Bold Policy Actions Needed to Transform Pakistan's IT/ITES Industry -- By Athar Osama

In the Indian IT Industry, there is a popular saying that goes like this: "IT was the only industry that the Indian government didn't understand well-enough to intervene in and hence destroy". In Pakistan as well, public policy, has played a fairly controversial role in the development of IT Industry over the years. For most of the 1990s, Government's policies towards the IT Industry were a little suspect, not because the government was doing too little, but because it was doing too much and mostly in the wrong direction. Dr. Atta ur Rahman, the then Minister of Technology in Pakistan, pushed up the hype of the IT bubble in Pakistan by touting the ease with which developing countries could join the race ("all you need is a computer and an internet connection"). While it sure was easy for someone in the developing world to go online—and many thousands did—developing quality software that could sell in the international market—or even domestically—was an altogether different ballgame.

The hype around IT in the 1990s resulted in the creation of hundreds, if not thousands, of "mom and pop" IT training institutes across the country and the government pumped money in providing Internet to 1000 villages all across Pakistan. The expressed purpose for investing in bringing Internet to Pakistan's thousand villages was that somehow, by doing so, Pakistan would be better prepared to become a software exporter around the world. As if browsing the internet and not reading a book was the most critical skill that was needed to create the next generation of human resources in Pakistan! Indeed, ignoring even the most basic arithmetic of the IT exports business, the government announced that Pakistan would surpass $1 billion mark in software/IT exports by the year 2000. Needless to say, this was never meant to be.

Today, things have changed considerably. On the positive side, I see signs of considerable sophistication through learning within the industry. Many naive entrepreneurs who formed companies in the early 1990s, believing in the mantra of if "I will make it, they will buy", have now come to realize the value of domain expertise, of specialization, of marketing, and of quality in software development. Increasingly one is seeing software operations being set up as having with a real strategy, a focus, and a vision rather than mere glorified software job shops. The reverse "brain drain" of ex-patriots— bringing fresh ideas, capital, and contacts with them—has also aided in the process. On the negative side, however, the industry faces serious organizational and management challenges (the "200-person barrier"), a shortage of middle management, not enough depth in the human resources pool, lack of venture finance, and most importantly, lack of an inspiring world class success story.

For better or worse, we have created thousands, perhaps hundreds of thousands, of relatively low-skilled IT workers and an IT industry has begun to emerge in Pakistan. More than anything else, I believe, it is important that our own little IT "revolution" must see the light of the day and that the hundreds of entrepreneurs that have dared to venture must feel the sweetness of success. The problem with policy now, as against in the 1990s, is that while it is doing several things that are likely to generally affect the growth of IT industry, it is not tackling head-on some of the biggest policy challenges faced by the industry.

The policy calculus is quite clear. Our policymakers need to make a decision whether their objective is to build an industry that challenges some of the emerging countries (even second tier countries like the Philippines, Malaysia, Ukraine etc.) and achieve some level of substance or continue to linger on as a third or fourth tier country with little to show of. Either of the scenarios are possible and the choice between them is one that must be made by the country's policy and business leaders. There is no harm in deciding that we wouldn't compete for a place on the victory stand. Not every country does. However, should the latter be our priority, we must be willing to undertake actions commensurate with that decision.

In short, while the industry continues to grow, it suffers from being caught up in a low-level equilibrium. As is, the industry would continue to grow at a healthy 20-30% per annum--and many entrepreneurs that I spoke to already foresee better years ahead after some depressing times during the dotcom bubble burst and recession of early 2000s--but the industry would probably not go through a major leap-forward or any dramatic transformation--as has happened for the Indian software industry in late 1990s--anytime soon. The reasons for this are both individual (at a company level) and collective (at an industry and policy level). While the company-level issues have been addressed in my report (available at: http://paksoftwarestudy.vttp.org/), here I would address some policy lapses and collective failures. So here goes my list:

Infrastructure, Infrastructure, Infrastructure!

If there is one thing that the Indian Government did, and did well, amongst the otherwise policy of "fits and starts", it was the emphasis on the provision of infrastructure for the software Industry. In 1986, the Indian government launched its Software Technology Parks of India (STPI) scheme that has grown to include over 25 locations across India today. The 1987 landmark decision that allowed Texas Instruments to install the first private satellite link with outside world provided the IT/Software exporters a way out of the government monopoly on telecommunications capacity and created enough backup and supplementary capacity to link Indian software companies with their American counterparts very early on in the IT revolution.

Pakistan's IT industry not only suffers from a lack of physical infrastructure (office space, to be more precise) but also from a lack of more distributed, accessible, and redundant telecommunications bandwidth-capacity. The events earlier this year, that resulted twice in cutting off of Pakistan's only Internet link with the rest of the world (through the SEA-ME-WE3 submarine cable) have been and must be an eye-opener for the country's policy establishment that had pretty much adopted an ostrich-like attitude so far. In the world of BPO and IT-enabled services, you cannot expect to gain any business, what to talk of big business, if you cannot provide fault-free 24-7-365 mission critical reliability to your customers. Any less would not work. One cannot blame the businesses for not doing enough if the culprit is a submarine cable that is clearly a public good and hence the responsibility of the government. The government of Pakistan must do what a government ought to do i.e. invest in common infrastructure that--for reasons of free-riding and collective failure--companies would under-invest in if left to their own device. For the importance of bandwidth redundancy, this must be government's first priority. The government has failed that test in the past.

A Clear, Consistent, and Uniform IT Investment Policy Regime.

