Industry Committee on Dec. 6th, 2007

[The Chair, Conservative, James Rajotte]

Order.

I'll ask the members and the witnesses to take their seats, please. I understand one of the witnesses will be joining us. He's currently stuck in traffic.

Members, I'd like your attention at the beginning of the meeting, before I formally go into the witness part.

We had a subcommittee meeting earlier this week, and I have the report from that subcommittee, but I would like to do that at the end of the meeting. We're going to allot the last 15 minutes for that. The committee will go in camera, and we can then formally adopt or amend what the subcommittee decided. I'd like the members, at least one representative from each party and the independents, to stay until the end of the meeting. We'll do that at 10:45, or even earlier, if we can.

This is the tenth meeting of the Standing Committee on Industry, Science and Technology. The orders today, pursuant to Standing Order 108(2), are to continue our study of the review of Canada's service sector.

We have with us today three witnesses. We have, first of all, from IBM Canada, Mr. Matthew Ivis, the governmental programs executive; and secondly, from Microsoft Canada Corporation, Mr. Marc Seaman, who is the national director of corporate and public affairs. We will be joined later by Mr. Bernard Courtois, the president and CEO of the Information Technology Association of Canada.

Welcome, Mr. Ivis and Mr. Seaman. You have up to ten minutes for an opening statement. You don't have to use all that time. And then we will go to questions and comments from members.

Mr. Ivis, we'll start with you.

[Matthew Ivis, Governmental Programs Executive, IBM Canada]

Good morning, and thank you for the opportunity to address the committee on this important topic.

IBM Canada strongly supports the committee's decision to undertake a study on the Canadian services sector. Services are a very significant but often overlooked segment of our economy. Our hope is that the study emulates the excellent work undertaken by this committee in regard to the challenges facing the Canadian manufacturing sector.

IBM has a significant manufacturing presence in Canada. Bromont, Quebec, is home to our microprocessor packaging and testing facility, employing 2,800 people. This world-class, high-tech manufacturing facility competes on a global basis for product mandates both from within and outside IBM.

I wanted to begin by underscoring that we strongly support the recommendations you provided in regard to the manufacturing sector. The report and its recommendations were comprehensive and balanced; I would like to urge you to bring the same approach to your study of the services sector, because services are crucial to the Canadian economy in terms of employment and competitiveness and hold tremendous potential in terms of increased trade.

The Canadian services sector accounts for two-thirds of all economic activity and three-quarters of employment. Moving forward, we expect to see these numbers increase as we have in other advanced economies. Services increasingly form intermediate inputs to the production process for goods and other services. In fact, according to the OECD, services now account for a full 25% of the value-added manufacturing.

As such, in today's economy a firm's productivity and competitiveness rely not only on its employees and capital equipment, but also on the services it purchases. A dynamic, competitive services sector can, therefore, enhance the competitiveness of the entire economy.

Moreover, services offer tremendous potential in terms of trade. Canada, with its open economy and highly educated and diverse population, is well positioned to capitalize on the increased trade and services being facilitated by information and communication technologies. Unfortunately, as the Conference Board of Canada recently noted, the high services profile of our economy is not being fully translated into international trade.

Our services exports are only 12.8% of our total exports, considerably below the 2004 world average of 19.6% and the U.S. share of just over 29%. Our share is also well below the share of other economies similar to Canada's, such as Australia's, which sits at 22%. In short, our economy has become substantially more services-based, but our trade has not.

I think this is a significant challenge that we collectively must examine and address, because the opportunity really is enormous. As developing economies advance and mature, their appetite for services will only increase. We are well positioned to take advantage of this demand, but we need to make sure the Canadian services sector is poised to exploit the opportunity. We must make sure that free trade agreements such as the WTO Doha development round include strong service sector commitments.

Unfortunately, despite the size and importance of the service sector, it is often characterized as a low-value, low-wage sector. While a wide variety of jobs exist in the services sector, I think it would be a mistake to generalize. The services sector includes many of the knowledge-based industries that offer the highest-paid jobs. For example, think of financial, education, health, government, business and professional services sectors. It is in these areas that we find our highly skilled doctors, lawyers, accountants, investment bankers, engineers and, lest I forget, IT professionals.

For these reasons, I commend the initiative of this committee in examining the Canadian services sector. I think there's a great opportunity to better understand the needs and dynamics of the sector and to make it more competitive and efficient moving forward.

For example, from our perspective the skills required in the services economy are different from those in the industrial economy. In a services-based industry, human capital is a major source of competitive advantage. We require more multidisciplinary skill sets--people who possess technology skills as well as business, legal, and societal acumen.

