Pakistan's Software Industry--Best Practices and Strategic Challenges
Pakistan's Nascent, often over/under-rated software industry (depending on how you look at it), maybe ready for a take-off. Provided we make the right choices. This article summarizes the findings of an Original Research Study funded by Pakistan Software Export Board (PSEB)and draws conclusions. -A.O.
The software industry—widely seen as the “great enabler”—provides an opportunity to the developing countries to play a greater economic role in the fast globalizing world. The example of neighboring India—whose ambition and progress towards becoming a “mini (software) superpower” is no mystery from the world—is often cited in the development literature as an evidence of the fact. Pakistan’s software industry—widely perceived to be sharing a number of key factors with India—has embarked upon an ambitious effort of its own to claim its share in the riches of the world’s software markets. Pakistan is currently viewed as a tier-3 country in a widely quoted taxonomy of software exporting nations (Carmel, 2003). It is widely believed that, with the wealth of talent and strengths available, the country deserves a better place in this global pecking order of software exporting nations—atleast a tier-2 status like Russia and China, or even a tier-1 status alongside archrival India[1].
Pakistan’s software industry has been a subject of the curiosity of interested by-standers—both local and expatriate entrepreneurs—industry analysts, and potential investors alike. Yet, lack of credible data on the current state and competitive dynamics of the industry has often been a hindrance in engaging these individuals and materializing many prospective ventures. We were recently involved, on the request of an expatriate investor, in an effort to incubate an IT-focused venture capital fund in Pakistan. As we spoke with industry leaders and the financial community, we repeatedly encountered a series of tough questions, for example:
-- Why hasn’t the Pakistani software industry been able to produce a single world-class software firm (e.g. Wipro, Infosys or TCS of India) in the last 10-15 years?
-- Why haven’t we been able to grow Pakistani software exports beyond a certain level ($30-60 million per annum) for the last 5 years?
-- Does Pakistani software industry merely represent a lower level of development or an altogether different development trajectory as compared to known peer nations?
-- What constitutes a generalized set of best practices in the local software industry (i.e. what differentiates better performers from those that don’t perform that well)?
This study attempts to answer some of these questions. While several factors are widely believed to be a hindrance in the country’s aspiration to become a significant software exporter, not the least important of which are macro- and geopolitical in nature (e.g. law and order and security situation, image of the country etc.), we adopt an inside-out approach that asks: “What can the various players, essentially software companies, in the industry learn from each other?” There is a growing realization that we must truly understand the structure of the Pakistani software industry and the nature of Pakistan’s competitive advantage in the software arena in order to devise better industrial and organizational strategies and public policy interventions. The Best Practices in Pakistani Software Sector Project—being the first of its kind and scope in Pakistan—is an exploratory study of the Pakistani software industry that attempts to do just that.
The study draws upon an “on-the-spot” survey of 40 of the most prominent and largest software companies in Pakistan, as identified by PSEB and P@SHA. We conducted organizational interviews with senior executives (CEOs/CTOs or Local of Heads of Operations) of 47 of these companies to supplement the statistical data with qualitative insights. These interviews focused on understanding these organizations, their business and revenue models, competitive drivers, strategic challenges, and policy bottlenecks. We also conducted interviews of opinion leaders, policy-makers, and senior executives of other organizational entities (e.g. IT MNCs, financial institutions, and academia) that had a significant bearing on the local software industry. In all we conducted over 65 interviews between Oct.-Dec. timeframe (see Appendix)
The substantive findings of the study can be broadly divided into two components. The first part attempts at creating a brief statistical snapshot of the Pakistani software industry, as gleaned from the data on organizational, managerial, and technical practices of our respondents. The second part of the study uses a taxonomy of generic software business models to develop a qualitative sense of software development activity in Pakistan. It also identifies key strategic challenges (13 in all) typically faced by companies within each of these generic business models and managerial best practices (20 in all) adopted by various players in the industry to meet each of these strategic challenges. The report concludes with a discussion on environmental and policy bottlenecks and some tentative conclusions
The results of the statistical analysis are quite illuminating. On the whole, the 60 software houses included in our statistical sample employ over 4000 technical and professional employees—for an average of 62 employees per organization. Roughly one third (32%) of the software companies reported annual revenues of more than a million dollars with some reporting more than $5M, another third (36%) between $200K and $1M, and the rest (32%) less than $200K. 6 of the companies had more than 250 employees and another 8 had between 100 and 250 employees. On the whole these 60 companies had experienced an employment growth of about 27.5% and a revenue growth of 37.4% over the last year—pointing at better utilization of excess capacity or value-addition per employee, or both. Around 40% of the companies in our sample were subsidiaries of foreign companies—with majority of them having a parent company in the United States. 55% of the companies had one or more front offices abroad (50% in the US, 11% each in UK and Middle East, and 3% in the Asia Pacific region). 45% of the respondents had quality certification (mostly ISO-9000 with only 3% having CMM). 73.7% of the companies had dedicated quality assurance teams.
