Research Summary: “Software Development Handbook: Transforming for the Digital Age” By Tobias Strålin, Chandra Gnanasambandam, Peter Andén Santiago Comella-Dorda, & Ondrej Burkacky, McKinsey & Company (2016)

Agile vs. Waterfall Approaches to Software Development

At Issue: Software development is no longer strictly the domain of Silicon Valley tech companies. Custom software is increasingly essential to companies large and small, across all industries and geographies. Organizations that once dedicated nearly all of their innovation resources to hardware are increasingly focused on software. Nonetheless, a persistent innovation gap exists between top and bottom performers in every industry. Organizations seeking to position themselves at the top end of the spectrum require a clear path forward that prioritizes innovative software development.

Research Objective(s): The authors’ objective was to compile a compendium of research articles that collectively function as software development handbook.

Scope: This handbook addresses the various elements of building and sustaining successful software development initiatives for organizations of all sizes, industries, and geographies.

Approach: The authors created the handbook by utilizing relevant articles previously written by other McKinsey researchers, in addition to writing several new research articles specifically for the handbook’s purposes.

Findings: Select findings from the handbook include:

• Top-quartile companies develop software upwards of three times more productively than companies in the bottom quartile. Top-quartile companies have 80 percent fewer residual design defects in their software output, and their “time to market” is 70 percent faster.
• Organizations with the most innovation-friendly operating models incorporate agile working methods, flexible hours, and motivational tactics (such as internal competitions) to spur employees to pursue innovative and challenging projects.
• Successful digital transformations require companies to 1) conduct deep-dive analyses of customer needs and the organizational value chain; 2) build on existing organizational strengths; and 3) where possible, create structural advantages.
• Organizational leaders overseeing software development should consider four key questions: What software is being developed? Where is the software developed? How is software developed? How is software development enabled?
• Best-in-class software developers are twice as effective as average performers at producing high-quality code, which constitutes a meaningful competitive advantage in the current business environment.
• Companies that maintain completely separate organizational functions tend to be the least effective at software development.
• The “agile” development methodology produces better, more reliable software faster and at lower cost than traditional “waterfall” development approaches.
• Implementing “agile” software development at scale requires the right design choices, practices, and processes in four broad categories: products and architecture, methods, organization, and enablers.
• A company’s software development “agility” depends on its organizational structure, how teams are managed and supported, and how the organization interfaces with its development partners.
• Taking a modular approach to software development enables organizations to customize, maintain, and extend their technological capabilities in a cost-effective way.
• The “Internet of Things” revolution, cheap connectivity, and advanced analytics are key parts of a growing digital landscape that is predicted to have an $11 trillion global impact.

Notes: The complete Software Development Handbook can be accessed here.

Keywords: software development, software innovation, custom software

Researcher Profile: Allie Grace Garnett is a professional researcher and freelance writer with a background in finance and entrepreneurship. A serial entrepreneur who has established numerous businesses, Ms. Garnett previously was a founding Principal of Nexos Resource Partners (NRP), an energy project finance firm in New York. Prior to co-founding NRP, Ms. Garnett provided financial advisory and fund raising services to institutional-scale energy funds with Sustainable Development Capital. Ms. Garnett served as the Vice President of Marketing and Strategic Partnerships for the start-up Rentricity, and additionally founded a nonprofit organization (YAVA) that encourages volunteerism among college students. Ms. Garnett holds a Master of Business Administration degree from Harvard Business School and a Bachelor of Science in Civil Engineering degree from Northeastern University.

Research Summary: “What 40 Years of Research Reveals About the Differences Between Disruptive and Radical Innovation” By Christian Hopp, David Antons, Jermain Kaminski, & Torsten Oliver Salge, RWTH Aachen University Faculty of Business and Economics for Harvard Business Review (2018)

“If you went to bed last night as an industrial company, you’re going to wake up this morning as a software and analytics company.” – Jeff Immelt, former CEO of General Electric

“Software is eating the world.” – VC investor Marc Andreesen

At Issue: The second wave of digitization is poised to disrupt all spheres of the modern economy. Yet, despite digitization’s unprecedented scope and momentum, many organizational decision-makers remain unsure of how to approach technological innovation. To begin with, organizational leaders need to recognize the fundamental differences between disruptive and radical innovation.

