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.
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.
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.”