In these cases the vendor uses the advances in subsequent sales for new applications of their products for they retain the know-how.
For example Pratt &Whitney Canada's introduction of a new MIS system required a major joint effort of Pratt's software specialists and the vendor's to produce a major upgrade which was subsequently incorporated by the vendor into new releases.
Likewise, when Ericsson turned to a vendor for an integrated development/documentation methodology and tools for real-time telecom systems, a major joint SR&ED development effort was required where both Ericsson and the vendor are reaping the benefits in spite of the product being internal use software.
2. Technology Cycles: Creation of businesses when development teams, departments, etc. are dissolved, as technologies mature
In his Oct. 5th presentation, Carl Kohn outlined how he has drawn from his experience in academia as the lead for systems development at Bell and subsequently drew from his experience with Bell to create his own business which develops major large custom MIS systems for companies in the financial, foreign exchange, publishing and health services sectors. The message here is that knowledge associated with internal use software flows with the movement of the developers and is available for their next projects.
It should be noted that Carl's experience reflects a very common cycle associated with internal software. When a technology is new and at the leading edge, companies hire the leading specialists to set up dedicated groups, which are subsequently phased out as the technologies mature. The result is that a talented pool of specialists then goes on to new challenges and to create new businesses with the knowledge they gained. We believe that it is incorrect to assume that the knowledge is strongly internalized by the developing firm.
3. Natural Attrition: Movement of Senior Technologists to New Challenges
The workforce in the IT sector is notoriously mobile carrying their latest experiences from one project, quickly on to the next. In fact, employee turnover rates for those involved in system design are commonly reported to be in the 20 to 30% range per year. As noted in our original submission, it is incorrect to believe that the knowledge gained in developing internal software is simply internalized. In fact, this knowledge is embodied in highly qualified people and moves with them when they move.
Longitudinal studies of the careers of such workers are not yet available, but are being pursued as part of a major study of the IT labour market by HRDC in consultation with the Software Human Resource Council, ITAC and CIPS. Anecdotal evidence suggests, however, that the frequent movement of system design personnel regularly involves a change of industry and region of employment in addition to employer. As a consequence, advances learned in any given internal development setting can and do quickly find their way to other companies, industries, and even geographies.
4. Spin-off of Internal Technologies to New Applications and Setting
It is often the case for companies to spin off technical groups developing internal use technologies as new companies. As well, the needs of one company for internal software continually require companies to joint partner work on the development of internal software with smaller suppliers. Inherently, in such situations, there is a continual flow of knowledge outward through the suppliers.
Nortel Networks, for example, spun off Entrust Technologies, a growing high-tech company which is now a leader in security software for the finance and Internet communities.
Spectra Securities Software Inc. of Toronto was 11 years ago the internal IT department of Burns Fry, the brokerage firm. Spectra now has blue chip clients and offices in 4 countries.
CanWest Gas is a gas aggregator that developed software to manage their business. It was one of the first database engines to manage the wide area network of customers, suppliers and pipeline owners. The software was very successful and they spun off the company to form a software company - it was owned and operated by the employees and consultants that developed the system. They had major customers in the US.
The BC Hothouse Growers Association and the Construction Association in Victoria had similar experiences. They developed internal use software and put it into a separate companies to commercialize.
These are but a few of the many situations where internal use software has become a viable commercial product, even where the company did not have any such intention when they started out.
5. Joint Company/Industry/Academic Developments of Internal Use Software
The credits are giving impetus to strong working partnerships between Canadian manufacturers and Canadian Universities which are fostering important internal improvements for the companies through advances in computer assisted engineering, digital design, computer aided analysis, manufacturing, etc. The knowledge gained through these partnerships is not only internalized by the companies but is also externalized by the movement of students and by the academic environment itself.
The Automotive Research and Development Center, a joint partnership of DaimlerChrysler Canada and the University of Windsor, is an example of the close cooperation that is occurring between Academia and business in the development of more effective digital design and manufacturing systems. This is a thirty million dollar investment which is in part fostered by the credits.
Bell Canada alone puts around $30 million into Bell University labs, in part, because of the need to maintain their internal technologies at the leading edge. Likewise, in their Oct. 5th presentation, Pratt & Whitney Canada highlighted some of the important results they are achieving through eight partnerships with various Canadian universities.
Frequently, companies will create internal-use software to reduce costs, time-to-market and, in some cases, simply to "survive". As mentioned in the presentations on October 5th, Nortel Networks needed a system to handle their recruiting efforts. After searching the marketplace, they discovered there was no web-based solution available that would handle the number of applications expected, the number of managers in its numerous worldwide locations that needed to review the applications, the control of the applications and offers that was required by their Human Resources organization, etc. Nortel is not in the business of developing such recruiting systems, but was forced to do so. An extremely innovative, leading-edge system was developed, many of the techniques have been used in other projects, the lessons learned have found their way to numerous external developers and the knowledge has been dispersed as the developers have moved on.
Concluding Comment:
Finally, we believe that there is another very important spin-off benefit associated with these credits which is often overlooked when economic benefits are discussed. These credits have their strongest influence on business decisions during economic downturns when alternative sources of financing are restricted. They are important considerations when businesses decide where not to cut their R&D efforts. For example, the Automotive Research and Development Center is still receiving strong support in spite of DaimlerChrysler's current difficulties. The credits were certainly one of the considerations. It is also important to recognize that these examples are not exceptions and reflect what commonly occurs when internal use software is developed. As noted in our original submission,
As noted in our original submission, we would be pleased to assist the Department of Finance should they wish to commission work that focuses on understanding the flow of knowledge and spin-offs in the new economy.
Also, we would like to reemphasize our original position; this is the wrong time to tamper with the credits. The efforts of the CCRA/industry partnership to get the program back on track are just now showing results. We believe that the program is on the right track and that changes at this time would be counter-productive.
Contact:
Russ Roberts, Senior Policy Director
CATAAlliance
phone: (613) 748-1993
roberts-bishop@sympatico.ca