Also, our research and development activity should better reflect the composition of the economy. This means more services-based R and D, because despite the size of the services economy, very little is known about driving services innovation. In fact, our scientific understanding of modern services, services systems, and service architectures in general is rudimentary.

And finally, our public policy specifically in regard to innovation and trade must focus more attention and place a higher priority on the services sector.

I began by outlining that IBM Canada has significant manufacturing operations in Canada, and I'll end by relaying that we're also a major Canadian services provider. In fact, over 50% of IBM Canada's 19,500 employees are service professionals. They are business, technology, and management consultants.

If you add to this our software developers, you'll have another 3,000 highly skilled IBM Canada employees in the frame, as well as the destination for the majority of the $360 million that we invested in R and D last year and the $3 billion we've invested in research and development in Canada over the last decade.

With this, I'll conclude by thanking the committee for undertaking this study. It's an important subject that I think is very much worthy of your attention.

Thank you.

[The Chair, Conservative, James Rajotte]

Thank you very much, Mr. Ivis.

Now we'll go to Mr. Seaman, please.

[Marc Seaman, National Director, Corporate and Public Affairs, Microsoft Canada Co.]

Good morning, everyone. I would like to thank you for inviting me to speak to you this morning. I am going to make my remarks in English, but I will be able to answer questions in French or English.

Thank you again for having Microsoft at the committee. It's not often that Microsoft and IBM sit together. We're fierce competitors, but we sit together in the good of the industry, and we are now joined by our colleague Bernard Courtois, who hopefully will provide a broad context of the industry.

The IT sector—and Bernard might be speaking to this—is about a $40-billion industry in Canada. It's a growing industry, and $25 billion of that is software and services. The software industry, which Microsoft predominantly works within, is a $6-billion specific industry, and it is the number-one driver behind approximately 23,000 IT companies across Canada that deliver services through software. It supports approximately 58.6% of overall industry employment and it creates about $25 billion in annual taxes.

The reason we're suggesting the importance of software within the broad IT ecosystem and within the services is that there's a moving trend towards what's called “software and services”, and a merging of that. The services on the Internet are definitely a major transformation of our industry. Service, unfortunately, is a word used in a lot of contexts, but it really is transforming the innovation happening around services.

First is in the area of software as a service, which is about one-to-many delivery of software over the Internet. This is fundamentally changing the way services and software are delivered to individuals and to businesses.

A second area is the service orientation, which is the development approach that lets us compose multiple services. It shows up in the lightweight mash-ups that you see on the web today, all the way up to the more heavyweight services-oriented architecture.

A third area is the new innovation of Web 2.0. Web 2.0 is really transforming...it's where the Googles, the Yahoos, Microsoft, and others are working towards delivering software directly to consumers, directly to businesses, through the Internet. It is the way of the future, where services will be delivered online. Services will be supported through a very seamless infrastructure so the software component is the industry driver behind that.

Most of the industry seems to be on the same path to software-plus services. Companies like IBM are certainly going that route, as well as some of the other organizations we've talked about. The importance, though, when we move towards software and services is that it's really about a knowledge economy. Where Canada is struggling with respect to that is in the area of graduating our numbers of students in math and computer sciences. I think Bernard may speak to that, but my ITAC report indicates there will be 25,000 IT jobs in the next year, and only 8,000 graduates from Canada. This is not unique to just Canada. We're facing the same challenges in the United States as an organization. Hence, many of you may have heard of Microsoft opening a software development centre in British Columbia. The majority of our people from that centre—it's recruiting the brightest from around the world—will come from overseas, primarily from India and China.

I think the reason I put that in the context of where software and services are is that the transformation of the industry is moving towards software and services combined, and delivering the services and software through online experience. The software development side and the impact it has and the ability to transform on a global perspective and to have this centred in Canada and having a stronger regimen around that is a great opportunity right now for this country, based on some of our immigration policies, some of our infrastructure issues, and so forth.

One of the aspects we certainly want to bring to bear to the committee, and which I know the government is paying attention to, is the lack of a strong IP regime in Canada and the protection of IP, because as you're working towards software development, it's important to have IP supporting that.

The other one, as Matthew pointed out and as we just talked about, is the skills shortage in the area specifically of software development and computer sciences.

So we certainly look forward to working with the government on shaping a greater strategy for IP protection and for software development and working with the post-secondary institutions towards that end.

Lastly, I think that the onshoring of people is an important one. We've seen a lot of companies, like Microsoft, having an option of either offshoring the software development, or bringing it to North America. With the challenges in the United States with immigration policies, I think it's a great opportunity for Canada for the onshoring, and for the knowledge-based industry to really take hold here in this country.

