Author Segal LLP

Canada Lags Badly as We Head toward the Digital Future

101416_thinkstock_178976393_lores_kwDigital disruption is described as the changes that occur when new technologies and businesses models have a negative effect on existing goods and services. Despite some activity, Canada is lagging the rest of the world in companies transforming to take on the challenge.

Technologies Taking Hold

A recent example of digital disruption is Uber, the smartphone ride-hailing app. If you’re not familiar with the service, you push an icon on your smartphone to order a driver, and the app tells you when a car has accepted the job, when it will arrive and about how much it’s going to cost (generally less that a regulated taxi). The drivers are regular folks driving their own cars.

It’s no surprise the taxi drivers in cities where Uber has made inroads are unhappy and protesting the service. In Quebec, for example, there has been turmoil, protests and arrests all related to the provincial government’s plan for a pilot project where Uber can operate freely until legislators decide what to do.

What Uber is doing to the car industry, Airbnb has done to the hotel industry (people rent out their homes or apartments on a short-term basis at prices lower than hotels charge). Facebook, Amazon and Netflix have also disrupted their respective industries (the most popular media owner creates no content, the world’s most valuable retailer owns no outlets and the world’s largest movie house operates no cinemas).

Digital Definitions

Technically, digital disruption is when new digital technologies and business models affect the value proposition of existing goods and services. Digital transformation is what happens before the disruption or in response, when businesses alter their activities, processes, competencies and models to take advantage of the changes and opportunities of digital technologies.

And because of digital disruption, 78% of business around the globe believes that digital start-ups pose a threat to their organizations and 45% worry that the competition from these up starts may make them obsolete in the next three to five years. These are among the results from Embracing a Digital Future — Transforming to Leap Ahead, a survey performed for Dell Technologies by independent technology market research company Vanson Bourne.

Vanson Bourne surveyed 4,000 business leaders — from mid-size to large enterprises — across 16 countries (including Canada) and 12 industries.

The bad news for Canada? It ranks among the least digitally mature countries, ahead only of China and Japan.

Why? This country faces less digital disruption compared to others — so far (see the box below for a list of some of the many companies disrupting digitally in Canada). A “perfect storm of slow digital adoption and less disruption finds Canada among the bottom three countries in digital maturity,” according to Dell.

Looking at the Past and Toward the Future

Only 35% of Canadian companies have experienced significant industry disruption over the past three years, compared to 52% of companies globally. Additionally, only 48% of Canadian companies have seen new competitors emerge as a result of digital technologies, compared to 62% globally.

According to the survey, 72% of Canadian businesses admit they haven’t acted on digital intelligence, compared to 64% globally.

Other, global results from the survey are:

  • 48% of businesses don’t know what their industry will look like in three years,
  • 60% can’t meet customers’ top demands,
  • 73% confess digital transformation could be more widespread in their organizations,
  • 66% are planning to invest in IT infrastructure and digital skills leadership,
  • 72% are planning to expand their software development capabilities, and
  • 52% have experienced significant disruption in their industries over the past three years as a result of digital technologies and the “Internet of Things” (IoT).

The top IT investments planned over the next three years are:

1. Converged infrastructure that attempts to minimise compatibility issues between servers, storage systems and network devices,

2. Ultra-high performance technologies such as Flash,

3. Analytics, big data and data processing such as “data lakes,” which hold vast amounts of raw data, and

4. IoT technologies, which encompass networks of connected objects that can collect and exchange data using embedded sensors (think of thermostats, lights and cars that can all be connected to the Internet).

Additionally, 35% of respondents have created full digital profit-and-loss statements, 35% are partnering with start-ups to adopt an open innovation model, and 28% have spun-off a separate part of the organization or intend to acquire the skills and innovation they need through mergers or acquisitions. Just 17% measure success according to the number of patents they file, but nearly half (46%) are integrating digital goals into all department and staff objectives.

What Can Your Business Do?