Research Objective(s): The researchers’ objective was to perform a meta-analysis of the existing research on innovation, in order to ascertain further insights on the fundamental nature of innovation itself.

Scope: The scope of this study was existing innovation research conducted across a 40+-year span of time (1975 to 2016).

Approach: The authors of this study conducted secondary research by completing a systematic review of the existing research on innovation. Using qualitative and quantitative methods, the researchers analyzed and organized 1,078 articles published on the topics of disruptive, architectural, breakthrough, competence-destroying, discontinuous, and radical innovation. The researchers utilized topic-modeling and community detection algorithms to determine correlations among topics and phrases in the subject documents.

Findings: Disruptive innovation and radical innovation are the two topical areas linked to the largest number of other innovation-related topics.

• Disruptive innovation occurs when new entrants challenge incumbent firms, often despite inferior resources. Disruptive innovation occurs not by the use of innovative technology alone, but rather in combination with business model innovations.
• Radical innovation occurs internally within organizations, and involves the creation of new knowledge or successful commercialization of completely novel products and ideas.

Disruptive innovation is inextricably linked to business model variations and encroachment on dominant competitors from the low end of the market. Radical innovation is dependent on internal organizational capabilities and individual and organizational human capital. While disruptive innovation typically involves better recognition of customers’ needs, radical innovation may involve displacing current products, modifying relationships between customers or suppliers, or creating completely new product categories. Topically, disruptive innovation is correlated with new business units and new business models, while radical innovation is correlated to the topics of organizational culture and capabilities, social and human capital, and project management. Disruptive and radical innovation are often conflated by organizational decision-makers, despite clear evidence that these different types of innovation are caused by very different mechanisms and require distinctly different organizational strategies to respond. Incumbent firms that are very effective at radical innovation are more likely to succeed in warding off credible threats posed by disruptive innovation.

Notes: The full text of this study can be accessed here.

Keywords: disruptive innovation, radical innovation, business model innovation

Researcher Profile: Allie Grace Garnett is a professional researcher and freelance writer with a background in finance and entrepreneurship. A serial entrepreneur who has established numerous businesses, Ms. Garnett previously was a founding Principal of Nexos Resource Partners (NRP), an energy project finance firm in New York. Prior to co-founding NRP, Ms. Garnett provided financial advisory and fund raising services to institutional-scale energy funds with Sustainable Development Capital. Ms. Garnett served as the Vice President of Marketing and Strategic Partnerships for the start-up Rentricity, and additionally founded a nonprofit organization (YAVA) that encourages volunteerism among college students. Ms. Garnett holds a Master of Business Administration degree from Harvard Business School and a Bachelor of Science in Civil Engineering degree from Northeastern University.

Research Summary: “Achieving Business Impact with Data” By Niko Mohr & Holger Hürtgen, Digital McKinsey (2018)

Insights Value Chain

At Issue: Every day, increasingly more data is available, computing power is constantly growing, and mathematical techniques and so-called data science are becoming more advanced. Organizations face a very significant opportunity, and potentially daunting challenge, to utilize data (their own) to achieve meaningful business impact. Many companies may understand the importance of data, but can easily face persistent difficulties in the realms of technology and business in the process of data integration. A company must strengthen every link in its “insights value chain” in order to effectively utilize data at its full potential.

Research Objective(s): The researchers’ primary objective was to develop and support the hypothesis that a company is “only as good as the weakest link in [its] ‘insights value chain’.” In preparing this report, the researchers sought to 1) outline the scope of data’s growing importance and impact potential; 2) describe the fundamentals of the insights value chain, including both upstream and downstream processes; and 3) introduce key practice perspectives on creating insights-based value and achieving meaningful business impact.

Scope: This study defines and examines the “insights value chain”, which the researchers describe as consisting of both technical and business components. The technical components include data, analytics (algorithms and technical talent), and information technology. The business components consist of people (non-technical talent) and business processes.

Approach: The researchers are subject-matter experts who leveraged their direct experience working with client companies to develop and support their positions on the impact that data can have when businesses utilize it effectively.

Findings: The three primary structural challenges that prevent organizations from achieving maximum business impact with data are:

1. The separation of data and business: data science and business execution are totally separate in many companies;
2. The gap between insight and impact: many organizations struggle with the crucial step of implementation – the act of “moving from insight to insight-based value creation”; and
3. Lack of organizational commitment: organizations often lack top-level executives who are strongly committed to data analytics, and fail to “embed” data analytics deeply into the corporate culture.