The second element of a suggested policy regime is the presence of a clear, consistent, and uniform IT investment policy. Attracting IT investment into Pakistan is not only critical for creating an image of success and hence the "buzz" that would feed onto itself but also to exposing the local market to foreign ideas, management practices, and capital. This cannot, however, be done if the government policy on the matter is inconsistent, confused, and arbitrary. The government needs to develop a policy case that determines the right parameters of an investment policy to attract foreign investment in the IT sector.

The policy of providing tax-free status to the IT industry has clearly not worked as well as one would have expected primarily because countries are locked-in into a race to the bottom as far as providing incentives is concerned. If the government of Pakistan decides that attracting investment is a big priority--and it should be if IT industry in Pakistan is to get out of is current low-level equilibrium--it must take an unconventional approach to incentivizing investment in Pakistan. One of the ways to do so is to develop a package of incentives specifically designed at attacking other policy bottlenecks (e.g. real estate, manpower training etc.) that would level the playing field for foreign companies looking at alternative offshore destinations. It is not necessary that these incentives be an outright subsidy but rather a carefully designed package that recovers its value ( e.g. through employment generation, tax revenues) in a short period of time.

What is very important, however, is not only that such a policy exists but also that it is openly communicated and, based on a pre-defined criteria, is automatically available to all, and is applied in a fair, transparent, and consistent manner. This would ensure that when a local company gets into negotiations with a large foreign partner for acquisition or a major customer that requires mobilization of considerable resources and upfront investment, it has a bankable guarantee from the government of Pakistan to put on the negotiation table that clearly says: if you invest $x in Pakistan, GOP will support (and make it cheaper for) you to do so by providing a set of incentives amounting to $y. This way it would be possible for foreign entities contemplating investing in Pakistan to assess and incorporate these incentives in their decision calculus. This would also put an end to the politics of backdoor incentives and create a level playing field for all. The math for this policy arrangement must be worked out, and the investment strategy and/or incentives offerings must be devised with great care because of the possibilities of misuse inherent in such an open-to-all commitment. Careful analysis must be undertaken as to what sort of incentives are most likely to sweeten the bargain for a potential foreign investor just enough to push him/her over the edge and clinch the deal for us.

Fighting the Image Problem Systematically and Collectively.

Pakistan has a serious image problem around the world. There are no two ways about it. Even though the image problem might merely be an issue of perception rather than reality, it can have serious consequences for economic interactions of the kind that are needed to jumpstart an IT/ITES industry in a major way. While some companies may be able to get around the image issue through clever tactics or due to the long-established reputations of their founders, it is difficult for an average Pakistani entity to knock on its clients' doors and introduce itself as coming from what is largely seen as world's backwater. The image becomes all the more important if one attempts to sell Pakistan as a possible destination for migrating a critical part of a client's business operation. While every one of us tries to do something about this as a necessary cost of doing business, branding Pakistan is not the job that any company can seek to achieve individually. It is the collective job of the entire industry and one that the government must become an equal partner in.

Developing Pakistan's image vis-a-vis the IT industry would require concurrent action on two fronts. On the economic/industry level, Pakistan's IT industry must brand itself as a dependable destination of quality products and services very much like India Inc. and IITs have now become well-recognized brands of hard-work, intelligence, and quality. This is something that is best undertaken by the Industry itself, not only by providing quality services and products in the first place but also by actively undertaking activities that generate and disseminate knowledge and success stories about the industry (e.g. for an example of one of the several ways India does this, look at the work of India Brand Equity Foundation, a public-private partnership: http://www.ibef.org/). Why is it that Pakistan's IT industry does not participate in conferences at major US Universities (e.g. like India does at Wharton, Stanford, Kellog etc. every year) or PASHA fund a regular series of reports and studies like NASSCOM does. Clearly, the industry has thus far lacked the collective will to cooperate and undertake what is necessary for its collective future.

In addition to this economic/industry branding, Pakistan also requires concurrent political/country branding as well, for without the latter the former alone would not work. Twice a year, our president, prime minister, and/or the minister of IT visits America, makes a few statements on TV, and believes that their job is done. Nothing can be far from that. In Washington, and elsewhere, country's image are made through sustained and meaningful interaction with academic and business leaders, policy-makers and politicians. We have to make a strong political statement and Washington (and elsewhere) that Pakistan is a very important strategic ally and that its makes perfect economic and political sense for the US business community to engage with and invest in Pakistan. It must be emphasized that making Pakistan a partner and beneficiary of the global economic order is only going to strengthen Pakistan's resolve to fight extremism in its own society and elsewhere. Pakistani decision-makers need to understand and appreciate how the game is played in Washington and play along.

Quality and Quantity of Human Resources.

The quality and quantity of human resources is another critical issue facing Pakistan's IT industry. "cheap" labor that is often touted by the government (and the industry) as a strategic advantage for Pakistan is, in reality, a major weakness. Not only do we produce software professionals (programmers, managers, entrepreneurs) in numbers that are sub-critical for the development of an industry but we also fail to provide the kind of quality that is needed to do so. According to one senior policy-maker, of the 5000 or so IT professionals produced within Pakistan's various IT institutions only 1000 or so are immediately employable.

Yet the policymakers in the country fail to take the issue by the horns. In fact, they are in a state of denial. I learnt about this first hand when I was doing the study on Pakistan's software industry last year. Having talked to tens of industry leaders and CEOs, and tabulated the data on policy bottlenecks, it became quite clear to me that the industry suffers from a serious shortage of quality manpower. Yet, when I approached one of the senior policymakers on the subject, (s)he refused to even acknowledge the problem. "The Industry leaders don't know how to run their businesses, and end up blaming the government for their own problems", was the typical response I got. Needless to say that during the consultative sessions held with the industry leaders, that this policymaker also attended, (s)he was forced to undergo a 180-degree change in his/her viewpoint on the subject. It would take still greater effort for this change to trickle down to actual policy in the field and even more for this policy change to have an effect on the ground.

