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.