TELECOMMUNICATIONS AND THE COMPUTER SERVICE INDUSTRY IN CANADA

APRIL 27, 1970

Mr. Kierans’ speech to the Canadian Information Processing Society on January 14, 1970 stated that the aim of the Telecommission was as follows:

"It is essential also that the government adopt a positive attitude toward the computer industry, encouraging the maximum degree of innovation, encouraging the entry into the market of firms which make up in imagination what they may lack in capital resources, encouraging also research and development which, in the fields of software programming and of terminal equipment, can lead us toward export sales. To create, in short, a climate in which Canadian companies can flourish and in which, because of the presence of excellence, the kind of data banks to which I have been referring would be located here rather than elsewhere. It is also essential that the enormous benefits of the computer revolution be made available to the maximum number of Canadians, wherever they live, otherwise we will widen the gap between haves and have-nots. Any finally, it is essential that all our specific policies and programs should be formulated on the assumption that machines exist to serve men and that machines must be shaped and controlled to serve human needs instead of men being regimented to suit the technical convenience of machines."

To summarize the aims, his intention appears to be:
- To promote and protect the Canadian computer industry.
- To ensure that the benefits of the computer industry are made available to as many Canadians as possible.

We share these aims but are very concerned that the first step that may be taken by the Department of Communications could severely damage the Canadian computer industry, as it now exists, and will not serve the national purpose as this may be defined by other studies now underway in the Telecommission.

PROPOSED GOVERNMENT POLICY

The industry has not been made aware of what the proposed government policy will be. However, speculation is rampant that the Department of Communications is recommending that common carriers and, in particular, Bell Canada, be allowed to provide computer services.

If this is the case, such a policy would be in direct opposition to the brief submitted by the industry in July 1969. The FCC study in the U.S., announced on April 6, 1970, prohibits AT&T entry into the computer service bureau field. While we would not maintain that conditions in the United States and Canada are identical, the results of the four-year FCC Study are at least worth examination by the industry and by the Department of Communications.

To date, the Department of Communications has only outlined some policy options and the industry is totally unaware of the conclusions arrived at by the Department, However, the following comments are still valid.

CONSIDERATIONS

1. Capacity

The existing computer service industry has already provided, with private funds, more than adequate capacity to meet the foreseeable needs of the Canadian economy. The field is highly competitive and there is no lack of service to Canadian industry.

2. Economy-of-Scale

For the foreseeable future, there is no way in which Bell Canada or any other company could provide more economy-of-scale than is already provided by SDL which has installed, at its own expense, the largest and fastest computer in Canada and one of the largest in the world.

3. Innovation

The impetus for the development of this industry has not come from companies such as Bell Canada but has come what Mr. Kierans referred to as the "modest Canadian entrepreneurs" (speech to the Data Processing Management Association, February 19, 1970).

Bell Canada, on the other hand, has evidently been unable to anticipate the needs of this growing field and is not now able to provide economic data communication service in Canada.

4. Risk

The existing Canadian companies have undertaken all the risks in developing this new industry. At the very time when the industry is at its most critical stage, it appears the Government may be about to allow Bell Canada to provide its massive financial resources to compete directly with this new industry.

The industry itself has been able to finance its own development, but if the Government announces that Bell Canada will be allowed to compete in the computer services field, financing for the existing companies may become almost impossible. This will likely have the effect of driving these firms outside of Canada - the very thing that Mr. Kierans has publicly declared he does not want to have happen. If public financing is not available here or in the United States, the next step would be that these firms would be absorbed by large American corporations.

PROPOSAL

The Department of Communications wants a vehicle through which it can implement any national policy that may be recommended by other committees of the Telecommission. These may include the east-west development of a computer/communications network, the provision of nationally-available databanks on economic, social or industrial information, and a means of promoting regional development in Canada through the provision of computer services where they are needed. The Department appears to believe that such developments can only take place if Bell Canada is allowed to participate in the computer field as well as the communications field.

The Department has also indicated that they believe Bell Canada should be in the raw computer field only. We have disputed, and do dispute the technical feasibility of differentiating between raw computing and applications services.

We also doubt that Bell Canada or any single organization has sufficient knowledge or innovative spirit to provide such a national program even with Federal Government backing.

However, we are as interested as the Government itself in meeting the national needs of Canada. We recognize that the Government must have some means of co-ordinating and implementing such national policies as it may wish.

We recommend, therefore, that Bell Canada not be allowed to enter the computer services field. There is no question that if the Bell is allowed to enter, there would be immediate competition between the Bell and CN/CP which would only lead to a vastly increased computer capacity in Canada and which would have the effects described above of ruining the existing Canadian computer service industry.

We propose, therefore, that Bell Canada be allowed, instead, to undertake the role of co-ordinating a national communications network as a prime contractor, using firms already existing in the computer service industry to provide the raw computing power and related applications services.

For example, if the Bell were to contract with three of the largest computer service firms and combine this with a network serving Canada, the result would be provision of service offering an IBM System/360 Model 85, a Univac 1108, and a CDC 6600. The firms referred to are Systems Dimensions Limited, Computel, and Multiple Access General Computer Corporation. The addition of AGT Data Systems, the largest Canadian computer consulting group, and the addition of the Northern Electric Research & Development Laboratories, would provide all the capacity that would be needed to develop a service over the next decade for small business and industry as well as for large Canadian corporations. Other firms in the Canadian computer industry might be added to this group as required.

ADVANTAGES

1. Although the firms would form a consortium for the purpose of developing a Canadian computer network, they would still be independent and able to use their own imagination to develop new products for use in Canada and for export.

2. The announcement of such a policy would greatly strengthen the Canadian industry and would encourage the Canadian public to make the necessary further investment in the field.

3. Such an announcement would discourage the entry of U.S. computer firms.

4. Such a policy would provide Bell Canada with a profitable means of increasing its own communications network, but would avoid r equiring Bell Canada to duplicate the already extensive computer capacity in Canada.

5. There would be no reason why the CN/CP Telecommunications arrangement with Computer Science Corporation could not then proceed to provide a measure of competition to the Bell Canada consortium.

6. A vehicle for the implementation of the Government’s national policy would clearly be available.

Back to Section A Index or just read on

 

AND THIS IS JUST FOR STARTERS

A staff talk, one of a series of Fireside Chats, 1971

In case you hadn't noticed, the last eighteen months have been amongst the busiest in our history. We have made impressive moves in areas that will ensure a bright future in the years to come.

If you thought this was a quiet period because we were not breaking any sales records, just look at what we have done:

In Toronto, we closed one of the largest projects ever let by the Ontario Government - the Ministry of Housing Project.

SDL Informatique sold a major new approach with the Daisyfresh account.

In Ottawa, despite a very competitive situation, we still have over 2.5 times the amount of business of our next largest competitor.

SDL International closed its first major account with the U.S. Government - the U.S. Navy.

In Western Canada we opened new accounts with over 20 clients.

In fact, during the past six months about 10% of our revenue came from new accounts.

We instituted an entirely new approach to developing products and supporting the market with the creation of the Product Division and the establishment of the Marketing and Sales Support departments, and Product Marketing.

This in turn led to new methods of meeting customer needs with our Data Base Services.

We introduced new pre-programmed services covering a variety of standard client applications.

We introduced the System Life Cycle - a new approach to producing results for our clients.

We expanded not only what we are selling but where, with new offices opened in Washington, Calgary, Edmonton and ^Vancouver.

We backed this selling up by expanding our educational role. We started in new sales training program. We added video tape to facilitate our educational programs.

We finalized a new university recruiting approach called the Class of '77 to ensure we have the people resources for the future.

We revised the corporate image with a new approach to sales literature. We introduced Word Processing as an aid to creating proposals and assisting in this new image.

We launched a major advertising campaign.

We appeared in the National Computer Conference Show in New York, and the Canadian Computer Show in Montreal and the DP Federal Expo Show in Washington. We are now going into the Computer Caravan in Philadelphia and Boston.

We moved to new offices in Montreal. We made a major renovation in the Quebec City office. We relocated the Washington office to new premises.

We completed an operating system conversion estimated to cost more than a million dollars - the first major re-engineering of our CS products since the company started.

Along with MVS, came TSO, CICS, and other new approaches to help our clients utilize this system.

We introduced new communications networking technology through COMTEN processors located in New York, Boston, Washington and Ottawa.

We undertook a project using a Hewlett Packard mini computer to provide Data Entry and Text Editing service. The Ottawa branch office is now further developing our approach for customer use in the next few months.

We added a third major computer.

The results of all this activity have not yet shown up on the bottom line. They will.

And this is just for starters. We are determined to present to the Board of Directors in June the most aggressive plan for corporate expansion since the company started. And we have the people and the financial resources to make it happen.

Back to Section A Index or just read on

RELATIONSHIP OF BELL CANADA TO A MERGER OF SDL AND AGT

JANUARY 29, 1971

BACKGROUND

SDL owns and operates the largest computer in Canada. With its network of high-speed terminal connections, it is the largest non-military high-speed remote job entry networks in Canada and probably one of the largest in North America.

AGT Data Systems is a diversified company in the computer services industry which includes, with its DCF Division, one of the largest computer consulting organizations in Canada.

It is generally accepted in the industry that these two companies would form a natural fit if merged into one corporation. In addition to the obviously complementary nature of their approaches to the computer service field, each company has:

• compatible management teams with similar backgrounds, both having come primarily from IBM

• extensive systems development and computer operations experience in SDL complemented by the equally extensive marketing, application development and consulting experience of AGT.

• combined earnings projections that are extremely attractive

• a proven ability to work together as shown by the marketing agreement already existing between the two companies.

One might ask why these two companies had not yet merged. The direct answer is that each company is young and the management of each had a desire to bring the companies to a position of proven performance. In addition, during this period of intense development, a merger would divert management time from their prime purpose. The management of the companies agreed that should such a merger be desired, it could be brought together at any appropriate time.

A recent analysis of the factors operating in the computer services industry in Canada now indicates that it may be timely to consider such a move. A copy of this paper, in the form of a memorandum to the respective Boards of Directors, was sent to Bell Canada previously.

The result of such a merger would be the largest factor in the Canadian-owned computer service industry, with a staff of over 350 and revenue at an annualized rate of over $10,000,000 a year.

RELATIONSHIP WITH BELL CANADA

The resulting company would be broadly diversified but would have several gaps in being able to offer a fully integrated approach to the industry. As noted in the submission to the common carriers by SDL, dated September 1970, a large portion of the business in the computer services field will involve expenditure for common carrier services, modems and terminals of various kinds. If the new company is to maximize its profits, it will have to supply as many of these services as possible itself.

If this is a logical development for the new corporation, it raises the question of what the attitude of Bell Canada might be toward this company.

1. Bell might take a ‘neutral’ stance:

If it is the intention of Bell Canada not to enter the computer services field, in the near term, Bell could certainly treat the new company as just a new and larger customer.

However, it is likely that there will be continuing pressure for the Bell to take an early position in this field. To begin with, such an investment clearly would provide a better return on capital than the 6.8% earned in 1969. In addition, it would allow the Bell to offer a fuller range of services to its own users, both in the consulting field and by broadening the usefulness of the telephone as a communications device.

If Bell were to enter the computer services industry, this could lead to a sounder expansion of the industry which, in turn, will increase the rate of expansion of Bell’s own business in the communications field.

Finally, it is likely that there will be continuing pressure by the Federal Government to have Bell enter the field through some means or other.

However, should the Bell later decide to enter the computer services field, the competition would clearly be much stronger as a result of the SDL/AGT merger.

Undoubtedly then, Bell could decide to do nothing in the light of the new corporation but as there will be pressures for the Bell to eventually take a stand, there may be advantages in Bell making a move in this field now while it still has all its options open to it. The alternative is that the Federal Government may dictate the moves Bell can make. As a minimum, the environment in which Bell would enter the industry at a later date will certainly be more competitive and more expensive.

2. Bell Canada could enter the field with its own resources:

No one doubts that this could be done. However, experience to date has indicated that any proposals by the Federal Government to push Bell into the field have met with very stiff opposition from the already existing industry. If Bell does enter in direct competition to this industry, it is clear that the industry would have little choice but to enter into data communications competition with the Bell in the lucrative Ontario Quebec market. There is ample precedent for this in the United States with the DATRAN application and others.

While the Bell could certainly locate the capital to enter the field, there might be some reasonable doubt as to whether the Bell could compete effectively as the overhead of the present industry is, in general, less than that of the Bell because the present industry is not required to service areas that are not profitable.

Our experience also indicates that a great deal of experience is required in addition to the capital to make a real success in the computer services industry. The man years of development already invested in the specialized accounting routines necessary for billing customers, the production control systems and the line monitoring software are not easily duplicated. This is illustrated by the fact that in the United States, even the largest companies have been unable to successfully duplicate some of the procedures developed here in Canada. MacDonnell Automation, one of the largest service corporations in the central United States, has repeatedly tried to buy some of these products from SDL.

In addition to the product development necessary in this field, considerable marketing know-how is required. The computer service product is far more complex than the products sold by most companies.

Although Bell has developed a large staff of data processing professionals, this expertise has not been directed towards packaging for resale nor for the demonstrably difficult task of marketing computer-based services.

SDL and AGT have in excess of 50 ex-IBM Canada employees, allowing us the benefits of the proven marketing techniques that have had such demonstrable success over the past decade.

3. Bell Canada could absorb the new company:

If the Bell may enter the field, a more certain way to assure success would be to enter with a successful existing company. In effect, the principle would be to enter the field with, rather than against, the already existing industry.

The first reaction might be that this would cause considerable controversy. However, it is interesting to consider who might object:

• The financial community would clearly be in favour of such a move. Not only would this increase the value of their investment in the major portion of the existing industry but it would add a large measure of profit leverage to the Bell’s own operation, making such a move doubly attractive.

• The Federal Government could hardly object as they have been pushing for such an entry by the Bell for some time. This would meet the Federal Government’s objectives of maximizing the effective use of Canadian computer resources, keeping the industry Canadian and giving the Federal Government a vehicle through which it could implement its national policies as these are defined.

• The users of the combined service will get improved service and, therefore, are unlikely to object. They would not only get the best in co-ordinated experience in the computer/communications field, but would also be dealing with a company that could now offer an integrated product. The research facilities of Northern Electric could be used to develop and build a Canadian terminal, Canadian-designed modems and similar equipment and the already existing marketing and servicing organization combined with the consulting strength of the DCF Division of AGT should provide the best possible product for the user.

• One would expect that other companies in the computer services field would object. However, to be realistic, the major force in the field is still IBM itself and IBM is highly unlikely to register any significant protest. CDC and other manufacturing firms are not extensively involved in the computer services field in any case and would have little reason to object

Also, these firms appear to be getting substantial financial assistance from the Federal Government and would not likely object if the Government indicated it approved of this move by the Bell.

This would leave only a small number of Canadian firms in the field. We would not be so presumptuous as to suggest that the Bell only consider the combined SDL/AGT corporation. Other Canadian companies could be obtained by the Bell if they logically complemented the computer services being offered. With the financial, marketing and technical difficulties being encountered by a number of the companies in the field, it is doubtful if the Bell would want to consider more than two or three other companies and with these effective control of the industry in Canada, outside of IBM, would be obtained.

WHY NOW?

In addition to the reasons pointed out before as to why it may be advantageous for Bell Canada to make a move into the field through the existing industry, it should also be noted that the price of equity in existing companies is as low as it will likely be. In fact, the potential existing in some of the companies now is one of the factors worrying the Federal Government who have a genuine concern over the possibilities of foreign rather than domestic takeovers.

Needless to say, the internal business that Bell Canada and Northern Electric could provide to the new company would sufficiently enhance the worth of the investment that its value would be ensured.

In particular, the combined SDL/AGT corporation is one with the experience and demonstrated ability that would not easily be duplicated in any other move Bell Canada could make.

In addition to this aspect of the timeliness of an entry into the industry now, SDL/AGT currently have a distinct price/performance advantage over IBM. This is particularly important when viewed in the light of IBM’s current ‘‘fourth generation" machine announcements - the /370 series - which in our evaluation with Northern continued to demonstrate the SDL price/performance superiority even over the new equipment.

It is expected that the ‘life’ of the /370 series will extend beyond five years and, hence, the company can enjoy a substantial advantage that can be exploited over the near and mid term.

CONCLUSION

While Bell Canada has many options, we believe none will offer better prospects for a successful entry into the computer services field on terms attractive to the Bell than the proposed participation in a joint SDL/AGT corporation.

If such an approach is conceptually attractive to Bell Canada, our companies will make available the necessary financial projections and statements to carry the investigation through its next stage.

Back to Section A Index or just read on

 

A NEW INDUSTRY LOOKS AT THE BELL

March 1, 1971

The joining of computers to communication networks is like the marriage of a less of what each fully understands reality, however, young campus rebel to a rich widow. Regardless of what each is looking for in the marriage, neither the attitude and needs of the other. In many of the problems that arise are psychological rather than technical.

Fortunately, marriages can often be saved by the use of group therapy and I suspect that is what we have tonight. Such therapy is only useful if the participants are very frank and I hope for that reason you will accept my comments in the proper spirit.

First, I believe it is important that we define the new computer services industry. Leaving aside that segment of this new industry having to do with application package development, consulting and other areas that are primarily manpower industries, let us consider where most of the interface between the common carriers and the industry takes place. This revolves around the remote access to computers.

Some of this access is through low-speed key-driven terminals such as the teletype or the IBM 2741 typewriter terminal. This is an interesting area that has problems of its own. Among these are the requirement to use a full voice grade line when in fact a 160 baud sub-channel would be quite adequate. This means there is a demand for the multiplexing of such service to gain better use of a voice grade line.

Another problem in the low-speed area involves the use of acoustic couplers. Carrier resistance to these devices is understandable from the viewpoint of potential network pollution, but is an example of customer demand running ahead of the apparent ability of the network to adjust to a desired product.

A third problem often discussed in the low-speed area is that of the method of tariffing data transmission. As has often been noted, the key-driven terminal user occupies a line for a long period of time but, in fact, puts very little data over the line. The time/distance rate structure tends to make this type of transmission very uneconomic to the customer.

I only mention these problems in the low-speed area for the sake of completeness. The rest of this evening’s talk will be directed toward the medium and high-speed service as this is the one on which our company depends for most of its revenue.

THE SDL CONFIGURATION

Systems Dimensions Limited operates one of the world’s largest and fastest computers, an IBN System/360 Model 85. The data input/output bandwidth of our computer, as presently configured, exceeds 36 million bits per second. Through the addition of presently on-order channels and input/output devices, this figure will, by mid-1972, exceed 60 million bits per second.

Common carrier data communications are extensively used to bring our customers’ work to our computer for processing and to return to them their results.

Our presently installed data communications facility utilizes a data bandwidth of about 120,000 bits per second. This amounts to about one-third of one percent of our installed data input/output capability.

Nevertheless, we currently operate at a level such that this 0.3% flow generates and relates to work absorbing approximately 20% of our currently installed processing capacity.

REMOTE ACCESS CUSTOMER PROFILE

SDL’s remotely located customers represent practically every major branch of industry, business, science and technology. There are many common factors that reflect their data transmission needs.

While the majority of our customers are familiar with the operation of large computers and their access methods and economies, relatively few customers are conversant with common-carrier data transmission techniques and economies.

Most of our customers are familiar with programming, do their own programming and/or make use of pre-programmed generalized application support packages. Our remote access customers are normally ready to begin transmission to us within a few days of deciding to use our services. They are usually quite familiar with the operation of the installed terminal business equipment and require only minimal instruction in the art of organizing their processing work for maximum effectiveness.

SDL presently receives and transmits customer data through 62 data entry ports on the Model 85. These are distributed as follows:

22 165 bit per second (BPS) dial-up ports used for access by IBM 2741’s and other similar key-driven terminals

27 2000/2400 bit per second (bps) ports used to communicate with intermediate speed remote card reader/punch printers or small computers such as the IBM 1130 and the UNIVAC 9200

13 4800 bit per second (bps) ports used to communicate with specific customer terminal equipment in the intermediate speed range such as the IBM Model 20 or the UNIVAC 9300

At present, our Model 85 can have a total of about 150 ports having an aggregate data transmission capability of about 400,000 bits per second. Additional multiplexing equipment on order for fourth quarter 1971 delivery will more than double this figure to give 350 ports and an aggregate capability of nearly 2,000,000 bits per second.

For yet additional port capacity, small processors such as the IBM System/360 Model 25 can provide many more additional ports and be linked to the Model 85 via high-speed channels at rates of about 1,000,000 bits per second each.

OUR NEED

A significant number of our customer/prospects are organizations now spending approximately $5,000 per month on their own computing hardware such as IBM Model 20’s or UNIVAC 9300’s. Our service prices, when swollen by terminal modem and toll charges are often only marginally advantageous to the small customer despite the normally enormous price/performance gains of our Model 85 over his own computer. A typical breakdown of our monthly charges to a customer in this workload range is:

Common Carrier Toll Charges or Lease $ 500

Two Modems (normally owned by 500 - 20%
the common carrier)

Terminal Equipment (reader/printer) 1,000 - 20%

SDL Model 85 Computing Services 3,000 - 60%

$5,000

The productive use the customer gets from this type of system is what the Model 85 produces for him. The terminal is essentially non-productive and the expenditure of 20% on modems and common carrier toll charges is equally non-productive. Our desire is to be as efficient and inexpensive as possible in these two areas. Needless to say, it is the 20% for modems and common carriers charges that we are talking about tonight.

PROBLEM AREAS

1. Delivery

Once one of our customers is sold on using our service, he is ready to make use of this service immediately. One of our biggest problems has been in obtaining adequate delivery of lines and modems. We can stock-pile terminals if necessary. We could even purchase non-Bell modems although we frankly believe this is not our business. SDL has made a large investment in computer capacity and feel that having to use further capital to buy what is essentially communications equipment, should not be our responsibility.

If we cannot start service to a customer very shortly after he has signed an order, we lose considerable revenue. Further, the customer who has now decided to convert to our system has people who are used unproductively while waiting to start the conversion. The best we can do is provide an in-city delivery service to some location where we have our own terminal. Also, to be honest, the longer the time lag between the close of the sale and the start of the service, the more likely the customer is to alter his decision.

Yet, the typical delay is six to eight weeks to obtain a leased line.

Now, consider a typical situation. Knowing that there will be this considerable delay in getting a line installed, SDL eventually resorts to ordering a line in anticipation of getting an order. Now, one of two things may happen. The Bell delivers earlier than expected and arrives in the customer’s office without notification to SDL to install a dataset which the customer does not expect. This leads to very interesting situations. Or, the customer decides not to use our service and we have to cancel the line.

Now the Bell is critical of SDL because we cancelled a line on short notice.

In a word, by trying to correct the Bell’s problem of slow delivery, we have worsened the situation rather than made it better.

A recent embarrassing incident arose when, in anticipation of a requirement from Northern Electric in Montreal, we discovered that the only way we could adequately get good delivery was to install CN/CP service. This solution seemed rather unpalatable to Northern.

The expectations of the computer service industry may be too high but the delivery the Bell is able to provide on leased 2400/4800 baud- lines is not responsive to the industry’s needs.

2. Reliability

Here again, those in the computer industry are intolerant of the error rates on the common carrier network. As an example of the difference in attitude I referred to earlier, we should bear in mind that those who have been working with computers expect virtually faultless operation. On the other hand, in voice communications, transmission is satisfactory if the person at the other end can reasonably understand what is said.

Let me give you an example of why noisy lines are unsatisfactory. Mr. W.V. Wolontis, Executive Director of the Data Systems Engineering Division at Bell Labs noted in the Bell Laboratories Record, August 1970 that "typically for the great majority of switching offices, Data-Phone service gives you less than one error in 100,000 bits on about 90% of the connections dialed". If 100K bits equals approximately 12,500 bytes and the average print line is 120 characters this would mean that one could expect an error for about 100 lines printed. Naturally, this does not happen as the one error in 100,000 bits is an average over many dial-up calls and clearly a bad connection can generate hundreds of wrong bits thus biasing the average.

Also, the use of data compression and other standard techniques would really allow you to print many more than 100 lines before expecting an error. However, it is obvious that this rate is far too high for satisfactory data transmission.

This problem now ties into the delivery problem. You might have expected that we could use a dial-up facility prior to obtaining a leased line but dial-up tends to be highly unreliable and leased lines are on a long delivery schedule. Hence, the computer service industry is caught in the middle.

3. Type of Service

Last year Bell Canada announced Multicom. One executive of the Bell pointed to this with pride noting that this is a service available in Canada that was not available in the United States, and hence, Bell Canada was endeavouring to help the computer serv ices industry by anticipating its needs.

The computer services industry may, however, seem somewhat ungrateful. I do not know how many Multicom customers you have in Canada at the moment but I suspect the number is very low. This is not entirely the fault of the service as we certainly expect to be using 50KB lines in the near future. However, the cost of the service is such that it rapidly becomes uneconomic relative to a Telpak line. My concern is not to criticize the Multicom service but rather to comment on the way it arrived on the scene. I suspect that it was the result of what someone in the Bell thought the computer services industry needed. I know that we in SDL were not asked or we could quickly have pointed out that the immediate need could likely have been solved much less expensively by something such as a Telpak- equivalent service for the high speed transmission of magnetic tapes during off-hours, when I suspect that the microwave network is lightly used, e.g. after prime viewing time.

My point is that the Bell has tended to work in an unnecessary state of isolation and only recently has started to enter into a real dialogue with the industry. I will come back to this point later.

4. Service Personnel

This is a touchy area as one can never fault the Bell for polite responsiveness. However, it has been our experience over many months that the sales and service representatives, however well intentioned, are not necessarily adequately trained for the rather demanding jobs in the computer services field. Again, you should bear in mind that those in the computer industry are used to dealing with highly trained professionals often with one or more university degrees.

Our experience in trying to get a price quotation on a simple service can drag over many months and often indicates either a lack of understanding of the problem or worse, an attitude that implies "if it isn’t in the book, it doesn’t exist".

Once again, the demands of the computer industry may be unreasonable. For example, we may ask for 9600 baud service that can be split at our bidding into a single 4800 baud line and two 2400 baud lines. The answer from the Bell is almost certainly that this is totally impossible. This is often somewhat frustrating as we may know of cases in the United States where similar service has been provided and it is rare that Bell Canada knows that AT&T has a ready-made solution. (I will come back to this point in a moment.) Our request may have been unreasonable but so was the Bell’s answer. What we were really doing is posing a problem to the Bell and would hope for an answer such as ’we cannot provide that exact service but we could provide a 4800 baud line and two 2400 baud lines during the day and provide a 15KB line after 6:00 p.m. Would this be acceptable?’

In effect, what we are looking for are people to work with us to solve problems in a frontier area and once the "it’s not in the book" attitude appears, then the computer industry concludes that the Bell again is not being responsive.

5. Foreign Service

The Trans-Canada Telephone System regularly places full- page ads noting that they alone have international expertise. In fact, they quote a number (toll free) that one should call to find out about service between Canada and other countries.

We do have extensive business in the United States and the service across-the-border resulted in this type of situation:

A 4800 baud line was ordered between New York and Ottawa on August 12, 1970. After a considerable number of phone calls, a reply was received on October 15 indicating that the leased line would be installed on December 28. It turned out that what AT&T Long Lines had done was to present the order to Bell Canada. Bell Canada then requested an RPQ for the engineering of the leased line and apparently received a reply on November 20. At this point, it is interesting to note that a simple 4800 baud line is still considered special engineering.

The earliest installation date was then nine weeks after receipt of the approved RPQ. This made the earliest installation date January 28, 1971 or close to six months after the original order.

This situation is typical rather than exceptional. Our next experience was with the installation of FX lines between New York, Boston and Ottawa.

Without detailing the experience, it is sufficient to note that minor problems involving AT&T and the Bell took an inordinate length of time to get solved, e.g. the lines would drop out without notice and what should have been a simple correction took several months to correct.

In a word, this is one area where the Bell should have a great advantage over CN/CP but the evidence is you are not taking advantage of this.

6. Cost of Service

Another aspect of Bell’s service that is particularly irritating to the computer services industry is the apparent reluctance of Bell to consider types of tariffs designed for the computer services industry.

In a Request for Price Quotation submitted to the Bell in September 1970, SDL took a first step in defining what the needs of the computer services industry really were. We made numerous suggestions as to how rates could be altered to make them more feasible for data transmission. We p4inted out that the almost linear charge distance relationship for dedicated inter-city data service was geographically restrictive. We understand, of course, that some front-end loading may be necessary because it presumably costs a certain amount to make a connection. However, once that connection is established, we doubt that it really costs Bell Canada much more to send data from Ottawa

to Vancouver than it would from Ottawa to Toronto. We recommended, therefore, a smoothly decreasing non- linear charge to distance relationship for dedicated inter-city data service.

We realize that we are not in the position to fully understand the cost structures behind the present charging arrangement. However, once again, this was an example of where we were trying to define our needs and putting forward suggestions to the Bell. The answer that came back was that such an arrangement was not presently possible. Here again, we were looking for the solution to a problem and got an out-of-the-book answer.

Another factor that irks the computer services industry is that we know that the cost of modems in the United States is about half the cost in Canada and the cost of long distance transmission service is similarly far more attractive. It is also irritating that we in Canada are unable to make use of this transcontinental American service as we are forced to use the more highly priced Canadian service.

In effect, it would appear to the computer services industry that Bell Canada is seriously standing in the way of any amount of east-west transmission and is a major factor in forcing Canadian computer services companies to seek business in the United States.

7. Advanced Design in Canada

The question of manufacturing modems in Canada brings up another interesting point. We recently suggested to Northern that they might consider manufacturing some types of modems in Canada and at the same time vastly improve the flexibility of the present modems. This is a subject in itself but if this could be undertaken in Canada, I am sure that the BNR could vastly improve present designs.

For example, one cannot readily put two datasets of supposedly the same type at either end of a line and expect them to work. Minor incompatibilities and on dial-up calls lack of simplified balancing and diagnostic procedures make this situation one which forces the computer services to use non-Bell modems.

This in itself often proves to be a problem because of the lingering reluctance of the Bell to interface responsively with non-Bell equipment.

I could go on with many other examples where it appears that the industry and the Bell are far apart in understanding each other’s needs. Let me now look at some fundamental problems as I see them.

FUNDAMENTAL PROBLEMS

One reason for the lack of communication between the computer services industry and the Bell can be laid on the doorstep of the Government. Without doubt the possibility that the common carriers might enter the computer services industry has made us view the Bell with suspicion. No doubt, we were reluctant to describe the needs of our industry to a potential competitor.

The Bell, on the other hand, appears to have taken the attitude that they know what is required and until recently did not seek out the opinion of the industry. When they did so, the result was a further cause for irritation. I am referring to the now famous Bell Questionnaire. This extensive questionnaire appeared to be a broad survey of the data communications needs of the computer industry. If it had stopped there, the questionnaire would have been most useful. Regrettably, the questionnaire went on to ask any number of questions that would clearly only have been asked by an organization about to enter the computer services industry. These questions included such items as:

- Are you happy with your present computer supplier and how do you rank the following suppliers?

- How much do you pay for maintenance on your computer system?

- What applications do you now have installed on computer service companies?

- etc.

There is a more fundamental problem. Mr. Scrivener, the other day, mentioned to me that one of his major concerns was to ensure that the Bell always provided equal service to all users. This worthwhile aim is fine for supplying Contempora phones to a mass market but cannot provide a responsiveness to a developing field that is clearly anything but a mass market. The Bell must be prepared to work with individual companies to try new services. From time to time, this will lead to one company having a service that is not at that point, available to another company, but this is the only way in which the field can develop.