Broadly speaking, our respondents derive their revenues from export and domestic markets in a ratio of 60:40. On the exports side, they derive 22.5% and 38.5% of the revenues from products and services respectively. Although we did not ask directly, our conversations with the top leaders of the industry suggest that a majority of the product-exports are “customized” rather than “shrink-wrapped” products. On the domestic side, however, the ratios are somewhat reversed with products and services contributing 23% and 16.5% respectively. Our respondents predominantly serve the private sector markets with around 85% of the total sales going to private sector (local and foreign combined) and the rest going to public sector, equally divided between domestic and foreign.
We tried to parse the data into various classifications in an attempt to understand the organization and dynamics of software industry. For example, we looked at the differences between export-focused, domestic-focused, and hybrid software operations; between product-focused, services-focused, and hybrid operations; between large and small operations; and between operations formed prior to and after the DotCom Bubble burst in the United States. Our results are suggestive of several interesting trends.
For example, on the managerial practices side, there is some suggestive evidence that export-focused software operations are more likely to distribute stocks/ownership among employees, hold employee bonding activities, and benefit from employee-driven innovation while domestic-focused software operations are more likely to share profits with employees, provide additional benefits to female employees, have greater financial discipline, and provide time to employees to work on their own interests. Despite the latter, however, they seem to benefit less from employee-driven innovation and suffer more from a perception of lower delegation quality. Hybrids fall in between the two categories on almost all these measures.
Export-focused operations tend to spend more, on average, on quality assurance while hybrids tend to have a greater propensity for seeking a quality certification. All companies, across the board, prefer to use and express greater satisfaction with high-contact approaches of marketing (e.g. word-to-mouth, one-on-one contacts, and pre-established networks). We do not find a lot of differences between the cost-structures of export-focused, domestic-focused, or hybrid operations, except that hybrids seemed to under-invest in product-development to pay for expensive marketing and advertising, and training and certification. CEOs of export-focused software operations tend to spend much more time in tactical rather than strategic mode (doing day-to-day management rather than marketing and business development).
Our analysis of other classifications provides few interesting insights. The dedicated development centers tend to be smaller, more rigorous (from a technical and process standpoint) than the rest of the industry. They, however, seem to experience serious constraints to revenue and employment growth—a fact that we interpret as a manifestation of their “mid-life” crisis. Although we see a trend towards productization in the industry, we found few significant differences between product-focused and services-focused operations. This lack of differentiation (e.g. in the cost structures of services and product-focused operations) is problematic, to say the least. There were also few significant differences between large and small software operations and between those created before and after the DotCom Bubble burst.
On the whole these findings also paint a picture of lack of focus and specialization within the Pakistani software industry. That product-focused operations are similar to services-focused operations and pre-DotCom operations are not qualitatively different from post-DotCom operations does not speak well for the maturity of the industry as a whole. A related substantive finding is the trend towards the “hybridization” of software development activity. The hybrid firm has emerged as an important organizational class on its own rather than the average of the two extremes. While the hybrid firm tends to do better than the two extremes on some measures and hence might be seen as a manifestation of the industry’s survival instinct, it is not quite clear if it is the optimal model of organization of software development activity in the long run.
