Talks begin with other provinces

Cisco Canada could create 300 new R&D jobs within 18 months — three and a half years ahead of schedule — as part of an agreement signed with the Ontario government last fall that includes $455 million in new spending on R&D over the next five years (R$, September 13/11). Company president Nitin Kawale says the model demonstrates it is possible for large research-intensive firms to choose Canada over lower cost jurisdictions by playing to its strengths — namely skilled workers and low inflation. The model is proving so successful the company has entered talks with other provinces and universities, including the University of British Columbia, to expand Cisco's cross-Canada capabilities by linking multiple innovation centres.

"Talks with all the provinces are going extremely well," says Cisco Canada president Nitin Kawale. "Our hope is that governments are receptive and Canada is a great place to do R&D and grow."

Cisco Canada committed to a major increase in R&D spending following a critical corporate restructuring of its Canadian operations and a $25 million grant from the Ontario government. The subsidiary of San Diego CA-based Cisco Systems Inc will add at least 200 positions at its Kanata ON operations and the remainder at its Toronto facilities, boosting the 850 employees it already has in the province.

Cisco has dubbed its provincial activities the Ontario IT Innovation Initiative and will pursue R&D to advance its Internet routing expertise, create technologies for the mobile and broadband Internet and online video sharing. The Ontario expansion comes at a time of unprecedented competition for R&D jobs from emerging nations that can provide engineers for a much lower cost, challenging Cisco Canada to develop a compelling argument for Canadian expansion to secure head office support.

"Ontario has talent, political stability and great engineering schools. The challenge (to increasing R&D) is around dollars and cents. It really was a financial scenario and the timing would not have worked four or five years ago," says Kawale. "The challenge is competing globally with other Cisco operations. Canada is not always the most cost effective so we did a cost analysis to identify gaps and partnered with the province of Ontario (which) helped narrow the gap."

The biggest stumbling block for choosing Canada over a country like India or China is the cost of labour. Kawale says the Ontario government's grant, combined with the scientific research and experimental development (SR&ED) tax incentive program, the provincial top up to that program, and low corporate taxes, helped to greatly reduce the gap.

Another advantage to Canada is the stability of its workforce. Kawale says job hopping or "churn" is at least 10% at Cisco's facilities in India. Cisco project managers have seen an entire staff roster turn over during the life of a project.

"The dynamics in emerging markets are churn, language, time zones and inflation. We don't have churn or inflation in Canada," he says.

Benefitting from the federal and provincial tax credits had been a challenge for Cisco because of its corporate structure. The company established a Canadian sales division more than 20 years ago with an office in Toronto. The R&D operations followed with the two acquisitions of Ottawa area firms. Skystone Systems was purchased in 1997 to gain access to its high-speed Synchronous Optical Networking/Synchronous Digital Hierarchy (SONET/SDH) technology. It was followed by the purchase of US-based StratumOne Communications Inc and its Ottawa-based operations in 1999 for that company's integrated semiconductor products for very high-speed, wide-area data based interfaces.

Cisco Canada's two divisions were considered separate corporate entities by Canada Revenue Agency which made tax credits earned impossible to redeem as the R&D operation had no profits to offset. There were more than $350 million in unused tax credits accumulated when Cisco Canada merged the two entities last year. Gaining access to the refundable SR&ED and Ontario tax credits helped to narrow the gap in wages between Canada and Cisco operations in India and China, effectively leveling the playing field.

"We structured all the legal entities correctly to take advantage of the credits," says Kawale, adding that the tax credit program could benefit from further refinement. "We would like to see more predictability. We're not sure what's going to come back when we submit (claims) which would allow us to make faster and larger decisions. The product life cycle time is often faster than the time it takes to get the credit."

It has only been recently that Cisco Canada has set its sights beyond Ontario. In 2010 and 2011, the company struck agreements with provincial governments in Manitoba and Nova Scotia and collaborated with the Univ of New Brunswick to establish an endowed chair in advanced learning technologies and assist engineering students develop energy-efficient processes for manufacturing.

Founded in 1984, Cisco generated revenue of $43.2 billion in 2011, with R&D expenditures of $5.8 billion or 13.4% of revenue. Its rapid growth has been accelerated through more than 150 acquisitions since 1993 and its global workforce stands at approximately 65,000. Cisco Canada is the company's third largest subsidiary.

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