There at least five trends that are emerging in the industry and widely talked about. Although these trends are not well established but some developments in recents past have indicated the presence of these trends. The time is near when these trends will shape up the whole industry and will be recognized by policy makers and the venture capitalists. Owing to the nature and pace of developments these trends are imminent in near future. The trends are listed below with brief explanations.
Trend # 1: The Shift towards the Domestic Market
The most noticeable trend of the industry is transformation of revenue break from foreign majorly foreign to majorly domestic. Not long ago the ration of software exports revenues to domestic market revenues was 60:40. This ration has turned upside down in just three years with domestic market contributing almost 60% to the total revenues from IT and BPO market. Industry experts quote a number of reasons underlying this shift of revenue breakup. Some have signaled the blockades that exist in export of software industry and the others attribute this change to restrictions that foreigners face for travelling in Pakistan. Moreover, the 2006 fiasco when internet went down for no less than twelve days is another reason for distrust of foreigner on the local market. The domestic market, however, has picked up pace as the industries such as banking, public sector etc and outsourcing became prominent in the local market. Automation of the whole banking industry with most of the banks choosing to re-engineer on the lines of IT solutions are under spotlight.
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In public sector, a number of major projects were executed all across Pakistan. The most prominent names in the pulic sector who have embraced organization wide IT base solutions include Central Board of Revenue, NADRA, Project to Improve Financial Reporting and Auditing and Punjab Information Technology Board. International economic reformation bodies such as Asian Development Bank and World Bank have shown interest in automation of these public sector organizations. In near future, a $48 million project is imminent for PBR.
Although the domestic market has shown rising trend in revenues but the trend is vulnerable to decline if distressful situation of foreign market is not addressed in time. The domestic market currently is limited to a very few sector mentioned above. For full throttle of growth and more importantly its sustainability, development on both the fronts is inevitable for industry to flourish.
Most of the companies have now adopted risk minimization strategy by broadening their products and services portfolio and effective risk management. Foreign industry is known to have proven high margins in the industry with high risks always looming whereas the domestic market is relatively low risk market with moderate margins. Currently the approach in the current economic downturn is to minimize risk while maintaining constant cash inflows. The approach is now transforming from ONLY DOMESTIC to FIRST DOMESTIC.
Besides all the risks and pitfalls foreseen, the software industry is likely to undergo capacity building in the days to come. All this industry needs at the moment is perseverance and continual address of the key issues lying the way of software export front.
Trend # 2: The 'Coming of Age' Of Systems Integration
The second most prominent trend in the software industry is the of emergence of Systems Integration. Although the concept has been around for years but its dominance is being felt greatly in recent years. Systems integration has been part of the businesses of giants of the industry such as IBM but it has also remained among key activities of mushroom software entrepreneurs who are yet to claim their identity on national level.
There are a number of factors which can be attributed for this trend to have set in place. The most notable of all is the inclination of IT professionals towards development of something on their own rather than buying or licensing and implementing readymade solution. The trend of systems integration is also attributable to demand supply dynamics the industry has seen in recent past when Pakistan's economy took leap in last government and public sector organizations such as NADRA with its state of the art computerized ID card and passport identification solutions ventures were inevitable. Similarly, the wave of banking industry automation called for integrated systems solutions to stay competitive in the market.
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In the context of supply of the industry, the industry had undergone maturity with the same technological solutions to address ever-changing IT industry demand. The supply maturity of the industry can be observed by looking at the fact that SAP consultants used to be very few in the local market when Abacus thought of starting venture of SAP consultancy in the local market. They only found a handful of SAP consultants in the local industry. Today with demand of giant companies such as PSO, PARCO, SHELL PAKISTAN, Unilever and many other compnies, the industry is getting rich with SAP consultants who are well capable of providing solutions on big international projects.
As a result of system integrators emergence, there are a couple of effects that have been observed in the industry. Firstly, small software firms started becoming business partners of multi-national players of the industry. These multi-nationals included IBM, Siemens, Oracle and Microsoft to name a few. The second effect that was observed in the industry to emergence of system integrators was shift from 'create your own enterprise resource planning solution' to 'off-the shelf solutions'.
