Reprinted by permission of the Editor, Australian Defence Magazine

Peter Freed, Managing Director Cirrus Real Time Processing Systems

Peter Freed is the Managing Director of Cirrus Real Time Processing Systems ("Cirrus"), a leading Australian developer of advanced real time systems for the defence market. In parallel with developing Cirrus, Mr Freed has become well known as a vocal advocate of a greater role for the high technology SME sector in the domestic defence industry. Prior to founding Cirrus, Mr Freed held positions in software engineering and signal processing research at Sonartech and the CSIRO Division of Radiophysics respectively. Mr Freed holds a First Class Honours degree in Electrical Engineering from the University of Queensland, and was awarded the University Medal for academic excellence. He spoke in Sydney to ADM's Senior Correspondent, Julian Kerr.

ADM: How is Cirrus performing at the moment? Is the company maintaining its growth trajectory?

Freed: The first hurdle for any business is just to stay in business. We'll be celebrating our tenth anniversary at the end of August, so on that basis, we're travelling quite well. The second objective is growth and we haven't reached the trajectory that we set ourselves, mainly due to some pretty adverse market conditions that beset us a few years back. At that time we took a realistic look at what was happening in the market rather than burying our heads in the sand, and fundamentally changed our strategy. Thus far I'm reasonably pleased with how we're executing that strategy, and the prospects for future growth that we have under that strategy. Of course, only time will tell. We're only a 10-person organisation but we pack a pretty good punch. In the market we're now targeting there's a large amount of software work happening inside the major programs.

ADM: What was the change in strategy?

Freed: We were originally, essentially, an acoustics-area SME. There was a good level of development work being undertaken by the Commonwealth in that field and SMEs had a fair chance of participating in that work. Cirrus obtained a share of that work on competitive merits. Earlier in this decade, some of the big decisions that got made (due to considerations well above what's good for the SMEs in the submarines acoustic space) had the effect of essentially closing that door to us. So we looked around the industry and we saw that there was a large amount of high-tech software development underway, a lot of it inside the major programs being conducted by the primes, and we felt that the expertise that an SME like ours had, pretty well matched the software development happening inside those large programs. So we decided we should aim to work with the primes in doing some of that work for them on a value-for-money basis.

ADM: More broadly, how do you feel the high-technology SME's are travelling at present? Are their ranks thinning or expanding?

Freed: It's probably going to depend on where each company is in their own particular contracting cycle. I think it's true that quite a few of the high tech SMEs have endured some fairly bruising circumstances in the past few years. One of the things I like about my job is that over time I've met quite a few of my fellow proprietors, I know them to be a pretty resourceful bunch, and no doubt they're just that much hardier for the experience. Overall the picture is improving; the industry now has a lot of work coming into it.

ADM: What are the barriers to entry into the high-technology end of the defence market for emerging SME's, and what are the barriers to growth for established firms like yours?

Freed: The barriers to entry are substantial and many. Let's assume we have a bunch of bright guys who wish to develop a particular niche technology in which they have expertise. Let's make a big assumption that they've managed to get their finance in order, that they've developed their technology and they now have something to sell. If they were to approach Defence the odds are they won't get a particularly good reception because Defence would assess that the new product or technology is new, it's untested on the world market, and it's too risky to acquire. And if our entrepreneurs attempt to get around that problem by trying to sell on the world market, they'll hit the wall when the foreign buyers ask how the local defence force uses the product, and are they happy with it. It's a bit of a chicken and egg situation. The good news is that over time it does become easier, the problems are surmountable; the bad news is that it's going to take about 10 years for that chicken and egg problem to go away, and I don't think that is conducive to the Defence sector having a flood of entrepreneurial ventures. There's no magic recipe for that first sale. I'd say that every SME that has managed that has a different story to tell, but it's hard yards to make the breakthrough and there are a lot of disappointments along the way. More established companies like Cirrus can reach key decision-makers a lot more easily than a startup that no one has ever heard of. The real barrier to growth for an established SME really comes down to one key question - are we able to get reasonable access to workflow that we can bid for?

ADM: Have you launched your new product range? If so, with what result?

Freed: Our Arbiter technology is now available. It's a great technology for military network builders that are confronted with the need to reuse legacy equipment that may not have been designed for use with internet-type technologies, or where a tactical network's ability to support operational missions is limited by congestion. In either case, the network builder is going to have to write some custom software, whether to support unusual communications protocols, or to incorporate logic that identifies for prioritisation the specific subsets of traffic that are most critical to a given operational mission. The Arbiter provides a common framework for developing the software that addresses these types of issues, reducing cost and mitigating a good proportion of the effort and technical risk to the integrator. Now we see these types of challenges arising on a good number of the projects on the NCW roadmap, so we've got a good target market. We're pleased with where we're at commercially with the Arbiter; we've had a couple of contracted activities with Defence and associated industry this financial year that we've based on it, and we have a few more we're in discussion on, some of which I saw reported in ADM earlier this year. Exports remain a possibility down the track, but we'd certainly first work with network developers here on some of the NCW programmes

ADM: How much have you invested in developing new IP and products over the past few years?

Freed: Over the past three years, we've invested a substantial amount in R&D of our Arbiter technology. AusIndustry has matched us dollar for dollar, and we're appreciative of that support. Our total spend on this programme went past the million dollar mark last December, so that's a pretty big commitment on the part of Cirrus.

ADM: How do SMEs find both the money and the time to carry out R&D while simultaneously trying to earn a living?

Freed: It's not easy. But we don't consider it a spend, we consider it an investment, and we're only doing it where we believe there's a return - not necessarily a short term return, but a return there must be. On that basis we consider ourselves to be careful but decisive investors in R&D. We competitively secured the Arbiter grant funding from AusIndustry and that has been a big help, but Cirrus has reinvested a substantial portion of earnings in R&D.