We are a very small industry and are not yet in the position to provide Bell with much revenue, but if we can believe AT&T’s own figures, this industry will supply a vast market for Bell Canada in the decades to come. If we are to realize this potential, I believe it is essential that the computer services industry be more realistic and more tolerant of the position of the Bell while at the same time, the Bell must be prepared to listen and react in a more flexible fashion.

CONCLUSION

I hope that SDL played some small part in breaking the ice by defining the needs of the company over the next few years in our RPQ of September. I am now very pleased to see the Bell reciprocating through a meeting such as that held tonight. I hope that this interaction does not end here but rather that this is just the start of a dialogue that will enable our two industries to work closely together to realize what I am sure will be a most rewarding experience in the years to come.

Back to Section A Index or just read on

 

AN EXPERIENCE IN RAISING VENTURE CAPITAL

When anything works out well there is a tendency to assume that the actions taken were the only correct ones under the circumstances and, further, that those actions had been planned with insight approaching clairvoyance. A more honest approach would be to admit that most decisions will work, a few are so bad that failure is inevitable and some turn out so well that an element of luck is involved.

The SDL story is not one that can readily be repeated because it happened under circumstances that will not likely recur. Therefore, the most useful thing I can pass on from this experience are those repeatable actions that by good luck or good management led to the success of the corporation.

IN THE BEGINNING

If we assume that raising venture capital means obtaining someone else’s money to launch a new venture based on your ideas then some soul searching should be done before you start this process. The rewards can be high but the risks can be high for both you and the investor. Unless you are successful in your first venture you may find that further ventures are difficult to undertake for your risk is your reputation. As this is one of the most precious commodities an individual has, I would not recommend venturing it lightly. Secondly, you will be taking responsibility for other people’s money in amounts that could run into the millions. This is also not a responsibility to be taken lightly. I believe that nothing will scare a venture capitalist more quickly than the feeling that the entrepreneur has his eye solely on the potential gains rather than on the ‘idea.’ The entrepreneur must be prepared to make the transition to becoming the manager of a business and he must communicate this willingness to whoever is going to provide the venture capital.

In one of the best articles I have read on obtaining venture capital (When Venture Capital Dries Up – Mel Mandell, Innovation, March 1971), Mandell refers to those “rare individuals who have that burning ambition to run their own show.” I believe you should make sure that you have the desire to follow through and you should communicate this to the potential investor. I do not mean this to be discouraging but only to suggest that some self analysis in the early stage is necessary.

If you are an idea person but not necessarily the one whose real interest is in running an organization then I would suggest that before looking for venture capital you build around yourself the appropriate talent to carry through. If even this approach does not appeal, you should still not be discouraged for it may be possible for you to sell your idea to someone else for cash or royalties.

SOME GENERALITIES FROM THE SDL APPROACH

SDL was launched at the peak of a bull market and raising $17,500,000 on the basis of an idea would not be easy today and perhaps not even advisable. However, to start at the beginning, the company was founded by three people from IBM and one from outside. Although John Russell, Guy Morton and I had already left IBM to form a small consulting operation, the real entrepreneur in the story was Red Quain an Ottawa lawyer and Chartered Accountant. I emphasize this because Mr. Quain is no longer with SDL although he stayed with us performing a very important function until February of this year. The moral that comes from this has already been stated, i.e., the person with the idea may not necessarily be the person to implement it.

It is also important to note that from its earliest stage, SDL was never a “one man wonder.’ There was a balance of technical capability, legal and financial knowledge and some marketing and administrative know-how.

Having decided that the computer services industry was where we should go and having concluded that the market was right for such a venture, we proceeded to develop the plans and carefully document the approach. I might add that this was done while all of us were working full time in our consulting or legal professions. At this point, several important philosophies started to develop. The first was that if we were going to do anything, we would have to do it in the best possible way. Without meaning this to sound like a sales pitch, this became a cornerstone of the SDL approach. It meant that when we wanted to approach a source of underwriting, we should approach one of the largest and most reputable underwriters in the industry. While we could have chosen a number of reputable houses, we felt that Wood Gundy should be our first choice as it was the largest in Canada. It was only later that we would learn just how valuable this approach would prove to be.

Before we approached Wood Gundy, we had drawn together a sizable document outlining the basic approach, market projections, reference documents and a long series of questions and answers that we felt a potential underwriter should ask.

We knew that the underwriter would not likely have much technical expertise and therefore tried to think through each facet of the approach from first principles. It turned out that this had some very beneficial effects on us. This led us to such simple conclusions as acknowledging that if IBM had 75% of the data processing market and the market in Canada is basically a file processing market, then for heaven’s sake, do not try to enter the computer services market with a Wiz Bang 8. The lack of compatibility will only make a tough job that much more difficult. In trying to explain the basic principles to someone else, this almost forced us into common sense approaches and we critiqued our approach ourselves before presenting it to the underwriter.

Wood Gundy quite logically advised that we obtain an outside consultant to provide a further critique of our proposed approach. We chose a consultant from the United States, Booz, Allen & Hamilton as we believed that this would lead to a more objective evaluation when the group was far removed from the marketplace. The consultant’s report agreed on all major principles with our approach and this served only to give us a false sense of confidence in our own market projections. We were not, of course, the only company contemplating entering the computer services field. It turned out that everyone else was basing their financing on the same set of projections. For example, if at that time IBM had 80% of the datacentre business, there were likely 10 companies who would be quite content with 5% and somehow this added up to more than 100%.

We also forgot in our marketing projections that we were no longer selling for IBM where at least the reputation of the corporation was not in question. We were, in fact, going to be selling not only a new idea but a new and unknown corporation and we should have been sensible enough to temper our projections for this reason alone.

SDL had been started as a consulting company in March 1968 and the idea to enter the computer services field was first broached in late June of that same year. The development of the ideas and the investigation by the consultant took place over the summer and by mid-September we had a Letter of Intent from the underwriter. We had set ourselves a target of getting into business by July 1 of the following year and had already concluded that our approach should be to buy our own land, design and build our own building and purchase the major revenue producing piece of equipment. The scale of the underwriting had already reached a figure in excess of $15,000,000 and was to culminate in a final underwriting of $17,500,000. Such an underwriting takes time and it therefore became necessary for us to find some bridge financing that would allow us to hire staff, buy the land, retain architects and, in fact, start construction.

On the strength of the Letter of Intent, we started to approach major banking institutions when one of those fortuitous events occurred. An aggressive young banker by the name of Dick Thomson, who is now General Manager of the Toronto-Dominion Bank, heard that we were looking for bridge financing and approached us. After listening to our story, he stated simply that “the T-D would like to be your bankers. What do we have to do to get your business?” I took a deep breath and suggested that he could start by lending us $1,000,000. His reply was “Fine. What else?”

I tell this story as an example of the imagination that can be demonstrated by the Canadian banking field and put this forward as another challenge to those who claim that venture capital is difficult to come by in Canada. Our experience with both Wood Gundy and the Toronto-Dominion Bank would lead me to believe that there is more than enough imagination and backbone in our Canadian financial institutions to back worthwhile ventures. I might add that the Toronto-Dominion Bank ended up lending us $1,250,000 allowing us to start building our building on January 6, to complete it in April in time to accept delivery of an interim rented Model 65 , and build the staff up to 65 in time for our opening on June 29, 1969. One more point is important to note at this time. Much of our effort was directed toward hiring the best people we could find and without doubt the fact that we had a sizable staff even before the final prospectus was completed made a great difference in the success of the underwriting. It is also a tribute to the people themselves when you think that they came with SDL on the basis of nothing more secure than the bank loan that we had obtained from the T-D.

SOME PERSONAL COMMENTS

So far, I have made the story sound somewhat mechanical, i.e., the story may sound as though there is little more to obtaining an underwriting than coming up with a good idea, planning and researching your work carefully and then approaching your chosen source of venture capital. I believe that all of this is necessary but if this was all that was required, financing new ideas would be a relatively easy process.

I believe it would be more useful to go behind the scenes to try to determine not only why the underwriting was successful but why SDL as a company has continued to enjoy some measure of success. To do this I will have to become somewhat more personal but I believe the points are fundamental.

To continue the story past the underwriting and we should remember that a business must survive many years after the raising of the venture capital, I should point out that SDL could have foundered in early 1970. I mentioned that our market projections were overly optimistic. Despite the size of the underwriting, we had underestimated the amount of working capital that would give a sufficient margin of error should these projections prove to be overly optimistic. By early 1970, the stock market was at the lowest it had been for many years. Fortunately, our underwriter had counselled us to obtain a strong and hard working outside Board. We had also assumed a policy of being very open with the investors who had put up the original capital. These factors now came into play and when we concluded we needed another $1,500,000 we were able to raise this even in the depressed market.

The money was raised by selling additional shares to about a dozen Canadian institutions. This was literally a door-to-door sale by Wood Gundy and the corporate management. Wood Gundy trusted us to meet our revised projections and the founders of the company, in turn, showed their trust by giving up a small portion of their original equity as a bonus to those who would buy shares in the corporation in this type of market. That sense of trust paid off for everyone concerned. The stock rebounded in a way that has now tripled the price paid at that time. The company went on to meet its projections and the underwriter had demonstrated to the financial market that it was prepared to support any underwriting it recommended,

I cannot over-emphasize the extreme importance of a trusting and open relationship with your underwriter. If you have chosen wisely, this trust will pay off many times over. Remember, you are not underwriting once but rather you are establishing a long-term relationship with the financial community.

As a company we have gone out of our way to maintain this relationship with both suppliers and customers. I can remember an instance which was not untypical where our builder who had done an outstanding job for us approached us for an advanced progress payment. Knowing that this was what he was about to request and knowing that the request could be somewhat embarrassing, I started the meeting by presenting him with a cheque for $200,000 which was approximately the amount my sources had advised me he was looking for. The meeting turned from one of embarrassment into one of complete mutual trust and the builder went on to complete the building on a schedule that is almost unheard of in the Canadian construction trade.

I would also suggest that striving for a perfect deal is the best way to wind up with no deal at all. The rewards from a successful venture can be substantial and the risk of losing the opportunity of obtaining a mutually satisfactory deal by striving to get the last nickel at every turn will likely end up with the deal falling through or if it does go through with sufficient bad feeling generated that an on-going good relationship with the financial community is very difficult to maintain.

At the risk of over-emphasizing a point made earlier, do not forget while you are selling your idea, the market potential, the return on investment and all the other factors that you must also sell yourselves. I remember at one point asking our potential underwriters how they could really evaluate a complex technical proposal such as ours even with the aid of outside consultants. Without hesitation, the underwriter replied “we are not underwriting the concept, we are underwriting the people.” I remember thinking about this for a moment and then commenting that he was probably right because the best insurance the underwriter had was to be dealing with a group of people who would be simply too ashamed to fail. The investor must be sold on people plus plans.

SOME CONCLUDING THOUGHTS

SDL had to choose the path of a public underwriting because of the size of the investment required. I should point out that this is by no means the only approach to raising venture capital. In fact, an early public underwriting of a relatively small venture may be unwise.

For example, I have already said that no entrepreneur should start a project if he does not believe that he has an on-going operation. This means that the entrepreneur must be very aware of what will happen the publicly offered stock price after the underwriting. It is no reflection on the underwriter to note that if the size of the issue is very small, there may not be sufficient stock trading to enable the underwriter to make a good after-market and if the underwriter cannot make some money by continuing to trade and create a market in the stock the underwriter may lose interest and the stock may become unrealistically priced. I would suggest therefore that public underwritings should be used only when necessary. Public companies incur many costs that smaller private companies do not.

It is also more difficult to take a company public that has no earnings record. Therefore, I would suggest that you consider all other sources of venture capital before deciding on the public underwriting. It should be borne in mind that many large corporations will now provide seed money to new ventures to encourage entrepreneurs within their corporations to stay somewhat in the corporate sphere while getting what every entrepreneur wants which is ‘a piece of the action.’ Other sources of venture capital are corporations specializing in this field. I would also, of course, suggest that bank financing is often overlooked by those who have a preconceived notion that Canadian banks are so conservative they invest only in Canada Savings Bonds.

Finally, let me assure you that there is nothing more stimulating or more exciting than undertaking to do your own thing with your own idea. You have to be constantly aware of opportunities. The ideas and opportunities may not all be yours but when you see the right one, act aggressively. Like a football player, you may spend a lot of time blocking in the backfield and will get very few chances to carry the ball. But when you see a hole in the line and someone gives you the ball, run like hell!

Good entrepreneuring!

Back to Section A Index or just read on

 

TORONTO SOCIETY OF FINANCIAL ANALYSTS

AN UPDATE ON OCTOBER 4, 1972

The computer communications industry continues to intrigue investors and the public because of its aura of science fiction, its explosive growth potential, its spectacular advances and its equally massive failures. The computer systems that put men on the moon have also nearly put huge corporations like RCA out of business.

I would like today to talk about a particular segment of this industry that will be particularly important to Canada and hope that in doing so I can help you find a basis for analyzing this industry.

First, let me define the particular part of the industry I will be discussing.

The Canadian Computer Communications Task Force, in its recently released report, described the industry as consisting of “those organizations which manufacture or supply computer or computer-related communications goods and services”. Clearly the computer services industry is a subset of this broad field, i.e., that part of the industry which is not directly involved with the manufacturing of computers or the provision of data communication services. This still leaves two large areas to be filled by Service Suppliers and Other Product Suppliers.

It is these latter two areas which I will be discussing. The CCCTF estimated that in 1970-71 the Service Suppliers’ portion of the industry had gross revenues of $133,000,000 and the Other Product Suppliers segment had revenues of $80,000,000.

After eliminating inter-segment trade, the estimated total revenues in Canada directly attributable to computer/communications was about $560,000,000. To this should be added user salaries and wages of about $380,000,000 for those directly involved in other industries making use of computers and related communications. This total of $940,000,000 makes the computer communications industry one of the larger industries in Canada. However, of far more significance is the expected growth rate which should create an industry of $4-billion by 1980. This is an overall industry compound growth rate of 15.6% and a rise in terms of economic output from about 1% of the gross national product in 1970-71 to 2% in 1980.

Of particular significance for the particular segment of the industry I want to discuss is the fact that the Service Suppliers’ part of the industry is expected to increase by 16.7% and the Other Products segment by 16.2% compound growth rate. There are many reasons for this substantial predicted growth rate. However, the basic reason is that the computer/ communications industry is fundamental to increasing the productivity of other industries. The only thing that could really alter the growth rate would be a substantial change in the desire of other industries to increase their own productivity.

How do you Analyze Such a Growth Industry? It is easy to be oversold on companies operating in such a growth industry as I am sure every investment analyst is keenly aware. The glamour of the industry in the late 60’s led to rash predictions by both the industry and the analysts and this was justifiably followed in the early 70 ’s by an overly cautious approach by both groups. I hope the time has now arrived when we can look at the industry whose growth potential remains undiminished in a more rational manner. All analysts will have their own headings under which to analyze an industry and the companies within it but I will make some comments under headings which I am sure will appear on everyone’s list of essential things to consider. These would be:

– A general consideration of the market for all companies.

– For each company, a consideration of:

- how aggressively they approach the market,

- the cash flow to enable them to sustain growth,

- the management capability,

- the profit potential.

One should also consider what restraints might prevent the company from developing such as:

- legislative restraints

- ability to get people

- ability to finance.

Let’s look at these in turn.

THE MARKET IN CANADA

I view the market for computer-related services as almost unlimited. This may sound like a return to the rash statements of the late 60’s but if you consider that the computer services industry is essentially there to solve other people’s problems, one can assume that these problems are almost without limit. This is the viewpoint taken by SDL.

If you take the narrower approach of considering computer services as the provision of computer power, then the market is clearly more limited for it is limited to the rate at which others can solve their own problems and get them to a state where they can be put on a computer.

SDL views this as an imperfect way to approach the market for it means that we would not have control over our own rate of growth. We believe we must be in the business of providing total solutions for cu stomers and provide computer power wherever appropriate in this process.

As the EDP Industry Report of September 15, 1972 notes “computer services is the sector that blends the computer industry into almost every aspect of business, and it’s where the action is”. This same report goes on to say that “companies stressing service have a better prognosis than those stressing computer.” This does not mean that SDL views the market for providing computer power over a communications network as being any less exciting than it was. In fact, industry reports indicate that the remote batch business can probably be expected to increase at a rate of about 40% per year over the next several years.

However, we believe that the market is better approached if one can take control of the whole problem in an application area rather than just providing a more efficient way of processing. If one writes programs and takes responsibility for running these to provide results, customer loyalty will continue to be very high and the whole approach will be far less price sensitive.

In a word, SDL believes that the market is vastly increased if one’s product is increased effectiveness rather than just increased efficiency.

The CCCTF described the market as a triangle and pointed out that those companies providing only remote batch services tend to appeal to the tip of this triangle only, i.e., those companies who are already sophisticated in the use of computers. By providing a sophisticated combination of systems analysis, programming services and computer power, a company should be able to approach much further down the triangle into medium-size businesses and ultimately into very small businesses where such organizations have all the problems of large businesses but obviously cannot afford the technical staff to provide effective solutions.

THE INTERNATIONAL MARKET

The market for providing raw computer power in the United States is very competitive. SDL believes that by providing a total solution approach we can offer a service in the United States that can compete very effectively. Competing companies in the United States can buy equipment as large as that owned by SDL but cannot buy people whose talents are any better than those of Canadians operating in the field.

We also believe that the concept of how to run a computer centre as well as SDL’s increased industry and problem solving knowledge are very exportable products.

It is for these reasons that SDL established SDL International to handle the marketing of our services in the United States and possibly elsewhere.

THE SDL VIEW of the MARKET

In general, then, SDL views the market which it could go after as being all segments of the Service Supplier area, Other Product Suppliers and the area covered by user salaries and wages. In 1980, these areas are estimated to be:

Service Suppliers $ 513,000,000

Other Product Suppliers 356,000,000

User Salaries and Wages 1,475,000,000

This could mean a potential market of over $2.3-billion dollars in Canada alone in 1980 even assuming that SDL makes no moves in the data communications area or in the area of hardware manufacturing itself. Added to this potential would be markets in other countries.

This does not mean that SDL presently has service offerings in all of the areas shown in the attached Appendix but it does mean that it is the corporate intent to cover as much of this within the computer/communications field as can be handled on a profitable and manageable basis.

SDL’s approach will be to aggressively expand over the next decade to be a broadly diversified Canadian-owned company operating within the computer/communications field.

F.G. Withington of Arthur D. Little, Inc, when addressing the 1971 Annual Conference of the Association of Computing Machinery, suggested that in the data processing industry “opportunities will be many and so will failures, but – one thing for sure – any competitor who tries to remain within one of the traditional subdivisions of the computer industry, however, large, will be lucky if he is around in 25 years.”

As people’s problems change, so must SDL’s ability to respond for we fully intend to be around in 25 years.

THE SDL APPROACH

SDL started in the computer communications field by providing computer time on a remote batch basis over a communications network. We now have what we believe to be the largest and fastest computer in Canada, the largest network of high-speed data communications terminals, the largest revenue of any Canadian-owned computer service company and the largest staff. Our growth rate in revenue during our first three years of operation has been:

1969-70 $1.4-million

1970-71 $4.0-million

1971-72 $5.8-million

The cashflow from this operation has increased to the point where we can now invest in a diversification program to cover the areas of the market noted above. However, I wanted to emphasize that this diversification into other high leverage areas does not imply any lessening commitment to our original product. SDL is committed to a program of expanding our capability in new areas of providing computer time. This will include an expansion in the ways in which this computer time can be accessed through other types of terminals and will certainly include an expansion of our capability in the Virtual Memory system area. Fortunately, we are in a good position to take advantage of the new technology while keeping incremental costs to a minimum. Having already bought the largest System/360 /370 compatible machine in Canada, which itself has ample capacity still available, we need only front-end this machine with a Virtual Memory machine at a small incremental cost. This machine, which will be a System/370 Model 145 will be added sometime next year and it will be used by our Systems Support Group to develop proprietary techniques for effectively using this new capability as we have done with earlier products. The Virtual Memory capability will then be gradually expanded as we require more capacity. .

RECENT SDL MOVES

Two of the points I originally suggested that analysts would be interested in would be the aggressiveness of the approach to the market and the cashflow. I have already indicated

that SDL will push into any area of the computer/communications industry where profit potential appears high. I have also pointed out that our cash from our original product, even at breakeven operation, would be accumulating at over $120,000 a month and we must find good ways of investing this cash to get a high leverage, SDL management has therefore decided to invest some of this cashflow as well as some shares in the parent company in two recent acquisitions. The first of these was Softwarehouse Limited, This Canadian organization had 23 people when it joined SDL. It has nearly doubled in size and is now operating in Toronto and Montreal as well as from its original base in Ottawa. Softwarehouse is helping SDL move toward a total systems approach by providing industry expertise in a variety of business-oriented application areas. SDL now has the capability of analyzing a problem, creating a computer-based solution and providing results on a continuing basis for almost any size of business.

As well as concentrating on the information needs of business SDL wanted to get involved in the major application areas which Volume 2 of the CCCTF Report indicated would be the significant growth areas in Canada and elsewhere over the next decades. These are the automation of payments and credits, applications in education and applications connected with Canada’s health care delivery system. SDL already had considerable industry expertise in the areas of bank automation. The Canadian company with the greatest depth of application knowledge by far in the latter two fields is the Systems Research Group. This Toronto-based organization of about 65 people applies sophisticated analytical techniques to arrive at computer-based solutions in the areas of education, health care, urban development, environmental control and other fields of social concern. SRG operates extensively in the United States as well as in Canada.

Both Softwarehouse and SRG have well-established records of profitable operation and will contribute not only to the profitability of the parent company but have the desired effect of expanding the range of SDL services to new application specialities.

These companies also add to SDL additional marketing and management potential.

During our last fiscal year, SDL established a wholly-owned subsidiary in the computer consulting field called Systemplan Limited. This subsidiary uses our expertise in the management of computing centres and the very important systems support techniques we have developed to advise other companies on ways of improving their own efficiency. This can be done either by Systemplan alone or in conjunction with a major management consulting firm. The overhead on this operation is kept low and the advice given the customers of high quality by making use of talent from many areas of SDL loaned to Systemplan for a specific proposal. This ensures that those involved in consulting through SDL are as current as possible in the techniques on which they are consulting.

SDL also stays alert to other profit-making possibilities in the management services area should we decide that the correct solution for a client would be facilities management or some other approach. It can be seen from the above that some of our expansion is by acquisition where we believe we need new areas of industry knowledge and some by development from within. Either kind of expansion must be handled with care. We must be very sure that the areas into which we are expanding will have a synergistic effect with our present business and will themselves be profitable operations. We are also paying particular attention to the financial and legal control that must be provided across all these operations. These functions along with the overall corporate planning function are, at the moment, receiving particular attention from an organizational standpoint. I mentioned earlier that a company expanding as rapidly as SDL must pay particular attention to management development. We believe we are taking the right steps in this important area by making extensive use of AMA training courses and by periodically checking our own thoughts on organization and control through the use of outside management consultants.

THE PROFIT POTENTIAL

Having outlined the general philosophy of SDL and the attention we are paying to managing this, I should now address the point I mentioned that would be of key interest to an analyst – profitability. It is one thing to become profitable, but another to sustain profitability. As you know, SDL started operating profitably 25 years after its inception and I am pleased to report that we have just completed our third consecutive profitable quarter since then. We expect that our sales for our fourth operating year ending June 30, 1973 should be in the area of $9,000,000 including the prorated contribution of our most recent acquisition. This is an increase from the $5.8-million in the year just completed.

I remain very cautious about making projections in a field as fast moving as the computer/communications industry. However, as our acquisition of SRG is on an earn-out basis and may, therefore, be somewhat more complicated for the analyst to assess, I did make the prediction the other day that our earnings per share for this fiscal year before tax and before debenture conversion would be about 80 cents. I cautioned at that time that SRG would certainly incur a tax liability although SDL itself would not be taxable in this year. This is a turnaround in one year from our loss of 26 cents last year.

This indicates there is a high leverage in our original product line to which we have added the effect of our two new already profitable acquisitions. I am optimistic that we are in a very sound position with our broadened approach to the marketplace to maintain a steady growth rate and believe that we are making the right moves to enable us to approach this huge market.

WHAT CONSTRAINTS COULD THERE BE?

Finally, I mentioned that analysts would want to consider any possible constraints that might dampen the expansion rate predicted by the CCCTF. Naturally, one must consider moves by competitors. A market as large as the one discussed will obviously attract a number of firms into the field. However, the very size of the market means that there should be more than enough room for many large firms. It is interesting that the organizations now in the field are somewhat different from those that started out. Some of the originals such as Computel remain but many of the new entrants are from outside the computer industry. We expected an impact from these companies and I am sure will feel some pinch in some areas for these companies can sustain large losses over a long period of time if they choose to do so. However, as we broaden our own approach, we find that we are really approaching a market in which size is not necessarily an advantage but industry know-how certainly is. I believe the market is amply large enough to allow healthy competition and profitable operation by a number of firms in the field.

A second possibility would be that legal constraints might be put on our industry. This concern has fortunately now been cleared away. The CCCTF report specifically recommended that the computer services industry remain unregulated. The Task Force went on to say that no restrictions should be imposed on the entry of any organizations into this business unless such entry would lead to unfair competitive practices. We believe that this concept is fair and we applaud the CCCTF Report for going on to note that for this reason some restrictions should be placed on common carriers, banks and universities should they choose to operate in the commercial computer services field. Another de facto constraint on the field could be IBM. No industry of any size is so dominated by one company as is the computer industry in general. However, in the United States it is interesting to note that IBM accounts for only 5% of the computer services industry. This percentage is higher in Canada but this does indicate that IBM does not have the dominance in the service field that it has in the hardware field.

In a way, the provision of raw computer time is directly competitive to the installation of an in-house computer and so to some extent we are in direct competition with IBM. SDL, however, has generally taken the approach of avoiding a head-on clash with IBM, Bell Canada or other giants in the field by becoming users of their know-how and adding to this capability our own total problem-solving approach to customers’ problems. This puts SDL in a rather unique position where, by solving the customers’ problems, we are also expanding the sales of IBM, Bell Canada and others who might otherwise be head-on competitors.

The only other constraint I mentioned that would affect SDL’s ability to continue to grow at rates greater than the already impressive industry projections would be our inability to obtain enough people. We are approaching this in two ways. First, we are expanding our internal education program to allow us to hire more people directly from universities and provide the necessary supplemental training ourselves. Secondly, we are gaining very competent professionals through our acquisition program. Our staff has increased as follows:

June, 1968 - 4

June, 1969 - 65

June, 1970 - 100

June, 1971 - 167

June, 1972 - 200

Now - 265

I believe that we can hire and develop staff fast enough to sustain the desired growth rate.

Finally, it would appear that we will be able to finance our growth internally and we do not anticipate having to come back to the capital market for additional financing.

SUMMARY

I believe that Canada can be very proud of its computer services industry which has come through some very difficult times with fewer casualties than in other countries. The SDL corporation is now one of the largest investor-owned companies in the computer services industry in North America and I believe we can play a significant role in Canada’s development in the years to come.

APPENDIX

Source: Report of the Canadian Computer/Communications Task Force:
Volume 1, May, 1972

SERVICE SUPPLIER

Functions Consulting Analyzing Designing Programming Report Writing Preparing Data Selling Operating Managing Training

Products & Services Feasibility Studies Models Simulations Hardware Tender Design Equipment Evaluation Equipment Selection Systems Analysis Systems Design Efficiency Audits Special Systems Operating Systems Software Applications Software Communications Software Data Preparation Computer Power/Time Facilities Management Personnel Placement Education & Training

OTHER PRODUCT SUPPLIERS

Functions Research Development Designing Manufacturing Assembling Importing Distributing Selling Exporting (?) Training Maintaining

Products & Services Data Cards Data Tape Print-Out Forms Forms Bursters Forms Decollators Magnetic Tapes Magnetic Disks Magnetic Drums Tape Cleaners Miscellaneous Products Specialized Furniture Raised Flooring Non-Combustible Files Fire-Proof Vaults Air Conditioning Equipment Stand-by Generating Equipment Field Maintenance

 

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COMPUTER SERVICES IN CANADA IN 1975

ANNUAL MEETING OF THE CANADIAN ASSOCIATION OF DATA PROCESSING SERVICE ORGANIZATIONS

OCTOBER 20, 1972

As Charles Kettering said "my interest is in the future because I am going to spend the rest of my life there." This quotation was used in a promotional piece for the World Future Society. Actually, this group is not, as you might imagine, part of the Prime Minister’s Office but is rather an organization of those who are interested in the methodology of forecasting the future.

For some academics, this may appear to be just another discipline but for a fast-moving industry such as ours anticipating and trying to influence the future is essential for our survival. But, how far in the future should one look?

The CCCTF Report did an admirable job of looking at what the computer services industry might be like ten years or more from now. By contrast, our companies tend to operate on an annual plan with some projections as to what might happen in the next several years. It is this ‘near future’ that I felt it would be most profitable to examine.

A large corporation such as IBM or Bell Canada can well afford to base plans on the types of trends that are seen in the CCCTF Report, i.e., anticipating what might happen in 1980. The computer services industry is, however, much closer to the marketplace and generally tries to formulate plans on what we think will happen in about a three-year timeframe. Firms in this industry that have tried to base their plans on ideas that are too far in advance of our ability to sell these ideas usually come to an abrupt end.

WHY 1975?

Many of our plans have about a three-year implementation cycle and so it is instructive to look at 1975. Beyond that, the computer services industry should recognize that it is very influenced by factors over which it may have little control. For this reason, very long-range planning can only take the form reacting to ‘alternate futures’ involving the major factors pressing on our field such as:

- The changing needs or whims of our customers.

- Alterations in the IBM umbrella which, as we have seen, can go up and down quite rapidly.

- Major changes in the competitive situation nationally and internationally.

- The impact of government involvement at several levels.

For these reasons, I think the most useful thing to do is to provoke discussion on what the field could look like in 1975 and what we as companies and as members of CADAPSO can do to alter this picture if we do not like what we see or how we can hasten the arrival of the events if we do.

SCENARIO 75

I will use the serious technique of scenario writing half seriously by describing what an interested and unbiased observer of the computer services industry such as Ian Rodger of the Financial Post might write about the field in October 1975 when reviewing the recently released Third Annual CADAPSO Survey of our industry in Canada.

October 25, 1975: "IS THE FUTURE OF THE COMPUTER SERVICES INDUSTRY BEHIND IT?"

This is the question raised by the Third Annual Industry Survey released this week by CADAPSO. As you may recall, this survey was started to provide continuing information about the industry using the CCCTF Report as a base. Authorization for the survey was given at the Annual Meeting of CADAPSO in October, 1972.

First, the survey indicates that the revenue of the computer services industry in Canada had risen to $278,000,000 in the year ended June 30, 1975. This indicates a growth rate faster than the 16.7% compound increase predicted in the CCCTF report starting from a base of $133,000,000 in 1970-71.The report went on to say that CADAPSO membership had grown to 65 firms representing over 80% of the revenue earned. The report noted that this seems to follow the 80-20 rule whereby 20% of the firms might be expected to provide 80% of the revenue. However, the extensive commentary with the report is more interesting than the figures since the report reviewed major events that had taken place during the past three years. The report indicated that most of the firms in the field tended to be small organizations serving a local market either with programming services, data origination services or other such services requiring little capital investment. Most of the growth had taken place in firms that were already in existence by 1971 or were more recent spin-offs from large corporations whose main business was not the data processing field. The report noted that no new major underwritings of firms in the field had taken place since the report started.

