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 tments 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.