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THE MAGAZINE OF APPLIED INNOVATION FROM MASSACHUSETTS "T> foD )A)JQ1 1998^ \/ Volume 1 UMASS/AMHERST 312066 0362 9092 2 Mother Ships and Manufacturing MIT: Research Stock on the Rise 14 p. Don't Bet Against Chelsea 26 p. E V E R T U R E Don't Look for Answers; Look Ingenuity for Tony Bogar No, you haven't seen this magazine before. This is the inaugural issue ofBusinessIngenuity, a quarterly publication designed to serve two purposes. Our primary goal is to provide you with ideas and Don't look to us for all information that you can incorporate into your business the answers. You know strategies. There are many magazines out there, perhaps your business better in your briefcase right now, filled with how-to articles and useful tips. That's good, but that's not our approach. than anyone else. You've got all the tips you need (many a decent duffer has Instead, use Business lost his game by trying every tip in every golfmagazine), Ingenuity to find the and you certainly couldn't have reached your current posi- tion without knowing your business. We understand that. right questions to ask, to We strive to be beneficial on a different level. find the ideas that will Ingenuity is what we are all about. We want to help you lead you to your own generate ideas, fit pieces ofa puzzle together, develop solutions. We also want to prompt you to ask questions. solutions. Where is your business headed? Where are your cus- tomers going? What is the next step? The step after that? What patterns are developing in your company, in the should be a part ofyour decision-making process. We economy, in society that you can use to your advantage? have a highly educated workforce, vibrant economy, Don't look to us for all the answers. You knowyour diverse communities, and ever-improving business infra- business better than anyone else. Instead, use Business structures, including innovative tax incentives and a gov- —MOBD— Ingenuity to find the right questions to ask, to find the ernment agency that can assistyou in your ideas that will lead you t—o your own solutions. Read our expansion and relocation process. Massachusetts is home business theory features in this issue, we discuss the to some ofthe most creative and motivated thinkers in — evolution ofmanufacturing partnership—s to discover the world. You know that. What you might not know is EMC emerging trends. Read our case studies has — that Massachusetts is a very good place to do business. revived itselfby making the right strategic decisions to The two purposes ofthis magazine converge in one learn from other people like you. Read BusinessIngenuity word: ingenuity. We want to share with you the ingenuity with the understanding that we are not pitching that we find all around us in Massachusetts, from panaceas, that you are responsible for developing the Harvard University and the Massachusetts Institute of strategies that fit your specific circumstances. Use Technology in Cambridge to the high-tech engines along Business Ingenuity as a catalyst. Route 128, from the biotechnology incubator in central You will notice that there are no advertisements in this Massachusetts to the research labs at the University of issue. Nor is there a subscription cost. You are sophisti- Massachusetts at Amherst. We hope you can use these cated enough to know that this is not an altruistic gift to ideas to advance your own business and to inspire, within the business community. yourselfand your colleagues, your own type ofingenuity. Thus, our second purpose. BusinessIngenuity is spon- We hope BusinessIngenuity becomes a valuable tool sored by the Massachusetts Office ofBusiness for you and your company. Your feedback can help us fill Development (MOBD). The features are bookended by that role. Please send your comments to: Business MA departments that are intended to keep you abreast of Ingenuity, 125 Walnut St., Watertown, 02172. developments here in the Bay State. It is also, quite hon- estly, a subtle pitch for your business. As you think about the future ofyour company, relocation questions undoubtedly will come to mind. We think Massachusetts BUSINESS INCI.NUITY/FiKST QUARTER 98 4 BUSINESS 1 INGENUITY First Quarter 1998 Volume 1 FEATURES Success Squared The EMC2 formula includes bold moves in uncertain times By Brian O'Connell Three years ago, EMC^ jumped into the open storage market when its competitors were still BUSINESS INGENUITY thinking about mainframes, and subsequent decisions have analysts comparing the company Editor-in-Chief TonyBogar to Microsoft and Intel Page 8 ExecutiveEditor JamesWolken MIT Research Stock Rises Wall Street pays attention when these AssistantEditor academics study finance CatherineJ. Blatz By S.C. Biemesderfer ArtDirector With their Nobel Prize in economics, Merton Bryan Carden MIT and Scholes put in the public limelight, Designers but the university's researchers have had Wall JeffPappas Street's