In line with the study objectives, we also asked the question: Do aggregate statistics reveal a pattern of “best practices” within the software Industry? We use multiple comparison groups (e.g. 40 most prominent companies, top-10 companies, 14 fastest growing companies, 14 companies that describe themselves as globally competitive against the rest of the industry) and find mixed results on that account. For example, we find robust evidence to support the fact that better-performing companies tend to adopt a set of employee-friendly management practices (e.g. flexibility, stock ownership, profit-sharing etc.) and have access to high quality managerial talent (e.g. mix of technical and business backgrounds, prior venture experience, financial discipline etc.) than the rest of the industry. All companies, across the board, prefer high-contact marketing approaches over low-contact ones but better-performing companies report higher satisfaction with the former than the rest of the industry. Our results on various measures of technical and process quality are, however, inconclusive, at best. Here, we do not find any clear patterns that differentiate better-performing companies from the rest of the industry. We believe that best practices within technical and process realms are dependent on the type of work performed and a number of project-specific variables. As reported elsewhere, therefore, project-level data might be better suited to identify these differences.
Next, based on our statistical findings and qualitative insights, we devise a 4-part taxonomy of generic business models. The four sub-classifications, named after their most prominent examples, include: Export-focused Local Firm (“Systems” or “Netsol” Model), Domestic Focused Local Firm (“TPS” or “LMKR” Model), Export Focused Foreign (Expatriate) Firm (“Techlogix” or “Etilize” Model), and Dedicated Development Center (“ITIM” or “Clickmarks” Model). We present a snapshot of each of these generic software business models and identify key strategic challenges for each—13 in all for the entire industry. As we discuss the ways relatively more successful firms in the industry have countered these strategic challenges, we also arrive at twenty (20) managerial best practices that could be replicated by other players in the industry.
The Export-focused Local Firm is one founded by a predominantly Pakistan-based entrepreneurial team (that may or may not have been aided/encouraged by a group of expatriates), but with an explicit purpose of exporting software products or services. Majority of the firms established in pre-DotCom Bubble burst era with an expressed purpose of exporting services to North America and Western European countries fall in this category. Although there are some that have taken the products route, their numbers are relatively smaller than those focusing on export of services. The most defining feature of this class of companies, namely, the local-presence of their founders and the export-orientation of their products/ services, brings a number of unique and important challenges to this type of a firm. We discuss three of these in great detail and allude to several others. The ones we discuss in depth include: customer acquisition in a foreign market, setting up a foreign marketing presence, and understanding the domain and context of a foreign customer. Some salient examples of this type of business model in action are: ThreesixtyDegreez, Post Amazers, Advanced Communications, Makabu, Netsol, and Autosoft Dynamics etc.
The Domestic-focused Local Firm, with an exception of a few companies, is really one because of circumstances rather than choice. More often than not, and logically so, the domestic-focused local firm plans to export its products or services abroad and is merely using the domestic market as a vehicle to gain a track record with real life customers. Whether a firm is in this category by choice (“I’ll do domestic first, export later”) or by circumstances (“Since the export market doesn’t seem very good right now, I’ll survive by selling at home”) the strategic challenges are quite similar. We discuss three of these in some detail. These include: operating in an under-developed local market, getting access to capital, and having a business plan and a strategic/domain focus. Other challenges alluded to include: migrating from the domestic to the export market, developing relationships, delivering quality products/services, and even marketing abroad. Some salient examples of this type of business model in action are: 2B Technologies, ZRG, TPS, Lumensoft, Yevolve, SI3, Softech Systems, AppXS, and Genesis Solutions etc.
The Export-focused Foreign Firm is one founded abroad (or jointly, in Pakistan), by a predominantly foreign (usually, an expatriate) entrepreneurial team, with an explicit purpose of using the Pakistan-based offshore development facility to deliver a product or service demanded by the foreign market. This type of business model has been adopted by services and product-focused companies alike. While this class of companies enjoy several advantages over those in earlier discussed categories, namely, quality of due-diligence on the basic idea, foreign contacts/networks of founders, and better access to capital etc., there are significant challenges as well. We discuss four of these challenges in some detail and identify a number of managerial best practices followed by some of the interviewees. These challenges include: dealing with the “image” problem, countering the geographically shifting “labor arbitrage” argument, scaling up the Pakistan-based operation, and getting to know the land and managing expectations etc. Some salient examples of this type of business model in action are: Elixir, Etilize, Ultimus, MixIT, TechLogix, Prosol, and Xavor etc.
