As the founder of OMX (Offset Market Exchange) and the newest Dragon on CBC’s Next Gen Den, Nicole Verkindt believes in the role of entrepreneurs to grow the economy and help solve global issues. In the article below, Verkindt utilizes her experience and expertise to dive deep into some of the biggest issues around acquisition that many large companies are facing today:
There is always a buzz and flurry of excitement around the thrill of the chase of government acquisition procurements as companies battle it out for the big, fat, upfront contracts to deliver ships, trucks and aircraft to the Government of Canada. But when it came to the more boring act of maintaining our fleets over a long period of time, it got me wondering whether the less sexy, long term maintenance contracts are actually the beauty pageants we want to consistently win.
I went on a mission to find Canadian content in In-Service Support (ISS) contracts and find out what makes ISS contracts so attractive. And did I ever find some gems from coast to coast.
I also uncovered four main reasons that make ISS contracts irresistible:
If acquisition is an exciting conquest to land, then ISS seems to go on forever with almost extreme levels of predictability. Maintaining and servicing fleets go on and on and seems to last forever (sometimes even longer than “forever” when we talk about fleet extensions). So when it comes to ensuring a sustainable and sticky business, this seems a worthwhile endeavour.
Furthermore, if there is one thing we can almost always guarantee when it comes to government procurements, it is delays. It always takes longer than expected to buy new equipment. And so consistently, and with great dependability, we can rely on our government to ensure that we will have to learn to maintain and sustain our existing equipment and programs even longer than expected, which was initially a long time to begin with. In business, long tails are good. In government procurement-related business, really, really long tails are really, really good.
Take the CF-18 Program for instance. I caught up with Jim Gillespie, Director of Programs, for Harris Canada Systems, Inc. He talked about the business that has accrued to Harris Canada and ultimately its Canadian supply chain in order to extend the fleet life of the CF-18s for an additional 20 years beyond the initial planned retirement timeline initially proposed for around the mid to late 1990s. “Since we started the CF-18 Avionics OWSS program we have bundled a large number of contracts that DND had with various suppliers. As we bundled the services we repatriated work from foreign suppliers to Canadian companies wherever we could. We continue to do that and expect more opportunity to do so with the extension of the CF-18 fleet life to 2025” he confirmed.
Not only does this ensure long term revenues to the company, but the predictability also stimulates long term partnerships with Canadian industry and innovation. “One of the strengths that we have, and have seen in other Canadian companies, is the ability to stretch out the life of our equipment by addressing obsolescence problems,” Gillespie commented. “We are innovative in finding ways to keep the aging equipment fully operational.”
It’s not often that we think about long term, constant improvements to systems that work as an important form of “Innovation” – a less sexy form of innovation than picturing a brilliant physicist trying to crack a code for the first time. However I suspect this form of innovation has the potential to be much more profitable in the long term.
It is clear that the F-18 program alone has impacted Canadian industry significantly, particularly in supporting ISS over the long term. Jim Barnes, the Business Development Director of Boeing Canada Defense, Space and Security noted that “Boeing has worked with Canadian firms on training and MRO for its F/A-18 modernization programs, in particular, due to the excellent support they afford our customers. L-3 MAS, for example, worked on avionics for the CF-18 Incremental Modernization program.”
Boeing also stressed the positive impacts to Canada of other programs such as the C-17 program.
Mr. Barnes cited Burlington-based Goodrich, which performs the overhaul of landing gear systems in Canada over the life of the program.
Not far down the street from Harris Canada, is BELL Helicopter’s main ISS facility in Canada.
BELL Canada has been maintaining the CH 146 for the last 20 years since the fleet’s inception. The company’s Calgary facility focuses on maintenance, repair and overhaul of the helicopters.
Over 85 helicopters continue to be serviced. There is a large network of Canadian suppliers that continues to benefit from the program. Over 20 years sustaining an entire business maintaining one program is a lot of longevity for Canadian business.
I met up with Mike Mallon, CH146 Material Support Lead for BELL Helicopter on the same trip.
Mallon reiterated that BELL has had a long-term involvement in the local economy in Calgary as well as across Canada in order to maintain that fleet. The program has created jobs in order to sustain the supply chain over the last 20 years.
And it’s a similar story when it comes to Raytheon Canada, which again has been located right down the street for decades.
“In-Service Support of DND’s equipment is a key component to ensure the Canadian Forces can perform their role in a cost and operationally effective manner,” said Terry Manion, vice president and general manager, Raytheon Canada Limited. For Canadian industry, ISS provides a critical opportunity to participate in the provision of long term support and technology improvements to high tech defence systems translating into long-term sustainable jobs in Canada.”
