This speech was delivered by BCA President Catherine Livingstone at the AFR Workforce and Productivity Summit in Melbourne on 8 December 2015.

Check against delivery.

Thanks Innes, and thank you to Michael Stutchbury and the AFR for organising today’s summit and inviting me to take part.

In hosting these policy forums, the AFR has assumed an increasingly important role in facilitating collaborative discussion on Australia’s reform imperatives.

The National Reform Summit, co-hosted with The Australian, was a standout example of this, and it’s good to be here today with a number of participants from that Summit, including Professor Garnaut and Dave Oliver.

At that National Reform Summit, the core summit groups reached some critical points of agreement.

Particularly pertinent for today was our agreement to the shared goal of lifting productivity growth to rates comparable with those of the 1990s; and that the gains should flow through to the community.

We agreed that productivity growth is not about working longer hours or reducing real wages. It’s about generating additional value through investment and innovation.

This is a value creation story, not a value destruction story.

So in that context, my remarks today will focus on innovation:

• the impact of megatrends on the innovation dynamic

• the implications for businesses

• the implications for workplaces, and

• implications for policy.

This is a timely discussion given yesterday’s release of the government’s National Innovation and Science Agenda, and in my closing comments I will make some observations on the Agenda.

Megatrends and how they’ve changed the innovation equation

Let me start by reflecting on how the global megatrends described by Richard have reshaped both the drivers and the tools of innovation from a business perspective.

Innovation has two dimensions – a demand side and a supply side.

It’s generally driven by the demand side, and businesses need to respond to the demand by investing in their supply side capability.

On the demand side, hyperconnectivity means that businesses are now dealing with far more demanding customers.

And in the context of global supply chains, that demand can come from anywhere. Even if you see yourself as a domestic supplier, you need to be globally competitive because your domestic customer has global options.

Whereas in the past, business has driven the level and rate of its own innovation, it’s now customers who decide – the degrees of freedom for a business to decide how, and how fast, to innovate have been drastically constrained by this power shift.

Consumers have become empowered by the transparency flowing from hyperconnectivity, and their expectations are such that they demand high levels of performance at lower and lower cost.

This is a major challenge for business as customers are less loyal and certainly less willing to pay what innovation actually costs.

On the supply side, of course, business has far better tools to respond to changing demands – they have new technologies, software, connectivity, and global access to IP, skills and markets.

Making optimum use of these tools requires organisations to continuously evolve their business models.

What does this mean for businesses?

Innovation is all about creating temporary competitive advantage – a pool of value you have until competition catches up or, as people like to say now, until you are disrupted. The cycle times are short, and getting shorter and more compressed.

The conundrum is that being more innovative involves taking on more risk, while businesses are constantly trying to de-risk.

For example, there are fewer conglomerate organisations which, by their very nature, involve risk on risk.

With 70 per cent of global trade now in intermediate products and services and capital goods rather than final products, we see more organisations focused on finding a niche in the global supply chain, rather than taking on the whole chain.

And we see core functions being outsourced. Whether it’s big pharma, a global resource company or a large telco, organisations have effectively outsourced their research to their supply chain, particularly to their SME suppliers.

They have outsourced elements of production, and they are taking advantage of the fact that the market for labour and skills is now global.

What this means is that we have to change our whole mental model of companies.

We have to start thinking of them as being part of a business ecosystem which fundamentally focuses on customers but also involves researchers, suppliers, the regulatory framework, and also the community which provides the social licence for a business to operate.

The concept of a self-sufficient company which does everything itself has become an anachronism. Its own inertia becomes a fatal constraint.

Understanding and nurturing its ecosystem is therefore core to any organisation’s ability to innovate. Collaboration becomes a central capability.

Only a healthy ecosystem has the requisite points of flex. The healthier it is, the more agile its various component parts can be and hence the faster its rate of adaptation to the changing demands of its customers.

Engendering an ecosystem mindset underpinned by a collaboration capability is central to increasing the innovation performance of Australian business.

I am constantly asked why there are not more examples of Cochlear in Australia.

How did we do what we did?

We did it by fundamentally understanding our customers and really working the ecosystem of researchers, suppliers, government and regulators, and the base of users.

How is this reflected in workplaces?

So how is the need for agility and ecosystem based business models changing workplaces?

Let’s return to the megatrends and their impact on automation, access to skills, and the relationship between employer and employee.

Automation

Starting with automation.

De-risking for a business inevitably leads to automation in order to achieve efficiency, and consistency of quality. Machines don’t have to be perfect – they just have to be better than humans, and that’s not as hard as we may imagine.

The traditional production line, where products are made, has already been substantially automated.

Now, artificial intelligence combined with data analytics, and voice recognition, means that the production line of repeatable administrative processes – accounting, insurance assessment, legal document review – is being automated.

This trend has led to recent projections that between 40% and 60% of current jobs in Australia will be automated within one to two decades.

Access to skills

Now to the access to skills.

Operating as part of an ecosystem means that it is no longer necessary for a business to have a permanent workforce for all of its needs, particularly specialist skills.

Because ubiquitous connectivity has enabled the market for labour to become global, a business can access high skill resources at very short notice.

This goes beyond the model of freelancing we see from Uber, AirBNB or AirTasker: particularly at higher skill levels, it turns an individual into a businesses that chooses which ecosystem they want to be part of and when.