The Dedicated Offshore Development Center, as the name suggests, is a fairly limited offshore operation of a foreign company. It is different from the Export-Focused Foreign (Expatriate) Firm in the sense that it is often an “add-on” to an already existing company whose strategic and managerial processes and controls are quite well-established. Due to its unique nature (i.e. limited scope) it faces a number of challenges that are distinct from the earlier-discussed category. We discuss three key challenges faced by organizations in this business model and identify innovative best practices to counter these. These include: managing the parent-subsidiary relationship, setting up an offshore facility in Pakistan, and building a quality software development operation. Some salient examples of this type of business model in action are: MetaApps, ITIM Associates, Clickmarks, Trivor Systems, and Strategic Systems International etc.
The taxonomy of generic software business models may be helpful in several ways. Firstly, it gives us a relatively easy and comprehensive way to classify a particular software operation into a broad enough category of organizations and a hence a reference point to compare ourselves against. Secondly, it highlights the importance of understanding the strengths, weaknesses, pre-requisites, and structural limitations of each of the generic software business models. It is also important here to understand that while transitions between these generic software business models are possible, they are not necessary or automatic. None of these business models is essentially good or bad, they are just different and one must pick the particular model that best suits his/her idea-offering-destination mix.
We conclude the study with a brief review on environmental and policy bottlenecks that have hindered the growth and development of the software industry. This is, by no means, an exhaustive study or even a comprehensive list of policy issues but rather a description of our statistical and qualitative findings. The country’s image, over-and-above the company’s brand, tops the list as the problem identified by as many as 68% of all respondents. This is followed by quality of manpower (56%), the cost of IT/Telecom infrastructure (50%), and law-and-order and security situation (48%) as the most important problems from the perspective of all-types of firms combined. While there are variations between how each of these may disproportionately affect various sub-categories of organizations, image, IT/Telecom infrastructure, and HR appear to rate consistently as among the top-5 problems in all categories. We also faithfully narrate several proposals, put forth by our interviewees, to address some of these issues.
On the whole, 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. Although the industry has come a long way since its first company opened shop in 1976, it has only been in the limelight—for investors and policymakers alike—since the early 1990s. 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 better-than-last-year performance in 2005. Another encouraging sign is the increasing number of Pakistani-owned foreign firms being located to Pakistan as well as the reverse brain drain being caused by returning Pakistani entrepreneurs who see the relatively less competitive and virgin market at home as a tremendous opportunity for setting up a Pakistan-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 domestic-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 now-effective WTO trade regime. The former has already begun to show tremendous promise with around a billion dollars of promised investment in last year alone. An investor whom we spoke to sees the situation as the fading away of the Old Pakistan and the Emergence of the New Pakistan that is effectively linked to and a significant player of the global economic system. The New Pakistan presents considerable promise and opportunity to those willing to bite at it. There are live examples of companies—TRG, SI3, LMKR, Netsol, Techlogix, Etilize, TPS and many more—that have capitalized on this new set of opportunities and positioned themselves to reap the rewards.
There are, however, considerable, although not insurmountable, challenges too. The industry suffers from a serious professionalization and institutionalization deficit. The 200-people barrier, although psychological, is real till it is actually broken—and broken convincingly and forever. In addition to the 200-people barrier, we also face a 20-people and a 2-people barrier that requires as much attention as the former. Many of our very innovative firms continue to resist professionalization and thus fail to grow beyond a particular size. The industry is hungry for capable investors/acquirers to come forth and bring about paradigm shifting structural changes to these companies and enable them to move to the next higher level of growth. The fast maturing market of outsourcing and offshoring services necessitate that our entrepreneurs and business leaders think about new ways of doing things. It is unlikely, given the consolidation in the outsourcing industry, that we would see a new player replacing Wipros, Infosys’, or TCS’ of this world. Rather than blindly copying the already well-established countries and players, we must think creatively to devise a model that best suits our own strengths and weaknesses. Our ability to lead in the business model innovation would determine, to a large extent, our place in the future pecking order of software exporting nations. Playing the volumes-game (ITES/BPO), without the requisite scalability and HR, is unlikely to succeed on an industry-wide scale. Until we can resolve the scalability issue, we must learn to play in the equally lucrative ideas-game.
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.