Five guiding principles for implementing and scaling data analytics:

1. Analytics is not a tool, but rather a new language – a new way of approaching business problems;
2. “Translators” are crucial – more versatile personnel who can help technical and business staff to communicate;
3. Change management is crucial – to establish trust in data analytics and enable staff to act on data’s findings;
4. Corporate IT departments must be involved – to implement successful solutions at scale; and
5. Agility must be maintained – in order for teams to “fail fast” and recover quickly.

Five strategic actions recommended for the medium- to long-term horizon:

1. Work “business backwards” not “data forward”: first identify business use cases that are relevant for the organization, then develop the data analytics to support them;
2. Prioritize and focus the team’s efforts: choose the top-three business use cases that are the easiest or fastest to implement, or are likely to have the greatest business impact, and accomplish those first;
3. Build IT systems with agility: develop data-driven solutions and supporting IT systems in a simultaneous manner;
4. Hire appropriately trained staff: fully integrate data science and business team personnel to quickly test and prove viable concepts; and
5. Organize for scale: establish a centralized data analytics unit and create an internal analytics academy to raise the “AQ” of the organization overall.

Notes: The full text of this study can be accessed here.

Keywords: business impact, data analytics, insights value chain

Researcher Profile: Allie Grace Garnett is a professional researcher and freelance writer with a background in finance and entrepreneurship. A serial entrepreneur who has established numerous businesses, Ms. Garnett previously was a founding Principal of Nexos Resource Partners (NRP), an energy project finance firm in New York. Prior to co-founding NRP, Ms. Garnett provided financial advisory and fund raising services to institutional-scale energy funds with Sustainable Development Capital. Ms. Garnett served as the Vice President of Marketing and Strategic Partnerships for the start-up Rentricity, and additionally founded a nonprofit organization (YAVA) that encourages volunteerism among college students. Ms. Garnett holds a Master of Business Administration degree from Harvard Business School and a Bachelor of Science in Civil Engineering degree from Northeastern University.

Research Summary: “Navigating Innovation Roadblocks: Key Differences between Innovative and Non-Innovative Organizations” By Cathleen Clerkin & Kristin Cullen-Lester, Center for Creative Leadership (2015)

Has Your Organization Attempted to Improve Innovation?

At Issue: “Innovate or die.” Despite numerous cautionary tales, such as those of Blockbuster, Kodak, and others, many organizations continue to struggle to innovate. Consensus exists that innovation is important; however, most organizations, even the innovative ones, report a persistent gap between employees’ and leaders’ desire for innovation and their ability to effectively implement innovative solutions. Organizations that are most effective at innovation share many common traits, and can serve as role models for their less innovative counterparts.

Research Objective(s): The researchers’ objectives were to understand, both qualitatively and quantitatively, the following aspects of innovation within organizations:

1. The extent to which organizations struggle with innovation;
2. Key differences between organizations that are effective and ineffective at innovation;
3. Common roadblocks that hinder innovation within organizations; and
4. Strategies by which business leaders can maximize the effectiveness of innovation initiatives within their organizations.

Scope: This study addresses innovation within for-profit organizations. It spans across geographies, industries, and seniority levels and work functions of organizational personnel.

Approach: The researchers conducted a voluntary online survey of 485 executives and employees, of varying seniority levels, from organizations around the globe. The researchers utilized qualitative and quantitative methods to analyze the survey response data, in addition to conducting secondary research in the form of a desktop review of available literature.

Findings: Organizations that are the most effective at innovation exhibit the following five key characteristics:

1. Senior leadership actively encourages innovation: only nine percent of survey respondents from “highly innovative” companies cited organizational leadership as a roadblock to innovation, while 30 percent of respondents from non-innovative companies answered the same;
2. Innovation is firmly embedded within the organizational culture: only eleven percent of respondents from “effective” organizations cited organizational culture as a roadblock to innovation, while more than half (56 percent) of respondents from “non-effective” organizations responded the same;
3. The organization has a formal innovation strategy: 66 percent of respondents from innovative organizations indicated that their company takes a formal approach to innovation, while only 20 percent of respondents from non-innovative organizations said the same;
4. The organization has a dedicated innovation budget: 90 percent of respondents from highly innovative organizations indicated that their company has a budget devoted to innovation, while only 58 percent of respondents from non-innovative organizations answered the same; and
5. The organization has clear goals and direction: only 17 percent of respondents from innovative organizations cited “no clear organizational direction” as roadblock to innovation, while 39 percent of respondents from non-innovative organizations cited a lack of clear goals as a major obstacle to achieving innovation.

