Government Operations Committee on Nov. 3rd, 2011

[The Chair, NDP, Pat Martin]

I'm going to call this meeting to order.

Good afternoon, everyone. Welcome to the 15th meeting of the Standing Committee on Government Operations and Estimates. We are reaching the third or fourth week of our study into the effectiveness of the Office of Small and Medium Enterprises, OSME, and the Canadian innovation commercialization program. Further to that study, we have witnesses today, in person, from Virtual Marine Technology Incorporated. Captain Anthony Patterson is the president and chief executive officer.

Good afternoon, Captain Patterson.

By video conference from Edmonton, Alberta, we'd like to welcome Geoff Hayward, the president and chief executive officer of DataGardens.

Welcome, Mr. Hayward. Can you hear us in Edmonton?

[Dr. Geoff Hayward, President and Chief Executive Officer, DataGardens]

Yes, I can.

[The Chair, NDP, Pat Martin]

Very good. This will work just fine.

We'll ask the witnesses then to make their brief presentations, and then we'll open it to questions.

We'll ask you to begin, Captain Patterson, from Virtual Marine Technology Incorporated.

[Capt Anthony Patterson, President and Chief Executive Officer, Virtual Marine Technology Inc.]

Thank you very much. It's a pleasure to be here.

I'll just give a quick description of VMT and our experience with the CICP program.

Virtual Marine Technology is Canada's largest marine simulation company. We enable our customers to implement enhanced, immersive, safe, and cost-effective training environments, mainly to improve safety on board ships and offshore structures. We were established in 2004 as a spin-out company from the National Research Council and Memorial University of Newfoundland, and we hold the exclusive worldwide licences to commercialize small craft training technology from those two organizations.

We are a small business, in that we are less than 50 people. We are privately held, incorporated under the province of Newfoundland and Labrador, with a branch office in Victoria, British Columbia, and our primary market is the offshore oil and gas industry, with secondary markets in shipping and defence.

Our experience with government to date is that we've had great support from the federal government on our innovation agenda. The federal government co-invested with the oil and gas industry in Newfoundland to develop the types of technologies that we're bringing to market. We've also had great support from the federal government for marketing of our technologies, particularly through ACOA and the trade commissioner's office in the Department of Foreign Affairs.

However, we've been unable to sell products directly to the federal government, primarily because a company like ours, which is relatively small, with new technologies, is normally screened out on risk assessment criteria, either financial or technical. In our view, CICP is the only practical way for the federal government to procure new innovations, like the ones we have, from us.

Our experience with CICP is that the particular project we are offering is to improve the training for small, high-speed craft operators--for instance, for people who operate search and rescue craft, or law enforcement. The scope is to evaluate the effectiveness of our new product in meeting return on investment criteria. The department that picked up our technology was the Canadian Coast Guard, and it will be deployed at their training school in Bamfield.

As for what's good about CICP, the online application was a great innovation. I think you should do more of that. The staff have been very helpful, and the bid and negotiation process was typical for government procurement. So there were no shortcuts; this was a full-on procurement with the federal government.

There are areas where we see room for improvement with CICP. There's no contract extension capability within the procurement vehicle. We actually had three divisions of the federal government that wanted to procure our technology, and once we selected one, it blocked the other two. And if you're not careful how you structure your program with CICP, you may be barred from future procurement opportunities with the federal government.

In conclusion, I would say that CICP is a great program. It's an essential but missing part of the spectrum of Canada's innovation strategy. We're very good at innovating things, but we're not great at bringing them to market. This program I think will help that. I would say that the CICP program needs to made bigger. Perhaps things like IRB set-asides could fund portions of something like the CICP program. You need to enable departments to buy more units under the same procurement vehicle if the trials prove to be successful, and I think the program scope needs to be expanded to include the purchase of early stage products instead of prototypes.

Those are my opening remarks. Thank you.

[The Chair, NDP, Pat Martin]

Thank you very much, Captain Patterson.

I hope during the question period we learn a little bit more about what Virtual Marine Technology actually does and some of the difficulties you may have had in marketing your product to your own government.

Could we hear, then, from Mr. Geoff Hayward, from DataGardens in Edmonton.

Mr. Hayward, you have the floor.

[Dr. Geoff Hayward]

Thank you very much for the opportunity to speak to the standing committee.

