In order to understand where strategic actions on the part of industry and Government can create the greatest return on investment, a number of opportunities to strengthen Queensland’s smart services sectors have been identified. These areas reflect the key issues and constraints reported by industry participants during focus group research, particularly in relation to the expansion of export capability.
Human capital is an essential component of smart services industries, because physical capital cannot be substituted for human input to the degree typically possible in manufacturing and resource-based industries. This characteristic of smart services means that, as firms in these industries scale up their operations to meet global export opportunities, the availability of appropriately skilled employees is crucial. Many firms surveyed commented that while significant opportunities existed to expand their exports, they were constrained in doing so due to a lack of available skills.
Australia’s current skills shortage is widely acknowledged, and constraints on the supply of appropriately qualified scientists, technologists, engineers, finance, accounting, project managers are particularly impacting knowledge-intensive services firms39. A significant majority of firms involved in focus group discussions reported that skill availability was the chief issue constraining their future growth expectations. The reliance of smart services on human capital for expansion means that export capability development and skill availability are inextricably linked. The growing importance of services and increasing global competition for skills implies that the solution to this issue is imperative, but also complex40.
One aspect of this issue that may be immediately addressable relates to the ‘industry-readiness’ of Queensland’s university graduates, who represent a key source of potential employees for smart services firms. While little evidence was given that the quality of technical and scientific training of Queensland tertiary students is problematic for employers, many firms reported that the commercial awareness and practical workplace skills of university graduates are currently insufficient41. A high percentage of firms surveyed estimate that a minimum of 12 months of ‘on-the-job’ training is required before graduates become productive members of firms’ operational activities. Allocating resources to conduct this training and supervision is particularly difficult for small-to-medium sized firms experiencing rapid growth into export markets.
There exists, therefore, an opportunity to develop improved university-to-work transitions by increasing the industry-readiness of Queensland graduates, in the disciplines most highly sought by services-oriented firms. This initiative should focus on ensuring that university students are exposed to a commercial environment as early as possible in their studies, through part-time working arrangements on a ‘commercial apprenticeship’-type basis42.
Due to the relatively small size of many smart services businesses, the fragmented nature of some of these sectors, and the high transferability of many skills required for smart services delivery, it is proposed that a community of participating students, alumni, firms and industry associations be established in the services domain. This semi-formal community, through regular networking forums and information-sharing sessions, would assist graduates in identifying career opportunities within the smart services sector as a whole – perhaps encouraging them to remain in Queensland - and improve local firms’ access to a pool of industry-ready recruits. A multi-firm, multi-sector, student employment and graduate recruitment program could provide a suitable model43. The establishment of a ‘Young Professionals’ community for the smart services sector could also assist with the attraction of multinational firms, entrepreneurs and skilled migrants to Queensland.
Iconic status can be understood as the global recognition that develops when regions become leading adopters of innovative, high-value technologies and services. Iconic status arises when well-solved problems create such impact that the outside perception of a region becomes linked to certain capabilities and strengths in that region. Queensland already enjoys high iconic status in several areas, including its mining industry, through continued technology leadership, and for its tourism industry, through global recognition for the State’s unique environment accessible through high-quality, diverse tourism offerings.
Iconic status often develops over time as local conditions and firm specialisations combine to create global market successes and established reputations. Milan, for example, has long been known as the home of luxury brands and design, while Austin’s status as a leading research and entrepreneurial hub, especially in ICT, is world-renowned.
In many cases, this process can be catalysed by specific projects, events or initiatives that achieve worldwide recognition for their innovativeness and impact, thereby leading to future growth opportunities. Malaysia’s Multimedia Super Corridor, for example, is considered to the be the ‘main engine’ behind the transformation of that country’s ICT-based and ICT-enabled industries, with the number of Malaysian ICT firms growing from 300 to over 3,400 over the last decade44; similarly, the Lord of the Rings trilogy is widely acknowledged as the enabler of ‘the development of world class capability (including NZ$100 million in new investment)’ in New Zealand’s film industry, including ‘the creation of a new dynamic entrepreneurial attitude amongst domestic filmmakers’45. In Australia, the implementation of the Snowy Mountains Hydro-Electric Scheme, for example, contributed substantially to the cementing of Australia’s reputation for engineering prowess in challenging terrain, and the success of the Sydney Olympics generated extensive export opportunities for many businesses involved in its design, management and provision of associated services.