So, digital disruption and transformation is fast becoming the new normal and nothing seems to be able to stop it. If you don’t want to be left behind, here are five ways that may help your business create a digital transformation strategy and meet the challenge head on:

1. Focus on customers. Businesses often view the world through the filters of marketing, sales and maximized revenues. Instead of thinking about business success, target the customer experience. One large hotel chain, for example, uses customer data to discover patterns that help their hotels boost customer service. For instance, the company can combine data it has on flight connections with the buying patterns of it top customers. If one of those customers misses a flight connection, the company will know that. They will also know facts such as he or she has bought martinis, shaken not stirred, and the last three times he or she was at a company property. Consequently, when the customer arrives, regardless of the hour, martinis could be delivered to the room.

2. Make analytics your friend. Stop thinking of marketing and sales data as simply marketing and sales data. Develop a strategy to access, analyse and use that data. Tap the brains of analysts who can think outside the box of departmental silos in order to combine all types of data, including point of sale, sensors and machines, logs and social streams. Then use that big data to innovate.

One large North American fashion retailer operating in Calgary, Ottawa, Vancouver and Toronto, invests heavily in big data analytics to figure out what products to promote to which customers, when, and by what channel. Apart from the data from its website or point-of-sale data, the company generates data from its likes on Facebook and its followers on Pinterest and Twitter.

The retailer has implemented a cross-channel inventory project that lets customers see in real-time where a product is available and when they can expect to receive it. This company (as well as other large retailers) have integrated online inventory as well as in-store inventory.

3. Unify your operations. Best-practice organizations assess digital requirements from across the business and then set objectives. Most organizations have multiple teams and departments involved in digital transformation. It’s crucial to ensure that all of your business is aligned and operating toward the digital goals you’ve defined.

Prepare your team in advance by making it clear that the project will require the business to operate without silos. Every department must be treated as relevant and important to the overall goal. It will help if you can name a Chief Digital Officer who can oversee and direct team members across the business.

4. Think visuals. Digital specialists have defined key performance indicators that extend far beyond revenue. This can include diverse factors such as customer lifetime value and employee satisfaction, as well as a funding model. Decide what visualization format is best for your needs. Data visualization is the ability to see various data in a variety of formats such as charts, graphs or other representations. Infographics often play a role in visualization. If your company has a hard time understanding how data can be used to drive digital transformation, consult an advisor who can help you leverage this critical information.

5. Be nimble and quick. By the time a project is completed, market and customer requirements have often changed. To avoid this problem, develop digital agility that will let your business embrace operational changes as a matter of routine by using digital technologies. Digital agility is rooted in the concept of learn, launch, re-learn and relaunch.

This lets you consistently experiment and adjust, refining your approach in manageable iterations. Successful firms in the digital age must be agile, including in the way they manage innovation and change.

In your digital transformation, the main goal is to continuously evolve digital strategy based on prior outcomes and feedback. The transformation should give your business the ability to sustain its competitive advantage in the face of challenges now and in the future.

Figure a Company’s Fundamentals into Its Long-Term Value

Most companies experience one or more blips along the way that can affect their stock prices, but most times the problems aren’t disastrous.

Develop a Baseline

lores_chart_graph_markers_pen_ruler_estimate_mbHow a company has handled challenges in the past is often a good indication of its potential for long-term growth and investment returns.

If you know the fundamentals of an enterprise you invest in, take a long-term view and stay apprised of changes within the company and how current events could affect the stock’s value, you are in a better position to maintain solid returns in your portfolio.

A share’s price generally depends on several factors including the:

  • Size, profitability and financial stability of the company;
  • Capability of its management;
  • State of the economy; and
  • Strength of its competition.

Developing a baseline will help you to identify if the original reasons why you and your financial adviser decided this company was a good fit for your long-term goals and risk tolerance still stand – and whether this could be an opportunity to add to your holdings.

When they are, however, do go running for the hills and join in a sell-off? Or have you invested for the long term and researched the company well enough to recognize whether the decline represents a fundamental change or is simply a temporary reaction to some external or internal force and that the price is likely to recover?

Two key places to start gauging a company’s fundamentals are the annual report and current events.