I'd first like to tell you a little bit about our company, DataGardens, and some of my observations about the challenges faced by ICT companies in western Canada and more broadly in Canada; how CICP plays a role in addressing those challenges; some of our particular experiences through the CICP program; and, finally, some of the benefits and costs to us as a company in participating.

First, to tell you a little bit about DataGardens as a corporation, we were founded in September of 2007. We've done something that we feel is quite remarkable, and we've been fortunate to receive international recognition for our capabilities and our technology. There is a revolution that's happening all around us in the field of computing, and it's called cloud computing. Cloud computing traces back to the capability to take physical computers and abstract all the essence of their processing, put them into software containers called virtual machines, and have many of these virtual machines running on one physical computer. Each of these virtual machines has its own operating system running quite independently and logically disconnected from all the others. But through this miracle of virtualization I'm able to take one physical box and run 20 computers on it, 20 of these virtual machines.

What DataGardens developed is the capability of moving these virtual machines, while they are still running, over large geographic distances. This is something that many companies have wanted to do for a long time, and we were the first to succeed at it.

Through this innovation we were fortunate to be recognized in 2009 as the number one start-up in the virtualization sector in the world by Virtualization Congress; selected by IDC as one of the top ten cloud computing companies to watch this year; and we've won several other awards, including top technology awards at IEEE GRID and Open Grid Forum.

I say all of this not to boast or in any way try to claim some special status, but to point out that like a lot of companies we feel we have excellent technology, and yet we are very severely challenged as we struggle to commercialize that technology. Canada has many powerful programs--IRAP, notably--that help companies like ours develop these incredible technologies. And yet there are tremendous challenges that we confront in finding the capital and the management resources to successfully commercialize those.

Particularly in western Canada, we feel that most companies like ours are poorly capitalized--have excellent technology, yes--and have some weaknesses in sales and marketing.

We have a huge challenge in confronting what I call the commercialization gap, and what the CICP also calls the commercialization gap, of proceeding from an early stage pilot capability or beta capability and pushing that forward into the market as a game changing product. I feel that CICP is one of the most important initiatives, if not the most important initiative, that I've seen come out of the federal government for helping companies like ours address this commercialization gap. It is critically important for a number of reasons. The benefits we have received....

Actually, maybe before I get to the benefits, I should tell you a little bit about the division of the federal government that found a desire and a need to adopt our capabilities. This ability of moving live virtual machines...powerful though it may be in principle, what's the use case? What is the application? Why do companies want this? One of the most important applications for it is the ability to provide non-disruptive disaster recovery protection for a business. If my business goes down or my data centre goes down, I'd like to have the capability to evacuate all my live virtual machines to a remote location and keep them running without any interruption in service whatsoever. That's the capability we offer. We believe it is quite disruptive in the industry.

We were fortunate enough that the CTO's office of Public Works recognized that uniqueness of our capability and selected us as one of the technologies they would like to deploy. They had three use cases for us. Public Works now, as Shared Services Canada, has the challenge of taking over 300 data centres and consolidating them down to about 20, to achieve efficiencies of operation to avoid some of the excess expense that we, as Canadian taxpayers, are bearing.

To use our product to live migrate virtual machines, to move an entire data centre from one site to another without anyone noticing any interruption in service whatsoever, is a tremendous capability for the federal government to have, and for that capability to be exposed just through software that can be deployed by their engineers in a very facile fashion, moving without any need for engineers to actually go on-site, is a tremendous capability. That's use case one: consolidating data centres.

The second use case was to provide disaster recovery protection, or what's also called business continuity protection, to all the divisions served by Shared Services Canada as a service--business continuity as a service--a revenue-generating centre for Shared Services Canada, while providing this data protection service to the divisions of the federal government.

The third use case was for Shared Services Canada to use our product for their own internal data protection. We have gone through extensive testing now with Shared Services Canada. We're now launching on a phase of an actual production deployment with one of the divisions served by Shared Services Canada, and we're very excited about that development.

Now with that background, I would like to just take what time is left--a couple of minutes, I hope--to tell you about the benefits that we have received from participation in the CICP program.