While success in export can be achieved in the absence of iconic status in a particular domain, significant acceleration in the scaling up of export-led growth does rely on iconic status being achieved. The environmental services sector in Queensland, for example, is better known for the effectiveness and quality of its technology-based services in international markets, rather than a strong implementation base at home, due to lower environmental and sustainability requirements in Queensland. Many Queensland-based environmental services firms have achieved success offshore; however, the historical regulatory environment in Queensland in terms of pollution controls, water management and carbon emission reduction has reduced the scope for the creation of iconic status in this area. Focus group feedback indicated that the absence of a strong environmental regulatory framework in Queensland (and Australia generally) presented a challenge for the environmental services sector in establishing global credibility, and thus a world-leading position, in this domain.
Across all smart services sectors, iconic status can be an important springboard for the development of export opportunities, and this is most effectively achieved when local companies leverage the delivery of world-class solutions at home. At present, Queensland has several opportunities to create iconic status through the delivery of world-class services to solve local requirements. Over the shorter term, the South East Queensland Regional and Infrastructure plans provide an historic opportunity to profile Queensland’s capabilities to design, engineer, plan, construct, manage and implement urban solutions. Promoting the iconic status of the rapid urban development of the south east corner will cement Queensland’s reputation as a leading centre for urban solutions and services, as well as providing direct lifestyle and amenity benefits to residents. Capturing this opportunity to establish a new source of global recognition for Queensland will provide a leverage point for local firms to deliver these services into offshore markets. In India, China and South East Asia, in particular, economic development and population growth pressures, combined with increasing urbanisation, are creating strong demand for rapid and effective urban development solutions. Worldwide recognition for the impact and effectiveness of Queensland’s own urban development would position Queensland-based firms well to capture these new market opportunities.
In the longer term, Queensland has the opportunity to create similar iconic status in the creation of innovative solutions to services delivery requirements for sparsely-distributed populations. These include ICT-enabled delivery of essential and basic services such as health, education, financial, entertainment, and communication services, as well as remote resource monitoring and asset management, and emergency management and response systems. A concerted effort to build an effective platform for the delivery of these services to remote and regional Queenslanders - capitalising on our research strengths in these areas - would enhance the quality and accessibility of these services to all Queenslanders. It would also create an additional leverage point for Queensland firms involved in their implementation to offer these services more competitively in overseas markets, once iconic status has been established.
Indeed, in order to establish and maintain credibility on the global stage, it is already the case that many of Queensland’s services-oriented firms rely on the achievement of local success and recognition. The ability for knowledge-intensive firms to successfully export their services to the world appears, in many cases, to be closely linked to their status at home, by reducing overseas marketing costs, easing offshore clients’ due diligence requirements, and creating brand new export opportunities.
Focus group feedback emphasised, in particular, the importance of awards and prizes in establishing credibility and recognition in global markets. Concern was expressed, however, that the breadth and structure of Queensland’s Government-sponsored awards do not reflect current specialisations and strengths in the smart services sector. Both the Premier’s Smart Awards and the Premier’s Export Awards, for example, include only one general category for services. An immediate opportunity exists to review current award categories and, potentially on the basis of community feedback, align them more closely with Queensland’s emerging smart services strengths.
In summary, the development of iconic status in Queensland’s smart services requires celebrating our current strengths and successes, but also looking to the future to ensure that the State’s global profile is strengthened and expanded. With strategic focus, Queensland could become a world-recognised leader in smart rapid urban development services, and in ICT-enabled delivery of smart regional services. The achievement of iconic status in these domains would imply that high-value solutions have been delivered by Queensland-based firms for the benefit of the community, and that the impact and effectiveness of these solutions are recognised both at home and in the eyes of the world. By raising Queensland’s profile for being ‘smart’ in these areas, iconic status will also help attract skills and investment into the State46. By solving local problems with an eye to global needs, the creation of iconic status will both improve outcomes for Queenslanders, and open new global opportunities for Queensland firms.
Smart services firms face unique challenges in the development of export capability. There does not appear to be, however, a standard formula for the development of export capability across all services sectors. Focus group evidence suggests that the constraints and issues faced by firms in achieving sustained export success varies with the source of competitive advantage, the degree of industry fragmentation, differences in firm size and demand conditions in target markets.