Trend # 3: The Emergence of the 'Idea Entrepreneur'
The third most noticeable trend in the industry is emersion of idea based entrepreneurial ventures across the industry. When the industry started to deepen its roots in the Pakistan's market in the beginning of twenty first century, people were of the view that a software house can be operated by having a desktop computer and an internet connection. Everyone started to follow the same course and provided the same services all across the market. Then, a realization in market started to take that the rapidly growing and ever-changing market of software industry required idea based entrepreneurship where copy cats were not required anymore. There came a time when intellectual proprietary solutions were offered by the people and rules to sustain in the market changed. Now, the industry has seen human capital development on the lines of specialization rather than generalization of expertise. Now the niche markets are being ruled by the specialists of respective domains.
The industry is now open to entrepreneurs who have capability to strike with accuracy rather than following hit and trial approach. Environment of the software industry is not conducive for new comers and one has to face a lot of head on collision with the market players who have strengthened their foundations in the industry with identity of being specialist of their domain. Nevertheless, the industry is generous enough to entertain new ideas with technologically updated system solutions.
Entrepreneur today needs to be supported with funds to nurture the business idea and benefit the industry at large. In most of the cases, even a great idea fails to get the recognition and development it deserves. As a result, a discouraged entrepreneur is equivalent to brain drain in the industry. A failed idea just because of unavailability of funds is likely to discourage oozing of other ideas and specialized knowledge based business ventures. It also results in distracting focus of the entrepreneur.
Businesses based on ideas usually are found in 3 forms. The first form is based on in-depth knowledge of some industry and offer of some specialized product and service proposition. The second form is found in shape of unique coupled with special service that becomes need of the day for the software industry. The third form of such businesses is found in shape of intellectual property that cannot possible be copied by the competitors. Irrespective of the form of the business, the entrepreneur is highly likely to enjoy unmatchable competitive position in the market and posses capability to offer value added proposition.
For the entrepreneur who bring unique propositions to the market, the only way to succeed today is support in terms of investment and conducive environment from viewpoint of support infrastructure, if need be, and policy flexibility. It, therefore, becomes the responsibility of venture capitalists and policy makers to envisage the upcoming trends in the industry and do support the idea entrepreneurs to the best possible extent.
Trend # 4 - Out Of 'Voice Business' (and into Functional BPO?)
The fourth most noticeable trend of the industry is departure of voice base outsourcing business. There were times when voice based business emerged as high growth business area. But at the time when local firms started to buck up for the business coming from within and abroad, viability and sustainability of the business area was questioned by the industry experts.
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It was known that the business area was not there to stay for long. The underlying reasons, as quoted by many industry experts, included lack of human capital, infrastructure, high rates of real estate to operate and other such issues.
The trends of human resources in IT industry in general and software industry in particular have been erratic. For voice based businesses, number of people speaking English with required accent are very few and those holding the required profile for a call centre job, in most of the cases, are career oriented. According to a survey conducted by The Resource Group, the call centre jobs are perceived to be interim jobs and are preferred by people willing to join the workforce but have limited opportunities to make their mark in their desired career. These people also include the youngsters who graduate from the colleges and wait for higher education or early career opportunities. Such workforce is difficult to find and even if found once, is difficult to retain. This HR trend has damaged the business area severely and is one of the major reasons why voice based businesses are on decline.
Trend # 5 - Business Model Innovation for Export Success
The fifth most noticeable trend that is going to shape up the industry's future
"In a dynamic and fast changing industry like IT/Software, tomorrow can and will be radically different, and not merely an extension of today. It would require investors' foresight, business managers' insight, and entrepreneurs' courage to capture the moment and build the next generation of niche players and industry leaders and build it in the 'New Pakistan'. Profits are certainly to be earned by those who 'break the rules' and try the unthinkable."