First, to put it in the most blunt fashion possible, we have received $500,000 of revenue, which is vital to an organization of our size. But looking beyond the obvious, the customer reference is critical. We are now working with some of the largest managed service providers, or cloud providers, in the world, multibillion-dollar organizations. Actually, they look for customer references--who has deployed your product before. The fact that Shared Services Canada is a customer is a very important reference point for us.

Customer feedback, help to improve our product...we've received tremendous help from Shared Services Canada as we struggle to improve our product to better meet their needs and the needs of other cloud providers.

Follow-on sales opportunities--we hope to secure additional sales to Shared Services Canada over the coming year. We expect that Shared Services Canada will influence other government departments that aren't served by Shared Services Canada to look favourably upon our product.

We have also received help from Shared Services Canada to secure financing for our company, and new channels and strategic partners. So there are tremendous benefits.

In terms of shortcomings to the program, there are none that have affected us directly. I would point out that there is a significant overhead for companies in going through the due diligence to determine whether they will be accepted into the program. That's a risk factor for a lot of companies. There's a lot of effort involved in it, but it's something that we are very much appreciative that we went through.

I'd like to summarize by saying that CICP has been a vital component in our corporation's growth, and we would like to see the program expanded in the future.

[The Chair, NDP, Pat Martin]

Thank you, Mr. Hayward, for a very interesting presentation. You're very well represented here in the room. Actually, there are four large monitors and your face is on all four of them.

Your message is very well received. It's like a cloud, one of my colleagues says.

We're going to go to questioning by committee members, and first, on behalf of the NDP, is Mathieu Ravignat.

[Mathieu Ravignat, NDP, Pontiac, QC]

Thank you, Mr. Chair.

Thank you to our witnesses for appearing to share with us their experience with Public Works Canada.

As a member of the opposition, I am concerned with the quality of the information this program provides to businesses. Mr. Pablo Sobrino, the associate assistant deputy minister, appeared before this committee and explained that the CICP assessment was made up of two stages. First, each proposal is assessed for compliance to mandatory requirements. And the second stage deals with the degree of innovation in the proposals. In each of these stages how good was the information provided to you by the office?

[The Chair, NDP, Pat Martin]

Captain Patterson, go ahead.

[Capt Anthony Patterson]

Our company has experienced, mostly through the previous lifestyles of the people in it, dealing with government procurement and picking the essential information out of calls for proposals. In the criteria that were published it was very easy for us to make an assessment quickly as to whether or not we qualified for the program and what our chances of success would be.

We had, I would say, roughly seven days from the time we were aware of the program to the finalization of the call for proposals. We had to do that very quickly, and within the first hour or so we knew we were qualified.

From that perspective, we did get sufficient information to see whether we fit or not and whether we had a chance of being successful.

[Mathieu Ravignat, NDP, Pontiac, QC]

Mr. Hayward, would you have something to add.

[Dr. Geoff Hayward]

Yes. Thank you very much.

I thought the selection criteria were very clearly spelled out. I was pleased to see that it was obviously a very fair program. Sometimes there's a downside to that, in that they're totally inflexible on deadlines, but I appreciate overall the fact that this program was very fair, and obviously so.

There were some challenges, though, in the actual submission process. We were part of the first submission process, and I think true to the whole spirit of CICP, they were trying to innovate by using a new company to prepare the online application process. There were some hiccups with that, frankly, but I think they've worked their way through that now and I think the program is working very well.

[Mathieu Ravignat, NDP, Pontiac, QC]

Do you think the Canadian innovation commercialization program has an adequate definition of the term "innovation"? If not, what would you add to this definition? Do you have any suggestion on this definition?

[Capt Anthony Patterson]

One of the things I really like about the CICP program is that they tag innovation to the technology readiness scale, which is something that we commonly use, even within our own company, to determine whether technology is ready for commercialization or not. It was very clear where it tagged. The improvement, I would say, though, is that.... There is almost a catch-22: to be really successful, you had to have a product that was ready for commercializing, but you couldn't have sold it yet. Companies arrive at that blessed period for hopefully the minimum period of time.

So I would suggest, as an improvement to the thing, that the concept of an innovation should also include products that may have had a few customers, not very many, because for that first three years of a new product's life cycle there's intense reworking of the product. I don't think that because you've sold one thing to somebody it should disqualify you from this program.