Opportunities to form partnerships and alliances, in order to create critical mass in export markets, vary in each sector. In some cases, such as urban services, the formation of local consortia across sectoral boundaries to pursue large offshore projects appears promising, while in others, such as IT, alliances with locally-represented, multi-national industry leaders can generate new export opportunities. Highly fragmented sectors, such as environmental services, are dominated by small firms that would benefit from increased knowledge-sharing and networking opportunities.
In all cases, it was clear that knowledge of global market opportunities and development of the business capabilities required for culturally-varied export markets is most effectively gained through ‘on-the-ground’ experience. This export knowledge is expensive and difficult for small, high-growth firms to acquire in a timely and efficient manner. Currently, Queensland Government trade offices in offshore locations provide support to all firms wishing to access export markets, while sector specific organisations (such as the Information Industries Bureau) provide support locally on a sector-by-sector basis. What appears to be missing across all smart services sectors is a link between the ‘on the ground’ identification of export opportunities in offshore markets and knowledge of local industry strengths47. Connecting offshore market intelligence with local industry consortia would enable Queensland smart services firms to create critical mass in the pursuit of large, high value export opportunities48.
Even where smart services sectors have achieved export success, the level of sophistication in the local demand environment is key to growth and the development of new innovations in many cases49. For some sectors (such as ICT and urban services) the Government is a significant consumer of technologies and services, and could potentially be so in others (for example, environmental services). Focus group feedback emphasised that the impact of rules relating to services provision to Government may not be fully understood or recognised for all smart services sectors, in areas such as innovation partnerships, risk management and the need for a diversity of services providers even for whole-of-Government and other major projects. A more standardised and transparent framework that manages risk through a portfolio approach would create benefits for all firms in Queensland’s smart services sectors, whether multi-national, Australian or local, large, medium, start-up or small.
Finance requirements for services-based firms attempting to scale up their global operations are also different to manufacturing- and resources-based models. While there is a fledgling venture capital market for spin-outs and start-ups in Queensland, these are typically structured around companies that are technology-product based. Services-oriented firms, by contrast, often do not own defensible IP (e.g. in the form of patents) because intellectual property resides in highly intangible assets such as proprietary processes or in-depth, tacit domain knowledge embodied in key personnel.
While finance requirements vary on a firm-by-firm basis50, focus group evidence suggests that the services-oriented business model may be poorly understood by the local investment market, especially with regards to provision of equity finance. It is well documented that a funding gap exists in the Queensland market, in the range of $500,000 to $1million, due to a sparse business angel community and high fixed costs faced by venture capital firms in deal evaluation and monitoring, making early-stage investments less cost effective51. Where such funding is provided it is generally invested in firms with a highly defensible, product-based intellectual property position, although examples of venture capital investment in pure services firms do exist in Queensland.
It is also well recognised that the wider economic benefits of innovation investment accrue in significant part to the providers of risk capital, rather than to entrepreneurs themselves. Focus group discussions highlighted that many Queensland-based, services-oriented start-ups with high global growth potential have been forced to seek finance off-shore, through mechanisms such as private equity channels in the US and listing on the Alternative Investments Market (AIM) in London. This appears to be particularly the case for technology-based firms that generate a significant portion of their revenue from the provision of associated services, such as those providing environmental services and some participants in the ICT and mining and resources services sectors.
While the services-oriented business model can allow organic, client-financed growth as new contracts are secured, there is anecdotal evidence that Australian venture capital and private equity providers are reluctant to provide the investment required for aggressive international expansion where knowledge-based services are concerned. Focus group feedback highlighted that constraints on access to expansion capital are particularly problematic for firms in highly fragmented sectors, such as environmental services, where the absence of large, established players means that external sources of investment must be relied upon rather than financing expansion through risk-sharing alliances and partnerships52. The requirement to go off-shore for finance can lead to a lower economic return for Queensland, as profits are re-invested outside the State and firms often face re-location demands to suit investor requirements, thereby diminishing the job creation benefits of the smart services sector.
Overall, there is an opportunity for Queensland to ensure that industry development strategies and efforts take full account of the unique requirements of smart services sectors. Issues such as consortia formation, links to export market intelligence, provision to Government and finance requirements, as highlighted by focus group discussions, are best addressed on a sector by sector basis. While Queensland Government industry development policies currently target a number of so-called priority sectors, these may not accurately reflect current and emerging specialisations in the export-oriented, smart services domain. Reframing industry development strategies around sources of sustainable competitive advantage, including recognition of services as a key driver of future job creation and economic growth, will bring Queensland’s economic development strategy in line with current best practice53.