The fifth and final one of the five trends sweeping across the industry can be summarized in a few sentences in the words of one industry insider:
"Pakistan's software/BPO industry has just recently woken up from its slumber - from its dream of playing catch-up to and imitating the Indian software industry. For years, we have tried to follow the Indian business models. Some of us are only recently beginning to think for ourselves and do something that is in line with our circumstances and resources and uniquely our ownâ€¦'85"
Net sol's Novel Profit-sharing Outsourcing Arrangement
Last year, Net sol embarked upon an innovative outsourcing arrangement that had an interesting twist to it. The project started as a 6 -8 person proof of concept team dedicated to insurance claims processing for one of its clients in the financial industry. Initially, Net sol ran the project for a while to prove its performance credentials and win the trust of the client. Once that was achieved, it invited the client to establish a joint-venture company with Net sol owning a 51% controlling stake in the new venture. Both the client and Net sol invested $0.5 million in the new company. Net sol trained the staff and acquired necessary professional certifications for the operation. The client had complete visibility, including costs and profits, into the operation and could see how the new company made money and delivered value. Since the client jointly owned the company, it also received half of the overall profit. Today, the operation has grown to 125 people. The client receives, in profit sharing, 30% of what it pays out to buy the company's services thus achieving considerable savings for itself. Net sol, in return, has a captive client and an expanding business.
LMKR's Innovative Use of Financing to Grow
In 2005, LMKR had sold 60% of its equity to Halliburton and had become the latter's subsidiary whereby some new capital was injected into the business to help grow and diversify. This influx of equity resulted in considerable growth in the business over the span of the year. In December of 2006, LMKR bought back its equity from Halliburton at a higher valuation. Two months ago, it again brought in an international (UK-based) private equity firm Actins Group that has bought 49% of the company's equity. In addition to new money, Actins also brought in its networks and connections to the European market and a lot more. "I can't grow this company beyond a particular size without the help of these international players. I don't care if I own 100% of my company or not as long as we can grow it and value is added. We plan to go public and in a year's time and raise even more money to expand internationally. This is the only way to grow and become a global player in the IT space," says the company's CEO. LMKR's approach towards financing goes against the industry "wisdom" to holding ownership and equity close to ones chest rather than leveraging and spreading it around. A popular Silicon Valley saying goes: "It is better to be a 5% owner of a $1 billion company than a 100% owner of nothing".
Techlogix's Quest for Growing a High-End IT Consulting Operation
Techlogix is one of Pakistan's leading and most exciting high-end IT consulting and software development operations. The company focuses on a number of practice areas, namely, business process management (BPM), master data management (MDM), business intelligence (BI), application integration, project portfolio management, enterprise applications, and software product engineering. Today, as it attempts to diversity and grow, it is faced with the challenge of formalizing its seven practice areas and grow these into full-fledged enterprises of their own. "In due course, we would like to grow each of these business practice areas into as much size as the entire Techlogix earns today. This will require formalizing and growing these practices, internationally branding our methodologies, and diversifying our markets," says the CEO of Techlogix - Pakistan. The challenge is not unique to Techlogix but it is one towards which the company shows an unusual depth of thought and commitment. Scaling a professional services firm to 10x its current size is the challenge Techlogix faces today and, in addressing it, is creating an example worth emulating for others in the industry.
Voxel Communications' Clever Resource Swap
Faced with virtual elimination in mid-2005 when the internet backbone breakdown eliminated a major part of the call-center business in Pakistan, Voxel Communications was faced with a stark choice to close down its purpose built facility or to do something innovative to survive. "We found out that the only choice available to us was to buy somebody or be bought out. That is really difficult to do when you've just been through a bloodbath and have literally no money left in the bank", says Voxel's CEO. After a lot of strategizing and soul searching, Voxel discovered that its largest client's growth was being constrained because of its inability to find capital. It approached its key client in the US with a proposition. Voxel had excess capacity and equipment in Islamabad and it was willing to lend this equipment to the client if the latter outsourced a certain number of seats to Voxel in return. This would give the client the in-kind capital needed to grow and Voxel a paying client. It took seven months to convince SBP on the legitimacy of this unusual arrangement. The client bought into the idea and Voxel implemented the plan. In the first year alone, Voxel brought back into the country $91K for every $100K of equipment that it had lent to the client. The call center currently employs 135 people dedicated to business from this particular client. Not only did it find an innovative way to do business after a hopeless situation but reverted a lost client back to a captive one.