One of the reasons for the faster than anticipated growth in revenue was that spin-offs tend to take the parent company’s business with them and put it into the computer service sector rather than having it counted as in-house computing.

The report noted that there had been a number of mergers and acquisitions which tended to keep the growth rate in number of firms relatively flat. There is also a high turnover in the small local firms and two large firms in the field had chosen to withdraw from the computer services industry during the past two years.

Naturally, the largest entry in the field was that of Bell Canada who announced their intention in mid-1973 to enter the computer services field by setting up a wholly-owned subsidiary and placing much of their in-house equipment in this. Operation of this new subsidiary started in January, 1974 but as the Federal Government had not precluded a data processing subsidiary of a common carrier from selling to the parent company there had been very little external impact by this move. This may have been compounded by the fact that the new Bell subsidiary, Trans-Canada Data Systems, had concentrated on technical development rather than marketing on the assumption that referral business would be adequate to build a business base.

Two other major entries were spin-offs from life insurance companies who entered the field in late 1973 and early 1974. One reason for this move by the life insurance companies was to make better use of a staff that had been built up and which would be no longer required as the major applications they were developing stabilized.

Three major banks in Canada had entered the field in the past two years offering a variety of financial-related application packages. However, as the banks were required to do this on an arms-length basis, only one had established its own subsidiary to do this work and the other two had contracted out the processing to existing computer service firms.

A consortium approach was tried by three large companies in the Montreal area in late 1973 but as these organizations had little in common and had tried to run the operation on a joint management basis, the operation had met with little success. Finally, in early 1975, the consortium was reorganized and the work was contracted on a bulk buying basis to an existing computer service company.

One new phenomena which might become a trend in Canada took place in late 1974. By that time, MacDonnell-Automation of St. Louis had installed its 6th /370 Model 198 and having now bought the DATRAN operation from University Computing proceeded to establish DATRAN links in Toronto and Montreal. One Canadian computer service company realizing that this economy-of-scale could not be matched in Canada elected to phase out its own computer operation and buy time from MacDonnell-Automation. The company would provide application support in Canada but not computer services. The CADAPSO report noted that this might be the start of massive multi-national computer utility operations which would provide computer power to local computer service organizations who would concentrate on local problem solving.

IBM’s service bureau subsidiary in Canada which was established January 1, 1973 as the Service Bureau Corporation (Canada) Limited continued to occupy a steady part of the market by concentrating on several large application areas such as brokerage. SBC (Canada), however, seemed to have little impact in the general-purpose computer services market except in regions still not serviced by Canadian-owned companies.

The CADAPSO report noted that the industry organization had spent much time with the Focal Point in reviewing the changing nature of the computer services industry. The Focal Point, as you will recall, finally found a compromise home in the Department of External Affairs in mid-1974. Some of the conclusions that this joint study arrived at are as follows:

- The announcement of Virtual Memory capability on machines as small as the /370 125 meant that one of the reasons for large outside computer utilities had disappeared, i.e., the need for a very large machine for a small number of runs each month. This move by IBM could be seen by 1975 to have stemmed the trend to very large and very small machines and had the effect of bolstering the sagging mid-range market for IBM.

- This same phenomena had an effect on the computer timesharing firms because even small machines could now provide a reasonable timesharing facility through TSO on an in-house /370.

- This coupled with the disappointing progress in reducing the cost of communication lines led to a slower than anticipated development in the remote computing area. For example, while datasets offered by the common carriers in Canada did decrease about 15% in cost, similar datasets in the United States had decreased by almost 60% leading to a further imbalance between Canada and the United States in the cost of communications.

- Another factor that had mitigated against the growth of the raw computer power utility was the advent of the mini computer which could take over many of the functions of remote timesharing service.

- The machine replacement market had also proved somewhat disappointing as few companies were really willing to allow their entire data processing operation to go outside.

Fortunately, the computer services industry had clearly recognized these trends in the early 70’s and had already made the switch away from providing raw computer power and toward providing a total solution approach to customers’ problems. This was done either by providing tailor-made solutions or by providing specialized services which would be available only from the computer service vendor and could not readily be duplicated on an in-house system. Some computer services companies provided highly specialized services such as computerized text handling operations. Specialization by service or industry or both maintained the strong growth rate shown by the figures.

In general, it appears that the computer services industry will continue to more than match the original projections made by the CCCTF Report because it has learned to become more responsive to user needs and has begun providing what people wanted rather than what the industry wanted to sell. The report concluded that the computer services industry would continue to expand as long as it viewed its mission as being improving the productivity of its clientele. As a long-time observer of the field, I would conclude that its future is by no means behind it.

Any similarity to situations living or dead, is of course, purely coincidental. Like Ian writing in 1975, I have great faith that our industry will grow even faster than the rates predicted for I also believe that the industry is sufficiently adaptable to keep pace with the changing needs of our society.

I am also concerned that we not let up our pressure to keep a healthy climate for developing the computer services industry, one that will let us realize the desired growth rate. The field is amply large enough to sustain a number of good sized firms in Canada as well as a large number of small firms. If Toffler, Drucker, and others are correct, the future will require an increasing variety of services and these services will not be static. We must welcome change as there should be no one else in the country better equipped to deal with it than companies in a leading edge field such as ours. That is why I have predicted many more experiments with new types of organizations and services. Behind all of this there must be a strong industry association which can work with government and with users to make sure that the industry is being developed to be responsive to our customers, to be useful to the nation and to be profitable to the service companies. This, of course, is what CADAPSO is all about.

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MARKETING SEMINAR

SYSTEMS DIMENSIONS LIMITED

NOVEMBER 18, 1972

Jack Kyle described this as a meeting of our ‘professional marketing field force. I would like you to think about that description and the real meaning of the words he chose, because I want to talk about the concepts involved in each of those four words. (Story of Graduation Address from Man at YALE, using the letters to describe Youth, Ambition, etc.)

PROFESSIONAL

If there is anything that characterizes our field force, it is that they are considered to be ‘professional.’ Professionalism implies many obvious things: an in-depth knowledge of our products and services a deep desire to perform to the limits of one’s ability a sound and ethical approach to our customers. Professionalism also implies a way of looking at things professionals often work as part of a group and in SDL, it is important to recognize that that group is growing in numbers and ability very rapidly. This in turn means that maximum adaptability is required to changing requirements. (Those from Toronto might not understand this, but a quarterback, who is really professional, is at his best on the option plays). A true professional always tries his best to work with his team-mates, recognizing their different approaches to winning the game. At no time does a true professional ever publicly comment on his team-mates other than to stand up for them. a true professional is one who starts every play with the same enthusiasm and the assumption that this will be the play that will lead to the winning touchdown. He does this regardless of how well or how badly the previous play may have gone. The professional realizes he is paid to play the game and play it to win. Even if he owns the ball, he never picks it up and goes home.

I believe that the SDL field force is exactly this kind of highly professional group and it is this that has made our field force the most respected in the computer services business.

MARKETING

If we are the best in dedication and professional competence, can we also claim to be the best marketers? Sometimes there can be a conflict between doing an outstanding professional job, and selling as much as we are able to sell. There is always the danger that we could become over-cautious in our approach to selling.

I am not suggesting for a moment that we dilute the quality of what we do, but we should not let a fear of making a mistake prevent us from making the right moves.

I suspect that some of our work in the field is ‘over-engineered.’ We may have the tendency to build the dam 20 feet thicker than it really needs to be. Naturally, with this approach, no one will ever criticize the quality of the dam for it will never break, but we will probably take longer to build the dam than we need to, and we will certainly incur higher costs than are warranted.

I sometimes get the impression that our approach is over-hedged, overly-complicated and, therefore, at times not overly-saleable.

It is interesting to watch the different approaches between, say Softwarehouse, and the Computer Services Division. We have all noted that Softwarehouse tends to price the job to get the business, only define the specifications in general terms and then scramble to bring the whole operation in within the price and to the customer’s satisfaction. The Computer Services Division often tends to over-analyze, over-specify and over-protect the company. As professional marketers, we will have to get better at working at something that is in the middle ground.

I have already given some additional flexibility to the District Managers in the way our proposals can be structured. Throughout all levels of management, we will try to be very responsive to the things you were discovering in the field when you are trying to close business.

We need to develop imaginative approaches – a compromise between what we believe the customer really needs and what we know he wants and will buy.

We should remember that we can not do anything for a customer until he is a customer and this should be our first aim.

I believe that no one questions our professional ability in the field but I believe that in the area of marketing we have not yet qualified for the trophy. You have every reason to ask why I say this. Let me give you an example. Our sales in the quarter just past were 1.6 million dollars. This includes Softwarehouse sales. Computel sales in their most recent quarter were also 1.6 million and this includes the sales of their California division. More or less, these two are comparable in the content of their revenue makeup, but there is no way that the Computel product is anything like as good as ours. Somehow or other, Computel is able to do as good a selling job as we do with a far inferior product. If you have any doubt, let me carry on with the comparison.

COMPUTEL SDL
Total Revenue Invested Capital Total Revenue Invested Capital
13.2 million 7.8 million 11.4 million 14.7 million
to May 31-72 to June 30-72

These figures, even allowing for the fact that Computel was in business a year longer than SDL, indicate that they have, in fact, sold as well or better than we have, with almost half the capital investment we have made.

I believe that that is the real challenge we face and if, as a field organization, we want to be considered not just the best professionals but the best professional marketing organization, then we are going to have to prove it.

FIELD

The field is where the action is – the place where the game is played. It is up to us – me really – to make sure that you have the best possible equipment to make the game easy to win. At the moment, I am re-examining both the playing field and the equipment.

I am considering a number of major changes in the corporation, some of which will clearly affect the branch operation. I have several aims in mind:

I want to integrate many of the functions that are now separate in the field. Basically, I would like to take the apples and oranges, add a dash of Cointreau, can this, and sell the resulting fruit salad for a fancy price! As I have already said, we are not going to go the conglomerate route with our acquisition program. Instead, I intend to integrate in the field as much as I possibly can. The reasons are obvious.

I want a much closer integration of the Softwarehouse and SDL Computer Services group, to get rid of any lingering ‘we/they’ approach. Jack Davies correctly noted, when I talked at the Annual Meeting, that even I still think of Softwarehouse as essentially a separate organization and, when I commented on the marvelous performance of SDL employees in the United Appeal, I neglected to mention that, while we were seven times the City average, Softwarehouse was over twelve times.

I believe we must have a much clearer interface to the user so that he will understand that our field force represents all of the products of SDL.

We must have more easily identifiable responsibility for results of that total package of SDL products and this responsibility must rest ultimately in the field regardless of where the resources may have come from.

We must keep providing the field with new products and services.

I have not clearly identified within the company the responsibility for new product development or new product marketing and I believe you should expect this.

It is essential that we set up the proper program to train more people for the field, whether they are going to be programmers/ analysts, technical counsellors or salesmen.

We have resources to draw on that we never had before, e.g. we have a contract programming group located in Ottawa, we have industry expertise in SRG, we have the technical skills in the SSG for systems management, and we have skills within Operations for facilities management.

We must acquaint the field with the menu -one could consider that we have the cooks and we have the food, but we now need to make sure that you are the professional maitre d’s to help the customer select his meal and then convince him that the price he is going to pay is well worth it.

Finally, there are some other problems that result directly from too many good things happening in the corporation at once – it is up to me to get a better balance of load amongst the senior executives and this should also help the field by getting better responsiveness to your needs.

My aim is to have a reorganization that I can place before the Board of Directors at the next meeting on January 18.

FORCE

If I can provide the goods, and you can use your professional abilities to really market these services to their utmost, we will continue to be what the Financial Post implied in their recent special on the computer field – the major force that any other company will have to reckon with.

SUMMARY

What do I expect from you?

1) To meet or exceed the sales plan for this year.

2) To provide the winners in TARGET 600. This you should easily be able to do.

Remember that the corporate philosophy is that the company is there to serve the field, not the other way around. We are only as good as our professional marketing field force.

I know we have the talent to beat anyone in the field.

I know we have the spirit.

All we now need are the results.

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INVESTMENT DEALERS ASSOCIATION OF CANADA

OTTAWA GROUP

FEBRUARY 14, 1973

I find it hard to believe that SDL will be five years old next month. Those years have been a fascinating experience during which I have seen the corporation grow from a concept in the minds of the founders into a vital and dynamic organization that now has a life and a future of its own.

This year, more than any other, I have seen the corporation mature to the point where it is no longer dependent on a single product, a single location, or any single individual.

During those five years, SDL has moved forward in a continuous growth pattern that now sees the company with over 285 employees, revenues at a rate exceeding $10 million dollars a year, and operating in a consistently profitable fashion, as demonstrated over the past four quarters. SDL now markets its products and services coast to-coast in Canada and extensively in the United States.

The financial community has seen the market value of the company placed at over $60 million. The stock has increased from a Valuation Day price of $6.88 a little over a year ago, to over $20.00 today. All of these facts are well known. What I would now like to do is to try to convey to you some of the reasons that SDL has had the successful development it has enjoyed during its first five years, and why I believe this will continue.

SUCCESS IS NEVER HAVING TO SAY YOU'RE SORRY

I believe that to be truly successful, a company must have a real awareness of the part it plays in the broad pattern of development of the world around us. In its long-range planning, a company must be very aware of trends in society and must be prepared to create some of these trends as well as follow them. This means an active involvement in our profession, our industry, our community and, in particular, in the use of our imagination to push into new areas.

SYSTEMS DIMENSIONS LIMITED

What one believes a company can do depends a great deal on one’s perception of the potential of the company for influencing the future. For example, one could look at the investment business as being primarily the buying and selling of securities. However, I doubt if this would motivate management either today or tomorrow. Your industry could more broadly be looked at as the main force in underwriting the development of the country. The investment houses are indeed the creative force that opens new horizons, leads to the development of new industries, provides new careers, and certainly gives new forms of personal satisfaction.

I am very aware of this facet of the investment business because it was the faith of the investment community that gave SDL its opportunity to do what it has done.

I hope you do look at your business the way I look at mine because ‘tunnel vision’ has no place in the management of a company. I also hope that you are as lucky as I am to have found a business with such limitless opportunities, that each day becomes a fascinating experience filled with new things to do.

If the first reason for the success of SDL is derived from looking at the corporation as having the broadest possible opportunities to do new things, then I feel that the second most important factor is making the corporation a place where it is challenging to work. SDL has had its share of challenges and each one of these has been met with a sense of team spirit and goodwill that has enabled us to treat each new situation as a challenge rather than a problem. This approach of looking at things positively starts with the Board of Directors and carries through every part of the company.

At SDL, we all want to succeed and none of us have ever had the slightest doubt that we can, and will, succeed. To borrow a phrase from ‘Love Story.’ "Success is never having to say you’re sorry." At SDL, one of our aims is never to do anything that is less than our best, never to do anything that we might feel is questionable, and never to be in the position of having to say we’re sorry for not performing.

NEW DIMENSIONS at SDL

What I have really suggested is that an investor should be as interested in the spirit and vitality of a company as he is in the past financial results, however impressive those may seem. After all, people should invest in the future of a company more than in its past.

Last October, when talking to the Financial Analysts in Toronto, I stressed that SDL is moving far past the original concept of providing Canada’s most sophisticated computer services over a communications network. I pointed out that the concept of the company was not static and that, if we remained only with the concept we started with, we would not nearly live up to the potential I could see for SDL. Both challenge and profit would be held back if we restricted ourselves to merely doing better what others could eventually do given sufficient time and money.

The point I made then and one that follows logically for everything I have said about the company is that you should expect us to move into new areas which will be hard for people to duplicate and which will have a high leverage.

The first step in this process was to move into the field of application development and management. This was done through the acquisition of Softwarehouse. This active Ottawa-based organization had 23 people when we acquired them a little over a year ago, and has now expanded to over 65 people operating in Montreal and Toronto, as well as Ottawa. Although this group does some work that might be described as contract programming, their main thrust is to develop new applications for clients and then manage these for the client on a long-term basis.

Many of the packages developed for clients are replicable, and even greater leverage is obtained by marketing these package approaches to other clients in the same industry. This approach not only increases our already high customer loyalty, but provides an approach which is almost price insensitive — i.e. the price for the service is based on the value to the client rather than the cost to SDL.

Further benefits follow from this approach. The products so developed are ex portable, whereas the computer services alone can only be marketed within a reasonable geographic area defined by communications costs.

In some cases, the first client pays for the development costs and, therefore, there is little exposure to SDL. This initial client, of course benefits by being the first to in crease his own efficiency by using the application program developed for him.

This approach is also not dependent on the fast-changing computer equipment field. If a company were to restrict itself to providing raw computer power, it could soon find itself on a merry-go-round where, just as you grab the ring of profit, you have to go around again by ordering the latest piece of equipment.

At SDL, we prefer to move up in a straight line, rather than around in a circle.

THE CHALLENGE of the MACHINE

The secret to making money in the computer services industry is maximizing the revenue from your plant, i.e. your computer complex.

At SDL, we invested in a large IBM computer which, in the last year, has started to demonstrate the leverage we felt would be there once we had passed the breakeven point. The challenge now is to maximize the return on that investment before we have to obtain more equipment.

This can be done in several ways. First, we have a continuing program of improving the productivity of the plant supported by some of the best people in the industry.

This group of systems people has been very successful in shoving back the revenue-earning constraints that would otherwise have held the capacity far below what it is today. This process is continuing. It has led to a revenue producing capability that even today hits $2500 per hour during peak periods. This is still subject to further improvement. It appears that during these peak periods, about 20% of the revenue is absorbed in either overhead, internal development work, or other uses of the machine which means that the hourly billable potential under the present billing algorithm is somewhere in excess of $2000 per hour.

If this equipment is used 22 hours per day (after allowing for preventive maintenance and systems development time) for 360 days a year, the total annual demonstrable potential is nearly $16 million dollars.

Of course, the real secret is in filling the back shifts and weekends at the same level as occurs during prime shift. This can almost never be done if a company chooses to operate in a demand processing mode, i.e. the use of the computer is at the whim of the user. It is to get around this challenge that SDL has supplemented its original concept with a means of controlling usage so that the productivity of our plant can be maximized. The success of this process is reflected in our increasing utilization around-the-clock and the fact that even now over 40% of our total revenue is of the application management nature where the use of the computer time is under our control.

THE REAL POTENTIAL

The real potential for profit lies beyond this still. The discussion about the revenue-earning potential of the computer assumes that all time is being billed under our regular accounting algorithm. Far greater leverage is obtained from the same plant when we sell results and price these on a ‘per transaction’ basis. This boosts the profit-earning capability of the plant far beyond what might otherwise be expected. This approach is also significantly better for our customers who are now getting a professionally-managed application and, hence, a much better return on their dollars spent.

Finally, one of the major advantages of the new approach being taken by SDL is that, unlike the pure computer utility concept, our approach is unlikely ever to be subject to government regulation.

To summarize the profit potential of SDL when viewed in these terms, our new approach has the effect of ensuring our customers stay with us for long periods, providing a less price sensitive product, producing a package that is replicable, creating something that is exportable, providing a service that is hard to duplicate, instituting a process that is likely to be unregulatable, and doing this in a way in which we do not have to pay for our own development.

NEW FRONTIERS

If, from any earlier remarks, you have a better understanding of the real drive behind SDL, then you would already assume that we would not stop even with what is proving to be a very successful concept. In October last year, we acquired another company that will move us into new fields where we believe there is great potential. The Systems Research Group has been looking to the future to see where money will have to be spent in the decades to come for the further development of people and nations. Here, the challenges and potential clearly exist in major fields of human endeavour, including education, health care, urban development, environmental control and other areas of international social concern. SRG is working actively in all these fields with products designed to increase the efficiency of organizations operating in these areas. For SDL, these programs have the same potential benefits as the commercial packages discussed above. SRG is already doing extensive work in the United States for educational institutions, medical colleges, hospitals, and organizations concerned with urban development.

PLANNING for the FUTURE

I believe that you can organize statically or dynamically. The static organization is one in which all your executives are concerned only with the day-to-day problems.

A dynamic organization is one in which the chief executive surrounds himself with bright and aggressive people and then ensure that at least part of their time is devoted for future planning. This process almost guarantees forward movement.

Because some of our expanding opportunities have come through the acquisition of existing companies, SDL had to decide whether it was going to become a conglomerate or integrate these new companies and their approaches into a single corporation. We have clearly chosen to do the latter. On February 6, I announced a new organization for the company which will integrate as much as possible the original Systems Dimensions Limited group, Softwarehouse and the Systems Research Group. All of the services offered by the company will now be under the name ‘SDL.’

To accomplish this, I have divided the company into three major profit centres called the SDL Computer Services Group, the SDL Systems Research Group, and the SDL Institute.

The SDL Computer Services Group will, as the name implies, continue to develop and market our computer services network but will also now offer, as part of SDL, the application development and management capabilities of Softwarehouse. This group will administer our offices in Boston, Montreal, New York, Ottawa and Toronto.

The SDL Systems Research Group will continue to develop and market major programs in specific industries.

The SDL Institute is a further acknowledgement of our desire to push forward new frontiers for both our clients and ourselves. This organization will be involved in policy research for our clients, the development of cost benefit analysis programs, economic research, educational programs for clients and the development of new areas, such as social audit.

These decentralized profit centres will be serviced by the SDL Corporate Finance & Services Group, which will be responsible for the corporate financial development, personnel development, and other intergroup functions.

A Corporate Planning & Policy Committee has been established with the mandate to investigate and recommend to the President and the Board of Directors the policies that will continue the development of the company.

SUMMARY

I am far more excited about the potential of the company now than I was even five years ago when SDL was only a concept.

I hope that, with this discussion, I have helped you to see the growth potential of the company as I see it.

As Jonathan Livingstone Seagull advised one of his students. "Don’t believe only what your eyes are telling you. All they show is limitation. Look with your understanding, find out what you already know, and you will see the way to fly."

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SDL ANNUAL MEETING

PRESIDENT’S REMARKS

NOVEMBER 8, 1973

Information is so basic to every facet of our lives that we tend to take it for granted. Yet, more and more each day, we deal not in things but in information about things.

A recent article from The New York Times outlined the predicament of a father trying to explain to his son just what he did. He had taken his son to see his office building and the son, of course, asked what was produced there. His father lamely explained that, in fact, nothing was produced in that building and then went on to explain what he did do each day.

The description involved an amusing commentary on what most of us do—we dictate lengthy reports, we read other people’s reports and make angry marks on them, we shuffle figures about on a piece of paper, we try to convince someone that our figures are better than theirs, we exchange information endlessly on the telephone, or other media, but in fact we produce nothing! I sympathize with the father’s plight.

If you think of the core area of any large city, it is almost exclusively filled with huge buildings that produce nothing. What people in these buildings deal with is information. Information is SDL’s business. The Information Industry Information is not, however, an end in itself. Its real use comes in helping people to understand what they are doing and how to improve this. If one defines the business SDL is in, it is really helping other people to better understand their business, profession or organization, so they in turn can become more productive or more efficient. SDL is properly then, in any aspect of the creation, storage, processing, transmission or analysis of data to produce useful information.

We use the latest techniques—modern communication networks, the largest and smallest computers, the tools of mathematics. These techniques, together with an in-depth knowledge of the needs of other organizations, provide the background for the new growth industry of information technology.

This industry is destined to be one of the largest in the world, for the growth in the amount of information occurs at a greater rate than almost any other commodity with which man deals.

The Computer/Communications Task Force Report of the Department of Communications indicated that this industry would exceed $4- billion dollars in Canada alone by 1980, possibly outdistancing the petroleum and automobile industries, to become Canada‘s largest.

Other countries are aware of this and Japan has, as one of its national aims, becoming an information-producing country. I believe in Canada we can do the same, for Canada‘s greatest potential will clearly lie in service rather than manufacturing industries. Economy of scale does not apply to knowledge industries in the way it applies to manufacturing industries.

UNDERSTANDING SDL

SDL is one of the pioneer companies in the new information industry. Because the industry is so new, it may still be difficult to understand exactly what kind of services we provide. A few examples may help.

Earlier this year, we established the SDL Institute. This organization of highly-qualified professionals from various professions works with organizations to help them formulate their own long-range policies. It does this by assisting them with economic, technological or sociological forecasting against a background knowledge of demographic or other trends. To give just a few examples, the SDL Institute has recently been working on a study for the Organization for Economic Cooperation and Development (OECD) in Paris to determine what the water resource policy for Europe should be. Another example is work done for W.H. Smith & Sons, the worldwide booksellers, to help them determine what the effect will be on changing leisure patterns, and to suggest policy options the organization might undertake to ensure it will be a dynamic company in the coming decades.

Other projects undertaken by the Institute involve frontier fields of information processing, such as jurimetrics. This is basically a study of the information handling needs of the legal profession.

A study in this area is being undertaken for the Solicitor General‘s Department in Canada. SDL has also established major programs within leading growth industries—for example, one area of concentration is in the health care service industry. Earlier this year, the firm of Shortliffe & Associates joined us, bringing a specialized knowledge of the administrative data processing needs of the health care industry. We now provide services through the Hospital Medical Records Institute to over 100 hospitals in Ontario and have every reason to believe this will expand to hospitals in other provinces in the coming year or so. Our services in the medical field range from British Columbia to New Brunswick, where we provide studies on the organization of Teaching Hospitals, the medical equipment needs of new hospitals, and similar projects. We work with medical schools as well, including such major institutions as the Duke Medical School.

Another industry, which will continue to involve a significant portion of our gross national product in the decades to come, is education. Here, we provide our planning and administrative systems for universities and community colleges across the United States, from Whittier College in California to New York State University. I recently attended a presentation made to the President and senior administrative and academic staff at Howard University in Washington on the results of a simulation model prepared for the University by our staff. There was no doubt in our minds or theirs that, by the end of that presentation, the group had gained a new understanding of the use and costs of resources in a major university. I am assured these insights will be of great assistance in formulating their future plans.

SDL has major programs in commercial and government fields, ranging from development of a Management Information Systems for Philips Electronics in Toronto, through such esoteric applications as running federal election results for the CTV network.

Although we believe our major expansion in the coming five years will be in North America, we are currently examining business potential in areas as far apart as North Africa, the Caribbean, and Australia. It is interesting that much of this work involves an on-going involvement by SDL in the customer‘s information handling needs. Few of our projects are of a one-time nature. Many involve processing on our own computer network and, increasingly, we provide a major portion or all of a company‘s information processing needs. Building on a base of repetitive revenue is the secret of a true growth company.

GROWTH—BUT WHERE?

As you can gather from what I have described, SDL has built a solid base from which to expand.

• we start a second five years with a sound base of revenue and over 400 customers

• we have a highly-regarded group of marketing and technical staff who also number over 400

• we had a strong cashflow of over $3 million dollars last year we have a growth-oriented management determined to build on our record of achievements to date. In developing our second Five Year Plan, we examined all these factors and many others. We also looked at what sectors of the world economy we felt would grow most rapidly and, hence, would have the greatest information needs. Of thirty, major areas examined, we chose four principal ones. You can expect to see major corporate activity in the next 12-18 months in all of these areas, as SDL moves to become the leading information company in these major industries.

I have already mentioned education as one area of significant thrust for SDL. I would expect that in the coming months, you will see a number of announcements regarding projects in this field. These will likely involve acquisitions or development projects built around administrative systems for public and high schools, or frontier projects in new forms of education. This latter field could have particular significance in what we believe is the major expansion area in the education field—the process of continuing education throughout one‘s life. To do this, society must find better ways of delivering education to where people are, rather than requiring people to travel to the more conventional ‘bricks and mortar’ type of educational institutions. In the health care field, we are already developing better systems for hospital administration. Even newer fields of health care involve the concept of health maintenance rather than just active treatment. This will take us into such areas as multi-phasic screening and will certainly lead to more emphasis on the use of clinics rather than active treatment hospitals. The information needs in this rapidly-growing industry are enormous.

Aspects of the communications industry tie in very closely with both the above. If we are going to provide a full information service, we must also consider how to deliver these services to the user. There has been a great deal of discussion about the concept of a ‘Wired City’ where broadband cables can carry any variety of services to the home or office. We believe this industry has potential beyond anything else we have looked at. Estimates are that, in North America, the information industry alone, built around cable communications, could exceed $20-billion dollars within the next fifteen years.

At SDL, we believe it makes sense to supplement our computer power with a distribution network and are closely examining possibilities in this field. It has often been said that the computer is like an electrical generator. If this is the case, the ‘Wired City’ is a necessary part of providing the proper distribution network.

A fourth area is that of financial and retail services built around many aspects of the often-discussed ‘Cashless Society’. We believe that banks and financial institutions will play major roles themselves, as will communications companies in the area described above. But, this field is so large that specialized areas offer great potential to a company such as SDL. All tie into communications.

Some of the activity in the above fields will involve acquisitions, for in some cases we will be rounding out our capabilities by acquiring specialized industry knowledge. Some will be based on our large computer network and some will involve the use of mini-computers which may themselves be tied to a large central computer over a communications network. All this is aimed at producing results for the client. The fact that we have singled out four major fields for expansion certainly does not preclude other activity.

In October, we announced we had undertaken a major expansion in the Province of Quebec and had merged a highly-regarded organization in the computer services field—Informatel Inc -with SDL Informatique, to form a new organization in Quebec with a staff of over 70. Clearly, this indicates we plan to expand geographically, as well as on an industry basis.

Within the context of the information processing field, we are looking at more advanced applications which may lead us to new and profitable operations. Information comes in many languages and we believe that the computer translation field is finally maturing to the point where useful results can be obtained. We are examining such things as mechanized trademark searching and similar fields that hold exciting potential.

GROWTH MUST MEAN PROFIT

All of this growth must be staged so that there is growth in profitability as well as in revenue. As part of our Five Year Plan, we set an objective of obtaining a 20% before-tax return on sales. You will have already noted from the Annual Report that we achieved about 16% in our first full year of profitable operation. We are also aware of the need to keep earnings-per-share growing steadily and are, therefore, very sensitive to the need to keep dilution in outstanding shares to a minimum. While we believe we can, and must, continue our expansion into new areas of information processing, we do not want to risk the success we have had to date. Our intention is to stay within the information industry. We do not intend to become a conglomerate. However, some of our expansion will clearly be by acquisition and here we are pioneering new methods of associating ourselves with other companies. These methods are aimed at maximizing the upside potential for SDL while minimizing the downside risk in new ventures.

We are also exploring management techniques which involve a decentralized approach which should retain the flavour of entrepreneurship at SDL and the companies that become associated with it. Profit sharing will form a major part of these management advances.

I described this management approach in the Annual Report when I wrote "that our job at SDL is to manage change."

SUMMARY

The information industry clearly has the potential to allow SDL to develop into the largest Canadian-based organization doing business on a multi-national basis. This is our aim. I know we are in the right industry. I am confident we have the resources. I know we have the desire.

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MARKETING CONFERENCE, MONTEBELLO

PRESIDENT’S REMARKS

NOVEMBER 10, 1973.

Marketing is the link between ideas and results.

