How long until Australia's luck runs out?

“Australia is definitely the lucky country and we want it to be the lucky country in 50 years,” says Microsoft’s Australian managing director, Pip Marlow.

Marlow was discussing the Joined Up Innovation study, commissioned by Microsoft to examine how Australia’s small business sector is adapting to a rapidly changing global economy.

The lessons from the study are an important message on how all levels of industry can improve the nation’s lagging productivity, and the role of governments and academia in helping business compete in a high-cost, globalised economy.

A lagging small business sector

“While it is often easy to assume that every businesses is digitally aware and switched on, many SMEs still rely on manual processes and systems, such as faxes,” says Jeremy Thorpe, the PwC policy partner who authored the paper for Microsoft.

This is not a surprise to those who follow the small business sector, with both the Sensis e-Business report and MYOB Business Monitor showing the adoption of technology by SMEs has been stagnant for years and has even been falling on some measures.

Australia doesn’t perform well on global measures either, ranking 19th -- behind regional competitors such as South Korea and New Zealand -- in the 2013 Global Innovation Index. More importantly, Australia also lagged behind similar high-cost economies like the US, Germany and Britain.

To propose solutions to Australia’s underperformance, PwC consulted a panel of business and academic leaders to review innovation in the small business community and identify areas where the country can improve performance.

Fostering co-operation

First on the report’s wish list is fostering connections. The report calls for greater connections and co-operation between innovative companies, investors, the public sector and academia, with the writers calling on governments to make it more attractive for investors to work and build businesses in Australia.

That view echoes previous calls to reform investment and taxation rules (Is Australia open for startup business, February 13), however it’s hard to see that happening given the lack of appetite for reform among Canberra’s cossetted – and dare one say ‘entitled’? -- political classes (Turnbull and Clare’s broadband talkfest, February 25).

Rebuilding manufacturing

In the paper, Britain’s manufacturing industry is cited as an example where industry and academia, working together, have reinvigorated local businesses that were struggling to compete with China’s low-cost manufacturing sector.

BBC4’s World of Business report recently looked at the results of these efforts, citing an example of how Rolls-Royce were able to reduce machining of blade slots in jet engine rotors from 54 minutes to 30 seconds.

“That’s the kind of process improvement that companies need to achieve to manufacture in the UK,” Tim Chapman of the University of Sheffield’s Advanced Manufacturing Research Centre told the BBC.

Similar co-operation is essential for Australian industry if it’s going to compete, whether it’s in manufacturing or services.

Too much focus on start-ups

A concern of the report’s writers was too much emphasis is given to disruptive start-ups and not to innovation coming out of the SME sector.

To overcome this problem, the PwC-Microsoft report recommends governments start encouraging innovative firms to tender for public contracts.

This recommendation reflects what TechnologyOne Chief Executive Adrian DiMarco told Business Spectator in March (TechnologyOne's war on IT consultants, March 10), noting changes in Australian governments’ cultural cringe towards smaller local suppliers.

“For the last 15 years we’ve not been able to sell software to the state government.” DiMarco said. “It’s just changing, we’re getting in there now, but it was a terrible problem for us.”

In the view of the paper’s panel there is some way to go in that change, particularly for smaller businesses to get onto tendering panels.

Changing Australia’s business culture

Such a change to government procurement practices would require a dramatic shift in Australian public service culture, which DiMarco richly criticised for tending to favour large, well established companies.

The change in culture required though is far deeper than government procurement in the view of one of the report’s panellists, who expressed the concern that older Australians limit themselves by not asking questions.

“I find the younger generation just keeps asking question about where we got our money, what we do with it and so on, whereas the older ones don’t really,” said Adam Macarthur, chief executive and co-founder of Australian start-up ParcelPoint.

On the other hand, another panellist found Australians’ reticence to share information is holding back innovation in both the business community and in academia.

“My view is we die in a ditch over intellectual property,” the University of Melbourne’s Kate Cornick says. “We’ve got too many aspiring researchers thinking they’re sitting on the next Facebook -- therefore they don’t want to give anything away.”

A failure to collaborate

That cultural reticence to share information becomes a problem as Australia is left behind by much more collaborative regions such as Silicon Valley. The effect of that lack of collaboration means work is duplicated, resources go unused and talents go undiscovered.

The paper proposes better information sharing between groups -- an objective of the Digital Sydney project this author was involved in for the New South Wales government five years ago -- so that businesses become aware of investors, skills and suppliers available locally, rather than looking offshore to fill their needs.

Recognising and cultivating skills

Skills development is the bane of Australian industry and the panel proposed a number of areas where education could be improved, particularly in bringing the humanities and STEM -- Science, Technology, Engineering and Mathematics -- fields together.

However, STEM enrolments have collapsed in Australia by a whopping 50 per cent since 2012, Microsoft’s Marlow points out.

“If in the next 50 years we’re going to be an innovative and competitive country, are we producing workforce that can innovate, compete and thrive in that space? I’m concerned.”

That concern isn’t shared by governments as they continue cuts to the TAFE sector and universities continue to respond to funding shortages by reducing teaching expenses for STEM courses and research programs.

Encourage mobility

The final idea from the paper’s authors is to encourage mobility for Australian workers between academia and the big and small business sectors, along with encouraging workers to develop careers and networks inside and outside the country.

PwC’s Thorpe is optimistic that the small business sector can recover lost ground.

“They have the potential to leapfrog generations of technological innovation and move straight to best practice and the associated productivity improvements,” he says.

“This is the real advantage of getting technological 'laggards' up to speed; benefits can be substantial on a per-business basis.”

As Australia adapts to being a high-cost economy in a post-commodity boom era, the country must harness the power of the small business sector. The challenge is for proprietors, financiers and governments to step up to the mark.

Microsoft’s Marlow warns though that Australia can’t rely on luck.

“Hope is not a strategy; you have to be involved, you have to be involved in our ecosystem, you’ve got to be vocal, you’ve got to be pushing on all parts.”