With lower skill and mid skill functions automated, and companies looking to access specialist higher skills on a transient basis, individuals will define their own clear value proposition – they will take it online and bid for work, or people will bid for them.

These higher level skills will include generalist and general management skills.

Workplace agility

This makes the third trend – the changing relationship between employer and employee – so significant.

Even where a business employs permanent staff, the workplace is already looking very different from five years ago.

Why? Because to facilitate the right level of entrepreneurship and innovation, organisations are responding to the changing profile and expectations of employees.

In a landmark research study released in August, the City of London concluded that the role of the workplace in supporting business agility and connectivity cannot be overestimated.

The research estimates that non-core staff in a business could reach 40 per cent at certain times, necessitating agile team structures and continuous adaptability of workplaces.

It describes how workplaces need to be managed to enable increasingly complex relationships to flourish, with work being defined more as an “activity” than a place.

In a competitive global labour market, employers need to provide workplaces that not only attract and retain skilled people, but also to create the right environment to maximise innovation and entrepreneurship.

The concept of “agile working” has given rise to a range of evolving workplace practices and very different workplace design. The whole point of open plan offices and hot desking is to facilitate innovation by creating those chance encounters between knowledge workers which may lead to innovation.

To access skilled people, organisations will need to cater for different needs and expectations, with choice and flexibility clearly emerging as the top priority among people of all ages.

Business has no choice but to get this workplace relationship right, but it can’t get it right if as a society we are unable to have a national discussion about whether the current structures, interfaces and institutions that affect that relationship remain fit for purpose.

We have to be able to talk about whether the current workplace relations system in Australia is able to accommodate the changes we are talking about. Or are we preserving a set of rigidities which run counter to the needs of businesses and individuals?

Rather than asking how we protect certain jobs, we need to be asking how we protect the skills through constant upskilling and by allowing new jobs to emerge.

This brings us from the micro of business ecosystem adjustment to the macro policy environment which enables and facilitates it.

National Innovation and Science Agenda

The Business Council is very encouraged by the National Innovation and Science Agenda announced yesterday, particularly its recognition that there is a system and that it’s not something separable from the economy.

The system is embedded in the economy, which is why it requires a whole-of-government approach, and initiatives at scale to facilitate outcomes.

The Agenda recognises the role of government in mobilising the individual elements of the system.

While this does include a level of financial investment, more importantly, it includes government influencing innovation culture through leadership and signalling.

Government’s role is also one of facilitation and coordination through careful policy design across the economy, and the policy initiatives covered in the Agenda recognise both the supply and the demand side of innovation capacity.

This itself is a breakthrough.

On the supply side, the Agenda includes initiatives to build our skills and talent.

There are incentives to drive collaboration between researchers and business to increase translation, and measures to encourage early stage investors and greater risk appetite.

On the demand side, the Agenda includes initiatives that will see government becoming an exemplar by using procurement to become a more demanding customer. The concept of government leading by example is very powerful.

Of course, the success of innovation policy relies on the health of the economy as a whole.

This means that the initiatives announced yesterday need to be supported by reforms to the tax system, the workplace relations system and the de-regulation agenda, all of which are central to boosting Australia’s innovation performance.

Also central is policy consistency.

Two weeks ago, the Australian Council of Learned Academies (ACOLA) released its latest report on Translating Research for Economic and Social Benefit.

Unsurprisingly, the report finds that, to be fully effective, policies and programs related to innovation need to be part of a stable national innovation strategy.

The countries which do well on international innovation indicators all have long-term, consistent policy frameworks and support from central agencies.

We have Tekes in Finland, the National Science Foundation Engineering Research Centres in the United States, and the Fraunhofer Institute in Germany – all provide long-term funding.

On ACOLA’s analysis, the history of innovation programs in Australia reflects an approach which has been “fragmented, uncoordinated and under-resourced”.

By comparison with those countries which do well, and while we have had examples such as the Cooperative Research Centre program remaining for 25 years, the key R&D translation programs for SMEs have been repeatedly rebadged and interrupted.

The widely respected Industry Research and Development Grants Program became Commercial Ready then Commercialisation Australia then Entrepreneurs and Infrastructure Program – programs with virtually the same objectives – were rebadged and modified with no transition arrangements, by successive changes of government, or even changes within government.

Any change to a system introduces volatility and uncertainty. The innovation system is no exception – policy uncertainty is an anathema to business and militates against innovation. Policy uncertainty has a huge opportunity cost.

The National Innovation and Science Agenda is an opportunity to reset this approach by detailing a 4–10 year program. In this way, the Agenda more appropriately matches the long lead times which characterise many elements of innovation, particularly those related to research.

Given the strong package announced by the ALP last week, we now need the major parties to agree on significant policy detail to lock in the fundamentals.

This requires bipartisan support for specific policy settings to provide the certainty that business so acutely needs to focus its attention on its customers, its ecosystem and being innovative.

One final comment on the Agenda announced yesterday, and that is its powerful message about the need to reset our culture to one which exemplifies the relentless commitment to innovation.

This is not just about business being innovative.

It is incumbent on all of us as individuals in whatever role – researcher, teacher, grandparents, politicians – because in the final analysis, innovation is all about the actions of committed individuals.