Marketing can take many forms—it can be direct if you are a salesman or it can be indirect if you are a Technical Counsellor or part of a Softwarehouse Implementation Team. Even if you are not in day-today contact with customers or prospective clients, you still spend a good part of your time selling your ideas to management, your associates, your friends, and even your family.

Marketing is one of the most fascinating forms of human interface because it is the process in which all things get started and nothing can go beyond this point unless the marketing of the idea is successful.

In our case, nothing productive can happen until you, in your marketing capacity, close the sale. Here is really the start of a long and mutually beneficial relationship between SDL and the new client.

Looked at from a corporate viewpoint, the close of a sale is the most important single event in the day-to-day life of SDL.

Naturally, this is followed closely by a sound program of performance for the client which, in fact, also forms part of the on-going Marketing effort. But the start must be that exciting moment, when you have outlined all the reasons why a client should proceed and the client signs the order.

THE REAL SECRET OF SELLING

We have all read a number of books, I am sure, that outline the twenty-seven things necessary to become a successful salesman, or the eleven key ways to locate the prospect’s ‘hot button’ but, like a book by Ben Hogan with 300 pages telling you how to improve your golf swing, most of these weighty volumes try to tell too much.

In fact, the secret of good salesmanship is very simple. the principle you can learn in moments and the practice of this principle will improve your success in intra-personal relationships, whether in selling directly, dealing with clients, or simply getting along with others. The cardinal rule is not complex, it is not even new, it is, however, fundamental.

The secret of success in selling is to ‘put yourself in the place of the customer and look at the situation from the point of view of his desires.

This is not unlike the Golden Rule which, as you are aware, finds its way into almost every major system of philosophy and is expressed in nearly every major religious writing. What this really means is being very sensitive to the necessity of establishing an empathy with the customer and learning to understand not just what he says he needs, but rather what he really desires.

At SDL, we have a high quality and rapidly-expanding range of services but I suspect that all too often, we try to sell these services rather than finding out what the client really wants, expressed or unexpressed, and then helping him to achieve those desires.

It has often been said that no one really sells, people buy.

CREATIVE MARKETING

Listen to a good sales pitch by a door-to-door salesman. Inevitably, that salesman will have a carefully thought-through approach to try to relate his product to universal desires

that people have. The client will rarely express these very basic desires because this may be embarrassing. It may be an admission that, in fact, the individual is not really interested only in the good of the nation or other lofty ideals, although this could be a real desire of the person. More often, the real motivators are increased wealth, faster advancement on the job, more leisure, more power, increased security

As not every client has the same set of desires, it is very important to try to determine the most important real factor that will relate your service to your prospective client’s primary desire. It is this process that is really the backbone of creative marketing.

Think positively about how to relate your services to the things that will make the client feel comfortable Ask yourself what results we can produce that will help that client attain his needs if the client is concerned about increasing his own wealth, then try to find out how you can help his company improve its profitability. If he is worried about the expenditure needed to create the systems to allow him to become more efficient, then try to suggest ways in which he can spread the payments for development costs which may allow him to get the benefits that will allow his company or department to look better while spreading the cost so that he can fit this into this year’s budget a faster advancement is really the hidden desire of your prospect? Then, try to think of ways in which you can help him look good to his superior by ensuring that the credit for suggesting and completing the successful project goes to your client and your client understands in advance that this is the way you are going to handle the situation if more leisure is what the prospect is looking for, emphasize the ways you can make his job easier by taking over some of the responsibility for onerous tasks if more power is the client’s real desire, then de-emphasize the fact that we are taking over the management of his application and, instead, play up the reports he will get that will help him manage his area with more precision and the fact that he will get more time to grow his power if he does not have to worry about the day-to-day details of a particular application if security is what concerns your more timid prospect, emphasize the fact that we can take over the responsibility for much of what he does and guarantee that the results will be satisfactory. Be sure to ‘reference sell’ both subtly and directly with this kind of client. All of this should be done subtly, of course, for a direct acknowledgement of what you are trying to do is not the way to develop an empathy with the user.

If you plan your sales approach in advance, having first determined what you really believe the client wants, then you can introduce in many examples, references, or even in casual conversation, the kinds of things you believe will really get your prospect working with you rather than against you.

THE FIRST STEP

Obviously, the first step is to learn as much as possible about your prospective client. This involves learning to listen well. It is also necessary to be observant and gently probe in your conversation for things that will help you read your prospect better. For example, look around his office—if he has pictures of his family, then you might conclude that he is the type who will value his weekends and evenings at home. This would encourage you to stress things involving easing his workload. If his office is on the ‘plush’ side with several works of art gathered around, you could probably reasonably assume that this person is ‘money oriented.’ If, on the other hand, the office is less plush but tends to be filled with books on management, how to run organizational meetings, etc., it might be a fair first assumption that the individual is a company man who is scrambling to get to the top!

If you want some practice in this art, think of what your own office reveals about you. If you want some fun, come into my office some day and I think you will start to get a fair idea of what motivates me. The office is relatively austere, with the same old furniture I have had since we started the company over 51/2 years ago. However, around the walls and on the credenzas, you will see things relating to being Chairman of the United Way, being recently elected a Member of the Young Presidents Organization, being President of the Computer Society of Canada, etc. This would probably indicate to you that I tend to be ‘success motivated. I am sure others have noticed this because I often get asked to serve on voluntary Boards or help with other outside activities, and I am amused myself at how successful some people are in encouraging me to do this and how dismally others misread the situation! For example, if I were asked to help out with a Day Care Centre for Children 5 and Under in Nepean Township, I would immediately be thinking of ways to turn that down! If, on the other hand, I were asked to become the International President of the Universal Society for the Social Advancement of Youth, I would immediately be in the mood to accept—despite the fact that the only project of this organization was a Day Care Centre for Under 5-Year-Olds in Nepean Township!

All this is just a question of being sensitive to the things that really motivate people and being creative in packaging your product or service to flatter that desire.

SUMMARY

This principle of looking at things from the other person’s point of view is not only a great one when it comes to selling, it is about the best that I know of for living.

In SDL, we have had a fine track record of converting doubting prospects into satisfied and loyal customers. I know that, if we keep on practicing this Golden Rule of Marketing, both your success and ours together will be assured.

Good Luck and Good Selling!

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MONTREAL SOCIETY OF FINANCIAL ANALYSTS

SYSTEMS DIMENSIONS LIMITED

DECEMBER 12, 1973

I was amused to read a couple of weeks ago that there was a Conference held in Toronto entitled. "First International Conference on Entrepreneurial Studies." This Conference was held by the Canadian Centre for Entrepreneurial Studies. For a while, the study of entrepreneurship had been restricted to the occasional paperback by Adam Smith but, recently, the whole process has come under scrutiny by the highest levels of the academic community.

I am well aware of this because I am now regularly visited by sociologists, psychologists, and others, asking questions, such as. "Did I play competitive sports as a youngster?" or "Do I believe that money is the only true motivator?" I suspect I disappoint most of these ardent investigators when I explain that I believe most competitive sports lead to tennis elbows, or some whopping bruises from squash balls and, as far as I am concerned, money is less a motivator than the fun of playing the game. I believe that SDL is the best game in town.

SDL is an entrepreneurial firm. While many of those in government or academic pursuits are writing about how to be, or how not to be, an entrepreneur, SDL sees its role as DOING what others are TALKING ABOUT. For example, innumerable government studies, books, articles in ‘THE FUTURIST’ and in the trade literature have talked about the use of computers in the fields of education, health care services, or other leading edge applications, and have certainly described the great future of the ‘Wired City’ and the ‘Cashless Society.’

The role of SDL might be likened to that of a land developer following close behind the pioneers. You will remember that pioneers are often described as those with arrows in their backs! Our preference is to profitably develop new ideas that have already shown themselves to be feasible.

A good sense of timing is essential to the entrepreneurial firm.

SDL, then, bridges the gap between those who devise a new concept and those who, ultimately, take 50% of the profits, i.e. we fill that area between the talkers and the taxers. SDL moves concepts into reality. One could assume that a firm operating close to the leading edge of a high technology industry might be involved in taking high risks. This is anything but the case. In fact, the true entrepreneur is not a gambler at all but rather one who carefully assesses the risk and takes a calculated course designed to provide the maximum reward with the minimum risk.

The entrepreneur will start by determining what earnings-per-share, return on sales, or other measures he is aiming at, and then plots his moves accordingly. This does not ensure success but it does keep one’s focus clearly on the bottom line. For example, as noted in my remarks to our Annual Meeting a couple of weeks ago, I indicated that part of SDL’s expansion would be through acquisition and part through internal development. Because SDL intends to develop within the information industry, acquisitions will normally be made to expand our expertise in an industry to which we want to provide service, or to expand our horizons geographically. In either case, it is important that those who started their own companies and who are now about to become associated with us feel Comfortable within the new organization, and have an opportunity to continue their own development. For this reason, we often acquire companies on an ‘earn-out’ basis which provides a high upside potential for both parties if the acquired organization continues to be successful, but a low downside risk to SDL, should that particular market not develop as we expected. I might add that, to date, the latter protection has not been needed. This type of approach illustrates the way in which SDL plays the role of a true entrepreneurial firm by turning young developments or companies into profitable operations.

SDL AS AN INFORMATION COMPANY

I am often asked – what does SDL do? As analysts, you probably felt you understood the company fairly well when all we did was sell computer time. Everyone understood the concept of making a heavy front-end investment in a computer, and then realizing a high leverage once the breakeven point had been passed.

Now, we refer to ourselves as an information company. The point to remember is that we always were an information company but, when we started over five years ago, we were only in one aspect of this new field of information technology.

We started by concentrating on the computerization of information with little concern for the value of the information to the customer. We were really involved in improving the efficiency with which information was produced, but were not directly concerned with the effectiveness of the information on the productivity of our clients.

The next step was to consider how information was being used, and how it could be better used by our customers. This led us into the business of Application Management, where SDL takes the responsibility for dealing with the users of information to determine their real needs, and then develops and manages information systems to provide this information. At this point, our ability to truly satisfy the customers’ needs improves markedly. The next step was to increase our knowledge about particular growth industries so that we could anticipate some of the information needs in these areas. We then began to use our understanding of trends indicated by the information we were dealing with to help organizations decide what their own policy options might be and what information they would, in turn, need to better understand and control their own operations.

As tools in this business, we use some of the largest and most sophisticated computers available. We are increasingly interested in the communications network surrounding these computers, as it is vital to ensure that information is not only available but is available where it is needed.

THE GROWTH POTENTIAL OF SDL

On many occasions, I have emphasized the growth potential of the information industry. I expect that your major interest today is how SDL will continue to be profitable in this field.

The strength of SDL is two-fold. The first is our growing understanding of the needs for information in such major industries as government, health care services, particular industrial and commercial applications, education, and other growth industries.

The second is our competence in knowing how to process and distribute that information. This involves our ability to make information processing on a computer very efficient, and to develop ways of getting such information where it is needed. The profit to SDL comes from providing as complete a service as possible to the client. This allows us to relate the charge for our service to the value of that service to the client. Cans of peas are relatively undifferentiated within their government grades and, therefore, this type of business tends to have a high degree of competition and low profit margins. The unique services provided by SDL, because of our specialized knowledge in the fields mentioned above, allow us to package our service in a way that ensures effective results to the client at a price clearly understandable in relation to the value obtained. This is why you see SDL with $9.9 million dollars in sales last year, and a $770,000 profit after tax, while a huge grocery wholesaler might be doing well to make that profit on $400 million dollars of sales. Pricing on the basis of value rather than cost has a distinct advantage for the client. This allows us to continue to invest in the development of better services for his industry. Our ability to be really effective in improving the productivity of other industries depends on our understanding of those industries.

Recently, SDL altered its organization by establishing industry marketing groups to concentrate on the particular growth areas of our economy that we felt would be of national interest.

Such industry knowledge does not become obsolete and, as it grows, becomes increasingly valuable to our clients. This expansion to serve various industries also serves to diversify SDL with all the usual advantages that implies for spreading the business risk.

We are aiming at a growth in revenue that should average about 60% for the next several years. We are convinced that growth potential in the information industry is more than adequate to allow this.

We are planning for a 20% before tax return on sales, even allowing for this high growth rate.

These figures may seem ambitious, but we believe they are the correct ones at which to aim. We have been achieving a revenue growth at about this rate since our inception and, last year, our growth rate in revenue was about 70%. Last year, our return on sales before tax was about 16% and I am pleased to report that during the last couple of months, the rate of return on sales has reached the desired 20%.

WHAT DOES THE FUTURE HOLD?

My discussion of SDL and the information industry has been very bullish, and I suspect this talk is about the only bullish thing that most analysts have heard in recent weeks!

I would like to turn my attention, for a moment, to some more general observations. One of the Ottawa papers recently converted to a new automated offset printing process and, for some period thereafter, the paper appeared irregularly or not at all. I jokingly thanked the Editor, suggesting that he had withheld publication for a while to spare the public the stream of depressing news that seemed to fill every page–he did not think I was very funny! All we read about are crises in energy, crises in leadership, crises in diplomacy, rising prices and falling markets. No one doubts that, in a world of increasing complexity, there will be some difficult situations but the real problem we face is a lack of confidence. We seem to have lost sight of the fundamentals and are doubting our own ability to overcome difficulties. We treat such situations as ‘problems’ rather than ‘challenges’ and ‘barriers’ instead of ‘new mountains to climb.’ Arnold Toynbee stated that one of the main forces in the development of a culture was challenge and response. If Toffler is right that, in this ‘Future Shock’ society, we must expect challenges to appear at an ever-increasing rate, then our society has a great opportunity for development by responding with enthusiasm to these challenges. Such challenges, properly viewed, should mean new opportunities for investment, new and more exciting employment opportunities, and the chance to improve the quality of life. The energy crisis was not caused by King Faisal, nor the leadership crisis by Richard Nixon, nor the diplomacy crisis by Premier Sadat. These people only focus attention on trends that already existed and that we share the responsibility in causing. I believe that crises arise, partly because we do not recognize trends or choose to ignore them and, partly because we tend to overreact and worsen the situation. The lack of oil does not lead to a crisis in the information industry, but it could if I were to lose confidence in my own long-range plans by curtailing future development. Those of you in the investment community can similarly increase the swings of a crisis if you forget, even momentarily, the long-term strengths of our country. Without going into great detail, consider the following. ENERGY – North America would have had to correct the imbalance in foreign exchange occurring from the importation of oil from the East within this decade in any case. The U.S. could not stand the uncommitted dollar reserves that would end up in the hands of countries in the Middle East who could not use the money rationally in the short-term. This, coupled with the finite reserves of fossil fuel, as pointed out by Meadows, Gabor, and others, would also lead to the necessity of developing other forms of energy for North America. This temporary oil shortage should, then, not be looked upon as a crisis, but rather a great opportunity for Canada. We have a lead in the development of heavy water reactors. We have sources of fossil fuel in the Oil Sands and elsewhere which will have an increasing use in the years to come as a base for polyethylene’s and other materials. I project that the real result of the so-called Energy Crisis will be vast new industries, with considerable government support for projects that will far outdistance the Manhattan Project. LEADERSHIP – In many ways, Watergate is something that was bound to happen at some time, and we should bear in mind that a much better balance of power and a consequently more rational government will emerge as a result of this unfortunate scandal. We are likely approaching a new era of improved morality in government. DIPLOMACY – It is clear that a new sense of stability in international affairs has been developing as a result of the growing affluence of major powers. There will continue to be maneuvering for a position but I believe that neither the U.S.S.R. nor the People’s Republic of China have anything to gain from a major war, and we will hopefully face a period of relative international stability. The greatest challenge comes from something that the developed nations have hardly begun to appreciate from an investment standpoint – the development of the Third World. This will provide major opportunities for new jobs and new industries.

INDUSTRIAL DEVELOPMENT – Industry, in general, will be provided with unbelievable new opportunities for development. Detroit will have some scrambling to re-design automobiles to use either new fuels, e.g. hydrogen, or at least use less fuel. They will then have a replacement market of tens-of-millions of vehicles in the next few years. I could go on, but the point I am making must be clear. I believe that we are very inclined in this day of mass communication to overreact to crises, and lose sight of the incredible opportunities ahead of us.

In Canada, we are particularly fortunate – we have a small, highly-educated population, great natural resources, substantial fresh water, still several major untapped hydropower sources and a substantial lead in nuclear reactor power. The fundamentals are very strong. We must concentrate on these strengths and on our unique position to develop these. I have great confidence in the future of SDL, and I have just as much confidence in our country’s ability to weather these minor crises and be better for having faced them. All we need is confidence in ourselves–we have everything else we need.

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SDL AND THE WIRED CITY

JANUARY 1974

At the Annual Meeting in November, I identified a number of areas in which SDL would be making major commitments. These areas obviously included the continued development of our successful computer services operations and their related application management services for our clients. It also included an identification of some fields of industry specialization, such as the health care field and the education market where we believe proprietary products would provide us with a steady source of income with huge growth potential. Another area that seemed certain to us we must enter is that of providing information services for home and office, utilizing broadband communication facilities. At that meeting, I identified the potential of the "Wired City" as a $20-billion-dollar-a-year industry within the next fifteen years. You may recall that the Department of Communications "Report "BRANCHING OUT" indicated that, of the major areas of development which included health, education and financial-related services, the prospects for the Wired City are that it will become one of the most important parts of the information industry. To quote the widely-respected journal on studies of the future, the October 1973 edition of "THE FUTURIST" said the following. "We are at the dawn of a new industry-information services to the home. It is an industry that some experts expect to reach revenues of $20 billion dollars per year by the end of the 1980s." Yet it is an industry that does not now exist and is not even widely recognized." The mere fact that, of the several areas of major corporate development, this one is the least understood, makes it all the more important that we spend a few minutes ensuring we understand just what the potential really is. Our own study of the future of linking a broadband system to a computer listed 117 possible applications and this by no means exhausts the list. To arrive at the $20-billion-dollar market figure, noted earlier, in the study conducted for the American Telephone & Telegraph Company, only about 30 such application areas were selected, as follows:

Projected Dollar Value
of the Market in 1989
Services (in millions)

1. Plays & Movies from a Video Library 2829

2. Computer-Aided School Instruction 2047

3. Cashless-Society Transactions 1810

4. Person-to-Person (paid work at home) 1713

5. Computer tutor 1414

6. Adult Evening Courses on TV 1131

7. Correspondence School 943

8. Dedicated Newspaper 849

9. Answering Services 743

10. Computer-Assisted Meetings 707

11. Household Mail & Messages 707

12. Secretarial Assistance 707

13. Shopping Transactions (Store Catalogues) 584

14. Banking Services 566

15. Grocery Price List, Information and Ordering 566

16. Special Sales Information 354

17. Consumers’ Advisory Service 354

18. Daily Calendar & Reminder about Appointments 292

19. Legal Information 285

20. Weather Bureau 228

21. Newspaper, Electronic, General 200

22. Past and Forthcoming Events 130

23. Fares & Ticket Reservations 124

24. Message Recording 106

25. Index, All Served by the Home Terminal 106

26. Library Access 95

27. Bus, Train and Air Scheduling 79

28. Access to Company Files 46

29. Restaurants 35

30. Mass mail and direct advertising mail 0

The computer plays a major role in virtually all of these.

It is interesting to note that the early estimated start date for the provision of these services seems to be about 1975 and, in fact, seven of the top ten; had this as their early likely start date, including the top three. This should not be taken to mean that in a year from now, one should expect to start receiving these kinds of services on their TV set, but it does indicate that the new industry which has now been called the Cable Information Systems industry (CIS) is poised for its big development phase.

Our own estimates of when it would be realistic to assume some revenue from these advanced applications is in the period 3-4 years from now. The projected growth past this time, however, is very impressive. I believe it is important for SDL, as Canada "s leading information company, to be in at the start of this major new growth section of the information industry.

A POINT OF VIEW

If you look at broadband communications as being merely a means of bringing in an extra TV channel, then I believe you might fall into the trap that the early computer pundits did—that of considering that the computer is nothing more than a big adding machine. I believe that, like many other areas, the Wired City has been talked about for 5-6 years but it is now about ready for implementation.

You might well ask, however, whether SDL needs to own a broadband communications company in order to develop some of the services outlined above. In our opinion and, as clearly outlined in our Five Year Plan, it is necessary for us to acquire the industry knowledge in other fields to go along with our own computer know-how. We did this when entering the health field by acquiring Shortliffe & Associates, as we really believed we needed a medical doctor if we were going to have credibility in this field. We did much the same with the Systems Research Group to gain the understanding and knowledge of the education field, and I project that expansions in this area are by no means at an end.

If we felt we needed a better foothold in a geographic area, we have also acquired expertise in that particular segment, as we did when we acquired Informatel in Quebec. All of these things we have added to our basic understanding of computers and what is needed to make them useful.

It is our intention, as stated in the Annual Report, at the Annual Meeting, and on numerous other occasions, to develop applications in the cable communication field which can be marketed to other cable companies in Canada and in the United States. To do this, we need a company somewhere where we can develop these applications in a controlled situation. We need a national demonstration point. We need the credibility that comes from having done something ourselves in the broadband field rather than just telling people what we might do.

This new industry is at about the stage the remote job entry computer was when we started SDL in 1968. There have been many experiments which have clearly demonstrated the customer acceptability of these services and I believe that now is the time to move these from concept and experiment into reality.

This can only be done if we have the people and the know-how in this field that is equivalent to that we have in the computer field.

By analogy, if SDL were to have started in the computer field without a computer, we would be nothing more than a small consulting company at this point in time.

BUT WHY OCL?

OCL is a well-respected, well-run, and very profitable cable company. This alone might make it a good vehicle for SDL. However, consider the following. It is in SDL’s geographic area, making the development and testing of applications particularly easy. Ottawa is a good area, with the fifth highest per capita income in Canada. It is a secure area for cable because of its relative isolation from American TV through any other means with few industrial areas, there is a high density per square mile, making OCL a particularly profitable cable company it has the advantage of being in the backyard of the CRTC who, undoubtedly will be most interested in the systems we will be developing

BACKGROUND ON OCL

OCL is a reasonably mature cable company with about 65,000 subscribers in total. Despite the stability of this base, there was a growth rate of about 15% in the actual number of subscribers last year and a continued growth of about 7% in the total market size. In addition, OCL has future growth potential up the Ottawa River Valley in the Pembroke/Renfrew area. The company is expected to make this year about $625,000 after tax. If we did nothing with OCL, this alone would make the company an interesting investment but this is clearly not our intent. In about another ten months, the OCL system will be wired for extended channel operation, and this opens up a whole new opportunity for profitable operation. In fact, Phase I of our development project will be built around this—i.e. charging a premium for the capability we will present by substantially broadening the range of services available in much the way Rogers Cable does in Toronto. The plans are well developed for this and we could reasonably expect additional revenue to start in 1975-76. The second part of this Phase I service will involve the development of a variety of badly-needed administrative services for cable companies. Any use of premium TV or other such services in the home will require a far more elaborate administrative system, including invoicing, accounts receivable, customer marketing aids, sales analyses, etc., than are presently available. It is our intention to use the experience of OCL, and some of our own experience in the field, to develop such packages which we believe can then be readily marketed to other cable companies in Canada. Once again, it would be reasonable to expect some revenue from these types of applications to start in our next fiscal year.

If we went no further than Phase I, I believe this alone would make the move to broadband services well worthwhile. However, during this period, we would also start experimenting with limited two-way use of the broadband network. This might involve a combination of the telephone and Cable TV to provide a Tele-Shopping Service. We might also expect during this time to start a limited In-the-Home Information Service. As some of the benefit of such systems would clearly be to other participating companies, we would expect that some of the costs of this development would be shared.

The Phase II Premium Service involving the applications noted earlier, would be developed over a period of several years and revenue would not expect to start from these major applications until the 1977-78 fiscal year. This would involve such projects as an In-the-Home educational service.

WHAT RISK IS INVOLVED?

The risk appears to be very small. We can pick and choose both the rate at which we want to add new profitable services and the amount we wish to expend to develop these. There are many examples we can take a look at in the United States and elsewhere which will give us a good feeling for the market acceptability of the many new things that are now being tried. The advantage of having our own cable system is that we can "test market " very easily, possibly using programs or concepts developed elsewhere to ensure that what we are working on will, in fact, be a profitable operation.

Once developed, remember that the real potential is to use the credibility we have developed here in the same way we did in the computer services area to market such products and services to other cable companies.

One risk could be that this is a regulated industry. But we should remember that the regulation only involves a subsidiary which will obviously not be integrated with the rest of the SDL operations. Also, this exclusive franchise in a particular area can be considered a major advantage. If we were in open competition with other cable companies, we would have very little chance to market services we develop to others. We should also bear in mind that a number of the things we plan to develop will not in themselves likely be in the regulated area. In this area, we are making use of some of the finest technical and administrative advice we can find in Canada to ensure that risks in this area are at a minimum. I might also point out that the risks involved relative to the risks of starting SDL initially are infinitesimal.

WHAT ABOUT THE OFFER?

We declined to make the full details of the offer public, as this is only at the offer stage and, revealing all the financial details, would only invite counter offers for this very attractive company. However, as the closing date draws near, let me fill you in on same of the details. If the offer is accepted, OCL shareholders will receive 158,333 shares upon closing, and following CRTC approval and a further 139,705 shares to be issued on closing but to be released from escrow one year later.

I expect there will be very little inclination for anyone to sell shares in the present rather shaky market and many of the shares will not even be available for sale until perhaps 16-18 months from now. We should also bear in mind that the shareholders of OCL will also receive cash, which should lessen the chance that they will want to sell shares of SDL early.

The cash payment will be $1.7 million dollars on closing. For the remainder of the purchase price, SDL will issue interest-free notes. This will be made up of eleven notes of $250,000 each which will be paid quarterly commencing three months after the closing, and one note of $2,250,000 which will be payable three years after closing.

Using current interest rates, the actual discounted present value of the offer is about $10,100,000. This is about sixteen times current year "s earnings. This can be contrasted with a number of cable companies selling in the market at about thirteen times earnings, but one should remember that the price for a few trades in a weak market has no bearing on the price one would have to pay to gain control of a company. As you are well aware, if we tried to buy a company like OCL in the open market, we would quickly bid the price up to twenty times earnings or better. I might also point out that this is the maximum number of shares which would be issued because, if the average price of SDL shares at the time of closing is in excess of $15.00, the total value paid is $2,375,000 and the number of shares issued is calculated by dividing the average share price in excess of $15.00 into that amount.

Even if the maximum number of shares are issued, this still adds an after-tax earning of over $2.00 a share for those shares issued. It is further interesting to note that the eleven quarterly notes are more than financed by OCL’s own cashflow.

SUMMARY

The effect of this transaction will certainly be positive on the earnings-per-share of SDL over the years to come. We have been cautious about projecting any alteration in our own year ending June 30, 1974, because even if the deal is accepted by the OCL shareholders, it is not clear when CRTC approval will be granted. The offer is conditional on our receiving such approval by the CRTC no later than June 30, 1974, although this date can be extended at our option. If. we were fortunate enough to receive early approval by the CRTC, there might still be minimal effect on this year "s earnings, as we plan to follow our already-well-established policy of expensing development and we will have to put some development money as soon as possible into creating the administrative systems, referenced in Phase I. The effect would be, however, to help ensure that the projection, made many months ago, of about 65 cents per share after tax for this fiscal year, is realized. We have every reason to believe that this move will be looked on very positively by all levels of government who now realize the lead that Canada has in the cable communications industry and the likely export potential of products developed specifically to serve this new industry. We are excited about the potential of applications for the Wired City, and we believe this offer to OCL represents the best combination of a low downside risk with a very high upside potential.

I have talked about our proposed thrust into Wired City applications almost to the exclusion of the other things that SDL is doing. We should bear in mind that this is only one of a number of development areas for SDL and, even if we were to add the total revenue of OCL to our estimated revenue for this year and, of course, this is not possible, this would still amount to only about 18% of the combined revenues. Clearly, this will decline as a percentage of our revenue, as the other areas of service to government and industry continue to grow.

It is, however, an exciting and challenging new opportunity for profit for SDL, and I am confident that this will prove to be a sound investment of our substantial cash resources for the future.

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INVESTMENT DEALERS ASSOCIATION OF CANADA OTTAWA GROUP

MAY 6, 1974

A little over a year ago, you were kind enough to invite me to describe something about SDL and its plans. I remember concluding my remarks at that time by saying that "I am far more excited about the potential of the company now than I was even five years ago when SDL was only a concept."

I still am.

As we approach the end of our fifth operating year, it is interesting to take a look at our achievements to date. Sales revenue has climbed consistently in each of those years.

1969-70 1970-71 1971-72 1972-73 1973-74
(million) (million) (million) (million) (trillion)
$1.4 $4.1 $5.9 $9.9 $14.0 (est)

Profit on this year’s sales should be about $750,000 after tax or about a 10% before tax return.

The company has expanded dramatically to nearly 500 people and has obviously come a long way from being a small computer service company based in Ottawa.

We now have a broad and stable base of business serviced through branch offices in Canada and the United States.

Going back to the earnings, I expect that the earnings-per-share on a fully taxed and fully diluted basis will be about 33 cents this year. I expect that the real interest at this meeting is to get some feeling for the prospects that the earnings-per-share will match our growth rate in revenue next year and in the years to come.

FACTORS IN OUR FUTURE PROFITABILITY

The first thing one should look at in assessing the profit prospects for a company is the industry in which the company operates. I am pleased to say that the prospects for the information industry look as good as they ever did. To some degree, this can be validated by our continuing growth in sales. More important, this is the type of industry in which the market is really limitless and an organization with enough people and energy can make it grow as much as desired. It also tends to be a reasonably depression-proof industry for, although a temporary set-back in one part of the economy may have some effect, the types of services our company offers are just as useful for reducing costs as they are for improving productivity.

Therefore, I believe that our prospects for growth are very good regardless of the overall economic conditions.

Secondly, we have been building the base of people and industry knowledge needed to capitalize on this field. Our growth from about 300 people at this time last year to nearly 500 people now is even more dramatic when one realizes that most of these people are computer and information processing specialists operating as either Marketing or Customer Service personnel.

Thirdly, we are heading toward a period of stability in the number of shares outstanding. We have come through a year of very rapid growth, part of which was through acquisition. For this reason, the number of shares outstanding escalated quite sharply. This has been done to establish a base in a variety of industries to which, we believe, we can provide effective and profitable computer-based services. We do not anticipate that this growth by acquisition will continue at this rate and, therefore, our ability to increase our earnings-per-share should improve substantially.

We are entering a time of consolidation and building on the base we have either developed internally or acquired through acquisition. Finally, we have every reason to believe that profit margins can be increased. You may recall, at the Annual Meeting, I outlined an objective of a 20% return on sales before tax and I am pleased to say that we are almost realizing this even now in the combined areas of Computer Services and Application Management.

Such a rate of return is necessary to give us the strong cash flow to allow for future development. However, the overall rate of return on sales will likely be only 10-11% this year.

THE MIX of GROWTH and PROFITS

The main reason the profitability of the company has not kept pace with the rapidly-expanding sales is the difficulty one often encounters in concentrating on a broad program of acquisition. It is easy to see the potential but it is sometimes difficult to integrate a variety of new organizations and, at the same time, bring them all to an acceptable level of profitability. Added to this is the fact that an acquisition program is a relatively expensive thing to undertake in terms of executive time, legal fees, consulting fees, etc.