More detailed version--a 25 page paper, 125 page report, and briefing slides--of this study's findings are available on the project website: http://paksoftwarestudy.vttp.org
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Footnotes:
[1] A widely quoted GOP target of $1B in software exports by Y2000 would have propelled Pakistan into the exclusive tier-1 club.
The software industry—widely seen as the “great enabler”—provides an opportunity to the developing countries to play a greater economic role in the fast globalizing world. The example of neighboring India—whose ambition and progress towards becoming a “mini (software) superpower” is no mystery from the world—is often cited in the development literature as an evidence of the fact. Pakistan’s software industry—widely perceived to be sharing a number of key factors with India—has embarked upon an ambitious effort of its own to claim its share in the riches of the world’s software markets. Pakistan is currently viewed as a tier-3 country in a widely quoted taxonomy of software exporting nations (Carmel, 2003). It is widely believed that, with the wealth of talent and strengths available, the country deserves a better place in this global pecking order of software exporting nations—atleast a tier-2 status like Russia and China, or even a tier-1 status alongside archrival India[1].
Pakistan’s software industry has been a subject of the curiosity of interested by-standers—both local and expatriate entrepreneurs—industry analysts, and potential investors alike. Yet, lack of credible data on the current state and competitive dynamics of the industry has often been a hindrance in engaging these individuals and materializing many prospective ventures. We were recently involved, on the request of an expatriate investor, in an effort to incubate an IT-focused venture capital fund in Pakistan. As we spoke with industry leaders and the financial community, we repeatedly encountered a series of tough questions, for example:
-- Why hasn’t the Pakistani software industry been able to produce a single world-class software firm (e.g. Wipro, Infosys or TCS of India) in the last 10-15 years?
-- Why haven’t we been able to grow Pakistani software exports beyond a certain level ($30-60 million per annum) for the last 5 years?
-- Does Pakistani software industry merely represent a lower level of development or an altogether different development trajectory as compared to known peer nations?
-- What constitutes a generalized set of best practices in the local software industry (i.e. what differentiates better performers from those that don’t perform that well)?
This study attempts to answer some of these questions. While several factors are widely believed to be a hindrance in the country’s aspiration to become a significant software exporter, not the least important of which are macro- and geopolitical in nature (e.g. law and order and security situation, image of the country etc.), we adopt an inside-out approach that asks: “What can the various players, essentially software companies, in the industry learn from each other?” There is a growing realization that we must truly understand the structure of the Pakistani software industry and the nature of Pakistan’s competitive advantage in the software arena in order to devise better industrial and organizational strategies and public policy interventions. The Best Practices in Pakistani Software Sector Project—being the first of its kind and scope in Pakistan—is an exploratory study of the Pakistani software industry that attempts to do just that.
The study draws upon an “on-the-spot” survey of 40 of the most prominent and largest software companies in Pakistan, as identified by PSEB and P@SHA. We conducted organizational interviews with senior executives (CEOs/CTOs or Local of Heads of Operations) of 47 of these companies to supplement the statistical data with qualitative insights. These interviews focused on understanding these organizations, their business and revenue models, competitive drivers, strategic challenges, and policy bottlenecks. We also conducted interviews of opinion leaders, policy-makers, and senior executives of other organizational entities (e.g. IT MNCs, financial institutions, and academia) that had a significant bearing on the local software industry. In all we conducted over 65 interviews between Oct.-Dec. timeframe (see Appendix)
The substantive findings of the study can be broadly divided into two components. The first part attempts at creating a brief statistical snapshot of the Pakistani software industry, as gleaned from the data on organizational, managerial, and technical practices of our respondents. The second part of the study uses a taxonomy of generic software business models to develop a qualitative sense of software development activity in Pakistan. It also identifies key strategic challenges (13 in all) typically faced by companies within each of these generic business models and managerial best practices (20 in all) adopted by various players in the industry to meet each of these strategic challenges. The report concludes with a discussion on environmental and policy bottlenecks and some tentative conclusions
The results of the statistical analysis are quite illuminating. On the whole, the 60 software houses included in our statistical sample employ over 4000 technical and professional employees—for an average of 62 employees per organization. Roughly one third (32%) of the software companies reported annual revenues of more than a million dollars with some reporting more than $5M, another third (36%) between $200K and $1M, and the rest (32%) less than $200K. 6 of the companies had more than 250 employees and another 8 had between 100 and 250 employees. On the whole these 60 companies had experienced an employment growth of about 27.5% and a revenue growth of 37.4% over the last year—pointing at better utilization of excess capacity or value-addition per employee, or both. Around 40% of the companies in our sample were subsidiaries of foreign companies—with majority of them having a parent company in the United States. 55% of the companies had one or more front offices abroad (50% in the US, 11% each in UK and Middle East, and 3% in the Asia Pacific region). 45% of the respondents had quality certification (mostly ISO-9000 with only 3% having CMM). 73.7% of the companies had dedicated quality assurance teams.
