Special report: Growing software sector fuels Ann Arbor economy

Easy entry into software and Web development, spurred partly by the impact of “cloud computing,” is a key driver behind the growth, according to about two dozen interviews with technology entrepreneurs and executives in the Ann Arbor region.In a financial era defined by lack of easy access to capital, companies that don’t need large amounts of cash are better positioned to add jobs quickly and thus spark an economic renewal.

“Software in general is not nearly as capital intensive as any of the other areas we’re targeting,” said Bill Wagner, co-founder of Ann Arbor-based SRT Solutions. “You can do it out of your house. We just need a place for desks.”

The impact of cloud computing and open-source software on the startup community is not to be underestimated.

Cloud computing, which allows companies and entrepreneurs to rent server space from outside firms like Amazon, helps startups expand quickly. Open-source software lets companies build on existing technology without intellectual property repercussions.

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Economic development experts believe that the software and Web community is poised to help the Ann Arbor region - and perhaps, to a smaller extent, Michigan - recover from the economic crisis.

Ann Arbor’s growing IT community is still small compared to behemoths like Silicon Valley and Boston. However, the region compares favorably to fellow Midwestern IT hotspot, Madison, Wis., for example.

IT jobs that focus exclusively on technology represent just over 3 percent of Ann Arbor’s economy, according to the U.S. Bureau of Labor Statistics. It’s the same rate in Madison.

Those figures do not account for management, administration and sales jobs related to software and Web development - a figure that’s much harder to determine. Google’s 250-person sales operation in downtown Ann Arbor, for example, does not figure into the region’s total tech jobs count.

The presence of the University of Michigan - along with Eastern Michigan University and Washtenaw Community College - is an undisputed catalyst in the IT community’s growth.

“That provides this institutional, artificial gravity there to keep the smart particles from leaving town,” Bloom said.

Amy Cell, director of talent enhancement for Ann Arbor SPARK, tracks job opportunities for the economic development organization. She said about 17 percent of recent job openings marketed through SPARK were related to software or Web development.

“As companies consider relocating to Michigan or expanding their operations in Michigan, a lot of times it’s because of talent,” Cell said.

Where is the growth?

The information technology growth is concentrated a few specific subsectors of software and Web development:

-Cybersecurity. Growth in Ann Arbor’s IT security sector is particularly notable. From 2005 to 2008, the number of network and computer systems administrators in Washtenaw County increased 56.8 percent to 690, according to federal data. During the same period, the total number of jobs in the region dropped 5.6 percent.

Ann Arbor information technology statistics As a percentage of total employment, the Ann Arbor region has 32.7 percent more tech-centric IT jobs than the national average. Average pay for an IT worker in Washtenaw County is $66,650, about 36.3 percent above the average salary for the overall workforce. Washtenaw County's IT industry is about six times the size of its legal industry, twice the size of its entertainment industry and more than half the size of its auto industry. Source: U.S. Bureau of Labor Statistics jobs data

Two companies with major Ann Arbor operations are driving the growth. U-M spinoff Arbor Networks and California-based Barracuda Networks last year announced independent expansions with plans to hire 241 workers over five years.

-Web applications, including health care technology and mobile application development. The number of computer software engineers in Washtenaw County increased 12.5 percent to 1,260 between 2005 and 2008, according to federal data.

HealthMedia, one of the biggest software companies in the region, employs about 200 workers. Thomson Reuters’ 1,700-person presence in Ann Arbor and Dexter includes several software elements, including health care IT. Other health IT companies like Cielo MedSolutions, MedHub and White Pine Systems are gaining traction in the electronic medical records field.

In addition, a host of early-stage startups are emerging in this area.

“These guys are coming out of the woodwork,” said Dug Song, a veteran software entrepreneur and community activist in Ann Arbor.

Web customer satisfaction measurement firm ForeSee Results expects about 40 percent revenue growth this year.

Software entrepreneur Dug Song is mobilizing the entrepreneurial community through his group A2Geeks.

Web site developers, content management companies and search engine experts - a wide-ranging field that includes Pure Visibility, Fry, Enlighten and Switchback - represents another pocket of growth.

-Customized software for manufactured devices. The number of computer programmers in Washtenaw County grew 11.4 percent to 1,140 between 2005 and 2008.

Major companies, including the Toyota Technical Center in York Township, for example, rely heavily on “embedded controls” software.

Rich Sheridan, CEO of Menlo Innovations, said his software firm is enjoying a record year for revenue.

“It’s software that doesn’t have a user interface, but it is necessary,” Bloom said.

Smaller customized software companies like Ann Arbor-based Menlo Innovations are also key players in this area. Menlo CEO Rich Sheridan said his 8-year-old company is enjoying record revenue growth this year. Menlo’s software expertise was crucial to the development of Scio Township-based medical devices maker Accuri Cytometers’ lead product.

“While the hardware is obviously critical to (Accuri’s) success, it is the software that the user perceives as the product, because that’s what they interact with,” Sheridan said.

Influence of startups

In each subsector of software and Web development, early-stage startups are sprouting up in bunches. That’s partly because of cloud computing, a trend that is boosting companies like Ann Arbor-based data firm Online Technologies.

ForeSee Results CEO Larry Freed

“There’s more and more of those options,” said Larry Freed, CEO of ForeSee. “There’s very little capital needed to get started.”

What threatens the region’s software and Web momentum is the very factor that’s driving its momentum: the speed with which competitors can knock each other off.

That factor led to a significant decline in the region’s computer support specialists in recent years.

Major corporations have gradually cut their computer support staffs and outsourced those jobs overseas to save costs and boost profits. The number of computer support specialists in Ann Arbor slipped 26.4 percent to 1,170 in 2008.

But that trend may be reversing. In September, a California-based startup called Systems In Motion secured tax incentives from the state of Michigan to launch an IT support center in the Ann Arbor region. The company expects to hire 1,085 workers over the next five years.

Customized IT support is allowing smaller players, like Ann Arbor-based Dynamic Edge and Ann Arbor-based LTI Information Technology, to thrive despite the trend of outsourcing IT services.

“We don’t just provide an outsourced single IT person, we provide an outsourced IT team,” said Kevin Phillips, vice president of LTI.

Contact Nathan Bomey at (734) 623-2587 or nathanbomey@annarbor.com. You can also follow him on Twitter and subscribe to the AnnArbor.com Business Review weekly newsletter.