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Surviving and Growing: the constant challenges of SMBs in Canada’s Defence and Aerospace Domain

With billions of dollars announced for new programs and an acquisition budget coupled with defence procurement policies, it may seem that the environment is ideal for SMBs to grow and prosper in the coming years. The reality is not as simple as SMBs need to navigate their way through the procurement processes and constant delays in programs. Accessibility to financial and human resources is a constant challenge. However, a SMB like Bluedrop is not only surviving in this environment but is succeeding in positioning itself for growth.

Through Canada’s ‘Strong, Secure, Engaged’ defence policy, the government of Canada has developed a long-term plan for operational funding requirements, new acquisitions and sustainment. It has established a separate Capital Investment Fund that is earmarked for identified new programs with an acquisition budget of $213 billion and a sustainment budget of $108 billion. The major program plans are published years in advance and have industry consultation processes as they near the competitive bidding process.

The ‘2018 Defence Investment Plan’ includes the detailed listing of future projects and programs that are expected to be undertaken and the expected dates of award through to completion. Within this program there are specific requirements for industrial benefits and Canadian content with an emphasis on Key Industrial Capabilities (KICs).

Canada’s Industrial and Technological Benefits (ITB) Policy objectives are to facilitate economic development and long-term sustainment of Canada’s Defence Sector. This positions Canadian companies to move up the value chain, capture market opportunities, benefit from subsequent commercialization opportunities. ITB Policy encourages the participation of Canadian SMBs as suppliers on major federal procurements by maximizing the amount of business activities in Canada involving work directly related to a given acquisition as well as work in the Defence Sector more broadly by strengthening innovation and R&D in Canada. The opportunities contribute directly to increasing market competitiveness and establishing a defence pedigree such that SMBs can better access export markets.

The above policies would suggest that the Canadian Defence and Aerospace domain offers great opportunity for growth and continuous innovation. However, the reality is not as straightforward as we may think for SMBs operating in this space – where entry barriers are high and surviving as a SMB is an everyday challenge.

Even with a detailed listing of future projects and programs that are expected to be undertaken and the expected dates of award through to completion, these future programs are few and far between with lead times of over 18 months to come to fruition. Added to this, there are constant program delays that easily add months if not years to the procurement process. This is a lifetime in the life of a SMB.

The structure of the industry is also biased towards large primes who control all major procurements, leaving SMBs with only the ITB policy as an entry point to participate on large procurements. What this means is that once a major program is awarded, the SMB still needs to wait until a sub-contract is provided by the prime contractor and this adds extra time until revenues can actually be made by the SMB.

SMBs cannot survive with only contracts at initial procurement and acquisition time, as major programs are so few and far apart. Gaps between programs can spell the end of some companies without continuous backlog. To maintain its workforce and continuous work, it is imperative that SMBs have access to the In-Service-Support (ISS) portion of large programs to be able to grow.  This provides a more stable revenue stream for the long-term. The key is to be able to stack several ISS projects to ensure a minimum level of work at the onset of every year and keep adding new programs. We need a more “SMB-friendly” government procurement system that encourages primes to have SMBs participate in the long-term sustainment of programs. Small and medium-sized firms struggle to win government and defence contracts and the government does not always understand how an SMB business model differs from those of our bigger counterparts; the system is complex and geared to address established large corporate requirements. We need to reduce the complexity of contracts and contracting processes such that Canadian SMB capacity can be promoted.  The ‘unbundling’ on contracts would ensure that SMBs benefit during the duration of large programs and not only at acquisition time.

Next, assuming that the SMB has a solid backlog, the next problem is the availability of the proper resources. Aerospace is already experiencing a labour shortage and in addition, we live at a time of digital transformation where new competencies and knowledge are required. We need to invest in the re-training of our experienced workforce and align our education system to be able to fulfil upcoming job requirements.

Finally, surviving is not enough, as a SMB we need to grow. The only way to do so is through innovation and R&D so that the company can evolve with changing market demands. However, innovation means investment and that can be achieved only with profitability and availability of funding. With long procurement cycles, SMBs need support to access programs targeted to the industry’s innovation agenda that would send a signal that Canada is committed to the long-term development. Today’s programs such as BCIP and IDEaS are just a drop in the bucket compared to what would really be required to sustain an innovation and R&D agenda for Defence and Aerospace. Fortunately, a government program such as the Strategic Innovation Fund is a good step in the right direction.

At Bluedrop, we have been both successful and fortunate at navigating the intricate Defence and Aerospace procurement processes while keeping abreast of government policies to support SMBs. Bluedrop has benefited from Investment Framework transactions, BCIP and SIF programs and is involved on major Canadian programs in both acquisition and in-service support. This has been the result of extensive strategy definition, persistence and hard work to access these programs. The company had to transform itself from a pure courseware design and production service company to become a more complete training product and service company. This meant extensive investment and commitment in the strategy and the development our people.

The success Bluedrop is having with its new suite of Virtual Reality Rear Crew Mission Simulators is a result of a very focused plan and close relationship with major OEMs. The quality of our workforce has been the key success factor in adapting to market needs and providing excellent products and services to our customers.

What is becoming extremely clear is that we cannot grow based on Canadian programs only. It is imperative that SMBs extend their reach to export markets. Again, this means further investment and access to continuous work.

This is what makes working in a SMB both thrilling and challenging. As a SMB, we need to remain nimble, listen to our customers while having a clear strategy to take advantage of government programs and procurement policies while encouraging an innovation culture within the company.

Image: ©David Howells 2016

Author: Jean-Claude Siew

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