Broadly speaking, our respondents derive their revenues from export and domestic markets in a ratio of 60:40. On the exports side, they derive 22.5% and 38.5% of the revenues from products and services respectively. Although we did not ask directly, our conversations with the top leaders of the industry suggest that a majority of the product-exports are “customized” rather than “shrink-wrapped” products. On the domestic side, however, the ratios are somewhat reversed with products and services contributing 23% and 16.5% respectively. Our respondents predominantly serve the private sector markets with around 85% of the total sales going to private sector (local and foreign combined) and the rest going to public sector, equally divided between domestic and foreign.
We tried to parse the data into various classifications in an attempt to understand the organization and dynamics of software industry. For example, we looked at the differences between export-focused, domestic-focused, and hybrid software operations; between product-focused, services-focused, and hybrid operations; between large and small operations; and between operations formed prior to and after the DotCom Bubble burst in the United States. Our results are suggestive of several interesting trends.
For example, on the managerial practices side, there is some suggestive evidence that export-focused software operations are more likely to distribute stocks/ownership among employees, hold employee bonding activities, and benefit from employee-driven innovation while domestic-focused software operations are more likely to share profits with employees, provide additional benefits to female employees, have greater financial discipline, and provide time to employees to work on their own interests. Despite the latter, however, they seem to benefit less from employee-driven innovation and suffer more from a perception of lower delegation quality. Hybrids fall in between the two categories on almost all these measures.
Export-focused operations tend to spend more, on average, on quality assurance while hybrids tend to have a greater propensity for seeking a quality certification. All companies, across the board, prefer to use and express greater satisfaction with high-contact approaches of marketing (e.g. word-to-mouth, one-on-one contacts, and pre-established networks). We do not find a lot of differences between the cost-structures of export-focused, domestic-focused, or hybrid operations, except that hybrids seemed to under-invest in product-development to pay for expensive marketing and advertising, and training and certification. CEOs of export-focused software operations tend to spend much more time in tactical rather than strategic mode (doing day-to-day management rather than marketing and business development).
Our analysis of other classifications provides few interesting insights. The dedicated development centers tend to be smaller, more rigorous (from a technical and process standpoint) than the rest of the industry. They, however, seem to experience serious constraints to revenue and employment growth—a fact that we interpret as a manifestation of their “mid-life” crisis. Although we see a trend towards productization in the industry, we found few significant differences between product-focused and services-focused operations. This lack of differentiation (e.g. in the cost structures of services and product-focused operations) is problematic, to say the least. There were also few significant differences between large and small software operations and between those created before and after the DotCom Bubble burst.
On the whole these findings also paint a picture of lack of focus and specialization within the Pakistani software industry. That product-focused operations are similar to services-focused operations and pre-DotCom operations are not qualitatively different from post-DotCom operations does not speak well for the maturity of the industry as a whole. A related substantive finding is the trend towards the “hybridization” of software development activity. The hybrid firm has emerged as an important organizational class on its own rather than the average of the two extremes. While the hybrid firm tends to do better than the two extremes on some measures and hence might be seen as a manifestation of the industry’s survival instinct, it is not quite clear if it is the optimal model of organization of software development activity in the long run.
In line with the study objectives, we also asked the question: Do aggregate statistics reveal a pattern of “best practices” within the software Industry? We use multiple comparison groups (e.g. 40 most prominent companies, top-10 companies, 14 fastest growing companies, 14 companies that describe themselves as globally competitive against the rest of the industry) and find mixed results on that account. For example, we find robust evidence to support the fact that better-performing companies tend to adopt a set of employee-friendly management practices (e.g. flexibility, stock ownership, profit-sharing etc.) and have access to high quality managerial talent (e.g. mix of technical and business backgrounds, prior venture experience, financial discipline etc.) than the rest of the industry. All companies, across the board, prefer high-contact marketing approaches over low-contact ones but better-performing companies report higher satisfaction with the former than the rest of the industry. Our results on various measures of technical and process quality are, however, inconclusive, at best. Here, we do not find any clear patterns that differentiate better-performing companies from the rest of the industry. We believe that best practices within technical and process realms are dependent on the type of work performed and a number of project-specific variables. As reported elsewhere, therefore, project-level data might be better suited to identify these differences.
