[From CASE Reports, Vol. 13, No. 1, 1998]


IN SEARCH OF 'CRITICAL MASS'

Software Industry Outpaces Other Economic Sectors
As Experts Seek Ways to Nurture Future Growth

When an atom bomb explodes, it's because of critical mass: Jam together enough fissionable material like uranium and a chain reaction begins. It feeds on itself, growing bigger and bigger, because there is enough raw material present to fuel it.

The ultimate fate of Connecticut's software industry may depend on whether it can achieve its own form of critical mass. While the industry is growing faster than any other in the state, it remains small compared to those of prominent software hubs like Silicon Valley or Massachusetts' Route 128. And its limited size alone may in some ways impede its future growth.

Can Connecticut's software industry reach critical mass? The answer, according to state educators, researchers, and businessmen, will help determine whether the industry can attract and sustain the substantial base of programmers, entrepreneurs, and capital needed to make it thrive.

To a certain extent, the question of critical mass may be one of perception as much as one of numbers. The state's software industry is expanding at a swift pace. According to Steve Clement, Project and Communications Manager of the Connecticut Technology Council (CTC), which tracks technology issues, the industry has increased by 64% since 1992, to 1,143 firms. And of the fifty fastest-growing technology companies in the state over the past five years, 36% were software firms.

In addition, while Connecticut as a whole has lost jobs during the 1990s, employment in software companies has grown by 60% since 1992, to a 1997 figure of 12,874. (The software industry includes Standard Industrial Classifications (SIC) 7371-7375.)

But the total numbers are small. Even with its rapid growth, the software industry accounted for only 0.8% of total Connecticut employment in 1997. To Connecticut, however, the industry's importance exceeds its size.

Software-related jobs tend to be of high quality. According to CTC research, jobs in Connecticut's software industry average $54,819 in wages in 1997. The industry contributes more than proportionately to the gross state product: in 1997, with only 0.8% of employment, it accounted for 1.3% of the total gross state product.

An Enabling Industry

"Software is an enabling industry," says Laura Kent, executive director of CTC. "All the other industries are increasingly information-technology reliant, from Stop and Shop on up."

CASE member Martin Schultz, chairman of the computer science department at Yale, concurs. "Most people believe that the health of the economy is due to the computerization of industry and business. The technology is moving very fast." He believes that if industry cannot continue to take advantage of the increasing opportunities offered by advances in information technology, "the productivity gains that we've seen in recent years will stop."

According to Clement, much of Connecticut's software industry is driven by financial services, providing customized software for banks and insurance companies. He also sees an increasing number of companies producing web-related applications. "A lot of the growth in small companies is web-based: designing web pages, for example."

Although there are two software companies in Connecticut with revenues of over $50 million, most of the state's software firms are small. The average size, according to Clement, is 11 to 12 employees.

"Fairfield County has shown tremendous growth," he notes, adding that state Department of Economic and Community Development data show technology companies following the highway corridor along the Merritt Parkway and Route 84 from Fairfield County through New Haven to Hartford.

"Software," says Yale's Schultz, "is the perfect type of industry for a state like Connecticut. Initially, there's virtually no capital investment, so the price of entry is very low. All you need is a PC. And it's labor-intensive, it creates a lot of jobs, high-paying jobs. There's no pollution. It's ideal."

As computers rapidly become a more integral part of daily life, the industry will continue to grow. The state Department of Labor projects that software will remain one of the state's fastest growing industries, with computer-related jobs within Connecticut expected to increase by 34% between 1994 and 2005.

A "Resource Crunch"

But several factors may constrain the process; the most compelling of these is the national shortage of programmers. According to the US Department of Labor, an average of 95,000 new programmers, systems analysts and computer scientists will be needed each year from now to 2005, and one study estimates that, in US companies with over 100 employees, 346,000 programmer and systems analyst jobs remain unfilled. In Connecticut, according to Clement, software companies are about 30% under capacity.

"It's the biggest restraining factor in our growth," says Keith Blackwell, the co-founder and president of Bristol Technology. His company, with about 70 employees, specializes in producing tools for Windows-to-Unix cross platform development, and, with revenue growth of 1,500% over the past five years, was recently named the fastest growing technology company in Connecticut. Still, he struggles with what he terms a resource crunch. "We're having trouble finding the right people," he says.

"The region that answers the call for more workers the fastest, the best, and the most efficiently will be the one that thrives," emphasizes Kent. It is, she points out, a problem that requires a three-tiered solution. "Short-term is who can attract the workers to their state the fastest. Mid-term is who can put training programs in place. Long-term, it's getting kids to take math and science."

"Critical Mass"

Blackwell, who attributes the success of his company to finding good people, has hired only a few from within Connecticut. He seeks new workers through the Internet, finding them from Arizona and Oregon to China, India, and Scotland. But it is sometimes hard to get people to move here. "Critical mass, that's a problem, in terms of attracting people."