The human resource situation is an issue that requires serious acknowledgement and action on the part of our policymakers. It is also something that cannot be transformed overnight. Substantive changes in the country's human resource situation requires years, if not decades, to come about. It would also require the IT policymakers to work closely with those in HEC as well as the industry in designing a quality curriculum and bridging the deficiency of trainers in the country. This must, however, be done at the earliest so that its benefits may be reaped several years down the lane. Failing to act would only render Pakistan's IT industry stunted, sub-critical, and hollow from within.

Everything Else: Domestic Market, Venture Capital, Intellectual Property Rights etc.

While it is important for the Pakistani policymakers to take on the four challenges identified above, namely, infrastructure, investment, image, and HR, head-on, other policy actions may also be necessary to ensure an unrestricted growth of Pakistan's IT/ITES/BPO industry. The creation of a vibrant domestic market for IT is one such area. Several of the IT leaders that I spoke to complained about the lack of government contracts to IT Industry. They complained about the slow progress on the e-Government initiative, the award of major contracts to large public sector (chiefly, NADRA) and foreign entities etc. They rightly argue that America's Silicon Valley or Boston Route 128 would probably not have been developed had it not been for major defense R&D contracts given to local industry in these regions. The government policymakers, on the other hand, complain about the industry's lack of sophistication. "They can't even properly reply to RFPs, what to talk of actually having the capability to deliver even a moderate complexity e-Government software", claims one leading policy-maker, suggesting that how can (s)he, in good conscience, give a multi-million dollar project to a company that doesn't demonstrate the capability to deliver. There is some truth to both sides on this argument.

In the end, however, what is perhaps required is a careful calculation on the part of both the policymakers and the industry as to what sort of "investment" should the former be willing to make in a certain amount of "learning-by-doing" for the industry. True, it might take $3 million (and a lot of hits-and-trials) instead of $2 million to make a software the first time around, but that cost maybe justified as investment in future capacity. It happens all the time even in the developed world and there is no harm if it happens in Pakistan as well, provided it happens in a manner that is carefully thought through and monitored so that it doesn't end up becoming one of those deletion programs of yesteryears. Creative use of policy (for example, by requiring "local content" requirements or partnerships on foreign contracts) can further reduce the cost of this learning-by-doing.

Other issues that require some policy interventions, although not at the level alluded to above and certainly not as urgently as in the cases identified above, are the provision of venture-risk capital, and the establishment of intellectual property rights etc. Each of these issues require careful analysis of the various policy options and the development of a comprehensive policy regime that addresses these in a substantive manner. It would also require concurrent commitment on the part of the industry itself. This can be achieved through a public-private partnership designed at making (and realizing the benefits of) contingent commitments by both the public and private sectors.

A contingent commitment model would require the industry to identify its most urgent policy needs that are really, to their best judgment, are hampering the growth of the industry followed by a commitment to grow the industry (revenues or size) to a pre-set target if these needs were met. This would ensure that the industry brings forth issues that are really show-stoppers for it--and not merely resort to asking for undue favors or subsidies--and is then held accountable for showing results once these issues are addressed. The process of issues identification, target-setting, and performance monitoring must also be carried out in a consultative and transparent manner to avoid under-the-table favors and/or launching yet another initiative that fails to deliver.

The author is a Doctoral Fellow at the Frederick S. Pardee RAND Graduate School for Policy Studies in Santa Monica, CA and specializes in Technology and Innovation Policy. He may be contacted for comments and suggestions at Athar.Osama@gmail.com.

A Modified version of this article was published in Dawn, Science and Technology (February 4, 2006) and Science and Development Network (SciDev.Net) at: http://www.scidev.net./Opinions/index.cfm?fuseaction=readopinions&itemid=484&language=1

IT's Lost Decade: Does Pakistan of Today Mirrors India of 1995? -- II

IT's Lost Decade: Does Pakistan of Today Mirrors India of 1995? -- II
By Athar Osama
An abridged version of this article series was published in Dawn, EBR, July 4, 2004

In this first of this series of two articles, I outlined the primary motivation behind undertaking this analysis. I also laid some ground rules and identified sources for comparing the early performance of India's software/IT industry with that of Pakistan today. I then went on to trace the beginnings of the Indian software "miracle". Finally, I attempted to introduce some statistics that are available through various sources, to develop a more concrete sense of the state and dynamics of the Indian software industry up until mid-1990s. As I did that analysis, I also briefly outlined and discussed major similarities and differences between the Indian software industry and that of Pakistan. In this article, I would continue my examination of the Indian software industry as it stood in 1994/95 with some additional insights on its qualitative features. Then I would turn to some analysis and prescription for other countries aspiring to do the same.

A Brief Recap

In the way of a brief recap of the first article, I discussed the early days of the Indian software industry as it rose from the shadow of a much larger and mature hardware industry. The article also noted a curious contradiction in early Indian policy towards software as it linked permissions to import computer hardware with future commitments to export software. Not only did this result in half-hearted attempts to export software--the earliest of Indian software companies were not really in it for the exports, per se, but rather for the ease with which they could import computer hardware in the name of writing exportable software--but also much of the imported hardware actually ended up being leased out to the domestic market.

As the Indian software industry moved ahead, however, the domestic market for software created its own demand. IBM's departure from India in 1978 provided 1,200 "surplus" employees and was partially responsible for jumpstarting an entrepreneurial software Industry in India. The growth of the Indian software industry--increasingly outward-looking in its outlook--in the early days, however, was not without stops and jerks. For individual companies it was often a roller coaster ride with huge swings in annual revenues. While the gross annual export revenues for the entire industry grew from $4million in 1980 to $480 million ($168 million net of onsite expenses) in 1994/95, it had repeatedly missed the government target of $1 billion mark. Thus in 1994/95--the reference year of our analysis--the Indian software industry stood at a much stronger position from its humble beginnings in 1974, albeit (perhaps) with little real sense of the dramatic transformation that was to happen in the following decade.