The Annual Report: You should receive a copy of the annual report of each stock you hold through the mail. The reports are also typically available in the Investor Relations section of an enterprise’s website. In addition, The Canadian Securities Administrators’ System for Electronic Document Analysis and Retrieval (SEDAR) allows investors to research most documents and information filed by public companies.

A company’s annual report contains several key nuggets of information, including:

  • Letter to Shareholders. Scrutinize the letter from the President/CEO. Look for a discussion of why management believes the company’s future is bright and signs that the company is being forthright about the challenges it faces.
  • Management Team. You also want to examine how a company’s management responds when the going gets tough. A share’s price is often the judge of how effective leadership is.
  • Products and/or Services. The annual report will also often address how the company is keeping up with changing times as well as meeting its competition. If a competitor is responding to such customer demands as adding healthier options to a fast-food chain menu, can the same be said for the fast-food company in your portfolio?

Current Events: The news is a great source of information about corporations. It can provide insight into the steps a company takes to position itself for the future as well as alert investors to potential problems. Each nugget of information may affect whether the company’s stock price will go up or down.

When it comes to actually buying a stock, some investors opt to buy shares in a company whose stock prices have been beaten down in the short term. These investors believe that the price will eventually rebound and base that consideration on their knowledge of such fundamentals as the company’s potential for long-term growth and recovery, its products and its position in an industry.

These strategies, along with diversifying your portfolio, can help mitigate risk. They’re also an opportunity to talk to your adviser about whether it’s a good time to add to your holdings, or an indication of an ongoing problem suggesting it could be time to cut your losses and move on. (Be careful not to trigger an unexpected tax liability when selling. Consult with your tax adviser.)

Although there are no guarantees, history illustrates that over the long term, the stock market outperforms other investments. As risk tolerance and timeline vary with each individual investor, it’s important to consult your professional adviser to help determine the strategy that best suits your situation.

Screen Job Applicants for Security Purposes

Nuggets of Insight

lores_hr_handbook_magnify_search_inspect_amOver the years, screening practices have changed for several reasons, according to the Statscan study, including:

  • Changes in the industry and occupation job mix.
  • Improvements in detecting health conditions and drug or alcohol abuse.
  • Increased access to personal, financial, criminal, and other records.

Among the other results of the study:

  • Security screening increased with workplace size, used 18 per cent of the time at companies with at least 500 employees but just eight per cent in workplaces with fewer than 20 employees.
  • Medical examinations also increase with workplace size, being used for 30 per cent of new hires in large companies and only two percent in small companies.
  • Drug tests are now required for roughly one in 50 job applicants and rise to nearly one in 10 in primary product manufacturing industries.
  • Security checks were highest in: communications and other utilities (30%); education/ health (24%) and finance/insurance (19%). They were used least in retail trade and consumer services (7%).

Canadian employers are increasingly running security checks on new hires. In fact, more job applicants are being subjected to that type of screening than medical exams.

Statistics Canada compared hiring practices over a 20-year period and found that before 1980, about 25 percent of people underwent a medical examination, while only five per cent underwent a security check. By 2000 and 2001, the proportion that had undergone a security check had doubled to 12 per cent, most notably among individuals applying for positions in teaching, health care, law enforcement and information technology.

Meantime, the proportion undergoing medical exams dropped to 11 per cent. (See right-hand box for more results of the recent study based on the Workplace and Employee Survey.)

Of course, hiring decisions aren’t always based on intense screening. In some instances, finding the right person for the job is a simple matter of an interview and a test of knowledge or skills.

But more rigorous screening may be required for other positions. For example, drug tests for pilots or truck drivers, health exams for fire fighters and security checks for bank tellers and information technology staff.

As an employer, you have a duty to check backgrounds for the sake of your customers, other employees and investors. In addition, solid background checking practices can help decrease employee turnover and the costs of hiring, training and internal fraud.

In Canada, background checks are generally legal as long as they comply with:

  • The Personal Information Protection and Electronic Documents Act (PIPEDA).
  •  Rulings of the Privacy Commissioner of Canada.
  • Canadian federal and provincial human rights codes or acts.

