The case for diversification and finding Innovation in other sectors
This article appeared in Vanguard Magazine on April 1, 2016
Arguably the biggest mistake that I have made in my career to date has been, as director of business development at my small, family-owned defence manufacturing business, was not to diversify the company. Not being diversified in any sector or investment portfolio is often cited as a risky endeavor, but in the cyclical defence sector, it can be suicide.
In our experience, with the United States entering two major conflicts in Iraq and Afghanistan, we invested heavily upfront in additional fixed costs, in order to meet huge spikes in demand for our technology from the US Department of Defense. It took them years to calibrate, and it was almost too late when they realized they had significantly over-purchased off of our IDIQ umbrella agreement.
Orders quickly dried up, leaving our small manufacturing business with significant overheads (we were up to five factories and over 250,000 square feet at the time) without much hope of revenue coming in the door. We were diversified slightly, but our major focus was on defence. We did sell various components to the automotive sector (usually really low margin, and it only ever made sense if it meant covering some machine downtime).
Irrational customers and timing
Once, we got a call from a unique architectural company that had seen our 3D signature management nets and wanted to put them on the roofs of some unique buildings in Greece. Of course, they had to be white, he didn’t care much for infrared/ night vision reflectance, but he admitted that he would never have found our unique materials and designs from his generic material supplier sources. We had, after all, unique technology that only came about because of research initiated by the government and the defence sector.
Defence is cyclical. Studies have shown, however, that it tends to be inversely cyclical with the economy, which makes it, for a lot of SMEs, a good “2nd business” to be in.
Our customers in the defence sector (governments or government contractors) tend to make irrational consumers and the timing of their purchases don’t necessarily line up perfectly with supply and demand, yet are a reaction of a set of complex factors and series of events that all need to occur before a procurement, including actual end-user demand, which is often many years before the procurement.
I happen to love working in this industry. I find it fascinating living at the intersection between government and business, and revel in the complexities and details surrounding every procurement. We often get a front row seat at OMX as we assist government contractors (by them using our software tools) in teaming with Canadian partners, sourcing from Canadian suppliers and then tracking and generating data analytics on the impacts their particular solutions could have on the Canadian economy. But it doesn’t matter how much you love an industry, any business, particularly if you are small, should seriously think about diversification.
How to mitigate risks
I believe, that not only is diversification an important risk mitigator for long-term survival, but that it is truly an opportunity to drive innovation across sectors. Sometimes innovation is just connecting the dots and applying something innovative from one application to another.
For instance, take OMX’s B2B RFP engine model. Quite frankly, we found the concept prevalent in the hyper-competitive and price-sensitive automotive industry. Our ITB tracking tools mirror CRM software, while reporting, maps, and other features were also inspired by other applications in geomatics, analytics, accounting, and tech sectors. Isn’t it something like over 80 per cent of innovation is “adopt and adapt,” with somewhere less than 20 per cent amounting to eureka moments?
I am confident that the defence sector has a lot to learn and can borrow from other sectors, and vice-versa. Other sectors should be looking to what is coming out of defence for applications in the mainstream environment (think the internet, GPS, and many others). Like usual, it didn’t take me long at all to come up with various examples where this cross-over is either happening or really should be happening.
QRA, which is a small tech start-up success story that came out of an initial research project at Dalhousie University, got their start with an IRB investment from a major defence contractor. The problem their technology solves, however, is universal in launching major manufacturing platforms in any sector. What tends to happen is that a lot of companies build a system, test it and then find out there are design issues, instead of catching those design issues during the design phase before incurring all of those expenditures.
This results in huge cost overruns. Think about the cost for larger platforms such as major shipbuilding programs: navigation systems, situational awareness and the integration of combat systems. The Boeing Dreamliner, for instance, spent billions of dollars on testing and fixing design flaws. By leveraging the QRA technology more in the beginning of these major programs, those huge cost overruns would be reduced.
Over the past six months, the company has been very active in the automotive sector. As cars are getting more autonomous (fewer vehicles today are controlled by their drivers – think cruise control and ABS brakes, next step will be adaptive cruise control, keeping you from driving over the yellow lanes), they are needing technologies like QRA more and more.