TRG's International Acquisition Strategy
TRG's international acquisition strategy is well-known within the industry. The company found what it believed was an innovative approach to solve the country's image problem. It raised capital from the domestic market and embarked on a strategy to acquire controlling stakes in distressed call-centers in the United States. Once acquired and integrated into the larger company, TRG would route a major portion of the operations of these distressed call centers to its facilities in Pakistan. This would circumvent the image issue as the final client would hardly notice the change in ownership and the fact that the calls were being routed to Pakistan. While jury is still out on the success or failure of TRG's acquisition strategy, the assumption sounds quite naÃ¯'efve at second thought and in all likelihood TRG has found it difficult to realize the benefits envisioned. TRG has since somewhat changed its original strategy and is now looking at alternate destinations (such as the Philippines) to expand its call-center operations. The company's back-office, however, remains in Pakistan. Regardless of the final verdict on the success or failure of TRG's acquisition strategy, the company deserves credit for being the first to propose a different approach to solving a conventional problem and leading the industry's foray into "out-of-the-box" thinking and business model innovation.
From the research standpoint, this study points towards several interesting and substantive findings and highlights areas where more research work needs to be conducted.
First, we failed to find conclusive evidence in support of a trend of specialization and focus, at the level of an industry, if not the firm.
Are we, as an industry, doing better at creating more focused firms? Can we detect differences in the organization of software development activity that might point towards greater specialization or optimality? For example, the organizational processes of a company trying to do software outsourcing should be significantly different from one focusing on a product market, a fact that should be reflected in organizationalâ€level data on these two types of organizations..
Second, there is some suggestive evidence of best practices within the industry.
The relatively better-performing firms tend to adopt more employee friendly policies than the rest of the industry. Also, they tend to have better quality management talent. These are robust findings across multiple reference and control groups (e.g. top-10 firms, fastest growing firms, and global top-quartile firms etc.). Similarly firms of all sub-specializations tend to favor the more high-contact marketing approaches (e.g. word of mouth, pre-established networks, and one-to-one contacts) against the relatively low-contact ones. There might be lessons in this for the policy-makers designing programs (e.g. trade delegations, conference attendances) to improve the networking and customer acquisition ability of Pakistani software firms or for the industry entrepreneurs contemplating a new venture. We further supplement these statistical results with qualitative findings of strategic challenges and managerial best practices.
Third, although our results on measures of technical practices and process quality are mixed-and sometimes counterâ€intuitive-they point towards some consequential findings.
From the standpoint of technical and process quality, we find a lot of variation within the Pakistani software industry-a fact that may or may not auger well for the industry's maturity. That firms maybe acquiring quality certifications (e.g. ISO 9000) for reasons that may not have a lot to do with the actual quality of their processes is yet another finding worth some thought. We also found evidence of differential propensities to seek a quality certification (e.g. hybrids seem to have a greater propensity to seek a quality certification than either the exportâ€focused or the domesticâ€focused software operation) among our sample of respondents.
Fourth, there are a number of generic strategic challenges that need to be addressed by entrepreneurial ventures of various types.
We find a number of innovative ways in which companies have tried to address these challenges-some more successfully than others. We discuss several different approaches to each of the thirteen (13) strategic challenges identified in the report and document twenty (20) managerial best practices adopted by relatively successful companies that others might consider using as well. While many of these challenges have a clearly organizational focus (e.g. developing a domain expertise, setting up a quality software development operation, managing parentâ€subsidiary relationships etc.) others may be beyond the influence of a single firm (e.g. countering the "image" problem, getting access to quality human resources etc.) and others still may require a partnership between public and private sector entities (e.g. setting up an operation in Pakistan, scaling up the Pakistani operation etc.). An example of one such challenge for the industry is scaling up the size of average software development operation to undertake larger projects.
Finally, despite considerable progress on a number of public policy and infrastructural bottlenecks, the industry still faces a number of environmental and public policy challenges.
