Statistics Canada recently published its annual data on the IT sector for New Brunswick and the rest of the provinces. There is both good and bad news in the data. For the purposes of this data, IT includes software publishers [NAICS 51121], data processing, hosting, and related services [NAICS 51821] and computer systems design and related services [NAICS 54151].
On the good news side, operating revenue for the sector is up by 34% between 2015 and 2018. That is a strong rate of growth and slightly faster than the growth rate for the sector across the country overall (+30% across Canada).
However, on the bad news side, operating costs have swelled by 42% in New Brunswick’s IT sector compared to only 30% across the country. The result has been that operating profit margins have fell sharply in New Brunswick compared to the rest of the country.
As shown in the following graph, operating profit overall in New Brunswick has dropped to less than 2% per year in the past three years compared to above 10% nationally.
Now there could be an explanation for this. More startups might mean less profits in New Brunswick. Some national firms might be posting profits elsewhere, etc. But in general this is worrying. New Brunswick needs to be a place where firms can make a profit. To have operating costs rising much faster than operating revenues is a worry.
Labour costs represent 54% of total operating expenses in New Brunswick compared to only 45% across the country. In other words, higher labour costs as a share of total costs are eating up all the potential profits.
In the end, profitability matters. It should be a policy goal of government that this province be a place where firms with good business models and practices can make a decent profit. This will lead to more investment and end up with a virtuous cycle. This does not mean that every business should make profit but in general if a whole industry has very tight margins or is losing money (again relative to peers) it is not sustainable in the longer term.