Next, based on our statistical findings and qualitative insights, we devise a 4-part taxonomy of generic business models. The four sub-classifications, named after their most prominent examples, include: Export-focused Local Firm (“Systems” or “Netsol” Model), Domestic Focused Local Firm (“TPS” or “LMKR” Model), Export Focused Foreign (Expatriate) Firm (“Techlogix” or “Etilize” Model), and Dedicated Development Center (“ITIM” or “Clickmarks” Model). We present a snapshot of each of these generic software business models and identify key strategic challenges for each—13 in all for the entire industry. As we discuss the ways relatively more successful firms in the industry have countered these strategic challenges, we also arrive at twenty (20) managerial best practices that could be replicated by other players in the industry.
The Export-focused Local Firm is one founded by a predominantly Pakistan-based entrepreneurial team (that may or may not have been aided/encouraged by a group of expatriates), but with an explicit purpose of exporting software products or services. Majority of the firms established in pre-DotCom Bubble burst era with an expressed purpose of exporting services to North America and Western European countries fall in this category. Although there are some that have taken the products route, their numbers are relatively smaller than those focusing on export of services. The most defining feature of this class of companies, namely, the local-presence of their founders and the export-orientation of their products/ services, brings a number of unique and important challenges to this type of a firm. We discuss three of these in great detail and allude to several others. The ones we discuss in depth include: customer acquisition in a foreign market, setting up a foreign marketing presence, and understanding the domain and context of a foreign customer. Some salient examples of this type of business model in action are: ThreesixtyDegreez, Post Amazers, Advanced Communications, Makabu, Netsol, and Autosoft Dynamics etc.
The Domestic-focused Local Firm, with an exception of a few companies, is really one because of circumstances rather than choice. More often than not, and logically so, the domestic-focused local firm plans to export its products or services abroad and is merely using the domestic market as a vehicle to gain a track record with real life customers. Whether a firm is in this category by choice (“I’ll do domestic first, export later”) or by circumstances (“Since the export market doesn’t seem very good right now, I’ll survive by selling at home”) the strategic challenges are quite similar. We discuss three of these in some detail. These include: operating in an under-developed local market, getting access to capital, and having a business plan and a strategic/domain focus. Other challenges alluded to include: migrating from the domestic to the export market, developing relationships, delivering quality products/services, and even marketing abroad. Some salient examples of this type of business model in action are: 2B Technologies, ZRG, TPS, Lumensoft, Yevolve, SI3, Softech Systems, AppXS, and Genesis Solutions etc.
The Export-focused Foreign Firm is one founded abroad (or jointly, in Pakistan), by a predominantly foreign (usually, an expatriate) entrepreneurial team, with an explicit purpose of using the Pakistan-based offshore development facility to deliver a product or service demanded by the foreign market. This type of business model has been adopted by services and product-focused companies alike. While this class of companies enjoy several advantages over those in earlier discussed categories, namely, quality of due-diligence on the basic idea, foreign contacts/networks of founders, and better access to capital etc., there are significant challenges as well. We discuss four of these challenges in some detail and identify a number of managerial best practices followed by some of the interviewees. These challenges include: dealing with the “image” problem, countering the geographically shifting “labor arbitrage” argument, scaling up the Pakistan-based operation, and getting to know the land and managing expectations etc. Some salient examples of this type of business model in action are: Elixir, Etilize, Ultimus, MixIT, TechLogix, Prosol, and Xavor etc.
