Some entrepreneurs intuitively understand how to lash their wagons to a rapidly moving market trend. Others, however, know they have to wreck things in order to make a breakthrough. For much of the 2000s, Bluedrop Performance Learning, a publicly-traded St. John’s, Nfld. company, had a comfortable book of business, building online training modules for Fortune 500 companies, including behemoths like Dell and Microsoft.
But by 2008, founder Emad Rizkalla, a serial entrepreneur, realized his firm was playing in an increasingly commoditized marketplace. What’s more, he says, most of Bluedrop’s contracts “were small projects in large companies.” Built to work on “universally derided” corporate learning management platforms, Bluedrop’s products “weren’t transformative,” he adds.
Now here’s the nerves-of-steel part of the story: “In 2008,” Rizkalla explains matter-of-factly, “we started a massive transformation and fired all our Fortune 500 clients” so the firm could focus on developing sophisticated computer-based training simulators for the defence and aerospace sector, a field long dominated by giants like CAE Inc. and Boeing.
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That process led to Bluedrop’s acquisition, last winter, of its main Canadian rival, Atlantis Systems Corp., a Halifax company. Bluedrop paid $1 million in cash to Atlantis’ Florida-based private equity owners, and assumed $2.5 million in Atlantis’ debt. The company has told its investors that it plans to find $3 million in savings from consolidating the two operations, shifting all the management to St. John’s while retaining Atlantis’ software engineering operations.
The pay-off, however, isn’t just a larger and leaner company. The deal “allowed us to not focus on the Canadian market,” Rizkalla says. By acquiring Atlantis, Bluedrop’s client list now includes all the significant domestic defence contractors, which frees the company to use the deal as a platform for a renewed push into international markets.
Bluedrop, which recorded a $1.7 million loss on $11.5 million in revenues for fiscal 2013, has two main business lines: its learning network group develops e-learning modules for corporate clients, and accounts for about 30% of sales. Its aerospace and defence division, in turn, brought in almost $8 million last year. About a fifth of its revenues come from exports. The company ranks 260th on the 2014 PROFIT 500.
Given that Bluedrop had no presence in the defence space six years ago, the size and growth of that division is remarkable. Early on, Rizkalla felt there was an opportunity to develop training simulators that ran on computer terminals, rather than the fully-equipped mock-up cockpits that have been standard in the aerospace sector for years. He noticed there was an opportunity to develop such modules, as well as virtual reality simulators, for so-called “ground school” training for helicopter pilots or the maintenance crews working on military airplanes such as the Royal Canadian Air Force’s Hercules transport.
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Rizkalla insists that his defence-oriented training products don’t compete with the full-scale cockpit simulators built by firms like CAE, which is a customer of Bluedrop’s. Rather, he says, these training programs are complementary, and focus on so-called back-of-plane functions. Rizkalla’s take on the market is that the major aviation manufacturers will want both types of training systems.
It’s one thing to discern the opportunity, but quite another to shoe-horn into a market as complex and tightly constrained as the global defence sector. “It takes years to get the trust of these kinds of customers and set yourself up propertly.”
Early on in its transformation, Bluedrop made a handful of key hires, recruiting two retired Canadian military personnel to generate leads while helping the company figure out how to satisfy the strict security and reliability/quality assurance requirements imposed by defence contractors and their government clients. “You have to have people who really understand the culture.”
Rizkalla also told his staff that as they focusing on building a sustainable client base in the aerospace and defence world, it is more important to be easy to work with than relentlessly profitable. “We’ve eaten costs to maintain relationships,” he says, pointing out that clients often find themselves squeezed by their own defence-department customers. “From the letter of the contract perspective, we might have said, `It’s not our problem. But if your client is having a problem, you’re having a problem.” As he explains, it’s important to balance the goal of delivering strong quarterly results against the need to develop durable customer relationships. “If you lose those relationships, you haven’t done anything to help your shareholders.”
Today, having established connections in the Canadian defence sector and stripped excess expense out of the Atlantis acquisition, Bluedrop is finally poised to make a more concerted push into international markets. Rizkalla points out that one of the attractions about Atlantis is the fact that earlier versions of the firm’s training simulators are installed with users around the world.
“We’re looking at this dormant customer base to see if there are openings” to sell newer iterations of the combined company’s simulation software. “We think they can be revived. What we can do together, we couldn’t have done apart.”