ADM: Do you have trouble recruiting and retaining suitably qualified staff?

Freed: Recruitment hasn't been a problem for us. We've been hiring this year, and we've been able to find very high quality candidates. So far as staff retention is concerned, one of the best parts of my job is working with the staff I have. They're a great mixture of brains with can-do attitude, which makes for a good work environment. And we do have a profit-sharing scheme for our longer-term employees.

ADM:Companies like Cirrus compete in the marketplace but team up with others on projects. What are the capabilities that Cirrus might seek in potential partners to expand its market reach?

Freed: We're generally going to be at the end of the food chain so if a project is there to be teamed, it's unlikely that we'll be the prime and looking to people to contribute to a solution that we're putting together. It's more likely that somebody else will be the prime and we'll be teaming with them to do the part of the value chain that we're very good at ie complex software development. So the main capability we'd be looking at is - does this company have a realistic chance of making its way in the tendering?

ADM: Does Cirrus see links with global majors as the only route to market expansion or is there a role for the independent niche player?

Freed: It's unlikely that Cirrus would attempt to set up shop overseas. Should we have an export opportunity, we would team. With Arbiter, we'll certainly work with network developers here on some of the NCW programs first. Those organisations, through their supply chains, might decide to use the same technology on other similar programs they're developing overseas

ADM: Cirrus has developed some remarkably innovative acoustic processing products. What success is the company having in introducing these and its other advanced software products to the global market?

Freed: The local submarine space has been effectively closed to Cirrus over the past few years. Attempting to export in this space in the absence of local orders won't work.

ADM: Has the decision to use the US AN/BYG-1 submarine combat system effectively shut the door on opportunities for Cirrus on the Collins replacement combat system?

Freed: At this stage, yes.

ADM: How far is a company like Cirrus able to deal direct with the Defence end user, and how far is it necessary to deal instead through a prime or first-tier sub-contractor?

Freed: We're happy to work both ways.

ADM: There's been plenty of anecdotal evidence that prime contractors can treat SMEs in a somewhat cavalier manner - is that your experience? And if so is it getting worse, or better?

Freed: Yes, I've had experiences of that nature, but then business will always have a bit of rough and tumble. The key issue is whether or not SMEs can get reasonable bid access to the workflows that Defence is now entrusting the primes to manage. What perturbs me is when I hear primes talk the talk of meaningful SME engagement, but then do everything of a high-tech nature in house, irrespective of the fact that they might achieve a superior value-for-money outcome if they used a lean, smart SME. However, rather than dwell on that, I'd prefer to highlight a couple of the more positive interactions we've had with primes relating to this key issue of workflow access. Credit is due Boeing Australia in this regard for opening the door to us to develop a portion of the integration glueware for Vigilare. The traditional approach is that an SME might come onboard a big program run by a prime if and only if they happen to have a particular technology ready to go for that program; but the bespoke integration software was always developed by the prime's in house software team. So Boeing engaging an SME for this type of work is quite an innovative way of doing business - I can't recall any earlier incident of a prime doing this. In a different space, we have found that Kaz is matching the rhetoric of SME engagement with action, and we're pretty pleased with the relationship that's developing there. Both of these examples suggest to me that there is no valid commercial reason why primes can't engage SMEs in a meaningful way.

ADM: What's your competitive advantage over a prime contractor? And is this something which, paradoxically, could make you a favoured supplier to that same prime?

Freed: To describe our competitive advantage, let's look at our development of the Mine Hunting Simulation System (MHSS), which is a highly complex software intensive system. At the time of our tender win, other contenders (primes) suggested Defence would struggle to achieve a reasonable outcome for less than $10 million. Cirrus completed this contract successfully in under two years and under $2 million. Being able to build complex systems quickly and inexpensively is our competitive advantage; it creates a cost advantage. We're relaxed about sharing the cost benefit with our customers, so that probably makes us attractive.

ADM: Is the Australian market big enough to sustain the industry and technology base that the ADF needs to support it?

Freed: The objective of the expenditure is not to sustain industry, but rather to meet the ADF's needs. In the area of high technology, I'd never expect the Australian taxpayer to pay a premium for locally-produced technology. Now the good news is that there are plenty of examples of Australian SMEs that have produced excellent high tech kit for the ADF at very attractive prices to the taxpayer. So I don't think that the size of our market in itself means that high technology development can't be sustained here, it just means that the best VFM avenue to doing that development needs to be brought to bear.

ADM:From the SMEs' viewpoint, what would you like to be included in the Defence Industry Policy Review, and what would you like to emerge from it?

Freed: Defence Industry policy is a big area, but let's stick to the very basics. The Commonwealth Procurement Guidelines set out that the core principle for Australian government procurement is value for money. Now let's look at Cirrus' development of a complex product like the MHSS that I described earlier. The VFM outcome for the customer was exceptional when compared against industry norms. Other SMEs I'm familiar with have achieved similar VFM outcomes on their projects. And within Defence overall, there is plenty of this complex software development work going on. One would think that given the clearly stated core principle, the SMEs would be flooded with work, yet that has not been my experience. So we'd like the policy review to follow the chain of logic from the core principle down through the derivative policy documents like DPPM, and identify where the policy deviates from the core principle, or where the practice deviates from the policy. We would then like the gap, wherever it lies, to be plugged.

ADM: Whither Cirrus? What are your long-term ambitions for the company?

Freed: In the medium term, say three years, I would like to see Cirrus conducting multiple, say three software development projects in parallel. To the extent that we are allowed reasonable bid access to workflows, that is attainable. We're engineers at heart, and if we're able to get on and build useful things for the ADF we'll be happy. As for longer term goals, at this stage I'll keep these to myself.