Canadian Private Business:
A New Optimism
Helen Mallovy Hicks
In this episode, Eric Andrew, leader of PwC's Private Company Services practice, discusses some of the key findings of the latest Business Insights® survey of Canadian Private Companies, and reveals most are optimistic about the future.
Voiceover: Welcome to Strategy Talks, the business podcast series from PricewaterhouseCoopers Canada. Hosted by Dean Mullett, a corporate finance partner specializing in Capital Markets and M&A, and Helen Mallovy Hicks, a partner the Dispute Analysis and Valuations group, this interview series, featuring new topics and guests every episode, is designed to give you valuable insight into some of today's hottest issues affecting your business.
Helen: For many Canadian private companies, the recession has been a wake up call to the reality that very economy has cycles and that what goes up eventually comes down. Today we are joined by Eric Andrew, the national leader of PwC’s private company services practice. He’s joining us via telephone from our Vancouver office. Eric is going to discuss our latest business insights survey of private companies. Eric, we wanted to talk to you about the survey. I understand the last survey 466 private companies across Canada, what was the outlook for the next 12 months?
Eric: Helen, we surveyed the private companies in September of last year and the data that we got was remarkably accurate over the last few months. What the private companies reported was that they had taken action to clean up their operations. They had ridded themselves pretty quickly whether the recession and what surpassed us was how optimistic they were in terms of their prospects for the next 12 months. We saw optimism right across the country from east to west and I would say it was cautious optimism, it wasn’t sort of a view that everything was going to become rosy, but certainly pretty well all companies were reporting cautious optimism and expected that their operations were going to get better over the next 12 month period.
Dean: So Eric, in that cautious optimism and I guess that means a little bit of return to growth form perhaps were we were in 2009. Was that really retrenching some of the ground that was lost in 09? Or are we seeing these companies start to experience some positive things moving a more general positive direction overall?
Eric: What we saw in October 2008 was a severe decline in optimism. Everybody viewed the world was going to be very tough. We actually surveyed both in July of 2008 and October 2008 and the decline was very apparent. But when you look at where they are a year later, they’re not back to the levels that they were at in let’s say July of ’08 or even the previous year but the recovery is probably 50-75 percent of where they were originally.
Helen: Now Eric you’re data is telling you that more than 50 percent of the private companies think they have a plan to achieve growth in the next 12 months, now that growth is in the 3-6 percent range?
Helen: Do you think that’s realistic?
Eric: I think it is because first of all a lot of private companies told us that they have gone back to basics. I think they have taken the sort of measures that were needed very quickly in order to stabilize their operations and make sure that they were still earning sufficient cash flow to be able to invest in growing their businesses. So a lot of them reported firm control of their costs, they reported that they didn’t have to compromise. A lot of their business plans due to a lack of financing which surprised us, they reported that they were looking to reinforce their relationships with their clients, so they were doing a lot of the activities that were very important to make sure that their balance sheets were sound.
So I think they are well positioned to be able to take advantage of the growth and really the question is, given the recognition of a lot of competition in the market place, how are they going to achieve those plans for growth? And we could see that what they were looking to do is take small measured steps in terms of finding small ways to improve the various aspects of their businesses. Things such as empowering some of their employees to look at new ways of doing business, to look at new ways of marketing, developing new markets, finding more efficient ways of doing things. So those were some of the things we saw coming out of the survey.
Helen: Eric, can you tell us a little bit about the financing side? You say that the survey has shown that the companies didn’t have an issue with financing growth and that was a bit of the surprise. I know that comes to a surprise to Dean and I. Can you elaborate anything more of the survey that was interesting on the financing side?
Eric: One of the questions we asked was whether business plans for 2009 had been compromised a lack of access to financing. I think about 88 percent of the respondents basically said no. So we were actually quite surprised at that and you have to take out maybe the auto manufacturing groups in Ontario, but when you look at private companies across Canada, they are well capitalized. I think over the last few years they have not borrowed excessively. As a result found them in a reasonably strong position going into this recession.
Helen: So then Eric based on the results of your survey and what you are seeing with your private company’s clients and what your partners are seeing in that space or what our partners are seeing. What are the key things that private company owners should be thinking or focusing on at the moment?
Eric: I think that one of the biggest issues is how private companies are going to compete over the next, let’s call it decade. I think Canadian private companies have a smaller scale than many of their international competitors. That has a positive benefit and a negative benefit, the positive benefit is that they’re able to work their way into the US, for example, and operate with a scale that allows them to move very quickly into different markets. The negative is that they don’t have the deep financial ability to expand operations into different jurisdictions. The outlook over the next decade the issue that concerns me the most is that we will see more competition in the markets that these companies are operating in coming from other countries.
I think we have been relatively immune to a lot of foreign companies moving into Canada and challenging the business and models and business environment that Canadian companies have operated in and many, many companies either just domestic or just operating in the US and not enough companies have the skills and the ability to compete across into Asia and some of the expanding markets. So the biggest issue I think is how do these companies change their business models and find ways to go into new markets to meet the competition that I think are going to become much stiffer in the future.
Dean: So Eric, on that point, so do a number of the respondents to the business insight survey recognize that risk? Or are a lot of them still thinking it’s not there?