I talk about that in the context that it is a $1 trillion industry globally. The software and services industry provides over $900 billion in taxes annually globally. If some of that part of the context can be developed here in Canada, I think it's a great opportunity for companies like ours and a country like ours.

Thank you.

[The Chair, Conservative, James Rajotte]

Thank you very much, Mr. Seaman.

Welcome to the committee, Mr. Courtois. You now have up to ten minutes for an opening statement and then we'll go to questions and comments by members.

[Bernard Courtois, President and Chief Executive Officer, Information Technology Association of Canada]

Thank you, Mr. Chairman.

I am going to make my comments in English, but then I will be pleased to answer questions in French or English.

I want to thank the committee for beginning this process of looking at the service industry. I think it's very timely and very welcome.

Our perspective for the information and communication technology industry is a bit unique, because we have the perspective of what's happening in our own sector and a unique perspective on what's happening in the economy as a whole. In our industry, we have about 600,000 jobs at the present time, but in addition to that, there are about 500,000 information and communications technology workers who work in the rest of the economy and drive our productivity in the economy.

There are numerous macroeconomic studies that show that, today, productivity in a country's economy comes from deployment of information and communications technology. StatsCan just published another study yesterday, on a microeconomic basis, studying the performance of firms that had used ICT versus those that had not, and the studies demonstrate superior performance. So we see technology spreading throughout the economy and being necessary for the productivity of businesses, as well as public services, and we have witnessed the shift of the economy from one of manufacturing of products and extraction of natural resources to a services economy, and that's also true in our own segment.

In ICT, until about the year 2000, the revenues from manufacturing, services, and wholesale were proceeding at about the same pace. Indeed, manufacturing actually peaked and was growing faster than the others until that time, although employment was already beginning at that time to exceed in the services sector what it was in the manufacturing sector.

Since the year 2000, there has been a divergence, with services really driving the entire growth in our industry, and that's probably a sign of what's happening in the economy generally. The result has been that even though on the manufacturing side we've had a dip in revenues and employment, on both counts, both revenues and employment, our industry has continued to outpace the growth of the economy. We find ourselves hiring and employing more people today—and that has been true now for a couple of years—than at our peak, the peak of the bubble.

So our industry, like our economy, is shifting to services. One of the ways I can illustrate that is that the microelectronics industry, which makes the chips that go into all kinds of products nowadays, has shifted from companies or operations that are completely integrated, down to fabricating their own chips. Other than the plants in Bromont, in Canada, there aren't too many of those left. Most of the work now is for fabricationless semiconductor or microelectronics companies, and even chipless, where the work is essentially design and marketing, and so on, and not the fabrication of the actual product.

Our industry, like the rest of the economy, is shifting not only to a services economy but to a knowledge-based economy. We all know that. The knowledge-based economy is subject to the same forces as the manufacturing part of the economy and many other sectors, with the forces of globalization and the pressure from the drop in the U.S. dollar. Many other countries tried to go for the key jobs in this area. Our future as a developed economy, with an advanced system of education, a high quality of life, and being closest to what is still the richest market in the world is going to be based on knowledge and on leadership.

We will not succeed by being me-too. We can't compete on cost with countries like India or China, which graduate more engineers or PhDs every year than we have in our entire base. We can only compete by picking the leading-edge things where we can be faster or closer to the market and better with the new thing that will succeed in the marketplace.

As I said, we're subject to the same challenges as other sectors, and I think it's extremely timely for this committee to look at that, because these jobs are our future. We should pursue our advantages with intensity and tackle the challenges we have. We have talent challenges, as Mark mentioned.

We also have challenges for our entire R and D sector, which is really at the hub of the entire ecosystem on which our knowledge economy is based. So we are very happy the government is reviewing the SR&ED tax credit at the present time, because that program, as it turns out, simply does not count for many of our major investors in labs when they're making their investment decisions. We need to have all of those credits become refundable. At the moment they're only refundable for a small portion of smaller companies financed in a certain way. I would compare that with saying we want to attract auto plants in Canada, but we will put all our efforts on small plants and we won't try as hard for big plants, or our program won't work for big plants and we're not going to tackle those.

Those are the kinds of issues our industry and the knowledge economy face in Canada.

I thank you, Mr. Chairman, and I would be happy to continue the discussion.

[The Chair, Conservative, James Rajotte]

Thank you very much, Mr. Courtois.

I thank all of you for your presentations. There's a lot here to discuss and question.

We will start with Mr. McTeague, for six minutes, please.

[Dan McTeague, Liberal, Pickering—Scarborough East, ON]

Thank you.

