Stats Watch: Size matters

In an earlier Stats Watch and editorial I suggested we might be better creating a swag of $10 million companies rather than the 100 $100 million IT and telecomms organisations the ICT taskforce thinks we should aim for by 2012.

In an earlier Stats Watch (Measuring I(C)T) and editorial (When good IT goes bad), I suggested we might be better creating a swag of $10 million companies rather than the 100 $100 million IT and telecomms organisations the ICT taskforce thinks we should aim for by 2012. Others went the opposite way and thought 10 billion-dollar companies would be better.

In fact there’s real evidence that negotiating past $10 million in sales is a tricky passage, fraught with management, infrastructure and cost challenges that could rip apart the sturdiest corporate ship and damn the canniest captain. Also, the numbers suggest larger firms make a bigger contribution to the economy per employee.

Orion Systems founder Ian McCrae, who’s on the ICT taskforce, says the problems actually start to kick in at about $5 million. ICT companies can live quite nicely on revenue of a couple of million dollars of local sales, he says, but once they grow beyond $5 million they have to look overseas.

A $10 million company typically has 80 to 100 employees, which can be too large for the local market but tiny on an international scale. Once some early overseas sales are inked, support issues come into play and calls for a 24x7 helpdesk get louder. Lots of costs kick in and a company has to learn new skills. For example, companies don’t have to do PR in New Zealand, says McCrae, but getting noticed by the media and analysts is essential in the US. McCrae, whose health integration software firm turns over something like $15 million and exports to 20 countries, says management style has to change – often more than once – as the number of staff increases and it can be hard to get executives experienced in growth-related problems.

McCrae believes New Zealand ICT firms can overcome these hurdles without losing their collective shirts to overseas partners. First, they have to get their sales model right. This includes keeping infrastructure to a minimum when expanding overseas. Contrary to some firms who hide all antipodean traces, the Orion head says we shouldn’t be afraid of selling from New Zealand. Throw your resources into nailing down a good US reference site, which is essential for the media and analysts to notice you, he says.

Then look around for partners and how to overcome legal and customs issues in different countries. Again in contrast to others McCrae is not overly worried about losing his intellectual property -- anything can be quickly copied, he says. “You need a constant stream of ideas.” Orion, which has 60-plus developers, encourages this by luring the top graduates straight from university.

We shouldn’t rely on inbound investment, says McCrae. We have the perfect opportunity with the America’s Cup, he says, yet few of our well-heeled visitors appear to be investing locally.

The taskforce report says there are 7544 ICT firms with annual sales below $5 million and 171 with sales above this figure. Figures Statistics NZ crunched for Industry NZ suggest that larger firms tend to create more “value added” – outputs less inputs; it’s related to GST returns -- per employee than small firms. For instance, the average firm with less than half a million dollars in sales generates about $38,000 in value per employee. It’s $65,000 for firms selling $4-$5 million, but $236,000 for those above $98 million. I’m almost persuaded.

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