Tom Jenkins - Innovation Summit Presentation

Well, good afternoon everyone. It's a pleasure to be here. I've got a pretty heavy topic ahead and we've already had some great speakers this morning. The one thing I'd like to start off with though, before I get into all these slides and make it sound so simple, the reality is this is hard. This is very hard. That's why we have so few examples in our country and indeed there are so few examples around the world. This is brutally competitive. I'm reminded of some entrepreneurs sitting around when we have certain national officials tell us that we should be more productive in industry. Well, I can tell you that when we're running a company, we don't wake up in the morning brushing our teeth thinking to ourselves, 'Oh, I need to be more productive today.' We sit there and we worry about what our competitor's going to do to us today and what are we going to do to them. And from that, of course, comes productivity. But, you know, the source of all of this is competitiveness. And that's going to be one of the key points that I'd like to get across. But let me start with where we see it on a macro economic level. Why does innovation matter? Well, three-quarters of our gap in productivity with the Americans is due to our lack of investment in technology. Now in Canada, we have a great tradition of doing lots of reports and then, you know, it's questionable whether we do anything about it, but we do like to write reports. And this has been a consistent drumbeat for the better part of a decade. This is not new. There have been recent attempts both at the federal and provincial levels to start to arrest this curve. But nonetheless, for 30 years we have had a huge dilemma and innovation is at the heart of it. And it is an enormous responsibility for our generation to hand to the next generation a decent chance at a quality of life that we enjoy. So let me start with a management lesson. I'll have to come over here. A crow was sitting on a tree doing nothing all day. A small rabbit saw the crow and asked him, 'Can I also sit like you and do nothing all day?' The crow answered, 'Sure, why not.' So the rabbit sat on the ground below the crow and rested. All of a sudden a fox appeared, jumped on the rabbit, and ate it. And of course, the management lesson is to be sitting and doing nothing you must be sitting very, very high up.

And the point of this parable is that we, although we may not feel that here in Halifax or we may not feel it in certain cities throughout the country, we are blessed with an enormously wealthy country. I, for many of you travel around the world – it's one of our great dilemmas is that we are very blessed and you can become fat, dumb, and happy, and you don't react until it's far too late and you've disadvantaged your city or your province. And that is part of our challenge because Canada as a whole, we've had a great run, a great run. And where we should have been heavily penalized over the last three or four years as many other countries have been, we have not. And that therein lies a complex issue of human nature that we have. But let's talk about some basic primer things that are in the various reports and I'll talk to some of them. But I think the first thing we all have to realize: the world is flat, Friedman, etc., global supply chains. And when we say things like that at a macroeconomic level, we think well that must be the Americans or the Indians or something. Well, there's a Canadian company, Bombardier, that's their global supply chain. That's why they still exist today, because they embraced the change, they led the change, and they had to make a lot of tough decisions. Ontario, the one that I'm going to tell you the story about because we're going to go from Waterloo through to national innovation. Ontario had a devil of a dilemma and still has and is in the middle of it, and it's unclear what the end result will be. But Ontario rode for the better part of a century a manufacturing boom based on a whole variety of elements: cheap energy, access to markets, location, etc. But that day is drawing to a close and it's been a wrenching change. And I'm going to tell you a story about Waterloo, which was a manufacturing center, and I know some of you may not appreciate this or accept this. If you were to get an MBA study done of Halifax and an MBA study of Waterloo 20 years ago, everybody would bet on Halifax because you have so many more advantages than Waterloo had. Waterloo is innovation based on what's between our ears. There's no things in the ground, there's no regulatory advantage. Waterloo grew up on innovation on a global level. It did not have advantages. It had one advantage: it had a world-class university. And that's absolutely a core building block. But it's important to understand, you know, as I'm going to go through these slides, you'll go, 'Oh, well that's Waterloo,' maybe the same way you would say, 'Oh, that's the Americans or that's Boston and MIT and what have you.' But the reality is, you know, when you go back to the origins, there wasn't much there. And I was there at the beginning and there wasn't much there, but there was an attitude and an ecosystem which I'll get to.