Notes: The full text of this study can be accessed here.

Keywords: innovation, organizational effectiveness, organizational leadership

Researcher Profile: Allie Grace Garnett is a professional researcher and freelance writer with a background in finance and entrepreneurship. A serial entrepreneur who has established numerous businesses, Ms. Garnett previously was a founding Principal of Nexos Resource Partners (NRP), an energy project finance firm in New York. Prior to co-founding NRP, Ms. Garnett provided financial advisory and fund raising services to institutional-scale energy funds with Sustainable Development Capital. Ms. Garnett served as the Vice President of Marketing and Strategic Partnerships for the start-up Rentricity, and additionally founded a nonprofit organization (YAVA) that encourages volunteerism among college students. Ms. Garnett holds a Master of Business Administration degree from Harvard Business School and a Bachelor of Science in Civil Engineering degree from Northeastern University.

Research Summary: “Drive Innovation Using The Right Skills: The Value Of Custom Software Development” Prepared by Forrester Research, Inc. (2015)

Why Choose Custom Software?

At Issue: Successful businesses continually seek to improve their ability to win, serve, and retain customers.  As organizations compete, they must find innovative ways to differentiate themselves in the marketplace.  As a result, organizations face increasing pressure to utilize custom software systems tailored to meet their unique business needs.  However, custom software development projects are not guaranteed to be successful. Organizations must take a disciplined, thoughtful approach to custom software development in order to unlock the significant business value that it offers.

Research Objective(s): The researchers’ objective was to evaluate organizations’ success with outsourced custom software projects.  The researchers sought to test the hypothesis that custom software projects succeed not when organizations contract raw development capacity at the lowest possible cost, but rather by hiring the right team for the job – one that offers a mix of technical skills and continuous delivery practices, with a proven capability to deliver business value.

Scope: The study encompassed organizations in a variety of industries in the United States, United Kingdom, and Australia.  All the organizations surveyed had outsourced custom software development for at least 30 percent of their systems and applications.

Approach: The researchers conducted an online survey in 2014 of two hundred IT and business decision-makers.  All survey respondents were at the director level or higher.

Findings: The study yielded five key findings:

(1) Organizations prefer to utilize custom software systems and applications to drive innovation but require help to build these systems.  Nearly 50 percent of companies that outsource custom software development do so because they lack the time and skills internally to complete custom projects.

(2) A majority of companies that outsource custom software development are not satisfied with the services that they receive.  The areas of least satisfaction included product release frequency, autonomy of the development team (respondents noted teams’ insufficient ability to make correct decisions without instruction), development processes used, and speed of product delivery.

(3) Organizations are challenged to find custom software development teams with the right combination of technical, development, and delivery skills.  While software developers commonly possess advanced technical skills, many lack the necessary experience and autonomy to make efficient, intuitive decisions on an organization’s behalf.

(4) Organizations are willing to pay a premium for experienced development teams.  Eighty-seven percent of survey respondents indicated that they would pay more for high-performance development skills, with one in four responding that they would be willing to pay a premium of 20 percent or higher.

(5) Organizations are seeking strategic partners that can immediately provide the necessary technical skills in addition to educating internal IT staff.  The survey respondents, who cited developers’ technical expertise as the top priority when selecting third-party providers, ranked knowledge transfer to internal teams as the second most important factor in their selection processes.

Notes: The full text of this study can be accessed here.

