Monday 18 June 2001

Hot & Cold

JDS and Nortel are in a world of hurt. Fortunately, they're not the only game in town. Welcome to the bipolar economy.

Photo courtesy of Headlight / Michelle d'Auray, the federal government's chief information officer: 'Computer science professionals who left the public service now want to return ... We're getting lots of resumes from the private sector.'

Dave Chan, The Ottawa Citizen / Solinet CEO Scott Marshall celebrated the largest second-round investment in Canadian history on May 31. The same day, just a few kilometres east of Solinet's proposed new Kanata headquarters, STMicroelectronics announced it would lay off 450 workers by yearend.

(Hot & Cool)

Chris Mikula, The Ottawa Citizen / Hicham Adra, senior vice-president in charge of CGI's Ottawa operations, says he expects to hire an additional 100 employees this year, a 13 per cent rise. 'We're seeing a reverse brain drain from the west end.'

Lynn Ball, The Ottawa Citizen / Joanne Stidwill, who leads PWC's federal government practice in Ottawa: 'Our technology-based services are growing, especially ones related to the government online project.'

By rights, Ottawa's tech sector should be on its knees. The majority of its 76,000 employees make their living designing and building communications gear, the market hardest hit by the U.S.-led economic slump. Ottawa's two largest private-sector employers -- Nortel Networks and JDS Uniphase -- have collectively sacked nearly 8,000 workers since January. And the layoffs aren't over by a long shot. More are coming with warnings by the two companies last week of worse-than-anticipated results. Dozens of other tech companies have let go thousands more.

The ripple effects are being felt. Nortel alone is set to dump more than 600,000 square feet of surplus office space on the market -- roughly the same amount it added to its giant Carling Avenue and Moodie Drive campus with such fanfare in 1997. Service firms from caterers to law practices are starting to regret their rapid accumulation of high-tech clients. And there is a whiff of fear inside some of the high-tech startups that got their latest financing as recently as late last year.

Yet, despite these clear signs of distress, Ottawa's economy is so far showing only a little fatigue, not signaling collapse. The total number of tech workers has slipped just a few thousand since the beginning of the year, reflecting a mixture of large-company layoffs and new hiring at the smaller firms. The net decline in the number of technology jobs will almost certainly continue in the wake of last week's surprise warnings by JDS and Nortel.

Economy-wide, nearly 582,000 were employed in the Ottawa-Hull area last month, down less than one per cent from the February peak and up a remarkable 100,000 from late 1995, when the tech industry began its remarkable rise. Perhaps not surprisingly, the recent series of layoffs have so far done little to ease rush-hour traffic or curb new housing developments on the city's peripheries.

Even in Kanata, the tech capital, construction cranes still dominate the skyline along March Road and Palladium Drive. Many of these office towers were started during better times but a surprising number have been commissioned by still-healthy, growing concerns like Solinet Systems, Mitel, Tundra Semiconductor and Cogency Semiconductor.

The recent headline news has focused on layoffs but the reality is more complex. Last year's red-hot economy is transforming itself into a bipolar one. If you make your living on high-tech manufacturing lines, odds are you've already been laid off. But if you work for a startup, you could be rolling in money, options and future promise. Your situation varies enormously depending on your company's market niche, the aggressiveness of your bosses and the date your company last received significant financing.

But perhaps the most telling sign of Ottawa's strange new bipolar tendencies can be found downtown, where the federal government is finally getting serious about putting most government services online. Along the way, it's starting to hire some of those laid-off engineers from the west end -- either directly through employment or indirectly through its purchase of private-sector services. Not only that, but it's no longer uncool to work on government technology projects.

Treasury Board earlier this month awarded a $57-million contract to a BCE-led consortium to create a secure system -- dubbed Secure Channel -- for providing government services into peoples' homes. Once the system is up and running, federal departments and agencies will be free to devote a portion of their $5-billion-a-year information technology budgets towards developing new applications.