The major area we are now concentrating on improving is in our Health Services Division and our Educational Services Division. We chose these areas because we felt then, and still believe, that a nation must invest heavily in its major resource—its people. This means, in turn, that any nation must concentrate on keeping its population healthy and keeping them in the forefront of education and training.

This, in turn, means that organizations operating in these fields will have a very real need for information systems to improve their planning and productivity and to control costs.

Through acquisition, we have gained the base of experience in the Planning, Programming and Budgeting systems, and in the simulation techniques so vital to cost control and forward planning. This type of business, however, involves selling to people and their organizations new ways of looking at cost control and new methods of forecasting future needs. The situation is not unlike the hurdle we had to face in creating the original SDL organization. We too had to sell government and industry on new ways of looking at doing business.

The Health & Education Divisions combined lost money during the most recent quarter and will still be a negative factor in income in the present quarter. However, we are convinced of the benefits to the organizations being served and of the ultimate profitability of the products being developed to them and to us.

Another example of expansion by acquisition that has not yet resulted in profitability to the company is our program for the Province of Quebec. We believe that the market in Quebec is going to be huge, as this major province utilizes its potential of resources and energy to create a new future for itself. We acquired an organization in Quebec City, which is providing a good base of business but we have added to this a new marketing group and, as a result of these costs, this new operation in Quebec City is still only marginally profitable.

We are an entrepreneurial and innovative company taking the steps to lead our industry into new areas. In doing so, we are going to incur some costs. We may even make some wrong moves. But the majority of our decisions have been right, as our Five Year record indicates. We must not become afraid of innovation, nor must we back away from new frontier fields which may contain some element of risk. Our approach must be built on an analysis of where the potential will be greatest and the risk least.

I am convinced that, even where the development of some areas has been slower than expected, the basic thrust is correct and the results will come.

A TYPICAL NEW AREA

As an example of a possible thrust into a new area, I would like to bring you up to date on what SDL is doing in the field of Cable Information Systems. As you are aware, our offer to purchase all the shares of Ottawa Cablevision Limited was controversial, and there were some concerns that we might be moving from a field of high growth and potential to one with a more predictable and stable growth pattern.

As outlined at length in our most recent Six Months Statement, our reason for choosing the cable industry as an area of development was our belief that cable represents a potential far beyond that seen by most people. We look at cable as a means of communicating with people where they work and where they live whereas most have viewed it to date as being merely a way of improving standard television reception.

We believe that there are substantial new services which could be brought to individuals, which would be computer-based, and would use the cable as the link between the service and the consumer. This involves a change in the concept of communications to the home, for it involves the idea of the user having selective control over what he gets rather than being fed only the ‘fat and lean’ provided by the networks. The principle would be that the user could decide what he wants to see and when rather than having things dictated to him, according to the scheduling priorities of the networks.

Naturally, the types of services would go far beyond entertainment. as our plan would be to bring to the consumer In-the-Home Shopping Services, Stock Market Reports, Airline Reservation Services, Education Programs, and other such advanced applications.

Our reason for wanting to own a company in the field was to ensure that we had a good test bed to try out some of these concepts. In a way, the information-carrying capability of the cable is a potential looking for a problem We do not believe that we have all the answers yet but do believe that the potential market is great.

The problem with the cable industry is that it is a regulatory jungle. As SDL is an innovative organization, quite willing to experiment and push into new fields, we may find that operating under the close jurisdiction of a regulatory body may dampen the speed with which we would like to accomplish our aims.

It is not yet clear whether the CRTC will allow us to proceed through Ownership. They can affect our purchase of Ottawa Cablevision Limited either directly by a ruling, or indirectly, by delay. If either of these happen, then we would have to look for other ways of working with the cable industry to ensure that it does reach the potential we believe is there.

OUR CONTINUED THRUST

There is now no doubt that the acceptance we fought for in our early years has now been won. The concept of using professional outside services for computer capability and applications development and management is now a matter of course. Our sales in these areas are at an all-time-high and are continuing to run ahead of our best projections for both revenue and profitability. We have steadily expanded our computer capability over the years and will continue to do so. As mentioned earlier, we are continuing the emphasis we have had since we started on the expansion and development of our staff.

We have built our reputation on a quality service and now plan to expand farther East and West, as well as continuing our push for export sales to the United States and elsewhere.

SUMMARY

The aim of SDL at the present is to concentrate on the fundamentals of...
• a good product • good selling • good control.

We have a fine base on which to build and are aiming at a steadily improved profit performance in the years to come.

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SERVICE BUREAUS AND CABLE TV STATE OF THE ART AND PERSPECTIVES

A TALK GIVEN TO THE ORGANIZATION FOR ECONOMIC CO-OPERATION AND DEVELOPMENT, PARIS.

SEPTEMBER 25-26, 1974

The idea is intriguing. The concept of moving information to people, rather than people to information, has inspired the already fertile imaginations of computer specialists, sociologists, economists and futurists of every profession. Like many breakthroughs in concept, the idea of providing sophisticated broad-band two-way communications networks for our cities is one that has been talked about for at least half a decade. However, it remains primarily a laboratory curiosity because to date there is insufficient social or economic pressure for governments to act, or private enterprise to invest. I believe, however, that there are pressures building that should lead to a serious consideration of some form of Wired City experimentation in the late 70’s. In the industrialized countries, these pressures will be such that gradual implementation of some of the many applications forecast will become a reality in the 1980’s and 1990’s. I will outline some of the reasons for my belief that the Wired City is getting close to reality. First, however, to ensure that we are all talking about the same thing, I will briefly describe the situation in Canada and the state of the technology.

BROAD-BAND NETWORKS IN CANADA

As has been pointed out on many occasions most cities, at least in the West, are already ‘wired’ to some degree. A switched voice grade communication system exists already. What we are looking at when considering the Wired City is the evolution from such relatively primitive systems to extensive broad-band networks that could provide for a wide range of sophisticated telecommunications services. Canada is already an extensively ‘wired’ country. Bell Canada projects that by 1978 there will be some 8.9 million telephones, or approximately 1 for every 2.75 people. This switched network, while quite up-to-date, has the usual limitation of the band width of a pair of unshielded copper wires. As we all know, this is barely adequate for relatively simple data transmission with bit rates being usually restricted to 2400-4800 bps. When you examine the range of services that might be desirable (as we shall in a moment), it is clear that only a coaxial cable, or similar transmission facility, could possibly meet the band width need. To put this in perspective, I might mention that the type of coaxial cable now being used by cable TV companies has a capacity of about 300 MHz. One television channel takes about 6 MHz, indicating that one would have to have an information-carrying capacity of somewhere in this 300 MHz range to allow for multiple television channels, audio signals and the range of new services we will be discussing. To contrast this once again with the present switched common carrier network, we should bear in mind that the latter was designed for voice traffic and low band width requirements in the 4 KHz area. Needless to say, it was the desire to improve the quality of television signals in urban areas that first led to the extensive coaxial cable networks that now exist in Canada. Notwithstanding the attempts by the Canadian Government to encourage Canadian broadcasting within our borders, it was clearly the desire of Canadians to pick up American channels that led to the rapid growth of Cable TV in our country. With a population of 23 million people and 4,500,000 TV sets, the number of subscribers on cable today is over 1.7 million, or 38% of the TV-viewing market. The remoteness of some of our cities from the U.S. border encouraged the development of large antennas which could pick up the remote signals and relay them through the cable network into homes. By contrast, in the United States, with a population of 220 million people, there are 75 million TV sets, but only 8 million subscribers resulting in a penetration of about 11%. Clearly, the reason for this lower percentage in the United States is the range of choice already available to U.S. viewers off the air. However, a rapid growth rate is anticipated in the United States because of the increase in the number of colour television sets which require better transmission of signal and the difficulty of receiving good signals in crowded urban areas with large buildings which tend to block the transmission. I understand that the new World Trade Centre in New York acts like a giant reflector for TV signals causing ‘ghosting’ problems for those who do not have cable. However, in Canada, as in the United States, this extensive coaxial network is at the present time used for virtually nothing except the improvement of TV transmission. There are several reasons for this. The first is technological. The network at the moment is essentially a one-way system, i.e. it is a point-to-multipoint broadcasting system rather than a switched two-way network. This does not completely restrict its usefulness but does mean that investment must be made in the network before any advanced applications could be tried. The second reason, however, is regulatory. In Canada, the Canadian Radio-Television Commission, which is the body that regulates cable television, has to date restricted its thinking about the more advanced use of cable to a rather narrow definition of its terms of reference under the Broadcasting Act. I might mention here that SDL’s recent attempt to purchase one of Canada’s leading cable television companies was turned down by the CRTC in July on the grounds that "the Commission considers that permitting the ownership of a cable undertaking by a company operating in the field of computer services would be premature." This decision by the CRTC has embroiled that organization in considerable controversy, for many like ourselves felt that the union of a cable company and a computer services organization would be the best possible way to move from discussion into action. I might point out that this has not discouraged us, as even if we are precluded from ownership of a cable company, we are not precluded from developing applications for this field and marketing these through existing cable organizations. No doubt, one of the important considerations in the CRTC decision was the role to be played by common carriers who feel they should have an exclusive right to any type of transmission that does not fit within the limited definition of the word broadcasting. We argued that the common carriers were, in fact, restricted, by definition, to the medium and were precluded from influencing the message, i.e. SDL’s interest was in providing the products, while the interest of the common carriers should be restricted to transmission. We understood that our ownership of a cable company would not allow us to invade the area of the carriers by providing a switched point-to-point facility and our belief was that many of the potential applications could be handled quite adequately on a point-to-multipoint basis. I will not dwell on this regulatory problem as this is a Canadian situation, but it is important to recognize that the jurisdictional questions may have a lot to do with the speed with which the Wired City may be implemented in Canada and elsewhere.

WHAT PRESSURES FAVOUR THE WIRED CITY APPROACH?

We may or may not agree with all the conclusion drawn in "Limits to Growth," but there is little doubt that the factors identified as being the dominant ones in our long term economic planning are going to be population growth, limitations of resource availability, pollution, availability of capital, and sufficient sources of energy. The problems that a Wired City should solve involves all of these. One of the most publicized benefits supposedly resulting from having a wide range of information services available to individuals wherever they may choose to live is the reduction of urban congestion. As populations grow, the only solution may be to decentralize these populations into satellite communities, perhaps along the line of Taby near Stockholm. Individuals could live and work in these communities and still get the information necessary for their jobs and otherwise communicate readily over video phone like networks as long as the information moving capability were large enough.

As far as resources are concerned, as I will describe in a particular example, electronic media could easily replace many of the things now printed on paper and the elimination of hard copy could save one of our major natural resources.

The concept of mass transportation for moving people to get them where their minds are needed leads to increasing problems of pollution, at least as long as fossil fuels are extensively used. One might conclude that there is electromagnetic spectrum pollution by changing to an extensive use of broadcast medium, but some of this is helped by the use of cable, whether coaxial, fiber optic, or other, as these networks allow one to bend the signal to wherever you want it to go with little if any electromagnetic radiation or leakage—another reason for going the Wired City route. As far as energy is concerned, it seems generally assumed that it takes less energy to move information than it does to move people. However, I have not seen any definitive studies on this.

The final question is that of capital, and here it is less obvious that the Wired City is as efficient as other methods. The present investment in the switched voice network in Canada is probably in excess of $7 billion dollars. However, estimates of wiring major Canadian centres with a switched coaxial cable system exceeds $70 billion dollars. As Canada at the moment is wrestling with the need to provide capital in the amounts of $5 billion dollars apiece for pipeline, oil sands, and other natural resource projects, the economics of such a sophisticated system will have to be examined in great detail before Canada would embark on such a project as being the best use of its capital. However, assuming that the capital can be found, the concept of an information-rich society allowing people to improve their quality of life in part by decentralizing where they live has certainly got attractions. It is easy, however, to talk in the abstract. It might be more useful to examine several particular projects that SDL is examining for possible joint development with institutions in these fields. Some we have concluded have good potential, while others have hidden problems.

IN-THE-HOME EDUCATION

This particular application illustrates the latter and brings out many of the points discussed above. For example, we are all aware of the limitations of computer-assisted instruction. This was supposed to be the cure-all for many of our educational problems. A more realistic view now indicates that it may help but must be used as an addition to, and not a substitute for, other forms of education. The theoretical reasons for wanting to combine CAI with a cable communication network are as follows: many of the advantages claimed for CAI in terms of user-controlled education would be enhanced by being available in the home, e.g. the learning pace can be set by the student and older students need not be embarrassed by being in classes with their juniors there is an assumption that, if Toffler is correct, we may all have to re-educate ourselves several times during our lifetime in our fast-moving society. This makes continuing education one of the major problems to be faced by any industrialized nation many courses, but not all, could be taught by a combination of two-way interactive instruction combined with extensive use of film and assisted, of course, by a computer terminal. There is no reason for a student to travel to a ‘brick and mortar’ type of institution to get this kind of instruction. in many of our cities, weather problems mitigate against travel during the winter, transportation is time-consuming, pollutes, uses energy, etc. In addition, crime in the streets may become a real impediment to people returning to downtown educational institutions for evening courses presumably, if the user can select the time at which a program is shown, he will more likely be able to complete the course, for many people cannot tie themselves to a fixed time two nights a week All of these advantages seem to make education a good initial project for the Wired City. In fact, SDL had no difficulty in interesting Carleton University and Algonquin College in Ottawa in participating in projects to test the possibilities. However, as we investigated this further, we began to get indications that, while many surveys showed a demand for educational TV, when the programs were actually offered, they were not being used. There also seemed to be an upper limit on what people would pay for a particular college course. One survey indicated that only 2% of the adult population would be willing to pay $50.00 for a course. The economics were certainly of concern to us. A second problem was the cost of suitable terminals for a sophisticated system. A simple terminal could be added to a TV set allowing for minimal two-way communication for perhaps $50-$200. However, full alphanumeric terminals are substantially more expensive than this, and would probably prove to be the real impediment to in-the-home education for many years to come. I have gone into some detail on this application because it is typical of one of the many on the attached list which may seem attractive, but may be economically unsound. This is particularly true when one examines the real cost which is that of providing appropriate program material.

TELE-SHOPPING

By contrast, another application we examined was that of in-the-home shopping. Here, the situation is quite different because there is a strong economic push on the part of large merchandisers to find a more effective way to sell their product. Standard advertising on television violates a fundamental rule of good salesmanship, which is, to close the sale at the time the sales presentation is made. If a householder was able to order the product as soon as the desire had been created, the sale of that product should be increased substantially. In effect, such an operation would really be an electronic mail-order catalogue. First, consider the difficulties with the present catalogue sale operation as it exists in North America. Catalogues are very expensive to produce and, of course, waste incredible amounts of high quality paper. Catalogue distribution is difficult, with little way of ensuring that the catalogues do reach people who will use them. Further, catalogues are very static. They cannot be updated readily, they are not very effective sales tools because they are static, and the most critical problem of all is that it is not possible in these days of rapidly-rising prices to update catalogue prices easily. It is not a well-known fact, but many catalogue prices of necessity are determined 10-12 months in advance, which may mean that sales from a catalogue are a losing proposition by the time the catalogue is produced. Think, in turn, of putting such a catalogue in video form over a television set. The customer could call for an index, select the category of items in which he is interested, and then have the various items presented in a dynamic form, e.g. if one were looking for an electric saw, the picture could show uses of the saw as well as simply a static picture of the item, thereby encouraging the sale. When the customer sees the item he wants, he could order it merely by indicating the code number, colour, etc., on a simple terminal which would relay the information to either a service bureau computer, or possibly one belonging to the merchandising company and the computer would, in turn, arrange for the shipment. This, I might add, is once again a pollution-saving and energy-saving process, for it is far more efficient for individuals to order in this way and have a single delivery system deliver the unit than it is for each housewife to get into a car and drive to a shopping centre.

Associated sales could also be promoted. For example, if someone has just ordered a saw, the electronic catalogue could suggest attachments, such as a sander or buffer head, for the unit. Needless to say, this also completely cures the problem of price updating as this could be as dynamic as necessary. Without going into any further detail on this interesting type of application, it was SDL’s conclusion that such in-the-home services on a private enterprise basis had more likelihood of immediate success than something such as in-the-home education, even though the latter might have much greater long-run benefits to society.

It should be noted that this type of application could have been handled quite easily with a one-way cable communication system. The actual placing of the order could have been done by a phone call to the supplier. This slightly less automated type of system was tried, in fact, without the benefit of television in a fairly successful test in Toronto. A restricted number of customers were allowed to use their touch-tone phones to order items from the catalogue and a voice answer-back system was used to check the details of the order. This tended to confirm our belief that a market exists for such commercial systems at the present time.

NATIONAL CONSIDERATIONS

I have singled out only two of an endless list of possibilities. The electronic newspaper has an attraction to SDL because, once again, the production of large newspapers use substantial natural resources and yet much of the paper goes unread. A user-selected electronic method of scanning news items and printing on a facsimile printer only articles that are really of interest has got definite possibilities. Electronic mail has similar attractions. There is hardly an industrialized nation that is not having a major problem with moving information through the postal service. It is doubtful whether one can get enough postal carriers to deliver the mail for much longer, and the cost will continue to escalate. A form of transmission of handwritten information, such as is commonly practised in factories, would solve many of these problems, although one might speculate that a recorded voice message could substitute for this in many instances. Electronic mail, however, concerned SDL because this did appear to get us into an area of point-to-point transmission which we more properly believed could be the function of a common carrier. Because of SDL’s extensive work in medical records, we believe that the ability of a doctor to call up medical information from a centralized databank on a patient’s home TV set would immeasurably help in the treatment of patients in the home, emergency patients at a hospital, and other such applications. Once again, we tended to approach this area with caution, as the question of individual privacy loomed large in this type of data bank. In any ease, all of these applications must now be examined in terms of the return on investment to the country concerned. For example, an in-the-home education project can only be examined in terms of what a country is trying to accomplish with its entire educational program, e.g. what balance does a country want in terms of improving the quality of life through avocational training, as opposed to increasing national productivity through vocational education. In-the-home education may prove to be a very expensive answer. When examining an application, such as Tele-Shopping, a country should be very aware of the problems that could be created by pushing the advertising system to its logical limit- An electronic catalogue with instant impulse selling could create artificial demands which will put further strains on our natural resources. As many people have pointed out, Keynes tended to forget the supply side of the equation, and our major problem for the latter part of this century may be to meet the demand rather than create more demand.

SOME CONCLUSIONS

The technology is here to create Wired Cities. However, this is really a technology looking for a problem. On the surface the advantages seem great, but the costs of implementation are high, and the return on this investment should be looked at very carefully. As a private company, SDL is interested in applications that will have a reasonably short pay-off. It is for this reason that we believe applications, such as Tele-Shopping, have an attraction in the North American market. However, basically the Wired City needs a crisis. There was nothing like the energy crisis to finally give the impetus to go after geothermal power, solar energy, thermonuclear energy, and other sources. A sharply increased growth in population will lead to many projects to get better production of nutrients by capturing their value early in their development cycle, e.g. direct use of vegetable protein rather than converting it to animal protein through raising cattle. The information industry, which is being projected by Drucker in the "Age of Discontinuity" as being one of the major industries for the latter part of this century, has, by and large, not yet faced such a crisis and, therefore, even the industrialized nations are taking their time bringing about the Wired City. Despite its inevitability, this is the major reason for the relatively slow rate of development.

In Japan, where urban density, pollution, lack of natural resources and other problems, are far more urgent than they are in North America or even in many parts of Europe, there is a growing emphasis on developing an information society. Dr. Masuda and his associates have seriously proposed this as the main thrust of the Japanese economy in the decades to come and is, in fact, their only answer to many of their problems. No such crisis exists in the most western countries yet.

Certainly, the Wired City is no answer for the developing nations. I expect that, in reality, most of the applications will remain sufficiently low on people’s priority lists that only experimental projects will be undertaken even in North America for the rest of this decade.

As the economics of most projects are doubtful in the near term, I expect that only where a country wants to move forward as a matter of national policy will there really be extensive development of a switched broad-band network. The best short-run solution for private firms will be to select certain applications, such as Tele-Shopping which could be handled by existing cable companies and existing technology. This should at least provide within the country a body of expertise with some experience on limited two-way communication with the home. This is the approach that SDL will be taking in the latter part of the 70’s.

A SURVEY OF POTENTIAL APPLICATIONS IN THE WIRED CITY

Projected Dollar Value of
the Market in North America
Services in 1989 (in millions)

1. Plays & Movies from a Video Library 2829

2. Computer-Aided School Instruction 2047

3. Cashless-Society Transactions 1810

4. Person-to-Person (paid work at home) 1713

5. Computer tutor 1414

6. Adult Evening Courses on TV 1131

7. Correspondence School 943

8. Dedicated Newspaper 849

9. Answering Services 743

10. Computer-Assisted Meetings 707

11. Household Mail & Messages 707

12. Secretarial Assistance 707

13. Shopping Transactions (Store Catalogues) 584

14. Banking Services 566

15. Grocery Price List, Information and Ordering 566

16. Special Sales Information 354

17. Consumers’ Advisory Service 354

18. Daily Calendar & Reminder about Appointments 292

19. Legal Information 285

20. Weather Bureau 228

21. Newspaper, Electronic, General 200

22. Past and Forthcoming Events 130

23. Fares & Ticket Reservations 124

24. Message Recording 106

25. Index, All Served by the Home Terminal 106

26. Library Access 95

27. Bus, Train and Air Scheduling 79

28. Access to Company Files 46

29. Restaurants 35

30. Mass mail and direct advertising mail 0

The above table was quoted in an article in ‘THE FUTURIST’ in October 1973 by Paul Baron, President, Cabledata Associates, Inc., Palo Alto, California.

BIBLIOGRAPHY

This list is intended to be selective rather than comprehensive. It provides recent references on each of the major topics discussed. Many of the books or publications are from Canadian sources and should be readily obtainable.

GENERAL

Department of Communications, Government of Canada

These reports are available from Information Canada, Ottawa.

1. Multiservice Cable Telecommunication Systems The Wired City, Study 8 (d) 1971

2. Report on the Seminar on the Wired City, Study 6 (d) 1971

TECHNOLOGY

3. H.E. English (Ed.)—Telecommunication for Canada, Toronto, Methuen 1973 Pgs. 256-292

REGULATORY CONSIDERATIONS

4. H.E. English—as above for Canada.

5. Cable: Report to the President 1974. The Cabinet Committee on Cable Communications Available from: The U.S. Government Printing Office covers U.S. policy recommendations

6. Analysis of the Relationship between the Functions of the Common Carriers and those engaged in Broadcasting. Study 1 (d) 1971. Department of Communications, Government of Canada Available from Information Canada.

7. Policy Statement on Cable. Released by CRTC on July 16, 1971. Available from the Canadian Radio-Television Commission, Ottawa.

APPLICATIONS IN THE COMMUNITY

8. H. Sackman and B.H. Boehm (Ed.)—Planning Community Information Utilities AFIPS Press 1972, for a review of Telepurchasing and other new services.

9. J. Dakin—Telecommunications and the Planning of Greater Metropolitan Regions. University of Toronto Press 1973

APPLICATIONS IN EDUCATION

10. R. Adler and W.S. Baer—Aspen Notebook: Cable and Continuing Education. Praeger Publishers, New York 1973

11. J. Shafer—Education and Cable TV: A Guide to Franchising and Utilization. Eric Clearinghouse on Media and Technology Stanford University 1973

12. Cable Television and the University—Proceedings of the Conference in Dallas. Educom, New Jersey 1974

SOCIAL CONSIDERATIONS

13. J.M. Guite—CATV Technology for Citizen Feedback to Government. Background paper for the Canadian Computer/Communications Task Force 1971 Available from Information Canada.

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PRESIDENT’S REMARKS, ANNUAL MEETING

NOVEMBER 15, 1974

In last year’s Annual Report, I quoted Peter Drucker as saying "one risk an innovative organization cannot afford is the risk of aiming too low" his has certainly not been a problem at SDL. Even for a company with our track record of growth, we attempted a great deal during last year.

By any criteria, except the bottom line, our continued growth was impressive. Revenues rose from $9.9 million to $14 million dollars which is a 40% increase. The number of employees grew from 350 to 520. The number of clients grew to over 600. This growth was in line with our long range plan for corporate development. This plan saw us expanding our Computer Services into a number of specialized industry areas where we could provide solutions to our clients’ problems which are more than just faster processing using yesterday’s approaches. We recognized that unique opportunities to move into new areas existed during 1973-74 as a number of companies were available to SDL through acquisition. Also, we had a buoyant stock market. We were successful in capitalizing on many of these opportunities, although the results on the bottom line were clearly less than we had expected. We were able to expand in the Education market with the acquisition of Anathon Computer & Educational Systems, Inc. of New York. In the medical and health care field, we acquired the very necessary industry knowledge through the acquisition of Shortliffe & Associates. We expanded in Quebec City with the purchase of Informatel, Inc.

Our biggest disappointment came from our attempted acquisition of Ottawa Cablevision Limited. This was not allowed by the Canadian Radio-Television Commission on the grounds that such a move by a company in our industry would be premature. However, by that time, the declining stock market conditions had made this deal less attractive than it had been originally, although we were fully prepared to live up to our commitment had the CRTC approval been received by June 30th, 1974. In general, last year was one of high activity in which we created our plan, chose the industries in which we wanted to make acquisitions, put the plan into action, and then assessed the results. I believe the approach was correct, but the short-range results in profitability was less than we had hoped. It should be remembered that we were not aiming at becoming a conglomerate. It was our intention to expand within the information industry by broadening the base of services we could provide. We quickly discovered that it was not feasible to acquire organizations with similar skills, albeit servicing different industries, and then not integrate these into the rest of the organization. This integration was a difficult procedure, even with the best of intentions by all parties.

The integration of the various acquired organizations is now virtually complete—the only exception being Anathon Computer & Educational Systems in the United States. The link to all these organizations is the computer based processing of data. We have now established a single marketing organization which handles our complete product line and this, we believe, is a most important step for the future development of the company. The changes involved not only the winding up of nearly all of the subsidiaries and the creation of a uniform and integrated organization, but also the reassessment of the senior management needs of the company. This process, which took place between March and September of 1974, led to the reduction in the number of officers from fourteen to six. I should point out that this change is no reflection on those senior officers who are no longer with SDL, but rather a recognition that an integrated organization does not require the same skills and number of senior people as does a diversified company composed mostly of subsidiaries.

THE CONTINUED CORPORATE DEVELOPMENT PLAN

Our approach for the coming period will be based on internal growth and development rather than acquisition. We will build on the base of new knowledge and expertise acquired through acquisitions, as well as the already strong and competent staff we have built up over the years.

Surprisingly, the five year projected growth rate, which we believe can be generated with this approach, is hardly less dramatic than that at which we had originally aimed. I believe it is still reasonable to expect that SDL could grow at a rate nearly double that of the computer industry as a whole, which has often been quoted at 15-16%.

To judge whether this is possible, one should assess SDL as it is today.

SDL AFTER FIVE YEARS

SDL has demonstrated it can sustain a strong growth in revenue. As I mentioned, the sales last year were $14 million dollars and already, during the first quarter, we are operating at a rate of over $19 million dollars. Our first quarter is usually our slowest.

SDL is the only company of significant size in the Canadian-owned computer services industry in Canada that has consistently produced profits from operations for eleven consecutive quarters.

SDL is the only large computer service organization in Canada that is not controlled or owned by another organization.

SDL has the most diversified customer base of any company in our industry in Canada.

SDL has not only the largest staff of any Canadian computer service organization, but also one with the highest reputation for technical excellence and marketing proficiency.

SDL is conservatively and adequately financed to carry it through the forthcoming development period.

Finally, I maintain my belief in the future of the industry in which we operate, and the likelihood that it can weather successfully whatever economic conditions we may face.

THE QUARTERLY RESULTS

If the base which we now have is sound, what of the performance?

The first quarter showed a remarkable increase in revenue from $2.9 million for the first quarter last year to $4.8 million in the quarter ended September 30, 1974. This is a 65% growth.

The profit for the quarter fully taxed was $126,000, or on a fully diluted basis, 5 cents per share.

The profit, including the provision for loss carry forward was $252,000. This was about $75,000 over our budgeted profit before tax for the period and about $250,000 over our budgeted sales.

In general, we are pleased with the progress.

OTHER CORPORATE DEVELOPMENTS

We are particularly pleased to welcome Mr. W.V. Moore to our Board of Directors. Mr. Moore was formerly President of IBM Canada and is currently Chairman of Consolidated Computer. His valued advice at our Board meetings will be most appreciated.

The installation of the IBM 370/16 8 in August significantly increased our revenue-earning capacity. This installation was very smooth and was, in fact, transparent to our users. This was a technical feat of some magnitude, as we had to integrate this new system with the Model 85 so that both worked as a unit.

SUMMARY

We elected to face squarely any problems our expansion program caused and take rapid corrective action. I believe we have demonstrated the strength of the corporation by coming through a difficult year with a sound organization of dedicated people, continued growth in sales and good prospects for growing profitability for the rest of this year and the years to come.

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THE WIRED CITY CONCEPT - AS IT STANDS TODAY

A TALK GIVEN TO THE CANADIAN INDUSTRIAL COMMUNICATIONS ASSEMBLY, OTTAWA, CANADA

MARCH 14, 1975

The Wired City has yet to be plugged in. The more I examine the concept, the more I become convinced that the reason is not technological, but rather a question of political decision and economic common sense. However, the way has been opened for progress.

As this is a technologically mature audience, I am not going to review the many advantages claimed for The Wired City. The concept of using the broadband cable communication links now available in Canada through the CATV companies, by linking these to a computer to provide a range of in-the-home or office services is well known. Repeating these would remind me of discussions in university about the existence of God. I remember our discussions became so sophisticated, we actually numbered the standard arguments ‘pro and con’ and disposed of these early statements much like the standard opening of a chess game. Instead, you have asked me to update you on what is really happening, as opposed to what the many learned articles indicate might happen.

WHERE DOES THE WIRED CITY STAND TODAY?

I remember Sol Hurok’s famous comment about the entertainment world that. when people don’t want to come, nothing in the world will stop them. This is about where the Wired City stands today. Essentially, it is still in an experimental stage. A number of quite interesting projects are being tried, but no one, including SDL, has yet found a way to make any money in the field.

As I pointed out last Fall in a talk to the OECD in Paris, there is a wealth of alternate forms of entertainment. From the point of view of any country’s national priority list, the Wired City does not rank high. I mentioned at that time that there were some intriguing applications, such as In-the-Home Shopping, which I thought that a private organization could undertake, using the existing cable company facilities. Such an application is, however, purely commercial and seems to run counter to the present policies of the Canadian Radio-Television Commission. I expressed considerable doubt that the use of the current cable network for such things as In-the-Home Education was on the near horizon. Despite the many theoretical advantages, the need has yet to be clearly demonstrated, the expense is high, and in any case the impetus is going to have to come from the provincial governments. I really doubt that a private organization can be successful competing against the public education system. However, one of the high-ranked potential applications for The Wired City is the Cashless Society. This area bears serious examination, for even though it may not require broadband facilities, it will be the earliest of the major applications usually associated with The Wired City.