Mr. Courtois, I would like to come back to where you left off. You were discussing the knowledge economy.

I want to find out your perspective on what the greatest challenges are for Canada continuing to advance in the area of new technologies, cutting-edge technologies, and enhancing the knowledge-based economy. I think Mr. Seaman also may have referenced protecting intellectual property. Do you see counterfeiting and issues of piracy as problems to the further development of these cutting-edge technologies that are going to sustain your industries?

[Bernard Courtois]

Yes, as a group at ITAC, when we look at the competitiveness of our sector and there are various subsectors wanting to decide who they will measure themselves against in aiming for leadership, and we canvass them about the kinds of things they look at when they decide to invest or to put a lab or an operation in a particular country, the solidity of the intellectual property regime is one of the elements they look at.

In Canada we have an intellectual property regime that is very good in some aspects, being more balanced and better than these regimes in many other places, but it is weak in the protection against counterfeiting. We are an industry that is changing extremely fast in terms of business models, new markets, and new offerings to consumers. Those markets involve some people who say, well, I'm going to almost give the product away and get ad revenues; or some artist is saying, I'll have people pay what they want for my music.

But the fact is that unless the intellectual property regime protects the rights of those who want to protect their rights, then we cut off a whole series of business models. While the marketplace is going to sort out what works and what doesn't and what is best for consumers, the base has to be there so that those who want to protect their rights can protect them.

[Dan McTeague, Liberal, Pickering—Scarborough East, ON]

Monsieur Courtois, thank you.

I'd like to hear from Mr. Seaman and Mr. Ivis, because I think both of them may have referenced this as well. I want to get an idea of how serious the situation is from their perspectives as well.

[Marc Seaman]

Mr. Chair, Canada has one of the highest piracy rates in the western hemisphere. Our piracy rate is approximately 33%—and this is specifically of Microsoft products. Thirty-three percent of all Microsoft software in Canada is pirated or counterfeited. This compares with about 21% in the United States. Obviously it's not as significant as it is in parts of Asia, but as I mentioned, in the western hemisphere, Canada is one of the weakest nations as far as protection of those types of rights is concerned.

The loss to the economy from that is quite significant, both in taxes as well as in terms of the industrial base. It also is an impediment and discourages companies on the IP side to really want to develop products here.

Now, we understand, or are hopeful, that copyright legislation will be tabled in the coming weeks, which will help enhance that, but without strong enforcement at the borders and the ability of border guards to seize counterfeit products, it is going to.... It has to be an integrated strategy ensuring we have strong IP, anti-counterfeiting, and anti-piracy legislation, and enforcement and funding for the RCMP and the Border Services Agency to ensure we can execute against this. Because Canada, as I said, is unfortunately one of the worst nations with respect to this.

[Dan McTeague, Liberal, Pickering—Scarborough East, ON]

Thank you.

Mr. Ivis.

[Matthew Ivis]

Just briefly, to add to that, I would agree with my colleagues here and just say it's very important to balance incentivizing the creator as well as being able to facilitate innovation from the creation of that knowledge. Balancing those needs is imperative, and the government plays a strong role in defining that balance. It is very important to your question on driving new technologies and innovation in the marketplace.

[Dan McTeague, Liberal, Pickering—Scarborough East, ON]

Thank you all for that, and we look forward to the government's announcement. That can't come soon enough for some of us, certainly on this side of the table.

We look forward to strong support from your industries and from those you represent to ensure this legislation has the full understanding from the public's perspective of how the current status is unacceptable and untenable, certainly in terms of development of jobs and creating new opportunities.

Mr. Ivis, you had talked a bit about the amount of work, new ideas coming forward in a knowledge-based economy, IT developers. To what extent is your industry involved in terms of training beyond schools? At what point and in what kind of investment does IBM see itself in terms of training new entrants? Obviously there is a lot of demand for jobs. Can you give us an idea of just how much effort—financial resources and otherwise—is being made by your company in terms of training people out of school?

[Matthew Ivis]

Sure, and you're talking about internal training within IBM.

Yes, we place a heavy emphasis on internal training. On a global basis we invest about $350 million a year. We have moved very aggressively into Internet-based training. We focus very heavily on retraining and re-skilling across our workforce. As I mentioned, services is a large component of our workforce. In the 1980s it comprised some 10% of our global revenues. Now it's over 50% of our global revenues. So in this area where we're heavily focused on the services aspect, keeping our people up to date in terms of knowledge and skills is imperative, because in a services-based business human capital is often your greatest competitive advantage. It's their ideas, their skills that really make you world class and differentiated against your competitors. It's a strong focus of ours. It's something we heavily invest in and encourage, as an organization, as well.