Another major foreign OEM, Lockheed Martin, commented on its role as the Single Point of Accountability for the Government of Canada with its performance based In-Service Support (ISS) contract for support of the 17-ship CC-130J fleet.
“The experience that Lockheed developed as the original equipment manufacturer (OEM) over the life of the Hercules program — which is more than 60 years old and has produced almost 2,500 aircraft — provides the company with a unique position to provide unprecedented support with unparalleled knowledge and insight inherent with being an OEM. It’s through this knowledge and within these insights that we are able to provide our operators, in this case the Royal Canadian Air Force, with real-time information and solutions that keep its fleet healthy and ready to support any mission, anywhere, at any time,” according to Toni Lepone, Head of Communications, The Americas for Lockheed Martin. That program has had a widereaching involvement with suppliers across Canada including Cascade, IMP, CAE, Standard Aero, Rolls-Royce Canada, GE Canada and Sonovision.
Longevity is great and being successful based primarily on “still being around” is good, and I imagine quite profitable. But what else? What about higher margin work, higher tech with unique IP that is exportable? Work to SMEs that are nimble, quick and innovative?
Besides doing something for a long time, why else would you continue to do something then if it’s not for a good time?
Could it be possible that In Service Support contracts are equivalent to razor blade sales for Gillette? Do ISS contracts have higher margin and therefore are much more profitable endeavours then standard acquisition contracts?
I didn’t get into those details with our interview subjects, but based on some pricing models I have personally used in past capture programs that I bid on in my previous life as a capture lead, we often buried most of our profits in the ISS work. Even at OMX, we take big losses up front selling $90/month/user subscriptions to our platform, but after 5 years, it all starts to make sense, which is the same for most SaaS (Software-as-a-Service) subscription models today.
Even when the Canadian company is not the prime on ISS work, the numbers show that significant money has flowed to Canadian industry from foreign ISS contracts.
Boeing contributes more than US$1 billion in economic benefit to Canada each year for instance, and has completed US$6.5 billion in industrial and regional benefits programs in the country, with six major work packages underway as part of the company’s commitments for in-service support of Canada’s medium and heavy lift aircraft. Boeing also works with Canadian companies for ongoing support including training systems, landing gear and MRO, among other things. Canadian companies like Bluedrop Training & Simulation and CAE offer expertise that complements Boeing’s products in support of Canada, which continue to benefit from new opportunities to collaborate with Boeing. Lockheed I imagine has similar impacts, as well as the other foreign OEMs.
World Trade Organization (WTO) policy justifies the allowance of offsets as national security exemptions under the premise that every country has the right to protect its own defence industrial base.
That thinking would lead me to argue that if a nation state should be self-sustainable to develop its own defence equipment, then it could be almost more important for countries to have the capability to service and maintain its existing fleet.
By lacking this unique IP and capabilities, a country could be smacked at the back of the knees with a baseball bat very quickly, grounding fleets and halting our ability to respond to threats or support allies abroad. And so by that logic, can’t we argue that a country is safer when it controls its own ability to maintain and sustain its defence related equipment?
I spoke to Lockheed Martin about its role in ISS in Canada, and the company emphasized that it was critical for them to have transferred the necessary Intellectual Property to Canadian industry under license, and receive all relevant export approvals in order for Canadian industry to not only maintain their own fleets, but be positioned as key operators in global fleet management.This not only promotes long term, successful Canadian industry in ISS, but to protect our ability to operate successfully to keep Canadians safe at home and abroad.
4) Strong Value Proposition to Canada: SME Technologies in Global Value Chains
When I started digging for Canadian technologies in In Service Support, it didn’t take me long at all. Big and small, from coast to coast – we are rich in ISS Canadian Content. The more obvious players: Cascade, IMP, Vector Aerospace, CAE, Kelowna Flight Craft all come to mind quickly.
Beyond the most obvious players in Canadian ISS, we found numerous SMEs as well. Total Outsource Canada for instance, which is based in Ottawa, is a “one-stop solution provider” for Integrated Logistics Support (ILS) including supply chain, technical publications, design and training services.
Racerocks, a Western Canadian tech SME, recently signed a long term contract with Davie Shipyard to provide all of the training and development of maintenance programming for its Resolve project. RaceRocks mapped out their SMB partners across Canada including Modest Tree 3D, ACCU Translations, Instruction, Royal Roads University, and Camosun College.