THE CASHLESS SOCIETY

As some wag noted. inflation has already made this a cashless society for most of us. The concept of automating the payments system is viable. It is particularly attractive because there is a high degree of economic pressure for a solution to the growing paperwork problem encountered by the banks, or other near-bank institutions. This situation has recently been the subject of a landmark decision. I doubt if many of the companies in the cable industry have yet really understood all the implications. In January 1975, the Department of Communications and the Department of Finance sided with Bell Canada by backing their approach to packet-switching for transmission of data. Effectively, this decision gave Bell the go-ahead to develop the network and the standards which the banks and the computer manufacturers must follow.

The intention is that this would allow any financial institution, or any institution for that matter, to use a publicly-available network for automated payment transactions. Once again, I will assume that the details of this are well-known to you and will dwell on the implications of this very important move.

Let us go back for a moment to consider the real reasons why the Federal Government chose to use Bell Canada as the vehicle for this important application. To begin with, any major use of the existing cable organizations has the immediate problem of limited coverage. Even though Canada is the most heavily cabled country of any major nation, there are vast areas of the country which do not, and probably will not, be reachable by the cables now provided by CATV companies in our major centres. An automated payments system for Canada could not realistically, therefore, be delegated to the cable companies.

Secondly, the Federal Government has recognized the obvious fact that national policy cannot easily be built around some 380 individual firms, many of which are small, marginally financed, managed by local entrepreneurs, and where few have the technical capability to undertake a major Wired City project.

The CRTC has gone out of its way to ensure that these companies do as little networking as possible, concentrate on serving a very local market, and certainly do not compete any more than is necessary with the major broadcasting networks.

Further, the recent decision of the CRTC to discourage the CATV companies from Pay TV has further reduced the potential of cable companies in Wired City applications.

All of this has, in my opinion, relegated the cable companies to a lower growth, quasi-parasitic type of operation. I say ‘parasitic1 because, as you know, cable companies, by and large, produce nothing new except for a bit of local programming. Essentially, all they do is re-transmit what someone else has produced. It had been the hope of a number of the major cable organizations to evolve their companies into the major vehicle for The Wired City in Canada. As many of you know, several of these companies banded together to form Broadcast Communication Network (BCN) as an organization which would examine these possibilities. I understand that this project is being re-examined at the moment. This is particularly understandable in view of the recent CRTC decision to not allow the mingling of computer service organizations and cable companies.

Thirdly, and finally, it is doubtful that these individual cable companies are going to stay under federal jurisdiction. To my knowledge, no cable company operates across a provincial border. The Federal Government could not reasonably be expected to put major applications, such as a nationally-available automated payments system in the hands of organizations that almost certainly will rapidly fall within provincial jurisdiction, or even municipal. The mere fact that the CRTC has forced the cable companies to remain local will effectively force these companies out of federal jurisdiction in the near future.

Without meaning to sound too pessimistic on the future of the cable industry as a medium for The Wired City, I honestly believe that cable companies are going to be relegated to a very minor role in the communications industry.

When you examine the above, you can see clearly why the Federal Government chose the Trans-Canada Telephone System rather than the cable companies as the future vehicle for Wired City applications.

There is no way I can speak for Bell Canada on the question of their strategy. However, their position as operators of a national switched network must suggest to them a logical course of action. Bell, apparently, missed the implications of The Wired City in the early days and, by default, allowed the initial wiring of many cities with coaxial cable by the cable companies. However, the cable that is used by many of the CATV organizations is still essentially a one-way media. To differentiate themselves from the common carriers, the cable companies have presented themselves as being point-to-multipoint broadcasters rather than a switched point-to-point communicator. This latter function is clearly that of the public communications system. This limitation of a one-way non-switched network will severely restrict the ability of the cable companies to pick off the significant applications of The Wired City. Further, the technology is changing. One should bear in mind that Bell Canada still enjoys the rights of way for communication lines in most locations, owns the poles and, in fact, owns much of the cable on which the cable companies actually transmit. There is little doubt that, even if the cable companies were given some rights to undertake Wired City applications, which would involve a change of heart by the CRTC, Bell could counter this move by simply over-wiring

the area. Further, it could over-wire with fiber optics, or some more advanced technology which would effectively relegate the cable companies, once again, to small local operations, using second class technology. In a word, the winner of Round 1, and I predict the winner of the fight, is clearly Bell Canada and the Trans-Canada Telephone System.

ROUND 2 TO BELL

To further reinforce my contention that the Federal Government has consigned the future of The Wired City to the TCTS companies, I will briefly discuss the second announcement regarding the relationship of Bell Canada to the computer service companies. In January 1975, the same two federal government departments jointly announced that Bell would be allowed to enter the computer services industry. Clearly, if Bell is going to provide services along the Wired City line, this move is necessary. The recommendation was in line with the position taken by the Canadian Association of Data Processing Service Organizations. This group came out with the fair and rational suggestion that the computer services industry should not try to restrain the entry of other organizations into its industry. The only thing that CADAPSO asked for, and got, was that an organization enjoying a monopoly position, granted by the government, should not be able to use this position to adversely affect other organizations not enjoying such a position, e.g. the banks, the common carriers, or other such groups, should not be allowed to use their government-granted power to dominate the industry. Therefore, the federal government said that Bell could only establish an arms-length subsidiary, and could not have that subsidiary sell computer services to the parent at preferred rates. On the surface, this looks like a reasonable approach. However, when one considers that Bell Canada’s telephone service is rate-regulated, one might question why Bell would want its subsidiary to sell to the parent company at anything other than the highest rates it could reasonably charge. This obviously makes the subsidiary more profitable, lowers the return on investment of the parent company, and could provide justification for rate increases by the parent—a ‘most favoured nation ‘ approach in reverse.

Secondly, Bell would certainly not object to having its computer services entry as a completely arms-length operation. I could expect that Bell ‘s long-range strategy would reasonably be to get as many as possible of its operations out of the regulated side of the business. If the computer services business looks as though it is going to be profitable, the last thing Bell would want would be to have its subsidiary part of the regulated telephone operation.

In essence, then, Bell Canada won Rounds 1 and 2 in this fight for the right to develop the Wired City.

IMPLICATIONS FOR THE FUTURE

I do not look upon this as being at all negative. Frankly, I believe the federal government has made the only choice that makes any sense. Allowing Bell to proceed along these lines really restores the situation to where it should have been many years ago. Clearly, one national network is the best use of our limited national financial resources. It will provide the best automated payments system to the majority of people more rapidly than any other method I can think of. I am sure that we all will acknowledge that Bell Canada has provided us with one of the finest telephone systems anywhere in the world. I also believe that Bell is reasonably responsive to changing needs. In fact, in the computer services industry I have found that they have listened very carefully to our concept of what was needed and Dataroute has now given Canada a digital data network second-to-none.

Computer service organizations, such as ourselves, have already reasoned that there is a market for them in the automated payments system area and their position is made stronger by the existence of the proposed network that will be available to financial institutions. This network will not be dependent on any one computer manufacturer ‘s standards, nor will it be without standards, as might be the case if The Wired City were opened to the scattered cable companies.

SOME CONCLUSIONS

The first conclusion is obvious. The Wired City will progress from this point on as fast as Bell Canada cares to push it. The first real application will be in the Automated Payments area. Secondly, the cable companies have lost their chance to be a significant factor in the national scene or have had it taken from them. Thirdly, we should not be too upset at this trend, for I believe that the decision shows a lot of common sense and will be best for the country in the long run. The alternative decision to have important Wired City applications in the hands of the cable companies, or the small computer service organizations, would really make no sense at all. These organizations, as is always the case when there is a near-monopoly in an industry, must find their markets in areas that are peripheral to such major applications as are forecast for the Wired City. There is a big remaining market that will be of little interest to corporations the size of Bell or IBM. It is here that the computer service organizations can find a profitable future. Finally, one might conclude that, when a company is developing its corporate strategy, it is rarely wise to ignore the obvious and the logical. The decision that the future of the Wired City belongs to Bell and the TCTS has, of course, not been explicitly stated by the Federal Government or anyone else. However, the decision should be recognized and is the only sensible one. The challenge now is to rank the really important applications in a national priority sequence, and get on with the job.

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SDL ANNUAL MEETING

PRESIDENT’S ADDRESS

DECEMBER 8, 1976

SDL has a unique record in the computer services industry. We have completed four consecutive years of profitable operation – a feat accomplished by no other large company in our industry in Canada and very few in the United States.

At a level of $20 million dollars in sales, SDL is among the top dozen or so firms in our industry in North America.

We are also the only major independent firm in Canada in this industry. We built our revenue base entirely on our own without the benefit of any large block of business provided to us by a parent company.

We are the only Canadian company that has built substantial sales in the United States and has a long term commitment to continue this course.

However, the past few years have not been easy. It has been difficult to produce a steady growth in earnings and revenue. I predict that the next few years will not be easy either.

THE INDUSTRY

Projections by outside groups for growth in our industry are optimistic. The Computer Communications Secretariat of the Department of Communications even estimated that the total sales of the computer services industry in Canada could be larger than the total hardware sales by 1985. Such growth predictions, however, are dependent on factors beyond the control of the industry. In particular, growth such as this depends on the availability of enough capital to be able to invest in the productivity improvements that our industry can provide.

To a degree, we are like every other industry in our dependence on the growth of the economy as a whole. Predictions of 20% compound growth over a long period are always suspect in an economy where the Gross National Product is only increasing at 4-5%.

Still, there is a vital need by all industries for better information and better tools to improve productivity. This is our business. For Canada and the United States, future economic survival will depend on our ability to increase industrial productivity. This should provide the opportunity for the industry to sustain a growth rate substantially better than that of the economy as a whole.

I generally believe that a rate of growth in the industry in the area of 20% per annum for the period 1977 through 1981 is possible providing we have a reasonably healthy economy.

Our own projections for SDL are in this area for the five years starting 1977.

Against this background, let us take a look at SDL itself . . .

WHAT DOES SDL DO?

Every organization needs a ‘mission’ and ours is . . . "to be the organization that others can depend on to meet their continuing information systems needs." Our approach is to . . . "help our customers by providing services of high value based on expertise in computer-related technology."

Our aim in all of this is to . . . "provide a satisfactory return to our shareholders." I define this more specifically as being . . .

• to provide a steadily growing profit

• to pay a gradually increasing dividend

• to attain sufficient size and market position to ensure continuity of earnings and a reasonable safety of investment

We have done a good job in defining what we should do but have yet to satisfy ourselves or the shareholders that we are meeting our corporate aim.

First, let us look at the kinds of services we provide to help our customers. Our approach is to provide a highly efficient data processing service available over communication lines from our installation in the Systemcentre in Ottawa. This system can be accessed by terminals from anywhere in North America.

To supplement the availability of this computer power, we have gradually been building up a series of services specifically designed to help customers solve their information problems. In one way, we can be thought of as a service organization that will allow companies to buy the components they need to develop a good computer system, i.e. the computer power they require, the people they need to analyze the problems, and write programs, and the general purpose packages to assist them in this process. However, we are also very much in the business of providing total solutions ranging from systems, such as Payroll and General Ledger, to corporate planning models helping our clients to make good use of the data that exists within their organizations.

The trend is toward more ‘value added’ services. Although we will still continue to market computer power to be used by clients with their own programs, we are increasingly taking responsibility for developing complete solutions to clients’ problems.

In a word, we believe that we should be doing more than just providing less expensive data processing. Rather, we are in the business of providing better overall solutions to problems. Our approach is to help customers do things better and not simply cheaper.

We have developed one of the most sophisticated computer complexes in Canada and have done this in such a way that we can balance the computer power very accurately to the current need. Our present system allows us to add or delete computer mainframes as the demand fluctuates and do this in such a way that the process is transparent to the user.

As all our computers are linked, allowing any user to access any of his files from any of the computer mainframes, we have a unique approach to computer services.

We are in the final stages of converting the whole computer complex to IBM’s newest operating system. This is the first major operating system conversion that the company has undertaken since it started in 1968.

We believe that the time and effort put into this change will ensure that we continue to provide our customers with the best computer service in North America.

But SDL is far more than machines. If we are really to solve information problems for customers, we must have the best people in the industry. We have recruited and trained a staff of over 400, many of whom are graduates of universities or colleges. We continue to update this staff with intensive internal training programs in sales techniques, technical subjects, and management development.

This staff is located not only in Ottawa, but in branch offices in Boston, Calgary, Montreal, New York, Quebec City, Toronto, Vancouver, and Washington.

Therefore, we have a fine computer system that can be accessed by users over an extensive communications network. We are creating many aids to help clients develop more effective solutions to their problems. We have an excellent staff with an outstanding technical reputation.

OUR SITUATION TODAY

With all of these factors in our favour, why have sales levelled off and profits declined?

Some of the reasons were outlined in the Annual Report – a major one being that a number of large contracts, principally with the Ontario Government, came to an end in the 1975-76 fiscal year.

There are other reasons for the present sales situation . . .

• the lack of growth in the Federal Government Market in Canada

• an overcapacity situation in our industry resulting in intense price competition

• the general situation in the economy

Over the years, SDL has been very successful in developing the Canadian Federal Government market. Now this market is there for other companies to approach. Unfortunately, much of this competition is now at prices that could not possibly lead to sustained profitability for the offering companies.

The Federal Government has compounded the problem by continually re-tendering work already in the private sector while protecting the internal computer empires that could, most profitably, be tendered. The result is that expenditures on in-house computer installations in the Canadian Federal Government continue to climb at a rate significantly faster than the expenditures for computer services from the private sector.

The Federal Government has not coordinated its approach to the use of government purchasing. The stated aim of the Departments of Communications and Industry, Trade & Commerce is to build a strong Canadian-owned computer services industry. The result of recent tendering practices by the Department of Supply & Services is to force industry pricing to new and unprofitable lows. The industry is further hurt by an apparently deliberate practice of geographically distributing computer services business, thus encouraging the fragmentation of the industry.

The Government cannot have it both ways. If it wants a strong industry capable of competing for export dollars, it must use its purchasing power to this end. It is unlikely that Canada can build a significant computer hardware industry. It would be to the benefit of all Canadians to have a strong Canadian-owned computer services industry.

In the long run, SDL is working to become less dependent on any one market. We have been successfully diversifying. Nonetheless, developing new markets does take time. It also requires some investment.

In the Spring, we established a Product Development Division, organized a new Marketing Department, and set up a Sales Support Department to speed up the development and implementation of new services. You have not yet seen the effect of this, although it is encouraging to note that the commercial sales have been steadily increasing and are filling a good part of the gap created by the declining market in all levels of government.

I am also pleased to note that we have been able to maintain a constant level of cost, despite the expanded emphasis of R & D and Marketing. In fact, our costs for the first quarter were below the costs for the same period last year.

All of our R & D costs and, in fact, all costs at the present time, are being expensed, as incurred.

Despite the increased marketing efforts in the United States and Canada, I still expect that 1976/77 will be a difficult year. In the most recent quarterly report, I mentioned that I felt the year would show no improvement over last year. I now feel that even this is optimistic, as sales in the second quarter are continuing to be weaker than expected. The major problem area continues to be in government sales.

Our first priority is to turn this situation around. I am optimistic that this can be done before the end of this fiscal year but possibly not in time to have a profitable year.

THE OUTLOOK

In summary, the short range outlook is for ‘holding our own1 while we concentrate on getting the revenue growing again.

We are highly leveraged as we have the capacity to handle additional revenue at little additional cost.

We have been prudently controlling costs and building up a very strong financial position. Our working capital has grown to over $8 million dollars. Our cash position is strong.

We know what we have to do. The plans are in place. The product announcements, such as you see here today, are evidence of the results to come. We are really in a transitional phase between being essentially a computer utility service, largely dependent on government business, and being a broadly based computer services company servicing the North American market.

I am confident that we have the plans and resources to resume our position as the growth company in a growth industry.

Back to Section A Index or just read on

 

WHAT’S NEW UNDER THE SUN?

PRESIDENT’S ADDRESS SDL/IFIP

AUGUST 8-12TH, 1977

There are lots of exciting things that I could talk about at this time. However, I may as well concentrate on the one thing you really want to hear about.

How Did a Nice Company Like SDL End Up in the Insurance Business?

First, let me relieve your minds about a few items. It is not going to be necessary to change the name of the company to ‘Sun Dimensions Limited’ or even ‘Sun Systems.’ There has been a mild hint that it might be appropriate to change the name of our approach to Systems Development to the ‘Sun Life Cycle’ rather than ‘System Life Cycle’ but I do not expect they will press this point too hard. I do believe, however, that our proposed new venture with Sun will help us all achieve a brighter future.

HOW DID THIS ALL COME ABOUT?

SDL has always been an independent, growth-oriented company. In April, and again in June, I had placed before the Board a series of strategy options for the company, including one which was a very aggressive growth plan involving expansion into the United States. We had carefully saved up the cash to enable us to make this move. However, any major expansion would have an impact on our profitability. The start-up costs of a new Centre in the United States would have put the company into a loss position for about two more years. The difficulty that the Board and I could see was that this could cause the stock to drop even further. If this happened, a takeover by a possibly unfriendly company, or group, would be almost inevitable.

Effectively, we had a plan which we might not live to implement.

For this reason, the Board was not at all adverse to the idea of finding the right kind of company that would be interested in taking a majority interest in SDL. From such a sheltered position, we could then proceed with our plans for the future.

Over the past couple of years, I had talked to nearly all our major competitors about something called ‘industry rationalization.’ Everyone thought this was a good idea but naturally everyone believed what was intended was that they would come out on top. Frankly, it would be difficult to put two very similar companies together from a personnel standpoint, i.e. the resulting company might have a lot of duplicate staff. This could mean blood on the floor, and I am always squeamish about the sight of blood—particularly when some of it might be mine. I was looking for a company like Sun Life which would be essentially complementary rather than competitive. Sun, in fact, had been one on the prime candidates but events moved even more quickly than I had expected. In late June, the Vice Chairman of the Board of Crown Life called to suggest the start of discussions between Datacrown and SDL. Within a day or so, our stock took off. As a public company, we had to make an announcement about any factors that might cause the stock to move up so quickly. The impending discussions with Crown Life were certainly in this category. From that point on, we were operating in full public view.

THE RISING SUN

When Sun Life learned of our discussions, they approached us immediately. Sun Life had been considering for some time the possibility of making an offer for SDL and, hence, could move very quickly. I had discussions with each of Crown Life and Sun Life to answer their questions about SDL, and then called a Board Meeting for July 6th. The day started with a breakfast meeting in the Royal York Hotel at 7:45 a.m. At that meeting, Crown Life made their offer. It was a good offer. It was also a good breakfast. At 10:00 a.m., the Sun Life representatives met with us in our lawyers’ office in the Royal Bank Building. Sun Life did not buy breakfast, but did arrive with a better offer. Neither company, of course, knew the other company’s bid. It was like opening Christmas presents. The SDL Board agreed to recommend the Sun Life Offer. Crown Life withdrew.

BEHIND EVERY CLOUD, THERE’S A LITTLE BIT OF SUN

The world was unfolding as it should. Not only was Sun Life a most acceptable partner, but the Board believed their price to be fair. The $4.50 bid was certainly better than we could reasonably expect to be able to produce for our shareholders in the current market conditions for the foreseeable future. It was also approximately equal to the net tangible asset value of the company. Finally, Sun Life was well-known to us, as they were already a small investor and one of their senior officers had been on our Board of Directors for many years. Sun would certainly provide us with the large friendly backer that we were seeking. Several hectic weeks followed while Sun drafted their Offer and we drafted our Directors’ Circular. A typical meeting, which would often last all day, would involve senior representatives from two of the largest law firms in Canada, the internal Counsel from Sun Life, representatives of the two agents, Wood Gundy and Dominion Securities, who would round up the stock, and a variety of other accountants, auditors, and investment people. By the evening of July 25th, everything was in place and the mailing was to take place the next day. Despite an intermittent mail strike in Ottawa, I felt that I could now relax. The Offer was mailed on the Tuesday, and by Thursday, the stock began trading in huge volumes—over 100,000 shares on Thursday alone. Even more surprising was that the stock was trading well above the Offer price. There was speculation about a counter bid. Friday evening, Rod Oram of The Globe & Mail, called to say he had been contacting a number of people who might be making a bid and had casually called Crown Life. When put on the spot, Crown admitted they were doing some of the buying. Monday was a holiday in Canada, so I had a long weekend to carefully plot how I would subtly find out what Crown Life was really up to. By Tuesday morning, I had the answer. I called Bob Dowsett, the President of Crown Life, and asked him what he had in mind. I noted that our names had been romantically linked in The Globe & Mail, and now would like to know if his intentions were honourable.’ Bob indicated that he was really hedging his bets in case the Sun Life Offer was not accepted by enough shareholders. But he certainly was not prepared to get into a bidding war with a company with $5 billion dollars of assets. In fact, by this time, the stock was being tendered in large quantities through brokers and, as everyone seemed to feel it was a good move for both SDL and Sun Life, the likelihood of the Offer being successful now seemed assured.

LIFE UNDER THE SUN

Over the past few weeks, I have had ample opportunity to work with people at Sun. I can assure you they will be a fine group with which to work. Sun Life is not only the largest insurance company in Canada but one of the largest in the world. Their approach is aggressive. Their markets are worldwide. Their intention, as stated to me, is to have SDL continue as an independent company. I will report to a new Board of Directors appointed by Sun Life. I believe that this move will be as close as we could come to getting the protection we needed, while retaining a significant degree of independence. It’s like having a big brother to protect you from roving Romeos while you are still single.

THE SUNNY SCENE IN BOSTON

Sun Life has its American head office in Boston. SDL has its most consistently successful office in Boston. The Boston Office is so psychic about sales potential, they even made arrangements to rent space in the new Sun Life Building in Boston before any of the rest of us knew anything about Sun Life’s intentions. It is now my pleasure to announce the Winner of the President’s Award for the Outstanding Office of the Year. The winner for the third straight year is Tom Kinney and the Boston Office.

Back to Section A Index or just read on

 

PRESIDENT’S REMARKS, SDL ANNUAL MEETING

OTTAWA, CANADA

NOVEMBER 2, 1977

A recent book published about the computer field is called "The Waves of Change." In it, Dr. Charles Lecht describes the rapid changes that have taken place in computer technology and forecasts even more dramatic changes in this fast moving field.

Small wonder, then, that companies in our field must learn not only to accept, but to capitalize on, rapid change. Over the past few years, SDL has survived many changes in our industry. None, however, have been more dramatic than those which occurred during the past eighteen months.

We can look at these changes in three general areas . . .

• market

• technology

• ownership

Our aim is to turn the changes in all of these areas to our advantage.

MARKET

As outlined in the Annual Report and in previous reports to shareholders, the market in Canada has changed dramatically in the past couple of years. The Federal Government market, which had grown quite dramatically under an enlightened policy of placing business with the private sector, has now levelled off. The provincial governments, which had at one time placed some business with the private sector, have now withdrawn much of this internally. This happened at the very time when new companies were entering the field. This, in turn, led to an erosion of the price levels in the industry.

These factors, plus the general economic conditions in Canada, caused SDL to have its first loss year in the past five years. As SDL does not have any protected base of business from a parent company, we were more subject to revenue erosion than some of the other companies in the field.

However, even in a difficult year, we were able to maintain a very good cash flow which exceeded 1 million dollars in 1976-77. Our Working Capital grew to over 8.7 million dollars. We ended the year in a very sound financial condition.

I indicated that a company in a fast moving market should be able to adapt changing market conditions to its advantage. I could now outline briefly what SDL has been doing to capitalize on this change.

First, we have diversified our marketing efforts on a geographic basis. This has led to a change in our balance of revenue. Now approximately 20% of our revenue comes from the United States. Another 20% comes from SDL Informatique which operates in Quebec and the Maritimes. This is almost exclusively a commercial market. We have also increased our marketing efforts in Western Canada.

Secondly, we have for some time recognized that one must offer more than computer power. We believe that, in the future, there will be some polarization between a raw computer power product and a value added product.

It is certainly our intention to continue to offer a quality computer services product. This has been an SDL specialty since the start of the company. Our target markets for this type of service will tend to be the medium-to-large scale organizations in Canada and the United States.

The value added part of our business, which we call Application Services, is growing. It now accounts for about 25% of our total business. In this area, we sell solutions to problems rather than simply computer power. As this type of approach is particularly helpful to smaller organizations who may not have the in-house computer expertise to make good use of computer power, we believe that this will broaden our markets considerably in the years to come. It also tends to be a more stable revenue source which is less susceptible to some of the technological changes I will discuss in a moment.

We are reacting, therefore, to the changing market by both broadening our product line and by marketing in new geographic areas. Our approach will be an aggressive one aimed at furthering these two development areas, as well as investigating what might be done to improve market conditions, in general, in Canada.

TECHNOLOGY

We believe we are well positioned to take advantage of changes which are coming in the technology. We have one of the most up-to-date computer complexes in North America. We have recently gone through a major conversion to the new IBM Operating System. We have purchased most of the computer equipment we have, taking advantage of lower IBM prices and our favourable purchase option agreements.

We are writing off the equipment over a relatively short period. We are also not capitalizing any of our development costs. This should give us one of the most flexible positions in the industry.

SDL continues to believe that, despite the changing cost of computer cycles, there will for many years be a requirement for very large computers. Many organizations will require access to huge databanks, will need to do more complex planning and simulation operations, will have to use more mathematical approaches to solving problems of energy, transportation, or other areas, and will certainly have requirements for very large file handling.

None of these are particularly well-handled by mini computers. However, we also believe that we can capitalize on the new lower cost of computer cycles by taking a hierarchical approach. We expect that we will be able to offer to our clients . . .

• microcomputers which essentially provide one function to one user

• mini computers which provide several functions to several users

• midi computers which may be on a regional basis and provide many functions to many users

• maxi computers which will provide a very broad range of functions to a very large range of users

At SDL, we have seen many changes in the philosophy of when computer power should be centralized or decentralized. Many of us can remember the IBM 1401 era where decentralization seemed to be the right answer. This was followed by huge computers and people rushed to centralize. Now mini computers seem to be leading back toward a decentralized approach.

We believe we can provide our clients with the best possible solution by balancing their needs to our broad range of available solutions. We do anticipate that we will be moving more computer cycles closer to the clients and this will likely involve our establishing Regional Computer Centres of varying capacities.

Even with the advent of satellite technology, fibre optics, and other communications advances, we do not believe that communication costs will come down sufficiently to make it economic to transmit everything from the client to a single large computer. The growing tendency toward national privacy laws will also have an effect on our ability to do this in the future.

Once again, therefore, we believe that we are taking the right steps to adapt the technology to meaningful new solutions for clients.

OWNERSHIP

Toward the end of the 1976-77 fiscal year, several large organizations showed an interest in acquiring SDL. Bids were received from Crown Life Insurance Company and Sun Life Assurance Company of Canada. As you are aware, a third bid by Coastal Enterprises Limited was successful and Coastal now owns over 90% of the common shares of the Company.

The management of SDL believes that this will also work to our advantage. Capitalizing on the growing markets in the United States and elsewhere and the desire to see the market conditions in Canada improved will require aggressive management and investment. This would have been true had we remained a broadly held public company, or a company with a major controlling interest by one organization. The advantage of the current situation is that we should now be able to take a longer range view towards getting a good return on investment in the company.

The management looks forward to working out such plans with the new Board of Directors.

At this point, I would like to say a word of special thanks to those members who have retired from the Board. They saw the company grow from a standing start to over $20 million dollars a year. Their advice and assistance during this era of rapid growth is much appreciated.

OUTLOOK

As discussed in the Annual Report, we do anticipate that this year there will be a return to modest profitability. However, depending on decisions and plans of the new Board of Directors, it is possible that the profitability may remain low for the next couple of years, as funds are reinvested in future opportunities.

The management is enthusiastic about the future prospects in this exciting and fast moving field. Initial meetings with the new owners of the company indicate they share this enthusiasm. Together, we are looking forward to a period of aggressive growth, leading to expanded profits in years to come.

Back to Section A Index or just read on

 

THE WIRED CITY

(A background piece on the proposed acquisition of Ottawa Cablevision Limited
by SDL to form the first integrated wired city operation in Canada.
The intention was to offer such online services as in-the-home banking, shopping, education and information retrieval – this proved to be a bit premature as the Federal Government subsequently turned down our application to
acquire a cable company.)

We at SDL are excited with the potential of the Wired City concept and what it holds for companies like ours that are involved in information technology. In fact, we believe so much in the future of this concept that we are proposing to spend upwards of $11 million dollars to buy one of Canada’s leading cable companies in order to put us at the forefront in gaining an understanding of, and developing the products and services that will be a part of the future Wired City.

WHAT IS THE WIRED CITY CONCEPT?

Basically, it is the reality in future years of being able to deliver a broad range of information services into homes, industries, and institutions, affording the user convenience, choice, and participation in an audio visual dimension. The delivery vehicle for these future services and, in fact, the catalyst in the evolution of the Wired City concept, is the cable television system known as CATV. Rapid advances in CATV technology (indicated by write-off periods for CATV electronic equipment of five year or less) have resulted in an enormous growth in the potential of CATV from an original 12-channel concept into upwards of 30 deliverable channels. Couple this advancement in technology with geographical isolation in North America, and an unquenchable thirst for more and more choices of video material, and you have one of the fastest-growing industries in North America. Consider the following. that in Canada, with a population of 23 million people and 4,500,000 TV sets, cable subscribers number today 1,700,000, or 38% of the TV viewing market. The annual growth rate of cablevision subscribers is over 7%, which means that some 30% of all Canadians have this powerful conduit of information now in their homes and growing at a very substantial rate. In the United States, in a population in excess of 200 million people, there are 75,000,000 TV sets, and 8,000,000 subscribers, resulting in a penetration of 11%. The annual growth rate in the United States is much faster than Canada, exceeding 10%, resulting in some 15% of all Americans having this conduit for information in their homes. CATV, in its basic form, is an outgrowth of the master antenna idea and still offers, however, little more than a greater choice of stations and a better quality picture. The CATV industry itself does not really understand the powerful vehicle that they now possess; however, others very clearly do. The Bell Telephone Company (and AT & T) have already reacted by trying to define the limits of use that CATV companies can make of the Bell facilities that they rent. Also, in Canada, Bell Telephone has announced its desire to be a provider of cable services in competition with, and as an adjunct to, the present CATV offerings. The federal governments, however, have most certainly understood the potential of the CATV system and, through the Federal Communications Commission in the United States and the Canadian Radio-Television Commission in Canada, these governments have acted quickly to.

1. gain absolute jurisdiction over CATV

2. dictate interim policy designed to maintain the status quo, while settling future policy direction

3. to fund projects to learn about the advantages and disadvantages, benefits and problems associated with the blossoming CATV industry and with North America’s rapid growth towards the Wired City

4. limit foreign ownership of CATV and CATV associated companies

5. to "trial balloon" projected policy

The result has been confusing, to say the least. The CATV companies have found it difficult to make and carry out their fiscal plans with the governments waffling on decisions, being unclear in stating policy, and injecting new demands on the companies, demands which are either uneconomic or unfeasible, or both.

WHAT ARE THE CONCERNS OF THE GOVERNMENTS?

Is the broadband potential of the CATV cable itself a threat to the communications authority of a Bell Telephone company? To some degree.

Is the local distribution of distant television/radio signals infringing on the rights of native broadcasters and disturbing the business economics of the individual broadcaster? There are examples of these symptoms.

But, the real impact, the real concern, is much more significant than these. The concern is.

1. the quality of services to the general public

2. the protection of individual rights (privacy, security, freedoms re: race, colour and creed)

3. the quality of distribution throughout the nation

4. protection of national interests

5. disruption in the economics of related industries

By discussing the problems associated with the industry, and the great concerns being shown by the two major governments, I hope to underline the tremendous potential that this Wired City concept holds.