Les Trachtman, who served as director of corporate development for Hyperion, and who is now president and CEO of Metaserver, a New Haven startup [see above], concurs. Without the assurance that Connecticut is a software center, programmers are often reluctant to uproot their lives. "There's no big group of software companies here, like there is in Massachusetts, and Silicon Valley." He feels that Connecticut, with its small communities, offers a good quality of life. "But there have to be the companies."

The problem, says Kent, is that because Connecticut's software industry isn't well publicized, it can be hard to persuade people to take jobs here. Because they do not feel that a thriving industry exists, they don't believe there is any opportunity for growth or advancement.

Nonetheless, she points out, there are over 1,000 companies, with about 10 people working in each. This figure does not reflect those employed in programming or other software-related occupations in banking and other industries--nearly six times as many as those employed in the software industry proper. "That's quite a lot of people," Kent says. "It's not that there's no opportunity in Connecticut."

New Partnerships, Collaborations

CTC is joining with the Connecticut Economic Resource Council (CERC) Inc., a nonprofit group funded by the state and by utility and telecommunications companies, to attempt to change the public perception of Connecticut.

CERC will spend $600,000 on a marketing campaign that will try to redefine Connecticut as a technology state. Ads featuring the slogan "Connecticut: Where Technology's Going," will appear in newspapers, trade magazines, and on radio in New York, New Jersey, Pennsylvania and Boston. One-third of the money will be spent in Connecticut to help make small technology companies aware of resources available locally.

Other resources within the state address the programmer shortage more directly. At the universities and colleges, more students are beginning to take an interest in the field, reversing a ten-year decline. In 1997, computer and information science degrees from all colleges and universities numbered less than 300, which was down 50% from those awarded in 1987. However, at Yale, the number of juniors and seniors majoring in the field has risen to 69, from a low of 30 eight years ago; at the University of Connecticut (UConn), the number of those enrolled in computer science and engineering in 1997 is 274, up from a 1994 low of 176.

One ambitious new program is working directly with businesses to help provide the training that they require for employees. The Connecticut Information Technology Institute (CITI), newly established at UConn's Stamford campus, was begun as a direct response to the shortage of workers. CITI will focus on three main areas, according to Fred Maryanski, vice chancellor for academic administration and chief information technology officer at UConn. First, CITI will offer both graduate and underg"> aduate degrees in business, computer science, and technical writing and communication. Second, it will offer a professional development program, consisting of short courses aimed at increasing skill sets in particular areas. This program will begin this spring, with courses in information technology and

in management. In its third role, CITI will attempt to foster communications and interaction among information technology companies, providing regular forums in which its corporate members can discuss information technology issues with leaders in the field. "If you look at successful business models, in areas like Silicon Valley and Route 128, you will find that they are characterized by more interactions," said Maryanski.

CITI's development has, from the beginning, been characterized by a close collaboration between the university, business community and the local government. "The programs have been based on the input of people from the companies who will be hiring the graduates, and who will be sending their employees for additional training," notes Maryanski. Businesses are expected to provide much of the financing for the program, and have already committed $3.4 million toward the $6 million endowment needed to fund the program. Businesses can also become members for a $25,000 annual fee.

"It's a program which tries to address the needs over a broad spectrum, by providing programs in Stamford, strengthening our undergraduate programs here, and linking those to the southwestern Connecticut companies, providing them with access to a larger and better skilled information technology workforce," says Maryanski. Eventually, CITI hopes to graduate about 300 students a year.

Through a newly developed partnership, CITI students will be drawn not only from UConn's Stamford campus, but also from Norwalk Community Technical College and Housatonic Community Technical College. CITI courses will be matched up with courses from Norwalk and Housatonic, so that students can easily transfer to UConn and complete their degrees. The universities are also collaborating in other areas, such as non-credit courses and community outreach.

In fact, two-year colleges such as these have long been seen as a place to train employees in skills that serve the needs of specific companies. In Connecticut, the Business and Industry Services Network, established over a decade ago, provides a mechanism by which companies can request contract training in a variety of areas including information technology.

Room for Improvement

However, some feel that Connecticut can do better. In Connecticut, companies must pay for such training while in North Carolina, for example, the training is funded by the state. "In North Carolina, they use their com-tech colleges very well," says Clement. "They're used for training; they're used as an economic development incentive. They're funded very well--there's a pool of resources that allows the com-tech colleges to create programs very rapidly, [in response to] training needs."

If the lack of programmers is the biggest problem hampering the growth of individual companies, there may be other factors affecting the growth of the industry as a whole. Since the 1990s, according to CTC, high-technology startups--including fields such as biotechnology and photonics as well as software--have increased by only 5% in Connecticut, which means that the state ranks last in the nation in the growth of technology-based startups.