Keywords: custom software development, innovation, differentiation

Researcher Profile: Allie Grace Garnett is a professional researcher and freelance writer with a background in finance and entrepreneurship.  A serial entrepreneur who has established numerous businesses, Ms. Garnett previously was a founding Principal of Nexos Resource Partners (NRP), an energy project finance firm in New York.  Prior to co-founding NRP, Ms. Garnett provided financial advisory and fund raising services to institutional-scale energy funds with Sustainable Development Capital. Ms. Garnett served as the Vice President of Marketing and Strategic Partnerships for the start-up Rentricity, and additionally founded a nonprofit organization (YAVA) that encourages volunteerism among college students.  Ms. Garnett holds a Master of Business Administration degree from Harvard Business School and a Bachelor of Science in Civil Engineering degree from Northeastern University.

Research Summary: “A Research on Determining Innovation Factors for SMEs” By Ebru Beyza Bayarçelik, Gelisim University & Fulya Tase and Sinan Apak, Maltepe University (Istanbul, Turkey 2014)

Most Important Factors Affecting SME Innovation

At Issue: SMEs, by their sheer prevalence, are essential components of every sector of the economy. Therefore it is crucial that innovation by SMEs be encouraged and supported, such that SMEs may remain competitive with larger organizations. To innovate effectively, SMEs must fully embrace strategic management decisions. However, many SMEs struggle with the decision phase of pursuing innovations, and are significantly impacted by both external (market) conditions and internal factors.

Research Objective(s): The research focuses on determining the primary factors that enable SMEs to achieve strategic innovation success.

Scope: This research examines innovation by SMEs in industrialized nations worldwide.

Approach: The authors of the study conducted both primary and secondary research to obtain their conclusions. For the primary research, they surveyed the owners of 34 SMEs on the relative strengths of eleven factors as pertaining to the degree of innovation within their organizations. The researchers then employed mathematical models to further analyze the data and justify their conclusions.

Findings: Prior studies have determined management skill and industry maturity to be key factors in driving SME innovation. Other important factors cited in previous studies have been industry demand, industry-university partnerships, employees’ attitudes toward change, industry size, and personnel age.

The direct research conducted for this study concluded that management skill, technological capability, financial capacity, and firm size carry the most weight (approximately half) of the eleven independent factors considered.

Notes: The full text of this study can be accessed at https://www.sciencedirect.com/science/article/pii/S1877042814050812.

Researcher Profile: Allie Grace Garnett is a professional researcher and freelance writer with a background in finance and entrepreneurship. A serial entrepreneur who has established numerous businesses, Ms. Garnett previously was a founding Principal of Nexos Resource Partners (NRP), an energy project finance firm in New York. Prior to co-founding NRP, Ms. Garnett provided financial advisory and fund raising services to institutional-scale energy funds with Sustainable Development Capital. Ms. Garnett served as the Vice President of Marketing and Strategic Partnerships for the start-up Rentricity, and additionally founded a nonprofit organization (YAVA) that encourages volunteerism among college students. Ms. Garnett holds a Master of Business Administration degree from Harvard Business School and a Bachelor of Science in Civil Engineering degree from Northeastern University.

Research Summary: “Skill Shift: Automation and the Future of the Workforce” By Jacques Bughin, Eric Hazan, Susan Lund, Peter Dahlström, Anna Wiesinger, & Amresh Subramaniam, McKinsey & Company (2018)

Skill Shifts in the Future of the Workforce

At Issue: Automation and artificial intelligence (AI) are changing the nature of work. As people increasingly interact with machines in the workplace, demand for workforce skills is shifting and how work is organized within companies is changing – both at an accelerated pace. Workers everywhere must either deepen their existing skill sets or acquire new ones. Companies, too, must rethink how work is organized and executed within their organizations.

Research Objective(s): This research on automation and AI in the workplace was completed as part of McKinsey’s wider effort to assess the impact of technology worldwide on the economy, business, and society.

Scope: The study focuses on five sectors – banking and insurance, energy and mining, healthcare, manufacturing, and retail – primarily in France, Germany, Italy, Spain, the United Kingdom, and the United States.

Approach: The McKinsey team conducted both primary and secondary research, with a main goal of estimating the time spent on 25 core workplace skills, both today and in the future.

Findings: Automation and AI will accelerate the shift in required workforce skills that has been occurring over the past fifteen years. The demand for technological skills, currently the smallest category of workforce competencies, will rise the most – 55 percent – and by 2030 will represent 17 percent of hours worked, up from 11 percent in 2016. This surge will encompass increased demand for both basic digital competencies and advanced technological skills. However, basic cognitive tasks, such as simple data input and processing, will decline by 15 percent, falling to 14 percent of hours worked in 2030, down from 18 percent in 2016.

