Canada’s battered software sector spots a light

After 3 bad years, firms expect growth But higher dollar could hurt exports

Software vendors in Canada are bullish on their prospects for the future, with the average company expecting to double revenues within the next three years, says a survey.

“ There is an anticipation of a general revival in the Canadian market, especially in software vendor growth,” said Warren Shiau, lead analyst in information technology research for The Strategic Counsel, which conducted the survey on behalf of Microsoft Canada to be released today. The average annual revenue for Canadian software companies in 2004 was $ 12.2 million with 68 employees, says the consulting firm.

According to the survey by Strategic Counsel, about a quarter of all companies expect revenues to at least double in the next three years.

Another 14.5 per cent expect revenue to grow by 50 to 99 per cent, and 47 per cent expect revenues to grow by 10 to 49 per cent. Only six per cent expect to grow between 0 and 9 per cent.

“ People do tend to be optimistic, otherwise I guess they shouldn’t be in business, but in general I think it points to an underlying theme of an improving outlook for the future,” said Shiau.

This is a vastly improved outlook, compared to the actuality of the last three years between 2002 to 2005, when 26 per cent of software vendors responded that they failed to achieve yearoveryear revenue growth, reports Strategic Counsel.

“ We are seeing a higher degree of confidence here in Canada, where our markets have been relatively depressed from a lack of growth compared to the United States,’’ said Shiau.

‘‘ I think vendors are expecting some catch up spending to happen.’’ The survey found that Canadians typically tend to be more conservative than their American counterparts when adopting new technology, which can hurt productivity.

“ There are larger upgrade cycles and our IT infrastructure tends to be less modern,” said Shiau. One shrinking advantage for Canadian IT companies has been the low Canadian dollar, relative to the American dollar, an advantage that has been fast disappearing as the loonie has been on an upward tear.

“ This has been a false advantage, which has masked some of the productivity problems,” said Shiau. “ I think there is some realization that you have to make that investment in IT in order to produce a business benefit.”

According to the survey, 69 per cent of software vendors’ revenue comes from the domestic market, with the rest coming internationally. About 40 per cent of vendors expect their Canadian business to increase in the next three years, while 21.5 per cent anticipate a decrease.

“ We are pleasantly surprised to see this level of optimism,” said Andrew Dixon, director of Windows Server System for Microsoft, which is launching its latest SQL Server 2005 platform today.

While the survey revealed that Canadian software vendors feel that they are just as knowledgeable and good at managing information technology as their American counterparts, they were less focused on applying IT to create strategic business advantage and growth.

“ The U. S. firms have traditionally taken more risk in investing in IT, compared to Canada, which has contributed to us not driving the same kinds of opportunities,” said Dixon.

Shiau stressed that it was not simply a matter of investment, but also in how IT was used to drive productivity that made a difference.

According to the latest figures from Statistics Canada there are 928 software companies in Canada. The survey of 200 small, mid-sized and large software companies was conducted during October of this year, representing more than 20 per cent of all vendors.