The Dedicated Offshore Development Center, as the name suggests, is a fairly limited offshore operation of a foreign company. It is different from the Export-Focused Foreign (Expatriate) Firm in the sense that it is often an “add-on” to an already existing company whose strategic and managerial processes and controls are quite well-established. Due to its unique nature (i.e. limited scope) it faces a number of challenges that are distinct from the earlier-discussed category. We discuss three key challenges faced by organizations in this business model and identify innovative best practices to counter these. These include: managing the parent-subsidiary relationship, setting up an offshore facility in Pakistan, and building a quality software development operation. Some salient examples of this type of business model in action are: MetaApps, ITIM Associates, Clickmarks, Trivor Systems, and Strategic Systems International etc.
The taxonomy of generic software business models may be helpful in several ways. Firstly, it gives us a relatively easy and comprehensive way to classify a particular software operation into a broad enough category of organizations and a hence a reference point to compare ourselves against. Secondly, it highlights the importance of understanding the strengths, weaknesses, pre-requisites, and structural limitations of each of the generic software business models. It is also important here to understand that while transitions between these generic software business models are possible, they are not necessary or automatic. None of these business models is essentially good or bad, they are just different and one must pick the particular model that best suits his/her idea-offering-destination mix.
We conclude the study with a brief review on environmental and policy bottlenecks that have hindered the growth and development of the software industry. This is, by no means, an exhaustive study or even a comprehensive list of policy issues but rather a description of our statistical and qualitative findings. The country’s image, over-and-above the company’s brand, tops the list as the problem identified by as many as 68% of all respondents. This is followed by quality of manpower (56%), the cost of IT/Telecom infrastructure (50%), and law-and-order and security situation (48%) as the most important problems from the perspective of all-types of firms combined. While there are variations between how each of these may disproportionately affect various sub-categories of organizations, image, IT/Telecom infrastructure, and HR appear to rate consistently as among the top-5 problems in all categories. We also faithfully narrate several proposals, put forth by our interviewees, to address some of these issues.
On the whole, 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. Although the industry has come a long way since its first company opened shop in 1976, it has only been in the limelight—for investors and policymakers alike—since the early 1990s. 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 better-than-last-year performance in 2005. Another encouraging sign is the increasing number of Pakistani-owned foreign firms being located to Pakistan as well as the reverse brain drain being caused by returning Pakistani entrepreneurs who see the relatively less competitive and virgin market at home as a tremendous opportunity for setting up a Pakistan-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 domestic-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 now-effective WTO trade regime. The former has already begun to show tremendous promise with around a billion dollars of promised investment in last year alone. An investor whom we spoke to sees the situation as the fading away of the Old Pakistan and the Emergence of the New Pakistan that is effectively linked to and a significant player of the global economic system. The New Pakistan presents considerable promise and opportunity to those willing to bite at it. There are live examples of companies—TRG, SI3, LMKR, Netsol, Techlogix, Etilize, TPS and many more—that have capitalized on this new set of opportunities and positioned themselves to reap the rewards.
There are, however, considerable, although not insurmountable, challenges too. The industry suffers from a serious professionalization and institutionalization deficit. The 200-people barrier, although psychological, is real till it is actually broken—and broken convincingly and forever. In addition to the 200-people barrier, we also face a 20-people and a 2-people barrier that requires as much attention as the former. Many of our very innovative firms continue to resist professionalization and thus fail to grow beyond a particular size. The industry is hungry for capable investors/acquirers to come forth and bring about paradigm shifting structural changes to these companies and enable them to move to the next higher level of growth. The fast maturing market of outsourcing and offshoring services necessitate that our entrepreneurs and business leaders think about new ways of doing things. It is unlikely, given the consolidation in the outsourcing industry, that we would see a new player replacing Wipros, Infosys’, or TCS’ of this world. Rather than blindly copying the already well-established countries and players, we must think creatively to devise a model that best suits our own strengths and weaknesses. Our ability to lead in the business model innovation would determine, to a large extent, our place in the future pecking order of software exporting nations. Playing the volumes-game (ITES/BPO), without the requisite scalability and HR, is unlikely to succeed on an industry-wide scale. Until we can resolve the scalability issue, we must learn to play in the equally lucrative ideas-game.
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.
More detailed version--a 25 page paper, 125 page report, and briefing slides--of this study's findings are available on the project website: http://paksoftwarestudy.vttp.org
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Footnotes:
[1] A widely quoted GOP target of $1B in software exports by Y2000 would have propelled Pakistan into the exclusive tier-1 club.
posted by Athar Osama at
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