A slumping loonie is creating what looks like a silver lining for some Canadian IT businesses, but that lining may actually be made of fool’s gold, according to experts.
Greg Lane, a director on the Canadian Information Processing Society’s (CIPS) national board, has a simple synopsis for what happens to the IT industry when the dollar dives.
“Short-term, good thing. Long-term, I’m not sure it’s a good thing,” said Lane, who is also a business development consultant at Deloitte Consulting. “We compete much more economically for opportunities in the U.S., so in the short term, there are Canadians employed on U.S. opportunities. It’s a good news thing in the short term, but it is an artificial circumstance. It’s one of these boom and bust things.”
The dollar, which is having a particularly volatile week that saw it fall to an all-time low on Friday, has a profound effect on the value of goods and services in Canada, Lane said.
“You can use Canadian resources in a U.S. opportunity because the quality of the work and the workers is equivalent, and we may argue better, and you can get them for sixty cents on the dollar, which more than compensates for travel and relocation,” he said. “There is also a potential resurgence of the outsourcing phenomena and that tends to happen when there is an extreme circumstance, like a downturn.”
But Joseph D’Cruz, a professor of strategic management at the University of Toronto’s Joseph L. Rotman School of Management, said any benefit that companies do see is negligible and won’t last.
“It hurts more than it helps because we import a lot more IT products that we export, so companies such as Compaq and IBM will see their cost of product go up compared to their Canadian sales price,” D’Cruz said. “Any benefit based on minor price changes is not going to last very long. Then what happens? We start the game again.”
According to D’Cruz, smart companies find a way to develop competitive advantage based on innovation and technology. Others, he added, attempt to ride it out.
“Rolling with the punches is a passive strategy and, in the long-run, that’s not going to be as good as a strategy of finding something you are really good at,” he said. “At some stage, the dollar is going to hit bottom and all of these effects are reversed. We never know when the dollar is going to turn and consequently, the IT companies don’t know how to play the game.”
With one U.S. dollar worth more than $1.60 Canadian, U.S. companies may be tempted to shop around. “This makes Canadian companies cheap, which will result in a flood of American takeovers,” D’Cruz said. “That’s not healthy because we will be converted more and more to a branch-plant economy, an economy where the strategic decisions are made in the United States.”
The Bank of Canada will release its monetary policy report Wednesday, which is expected to increase confidence in the dollar. Last week’s policy statement noted that consumer confidence was starting to stabilize.
“Depending on a falling exchange rate to keep your company successful is the weakest business strategy,” D’Cruz concluded. “The more IT companies relying on the falling exchange, the weaker the industry is. It takes the attention away from a good strategic plan.”
The Rotman’s School of Management in Toronto is at http://ww.mgnt.utoronto.ca
Deloitte Consulting in Toronto is at http://ww.dc.com
CIPS, with branches across the country, is at http://ww.cips.ca