The multi-year online project is a godsend for companies looking to fill their order books following the completion of their Y2K jobs. It's also an important source of stability for many tech workers. "It's business as usual for us with a bit of an acceleration over the next few years," says Michelle d'Auray, the federal government's chief information officer. "Computer science professionals who left the public service now want to return because of the online project. We're getting lots of resumes from the private sector."

The government employs roughly 8,000 computer scientists to manage and run its massive communications networks and databases -- and nearly three-quarters work in the Ottawa region. However, federal departments and agencies also rely on private firms for help in designing and upgrading those networks and developing related software.

At least 10 companies are involved in the BCE-led Secure Channel project and many of these will hire subcontractors. Most hope to convince individual federal departments to outsource even more of their information technology spending in coming years. Some, such as CGI Group -- a Montreal-based technology services conglomerate with an extensive presence in Ottawa -- are already boosting hiring.

Hicham Adra, the senior vice-president in charge of CGI's Ottawa operations says he is looking to hire an additional 100 employees this year, representing a healthy 13 per cent rise. Interestingly, he is hiring senior workers from Nortel and other companies anchored in Nepean and Kanata. "We're seeing a reverse brain drain from the west end," says Adra, whose company will play a key role in designing the Secure Channel and making sure it connects properly to existing federal computer systems.

It's difficult to estimate how many private-sector jobs depend on federal contracts because no one tracks the data across all the departments. But just five technology outsourcing and consulting outfits employ nearly 5,000 in the Ottawa area and most are boosting hiring. The big five include EDS, IBM, CGI, Accenture and PricewaterhouseCoopers. PWC has boosted its Ottawa workforce nearly 67 per cent over the past year to roughly 500. This is thanks largely to the aggressive hiring of about 200 ''business process outsourcers'' -- high-level consultants -- who advise high-tech and other clients.

"Our technology-based services are growing, especially ones related to the government online project," says Joanne Stidwill, who leads PWC's federal government practice in Ottawa.

While the new government projects are welcome news for some technology firms, the federal information technology sector on its own isn't enough to make up for the deep private-sector job cuts occurring in other parts of the city. More than half the 10,000-plus positions lost to date are in high-tech manufacturing. The only thing that will bring these jobs back is an industry-wide recovery -- something not considered likely until next year at the earliest. Pessimists now believe we'll have to wait until 2003 before the big telephone companies and other service providers are expected to begin re-ordering communications gear in some volume.

In the meantime, a legion of startups is picking up some of the slack. Twenty-five of the fastest-growing newcomers have added 839 employees since Jan. 1, representing a sharp increase of 50 per cent. But even the startups are showing bipolar tendencies. Within the group that have received venture financing in the past year, two -- Sedona Networks and Sybridge Technologies -- have gone belly up and half-a-dozen others have cut staff. The net loss from this sub-group is about 400 jobs.

"It's the guys who have designed their product to go to market this year who are really hurting," says Peter Charbonneau, a partner with Skypoint Capital, a Kanata-based venture capital firm. "But if you're looking beyond a two-year horizon, VCs are still actively investing."

The role of venture financing is key because any new money received by startups is usually put to use immediately through the hiring of well-paid engineers and scientists. So it's encouraging to note that venture capitalists are investing in Ottawa companies at nearly the same pace as last year, when the region smashed all previous records. But venture firms are clearly becoming more selective. So far this year, they have invested $547 million in 19 Ottawa area companies. Just two firms -- Solinet Systems and Tropic Networks -- accounted for 43 per cent of the total.

Solinet's $143 million, second-round investment was the largest in Canadian history. It offers a superlative example, on several levels, of the sharp contrasts now typical of the city's economy. Start with the timing. The same day Solinet's irrepressible chief executive Scott Marshall told the world about his company's coup, STMicroelectronics, just a few kilometres east of Solinet's proposed new Kanata headquarters, was delivering a much different message. The former Nortel chip-making operation announced it would close this aging facility by yearend, throwing 450 out of work.

