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.
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 6800 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 98% 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.
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. $1.8 million in the U.S.).
Even more surprising is an examination of the size of the larger Canadian firms:
THE TOP COMPANIES IN THE CANADIAN COMPUTER SERVICES INDUSTRY
ESTIMATED DATA PROCESSING
IBM Canada Ltd
FISCAL YEAR END
($ MILLIONS) 1975
* 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 dollar’ 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 length’ 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
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.