Background assessments are also legal provided they are not influenced by race, religion or ethnicity and all applicants to a similar position are treated equally.

With that in mind, it is essential that everyone in your company follow a consistent hiring process. Discrepancies in the process can lead to damaging risks such as negligent hiring suits and dishonest workers’ compensation claims.

Consider a hiring reference guide for managers that includes interviewing techniques, employment screening policies and lists of questions that can and cannot be asked.

Your company’s reference guide can also include red flags that may be uncovered during a background check. Here are some guidelines for handling the following eight red flags when considering applicants:

1. Previous Employment

  • The applicant quit his or her most recent job without notice.
  • The former employer hesitates to answer the question: “Would your rehire this person?”
  • Title and wages of previous job differ from what the applicant reported.
  • The previous employer is looking for the return of merchandise or repayment of a loan.
  • The applicant is in litigation with a previous employer.

Try to get references from three to five previous employers. But keep in mind that if you ask for references and don’t check them, you risk liability. In cases when it was reasonably necessary to check references and an employer failed to do so, courts have held the employer liable for the improper acts of the employee.

2.  A Criminal Record

You can check past criminal activity by contacting local police or law enforcement agencies, but you must have the candidate sign a release to obtain the information. You cannot, however, deny a position because of:

  • A conviction under a federal law, such as the Criminal Code or the Narcotics Control Act, for which a pardon has been granted, or
  • A conviction for a provincial offence, unless the conviction will affect the applicant’s ability to do the job. You can refuse to hire someone based on criminal convictions when there is no pardon.

3. Driving Record

  • A revoked or suspended license.
  • An applicant lies about his or her class of license – for example claiming to have a license to drive a bus with more than 24 passengers while in fact having only a license to drive passenger cars and light trucks.
  • An applicant held a license in another province but failed to mention that province on the job application or resume.

4. Education

  • A verified grade point average is discovered to be 0.5 or more points lower than the applicant’s claim.
  • There is no evidence of a degree the applicant claims to have.
  • Dates of attendance claimed by the applicant differ by more than two months.

5. References

  • References are contacted and say they don’t know the applicant.
  • No references can be reached.

6. Professional Licences and Credentials

  • A licence was never granted or is no longer valid.
  • The applicant’s licence is restricted.
  • Records indicate that legal/civil action was taken against applicant.

7. Social Insurance Number (SIN)/ Address

  • A SIN that does not match the one provided by the applicant.
  • An indication that the SIN was used fraudulently.
  • Addresses don’t match data on the application.

8. Credit Report

A problematic credit history may be inappropriate for employees in certain positions. You can conduct credit checks but you are required by law to notify applicants or current employees in writing and provide the name of the consumer reporting agency.

Doing Business in China: Protect Intellectual Property

Companies are rushing to trade with China, the world’s second largest economy.

Use All Available Resources lores_globe_glass_bz

Your business should consider using Canada’s trade resources.

For example, register your trademarks and copyrights with the Canadian Border Services Agency. Customs will screen select shipments to verify that they comply with the Customs Act. Intellectual property can also be registered with Chinese Customs. Registration is not foolproof, however. In both countries, the screening process keeps only a small portion of infringing goods out of the marketplace.

Other Canadian agencies can also help sort out intellectual property difficulties. The Canadian Intellectual Property Office has a wealth of IP information. The Canadian Embassy can help locate IP attorneys in China as well as monitor the status of an infringement case within the Chinese legal system.

The Canadian Trade Commission also has extensive knowledge of Chinese intellectual property laws as well as industry-specific information regarding music, software, the automotive industry and pharmaceuticals.

You might also want to consider subscribing to blogs. There are a number of highly informative websites and blogs that cover Chinese intellectually property laws in detail. These sites also routinely cover enforcement actions.

In addition, consider creating Google alerts focused on Chinese intellectual property laws and enforcement.

Some organizations are expanding so rapidly into China that they dangerously postpone registering their intellectual property (IP). The importance of protecting IP cannot be overemphasized — it is often at the heart of a business’s success.