attention for years Page 1 PHOTOS:BARRYHETHERINGGON Dan Kraby ProductionManager "Mother Ships" and Manufacturing Matt Carson Horizontal model ofmanufacturing takes Commonwealth wing in outsourcing era of Massachusetts By Michael McDermott J. While outsourcing coursed through industry Governor Argeo PaulCellucci after industry, manufacturing held itself — apart and suffered. Now the "Mother Ship" DirectorofEconomicDevelopment comes to the rescue Page 20 DavidA. Tibbetts MassachusettsOffice ofBusinessDevelopment Don't Bet Against Chelsea OneAshburtonPlace With a little luck and the right incentives, 21stFloor Boston,MA02108 a battered city is reclaiming its stake Phone:(617)727-3206 in the economy Out-of-state:(800)5-CAPITAL By Brian Sullivan Fax:(617)727-8797 Officials in this Massachusetts city are reaching E-mail:[email protected] Web:www.state.ma.us/mobd out to businesses with offers that give Chelsea PHOTOS:KATHYTARANTOLA new appeal and a new stature in Skinner-James the economy Page 26 Communications DEPARTMENTS CEO Stephanie Skinner President JamesWolken In Sites, p. 2 Sectors, p. 32 125WalnutStreet Watertown,MA02172 Capital Ventures, p. 6 Contacts, p. 39 Phone:(617)926-7077 Fax: (617)926-7013 BusinessIngenuity,TheMagazineofAppliedInnovationfromMassachusetts(ISSN1097-9352)ispublishedquarterly(March,June, Sept,Dec)lortheMassachusettsOfficeofBusinessDevelopment(MOBD)bySkinner-JamesCommunications, 125WalnutSt., Watertown,MA02172.Allrightsreserved.Nopartorwholeofthispublicationmaybereproducedinanyformorbyanymeans withoutpriorpermissionofthepublisher,Skinner-JamesCommunications.Theopinionsexpressedarenottobeconsidered «~T-"1^3^ BpursiinnteesdsoInngreencuyictlyedispaper AofpfpilciiaclateixopnretsosimoanisloaftMpeOrBioDdi.calRseqpuoessttasgeforratreesprisinptesnadnidngpeartmBiossstioonn,sMshAoualdndbeadddiirteicotneadltmoaiBluisnigneosfsfiIcnegse.nuPitOyS,T(6M1A7)S9T2E6R-7:07S7e.nd addresschangestoBusinessIngenuity, 125WalnutSt.,Watertown,MA02172. B SITES N Mutual Benefit for Mutual Fund Service Companies Massachusetts has become a friendlier place for the mutual fund industry in the past year with legis- lation that provides strong tax incentives for those companies based in Massachusetts, which claims 23 percent ofall the mutual fund assets in the United States. What this means for The new law is twofold, one part redefining where mutual fund service mutual fund sales can be said to take place, and the next elevating the importance ofthis factor in the apportion- companies is that not ment ofa company's income. only will the percentage The "destination test" section ofthe law allows a cor- ofsales on which they poration (such as an investment adviser) providing services to a mutual fund to treat its charges for those ser- are taxed drop dramati- vices as Massachusetts sales only to the extent that fund cally, but sales will be the shareholders live in the Bay State. This reduces, for many companies, the number ofMassachusetts-based only factor upon which sales and, therefore, the tax due to Massachusetts. the state tax is based. The second part ofthe law states that mutual fund com- "You could see approxi- panies may use a 100 percent single sales factor formula to apportion their income, rather than the old formula, in mate percentage reduc- — — which three factors property, payroll, and sales were tions going from the 90 used. Under this law, taxwill be based solely on sales. In percent range down to order to use this apportionment formula, mutual fund companies must meet certain job growth requirements. the 20 percent range," What this means for mutual fund companies is that not says Will Hazel, formerly onlywill the percentage ofsales on which they are taxed drop dramatically, but sales will be the only factor upon of the Massachusetts which the state tax is based. Depending on the particular Department ofRevenue. facts, "you could see approximate percentage reductions going from the 90 percent range down to the 20 percent range," says Will Hazel, formerly ofthe Massachusetts Department ofRevenue and now a partner at the law firm ofChu, Ring and Hazel, ofBoston. Ifa mutual fund service company fails to meet the — criteria for job growth defined as a 5 percent increase from its 1996 employment level and an increase ofthe — same amount each year after that for five years it will not be allowed to use the single sales factor formula and instead will be required to use the old three-prong apportionment. The destination test, however, applies to a company regardless ofjob growth. Hazel describes the single sales factor as an "extra car- rot" for a mutual fund company already benefiting from the destination test. The setup benefits everyone, including the state, which, with the higher job levels, will eventually collect more individual taxes, "which is more than the corporate excise you're going to get out ofme [a IMJSIM.Sh IV VIIIY/IIRM QUAIUI.ll 98 ,1 I N I T E S mutual fund company]," he notes. "It's not fair