The recent announcement from General Motors of their investment in Lyft to develop self-driving cars tells me this is just the beginning. And since the future of the automotive sector really is in self-driving cards, in addition to increased safety standards, the level of systems engineering and technical verifications will inevitably go up dramatically.
“It’s interesting for us, since the automotive sector truly has the same technical problem as other sectors, it is just a different business model and approach going from that sector into defence and the other way around” said QRA CEO and co-founder, Jordan Kyriakidis. His biggest advice to early-stage companies entering the sector is to be prepared upfront with enough financing for the long haul in order to be successful in any of these sectors. While QRA is a success story stemming from an initial spark of investment from a defence contractor, followed by a diversification of their revenue base; I found a few other technologies that have come out of the mining and health sectors, but also have application in the defence.
Tech for mining may have use in the military
I caught up with Greg Baiden for instance, who has a Ph.D. in mining and over 35 years working in nickel mining. He is based in Sudbury, now running a small Canadian tech company called Penguin ASI. Greg is an inventor of innovative network systems for mines, which allow various mobile pieces of equipment (think:
drills, front end loaders, and automated trucks) to communicate with each other. He now develops what he refers to as“telerobotics,” which allow an operator to control a machine from a great distance over a computer network.
Mining can be a very dangerous endeavor, particularly in releasing what they refer to as “hang-ups,” essentially rock blockages that are inhibiting the release of certain rocks. His company’s latest robot is designed specifically to assess and remove these blockages without risking a human life in the process. The robot’s arm will reach 30 feet up in the air, controlled by 3D vision systems, allowing miners to drill holes, and load them up with explosives.
The application in defence is very real, with a lot of interest right now in something called a “Net-centric battlefield” (i.e. centralizing the command centres across the Navy, Airforce and Army into one network system). These robots are capable of reaching inside of unsafe areas and mapping them, then leveraging 3D gaming models from a gaming software that allows the operator to run the video game, providing instructions to the robotic system.
It really is the future of warfare. If mine can be compared to a “missile launcher in a battlefield, then there is no difference to how technology like this can be valuable. After all, like Penguin ASI Founder admits: “The comms systems in a mine are really not very different from the requirements on an Aircraft carrier”.
Another up and coming technology coming out of the health sector, Antris, is designed to help support organizations with work-alone or at-risk personnel. It communicates with a user’s mobile or GPS device, and when required, automatically updates designated contacts of their trip plan progress. The Antris escalating alert process is automated to react immediately if a user misses a planned check- in or initiates
a panic alarm, so they get the help they need, where and when they need it. The solution works with an organization’s existing devices – mobile phones, computers, tablets, satellite phones, and GPS devices. Users can communicate with Antris via multiple platforms: the web and mobile applications, two-way text messaging and voice call-in. For remote personnel with limited or no cell connectivity, Antris offers integration with GPS devices and satellite phones.
Health and social service workers use Antris for safe check-ins in at-risk locations in urban settings within cell coverage. Antris works with search-and-rescue professionals as an incident prevention tool that mitigates false alarms and keeps users safe. While active today in social services, there are huge opportunities in the defence and search-and-rescue sectors.
OMX is another great example (if I can say so myself) of technology with application in various sectors. The unique supply chain management tools that we have developed, including our RFP engine has recently (within the first week of January 2016) secured new major OEM customers from both the mining and oil and gas sectors. In the coming months, our users can expect many new opportunities showing up on our platform from those sectors, but also those which have application to SMEs operating in the defence sector. After all, most businesses don’t sell a product, they sell a capability.
Keith Donaldson, vice-president of sales and business development at Apex Industries Inc., an SME that has been active in Canada for over 54 years, weighed in on how critical diversification has been for the long-term sustainability of Apex. The company’s capabilities extend to complex custom CNC machining, sheet metal, full assembly and design/integration.
Apex currently works in aerospace, defence, security, marine, optical and the automation industry. Keith reflected that: “Much of this work has overlapping techniques, expertise and demands (e.g. priority of on-time delivery, price, quality and continuous innovation).Our motto, “Strength in Diversity,” reflects our corporate stance on diversification. While we are an SME with over 200 employees, we are truly five small businesses in one. It is our diversification that helps us navigate the ebb and flow of cyclical markets while adding to our in-house crosssector knowledge and expertise. Leveraging our cross-sector capabilities and technologies important to us as a business, with process and technology improvements carrying over to multiple sectors.”