So my background on this, I'm going to try and span the micro to the macro in less than 45 minutes, so I'll do my best. My background of course is Communitech, which is generally celebrated as one of the industrial sort of ecosystems, if you will, in the country. Well, I can tell you it was started at my kitchen table, two bottles of red wine, and I had to convince Jimmy Balsley and Michael Azuritis and Randall Howard to put five thousand dollars in and we would start a peer-to-peer experience sharing. We had, I think, between all the companies in Waterloo there were seven of us. I think we might have had a hundred employees between us, and to put five thousand dollars in was a lot of money. But that's how Communitech got started. It's now 25 million dollars and I'll go through the stats – I think it's got something like 85,000 employees within the area, but that's how it got started. Kitchen table. Well, and here you are, 1,500 tech companies now, etc., 30,000 directly employed in the tech firms within the region, 123% growth rate, etc. And home to – and remember, Waterloo is less than 0.2% of the population of Canada, and yet it has, I think, 14 of the top 100 R&D spenders in industry. It's just punching way above its weight. So why? And you know, you can see here the largest tech company, the largest software company, aerospace, etc. The number one core building block of this was excellence of research, excellence of the co-op program of the University of Waterloo. Absolutely core building block. Waterloo would not be here without that. And you have Dao – you know, you have already an amazing building block to go from, and so on. But you can see the catchment and the institutes and the patents and what have you. In my own personal story, OpenText began with core research from the University of Waterloo. We were in a hyper-competitive situation against Stanford, against Carnegie Mellon, and against MIT. All three had along with Waterloo the greatest database algorithm people. Why did Waterloo have it? Because it happened to have insurance companies that invested long ago in the mathematics department, and Waterloo has the largest math department in North America. And that's where this all came from. And those algorithms allowed us to build search engines. That's me and Jerry Yang starting Yahoo in a cyber cafe in Manhattan about 15 years ago. For me personally, I've kept up with things called big data and working on things behind the firewall. What I'm trying to give you a sense of here, because I'm going to go through a lot of economic things, at the core of this is research excellence. At the core. Because you have to be specialized and you have to be better than anybody else in the world if you're going to do this. But you have to focus, you have to pick what you're going to be. The global reach of OpenText is now half a billion, it's one in three users of the internet, and it went through hyper growth. And this is where we start to slide into the economic conditions, because it's not just enough to have that world-leading global research, you have to be able to manage the economics of it, because innovation is not a technical process, it's an economic process. Peter Nicholson, who I know many of you know well, Peter really did the seminal work on this about five years ago, and really showed worldwide this is really a process of economics. And what happens is we all think it's tech because we have electrical engineers like me and mathematicians and what have you, all talked about quantum and things like that, and we lose the point that it's a necessary but not sufficient criteria. This is actually an economic process.

But at its core, it is specialization, and usually that comes from technical superiority. Today, and some of the things that I'm going to talk about, OpenText will invest a billion dollars into innovation. And then all the rankings there and what have you. But you have to realize when you read the research rankings, on the one side of the paper Research Magazine does in universities, on the other side of the paper does industry. When you read down and look at those dozen or so Waterloo companies, they weren't there a decade ago. So that's another thing to realize: this doesn't take a long time. I mean, in economic terms to be able to do something within a decade is quite remarkable. So you know, these companies all grew up in the past decade, and as you can see from that curve, when you're in hyper growth, things really move quickly. But how did this happen? You know, the reality is it takes a village to raise a child. And as the premier mentioned earlier, you can use the macroeconomic terms of ecosystem or what have you, but the reality is it comes down to a community. And let me tell you a story about 30 years ago when I first moved to Waterloo. I grew up in Hamilton and I moved to Waterloo. And everywhere I went as an entrepreneur, they wanted to help me. Whether it was the mayor – now remember, when I say entrepreneur, I had an idea and I had three people working with me and we were struggling to make payroll every 90 days, so you know, put it all in perspective. And yet I can remember the mayor of the day driving into Toronto to help me convince seven mathematicians who were leading mathematicians from the University of Toronto, if they would just please move to Waterloo to join this company called OpenText. And he drove to Toronto and helped me do that. It was really quite remarkable. Accountants, lawyers, all the things that are in the village to help that child. Sometimes they would do it for free, knowing that if we grew up, they'd get our business. It really was quite remarkable. And I'll talk about why that was. I didn't appreciate it at the time, but it's because Waterloo had a wonderful industrial history of actually many entrepreneurs before us. They just weren't in tech, they were in textiles or agriculture, etc. Halifax has the same heritage. And it wasn't until later that we started to celebrate that heritage in Waterloo. And as we heard from the MIT experience, it makes a huge difference when people say, 'Well so-and-so did it, I can do that.' There's a human element to this, a je ne sais quoi element, and that's really what bred a lot of this. And the entrepreneurs in Waterloo go back a century. You have that same heritage, celebrate it. The other thing that's interesting, and this is what I was trying to refer to, and David Johnson of course was the universal Waterloo president for so many years, and he was very difficult, if you know David, to follow him in speaking, so I'm very happy in one area that he's not Waterloo anymore. But David would always refer to the water in Waterloo as barn building. The other thing that you also share as a heritage: you all know each other. That makes a huge difference. Because in Waterloo it's the same way, there's a barn building atmosphere there, and it comes from the Mennonite heritage and what have you, but that makes a huge difference.