Now, let’s look at the types of services that one can envisage in the Wired City.

First of all, one has to look at an evolving CATV technology. The technology evolves through the following stages:

One-way service: This is simply a TV set, possibly with a converter to give it expanded capacity and offering up to 30 or more channels of information services.

Subscriber Response Systems: This contains a two-way cable operation, operating through a standard TV set, with a small response terminal, probably with not more than twelve function keys for subscriber response

Electronic Information Services: At this stage, we envisage a television set with a rather expansive keyboard and a two-way system, capable of very substantial two-way interaction between the user and the service.

Each of these stages involves substantial capital investment by the cable company in upgrading its plant facilities. For example, a simple amplifier upgrade, plus some re-wiring, may cost as much as $2-3 million dollars and take as long as two years to complete. When one talks of having a two-way cable system capability, this involves another substantial capital outlay plus associated technologies to make the capability functional. This could include, for example, frame grabbing technology, which allows the user to freeze information on the face of the television screen in order to examine it and interact with it. Each of these stages, as well, presents a more complex interface between the man and the system. These human interactions with electronic systems of this type require extensive research to understand human behavioural patterns and response expectations. To give you an example of the complexity of this research activity, a group of experts at MIT have been working in a "man-machine laboratory" for in excess of five years now, studying the man-machine interface problem. They use automatic and electronic means to research group discussions and behavioural patterns within those, and to check out such things as the use of cable television for remote diagnosis of patients by doctors from a central location. A multi million dollar project to test out various concepts of the Wired City was just completed in Reston, Virginia, financed by The Mitre Corporation, and Gulf & Western Company.

Consequently, the time horizon over which we view this development is subject to.

1. the technological state of the art

2. the economics of provision

3. the user rate of acceptance

In concert with this technological development, we envisage a development of services to accompany it. These services would use the enhanced technological capability as they evolve, and as we learn more about their development. Some of the criteria that would govern the development of these various services would be...

1. service economics

2. user acceptance

3. limits of viability

However, one thing is clear. that a number of services will be provided to the user at his convenience, subject to his choice and allowing for his optional participation. The audio visual medium will keep him very much involved. The user in this context may be an individual, a company, or an institution.

One can identify in excess of 180 different applications that can be married to the cable technology. These span a lot of areas, including education, law enforcement, medical care, unemployment, traffic,

and utilities management. Put yourself in a dream world and think about catalogue shopping in-the-home, presenting a whole new vista for merchandisers. Or, consider your utility meters, water, gas and oil, read automatically by the local supplier. Or, consider delivering banking and credit services into your living room.

Let’s now try and put this technological and application or service development in some perspective, by viewing some specific examples.

First of all, let’s look at the field of education. One can envisage offering the following broad range of products:

1. Elementary and secondary classroom instruction, either on a group or individual basis.

2. College and University degree courses in the "Open University" concept.

3. Job training and re-training.

4. Specialized training for the handicapped, the gifted, the slow learners, prisoners, professionals and the unemployed.

Why Should These Products Have a Market? The answers are fairly straightforward.

1. Advancing technology is obsoleting or changing job training requirements continually.

2. People change jobs regularly today and the old concept of a career for a lifetime is virtually dead.

3. There is an increasing amount of leisure time, a void that society must fill.

4. The high level of education that we are handing to our young people today leads to a thirst for more knowledge and an interest in on-going education.

5. There is a need to translate the formal education process into the real world’s needs, that is, the formal schooling we get to the age of, say 25, is really inadequate preparation for a lifetime of fulfilling career objectives and personal pursuits.

Some of these educational offerings have been offered in a very limited way, using the one-way concept. For example, in Toronto, Ryerson Polytechnical Institute offered degree courses using FM-radio, an optional set of books, and classroom time on weekends.

The course was offered to:

1. those interested in just listening to the programs

2. those interested in listening to the programs and receiving the texts

3. those interested in completing the entire degree process

While that particular experiment has not been an economic success, certain behavioural patterns have been observed, and it is believed that this could be extrapolated into quite a broad-scale offering.

The problems in bringing education into the home, office, or institution, through CATV, are many. First of all, the individual has differences in the level of education, commitment, motivation and sophistication.

Secondly, the CATV system itself has many shortcomings:

1. the channel capacity and its ownership

2. limited cable penetration to date

3. an inadequate demography

4. the quality of current cablecasting

Thirdly, educators themselves pose a problem.

1. faculty resistance

2. legal and copyright on programming

3. pricing inequities

4. the need for non-traditional education, a field in which we do not have a great deal of experience

Finally, the producer of the service, the prime contractor, if you like, has to be able to "put it all together." He is looking at the following decision criteria:

1. whatever product or services offered must contain a profit for all

2. the product or service must be acceptable to the CRTC or the FCC, or the other regulatory bodies

3. the product must be deliverable within the state of the art, that is, we must have resolved to that point the man-machine interface problems.

4. the product must be packaged to be exported to other CATV companies in North America in order to get the broadest market possible and increase the profitability of the venture.

5. there should be some outside funding sources when one considers the enormous capital investment costs in launching such a service. In terms of capital investment dollars, we are probably talking in the order of $5-6 million dollars. An example to put this capital investment into some perspective is the forthcoming experiment by The Mitre Corporation in Stockton, California, where an initial 2-3 year venture in education to 1,000 selected participants, will cost the American taxpayer, through government funding, close to $5 million dollars.

When one examines the vastness of the undertaking of developing and providing services in Education, one is staggered by the potential of service offerings that span merchandising, utility meter management, group discussions across the country without the limitation of geography, remote medical diagnosis, the monitoring of urban developments to assist the Departments of the Police, local Health units, and fire protection. How do we at SDL see ourselves fitting into this big picture?

Well... as information processors, as people involved in the information industry, we hope to be architects of computer-based systems that will provide the capability to deliver the service, or interface the service, with the CATV system. We wish to act in the role of the prime contractor, developing and coordinating the total service offering using the experience and know-how of the educator and retailer, and translating that into computer-controlled systems that will distribute, through the CATV vehicle, these products and services to homes, industry, and institutions.

Obviously, everyone in the piece has to make a profit, and everyone in the piece has to have a motivation for being involved.

We think it is clear that there is motivation and profit for all, and that the market and its implications are too great to ignore.

Back to Section A Index or just read on

 

THE FUTURE OF COMPUTER SERVICES IN CANADA

A talk given to the Canadian Information Processing Society and the Data Processing Management Association, Vancouver, B.C.

APRIL 10, 1979

Why is it important to review this segment of the computer communications industry at this time?

For years the excitement in the computer industry has centered around new hardware announcements or, in the last decade, new software advances. Now the computer services industry, which draws these two together, is in many ways the trend setter.

The computer services industry is the fastest growing segment of the computer field. According to the work done by the Computer Communications Secretariat it could outdistance both the hardware and communications parts of the industry in terms of revenue by 1985.

The computer services industry represents in microcosm the trends we can see in the industry as a whole, and by its nature must be at the leading edge.

We can start to meaningfully analyse the industry as it now has a ten year track record in its modern form. We can date the modern era from about 1968.

Finally, it is worth noting that although I will discuss the commercial service bureau industry, many of you run what are in fact internal service bureaus. The trends seen in the commercial sector apply just as readily to the in-house service bureaus.

THE INDUSTRY AS IT IS

In some ways this is an odd time for self-examination. The industry is just coming off its best year ever

• industry revenues exceeded $600,000,000.

• the industry provides employment for over 11,000 Canadians.

• the industry has enjoyed a growth rate of over 20% in revenue and has finally attained a level of profitability sufficient for it to reinvest adequate funds in long range R&D.

However, the industry could be in the same position as many happenings that looked their best just before a decline.

Are we the dinosaur of several million years ago, the stock market in the mid 1920’s, or the nuclear aircraft carrier in the early 1970’s?

The problem with many of these seemingly successful situations was the inability to foresee and adapt to a changing environment. Even with perfect foresight, size or momentum can make it difficult to change.

Is the computer services industry in Canada in this situation?

A DYNAMIC DECADE

We can get some perspective on where the industry is going by being very honest about what really happened to get the industry where it is today.

During the late 60’s many books and articles were written about the benefits of the Computer Utility industry, the coming Information Age, the Wired City, etc. But really there was a particular set of circumstances that allowed a number of entrepreneurs to capitalize (literally and figuratively) on several important trends:

a. Large universal computer systems became available in the mid-60’s with operating systems that allowed multiprogramming.

b. Data communications facilities developed to the point where they were usable on a large scale.

c. There was a buoyant stock market.

The economy of scale of the new/360 Series, 1108’s, and similar large machines was a significant advance over their predecessors. More important, the generalization and power of the operating systems meant that the application programmer saw himself as interfacing with the operating systems rather than the computer. Physical nearness to the computer was no longer necessary. The powerful systems also allowed meaningful sharing of the computer resource.

Data communication had been a laboratory curiosity before the early 60’s, but was finally recognized by the common carriers as having real revenue potential. This ensured that attention was paid to it.

Finally, there was at that time a real financial incentive to undertake new ventures (for the entrepreneur B.C. refers to Before Capital-Gains-Tax).

The industry was an opportunistic response to its times.

It was amazingly successful, considering it was developed around the available technology rather than in response to specific user needs. It has always been an ‘alternative industry’ with other feasible approaches for the user readily available.

Two reasons for its success were

1. It demonstrated considerable dexterity in adapting technology to meet the needs it had convinced people they had.

2. It realized that with good marketing, you can sell anything.

To provide a preliminary answer then to the question posed at the outset, I believe that the computer services industry can avoid going the way of the dinosaur if it concentrates on imaginatively adapting new technology to client needs and on good marketing. Come to think of it, this applies to most industries.

TRENDS—PERCEIVED AND REAL

Before we examine where the industry is going, we should quickly look at where it is in terms of what we perceive we sell, and the user perceives he is buying.

1. WE SELL CYCLES

The industry believes that it sells a sophisticated form of computer cycle which provides a viable alternative to what a user could do on an in-house installation.

These cycles are usually sold to data processing people.

They are usually bought because these data processing people:

• need access from time to time to a very large machine, but would prefer to pay for the privilege by the pound (or the kilo!).

• they need assistance with peak loads.

• they would like a buffer against the constant change in hardware and software

• that is expensive and time consuming to implement.

• they need access to specialized software.

• they are trying to improve their programmer productivity which is their most expensive resource by ensuring the cycles he or she needs for testing will be available when needed.

In a word, users buy these sophisticated cycles because of the improved cost effectiveness and advanced function.

2. WE SELL RESULTS

The industry believes it is adding value to the client’s data processing needs by providing application oriented systems. It is the approach of solving a problem for the customer, rather than simply doing what he is already doing in a more cost effective manner.

Such services are usually sold to non-data processing people, i.e. end users.

These end users usually buy these services because:

• they are looking for a form of expertise that does not exist within their own organization.

• they do not want to build up staff in-house for what may be a temporary or specialized need.

• they likely do not have the expertise to manage internal staff of this type even if • they could acquire it.

• they believe they can get faster implementation by contracting outside.

• they may be able to get a less expensive result because of prior experience or prepackaged approaches or programs developed by the supplier.

In a word, these people are buying something they believe they cannot get as effectively internally.

THE CONVENTIONAL WISDOM

The conventional wisdom in the industry says that the latter approach is the way of the future.

WHY? The argument is that:

The cost of cycles is declining. Therefore, it is getting cheaper to install in-house hardware. The economy of scale is not what it used to be. Now the mini is making decentralized processing not only possible, but practical.

The complexity of large operating systems that allow multi-programming is getting in the way of economy of scale. Too much of the time of a large central processor is used up with unprofitable overhead.

While the cost of cycles is declining, the cost of data transmission is not declining nearly as rapidly.

Finally the user always really wanted his own machine and only the temporary cost advantage of the 70’s caused him to go outside.

Therefore, the need for large central cycle selling is doomed. The only solution is selling value-added services.

FACTS VERSUS THEORY

I was one of those who not only believed the conventional wisdom, but tried to implement it. After several years of trying this at SDL I have had to admit that cycle selling still pays the overheads. I have been unable to grow the value-added business to more than about 25% of our total revenues. Even this was done largely through a series of acquisitions.

Further, the machine replacement business which is really cycle selling taken to its logical conclusion, is doing just fine. This approach is the ultimate in Facilities Management, where the facility itself does not even exist on the customer’s premises.

This business which everyone predicted would decline with the falling cycle costs, is so healthy that at Datacrown we now have more equipment installed than all but three other organizations in Canada (all three happen to be banks). The business has not only grown to be large—about $50 million in revenue last year for Datacrown and SDL together—but profitable. For 1978 this rate of revenue produced a profit of over $5 million pre-tax.

What is really happening?

I believe that what we have done is lead the computer industry in a fundamentally new direction.

WE HAVE CHANGED PEOPLE’S FOCUS FROM MANAGING HARDWARE TO MANAGING INFORMATION.

Having made this breakthrough, the sophisticated user is not likely to revert to the time consuming diversion of managing the process rather than the data. The computer services industry has a fundamental reason for existing.

However, there are other reasons why the cycle selling business is booming:

• while cycle costs are declining, people costs certainly are not. It still costs a great deal to staff computers for multiple shifts, pay scarce systems programmers, and provide the management time for a major installation.

• software is becoming more costly as more unbundling occurs. A service bureau can provide one central copy of a program, rather than each individual having to pay the full cost.

• not all the costs of computing are declining at the same rate. For example, peripherals such as printers are not getting substantially cheaper. Economy of scale still exists.

• communications costs are high if the facilities are not fully utilized. A large computer services supplier can provide a major shared network, thus reducing costs to all users.

• the user today is sophisticated and is now quite willing to accept that external facilities are at least as secure as internal computer centres.

In a word, the user will buy a well managed pool of cycles because of its overall cost effectiveness. It also relieves the user of the endless hassle of management supervision of a constantly changing environment.

WHAT ABOUT THE NEXT DECADE

(a) Specialization—Sophisticated cycle filled networks will be provided by a few very large companies. This need for large capability, is one of the reasons for recent merger of SDL and Datacrown. I predict there will be a number of other mergers in the coming months.

Co-existing with these large national companies, will be a number of local suppliers of custom programming. Such work by a local supplier may be economic because it will not have to bear the overheads that would be applied by a major network supplier. The economy of scale does not necessarily apply to custom programming.

There will be some national organizations who will provide both value-added and network services, but I believe these will only be successful if they organize their value-added product lines as separate specialized divisions. These divisions will operate like small companies with their own sales force marketing to particular end users.

I do not believe that single supplier responsibility is as important as it once was in the computer field. The growing use of mainframes, peripheral equipment, software and common carrier services, all from different suppliers has led the sophisticated user to be fully prepared to buy cycles from one supplier and custom programming from another.

The result, in Canada, may be two or three very large national network suppliers with perhaps two or three hundred smaller suppliers of software.

(b) Systems Designed Around Data—The widespread use of improved Data Base Management Systems will encourage users to concentrate on the management of data rather than the network. I believe this to be a far more fundamental change than the widely discussed Distributed Processing concept.

Distributed Processing will play a role, but will become only a cost/effectiveness consideration. It is not a fundamental breakthrough.

Although a certain amount of intelligence will certainly be distributed, a large central machine somewhere in the network will still be required for:

• the processing of very large files.

• the consolidation of data from many network sources.

• integrated corporate modelling, and other projection techniques.

• availability of centralized information banks that would not be worthwhile keeping up to date on a distributed basis.

• availability of specialized programs where it would be uneconomic to keep these on a decentralized basis.

• back-up.

Users will depend on computer services network professionals to optimize the delivery system which will include a consideration of the best balance between centralized and distributed processing. The user will concentrate on the data and the application.

(c) Growth Of The Stand-Alone Mini Installations—The growth of the one machine/one application approach will be important, but primarily for small businesses. This will have little effect on the computer services industry as there is not much concentration in this area in any case.

IBM recognized that the small business market is not a good service bureau market when it sold the Service Bureau Corporation some years ago. I believe that if IBM re-enters the computer services field it will be through the Satellite Business Systems approach of concentrating on the Fortune 500 companies. The non-IBM computer services industry can approach a broader customer base, but still will not likely be able to market effectively to very small businesses or the home market. Small businesses whose major data processing problem is essentially in one area, e.g. distribution services, may well be served by a small dedicated in-house mini, perhaps with a link to a central site for some needs.

The implementation of Electronic Funds Transfer Services and some of the Wired City approaches are best left to the banks, the cable companies, or the Bell. Computer service companies could, however, become ‘information suppliers’ to any Wired City approach.

(d) Increased Data Transmission Capability—The pending competition between AT&T and IBM will lead to rapidly improving capability in the data communications field. The cost structure of data transmission should also improve with the availability of satellite facilities. There appears to be an over capacity at the present time which should make pricing more attractive. This will tend to encourage the use of networks by the few very large companies.

(e) Declining Cycle Costs—This downward trend will continue for both CPU and storage costs. However, the cost of leasing unbundled software and the cost of operating staff will continue to rise, offsetting this cycle cost advantage.

(f) Minimal International Computer Services Business -I have often expressed concern about the pending growth of international barriers to data transmission. I do not believe that computer service firms in Canada will be threatened by remotely located computer cycle suppliers and do not feel they need artificial protection.

The world wide growth of nationalism is very clear. I believe therefore that ultimately Trans-border data flows will be allowed only in certain areas such as access to generalized information banks the use of international credit cards, and certain types of information for Multi National Corporations. Access to many other forms of data will be restricted despite the attractiveness of lower satellite transmission costs.

At Datacrown we have seeded the expansion into the United States from a Canadian centre, but are planning to locate centres in other countries as required. What we will do in the long run is export the know-how, not transmit the cycles.

SUMMARY

In general, I project a very vigorous decade for the computer services industry.

• The need for improved productivity in this country is immense. This is the service we provide to other organizations.

• Qualified computer-professionals will be in short supply and organizations are going to have to use all the talent they have for application development rather than cycle delivery.

• The technology gives a great range of implementation possibilities to the computer services supplier. All we need to do is use our imagination.

The approach for computer service suppliers will be to provide specialized knowledge and facilities that are sufficiently advanced that it will not be worthwhile for the generalists to compete. This specialization may be in cycle selling, or application programming, or in certain instances, both.

The success will go to the firms who choose well what they want to do, and then do it well.

Back to Section A Index or just read on

 

SDL: A YOUNG COMPANY GROWING UP

A TALK GIVEN AT THE SDL ANNUAL BUSINESS CONFERENCE

KINGSTON, ONTARIO

FEBRUARY 1, 1977

When I see fifty young and enthusiastic Managers discussing strategies and making plans, I am confident that none of us have any reason to worry about the future of SDL. As I have said many times in the past, the future is what we want it to be as long as we are reasonably astute in choosing an approach with lots of scope. There is no doubt in my mind that the company has chosen an industry with all the scope and excitement that anyone could wish. The challenge before us now is to make good choices regarding the parts of that field in which we want to make our mark in the years to come. Part of that challenge will be to make sure that we reasonably match these choices for obtaining our desired results to our available resources. This is what you have been discussing at the Annual Business Conference. For my part, I usually talk a lot about the future. Today, however, I am going to talk about today—about a unique company whose greatest strength is its ability to capitalize on its strengths and to survive its own mistakes. A company cannot move forward if it is not willing to take risks. In the past, we have been a rather exciting risk taker. This has led to our share of great leaps forward as well as some hard landings at the end of the jumps. All the moves have sprung from an honest and enthusiastic attempt to move the business ahead to new heights and to push into new frontier areas. The result has been a relatively rapid growth to a $20 million dollar a year company. But, in retrospect, some of the risks taken were higher than necessary. While revenues grew, profit growth was very uncertain. The company is still carrying some overheads from those ‘heady’ days of youth. However, in general, we have come through this exuberant period relatively unscathed and we do have a very large base of revenue and working capital on which to build the future.

SDL has been like any youngster in its teens. Growing up rapidly has meant growing out of our clothes quickly and being a bit awkward from time to time. However, like any intelligent youth, we have learned a great deal. Now we look forward to an era of new management and new ideas. As a group, you can certainly profit by some of the mistakes your predecessors made. However, you should not be blinded by them. Columbus did not have a detailed map of the Atlantic and, if he had waited for one, the New World would never have been discovered. The challenge is to get the right mixture of innovative enthusiasm and businesslike prudence. What have we learned from our early years?

First, everyone makes mistakes. Never brood over them. Admit them, take corrective action and get them behind you as quickly as possible.

Secondly, recognizing that everyone makes mistakes, be careful about buying other peoples’. There is not much that others can do that we cannot do ourselves. Faith in our own team is nearly always faith well placed.

Thirdly, you cannot do everything at once, but you cannot do anything if you do not aim carefully and pull the trigger smoothly. This is what we are trying to do now.

We are entering a phase that does not allow us the undisciplined approach of youth. This is a tough thing to have to realize and even tougher to adjust to, and there are those who just never grow up. It is as though we were entering our early twenties faced with a growing family, a mortgage, and generally much broader responsibilities.

Just remember, it is also a time where great energy will produce great results. Like a youth entering his twenties, the future holds all sorts of opportunities that will be full of excitement and challenge. The difference at this stage in the life of a young person or a young company is the need for a more mature and disciplined approach. It is this kind of realization that led us to change our lifestyle. At SDL, we have always been aiming at a long and fruitful life, not the California lifestyle of multiple divorces, tranquilizers, and nervous breakdowns. The phase we are entering in our corporate life needs mature planning and precise execution. This is why we have been going through some reorganization. This is also why we have had the management training program with Omni systems, why we have developed better corporate procedures as you will shortly see in COMPASS and why we hold such sessions as the Annual Business Conference. It is a period that requires managers who enjoy being really professional managers. It is a time that requires some patience. It requires a great deal of steady development. The team we have got is the team we need NOW—today’s managers for today’s job. I emphasize that that job involves looking for the right balance. Maturity must not mean senility. We are not here to manage manuals. We are here to produce profits. This will require more imagination and innovative behaviour than ever before. The thing that has changed is the implementation of our ideas, not the implantation. We now need the kind of thinking that really pushes back frontiers—that careful, but imaginative approach that put a man on the moon, not the kind of shallow thinking that leads to hoolahoops or pet rocks. This is tougher, for it requires both imagination and implementation. The greatest change you will have noticed in SDL is the emphasis we are now putting on bridging the gap between our broad corporate aims and the specific results we want. Sometimes our corporate plans have been closer to corporate dreams. We are now fully awakened to what we have to do.

I am confident that we are going in the right direction. Part of this confidence arises from our approach of taking the time to set realistic objectives, plan how we will reach these, train people in what is required, and then put the plan into action. What we are really doing is applying the principles we developed in the System Life Cycle to our own business. The evaluation phase will be a very important part of this process. This is an environment in which you can learn, grow, and mature into outstanding managers. Don’t miss this opportunity. Management skills, once learned, are never lost. You can both learn and contribute a great deal in the next few years at SDL.

I have many other reasons to be confident about our position today. We have a company that can finance its own future -if we are prudent. We are not a huge company and we cannot spend like one. We can get farther faster if we make fewer mistakes—not that we expect to make no mistakes, but just fewer and, hopefully, smaller ones.

We have a tradition of being a company of new ideas, particularly in technical areas. We must continue the development started during the past year of building the sales side of the company and making SDL into a truly marketing-oriented organization. We will be an organization which retains its strong technical ability, but which now concentrates on smarter marketing of the products we develop. We will always need the better mousetrap, but we also need a lot more mice if we are going to make building that mousetrap really worthwhile.

More than any of the other assets the company has, my real reason for confidence in the future is YOU. If you came to the Annual Business Conference expecting easy, miracle answers, you now know that none exist. This is not what we expect. Miracles like meteors are short-lived in any case. What we do expect are sound plans, soundly executed. You are the base on which all our future accomplishments will be built. It is up to all of us to show that SDL is not only here to stay, but can develop that steady growth in revenue, profits, and financial position that I have already outlined to our shareholders as our aim. Our business can be fascinating. It can even be fun. It cannot be frivolous.

People expect more of an older, more mature, professional. They now expect more of us.

I know we can deliver. All we need is the challenge. We now have that.

For the first time in four-and-a-half years, we are actually losing money. This has come as a bit of a shock to the industry. Our pride in our work is such that we will not let that happen any longer. The challenge I am throwing out to you today is to have this company operating in the black by the end of this fiscal year. That is just the start.

The plans you are making for fiscal ’78 I am sure will indicate to everyone that we are not only moving back into the black but also forward to a very exciting period of profitable growth.

Back to Section A Index or just read on

 

SERVICE BUREAUS IN CANADA

The computer services industry in Canada is only about ten years old. This does not mean that there were no service bureaus in Canada before this last decade. However, the events that led to the establishment of an industry, rather than a few scattered companies, began as it did in the United States at the time of a buoyant stock market and in response to an opportunity to capitalize on new technology. The new technology, as viewed by Canadians, was the maturing of the communications facilities and the stabilizing of the operating systems of very large computers that allowed multi-programming capability. In general, the industry in Canada did not grow out of the PROJECT MAC type of interactive computing but, rather, from the need to provide computer capability for production work across a large country. Canada tends to be a branch office or distribution economy. In general, we lack the large research and development and scientific markets. As a result, there was less need for a FORTRAN-oriented interactive program development service, such as had an obvious market in the United States to service the industries that had grown up around NASA, AECL, the aircraft and electronics industries. The need in Canada in 1967-68 appeared to be for production work. This led to the early emphasis on Remote Job Entry.

EARLY INFLUENCES

IBM had offered service bureau facilities in Canada since the 1930’s. They dominated the service bureau market and continue to be the largest single factor today. As in the United States, there was, however, always some inconsistency of purpose in IBM’s service bureau approach. It was never clear in the 50’s and 60’s that IBM really saw a separate market for service bureau facilities. It appeared more likely that they used the service bureau simply as a lead for machine sales. IBM World Trade was not constrained by the U.S. Federal Court Order requiring them to leave the service bureau field. As a result, IBM now competes with the Service Bureau Corporation in Canada, which is a subsidiary of the Control Data Corporation as it is in the United States. During the early 60’s, IBM was particularly active in the On-Line Banking business and services to the brokerage community. IBM still dominates these markets today. There were other early entrants in the batch service bureau business. The Statistical Tabulating and Recording Company offered services on Remington-Rand equipment in Toronto and elsewhere. Batch services, such as National Datacentre Corporation in Vancouver, and Welby Services in Ottawa, had offered services since the early 50’s. However, the real boom started in Ottawa in 1967.

THE BOOM PERIOD

The biggest single user of computers in Canada, as in many other countries, is the Federal Government. It was natural then that the first large private service bureau should start here to tap this huge potential.

COMPUTEL was the idea of Warren Beamish, a former UNIVAC employee, and Bob Horwood, who was with the Federal National Energy Board. Together they raised the funds needed to purchase an 1108. This system was accessed by 1004’s operating as remote batch terminals. The system went into operation in 1967. Systems Dimensions Limited (SDL) followed in 1968 after arranging for an underwriting of $17.5 million dollars to enable its founders, John Russell, Guy Morton, and me, to order an IBM 36 0/85 which was the largest IBM machine available at that time. This system was installed in Ottawa and also operated on an RJE basis. The first large Toronto installation was a private concern known as SETEK. Dr. Joseph Kates, its founder (SETEK is KATES spelt backwards), used a Burroughs 5500 as their initial equipment. Dr. Kates, who is now the Director of the Science Council of Canada, pioneered a traffic control system for Toronto, amongst other early projects.

Of more lasting influence on the service bureau scene, however, was the continued influx of new companies resulting from public offerings in that buoyant stock market. In 1969, Multiple Access General Computer Corporation (now simply Multiple Access Limited), was formed in Toronto by Bob Parker. This was the first service bureau built around a CDC 6600. Clearly, the Canadian market now lacked neither choice of equipment, nor variety of service. In the West, Professor Bernie Hodson, started a company called SYMBIONICS Systems in Winnipeg, This was also a CDC-based bureau. However, the market in Winnipeg proved insufficient to support the organization and it lasted only a couple of years. There were a number of other false starts. COMPUTIME in Vancouver resulted only in an impressive but empty computer building. There were rumours of another group planning a Centre with a CDC-6800—neither this group nor the 6 8 00 ever got off the ground. In Montreal, System Corporation Limited, did make the first attempt by a public company to launch an interactive marketing program built around an IBM 360/67. This attempt was also short-lived. Also in Montreal, a firm called AQUILA, which was founded by Sir Robert Watson-Watt, the radar pioneer, began to offer Facilities Management services to organizations, such as the Montreal Stock Exchange. SMA (Societe Mathematiques Appliques) was the first CDC-6600-oriented Centre in Montreal. The flood of public companies continued. Some, such as AGT Data Systems, were primarily in the business of program development, although this organization did operate for a short while an RCA SPECTRA 70 in Toronto. All of this activity in the 1968-70 period caused the Federal Government to take a closer look at this growing industry. It was the industry, however, that took the first step toward becoming more involved with the Federal Government. The catalyst was the purchase by CN/CP of a 51% interest in Computer Science Corporation in Canada. These two huge corporations (Canadian Pacific being a publicly-owned corporation in transportation, hotels, airlines, etc., and Canadian National being a crown corporation in a similar line of business) had established a joint organization to offer low-speed communications facilities. They now wanted to expand into the growing computer services field. A group of the early entrepreneurs met with several senior Federal Government ministers in 1970 to protest the impending competition from the common carriers, in general, but in particular from a partially publicly-owned organization. The protest did not lead to a reversal (CN/CP still owned a share of CSC until 1976 when CN sold its 25% interest back to CSC). However, it did lead to an intensification of the Federal Government interest in the industry.

THE FEDERAL GOVERNMENT INFLUENCE

The Honourable Eric Kierans had been given responsibility for the operation of the Canadian Post Office. If nothing else, he was a man of vision and felt that the Post Office should see its mandate as the movement of information. The Post Office has never been the same since and the computer services industry was similarly swept up in a series of Federal Government initiative. The Telecommission was the first. The newly-formed Department of Communications, which incorporated the Post Office, arranged for a series of seminars on matters such as the Wired City, the socio-economic impact of computer communications, and other such lofty subjects. The Department then established the Computer Communications Secretariat under Dr. Hans Von Baeyer, which resulted in a monumental study of the computer communications industry in Canada. The resulting publication called ‘BRANCHING OUT’ was a fascinating look at the computer services industry and made the prediction that it would grow to a $5 billion dollar industry by 1985. This added to the euphoria. This minute new industry, which had been pampered by the stock market, was now elevated to national prominence by the Federal Government studies. By early 19 72, one of the companies in the field had even started making a profit I

WHAT GOES UP…

Against that background, new companies of a different type began to emerge—the spin-offs. This had been a common feature of the industry in the United States but, in Canada, without the benefit of a large aircraft industry, it was the life insurance companies that took the lead. In 1971, the Crown Life Insurance Company established a Toronto-based organization called Datacrown under the leadership of Dick Taylor. Next, four large organizations formed a consortium in Toronto called ‘The Canada Systems Group’. The companies were the London Life Insurance Company, Eaton’s, Stelco, and TRW. Eaton’s was Canada’s largest department store chain and Stelco is the Steel Company of Canada. London Life, however, left the group in its early stages as did TRW. Gulf Canada is now the third member of the consortium. These new entrants enjoyed some advantage over the earlier public companies, as they had available some captive market and, to a degree, this internal workload could be processed at night and on weekends. All of this added capacity was starting to take its toll. Profits in the 1973-75 era were hard to come by. Price competition was keen. The computer industry was no longer the darling of the brokerage community. Stocks were depressed. Reorganizations and takeovers began. COMPUTEL was acquired by the Royal Trust Company who now own over 9 8% of that organization.