The prevalence of the "image problem" as a critical bottleneck to the growth of the industry and perceived to have actually affected the largest number of firms in our sample is one example. Other significant environmental and policy bottlenecks include: the quality and availability of human resources, cost and availability of IT/Telecom infrastructure, and lack of availability of physical infrastructure (e.g. office-space, water, power etc.). We underscore the need for careful analysis of the extent of this problem and their impact on the industry, some creative and "outâ€ofâ€theâ€box" thinking on possible solutions, and putting in place a publicâ€private partnership framework based on contingent commitments of the two parties and governed by a transparent performanceâ€based assessment framework to address these.
Conclusion & Recommendations
The global recession during the last 2-3 years (2007-2010) has tested the industry's grit and resilience. Like other countries, Pakistan's software and BPO industry underwent a substantial period of change and turmoil during the last 3 years. It has, however, emerged as much stronger and more resilient than ever before. As certain segments of the Pakistani IT and IT-enabled services industries have faced challenging market conditions and have sought to reinvigorate and reinvent themselves, others have rebounded as much stronger, and still others that never existed have been born and come of age. The story of Pakistani IT and IT-enabled services industry - like any dynamic, living, and breathing industry - has been one of relentless change and innovation.
In mid-2007, Pakistan's Software and BPO industry was on the verge of a take-off. In FY2006, the software / BPO industry stood at $193.4 million of local revenues and spend and a global revenue $779.7 million. A survey of 80 of the industry's leading firms projected the domestic revenue and spend of country's software and BPO industry to be in excess of $269 million with the a global revenue impact of around $900+ million by end-2007.
That projected growth, however, did not materialize. Even before the global recession of the early 2008 had hit, the relative political-economic stability within the domestic environment in Pakistan had begun to falter. A "limited" judicial crisis that started around the middle of 2007 became a full blown constitutional row between the government and the judiciary thus affecting - directly and indirectly - the domestic demand for IT and IT-enabled services. On the export front as well, the credit crunch and sub-prime mortgage crisis turned into a full-fledged recession across the developed world.
The global recession hit in the early 2008 and with it came considerable belt tightening in IT spending in the country's major export markets - most notably United States, Canada, and Europe. The twin crises massively hit the industry revenues. During 2007-2008, the industry experienced a decline of 40% in domestic revenues and spend and 60% in export revenues. Growth began to re-emerge in 2009, albeit from a much lower level than the industry had been in 2006. The industry has since continued to grow and, in 2010, is expected to hit the level that it had achieved in 2006.
The Silver Lining: Emerging Demand and Supply Segments
While the revenue and spend statistics provide a particular view of Pakistan's IT and IT-enabled services industry, they fails to fully capture and appreciate the highly dynamic and vibrant nature of the industry. Pakistan's IT and IT-enabled services industry has continued to evolve and mature despite the political and financial turmoil - and the global economic recession. As the more traditional sub-sectors such as pure software development services experienced erosion of market demand, new and exciting areas have emerged promising potential for innovation and market growth.
In the last few years, for instance, systems integration and embedded systems seem to have come of age as an important sub-sector of the Pakistani IT and IT-enabled services industry. While systems integration has been a part and parcel of the IT industry since its inception, its growth has been somewhat limited. Increasingly, though, domestic IT spends as well as export opportunities is breathing new life in this particular sub-sector of the overall IT market. The industry has also climbed up the value chain within the customized software development services sub-sector as the firms have increasingly specialized in customization of well-established platforms (like Microsoft, SAP, and Oracle etc.) instead of trying to create in-house proprietary platforms.
Similarly, mobile applications, gaming, and animation is an emerging new area with considerable promise to become a key driver for the industry in the years to come. Supported by strong underlying demand, cut throat competition and the need for innovation and low cost and barriers to entry, mobile applications and gaming seem to have produced a few exciting players. A number of Pakistani start-ups have done very well in producing content and games that have hit the Top-10 lists in their respective genres at the Apple Store. Cricket Revolution - a full fledged cricket game - is the first of its kind developed in Pakistan.
On the demand side of the IT industry as well, there has been considerable change within various sub-segments of demand for IT products and services. Financial and telecommunications industries remain the largest users of IT and IT-enabled services within the country - although the former has experienced some flattening of demand in the recent years. The share of multinationals in spurring demand for IT products and services seems to be going through a trough that is broadly in line the global trend towards rationalization and centralization of IT procurement budgets of multinationals worldwide.