And here's how you operationalize it. I thought you had an excellent presentation today about the MIT ecosystem. Well, guess what, the UW ecosystem – you could have swapped MIT and UW logos and it would have been the same story. Benchmark these best practices, because the reason why everyone does it the same way is because it's true. So the wonderful thing is that you had an excellent presentation tomorrow or this morning about how to organize around Dow. If you have any breaks in that chain that was described this morning, go fix them right away, because breaks in that food chain matter. It's great that you can start little incubators out of Dow, but if you don't have all those seven steps as was presented, or what's presented here, you know, that breakdown breaks the whole thing. You're as strong as your weakest link. You have to have all the steps. And I'll get into some of the steps in a minute, because I'm going to talk about the three pillars. And what I refer to now as three and a half pillars, because in some of the studies that I've done over the last five years on this topic, it became very clear that we have a decentralized central government. Compared to, you know, we can talk about Singapore, we can talk about Israel, etc., even the United States in some regards, it's in fact more of a centralized country than we are. So the role of the province is very important here, very very important. It's not just the feds. There are so many levers that the province holds that it's maybe surprising. When you go and benchmark against Israel, etc., you have a lot of freedom to actually do things. And as David Johnson always quotes George Bernard Shaw, 'Why not? Why are you not doing that?' And so in this, there were three things that I've learned over the last five years about the roles of those pillars in our society, and you can see them there. I'm going to elaborate on each one. Industry needs to be more global, it's a big issue that we have, and I'll come back to that – that's what I mentioned right at the top. Government, both at the federal and provincial levels, needs to be a customer. Business doesn't want handouts, they want a customer in a competitive environment, but they want a customer. And finally, our universities, Dow included, have to go with the flow on commercialization. Our universities tend to suck all the oxygen out of the room on a lot of these topics. And remember the MIT lesson: as he got to step seven, Eric said, 'And then we fade away.' Very wise, very enlightened. UW, University of Waterloo, does the same thing. Very wise. And ultimately, to their own self-interest. Because the foundation principle of all these reports, as I was trying to say about brushing your teeth and what have you, is that competition leads to innovation, which leads to productivity. That causality chain for policy makers is a truism all throughout the world. When I see former communist countries in Paris at the OECD learning how to incent competition – I don't want to say those former communist countries, but I was really taken by the fact that they were studying deeply the OECD, because they've woken up that this is a fundamental economic principle.

And yet in our country we sometimes have the wrong discussion. We will say, 'Oh, we just don't make entrepreneurs,' or 'We don't have the right mental attitude.' That's bull. I have seen Canadians out-compete anyone in the world if you give them the right tools, the right resources, the right risk capital, and that opportunity. It's very rare I see a Canadian get beat on an international level. Very good, very very good. We produce excellent business people. And you know we need more R&D funding, etc., but the elephant on the table here is competition. And this is really at the heart of why we have the productivity thing. And the little report on the left-hand side is generally referred to as the Wilson report, Red Wilson. I was on this panel, had great pleasure of being led by Red Wilson, and we discovered that in fact we have six sectoral regimes at the federal level that in different ways inhibit competition. All of you are consumers of these services, whether you get on a plane or you use a cell phone, etc. You are in not an open market. You know that as a consumer when you try and call a helpline, right, you're not in a truly competitive environment. That harms the country. Now I'm not sitting here advocating we open up all our markets, because then we lose what it is to be Canadian. Almost all these sectoral regimes were created when they were created at the same time as NAFTA. All of these are 30 years old. And they were created as a concern that we were joining in a free market where we were less than 10 percent of the total market. So from a policy point of view, I understand why these were created. But surely to goodness, 30 years later with global trade, we have to rethink this. So one of the dilemmas that you're going to have is, within this group, you can't control those six sectors, that's from Ottawa. And yet it has a huge impact on your company's ability to be innovative. If you're paying five times more for connectivity or you're not even able to get certain speeds of bandwidth, your technology companies have no hope of competing with jurisdictions that do. So right from the very beginning, you have one arm tied behind your back. So that's one thing that you should all be aware of and participate in that national discussion. And the way you know this, you know, and you see this nationally – why some of our national players only acquire within the country. It's because if they acquired outside the country, their margins would go down. In all those sectors, we have the highest profits per sector than anywhere else in the world. So I don't want to name names and what have you, because it's not the issue of any one of those companies or the issue of a particular sector, it's an issue for all of us. So you can logically say that sub-optimal competition leads to sub-optimal innovation, which leads to sub-optimal productivity. We should not be surprised by these micro-macro economic results. Because competition is brutal, it's not a fun topic.