Product-Service Offering and Client Mix

Up until the mid-1990s, the Indian software industry mainly relied on export of software services--custom software development (conversion and application building) work (~90%)--rather than software products (<>Firm and Industry Structure

In the early days of the Indian software industry, we also observe over-reliance on a single (or a small set of) client(s). Between 1989/90 and 1994/95, eighteen of the top-twenty five software firms in India did majority of their work for a single foreign client. This over-reliance on a small set of clients accentuated the volatility of the companies' performance. For example, barring the top-3 companies in India, all of the companies that occupied the rest of the slots in the top-10 list had slipped down and off the list or gone out of business.

We find many of the above organizational characteristics prevailing in Pakistan's software Industry today. The over-reliance on a small set of clients has been a major bottleneck in the growth and diversification of the industry. Barring some exceptions, companies have resisted in investing in systematic marketing and brand-development with the result that they have failed to diversify their client base. Even the largest companies do not service more than a handful of clients and are dependent upon them for their continued viability. According to the PSEB study on Pakistan's Software Industry, companies, on average, derived as much as 50% of their revenues from a single client and between 70-90% from 5-largest clients. Although the trend was less extreme for product companies (generally operating in the domestic market) but it points in that direction, nonetheless.

The Indian software industry was also a very concentrated one. For a very long time, Tata Consultancy Services and Tata Uniysis Limited dominated the market share for Indian software exports. The two companies had the combined market share of upto 73% in early 1980s that only gradually decreased to 25% in 1994/95. According to DoE and Dataquest surveys, as late as 1989, 80% of the Indian software exporters had export revenues less than $50,000 per annum.

While Pakistani software Industry is not as concentrated as that of India's of the early days--primarily because there is no one leader that has made it big on the scale that Tatas did--but it too does have a very long tale. According to the above referenced PSEB survey, only 4 of the 60 largest software operations in Pakistan reported revenues greater than $5 million, although 50% of the companies surveyed had revenues in excess of a half-a-million dollars. While the dollar-figures are not comparable due to temporal and inflationary differences, the degree of concentration in the Pakistani industry of today is considerably less than the Indian industry of 1990s--a fact further amplified by the sheer number of companies in India (>1200 in 1994/95) vs. Pakistan (~3-400 in 2004, per PSEB/PASHA estimates).

HR and Manpower Situation

Numbers of software manpower in India are a little sketchy and of less credibility. Firms are reported to exaggerate manpower numbers to present a rosier picture of their capability than was actually true. Heeks, therefore, asks his readers to treat these numbers with caution. He puts together a set of "rough" figures gathered from a whole variety of government and private-sector sources as well as his interviews with industry executives prior to 1994/95. These data put the size of Indian software labor force at 15,000 in 1990 (around 6,500 of whom were engaged in export work) and around 50,000 in 1995 (27,500 of whom were engaged in export work). Other estimates suggest that, in addition to the above pure software work, as many as 150,000 workers were involved in data entry and processing work of various kinds around 1995. These latter figures, however, seem less credible than the pure software development figures as Heeks himself earlier suggested that the outsourcing/BPO type work at that time was nowhere as prevalent as these manpower figures suggest.

Compared to these figures, Pakistan's software industry appears to be relatively small in terms of manpower and employment. The PSEB Best Practices study puts the total employment in 60 of the most prominent (and larger) firms that it surveyed at around 5000 people. Another internal PSEB study whose results were shared with this author put the entire software industry size at around 8000 people. Even if one adds a tentative number of another 10,000 or so people who are involved in various kinds of ITES/BPO operations ( e.g. call-centers) in the mix, the total industry size is certainly not more than 20-25,000 people. This makes the Pakistani software industry today around half to a third of the size of India's software industry in 1995. While it would be a mistake to read too much into these figures--primarily because of their suspect credibility and lack of rigor--the broader trend is unmistakable.

The Indian software industry of that time, not very unlike Pakistan's software industry of today, suffered from high attrition and turnover rates. Software companies routinely lost 15-20% of their staff each year with some reporting an attrition rate as high as 50% in a single year. According to Heeks' estimates 10-15% of those who changed jobs went to work or study abroad. This was in addition to the regular rotation of employees that was common due to the practice of bodyshopping. According to one estimate, of the 20,000 people engaged in software exports in 1995, around 10,500 or so had worked abroad at some point during the year. Many of the people who worked on clients' sites, at one point or the other, broke off and went to work for the client.

Despite this healthy churn of employees, we still find complaints about difficulties in obtaining visas for Indian workers to work abroad. One interesting, yet confusing, anomaly that we find is the very little mention of India as the modern day manpower behemoth that it is widely acknowledged today. Heeks, for example, does not substantively talk about the role of IITs (Indian Institute of Technology) in his entire book. Infact, the word IIT is not even mentioned in the index of subjects. While there is no doubt today, about the role of IITs in the making of the Indian software miracle and much of that apparatus was already in place during the timeframe of interest for this study, this lack of interest and mention of IITs suggests that perhaps their role received national and international prominence and recognition after 1995.