Companies will need to make significant organizational changes to stay competitive, and executive teams must acquire additional knowledge to lead the adoption of automation and AI technologies. Nearly 33 percent of firms are concerned that they currently lack the skills necessary to increase automation, and that this skills deficiency will negatively impact their future financial performance.

Competition for high-skill workers will continue to increase, and companies that are slow to adopt automation and AI technologies will experience increasing difficulty with attracting and retaining top talent.

Notes: The full text of this study can be accessed at https://www.mckinsey.com/featured-insights/future-of-work/skill-shift-automation-and-the-future-of-the-workforce.

Researcher Profile: Allie Grace Garnett is a professional researcher and freelance writer with a background in finance and entrepreneurship. A serial entrepreneur who has established numerous businesses, Ms. Garnett previously was a founding Principal of Nexos Resource Partners (NRP), an energy project finance firm in New York. Prior to co-founding NRP, Ms. Garnett provided financial advisory and fund raising services to institutional-scale energy funds with Sustainable Development Capital. Ms. Garnett served as the Vice President of Marketing and Strategic Partnerships for the start-up Rentricity, and additionally founded a nonprofit organization (YAVA) that encourages volunteerism among college students. Ms. Garnett holds a Master of Business Administration degree from Harvard Business School and a Bachelor of Science in Civil Engineering degree from Northeastern University.

Research Summary: “Delivering Large-Scale IT Projects On Time, On Budget, and On Value” By Michael Bloch, Sven Blumberg, & Jürgen Laartz, McKinsey & Company (2012)

Cost Overruns, Schedule Overruns, & Benefits Shortfalls, Oh My!

At Issue: Large IT projects often cost much more money and take much more time than planned; failed projects can put whole organizations in jeopardy. To defy the odds, companies must both understand the underlying causes of project failure and master the key dimensions that align IT project value with business value.

Research Objective(s): The research team’s objective was to determine how companies can maximize the likelihood that IT projects deliver their expected value on time and within budget.

Scope: The research focus was on large IT projects, defined as those with initial cost estimates exceeding $15 million.

Approach: The McKinsey team, working with the BT Centre for Major Programme Management at the University of Oxford, analyzed more than 5,400 IT projects by comparing predicted budgets, schedules, and performance benefits with actual costs and results. The team also conducted a survey of IT executives to determine the most common underlying causes for a project’s success or failure.

Findings: Large IT projects, on average, run 45 percent over budget and 7 percent over time, while delivering 56 percent less value than predicted. The longer an IT project is scheduled to last, the more likely that it will run over time and over budget; every additional year spent on a project increases cost overruns by an average of 15 percent. Approximately 17 percent of IT projects go so badly that they threaten the very existence of the company. Project underperformance or failure is most commonly caused by: (a) a misguided or lack of focus; (b) highly technical project complexity or ever-changing project requirements; (c) a misaligned or unskilled team; and/or (d) unrealistic scheduling or reactive planning. The four most effective ways to enable a project’s success are (1) focus on managing the project’s strategy and stakeholders rather than concentrating exclusively on budget and scheduling; (2) master the technology and project content by securing critical internal and external IT talent; (3) build effective business teams by aligning their incentives and needs with the overall goals of project; and (4) excel at core project-management practices, such as adhering to short delivery cycles and conducting rigorous quality checks.

Notes: The full results of this study can be accessed at https://www.mckinsey.com/business-functions/digital-mckinsey/our-insights/delivering-large-scale-it-projects-on-time-on-budget-and-on-value.

Researcher Profile: Allie Grace Garnett is a professional researcher and freelance writer with a background in finance and entrepreneurship. A serial entrepreneur who has established numerous businesses, Ms. Garnett previously was a founding Principal of Nexos Resource Partners (NRP), an energy project finance firm in New York. Prior to co-founding NRP, Ms. Garnett provided financial advisory and fund raising services to institutional-scale energy funds with Sustainable Development Capital. Ms. Garnett served as the Vice President of Marketing and Strategic Partnerships for the start-up Rentricity, and additionally founded a nonprofit organization (YAVA) that encourages volunteerism among college students. Ms. Garnett holds a Master of Business Administration degree from Harvard Business School and a Bachelor of Science in Civil Engineering degree from Northeastern University.