[The Chair, Conservative, James Rajotte]

Thank you, Mr. McTeague.

We'll go to Madame Brunelle.

[Paule Brunelle, Bloc, Trois-Rivières, QC]

Good morning. Thank you all for being here.

I am wondering mainly about this shortage of skilled workers. Your industry is constantly expanding. I wonder about the relationship between the universities, which provide training, and your industry. We know that the training is done mainly within the companies.

Are our universities lagging behind in terms of training? Is this creating a disadvantage for your organization?

[Marc Seaman]

I imagine that the question is one of targeting...

[Paule Brunelle, Bloc, Trois-Rivières, QC]

I am asking each of you, everyone who has something to say.

[Bernard Courtois]

I could start by saying that our problem is twofold. First, there are no longer as many students wanting to enrol in the faculties that lead to jobs in technology. The problem starts well before that: it can be seen as early as secondary school. We are therefore trying to see how the parents of children who are finishing elementary school, and the children themselves, could be made more aware of the possibilities. There is a lack of information about the fact that the jobs of the future are in technology, and that they are very diverse, very interesting and completely different from what they were. In a nutshell, the number of students going into careers that lead to jobs in technology is too low.

As well, a lot of training is provided within companies. However, I am now hearing that in some cases, companies are having trouble hiring young people, no matter how qualified they are. In the present circumstances, basic jobs in some companies are being transferred to developing countries. They are looking for people with experience, because they are on the leading edge.

In our system, there is support for apprenticeship. In some cases, the provinces provides support through co-op programs, in particular, but at the federal level, apprenticeship systems mainly target old economy jobs, not new economy jobs. Something has to be done so that our qualified graduates can get into the job cycle, and so that five or 10 years from now they are there to take over as employees leave.

Even in the case of government contracts there is a problem. Often, to get a federal government contract, you have to list the qualifications of the employees who will be working on the project. There is no room for employees who do not have a lot of qualifications. Some members of my association who are in Ottawa tell me that they need a new generation in their companies, that they interview young people when they bid on federal government contracts, but they can't have them work on those contracts. That kind of thing happens when we are focused on the knowledge economy and trying to solve the problems that arise. They are not all huge problems. Of course, young people's career choices are a much harder problem to address.

I would like to know whether there are targeted programs that could solve the problems like the ones I am talking about.

[Paule Brunelle, Bloc, Trois-Rivières, QC]

Do you have any comments on this subject?

[Marc Seaman]

As was mentioned, Bill Gates came to Ottawa last year. He spoke with the Prime Minister and pointed out that this problem is not unique to Canada, but affects North America as a whole. A lot fewer postsecondary students are choosing mathematics and computer science, in particular. The strategy has to be applied not just at the postsecondary level, but really at the elementary and secondary levels. We need to develop more affinity, a better philosophy about integrating technology-related jobs.

Bill Gates has created the School of the Future. Forty of those schools have been established in the United States. One has been established in York Region, in Toronto. These schools are designed to determine what jobs there will be in 15 or 20 years and to start developing young people's skills a lot sooner.

[Paule Brunelle, Bloc, Trois-Rivières, QC]

In the sciences, among other things, we know that in Quebec the Conseil de développement du loisir scientifique is starting to provide young people with experience very early. Your companies might take an interest in this approach. Organizations can be set up in the schools. That would certainly help to overcome some myths. Young people are very fond of computers and big users of them. My 14-year-old son is must more up to date than I am about everything happening in that field. A lot of things could be done, it seems to me.

My next question relates to the representation of women in your industry. What can we do about this? Is the problem the same for women as it is for young people and other workers?

[Bernard Courtois]

In fact there is an equivalent problem. We have a lot of trouble persuading girls to think about making a career in technology. As you say, they are surrounded by technology every day, but they don't see it. We have to try to get the idea across that if we want to change the health care system in Canada, the biggest change we could make is to bring it into the 20th century and modernize it.

All jobs of the future, in all sorts of fields, are connected with technology. If kids want to change something in society, if they want to do the things they love, they should think about going in that direction.

Some of our companies have programs for the schools. They go out to see kids in secondary schools and talk to them about their careers. These kinds of programs exist everywhere in Canada. Unfortunately, it doesn't seem to be getting through to them. It may get through to the children in the schools, but not the parents. Career counsellors don't seem to be on board. It seems that we need a better link between the message we are trying to get across to the base and a message that would be directed to the public and be more visible in general. The connection should be made between the two, and we should try to solve this problem.

[The Chair, Conservative, James Rajotte]

We're over time here. Did someone want to comment briefly? We'll have Mr. Ivis, very briefly.