If your company plans to do business in China, or if it already is, it needs to be familiar with Chinese IP law. Beijing has strengthened those laws over the past decade, but work still needs to be done.

The Canadian Embassy recommends that every company’s plan for doing business with China include IP-protection strategies. Businesses that already operate there should review their IP policies and protections to ensure they have kept pace with corporate innovations and expansion.

Some companies mistakenly believe that Canadian intellectual property registration protects them in China. Others underestimate the risk of IP abuse. Patents and trademarks registered in Canada are not typically protected in China. To help prevent infringement, your business must register its intellectual property rights with the Chinese government.

The trademark and patent protection system in China operates on the basis of first-to-file rather than first-to-use or first-to-invent. This means that the first party to register is granted the rights. China’s intellectual property protections include:

Trademarks: Using trademarks is generally the most effective tool against infringement in China. It is easier to identify an infringing mark than a patent or copyright, which require a time-consuming administrative review.

Applications must be filed with the Trademark Office of the State Administration for Industry and Commerce (SAIC). Before beginning the process, conduct a search to confirm that no one else has registered your company’s trademarks. To ensure the maximum protection under the law, register your trademark in English and in Chinese characters. Despite different spoken Chinese dialects, a Chinese character trademark is understood by all Chinese consumers. Removing the language barrier with a character improves brand recognition and enables the products to reach a wider market. While you are at it, register your company’s Internet domains.

If your business has a physical presence in China it can file a trademark protection application directly. If it does not have offices there, it must use an authorized trademark agent. Warning: A registered trademark that is not used for three consecutive years in China is subject to cancellation.

Once a trademark license contract is signed, your organization must submit a copy to the Trademark Office within three months. The licensee must submit another copy to the local county SAIC. The contracts must include provisions showing your company agrees to supervise the quality of the goods the licensee manufactures and include a requirement that the licensee will put its name and address on the items.

Patents: Chinese patent law recognizes three kinds of patents: invention, utility model, and design. Applications are made to the State Intellectual Property Office. If your business doesn’t have an office in China it must apply through an authorized patent agent. The protection lasts for 20 years.

When your company applies for a patent in Canada, it can also submit an application for a Chinese patent. If your business already has a patent in Canada, you should apply in within one year for inventions and utility models and within six months for industrial designs. Any later than that and China may decide not grant a patent because authorities there won’t consider the invention to be “new and innovative.”

Copyright: As in other countries, there is no need to register a copyright to receive protection under Chinese law. Foreigners have copyright protection of their works if they were the first to publish the work in China. However, as is the case in Canada, registering a copyright with the Chinese authorities eases the process of copyright enforcement. Authorities can confiscate and destroy infringing products, but criminal prosecution is infrequent.

Trade Secrets: These also do not require registration. However, your business must be able to show that it has set up policies and procedures to safeguard its trade secrets. Your company’s treatment of the trade secret will dictate whether or not the courts grant protection. The theft of trade secrets is punishable under civil and criminal law.

To help further safeguard your IP rights in China, consider these steps:

  • Conduct due diligence on partners, agents and distributors. Associates or former employees are frequent sources of intellectual property infringement
  • Cover all aspects of your business’s IP with clear contracts that include clauses on your ownership rights and on limitations over the use of IP by partners, distributors, and licensees. Contractual problems are a frequent source of infringements. Have your legal advisers review all agreements and consult with you during negotiations.
  • Require employees to sign confidentiality and non-disclosure agreements as well as accords dealing with the use and ownership of intellectual property.
  • Engage a qualified intellectual property attorney if you plan to pursue an enforcement action. The Chinese agency to notify will depend on the type of intellectual property involved as well as the region of the country where the dispute has arisen.

If your organization does not register its intellectual property it risks having its inventions registered by others operating in bad faith. While there are mechanisms to pursue recourse, the legal processes can take years to wind their way through the system at considerable expense and trouble. The safest action is to register your intellectual property as soon as possible and to remember to register the Chinese character versions of their trademarks.