Quality and Productivity

Worker quality and productivity has often been an issue of much anguish in Pakistan. The shortage of middle management, people with project management experience, and low-quality of manpower churned out by mom-and-pop IT schools (and even some chartered universities) have often been cited as reasons for lack of quality and growth in the Pakistani industry. Heeks study provides some, albeit tentative, insight into productivity and quality of Indian software workforce and industry. Some of these figures, however, are quite unreliable. For example, Tata Consultancy Services (TCS) had a productivity of around $18,000 per employee all through the 1980-94/95 period, yet it is suddenly reported to have shot up 25% (to $24,000/person) in just one year thereafter (p. 98). Despite these discrepancies, however, there are some discernable patterns. For example, productivity ($/person) of onsite work is twice as that of offshore work, of export work is two-to-three times as large as domestic work, and for multinational subsidiaries is higher than that of locally owned operations.

For Indian software developers working onsite, their personal productivity (i.e. lines/programmer) is as high (or even higher) than their western counterparts. The programmers working offshore, however, seem to lag in terms of productivity than either onsite or foreign programmers. Many of these productivity differences seem to be caused by lack of resources (capital per programmer) and managerial skills (p. 100). Heeks also talk about the overall quality culture in Indian companies and the practice of seeking quality certifications.

Very much like Pakistan which actually seems to be following and Indian model in this respect, an observer talks about "India being struck by...'ISO 9000 fever'...from 1993 onwards" ( p.111). By 1996, 30 or so companies are reported to have been ISO 9000 certified. Heeks also documents a healthy degree of skepticism among industry players and executives of the value of seeking certification as an end in itself rather than a means to and end. In 1995, the practice of CMM certification had not become as common as it is reported today. Infact, Heeks suggests that majority of the companies only operate at ISO 9000 equivalent of CMM level 1 and 2 "thus putting [CMM] certification beyond their capabilities for some time to come." As with several instances earlier, we find the above situation to be fairly accurate picture of Pakistani software Industry as it stands today.

The Bottomline: If It Seems Familiar, It Probably Is

In a nutshell, in many more ways than we all anticipate, Pakistan's software industry of today (2004/05) resembles that of India from a decade ago (1994/95). Many of the readers--software industry executives and policymakers--would probably look at the state and dynamics of the Indian software industry as described in this and the preceding article and would notice the striking similarities but also some differences. Both industries developed primarily in the shadow of their hardware counterparts in the respective countries, albeit with a lag of a few years. Although the Indian governments' early policies towards computer industry (and hardware in particular) was much more restrictive than that in Pakistan, the two industries share a strikingly similar evolutionary trajectories. Striking similarities are also evident in the target setting process, the product-services mix, and the early quality dilemmas etc.

In addition to the above similarities, there are several significant differences too. First, the degree of concentration in the Pakistani software industry is much less than that in India's. There are no Tatas or Wipros in Pakistan. The ratio of revenues between the most successful and the median firm in Pakistan is around 1:100 against 1:2000 in India. In Pakistan, as against India, we find very little involvement of the country's large business houses in the software industry. Not that Pakistani business houses have not ventured into software but they have failed to create sustainable software businesses. The performance of Cressoft, Atlas Software, Kalsoft stands in sharp contrast with Tata Consultancy Services. While the reasons for this fact maybe debatable, the trend itself is undeniable.

Secondly, with an exception of NCR, Pakistan has never been seriously considered by Multinational software firms as a software development hub for their activities. This is in contrast to the early recognition of India's potential by the likes of Citicorp, TI, and GE that gave a certain boost to the Indian software industry. Third, Pakistan has seriously suffered (and continues to do so) from a weak HR pipeline, both in terms of quality and quantity of its product. This, to our mind, is the single most important hindrance in the development of Pakistan's software industry and the key differentiator between where it stands today vs. where India's software industry stood a decade from now.

Nations' histories are often deeply and irreversibly affected by idiosyncratic factors and events. Economists use the term "path dependence" to convey the notion that where nations (or industries) stand at a given instance in time is basically a reflection of a set of choices or events at various points in the past. While it is often difficult to attribute the exact benefit or harm caused by a particular event or factor, or even imagine what the counterfactual would have been but the practice of doing so remains in vogue. The Indian software industry, throughout its history, also faced quite a few of these factors and events that stand out as having significant influence on its outcomes. From as far back as the creation of IITs in 1950s, to the departure of IBM from India in 1978, to the practice of "bodyshopping" in the mid-to-late 1990s, these factors played crucial roles in the evolution and strengthening of the Indian software industry at these particular instances in time.

They, infact, can be credited for putting India onto an altogether different "path" or trajectory of development. The first provided a strong foundation for the software miracle, the second provided the entrepreneurial impetus, and the third, the final touches by creating a professionally competent and well-connected workforce. While it is hard to imagine how the Indian software industry might have evolved had there been no IITs or had they not practiced and perfected bodyshopping, the fact remains that these events did happen, either consciously or unconsciously, and changed the face of the Indian software industry. They also probably set it apart in from the Pakistani software industry and essentially gave India the head-start--and a decisive first-mover advantage--that it enjoys till this day, not only over Pakistan but also the rest of the world.

Did the decade of the 1990s, the one that Joseph Stiglitz, a Nobel Economist describes as the "roaring nineties", constitute a lost decade for Pakistan's software industry? In many ways, the above analysis provides an inkling into a possible answer to that question. Having started at pretty much the same time (mid 1970s) and progressed in similar fashion, Pakistan's software industry of today stands, like shadow of a much larger and well-recognized Indian behemoth, but it is very similar to what India was in 1995.

Many Pakistani software executives and CEOs would probably differ with my characterization of the 1990s as a lost decade for Pakistan. They would highlight the tremendous hard work and toil that they have put into the software sector during all of the nineties. In that particular respect I would understand, and probably agree with their judgment. However, the fact on the ground remains that Pakistan's software industry seems to have lost out on the tremendous opportunity that India's software industry capitalized upon in the 1990s. We would probably be justified to look for reasons and determinants of this lackluster performance in the decades prior to nineties (1980s or even earlier).

