Investment in growth can close productivity gap

More than one-third of firms overconfident in investment: Survey
By Amanda Silliker
|Canadian HR Reporter|Last Updated: 07/14/2013

More than one-third of Canadian companies are underinvesting in their own growth and don’t even know it — which is a significant cause of Canada’s productivity gap, according to a report by Deloitte.

“These overconfident firms need to realize that they aren’t investing enough in research and development, machinery and equipment, and information and communication technology compared to their competitors,” said Bill Currie, Deloitte Canada vice-chair and Americas managing director, and co-author of the report. “For most of them, it’s a case of solving a problem they aren’t even aware exists.”

Thirty-six per cent of employers are overconfident in their investments and completely unaware they are investing significantly less than their counterparts, found The Future of Productivity: A Wake-up Call for Canadian Companies, which polled 884 employers.

Canada’s productivity ranks 13th among 16 peer countries. The average Canadian worker contributes US$47.66 in gross domestic product (GDP) per hour compared to US$60.77 per hour in the United States, said the report.

“Businesses, often we look behind us. We do year-over-year analysis, we’re going to grow our top line by five per cent and we’ll grow our expenses less than that. And we do it based on what we did last year, not necessarily based on where our competitors are and what levels they’re investing at — it’s human nature to do that,” said Currie, who is based in Toronto.

Reducing this “perception gap” and helping companies realize they are underinvesting could reduce the Canada-U.S. investment divide by 29 per cent, said the report, and a solution can be found in competitive intelligence and taking a hard look at what competitors are doing.

“You do that by talking to vendors… professional firms, talking to your competitors, talking to people in your industry vertical to help you stay informed about what others are doing and make informed decisions,” said Currie. “We hope, as people become aware they are underinvesting, it changes their behaviours.”

The report also found Canadian firms have difficulty sustaining growth. Canada has one of the highest rates of new business entry but, as firms age, their performance slows and they fail to thrive.

“Seeing statistics that many businesses are not sustainable ultimately can impact an entrepreneur’s dream,” said Yvonne Silver, principal and executive coach at Leveraged Leadership in Calgary.

“Canada is a very attractive place for many foreign investors and immigrants because of our entrepreneurial spirit, so those kinds of findings are worrisome.”

The inability to sustain growth is a productivity issue because firms that grow rapidly in terms of employment and revenue make disproportionately higher contributions to national productivity, said The Future of Productivity.

HR can help companies sustain their growth by being more involved in conversations around business strategy, said Silver.

“(It’s about) understanding what will really help the business grow as well as what are the barriers that prevent growth and really ensuring middle managers are supported in how they learn about the risk and rewards and are able to articulate return on investment to their employees.”

Research and development

Canadian companies are far less likely than their peers to make investments in research and development (R&D). Private sector R&D spending in Canada is only one per cent of GDP, placing it at 49 per cent of the U.S. level, found the report.

But HR can help boost R&D spending.

“Investing in things that drive productivity includes training, hiring the right people, providing an environment where innovation is fostered — there’s a whole bunch of cultural aspects to this,” said Currie. “Developing people to be more productive is actually an HR function.”

Canadian managers are more risk-averse than their American counterparts, which may be one reason why they are investing less in R&D, found the report. This is a question of attitudes and cultural differences between the two countries, said Andrew Sharpe, executive director at the Centre for the Study of Living Standards in Ottawa.

“They don’t want to invest in R&D because they’re not sure what the returns are going to be. I guess we’re more conservative in this country; we don’t have the competitive pressures they have in the U.S.,” he said. “Maybe you can muddle through in this country without taking risks, where in the U.S., it’s such a cutthroat environment, you have to take risks more.”

Canadian firms also underspend on machinery and equipment (M&E) and information and communication technology (ICT). Spending in M&E is 65 per cent that of the U.S. and ICT spend is 53 per cent, found the report.

One reason for this may be a lack of change management, said Silver. Especially at large organizations, there are often too many new things happening at once and people get tired of it, she said.

“The capacity for bringing in new technology or new equipment is a learning curve and often there’s a saturation of information — people aren’t productive right away,” said Silver. “Just because you add new equipment doesn’t mean employees are fully trained on day one on how to use it and we have to appreciate there’s a lag time before the productivity can increase.”

HR has a hand in how a company introduces new technology, said Sharpe. It should be identifying the skills profile of the workforce to see how consistent it is with the new technologies being introduced, and make sure there is a retraining program in place.

“You have to make sure you have the appropriate skill set in your workforce… and you have to have employees that are capable of using the system,” said Sharpe. “You have to always know, ‘Is the current workforce able to adapt to new technologies?’”

Changing demographics will force Canada to become more productive if it wants to sustain its standard of living, said the report. As baby boomers exit the workplace over the next decade, the employment rate and hours worked will come under intense downward pressure.

Canadian employers need to focus on increasing their productivity and making better investments if they want to survive, said Sharpe.

“Business needs to get its act together — and don’t count on government. Government has been trying for years to get the right policy framework for productivity advance, but there’s no silver bullet,” he said. “The responsibility for business sector productivity lies with business.”

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