Racerocks CEO, Scott Dewis refers to all Canadian SMEs as Canada’s “innovators and the economic engine”.
If you ask Sam Mouallem, he will shower you with the same passion for leveraging the Canadian supply chain, particularly SMEs in the process. Simex defense provides a “direct link” to Canadian manufacturers for OEM MRO needs, leveraging OMX as one of their key tools. Personally, we love what Serge and his team are up to.
HCL Logistics, an SME based in London, ON, provides services to manufacturer’s to lean out their material handling requirements and focus on the production of their products. HCL provides a low cost supply chain, warehousing and distribution service connecting our customer’s product with their end users whether that is through production, spare parts distribution or working with customer to track and supply government furnished assets. The company’s material storage methods, equipment and technology allow us to ensure our customers can focus on what they do best; production and spares parts support. Our electronic integration with our customers allows them to view their inventory while giving us flexibility to control the storage and delivery of that material to their end users.
Truth be told, Vanguard couldn’t give us enough page space to include all the SMEs we run into that have benefited and are participating in ISS. It really is amazing.
Beyond SMEs, we found a lot of action in academia as well. In colleges in particular, there is significant maintenance and operation training happening in air, land and sea. Andrew Petrou, Director of Strategic Initiatives and External Relations of Centennial College and Executive Director of DAIR (Downsview Aerospace Innovation and Research) weighed in on his organization’s involvement in ISS confirming that “Centennial College plays a vital role in shaping the future of aircraft manufacturing and maintenance. We welcome the opportunity to assist OEMs – both domestic and foreign – in helping their skilled employees meet ISS and MRO requirements with an ever-evolving knowledge base that serves this dynamic industry.”
I also spent some significant time discussing ISS training on shipbuilding with Holland College based in PEI as well as the Saskatchewan Aviation Learning Center is operated by the Saskatchewan Indian Institute of Technologies. The Center houses both the Aircraft Maintenance Engineering Program and the Commercial Pilot Program and benefits the Aboriginal community, which is great.
One of the benefits of Canadian companies working with large foreign OEMs in ISS is access to global value chains across potentially multiple disciplines. For instance, Boeing offers indirect work opportunities across almost all of the company’s markets, including space, military and commercial platforms.
Boeing offers an industrial benefits program that includes long-term export contracts as well as opportunities for growth in developing fields. The focus is on maximizing regional benefits distribution while concentrating on small- and medium-sized enterprise since the belief is that this approach will have the greatest positive impact on Canada’s aerospace industry.
Gillespie from Harris Canada emphasized the positive impacts to International exports: “Aside from the obvious advantages that the government gets by having services provided by Canadian companies, the less obvious benefit is the opportunity for the individual companies to grow their business internationally. For example, as the US Navy draws down the size of their F/A-18 fleet, the depots and US based companies tend to drop support for the fleet. The international F/A-18 community will operate much longer than the USN, so they will need continued support. As a result, Canadian companies that are supporting the CF-18 have the opportunity to provide the same service to all other F/A-18 operating nations.”
Lockheed Martin’s involvement in Canada brings similar benefits as Canadian companies such as Cascade, IMP and Standard Aero for instance are all licensed to provide ISS/MRO services for world fleets of the C-130J, C-130, L-100 and P-3, which represents over 2,100 aircraft alone around the world.
It is clear benefits to Canada increase significantly when their markets expand beyond Canadian coasts. But we all know that.
The Way Forward
I am clearly not the first person to emphasize the importance of Canadian IP and content in ISS work. Both presidents of our national trade associations highlighted this in comments to me for this article. Jim Quick, president of AIAC emphasized that: “As the defence industry evolves in response to shifting procurement processes, budgets and equipment lifespan requirements, AIAC is committed to ensuring that future ISS work continues to be done here in Canada in support of the jobs and capabilities we have worked so hard to build.” While Christyn Cianfarani, president of CADSI emphasized the fact that “When the Canadian Armed Forces (CAF) uses its kit for as long as it does, ISS and MRO are key to maintaining those capabilities and the CAF’s operational readiness.” Furthermore, she homed in on the importance of ISS driving exports for Canadian industry saying that “several companies have leveraged their Canadian experience by winning contracts in the export markets.”
There are a ton of major ISS procurements coming up.
I am confident this is a great opportunity for Canadian industry to get involved with long term programs early on, gain access to global markets and allow us to maintain critical IP in country.