RELATIONSHIPS WITH GOVERNMENTS POLICIES AND STRATEGIES THE FIRST WORLD COMPUTING SERVICES INDUSTRY CONFERENCE

BARCELONA, SPAIN. JUNE 20-23, 1978

A CANADIAN VIEWPOINT

The Computer Services Industry in Canada is the fastest growing segment of the computer industry. In 1976, revenues for the industry exceeded $300 million. There are about 350 identified suppliers of some form of computer services in Canada, although only about half that number are of significant size.

Government at all levels has been a strong influence in the industry, although this influence has not always been positive.

Before discussing the role of government, it is important to understand that Canada has a highly decentralized form of government with considerable powers being granted to the Government of the ten Provinces by the British North America Act. In fact, although the government at all levels now accounts for about 40% of the Gross National Product, about half the expenditure by government is done through the Provinces. Despite this, it is the Federal Government that has had the major influence on the computer services industry.

THE ROLE OF THE GOVERNMENT

As in most countries, the various levels of government in Canada can play a role as

• a regulator

• a user

• a promoter

of the computer services industry.

GOVERNMENT AS A REGULATOR

From the earliest days of the Computer Services Industry, the Federal Government has been active in its examination of this new industry. As early as 1969, when a group of the original entrepreneurs met with Federal Government Ministers to protest the partial ownership by Canadian National Railways of Computer Science Corporation of Canada, the Government’s attention has been focused on the industry.

The Federal Government launched a major examination of the consequences of the computer/communications industry for a country which was both decentralized and whose population was spread along a 100 mile corridor close to the U.S. border. In a way, Canada could be viewed as a country 100 miles wide and 4,000 miles long.

The studies of the Telecommission led to a report called ‘BRANCHING OUT’. Although never accepted formally as Government Policy, this report recommended that the young computer services industry should not be regulated. As a result, there has been no serious attempt to directly regulate the activities of the industry in Canada.

This is not to imply, however, that government regulatory activities have not had a significant indirect influence on the industry.

For example, Government Tariff policy, which endeavours to protect a non-existent Canadian mainframe industry, has made it difficult for Canadian computer services firms to compete in the United States where mainframe costs are substantially lower. The Canadian Tariff Board has recognized the problems with this policy and has recommended a change. No action has been taken to date.

Regulations in the field of Privacy, Freedom of Information, and similar matters will, of course, have a direct influence on the way data is handled by service bureaus.

The Federal Government is groping toward a policy on transborder data flow, although this is not seen as a priority item for Canada at the present time.

CADAPSO, the industry association in Canada, has taken the position that common carriers, banks, or other organizations which are granted a monopolistic advantage by the Government, should not be allowed also to operate in the computer services industry, except on a completely arms length basis. This has led the Government, once again, to get involved in a regulatory sense through the Bank Act, or regulations affecting the carriers.

It is obvious, of course, that indirectly the role of the Government as a regulator has significant effect on the industry. All of the major computer services firms are highly dependent on communications. In Canada, the Canadian Radio-Television and Tele communications Commission regulates not only competition in the communications industry, but also rates. One of the major concerns of the industry in Canada is the high cost of communications relative to the cost of similar services in the United States.

In general, the role of Government as a regulator has been somewhat peripheral. The Federal Government has tended to leave the industry alone, at the industry’s request. It is the policy of CADAPSO to have this situation remain.

GOVERNMENT AS A USER

The Federal Government is the largest single user of computers in Canada. The ten Provincial Governments are also large users, as would be expected. The Federal Government has generally taken an enlightened policy towards the industry in terms of the use of outside services. In the mid-1960’s, the Federal Government did establish a Central Data Processing Service Bureau. This Bureau was subsequently disbanded in favour of requiring that Government Departments use outside services unless it could be clearly demonstrated that there were cost benefits or reasons of national security making it necessary for internal computers to be installed.

This is not to imply that this policy is necessarily being closely followed. At the present time, CADAPSO is pressuring the Federal Government to examine more of their in-house installations with a view to tendering some of these workloads. There is also some pressure to have the Government consider Facilities Management. This approach is almost unknown in the Canadian Federal Government computer area.

However, relative to the actions of the Provincial Governments, the Federal Government has thought through the problem and made the clear policy statement encouraging the use of private service bureaus.

The Provincial Governments, on the other hand, have been very slow to use outside services. In fact, there has been a recent trend in some of the larger provinces to take work back in-house. CADAPSO has been pressuring these governments to re-examine this and, in particular, to ensure that comparative costing studies are fair.