As Pakistan's software professionals, executives, and policymakers woke up to the opportunity in early 1990s, India was already well-place and on its way to capitalizing on the windfall. As they say, "if you can see the bandwagon, you've already probably lost it". The nineties marked the loss of that opportunity for Pakistan.

What Does This Mean for Pakistan's Software Industry?

What does it all mean for Pakistan's software industry, and that of other countries at similar level of development and facing the near perfect dominance of India? Would Pakistan's software Industry, having lost the opportunity by a decade, continue to grow in the manner similar to India's? Does the above analysis point towards a future where much of the disparity between India and Pakistan might be bridged someday? These are not easy questions for any industry analyst to answer.

There are several trends and counter-trends that point to different outcomes and development trajectories for the players in question. What is quite clear to even the most cursory of the observers, however, is that the IT/Software industry worldwide is now entering a phase of maturity after the crazy nineties. The investors who lost big time in the dotcom revolution--if there was ever one--are now more intelligent about investing in IT as are corporate and individual users ( e.g. CIOs) and entrepreneurs. Many of the trends that accentuated India's emergence on the world software scene (e.g. the Internet bubble, the millennium bug, and bodyshopping etc.) are perhaps a thing of the past--never to be repeated again, not atleast in the manner in which their confluence led to the dotcom bubble and its burst.

There are some counter-forces and mitigating factors as well. Firstly, the India of today is not India of the early 1990s. With somewhere between half-a-million to a million people already engaged in IT/ITES area, India is suffering from a huge strain on its HR and infrastructure capacity. The costs of setting up businesses and hiring talented programmers and managers are increasing by the day. The trends are so strong that government and private sector have been forced to look beyond the traditional Indian IT/ITES destinations like Bangalore etc. for software talent.

Secondly, the Indian government recently revoked the tax holiday on offshore operations of foreign software companies operating in India. The 35% tax is likely to hugely affected the cost-benefit calculations of foreign companies who have long viewed India as a cheap development center. Many industry observers, among them Anthony Mitchell of InternationalStaff.net who has long helped US companies outsource to India, view this as the single most significant action that has suddenly put other countries, like Pakistan, in the run for the big game.

Thirdly, while India has successfully milked its early-mover-advantage for years, there might be some late-mover-advantages up for grabs too. Pakistan, and other countries, might benefit from tremendous know-how and experience that has been generated as a result of a decade of experimentation that has gone into the Indian software industry and strategically place themselves in a well-defined and less competitive niche. This would, however, require business acumen and innovation to not follow the pack but rather innovate from a market-offering and organizational standpoint.

Looking at things as they stand today, one can probably make a fairly credible guess of the fact that Pakistan's software industry would not have the "luxury" of learning-by-doing at the clients' premises as India had in the form of bodyshopping in mid-to-late 1990s. But could there be something else? One of the very important lessons that one can take away from India's success story is the virtue of being prepared to capitalize on opportunities rather than seeking the "next big thing"--a lesson often lost on the Pakistani policymakers and business leaders alike.

When India's political leaders laid the foundation of a well-functioning tertiary education system in 1950s, they certainly did not have the current IT revolution in mind. IT had not even been invented in India at that time. Yet, by creating quality human resources--scientists, engineers, managers, and policymakers--they positioned India as a country that could capitalize on an opportunity as and when it arose. That's precisely what happened in early 1990s. The public policy lesson, for Pakistan and its likes, is to pay emphasis on long-term foundational investments in infrastructure, international goodwill, and human resources so as to quickly position themselves for the next big thing, as and when it becomes apparent what that is going to be.

Till that happens, Pakistani software professionals, business leaders, and policymakers must approach the strategic and policy-environmental challenges identified in the PSEB Best Practices study to forge ahead against formidable reputational and capability-based entry barriers. As many who toil for the cherished goal have discovered, it will certainly not be a walk-over that many naively expected in early 1990s, but rather a long and hard slog. But, in the end, it might be one well worth all the effort.


Athar Osama is a Doctoral Fellow in Policy Studies at the RAND Graduate School for Policy Analysis in Santa Monica, California. He specializes in technology and innovation strategy and policy areas. He maybe contacted at athar.osama@gmail.com

IT's Lost Decade: Does Pakistan of Today Mirrors India of 1995? -- I

IT's Lost Decade: Does Pakistan of Today Mirrors India of 1995? -- I
By Athar Osama
An abridged version of this article series is published in Dawn, EBR, July 4, 2005

One question that often floats around among Pakistani IT/software entrepreneurs, investors, and policymakers alike is whether or not and to what extent does Pakistan today represents an industry dynamic that is similar to India's from a decade ago? The underlying reason for seeking an answer to the above curiosity is to understand whether or not the current development of Pakistan's software industry represents a lower level of development in the natural progression of such an industry, as epitomized by India's, or if it represents a fundamentally different development trajectory. This is a perfectly legitimate concern for those aspiring to follow the example of Indian software Industry and replicate it at home.

To be fair, however, Pakistani entrepreneurs, investors, and policymakers are not alone in this aspiration. Many other countries around the world like Russia, China, Ukraine, the Philippines, Iran, Malaysia, and several countries of Eastern Europe aspire to become the next India or, at the very least, claim a respectable share of world's software export market. Only Ireland, Canada, and Israel--the lesser-powers of the software world--seem to have uniquely independent industrial development trajectories. Many policymakers, thus, spend sleepless nights thinking, strategizing, and day-dreaming about the goal of doing what India and China has done with the software and manufacturing industries respectively.