MULTIPLE ACCESS LIMITED, which had run up substantial losses, was reorganized through a reverse takeover of a profitable broadcasting business in Montreal. MAL is now controlled by Cemp Investments which is, in turn, an investment organization for the Bronfmann family of Seagram’s fame. AGT DATA SYSTEMS was absorbed by MAL.

AQUILA merged with BST. The latter was a program development firm, also based in Montreal. SMA was bought over by Power Corporation, which itself was a huge Quebec-based conglomerate. In fact, by the mid-1970’s only SDL remained amongst the larger corporations as an independently-held public company. This was not the last.

THE INDUSTRY In the MID-70’S

There were now a number of large companies in the $15-20 million dollar class…

- Computel - SDL - Datacrown - CSG - MAL

…plus, of course, IBM, with revenues of over $40 million dollars. The market was crowded but the surviving companies were either profitable or, at least, moving toward profitable operation.

In 1975, a new spin-off arrived. 1ST (Industrial Life -Technical Services) was launched by the Industrial Life Company of Quebec City. This company was also going the route of using large IBM, or IBM-compatible, systems. They aimed at the large Federal Government market, as well as the marketplace in Quebec. This had the effect of further sharpening the competitive pricing, as there were now six major firms, plus IBM, offering services on large equipment.

For the time being, this was more than the market could handle. SDL, which had been the largest supplier to the Federal Government, saw its Ottawa market eroded. In the summer of 1977, it was acquired by a Nova Scotia-based investment firm, thereby ending what had been a "roller coaster stock market" in publicly-traded computer service company securities for nearly a decade. Fortunately, the computer services market was continuing to grow and, despite the competitive situation in the country, all the major companies were operating profitably by the end of 1977.

THE INTERACTIVE MARKET

To this point, it would appear that the market in Canada was served only by batch services or RJE. In fact, there was a growing interactive time-sharing market as well. I.P. Sharp Associates became one of the leading proponents of APL and developed this into an international product line without outlets in the United States and the United Kingdom. Dataline in Toronto has successfully developed an interactive product line built around PDP equipment. A number of other companies in the $2-5 million range also offer a variety of interactive services. Lately, there has been a growing tendency for the larger RJE firms to offer a form of interactive services as well. In fact, the trend in Canada is similar to that in the United States, but the approach is from the other direction. In the U.S., the time-sharing firms appear to be broadening their services to offer more RJE while, in Canada, the RJE firms are expanding into the interactive time-sharing area.

SPECIALTY FIRMS

As could be expected, there are a number of firms that specialize in Payroll, or similar applications. The COMTECH Group International is a good example of a successful company specializing in Payroll and Financial applications. COMSHARE is a good example of a Canadian company that has expanded beyond the Canadian border, with subsidiaries offering services in the U.S., the U.K., and Europe. ALPHATEXT is an Ottawa-based firm specializing in text retrieval, photo composition, and other printing-related applications. There are also a number of firms, such as Digitech Limited and Riley’s Datashare, each based in Calgary, which tend to specialize in applications for the petroleum industry. This leads to a second observation about trends in the Canadian industry. As well as a move toward more interactive services, there is also a clear trend toward more Value Added. Although some firms, such as Datacrown, have tended in the past to successfully concentrate on the replacement of in-house computers, most have now added the capability to develop custom solutions to client problems and many have added proprietary packages for general purpose and industry-independent applications.

OVERVIEW OF THE INDUSTRY

There are now over 300 firms in Canada offering some form of computer-related service. Many of these are small local firms and a large number provide only a single service, such as data input. Statistics Canada uses the number 347 in their 1975 survey, but the industry association in Canada (CADAPSO) can locate only about 180 as being truly active.

Still this is a large number relative to the size of the Canadian market. The 9th Annual ADAPSO Report puts the number of U.S. computer services firms at 2,550. As ADAPSO does not likely cover the very small firms, a comparable definition in Canada would be closer to the CADAPSO estimate of 180 firms.

With a Gross National Product in the U.S., which is ten times that of Canada in 1975, one would expect about 180 computer service firms in Canada. This should be particularly true when one considers the threshold necessary before automation is feasible. In a word, one can conclude that the Canadian market is well supplied with computer services. In terms of revenue, for 1975, the Canadian industry was at $286 million dollars, while the U.S. industry was at $4,580,000,000. The average size was, therefore, not that different from the U.S. counterparts ($1.6 million in Canada vs. $1.8 million in the U.S.).

Even more surprising is an examination of the size of the larger Canadian firms:

THE TOP COMPANIES IN THE CANADIAN COMPUTER SERVICES INDUSTRY

ESTIMATED DATA PROCESSING

COMPANY NAME IBM Canada Ltd Canada Systems Group Ltd Systems Dimensions Limited Computel Systems Limited Datacrown Ltd Multiple Access Limited Canadian General Electric Ltd Comshare Ltd I.P. Sharp Associates Computer Sciences Canada Ltd Aquila BST Ltd SMA Ltd * Manitoba Data Services SDI Associates Ltd Saskcomp 1ST Inc Dataline Systems Ltd Newfoundland & Labrador Computer Services Group Alphatext Ltd Comtech Group International Digitech Ltd National Datacentres Computrex Centres Ltd R. Angus Computer Ltd MICR Systems Ltd Riley's Datashare Int'l Ltd Real Time Datapro Cybershare Ltd Maritime Computers Ltd

FISCAL YEAR END Dec. 31 Dec. 31 June 30 Aug. 31 Dec. 31 Mar. 31 Dec. 31 Dec. 31 Dec. 31 Dec. 31 Aug. 31 Dec. 31 Mar. 31 Apr. 30 Mar. 31 Dec. 31 Dec. 31 Mar. 31 Dec. 31 June 30 June 30 Mar. 31 Mar. 31 Mar. 31 Dec. 31 May 31 Feb. 28 May 31 Dec. 31

OWNERSHIP U.S. Canada Canada Canada Canada Canada U.S. Canada Canada U.S. U.S. Canada Canada Canada Canada Canada Canada Canada Canada Canada Canada Canada Canada U.S. Canada Canada Canada Canada Canada

REVENUES *1976 35 24 20 18 16 16 16 11 10 10 9 8 6 6 6 5 5 4 4 4 4 3 3 2 3 3 2 2 2 TOTAL TOTAL GROWTH

($ MILLIONS) 1975 35 21 21 14 12 12 14 9 9 9 6 6 3 6 4 1 1 4 4 3 5 3 3 3 2 2 2 2 2 257 220 16.82%

 

* Now part of 1ST Source: EDP In-Depth Reports, September 1977

This chart indicates that, not only is the industry growing at a healthy 17% but that it is predominantly Canadian-owned. In fact, only five of the top 29 firms have foreign-ownership and these represent only 28% of the revenue of the industry. Even this latter estimate is somewhat suspect, as Computer Science Canada is partially owned in Canada and R. Angus Computer Limited might as easily be classed as Canadian ownership at the present time. But revenue is not the only measure of progress. It is difficult to get an accurate picture of the profitability of firms in Canada compared to the United States. R.W. Evans of Evans Research Corporation in Canada calculated that, for 1974, the average profitability in terms of pre-tax profit margins for the seven largest independent U.S. computer service firms was 6.0%. At that time, the average for computer service firms with revenues about $2 million dollars in Canada was 2.4%. It would appear that firms in Canada are somewhat less profitable than their American counterparts. Finally, one could observe that there has been a geographic tendency to concentrate the location of major computer centres in the triangle formed by Toronto, Ottawa, and Montreal. In fact, all of the larger firms have their major facilities in one of these cities. Most have chosen to serve the rest of Canada through branch offices.

COMMUNICATION CAPABILITIES IN CANADA

One of the reasons for this tendency has been the availability of relatively good Trans-Canada computer communication networks. These services are offered by the Trans-Canada Telephone System (TCTS)—a consortium of the telephone companies across Canada, and by CN/CP. The latter organization was discussed earlier. The keen competition for the ‘digital dollar1 led to the early offering of a variety of facilities suitable for the development of the new remote computing field. In the early 70’s, TCTS announced DATAROUTE—a cross-country digital system. CN/CP followed with a similar system. Although costs in Canada for modems and circuits were, in general, considerably higher than in the United States, the quality and availability of service has generally also been high. This does not mean that the industry did not have to keep a continued pressure on the carriers to allow foreign attachments, in-house multiplexing, etc., but overall the availability of suitable communication services has helped the growth of the computer services industry in Canada. Recently, the carriers have introduced packet-switching networks. TCTS is offering an X-25 Protocol service called DATAPAC. CN/CP is offering a similar system called INFOSWITCH. Both systems will link all the major Canadian Centres. The Federal Government has taken a particular interest in the establishment of a compatible, national network, suitable for EFTS and similar applications. In a policy paper issued in 1975, the government endorsed the idea of one network compatible with international standards rather than one oriented toward any particular manufacturer.

THE CADAPSO STAND ON COMPETITION

The relationship between the common carriers and the computer services industry, however, has not always been smooth. As noted earlier, it was the involvement of CN/CP in the industry that first caused the leaders in the fledging field to get together. This led to the foundation of CADAPSO (Canadian Association of Data Processing Service Organizations). This organization is made up of over 60 firms representing about 80-85% of the business volume of the industry in Canada. CADAPSO has a close working relationship with ADAPSO. The position taken by CADAPSO on the entry of the carriers into our industry was the general principle that any organization should be allowed to provide services as long as they did not receive any advantage from a government-granted monopoly position that could lead to unfair competition. This was interpreted as meaning that the carriers, one of whom was already in the field, could offer services, but only on an ‘arms length1 basis, with no cross—subsidization, interlocking management, or joint advertising. In general, this was a position that anyone could invest in the field but only in a way that would allow all to compete fairly. There was immediate speculation that Bell Canada, the major member of the TCTS group, would enter the industry. Bell did not contemplate this. Their only venture to date has been a partial ownership with the Bank of Nova Scotia of Telaccount Limited. Telaccount offers simple accounting services to several hundred businesses, using a touch-tone phone for data input and a delivery service for output. The offering has not been a financial success.

This raises the question of Canadian banks and their posture in the industry. As in the United States, banks often offer payroll services for clients, but the banking situation in Canada is vastly different. The eleven Canadian chartered banks are powerful organizations and most have extensive branch operations across Canada, e.g. 1,000-2,000 branches for each of the major banks. It was quickly noted by CADAPSO members that these organizations could dominate the industry and use tied sales or other approaches to encourage clients to do most of their financially-related applications through the banks. The Federal Minister of Finance agreed with this contention and, in January 1975, issued a policy directive that banks would be limited to two types of services:

1. Wholesale Banking Services that are the provision to other financial institutions of computer services involved in the internal operations of a bank. These include the use of computers to support such services as clearing, deposit-taking, lending, mortgage and securities accounting.

2. Automated Payment Services, that is, the provision of data processing services closely related to the making of payments. These services are limited to such services as pre-authorized payments, descriptive deposit account statements, and payments-related parts of payroll preparation plans."

CADAPSO is now working with the Federal Government to ensure that such a policy is reflected in the Bank Act when it comes up for revision in 197 8.

THE GOVERNMENT AND THE COMPUTER SERVICES INDUSTRY

A peculiarly Canadian tendency is to have a mixed economy in which private enterprise and government organizations openly compete in the same market. This is true in radio and television, rail transportation, airlines, communications, and even the manufacture of plastics. This hybrid economy does not result from any deep philosophic socialism, but rather a pragmatic approach to doing what is easiest. This quasi-socialistic approach is creeping into the computer services field. One federally-owned crown corporation, called Polysar Limited, operates in the computer services field through a company called Polycom. At the provincial level, nearly all provinces have established organizations to service their own government agencies. These organizations compete for government business directly with the private sector. It should be noted that the Federal Government did have an organization known as the Central Data Processing Service Bureau for the same purpose that subsequently disbanded it. Of even more concern is that several of the provincial government organizations, e.g. Manitoba Data Corporation, Saskcomp, compete for private business as well. In Ontario, the Ministry of Government Services competes with the private sector for the business of the municipalities. All of this has had the effect of increasing the already highly competitive market conditions in Canada.

TRANSBORDER DATA FLOW

One final influence on the computer services industry in Canada has been the concern that major U.S. firms would enter the Canadian marketplace. To date, this has not happened in any significant way. Perhaps this is because the market in Canada is so competitive and has yet to show a sufficiently high degree of profitability to make outside investment attractive. As might be expected, while the Canadian companies have concentrated in the Eastern Triangle, the West has been left somewhat open to U.S. competition. Companies such as Boeing, with its Seattle strength, have made some inroads. U.S. companies concentrating in the petroleum industry have also made an impact in the market in Alberta. General Electric offers its Information Services in Canada as in many other countries. Control Data, IBM, and CSC have been discussed earlier. In general, however, the major foreign competition in Canada results from our being a branch office economy, as referred to earlier. A great deal of business, perhaps $200 million dollars in commercial rates, is processed in the United States at the head offices of major corporations operating in Canada. The flow of computer processing the other way is still a trickle. Several companies, notably I.P. Sharp, Computel, and SDL, have been active in the U.S. market. The total volume of business to date, however, has only amounted to about $10 million dollars per year. CADAPSO has taken the stand that a free flow of data across international borders is in the best long run interests of all concerned. It is interesting to note that, as on other issues, CADAPSO has taken a broadminded stand on issues such as this, making CADAPSO a somewhat unusual industry association.

THE INDUSTRY POTENTIAL

Although the growth rate is moderating somewhat, the industry has shown a rate of expansion far beyond that of the Gross National Product, or any other reasonable measure.

A forecast done by the Computer Communications Secretariat of the Department of Communications indicates that the computer services industry will be one of the major growth industries in Canada over the next decade. Major positive factors are.

• Federal Government interest in keeping the industry Canadian and encouraging its growth

• The strength of the major companies, all of which are backed by strong financial interests

• The acceptance in most circles that Canada will not be able to develop an indigenous computer manufacturing industry, coupled with the realization of the computer services industry or any service industry, may be the best place for Canada to concentrate for exports.

• A reputation within Canada for good computer services.

The clouds on the horizon are…

• the high cost of equipment, although the Federal Government recently recognized that, as there is no indigenous computer manufacturing industry to speak of, import duties and tariffs on such equipment should be eliminated

• the high cost of communication services relative to the United States a very crowded field which may have the effect of keeping profit levels in the industry too low to allow adequate investment in research and development for the long run

SUMMARY

Canadians are well served by a large number of national and local computer services firms. These organizations provide services on the latest equipment and competition has led to a buyer’s market in pricing. The declining cost of computer cycles, and the growth of the mini computer field, will cause many of the companies to rethink their market strategies, as has been the case in the United States. Raw power will not grow as rapidly as it has in the past, although those who predict the demise of the computer usage side of the business may fail to understand that the real cost of computing today is in people, not cycles. Therefore, an economy of scale still exists by centralizing in computer organizations such technical staff as systems programmers. These people will remain problem staff for the mid-range computer user in terms of retention and salary. In Canada as in the United States, the very large corporations will continue to install their own very large computers, matching the economy of scale of computer services organizations. The very small organizations will move toward uni-functional minis. There remains a huge mid-range market. The trend in Canada will be toward more value added and more industry specialization in the long run.

Back to Section A Index or just read on

 

WHERE IS THE COMPUTER INDUSTRY GOING?
A USER’S VIEWPOINT.

A TALK TO THE TORONTO SECTION OF THE CANADIAN INFORMATION PROCESSING SOCIETY

SEPTEMBER 11TH, 1979

I was invited to make some comments about the computer industry as an objective outside observer. I am indeed a defrocked supplier of computer services. Therefore, while it is true that I no longer need to defend any particular part of the computer industry, I have found a group whose point of view should be put forward. I am now a user of in-house computers and computer services.

Users I have quickly found do not spend much time talking about the declining costs of cycles, the rapidly changing technology, the advantages of distributed computing or other matters that were a way of life for me for nearly twenty-five years. Users are concerned with such mundane matters as cost effectiveness, responsiveness to business needs and simply getting the job done.

You probably expect an old timer from the computer field to come back and berate all of you for not doing things the way he used to do them. In fact just the opposite is true. I am finding to my concern that we are still doing things exactly the way we used to do them and, believe me, the good old days were not that great.

This has led me to a series of observations about some fundamental problems that the computer industry still has which may limit its ability to expand in the decades to come.

I will build these observations around four general topics:

• people and their approach to computing problems

• money and where to look for it for data processing projects

• ideas and where to look for them

• the environment for a healthy computer industry.

PEOPLE AND PROBLEMS

The public service in Canada is more versatile than many give them credit for. I was amused a year or so ago when Dr. Peter Robinson was claiming that we were losing job opportunities in the computer field by having so much computer work processed in the United States or elsewhere. From the same office, Hans Brune had written a Paper indicating that the biggest problem facing the computer field was the lack of adequately trained people. If Hans was correct, one would wonder why we would care particularly if we borrowed some talent from elsewhere. In any case, both were concentrating on the people side of the computer industry which is certainly the correct place to look for any limiting factors.

The Silt Report produced by SHARE a couple of years ago also zeroed in on this problem. The lack of people productivity was apparently the major reason for IBM scrapping its next generation of machines a couple of years ago. As a user I can now assure you that it is a very real problem.

It is not just that there are not enough people to sustain a healthy long range growth rate in the computer industry. The people are simply not producing in an efficient manner. I will give you an example and then suggest some possible solutions to this problem.

When I arrived at Premier Cablevision I was advised that they had underway the development of what was called a Management Information System. I had plenty of other things to do than get involved with a system that I was informed was in the late stages of implementation. I had heard some disquieting rumours that in fact the system had taken longer to implement than had been expected and was rather seriously over budget. When I finally took a look at the system I was dismayed to find that about every classic error one could think of had been made. All the problems I thought we had cured years ago were still being perpetuated by a new generation. For example:

• I could not locate any well documented set of system specifications that had been agreed to by management and the data processing group.

• The system was being developed from scratch, although there were at least half a dozen systems of which I was aware that could be obtained on a package basis that would have been at least adequate.

• The system had been designed to handle everything rather than recognizing that a good system should aim at handling perhaps 95% of the transactions, with manual exception routines for those odd situations that are simply not worth automating.

• There appeared to be some fundamental lacks of understanding of the requirements of the business as opposed to the requirements of the computer system.

• The response time for this on-line system was proving to be woefully inadequate and management was being asked to add more horse power in the form of additional memory, disc drives, etc.

• It appeared that there had been only minimal attempts to straighten out the systems problems as opposed to attempting to automate whatever management presented to the computer group, e.g. we had all kinds of odd rates that had developed over many years. The correct initial approach would have been to try to rationalize the rate structure and then automate.

I am not singling out Premier because I know that at least one other major cable system went through exactly the same procedure and then ended up scrapping their entire system. When will we learn?

After at least a quarter of a century I am finding that we are much more knowledgeable in the computer field but not much smarter. Somehow we have missed an opportunity to pass on a lot of common sense that would save the next generation some of the agony described above.

MOVING TOWARD A SOLUTION

For years I pushed for some form of certification or other professional standards in the computer field. It is probably too late now as the number of practitioners has grown so large that one could easily end up with a quarter of a million grandfathers under some phase-in plan. I still, however, would like to recommend to the field that certified computer auditors of some kind should be available to industry. I have in mind professional people of proven academic and hands-on experience who could be brought in by potential users to audit the approach being proposed by their data processing divisions. This would cover all the usual needs of proper specifications, conversion planning, back-up, editing, documentation and other standard techniques.

I realise that some of this is available from the major consulting firms but, unlike accounting auditors, these people are often too indulgent with those who are paying their fees, and do not have the nerve to tell the company or the data processing division it is on the wrong track or is headed for trouble.

Secondly, I believe that we must be able to produce something equivalent to an engineering manual for data processing. Engineers over the years have at least laid down enough guidelines and rules of thumb that most bridges don’t fall down, (except in the Northwestern United States where in fact they do fall down fairly regularly!). I know that programming has always been thought of as an art, but surely by this time we could have turned it into more of a science.

Thirdly, we need to do a better job of training systems analysts. For some reason we seem to have concentrated on training technically competent programmers but still are not providing to young graduates enough understanding of business requirements. In fact we do not seem to be able to pass on much in the way of just commonsense approaches to mundane problems. Possibly the use of case studies taken from real business situations could help in some of our universities and community colleges.

We need to learn such simple things as, "You never quote on a job. You only quote on a quote," i.e. the first step always is to ensure you have done your systems homework and then quote- on the time and cost of implementing such an approach. At least then the implementation estimates should be reasonably accurate. I could go on, but I think you see this problem from the user’s standpoint. We cannot leave computer systems development as an art. We cannot mass produce meaningful art and this will be a limiting factor on how fast the computer industry can develop.

MONEY

A possible limiting factor in the future of the industry is the lack of available capital to automate. This may sound strange, knowing the absolute necessity of increasing the productivity of industry in Canada. Also with the increasing wage demands that we can expect in the next few years, the desire to automate should be very high.

The problem is that we are not necessarily tackling the right problems for our country. Canada is not and is not likely to be a major manufacturing force in world terms. We are a country with a predominance of relatively small businesses. We are further very oriented towards service industries.

If small, service-oriented industries are where people will be employed, then that’s where the efforts of the computer industry should go. I predict a trend in business towards both more big organizations and more small organizations. (Does that sound familiar? The same comment is made about CPU sizes.) The very large firms, e.g. banks, life insurance companies, etc. are now highly automated. The market here while still growing will be limited in the future. As growth in employment in these large industries lessens, the number of people employed in smaller industries or even craft industries will increase.

What do these smaller organizations need? Most of their needs are simple.

• They require standard, simple to use cash flow analyses.

• They need easy-to-use budgeting packages.

Small businesses, however, also need education on the use of such packages. And yet this in an expensive process given the relatively low value of some of the sales in this area. Surely with our experience in self-teach texts, coupled with video tape packages, simple education processes could be devised to train small business in the fundamentals of accounting and then provide them with the tools on an in-house computer or on a service bureau to allow them to implement such standard procedures. It is amazing the number of business failures that take place because of a lack of understanding of the most mundane business principles.

There is a huge market of tens of thousands of medium to small businesses in Canada. The money is there but we will only pry it loose if we stop just chasing the very large businesses in Canada.

IDEAS

Gordon Thompson of Bell Northern Research in a recent paper produced for the Institute for Research on Public Policy commented that he felt the biggest restraint on the development of the computer industry was our inability to view information in new roles. We are still looking at automation in terms of replacement, substitution or expense saving and are not really looking at new ways of doing new things.

The computer industry must be alert to the real needs of business and look for new ideas that will help the businessman in some relatively fundamental areas. It has occurred to me that for a forward looking industry we spend a lot of time developing systems that only look backwards.

A businessman can do very little about the past, unlike a newly elected politician who will immediately rewrite history to show what a miserable job his predecessors had done. Yet if you look at most of the current computer systems we develop, all we produce is historical data. There is very little in the way of trend analysis. Certainly unless a corporation is a very large one there is little in the way of corporate modelling or simulation of alternate futures the corporation could consider.

Such systems need not be complex, but you would be amazed at how few companies even plot in some graphic form the trends of the most fundamental aspects of their revenue and costs. They are often in trouble before they realize it.

There is nothing new about this suggested need, but I believe there are many other such needs in industry. We are not well equipped in the computer industry to research these needs. I suggest some joint projects between our universities and community colleges with the Association for Independent Business, local Boards of Trade or other such organizations to see if we can come up with the ideas needed to open new markets. A lack of new ideas could be a major constraint on the industry.

THE ENVIRONMENT IN CANADA

A final possible constraint may be less obvious to you than it is to me in the broadcasting and communications business. I am now working in a heavily regulated industry and can tell you with no hesitation that over regulation can be the most devastating constraint on any industry. As a company, Premier is now pouring money into the United States and elsewhere in areas such as Pay Television because we are constrained from using our normal entrepreneurial instincts to bring about such services in Canada. In the computer industry you are lucky as you are essentially unregulated, but I wince every time I see an electronics firm going to the Federal government asking for some kind of assistance, or a computer services firm going to ask for R&D money to develop new projects. When you ask the government for something there is a price you will pay. That price may well be increasing government involvement, and that price is very high.

WHERE TO FROM HERE

When a football team is not playing well the usual advice is to go back to the fundamentals of blocking and tackling. Much of my advice from a user standpoint is similar. The need to formalize what we already know how to do, and then make sure we follow our own fundamentals.

If the industry is to continue to develop rapidly in the years to come we must put behind us some of the still present old problems, lessen our obsession with new technology and increase our attention to what the user really needs and will pay for.

Back to Section A Index or just read on

 

SOME THOUGHTS ON STRATEGIC DIRECTION

TALK GIVEN TO THE CANADA SYSTEMS GROUP MANAGEMENT COUNCIL

THURSDAY, MARCH 5, 1987

John Ricketts asked me to join you today to make some unbiased observations about the computer services industry from the point of view of someone who is at least ten years out of touch with the whole situation! He must think I have something to contribute as I had thought enough about it to get out of the business some years ago.

I quickly pointed out to him, however, that since that time I have been in the cable television business and now in the telephone business. The fact that I have been in various high tech operations is no fundamental reflection on your industry. It is just my naturally restless nature.

However, there is some advantage in being somewhat outside an industry and looking at what one of the most successful companies in that industry might consider doing at this point. It is easy to get too close to a subject or too far away and fall into the same trap as either priests or prostitutes providing sex counselling. I hope I am somewhere in between.

Let me say initially, however, that Canada Systems Group is doing very well. Therapy is for those who are not sure where they are going. Unlike Alice on meeting the Cheshire Cat, I believe that CSG has a good idea of where it is going and what it wants to accomplish. You may recall Alice’s encounter:

"Would you tell me please which way I ought to go from here?"

"That depends a good deal on where you want to get to," said the Cat.

"I don’t much care where," said Alice.

"Then it doesn’t matter which way you go," said the Cat.

A MISSION FOR CSG

When people are approached by a sales representative from CSG, Cantel or any high tech company, some image will flash into their minds. In the case of Cantel, I hope we are getting the image of being the leading supplier of mobile telephones. If we are lucky, we may even end up with people referring to Cantel phones rather than cellular phones.

In the case of CSG, I believe the image is one of a large computer services organization providing general purpose solutions to a variety of computer related problems.

However, it is important to concentrate on how you want to be perceived. IBM is perceived as being the computer leader although we always used to joke that IBM’s business was Earnings Per Share.

Cantel’s corporate mission is to "provide access to mobile communications to all Canadians."

What exactly is CSG’s mission and how does this relate to your plans and budget process.

In a word, what do you want to be when you grow up?

There are many successful strategies but from the vantage point of my decade of disassociation from the computer services industry, I get the impression that CSG is in a great many areas, e.g:

• shared processing

• facilities management

• data entry

• value added software systems

• packaged software sales.

It is not that this can not be a winning formula and for any country like Canada which lacks any single large dominant industry, this may be the only approach that can be taken. But as part of the old SDL 100 corporate plan (how to become a hundred million dollar corporation from a standing start), we tried to look at what the most successful companies were doing.

At one point in our career, we nearly acquired Shared Medical Systems (SMS). It may well be that we would have ruined the entrepreneurial spirit of this fine company. But we liked their strategy which has provided a steady earnings growth over 15 years.

The secret of their success was to concentrate on industry knowledge and largely ignore any image that they were a technology company. As you know, their marketing approach is to concentrate on the health care industry.

The great advantage of this approach is that while computer and communications technology changes from maxi’s to midi’s to mini’s to micro’s or whatever and alternates back and forth between distributed and centralized processing, industry knowledge stays with you. It is like learning good management techniques. They rarely change and stand you in good stead over a lifetime.

Concentrating on industries rather than the technology ensures that:

• the corporate approach survives technological change

• you can sell solutions

• it focuses the company on value added pricing

• you can lever the process by replicating the sale of discrete solutions.

As noted earlier, it may be difficult for a Canadian company to concentrate on a single industry but by concentrating on several major industries, such an approach could be replicated in this country.

With the new international standards of doing business, such an approach can become an export strategy as well. I should point out, however, that this has its pitfalls. Even my favourite company, SMS, flopped badly when they tried to take their health care systems to Japan. Even they learned that in some cases, cooperation with a foreign firm may be the only way to make this fly.

APPROACHES TO IMPLEMENTING SUCH A CORPORATE MISSION

If the corporate mission is to become expert in certain industries, rather than say general applications such as payables or inventory, then what are the options for doing this.

I am sure that CSG is already looking at the route of either internal development or acquisition. The acquisition route to acquire industry knowledge is always tempting. I caution, however, that like marriage, new partners always look their best on the wedding day. It is rare when one ever gets a pleasant surprise from an acquisition during the honeymoon or at any time downstream.

I went through this approach at SDL and did my best to advise Crowntek to avoid the same mistakes. We took a dunking from Duncan. The then head of Crowntek tried to convince me that the right approach was to broadly diversify the company by acquiring organizations that had little in common and were geographically disbursed. This is a sure formula for disaster.

The problem was compounded when the company persisted in acquiring organizations just past their start up phase, paying the principals on a short term earn out, e.g. two years and then not backing up the process by being able to run the companies when the inevitable happened, i.e. the founders leave and the company loses its momentum.

It is difficult enough merging two companies that are in the same industry as PWA and CP have just found out. But even when acquiring non-similar organizations there are pitfalls. It is difficult retaining the momentum in an acquired organization although not impossible.

As you probably gather from my observations, I believe that if CSG wants to follow the industry specialty route even more than it already has, the best approach is to develop the expertise internally possibly supplemented by some appropriate hires. Joint ventures with major companies of course also provide a reference sale and ensure the realism of the industry oriented products being developed.

MAKING MONEY WITH INDUSTRY PRODUCTS

Of course the secret of all development of industry packages, is the ability to easily replicate the solution to the problem. This is the McDonald’s approach.

It is a trite observation in the software business that developing unique solutions for particular companies provides no leverage to say nothing of the high exposure.

WHAT KINDS OF INDUSTRIES

We can all look at the obvious industries such as health care and transportation. There is nothing wrong with these. However, I suggest it is worth looking at some of the emerging new industries. For example, cellular telephones are being offered in some 120 cities in the United States and at least the non-wireline companies are often new to the phone business.

Paging is a growing market in North America as is trunking, dispatching and similar radio/telephone operations. I can attest from our own experience that there are not readily available large computer services organizations offering billing or inter-exchange services and the development internally for small companies is extremely costly. Cantel is at the moment using a service bureau in Cincinnati.

SUMMARY

What I have said is not new. But with the continuing decline in the cost of cycles, I question whether shared processing, facilities management and even data entry are going to be the approaches of the future.

I would hope for CSG’s sake that in several years when someone asks what Canada Systems Group does, their eyes immediately light up and say—oh yes, the international experts in laboratory testing data processing, computing systems for cellular or whatever.

In the meantime, congratulations on the dominant position you already have in the market. When someone asked a new teacher going through her probationary year what her main ambition was, her reply was simply, "to become a second year teacher."

As a consistent survivor, you are obviously doing most things right. Good luck.