Up to a point, Solinet can afford to forget about this year's poor economy because its major R&D effort revolves around a fibre-optic product not expected to be deployed in communications networks in a big way until next year and the year after. Marshall plans on boosting hiring by about 50 per cent by yearend to reach 300 and wants to add another 200 the following year. Solinet's founders have been reluctant to disclose exactly what they are working on but it's expected to involve long-haul optical systems capable of delivering signals down each fibre at the rate of up to 40 billion bits per second -- four times faster than the current generation.

Such a product naturally pits it against Innovance Networks, another well-financed Ottawa startup and Nortel, still the globe's current champion when it comes to selling long-haul systems. The rise of multiple suppliers underscores an important reality -- it's highly unlikely that Ottawa's proliferating optical startups will all be winners. When venture capitalists had money to burn last year and the year before, they wound up financing hundreds of competing firms across North American and Europe. The next rounds of financing will depend heavily on which innovators are building products that are actually being deployed in the big telephone and data networks. Some startups will fail and other could succeed spectacularly well, thus accelerating Ottawa's bipolar tendencies.

Ottawa can only hope that North America's communications service providers resume upgrading their networks sometime soon -- not a great bet. There remains the considerable risk that much of the current spate of home and office construction could end before the economy resumes its upward swing. "It takes 12 to 18 months to put up an office building and 12 months to take possession of a house," says Brian Card, the president of Ottawa-based Corporate Research Group. "This means the economy is still benefiting from last year's commitments."

Even as all this new real estate comes on stream, Card notes, the vacancy rate in the west end has soared from practically zero to 1.5 million square feet. "It's a tenants' market now," he says. And likely to become more so.

The city's top technology firms should begin to get a clearer fix on their future prospects in late summer and early fall, when their larger customers begin planning their capital spending budgets for 2002. In the meantime, Ottawa's startups and established players alike will live or die on the signals they receive from the companies now testing their prototypes and concepts. Smart engineering alone will not do the trick; good tactics and marketing are also key now.

That's the way it should be but the mania of the last few years convinced too many engineers that everyone could be rich. Like others who invested in high tech, they've discovered that's demonstrably not so. But in the bipolar economy, those who do make it, will at least do so on merit -- not luck or good timing.

Taking the bad ...

Companies Job cuts

Nortel 4000

JDS Uniphase 3800

STM Micro 450

SCI Brockville 300

Entrust 170

Sedona 160

Nokia 140

Volex 115

CrossKeys 90

Coventus 90

Zarlink 87

Alcatel Gatineau 80

Empowertel 66

Cisco 66

NetActive 60

Magardi 60

PMC-Sierra 55

Rebel.com 50

SR Telecom 45

Eftia OSS 45

Manugistics 40

Calian 35

Cybersafe 33

Vitana 25

Buystream 23

Espial 22

Chrysalis 20

Webhancer 10

Marconi 10

Learnsoft 5

Conexant 5

Sigem n/a

Rational Software n/a

Computer Sciences n/a

Compaq n/a

Total 10,157

... with the GOOD

Companies* Jobs added Rise

since since

Jan. 1 Jan.1

Solinet Systems 110 122%

Innovance Networks 109 136%

Zenastra 85 53%

Catena Technologies 60 23%

Lantern Communications 53 442%

AcceLight 52 53%

Tropic Networks 50 29%

March Networks 43 27%

WebPlan 33 22%

Quake Technologies 32 103%

Atreus Systems 31 50%

Lumic Electronics 30 100%

Dragonwave 30 60%

Sigpro 25 125%

Solidum Systems 25 48%

Internetivity 23 40%

Akara 23 26%

Trillium Photonics 20 154%

Sibercore 20 36%

Cold North Wind 18 150%

Atmos 18 67%

BTI Photonics 15 75%

Zucotto Wireless 15 20%

Watchfire 15 12%

JetNet Internetworking 14 82%

Sub-total 839 51%

*Firms with VC funding in past year