to tax me as if 100 percent ofmy business were based in Massachusetts," Hazel says. "Part ofmy economic opportunity has nothing to do with Mass- achusetts. By recognizing that, [the state] makes it more appealing for me to come here or to stay here." Making Movies in Massachusetts The Massachusetts film industry has been heating up recently, with the Bay State serving as a back- drop for everything from big-studio releases (Dream- works SKG'sAmistad) to critically acclaimed independent — films (Next Stop Wonderland, which made its debut at the Sundance Film Festival). As the beautiful people flock to Beantown, the dollars follow. The film industry had a total economic impact of$396 million on the Massachusetts economy in 1995 alone, according to a Northeastern University study. And it's not just local FX houses and camera opera- Benefits to the state tors who benefit. aren't limited to econom- "Lots ofbusinesses are affected by the film industry," asserts Ann Scanlon, media and marketing coordinator ic ones. For the filming for the Massachusetts Film Office. "Hotels, airlines, ofThe Crucible, starring restaurants, car rental agencies." She recalls that when Winona Ryder and Daniel NeilJordan's upcoming Dreamworks SKG film In Dreams was shooting in the Northampton area, the Inn Day-Lewis, the crew built at Northampton was booked nearly solid for weeks. At an entire 1 7th-century the same time, a local hardware store "couldn't keep duct village on Hog Island in tape in stock," she says. "Film production brings in so much revenue and so many jobs." Ipswich. "In return," says Benefits to the state aren't limited to economic ones, Ann Scanlon of the either. For the filming ofdirector Nicholas Hytner's ver- Massachusetts Film sion of The Crucible, starring Winona Ryder and Daniel Day-Lewis, the crew built an entire 17th-century village Office, "20th Century Fox on Hog Island in Ipswich. "In return," says Scanlon, made improvements to "20th Century Fox made improvements to the property, put in a well, and updated the docks" in the area. the property, put in a Among the movies filmed recently in Massachusetts: well, and updated the The Academy Award-nominated Good Will Hunting, star- docks" in the area. ring Robin Williams and the Cambridge-native screen- writing team ofMatt Damon and Ben Affleck, shot all around Harvard University, the Massachusetts Institute ofTechnology, Bunker Hill Community College, and SITES N I South Boston. Steven Spielberg's Amistad descended for a area are the new federal courthouse on Fan Pier and the — day on the State House thanks to the Massachusetts Seaport Hotel across from the World Trade Center. Film Office's Fee-Free Locations program, which allows Next up will be a 16-story building, a joint venture filmmakers to shoot at certain state-owned facilities free between Fidelity and the Drew Co. An extension ofthe ofcharge. More recently, In Dreams, with Annette Massachusetts Bay Transportation Authority's Red Line Bening and Aidan Quinn, was shot in the Northampton is also planned, making access to the site easier. area, andA CivilAction, starringJohn Travolta and based onJonathan Harr's nonfiction account ofa case in Woburn, was shot in Boston and Quincy. That particular Hotels Spring Up shoot was attended by none other than film buffand in Worcester Massachusetts Governor Paul Cellucci. Some Massachusetts locales are especially popular with movie makers, including the classic New England Two new hotels are planned for Worcester's feel of Good WillHunting haunt Harvard Square; and the coastal areas and islands, such as Nantucket, the setting downtown area, bolstering the city's economic for Michael Pressman's To Gillian on Her 37th Birthday, development agenda. starringMichelle Pfeiffer. (Pfeiffer's husband, Boston University Law School graduate David E. Kelley, has set many ofhis projects in Massachusetts, including his current television seriesAlly McBeal and The Practice.) Marriott International, Inc. will build a new Courtyard But mostly, says Scanlon, people are attracted to hotel on Grove Street, providing 150 moderately priced Massachusetts because it is "very diverse. We don't have a rooms aimed at business travelers. Scheduled to open in — specific look that people go for we have a lot oflooks." the spring of 1999, the Courtyard will be the first hotel built in the downtown area ofWorcester since 1982, when the Worcester Crowne Plaza opened. And the Peabody Hotel Group is evaluating a down- Meet Me town site for the possible construction ofanother new in "Southie" hotel. On December 10, the Worcester Redevelopment Authority gave the Peabody group exclusive hotel devel- oper status for 60 days. The group will evaluate whether Boston will get a new convention center thatwill the city can support another hotel in addition to the new allow it to once again attract the largest gatherings Marriott site. The planned hotels are partly in response to the ofbusinesses and trade