The R&D report from two years ago talked about support. And one of the motivators was, despite best-in-class funding at the federal level, we were middle to lower tier in business output. So although we spend one, either number one or number two spot within the OECD over the past decade in R&D incentives, we in fact were middle to lower quartile in our business output. So this is clearly a vexing problem. One of the issues was gaps in angel and late stage capital. And amongst all the other things, there were six recommendations made. Perhaps the most profound was the simplification of the SR&ED program to make it easier for entrepreneurs, but also to make it harder for those entrepreneurs to keep doing the same thing for 10 years. You know, the whole point of R&D is to create a product that somebody wants to buy, that creates profits, which drives, you know, quality of life for the country. It's not to do R&D for the next 30 years and that's all you do. And that report profiled so-called lifestyle companies. It's not the point of the policy to do R&D. The point of the policy is to create wealth for Canadians. So that's at the heart of a lot of the recommendations there. Well, one of the things in doing that was sitting at the OECD and saying to them, you know, and we're going to hear from Steve a little bit later about Israel. We asked them, 'Why is it that the Israelis or the Americans are continuously innovative?' Well, the chief economist at the OECD looked at us and said, 'Well, it's very simple. They have squared the circle on the public policy problem of how does government incent as a customer innovation.' Because if you're a civil servant, the easiest thing for you to do when you're doing a public procurement is take the lowest bid. 25 years ago, the private sector learned that the lowest bid is not the smart bid. The best bid is the lowest total cost of ownership. And in public policy, sometimes we refer to that as a P3, because we're trying to make sure that the vendor is responsible through the life. So without getting into the whole thing, the point being is that procurement and government as a customer is far superior to government as a subsidizer. And in fact, the primary research we did in Canada showed this: that what drove innovation – not invention, because there's a difference – what drove innovation, 62% of all respondents said customers in a competitive environment drove innovation. Do you know what the score was for R&D incentives? It's not even on the chart. It was 2%. 2%! So if we're going to perform or follow a strategy of public policy where we're going to give out SR&ED and we're going to give out handouts for R&D, and that's it, without any requirement on satisfying a customer need, then we're kidding ourselves. We have an invention strategy in our country, not an innovation strategy.

In the MIT story, the Lincoln Labs part of that very important, very very very important. And in fact, the American system, the Israeli system, and there are several other systems you can look at, procurement matters. So that led to a report. It actually just came out about six weeks ago, and that report is about how do we take defense procurement, because that's WTO exempt. So all of MIT Lincoln Lab is WTO exempt, just like Sandia national labs, etc. And that amongst all our allies and trading partners has agreed that if it's to do with your national security or defense, it's exempt. So right away, you know when we're in NAFTA and all the other trade agreements that we have and will make in the future, this is exempt. So this was fertile hunting ground for all of us in this room to think about. And it's also worth thinking about because government as a customer is now going to eclipse the oil sands. So think about that. Everyone thinks of oil sands as being this great economic driver in the country, which it is. Do you know this investment is 50% bigger than that over the next 20-year period? You know, premier mentioned this morning: ships, 25 billion. 25 billion! Everybody in this room should be doing high fives with each other. 25 billion. But the question is, what do you do with it? How do you leverage it? Because if all you do is cut steel, you've missed a generational opportunity. And so this report talks about how this big impact could be leveraged, and through something called KICs. KICs are Key Industrial Capabilities. Now we're not America. In fact, I'm always taken by what Singapore does or what Israel does. You know, we're 2% of world GDP, and yet many times we think we should be just like the Americans. Well, we're 300 million people short of that. And so it's sort of not wise to take all those policies. But think of what Singapore does. Singapore every five years picks three. Can you imagine our country being forced to pick three things? You know, because we're the country of peanut butter. We like to give a little bit to everybody because we're good Canadians. But the reality is, in Singapore they have a brutal discussion every fifth year. They go into their planning cycle, they pick three things, three things they think they can do well for the next five years. That's smart. And so the Key Industrial Capabilities idea is to pick six things, and then use something called IRBs, which are Industrial Regional Benefits. You have a KOA, which is one of the finest regional agencies, has very sophisticated management, does a great job, probably the finest regional agency. So you have already two great bargaining chips already for Halifax. And just to give you an idea, this is IRB last year, and the IRB program is going through a huge growth that will match the defense spending. There are the other Industry Canada programs there, whether it's SADI program or technology demonstrator programs, etc. It's already an order of magnitude bigger. You have an enormous opportunity on your doorstep. And by the way, IRB program 10 years ago would have been the reverse; it would have been one-tenth of the other programs. You have had an enormous program be created right before you over the last 10 years.