There are several opportunities for IT firms to engage with the emerging areas of local demand.
New avenues of IT spending growth that are likely to drive growth in the future are opening up. Mobile Banking, for instance, is an exciting new area that may bring together two IT demand drivers and set the stage of another spurt of explosive spending growth in the coming years. Value-added services (VAS) represent yet another lucrative frontier that still presents an untapped opportunity for the industry.
The dynamic character of Pakistan's IT and IT-enabled services industry continues to evolve and re-invent itself to meet the new challenges and opportunities that it faces. It is an industry that survives and thrives in spite of the various geo-strategic, political, and socio-economic challenges that are uniquely the country's own. Perhaps no other industry in the world with such ambition has been burdened with graver challenges than Pakistan. No other country has demonstrated more tenacity and a greater will to succeed despite the odds.
Where do we go from here?
The implications of the data and findings presented above are quite clear. We would not try to go beyond the mandate of this report and suggest alternative scenarios for the development of the Pakistani software industry and/or suggest a concrete roadmap to get to the most desired scenario. Our objective was to create the awareness and an unbiased assessment of where we are so that those responsible for deciding where to go, and how to get there, at both organizational and policyâ€levels, can use the information to make betterâ€informed decisions. We have, however, taken the liberty to make some tactical recommendations as and when we have found one staring at our face during the course of this analysis. On the whole, however, there are a few generalized conclusions that one can draw.
The first and foremost contribution of this study is to bring forth the very vibrant face of Pakistan's software industry. Pakistan today, unlike yesteryears, is fast turning into a happening place for IT. While the industry's first documented firm- Systems Ltd.-opened shop in 1976, the industry has only been a subject of focused attention for just over a decade now.
The decade of the 1990s and the Dotcom Bubble burst have brought considerable maturation and reality check to industry players. Ten years is a very short time for the development of an entire industry and there are signs that Pakistan's software industry, having laid the foundations for a tomorrow, maybe in for better times ahead. Last year alone, the industry has grown at around 37% in revenues and 27% in terms of technical and professional employment. Many of the CEOs we spoke to expect a betterâ€thanâ€lastâ€year performance in 2005. Another sign of the industry's maturity and coming of age-facilitated by the global geopolitical environment and off shoring trends- is the fact that an increasing number of Pakistaniâ€owned foreign companies are setting up development center operations in Pakistan. While many of these choose to operate under the radar screen, they are definitely going to bring about considerable transfer of knowâ€how and ideas from western software markets to Pakistan and result in the generation of local entrepreneurial activity. Also, another unmistakable sign is the trend of reverse brainâ€drain of quality Pakistani professionals from abroad who, given significantly less competition for ideas and talent and a relatively virgin market at home, see a tremendous opportunity in setting up a Pakistanâ€based company. Systems Integration, Innovation and Intelligence (SI3) and The Resource Group (TRG) are the poster children of this undeniable trend. None of these would have been possible a decade ago. On the domesticâ€front as well, there is a growing likelihood of considerable opening up and modernization of traditionally conservative segments of the economy. If deregulation in the financial sector is any credible sign of things to come, we are likely to see massive changes in the shape of the local manufacturing and service industries by virtue of telecom sector deregulation and the enhanced competition under the nowâ€effective WTO trade regime.
There are, however, considerable, although not insurmountable, challenges too. The industry suffers from a serious professionalization and institutionalization deficit. The 200â€people barrier, although psychological, is real till it is actually broken-and broken convincingly and forever. In addition to the 200â€people barrier, we also face a 20â€people and a In a dynamic and fast changing industry like IT/Software, tomorrow can and will be radically different, and not merely an extension of today. It would require investors' foresight, business manager's insight, and entrepreneur's courage to capture the moment and build the next generation of niche players and industry leaders and build it in the New Pakistan. Profits are certainly to be earned by those who "break the rules" and try the unthinkable. There is, however, a dire need to think deep and hard about the problems, patterns, and strategic challenges identified in this report, find explanations for these, and devise strategies to get around them.