associations in the country. In 190,000-square-foot, $38 million convention center November 1997 the Massachusetts Legislature approved adjacent to the Worcester Centrum. The new conven- construction ofa $700 million center to be built near the tion center, which had its grand opening in September, has a total of 100,310 square feet ofexhibition space waterfront in the South Boston neighborhood. Work is and includes two ballrooms, 11 meeting rooms, and a expected to begin this year, and the center is scheduled to VIP lounge. open in 2002. State leaders have predicted that the 600,000-square- foot facility could attract 500,000 conventioneers annually and bring in as much as $1 billion a year in visitor spend- ing. The convention center also will likely boost the building ofthousands ofnew hotel rooms in the Boston area, including a 1,000-room hotel on the site itself. The convention center will be another piece in the development ofthe waterfront. Already in place in the BUSINESS INCI NUITY/UKST QUARTER. 98 SITES N I Framingham Bounces Back Taxman Logs Off Though it suffered a blow back in 1989 when the Governor Paul Cellucci has signed a bill eliminating local General Motors plant closed, Framingham the sales tax on on-line services. A special commit- plans to rejuvenate its downtown area with the help ofa tee has until December 1, 1998, to file a recommenda- "downtown manager" it will hire. tion to make the law permanent. -;,- Among the projects being discussed: incentives for Ifthis recommendation is not made, Internet services business owners to renovate their building facades, a will again be taxable afterJuly 1, 1999. "Making study ofthe needs ofdowntown businesses, a $180,000 Massachusetts an Internet tax-free zone puts us on equal streetscape improvement project, a new location for the footing with other high-tech states such as California, commuter rail terminal, and a $900,000 project to fix five Washington, and Florida," Cellucci said late last year. intersections, including repaving and new traffic signaGls.M In addition to the moratorium on Internet taxes, About 1,600 jobs were lost with the closing ofthe Massachusetts taxpayers are eligible for a refund on the plant; however, between 1993 and 1995, over 5,000 new taxes they have paid on Internet services since 1990. jobs were added in this ethnically diverse community. Gateway to the United States Overseas technology companies are getting a help- ing hand in their expansion into the U.S. market, thanks to a Boston organization called Market Gateway. Run by the New England Israel Chamber of Commerce, Market Gateway provides office space in South Boston, as well as advice to newcomers on everything from American business laws to where to find hous- ing. Several Israeli companies are already settled in the South Boston offices, and new arrivals from Ireland, Scotland, and possibly Northern Ireland and Nova Scotia are expected soon. Boston is a convenient spot for European and Middle Eastern companies to make their first forays into America. In addition to the area's well-established high- tech market, the location means a shorter flight back to the home country, as well as more closely overlapping time zones than in a state further to the west. While some companies move on once they outgrow their — Market Gateway space, others including Irish software firm Iona Technologies, PLC, which has a 70-per- — son office in Cambridge are choosing to settle down in the Bay State. VENTURES A P T A L I Entrepreneurs, Investors Make Good Neighbors ChristopherKenneally measured either by area or by population, massachusetts isn't qualified for membership in the "land of the glants" club. the Commonwealth is the sixth smallest state in the union, and it has just over 6 million residents, fewer than cities like Tokyo or New York. When it comes to venture capital, though, the Bay State stands tall in the international business world. e According to a report released this fall by the Paris-based State, with Interlan and Wellfleet Communications Organisation for Economic Co-operation and Develop- receiving infusions ofventure capital investment at their — ment (OECD), Massachusetts proportionally speak- founding, he notes. (The third, Bay Networks, did not.) — ing ranks first among the 50 states in venture capital, He may be a restless entrepreneur, but the critical with $1.2 billion in assets raised. Second-place California, mass ofcapital and engineering talent in Massachusetts with $3.7 billion in venture capital assets raised, has a has allowed Severino to put down roots. "I didn't have to population nearly five times as great as Massachusetts's. move," he says. "I was able to do what I needed to do OECD Together, the calculated, Massachusetts and right here." California accounted for more venture capital than the More than likely, investors would have found Severino 15-nation European Union and held 40 percent ofall no matter where he lived. In a globalized