The ABCs of diversification
ATCO, Bombardier, and Calian are other companies we spoke to about the benefits of their diversified approach to their businesses. All three companies are truly examples of truly diversified companies.
When asked why they believe diversification is so critical, we heard the following:
“It is intuitive that an organization would identify if their products, methods or processes developed in one sector are also application in other industry sectors. This allows a company to capitalize on the organizational experience and IP already developed while broadening its revenue base. It also creates economies of scale due to the organization’s ability to re-use products and methods already developed, thus lowering costs and reducing risk. This in fact is a key factor in Calian’s overall growth strategy – that is to proactively seek opportunities to productize extensive services that we offer the defence industry and look for opportunities to expand into other industries.” – Kevin Ford, President and CEO, Calian.
Diversification allows Bombardier Specialized Aircraft to address a very wide range of mission solutions, from maritime patrol to surveillance, medical evacuation,and search and rescue, thereby shielding the organization from the negative impacts of a downturn in one specific market.There is an industry-wide trend towards the optimization of civil and military technologies, and the use of off-the– shelf solutions on advanced specialized aircraft. This not only reduces development costs of custom mission solutions but also greatly reduces the time to market of these advanced specialized solutions. -Stéphane Villeneuve, Vice President, Specialized Aircraft, Bombardier
“ATCO Frontec’s value proposition lies in its ability to draw on its wealth of experience and migrate this expertise across the markets it serves. This enables it to constantly innovate in developing new and enhanced capabilities, and pursue opportunities in adjacent markets. This is essential for long-term sustainable, organic growth. For instance, ATCO’s fuel management capability was originally developed during the early days of its involvement in the North Warning System contract. ATCO later built on this capability to create a joint venture with the Nunavut Petroleum Corporation to operate a bulk fuel storage facility and provide a pipeline distribution system in Iqaluit in support of the government of Nunavut. This contract grew to include the provision of tanker fuel re-supply and complete airport refueling operations.
With airport refuelling operations now within its portfolio, ATCO went on to provide management of the above-ground fuel tank farm to NATO Flying Training in Canada (NFTC) at 15 Wing Moose Jaw. Under this contract ATCO’s capabilities grew to include Fire Crash Rescue service; a high-value firefighting service, especially if you want to ensure personnel rescuing pilots from burning aircraft are trained sufficiently to not accidentally “eject” them during extraction. This unique capability was honed in ATCO’s fulfillment of its contract with NATO’s International Security Assistance Force at Kandahar airfield, where ATCO provided emergency Fire Crash Rescue services while operating in an active theatre of operations with multiple aircraft types (fixed and rotary wing) carrying live ordinance. ATCO continues to provide this service in Kandahar still today the by way of its own highly specialized fire department.
The next evolution of this capability has ATCO looking at select industrial markets and in international regions which are adopting a privatized model for Fire Services. All borne from early fuel management experience on the North Warning System.” – Marie Darling, Director of Business Development, ATCO Frontec.
We are also proud to be partnering (alongside Vanguard Magazine) as the B2B sponsor of the February 2016 conference called ConvergX (www.convergx.co): “Where industry lines disappear” occurring in Calgary, AB. The event is the brainchild of Kimberley Van Vliet, President & CEO of WāVv Business Development, which is primarily focused on expanding businesses through adjacent markets, particularly in the aerospace, defence, security and oil and gas sectors.
Kimberley Van Vliet reiterated her main reasons why it is critical for companies to diversify into Adjacent Markets:
• More fully utilize existing resources and capabilities
• Escape from undesirable or unattractive industry environments
• Make use of surplus cash flows
• Achieve economies of scale and scope as well as expand product offerings, and/ or expand into new geographical or technological areas
In conclusion, I am confident that industry diversification is a positive thing for this industry and those of us working in it. Like all good mistakes, I guess they are worth it, as long as you don’t make it twice.
Nicole Verkindt is the founder and president of OMX. She is a Board Member of the Canadian Commercial Corporation and was recently appointed to the Board of the Peter Munk School of Global Affairs