.

Research Summary: “Driving Canadian Growth and Innovation: Five Challenges Holding Back Small and Medium-Sized Enterprises in Canada” By Dan Herman & Anthony D. Williams, deepcentre: Centre for Digital Entrepreneurship + Economic Performance (2013)

At Issue: Small and medium-sized enterprises (SMEs), which comprise over 99 percent of businesses in Canada, are commonly portrayed as the backbone of the national economy. However, only a small minority of companies, approximately 4 to 7 percent, demonstrate sufficient growth to make a meaningful contribution to job creation and overall GDP. It is imperative for policy makers to mitigate or remove the prevailing impediments facing small businesses, such that a larger share of SMEs may embark upon growth trajectories that enable substantial contributions to the national economy.

Research Objective(s): The objectives of this study are to accurately characterize SMEs in Canada, identify key obstacles to their growth, and propose specific recommendations for policy makers to better support the small business economy.

Scope: The study addresses SMEs, defined as companies with fewer than 100 employees, in Canada. In addition to comprising over 99 percent of Canadian companies, SMEs employ more than 6.9 million people and account for nearly 70 percent of private-sector payrolls.

Approach: The authors of this study conducted secondary research by completing a review of more than 23 independent sources.

Findings: Canadian firms lag behind international competitors in adopting productivity-enhancing technologies. In 2006, Canada ranked eleventh among 21 OECD countries in total economic investment in information and communication technologies, down from tenth in 2005 and ninth in 2004. Technology investments by Canadian manufacturers fell by 37 percent between 2000 and 2013. There is a 33 percent technology investment gap between Canadian and U.S. firms, with Canadian SMEs spending 38 percent less on technology than their U.S. counterparts.

Despite the preponderance of service firms among Canadian SMEs, only 12 percent use supply chain management software. Just 4.2 percent of SMEs in Canada qualify as “innovative SMEs” – defined as those that allocate more than 20 percent of investment expenditures to research and development. Studies of SMEs in the U.K., Germany, and France indicate that greater adoption of technology by SMEs benefits not only individual companies but also the economy at large. Increased innovation by SMEs results in increased job creation, productivity improvements, and GDP growth.

To enlarge the pool of high-growth, high-impact SMEs in Canada, policy makers are advised to:

(1) Incentivize business growth via tax policy reforms that reward revenue and employment growth;

(2) Promote international expansion of SMEs by (a) facilitating access to export markets and (b) proactively identifying would-be exporters and facilitating their global expansion via management training, export assistance, and export financing;

(3) Build SME management competencies by hosting innovative management mentorship programs and providing incentives for participating in ongoing training;

(4) Promote technology adoption among SMEs by (a) sponsoring collaborative industry-government approaches to financing, (b) engaging in information sharing in order to build the case for technological investment, and (c) emphasizing that technology adoption does not just narrowly benefit knowledge-intensive companies or tech start-ups;

(5) Facilitate more competitive prices for telecommunications services;

(6) Encourage R&D spending by (a) facilitating the development of industry-academic partnerships and (b) providing financing options and commercialization support for SMEs that pursue promising ventures with university partners; and

(7) Improve access to capital for SMEs with high-growth potential by providing conditional loans and matching grants, in order to facilitate private SME investment in technology, training, and R&D.

Notes: The full text of this study can be accessed at http://deepcentre.com/wordpress/wp-content/uploads/2013/03/DEEP-Centre-May-2013-Driving-Canadian-Growth-and-Innovation.pdf.

Researcher Profile: Allie Grace Garnett is a professional researcher and freelance writer with a background in finance and entrepreneurship. A serial entrepreneur who has established numerous businesses, Ms. Garnett previously was a founding Principal of Nexos Resource Partners (NRP), an energy project finance firm in New York. Prior to co-founding NRP, Ms. Garnett provided financial advisory and fund raising services to institutional-scale energy funds with Sustainable Development Capital. Ms. Garnett served as the Vice President of Marketing and Strategic Partnerships for the start-up Rentricity, and additionally founded a nonprofit organization (YAVA) that encourages volunteerism among college students. Ms. Garnett holds a Master of Business Administration degree from Harvard Business School and a Bachelor of Science in Civil Engineering degree from Northeastern University.