In a recently issued policy statement, CTC recommended several tax changes to make Connecticut more appealing to businesses. These range from extending the number of years over which businesses can write off losses from the state's current low of 5 years to the federal standard of 20 to allowing smaller companies the same level of credits that larger companies are able to have, to a more innovative startup tax credit plan.

Encouraging Entrepreneurship

Metaserver's Trachtman regards such tax changes as helpful, but, in a sense, peripheral. "You've got to focus on what's missing," he says, noting that in order to bring or build enough software companies within the state, two things are needed. First, he feels, the state needs to train entrepreneurs who specialize in technology. "The thing that's going to create companies is risk-taking, and unless risk-taking is taught and encouraged, it's not going to happen." Second, he believes that state entrepreneurs need more access to venture capital. Venture capitalists, he says, are leery of investing in Connecticut software firms. "There's not an infrastructure, an industry, here," he says. "There's no critical mass. Venture capitalists look at Connecticut and say, why would any talented software person risk their career by moving here?" One of the first questions venture capitalists ask, he says, is if he would be willing to move his company.

"It's a catch-22," says Schultz. "[Venture capitalists] won't invest here because there's no critical mass, and there's no critical mass because they won't invest."

In general, however, obtaining venture capital is not a problem in Connecticut, says Mike Roer, executive director of the Connecticut Venture Group, a voluntary professional association that provides a network that links investors and entrepreneurs. "If a project is worthy, then the money is around." But he does offer a caveat: "As far as capital and intellectual expertise, Connecticut can hold its own against the rest of the country. But the third element is management ability: people who have successfully launched other products and companies, who have taken them through the difficult growth years. We're weak on that. We don't have a reserve pool of successful entrepreneurs."

Connecticut, in fact, does compare favorably to other states when it comes to obtaining venture capital. According to a recently released Price Waterhouse study, in 1997 Connecticut ranked 14th in the nation in the amount of venture capital invested, with 52 companies bringing in $199 million in investments. Of that figure, just over 17%, or $34.3 million, was invested in the software and information industry--a threefold increase over the previous year. Nationally, 24.4% of total venture capital investments were made in the field of software and information technology in 1997; at $3.1 billion nationwide, investment in the software industry is up 207% since 1994.

University Support Critical to Success

Trachtman believes that one factor that might help would be a greater commitment from the universities to making the software industry grow. Even without that kind of help, he believes that Connecticut's software industry can prosper. Companies like Hyperion, in Stamford, will grow and succeed, and they will spin off smaller companies that will, in their turn, start the process all over again. But, he says, "that's the hard way." (See sidebar, below)

"The state is doing a lot that people don't know about," says Tom Bradley, director of marketing for CERC. "The state's making changes, making it a better environment for business." Many programs already exist, from Connecticut Innovations Inc., the state-sponsored venture capital investment group, to the specialized training available through the community-technical colleges, to the technology transfer programs at the universities.

Many of the changes are so recent, says Bradley, that people aren't aware of the whole story yet. "People are making judgments on old news." But he thinks that perceptions will change, and, more important, of course, that the reality will change, too. "The critical mass isn't there yet," he admits, "but our growth rate is pretty astonishing. We're getting there." -- Karen Miller, freelance science writer

 Metaserver: Making Better Business Decisions

One of the state's newer software startups, Metaserver Inc., was established in 1997 and is headquartered in New Haven. The company's flagship product, the Metaserver®, provides the industry's first On-Line Decision Processing system, enabling businesses to react and respond to up-to-the-second events affecting their organizations.

The Metaserver is a decision server that integrates the real-time data feeds of transaction systems, on-line analysis systems, and external data sources to provide On-Line Decision Processing. Through its unique parallel distributed processing architecture, the Metaserver paves the way for a new set of applications that require rapid response to the changes affecting businesses. Metaserver integrates business processes using a high-level, point-and-click interface and executes them in an optimized environment.

Business decisions are made through a process of examining information, processing that information, and implementing the decision. By enabling On-Line Decision Processing, organizations benefit from better information, faster processing, and on-line responses. Metaserver reduces the "cycle time" inherent in the decision process.

Metaserver utilizes a unique, patent-pending, distributed approach to harness all computing resources. This enables parallel processing to occur whenever it is practical, allowing multiple applications to work simultaneously. Metaserver automatically seeks the best computing resources to ensure the highest performance possible. If a particular computer fails, the Metaserver automatically restarts the job and guarantees data integrity.

The Metaserver does not require existing applications to be altered. Instead a bridge, or initiator, is built to connect each application to the Metaserver. Any number of processes found in new or legacy applications can be attached to the Metaserver. There is no restriction on the types of platforms, operating environments, languages or applications that may be attached. For more information, check out the company's web site at http://www.mserver.com.


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