Despite this pressure, most Provincial Governments have large in-house service installations and in some cases, provincially controlled service organizations compete not only for government business but directly against the private sector.

This is not unusual in Canada. Canadians have developed a long tradition of direct competition between the private and public sector for private sector business. This is true in airlines, communications, broadcasting, and even in the plastics business. It is an odd situation that only complacent Canadians could tolerate.

A major difficulty encountered in Canada at the present time is the tender process for computer services. This is an evolving art and all levels of Government are very sensitive to the need to improve the process.

A development of the last couple of years at the Federal Government level has been very stiff price competition for Federal Government business.

This, in turn, has led to some depression of prices in the private sector. It is hard to blame the Government for this, although from time to time their approach of re-tendering business already in the private sector rather than tendering new business from entrenched in-house empires has compounded the problem. The oligarchic structure of the industry in Canada, with 5 to 6 large firms all about the same size, is at the root of the present competitive situation in Canada.

In general, then, the Federal Government has taken an enlightened approach toward the use of the industry and the Provincial Governments are generally acting very provincially.

GOVERNMENT AS A PROMOTER

This is an under-developed area. In general, neither the Federal nor Provincial Governments really understand the value of a service as an exportable product, as well as a vital national need.

We view the computer services industry as really an industry’s industry. Our main purpose is to sell our services to make other industries more productive. With the current low state of Canada’s industrial productivity, one would think that increased computerization would be a major national priority.

Instead, most levels of Government tend to concentrate their support on the manufac turing sector without particularly concerning themselves about how productive the companies are. There has been limited direct encouragement of our industry through Federal Government programs. After considerable input, the Federal Government finally altered their direct assistance programs to include some software products. In most cases, however, such direct aid for research has been difficult to obtain and often has been time consuming to justify.

Until March of 1978, there was an organization known as the Computer/Communications Secretariat set up within the Department of Communications. Its purpose was to improve the interface between Government and the industry. As an economy measure, this organization was disbanded leaving any Federal promotion of the industry to the Department of Industry, Trade & Commerce.

This latter organization is still very oriented towards manufacturing with little understanding of services as a product. CADAPSO is endeavouring to correct this, but it is a problem that goes far beyond our industry.

One can contrast the Canadian approach with that in Japan, where the understanding of information as a commodity is very clear at the national government level.

There have been some attempts by Provincial Governments to organize trade missions but, in general, all levels of Government have left the industry to do its own promotion. The most effective promotion of the industry has really been by the Federal Government through being a user.

In general, this is an area that needs rethinking by all levels of Government for the services industries in general.

A PROGRAM FOR GOVERNMENT

I am more concerned about too much government than too little. In a large measure, the industry has been as successful as it has because of the relatively low level of government involvement. There are, however, some activities that the government could undertake which would help this industry as well as some others:

1. Encourage service industries in general. By and large, these industries are low
users of energy, are high employers of people, are non-polluting, and in the form of
consulting are exporters of information and ideas. This latter activity can be a
major earner of foreign exchange.

The Government could assist research in new software programs by allowing a 150% write-off of R&D expenses for tax purposes, at least up to the amount of the tax otherwise payable. This measure was proposed in the Federal Budget of April 10, 1978.

2. Encourage the industry by using it. Even though there may be instances when an in-house computer is more efficient than the use of outside services, the difference in cost is not normally so significant that the Government would not gain back in taxes what it loses by not using in-house facilities. It is very difficult to convince other nations that the Canadian computer services are among the best if our own governments do not use the services.

3. Encourage entrepreneurial activities. It is not just large firms that come up with good ideas in the Computer Services Industry. The Federal Government could encourage entrepreneurs in this field by allowing the first $250,000 of capital gain to be tax free in a new enterprise.

4. Encourage better interface between universities and industry. Universities are largely supported by tax dollars. Many interesting innovations in the universities are therefore already paid by the public purse. Incentive schemes could be developed to encourage universities to publicize the results of their research and, if these computer software or hardware products are used, a profit sharing arrangement with the university could be developed.

As noted earlier, the most important action the government can take is to stay out of the way of the industry.

I would not recommend direct funding in this field by levels of government other than by giving a better tax break on industry-oriented R&D. I would also caution all levels of government to avoid indirectly constraining the industry by rushing into privacy legislation, international agreements on transborder flow and similar issues.

The industry has grown because it has met real rather than perceived needs. It is a field for entrepreneurs. One cannot legislate the existence of new markets.

My summary recommendation would be that, as this is a fast moving, market-oriented industry, there is little need for significant government involvement.