Eric: Dean, we didn’t survey this year on how many companies were growing their businesses overseas or going and establishing new operations overseas, but we have surveyed on that issue previously. What we found is that many respondents are clearly comfortable establishing operations south of the border in the States and in fact as we know the vast majority of trade is between Canada and the US. We also found that companies while they are quite proficient and sourcing product in Asia and Europe and other countries and importing those goods into Canada are much more reluctant to move operations overseas. And in fact I think that’s one of the big challenges that private companies have to deal with.
Part of the issue is being able to come up with sufficient financing to compete with other companies going into those jurisdictions but it’s one of those key challenges that I believe private companies have to deal with in the near future.
Dean: It’s interesting, I had the opportunity to participate in a trade mission with industry Canada to China about 4 or five years ago now and men with a lot of local Chinese business men, PwC people in China and Chinese government officials and the consistent message to me is where are the Canadians? They are not investing. We see the Americans, we see the Germans, we see the Brits, we see the Australians and I guess based on what we’re hearing from you today is that continues to be a bit of a challenge for Canadian businesses.
Eric: Yeah I think that’s right. Companies need to change their operating style from just believing they’re producing a traditional set of products or services and find ways to innovate very rapidly. That will be a key to achieving some of this growth.
Helen: One of the areas of growth opportunities you mentioned was innovation, can you tell us Eric a little bit more on what your view of innovation is?
Eric: Yes I can, I think that when people ask about innovations as a sort of image that comes to mind is test tubes and white lab coats and major technology. I actually think that what is needed is far more basic than that. I think it’s a case of working on the people and the culture of an organization and harnessing the power of all the individuals that work for a particular enterprise.
Innovation should be thought about as anything that improves the practices of a company on a daily basis and there are some fantastic examples of innovation in some very traditional businesses where employees have been empowered to come up with suggestions on how to improve interactions with customers, how to embrace green technology for example, how to take a task that may seem very mundane and do it better which leads to long term savings. Many companies operate on very thin margins and small savings here and there should be thought of as innovation because as those practices and those habits get engrained in a company it leads to real competitive advantage. The big opportunity is to tap into the effort of every employee in a company.
Dean: So really it’s anything and everything that a company does, innovation can help it, improve up on it and it’s from the janitor who may clean the facilities at night when no one is there to the CEO in the morning when he comes in it’s from top to bottom.
Eric: Dean, I think that it is from top to bottom and the days where management believe where they had to be the source of all changes and strategy and great ideas. Yes, obviously they still need to be thinking and doing those things but the opportunity to listen to the people who are actually performing the task and benefit from their views, not only will that increase from satisfaction of the people working in the organization.
I think the people will then give a better client service and that also will result in better business performance and more opportunities. It’s a very virtuous cycle if you can actually challenge the whole organization to think out of the box and weave innovation into every day practices within the company. Those habits take awhile to establish but it’s very exciting when you see businesses that are in very traditional areas completely out pace their peer group because all the employees really are on fire and understand the benefits that they can bring in this area.
Dean: That’s very interesting. If you think about it from a private company perspective, a lot of them have the entrepreneurial roots, you have a founder, very charismatic, dynamic, hard charging is what built the business, but given the way the world has changed in a competitive aspect, they have to change a bit about how they actually conduct themselves and open their mind to really accept the views and beliefs and actions of others, whereas before they just had sole belief of themselves and got the business off ground to begin with.
Helen: Well it makes a lot of sense to go down to the trenches and say “How can we do this better?” Getting a point of view from there.
Dean: It’s a dramatic shift so it will be interesting to see. Eric, I think Helen and I believe in your views around this. The companies that succeed and propel into the future on high grade of growth are the ones that probably get this right.
Eric: And I think that in our survey we actually had a couple of articles which were written by some of our clients on the issue of innovation in businesses. When you look at those really, they speak to a similar kind of concept where there is a realization, especially in a service business or a retail business. It’s your employees that interact with the customer and having them believe in what they’re doing and feeling empowered has such a positive impact on the experience that the customer gets as well. That also leads to a lot of opportunity.
Dean: I think it’s been very insightful what you’ve been able to share with our listeners today and I guess it kind of begs me to ask the question of why this survey? Why private companies? What is the importance and the significance within PwC; we invest the effort and time.
Eric: First of all Dean, private companies comprised the vast majority of our clients, over 65 percent of our Canadian client base are private companies and approximately 40 percent of our revenue come from private companies. It’s one of the fastest growing areas within firm right across the country. We do the survey for two reasons. One to help our own people understand what are the key trends and business issues that private companies are facing so that we’re better equipped to help them deal with business issues.
Secondly, it’s a way for us to contact and have robust dialogs with a marker place and share bench marking that doesn’t exist, there are very few surveys that just deal with the issues facing private companies. You find lots of sort of segmented surveys, but this is probably one of the few really robust surveys dealing with issues faced by private companies.
Dean: Well Eric, it certainly sounds like private companies are important to PwC and have a real vested interest in it. After hearing what you have to say about the business insight survey it sounds like we collectively with our private company clients we’re going to go on this journey of change together. So hopefully Canadian companies and business come out the other side a lot stronger than were we are today. Thank you very much for joining us.
Eric: Thanks Dean, thanks Helen.
Dean: For more information or to download a copy of the business in sight survey, visit pwc.com/ca/businessinsights.
Voiceover: This concludes this episode of Strategy Talks. Thank you for listening. We hope you’ll join us again, soon for another episode. To download or subscribe to this podcast series, or to find more information on this topic, please visit pwc.com/ca/strategytalks.
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