And it is, by no means, an unworthy goal to seek. Last year alone, India exported over $17 Billion worth of IT/ITES/BPO services to the world. Starting from scratch in 1970s, the Indian software industry has become the virtual "back-office" and "data-center" for the rest of the world. The dominance of Indian companies on the software export markets is reported to be so overwhelming that it accounts for around 50% of all "exportable" software and outsourcing services from the western world. Increasingly, therefore, India is being dubbed and embraced as an "emerging regional power" and a "software super-power" in capitals around the world.

How did India do it? Is the "Indian Miracle" replicable? One way to address this question is by looking at the early development of the Indian software industry and compare it with that of a new software exporting nation, like Pakistan of today. It is ironic, though, that despite all the hoopla of attempting to follow India's footsteps, the Indian software miracle is little studied and understood in the neighboring Pakistan. We use this opportunity to inform this analysis by comparing the software industries of these two countries. While these comparisons are tricky and their policy implications are subject to varying interpretations, they are nonetheless a first step towards understanding the Indian software miracle that may then lead to a prescription for an aspiring nation.

Some observers have already pointed out to anecdotal evidence in that respect. One notable observer, Mr. Anthony Mitchell, the CEO of InternationalStaff.net--a US company that specializes in linking US clients with Indian capacity in ITES/BPO arena--recently spent a month in Pakistan, scouring the country's growing software industry and concluded that what he saw in Pakistan was very similar to how he found "India of the early 1990s" to be. For policy prescriptions at the national level and strategic planning at the organizational level, however, we need systematic and undisputable, rather than anecdotal, evidence.

Setting The Ground Rules

This article is a first attempt to bring some systematic analysis to the above question. While there is a lot of hype around the rise to prominence of the Indian software industry, systematic analyses that stand any kind of scientific tests are few and far between. Many of these are of a much recent vantage than what is needed to carefully examine the Indian miracle ten years in the past. We use Dr. Richard Heeks' work on the Indian IT/software industry as the reference for this analysis. Dr. Heeks--a lecturer in Technology Management at University of Manchester's Development Informatics Program--has spent well over a decade (starting from late-1980s to early-1990s) studying and writing about the Indian software industry and is now recognized as one of the authorities on the subject.

Our choice is essentially driven by three reasons. First, unlike some other, more recent, attempts to document the Indian software industry, Heeks' work fully encompasses our time-period of interest and beyond that in a very substantial manner. Heeks' earlier work, therefore, is un-tainted by the later-year hype around the Indian software industry. Second, unlike some of the more recent Indian academics (notable exceptions do exist), Heeks comes out as an impartial objective observer of the Indian "miracle". There is, therefore, a greater likelihood that Heeks' is the least biased of all the accounts for Indian software industry. Third, Heeks' treatment of the software industry is academic and comprehensive and it incorporates that of several other authors/academics engaged in this area. Heeks heavily draws upon and corroborates qualitative and quantitative (often secondary) accounts and sources of information on the Indian software industry.

This article heavily draws upon Dr. Richard Heeks' book titled "India's Software Industry: State Policy, Liberalization, and Industrial Development" published by Sage Publications in 1996. It presents a snapshot of the Indian software industry from its beginnings up to 1994/95. This work is available on Amazon for the more interested and diligent reader. The other point of reference for this analysis is a study funded by Pakistan Software Export Board (PSEB) on Best Practices and Strategic Challenges of Pakistan's Software Industry--the first of its kind objective analysis of the current state and dynamics of Pakistan's software industry--that provides some baseline firm-level data on software development in Pakistan and provides strategic insights into the current challenges and future direction of the nascent industry. The study is documented in a 125-page report available online ( http://paksoftwarestudy.vttp.org/) for reference.

While Heeks' book, in its essence, addresses the broader question of industrial policy-style government intervention using the Indian software industry as a case in point--a question that is as relevant to Pakistan today as it was to India at the time of Heeks' writing--we would not, for now, address that particular issue and leave it for a later analysis. Instead, what is of greater interest and relevance to the question at hand is Heeks' fairly comprehensive treatment of the early years of the Indian software industry, complete with an extensive review of the (then) contemporary literature and secondary sources of data.

The beginnings of the Indian Software Industry

The beginnings of the Indian software "miracle" is set in backdrop of a highly regulated socialist-leaning policy environment comprising severe import-export restrictions, over-regulation, and bureaucratic meddling in the market, The first policy directive explicitly addressing the software industry was issued in 1970 by the newly created Department of Electronics (DoE) in the Indian government. It created the largely unsuccessful "program for generation of computer software" that was later revamped into a "Software Export Scheme" whose sole contribution was to "allow hardware to be imported for use in software export work" against a very humble requirement/goal that the importer make a "commitment to earn the import price (later amended to double the import price), in foreign currency, via software export within the following five years" (p. 42).

While throughout the 1970s and 1980s, the software export policy was gradually liberalized, it was becoming increasingly clear that most computers imported under the software export schemes were actually being leased out for the use of domestic market rather than used for creating exportable software. Despite these glitches, however, liberalization continued all through 1980s. Not unlike Pakistan's software industry, and for that matter any other country of that time, the seed for India's software industry was sown in the shadow of a much larger and mature hardware industry. The earliest producers of software were essentially hardware providers that did software as well. Tata Consultancy Services(TCS)--one of India's largest and most successful software operations today--was born in 1974 with an explicit intention of "export[ing] software in return for permission to import hardware" (under the scheme discussed above). This was merely two years prior to the time when Systems Pvt. Ltd--Pakistan's first software-hardware developer--opened shop in Lahore.