Don’t Treat Succession as if Your Business Were the Royal Family

lores_handing_baton_hands_exchanging_kkWilliam and Kate’s recent visit with the children brings to mind the issue of succession.

Of course for the Windsors, succession is a done deal. Prince Charles, the oldest child, will succeed Elizabeth II unless he dies or gives up his right. Prince William gets his chance after that.

Some family-owned businesses follow a similar model of succession. The current head or owner of the company passes the baton on to the oldest child — and in some cases, the oldest male child.

The Key Is Survival

But the old saying, “shirtsleeves to shirtsleeves in three generations,” describes a concerning fact about this standard of succession. Many family businesses that are passed down to children and then grandchildren may not survive through the third generation.

History shows that this path of succession often leads to inefficiencies and mistakes that jeopardize the continued existence of these family businesses. There are a lot of reasons for this, including that the first-born isn’t necessarily the most qualified. Still, keeping the business in the family can often yield more wealth for generations to come than any investments you might purchase with the proceeds from selling it.

If you decide to keep your successful business in the hands of the family, you need to begin the process of choosing a successor. That choice will have a direct impact on your financial future and retirement. Picking the wrong person (or handing over the reins too soon) can cause your company’s fortunes, and your retirement financing, to deteriorate. The worst-case scenario is that the business will fail.

Steps to Consider

If your company’s policy is to let the oldest child automatically take the reins, you might want to step back and consider other approaches. Here are eight common-sense steps to consider to help choose your best successor:

1. Determine if any of the next generation is even interested in continuing to work for, and more importantly, manage the business. And set a target date for the takeover. It can be difficult to keep a designated heir in place without a timeline. It needn’t be a specific date. A series of milestones leading to being prepared to take over is sufficient.

2. Decide which of the interested children has the best skills to take over. This might require outside assistance from trusted advisors or business consultants. Enlisting outsiders can help to eliminate any biases the family’s senior generation might have for — or against — certain offspring. A person outside the company will likely be impartial, have no real stake in the outcome and help you objectively evaluate potential candidates. Keep in mind, depending on your children and your family’s dynamics, it may turn out that someone outside the family who has worked in the business may have the skills and personality to lead into the future.

3. Don’t assume your primary choice wants to take on the mantle. Begin discussing the possibility long before you plan the transition. But be aware that the potential candidate may have a hard time getting his or her head around the idea. Leading the company is obviously going to be harder than just working for it. Not everyone has the strength, talent or understanding spouse who will allow them to take the reins.

4. If there’s more than one viable successor, give each a chance to win the job. This is no different from the process that often happens in publicly held companies and in many large private businesses. Each qualified candidate should be allowed to fill a position at the company and to progress up the ladder of management.

5. Rotate the jobs each candidate performs, if possible, so they gain experience in many areas of the business. Not only will this better groom the ultimate leader, it also will provide depth to the management team. The candidates should be trained in decision-making, leadership, risk management, people skills and handling stress. As each moves around the company, increase responsibilities and set more rigorous goals.

6. After a reasonable period of time, the “decision team” should select and meet with the best candidate to discuss expectations, compensation, terms of contract and other issues related to leading the company.

7. When there are multiple candidates, owners should meet with each one who wasn’t selected. Decisions will have to be made here, such as whether the person will stay in some executive position and be willing to work as a team with the new head and the other candidates. Don’t make the mistake of keeping candidates with the company simply because they’re part of the family. If someone isn’t a good fit, you may be better off terminating the business relationship.

8. Develop a well-communicated plan for the transition of power to the newly selected company head. This might take several months or even years. During this time, authority and decision-making should gradually be shifted from you to your successor, allowing you both to adjust to your new roles.

Don’t underestimate the human element and how much time and effort will be required to make the succession work. Developing a plan early will allow you to maintain control over the process and have the available information you need to make decisions. Once the plan is in effect, stick to it unless there are extenuating circumstances.

Other Resources

It’s a good idea to consult with your attorneys and tax advisors who specialize in family business succession to understand all the implications. When a successor has been adequately prepared, there will be limited or no disruption to your business when the person takes over. The change in leadership should be natural and expected by everyone.