economy, ven- American venture capital assets. ture capital has a reasonably small interest in where a Yet another leading survey ofventure capital invest- business is located. When they are determining whether ment, the Money Tree Report issued quarterly by to sink funds into a company, investors typically consider Coopers & Lybrand LLP, ranked three Boston-based other points, such as the skills and experience ofthe — outfits BancBoston Capital; Atlas Venture; and Advent management team and the market viability ofinnovative — International Corp. in the top five ofthe nation's most products and services. active VC firms for the second quarter of 1997. These "The money travels to where the ideas are," notes C. "big three" reported 29 initial investment deals into Kevin Landry, managing director and CEO ofTA U.S.-based and overseas companies in that period. Associates, a Boston-based VC-private equity firm that Proximity to venture capital in Massachusetts, and the invests about $250 million annually. According to the access to investment dollars which typically follows, "is Money Tree Report, for example, Massachusetts venture the engine that drives entrepreneurs," says Paul Severino, capitalists placed 71.2 percent oftheir total investment chairman ofNetCentric, a Cambridge-based supplier of dollars in the second quarter of 1997 outside the state. Internet fax software and services for network service Nevertheless, venture capitalists agree that there is a providers. "I think it makes a huge difference," adds the decided advantage for entrepreneurs who share an founder and former chairman ofBay Networks. address with so many oftheir potential investors. "Our Severino ought to know. Following his graduation objective is to build very big companies, and we like to from Rensselaer Polytechnic Institute in 1969, he moved spend time with management teams to grow their com- from Troy, N.Y., to Massachusetts to work at Digital panies," acknowledges Rick Burnes, founder and general VC Equipment Corp. In the three decades since, Severino partner ofCharles River Partners, a Waltham-based has started three major high-tech companies in the Bay firm that has invested approximately $300 million in 250 6 Bl HNESS INGENUI I Y/l IKS I QUARTER 98 CAPITAL VENTURES early-stage companies since its founding in 1970. take them public, he has observed, they can take advan- "We like to be able to have breakfast with entrepre- tage ofthe substantial number oftechnological and neurs," Burnes says. By his own estimate, two ofevery financial services available to them locally "They are able three Charles River deals are with Massachusetts-based to leverage offthe human capital that's here," Landry companies. explains. According to Landry, entrepreneurs almost naturally Moreover, the large number ofVC firms located in congregate in the hothouse educational environment of Massachusetts presents a smorgasbord ofopportunities Massachusetts. When they start businesses and eventually for investors. Charles River Partners, for example, has an TA average deal size ofabout $3 million, while for Associates, the figure is more than $15 million. To OECD Together, the calculated, address a "capital gap" confronting start-up companies in the early stage ofmarket development, the Common- Massachusetts and California wealth in 1978 formed the Massachusetts Technology accounted for more venture Development Corp. (MTDC), which usually participates in deals for less than $1.5 million. capital than the 15-nation "In Massachusetts, we have the full range oftypes of MTDC European Union and held investors," saysJohn Hodgman, president. "As a company goes through the various stages ofgrowth, it 40 percent of all American has ready access to a panoply ofinvestors. This also means that Massachusetts has become very diversified in venture capital assets. the types ofbusinesses that are launched here."* Michael C. Ruettgers, President and CEO, EMC Corporation n climbing to the top of the ultra- competitive, $10 billion computer . data storage industry, executives at Hopkinton, Mass.-based EMC2 Corp. got used to making big decisions. None was bigger than the company's decision three years ago to deep-six its commit- ment to its mainframe computing storage clients and concentrate instead on the burgeoning networked computer field. by Brian ,Con7iell EMC That decision enabled to dominate the network data storage industry (networked, or "open," data systems enable multiple computer servers to connect corporate information systems networks), generating $2.7 billion in sales in 1996 with a stock price that surged higher than any other company's on Wall Street from 1990 to 1995. How hot is EMC now? Merrill Lynch analyst Steven Milunovich recently gushed to The Boston Globe EMC that was poised to enter the rarefied stratosphen ofhigh-technology heavyweights like Microsoft and Intel: "[It's] the next franchise company in technology." IUN\I>SINCINUIIY/IIRM QUARTER 98