Playing the risky game of IT outsourcing

Although he’s probably better known by most Canadians as the former owner of the Ottawa Senators hockey club or the past CEO of heart-assist device maker World Heart Corp., Rod Bryden says he inked some of his riskiest deals when he was in the IT outsourcing business.

Bryden himself will tell you that he is not a techie. A law and economics major in university, after earning his master’s in corporate law he taught law at the University of Saskatchewan until 1969, when he moved to Ottawa to work as a contract advisor to the federal government, eventually becoming assistant deputy minister of economic expansion. In 1974 he left government to start a small consulting firm, Bryden Ltd. Around that same time, he also opened Kinburn Corp., a holding company that would own shares in the businesses he would later invest in.

The ’70s was a decade during which the high-tech cluster in Ottawa experienced major growth spurts, with the opening of companies like Mitel, JDS and Corel. IT services were on the rise as well, but they were very focused on hardware, with companies like System Dimensions Ltd. (SDL) offering shared-time processing services for other firms that didn’t have those capabilities in-house, Bryden recalls.

SDL was interested in expanding into Western Canada and approached Bryden to write a report about how the expansion should be done. “My firm said that the real opportunity for growth was in the software and services unit, not in mainframes. In view of that report, mainframes would become obsolete pretty soon,” Bryden says.

Most of SDL’s executives didn’t accept Bryden’s recommendations — except for one, the firm’s vice-president of software development, Jack Davies. He approached Bryden with the idea of forming a company that would focus on software and services. This new firm, SHL Systemhouse, opened its doors in August 1974 with Bryden — responsible for assisting with corporate organizational structuring and arranging funding — owning half, and Davies’ team — the computer experts — owning the other half.

Bryden says SHL was very different from other outsourcing companies at the time. The professional services side of the computer industry operated almost entirely on a “fee for service” basis, charging the customer by the hour for the design and development of application software for mainframes. At least from the customer’s perspective, the problem with this model was that there was no guarantee of final project cost. “The risk of how long [the project] would take was a risk borne by the customer,” he says.

SHL changed the outsourcing scene by taking fixed-price, design-and-build contracts, which shifted the risk from the client over to the service provider. “The customer’s primary role was to interact with our people to carefully define their needs. Once they defined them in the user requirement specifications, as long as those specifications did not change, we would write that software and implement that program for a fixed price.”

Since projects almost always ran over budget with contract programmers, it was an “easy sell” for the customer, he says. “That business grew as fast as we could hire people,” Bryden says.

That doesn’t mean it wasn’t a risky endeavour, he notes. “When you signed a fixed-price contract for $100,000, you could really be off by $200,000….On the other hand, you could also make a 15 per cent margin.” It was the risk associated with operating the business that way that had prevented other services companies from embracing the fixed price model in the past, he says. What made SHL work was “remarkable operational management” that resulted in predictable profits.

“There were 28 quarters in a row that the company made its business plan — but the only role for me was raising capital periodically and applauding,” while Davies and John Kelly, another Ottawa high-tech giant, ran the business, Bryden says.

By the ’80s SHL had grown into a large business active in both Canada and the U.S., with about 4,500 employees; Bryden says it was the first Ottawa tech company to go public after Mitel. But on “Black Monday,” Oct. 19, 1987, SHL’s market value dropped 40 per cent. Two years later, Bryden was forced to sell the company to pay off the debts of his holding company, Kinburn. After being sold to MCI, then acquired by Worldcom, SHL was eventually bought by EDS and remains a division of EDS Canada to this day.

Since then, Bryden has been involved in industries very different from IT, including hockey. Compared to IT, “hockey was a really simple business to run,” he says.

The biggest challenge of owning the Senators was to maintain a good team while keeping salaries down. But IT was an entirely different game. When signing a $100 million contract for a hospital, “if things go well we made a 10 per cent margin, but if things went bad we

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Jim Love, Chief Content Officer, IT World Canada

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