[The Chair, NDP, Pat Martin]

Mr. Hayward.

[Dr. Geoff Hayward]

I would agree with that observation.

My understanding is that the rules are a little bit more lax now, and maybe we should go back and talk to the people who run the program. My understanding is that you can have had a few products into the market, so there is a little bit of latitude there now.

I would be fully in agreement that it was clear from the outset that this had to be a very, very innovative product and it had to be also at the stage of a pilot trial.

[The Chair, NDP, Pat Martin]

Thank you Mr. Hayward.

Thank you, Mr. Ravignat. Your time has expired.

Next, for the Conservatives, is Mr. Ron Cannan.

[Ron Cannan, Conservative, Kelowna—Lake Country, BC]

Thank you, Mr. Chair, and thanks to our witnesses.

Captain Patterson, we had a chance to briefly chat before the meeting, and as I mentioned, I represent the Okanagan, Kelowna--Lake Country. You said you have an office in Victoria as well as in St. John's, so you're covered coast to coast in that respect. I commend you for your innovation and your company's continued creativity to use that technology to help oil and gas exploration up the coast.

If you could clarify, in your opening statement you commented that you had screened out on the risk assessment criteria. Maybe you could expand a little bit, say what exactly happened, and your recommendations as to how we could maybe.... The focus of this committee is that we're looking at the small business office and how we can make OSME and the CICP program more flexible and adaptable to utilize those Canadian technologies.

Maybe you could expand on your experience a little more, please.

[Capt Anthony Patterson]

The best example would be something that actually happened in the course of this year. We were not screened out of CICP, but we were screened out of an opportunity with the Canadian Commercial Corporation to sell a similar type of product to a foreign government. At the same time, we were accepted by Exxon Mobil as a supplier for essentially the same technology within their procurement system, and as well by a major defence contractor in Germany to supply the German navy.

So what I saw was that for essentially the same technology--the same company, the same financial status--we were good for the super majors, but we weren't good enough for the Canadian Commercial Corporation. Speaking with the Canadian Commercial Corporation, it's basically that their rules are such that new technologies and new companies are very difficult for them to deal with, because of high-risk factors. I think something like the CICP can bridge that gap to a certain degree, because it seems to have a lower threshold, let's say, than CCC for accepting companies.

[Ron Cannan, Conservative, Kelowna—Lake Country, BC]

I appreciate that. I think it's a good nugget that we could include in our report to take back, to make sure we do all we can to help encourage and support those innovative ideas in Canada.

To Mr. Hayward in Edmonton, I believe you said you were born and raised there, and you moved out west once you got the 35 below weather. Hopefully you still don't have your snow coming yet. I have a lot of good friends in Alberta. I know they have the tech park there and have done some great things. I applaud you on your few short years and what you've been able to accomplish with your company.

I mentioned to Mr. Patterson that buyandsell.gc.ca is a government website. Are you familiar with that website?

[Dr. Geoff Hayward]

Yes.

[Ron Cannan, Conservative, Kelowna—Lake Country, BC]

As the chair mentioned, this committee has been going on for a few weeks, and some of the witnesses had no idea, had never heard of the CICP or the buy and sell website. So I'd like to ask both of you, where did you find out about CICP and the buy and sell website?

[Dr. Geoff Hayward]

I did not know about the buy and sell website before my experience with CICP. A colleague introduced me to the CICP program. Actually, it was another company, now that I recall, that was making an application. We weren't directly aware. We hadn't received any notification about it, but another company that was applying let us know. We thought there was still time left, so we did apply, and through the application process became aware of the buy and sell government site.

[Capt Anthony Patterson]

Our experience is very similar. We found out through an industry association that we're part of in Newfoundland—OceansAdvance—that this call for proposals had come through, and then going onto the buy and sell...we became more aware of the website there.

We're very familiar with MERX, for instance, but not with that other website.

[Ron Cannan, Conservative, Kelowna—Lake Country, BC]

A very small percentage of the members of the Canadian Federation of Independent Business, for example, were aware of it, so I appreciate that. We'll continue to pound the message and do all we can to get it out.

I have one last question before my time runs out. Mr. Hayward, you mentioned capitalization as a big challenge. Is that in your specific industry, or is that as a new start-up company? Have you had work with venture capital and the angel investors?