And the six KICs we recommended, and because this report only came out about six weeks ago, government will be going through and verifying. But what's the first one? Boy, that sounds like Halifax to me. First one, and this country needs that because of what's going to happen in the Arctic. What port is going to service that? Are we going to go recreate Halifax in the north? I don't think so. It's an enormous, enormous generational opportunity, just enormous. And yet you have to ask yourselves in this room, are you really taking advantage of this? Sure, you're pursuing ships, but are you really thinking about the strategic implications for our country? Federal budget response to this did simplify the SR&ED and started to switch to direct programs. Prime Minister, and that's the Prime Minister down in the bottom, announced in January a 500 million dollar incentive program to risk capital, which should drive about 2 billion. And that will solve a lot of our risk capital issues. But the question this room has to ask: have you organized to take advantage of some of that pie? You have to ask yourselves that. Has Nova Scotia put itself in a position? And I would put to you that your measure: do you have someone who's full-time in venture capital at scale? So I would consider scale for Halifax a 100 million dollar fund. Do you have the managing general partner here in Halifax? Because as you saw with MIT, now mind you they've had a century of this, there were a dozen. But do you have one? One of the most seminal moments in Waterloo was our first venture capital company, which was created 15 years ago. Not when, you know, now it's easy with lots of venture in Waterloo, but it was created in anticipation. And you have to de-risk it. The province played a big role, the university played a big role. Question for you: do you have the core seeds of a venture capital community here? Because that matters. Management lesson: the boy rode on the donkey and the old man walked. As they went along, they passed some people who remarked to them it was a shame the old man was walking and the boy was riding. The man and the boy thought maybe the critics were right, so they changed positions. Later they pass some more people who further remark what a shame he makes that little boy walk. So they decided they both would walk. Soon they passed some people who thought they were stupid to walk when they had a decent donkey to ride, so they both rode the donkey. Now they passed some more people that shamed them by saying how awful to put such a load on that poor donkey. The boy and the man said they were probably right, so they decided to carry the donkey. As they crossed the bridge, they lost their grip on the animal and he fell into the river and drowned. And of course, the management lesson is: if you try to please everyone, you will eventually lose your ass.

This is such the Canadian dilemma. We try and do peanut butter, and the reality is we've got to focus. So let me give you an example of how we took the three pillars and we focused, and we focused in Waterloo around digital media. And what we did, as part of the national digital strategy, we took advantage of it and we created national centers of excellence for the whole country. And look at the response. You know, a lot of times all you have to do is run a conference like this and people start to show up, but you have to stick at it. And so over four years now, that was the National Digital Media Conference held in Stratford. Now Stratford is primarily a farming community with the Stratford Festival, the Shakespearean festival. We located a campus of the University of Waterloo there in an old industrial building. It used to be a warehouse for locomotives and repair. And do you know, I was in a meeting three weeks ago and the first eight startups made their venture pitch. And it took four years, but there is now a two-year wait list for students to get into that program. Because the program, as Eric can appreciate, was one-third digital media, one-third marketing, and one-third English and social sciences, so that they could tell a story, learn how to do story composition, learn how to program, and learn how to market. Everybody wants that degree. The cut off to get in is 92% average. Four years. And from an old industrial building. But it required all three pillars to come together. And there were six thousand showed up. We had to do it in a hockey rink because there was no other place in Stratford that could hold that many people. And we started Dragon's Den venture capital showcases. And interestingly, we also, Prime Minister discussed this with the president of Brazil last year, and we ran Brazil 3.0 in an international partnership, and there were 1,100 Brazilians that attended the first conference. We also ran the G20. So think about it, here's something that got created by the three pillars four years ago, and two years later it's making software for Obama and Clinton and Sarkozy, etc. So it went from an idea to international significance in less than two years. And that brings me to what I'm going to conclude with, some obvious low-hanging fruit on the ground for Halifax. Think of America and what the Obama administration did with open data initiatives. Where do you think FlightAware and Ancestry and Google Maps came from? Well, think of Canada. The oceanographic data management system. Halifax should own all the apps of this. You should own it. You should be the world leaders in this. You got such a great opportunity. So at the end of the day, what needs to change: your industries need to think global, government here needs to think as a customer, and the universities need to go with the flow. They need to follow those seven steps of MIT. Thank you very much.