Needless to say that these early Indian "software" companies made some "half-hearted" forays into software export (p. 69). Many of these were more interested in importing hardware in the guise of developing software and often discontinued the latter as soon as they had fullfilled their export obligations. The real impetus for software development, however, came from the data processing departments of some large Indian companies that had developed small software groups to meet in-house requirements and had begun attempting to sell their internally developed software in the local market. Another "blessing in disguise" was the departure of IBM in 1978 that left India with 1,200 unemployed ex-IBM employees, many of whom quickly opened up small software operations and computer bureaux (operations that leased out computing capacity to firms in need of that resource) and thus began a flurry of entrepreneurial activity in the much more traditional Indian economy of those days.

India Discovers the World and Vice Versa

It was during the 1980s that Indian software developers discovered the promise of exports. These early Indian software firms gradually moved beyond having to fulfill the "obligation" of exporting software and slowly found exports to be an attractive market in and of itself. In majority of the cases, the domestic operations of major software exporters lost their importance all through the 1980s. It was also during this period that the western countries discovered Indian software industry. Many western multi-nationals ( e.g. Texas Instruments, GE Computer and Information Services, and Citicorp Overseas Software Ltd. etc.) began thinking of capitalizing on the cheap and talented Indian labor force to develop software as well as capturing the Indian software market. This was clearly the beginnings of the Indian software miracle.

While data on Indian software industry is highly patchy and hence un-credible, there are atleast a couple of sources that date back to the early 1970s. In this regard too, India closely mirrors the Pakistan of today where few credible systematic attempts have been made to gather comprehensive data on the industry--not atleast till very recently. Of the two types of data available on Indian software industry, the government sources of data cover only the level of exports and number of registered software firms, while private sector ( e.g. Dataquest and IDC) does a better, albeit less credible and corroborated, job of capturing constructs such as industrial output, exports, employment, productivity, and number of active firms. "Neither set of figures can be regarded as accurate", observes one Indian analyst, while cautioning against believing too much in the available data (p. 67). While much of this skepticism seems valid, a cursory look at the available data does provide some interesting insights into the early days of the Indian software industry.

The first year of reporting for total software exports is 1980 when Indian software companies exported $4 million worth of software. The exports touched $100 million mark in 1989/90 and stood at around $500 million in 1994/95. Throughout the 1981-1994/95 timeframe, United States represented the single largest market for Indian software averaging around 60-65% of the total exports. One observer estimates, based on very narrow market segmentation, that India took about 20% of the foreign "opportunity" for internationally subcontracted software services in mid-1990s ( p.75). It, however, only represented 0.15% of the total world computer services and software market and 1.7% of the total US market in 1994/95. While these figures represent a minuscule portion of the overall US software market and even India's total exports, they are, nonetheless, reflective of the strong above-average growth of the software sector in India.

A Flurry of Missed Targets and Dashed Expectations

The export target for the 7th Indian five-year plan was Rs. 3000 million but the industry missed this figure by a large margin (Rs. 1250 million) in 1989/90. In a curious reincarnation of what has repeatedly happened in Pakistan recently, such government targets remained in vogue and were repeatedly moved forward. The most popular and "enduring" of such targets was the $1 billion worth of software export target that was supposed to be achieved in 1994/94 when it was first announced in 1992. Needless to say that the target remained illusive when its time came and in 1994, it was to be achieved in 1996; and in 1996 it was to be achieved in 1998 and so on (p. 74). (Note here that Pakistan also announced that it would reach a similar target in FY2000 that it has not been able to reach as of 2005 and is nowhere near reaching anytime soon either)

As the industry grew and looked outwards, the statistics also revealed the changing make up of the industry's output. Software export figures represented one-half of the overall software production (export+domestic) in mid-1980s and three-quarters in mid-1990s thus making the size of the overall software industry in India to be around $55 million in 1985 and $700 million in 1994/5 (p. 72). Exports primarily comprised services while domestic consumption was made up of packaged software--that too, according to one observer, consisted primarily of re-sale of imported software to domestic consumers.

The bias towards exports was so severe that fifteen of the top-twenty-five software producers in India earned less than 20% of their software revenues from domestic market. Roughly one-third of India's export earnings in 1994/94 came from companies that had no domestic market base for software services sales. This trend, once again, mirrors Pakistan's software industry of a few years back when companies like VROOM, Enabling Technologies, and Cressoft reigned supreme. The dotcom bubble burst and the recession in the US software markets has forced many Pakistani software operations to focus, atleast temporarily, to the domestic market.

"Bodyshopping" Becomes Synonymous with India Inc.

It was around the end of 1980s and early-1990s that India first adopted and then perfected the art of "bodyshopping". This was to become, for a few years thereafter, the world's predominant mode for getting around the Millennium-bug issue. Not only did the western companies welcome the possibility of hosting a large number of cheap Indian programmers doing fairly low-level grunt work to deal with millennium bug and other legacy issues but also liked the flexibility it provided for their own IT departments. This was also the beginning of the mass exodus of large number of Indian programmers to US in the 1990s.

While bodyshopping had a profound effect on the Indian software landscape--which changed forever as a result--it also had a depressing effect on net software export earnings for India. Since a large portion of Indian software export contracts came through onsite work, it required Indian companies to spend a large portion of these earnings on the travel, lodging, and marketing on the clients' site. According to one estimate, the net software export earnings averaged around only around 55% of the gross earnings recorded by companies. Of the $500 million in gross export earnings reported by Indian companies in 1994/95, for example, only around $170 million was left net of onsite expenditures thus reducing the overall "gain" to the Indian economy.

Bodyshopping, in some sense, reflects the most significant departure between the software industries of India of 1995 and Pakistan of today. Bodyshopping helped the Indian software industry in truly remarkable ways. Perhaps with the exception of the strong university education system (the IITs, for example) the practice of bodyshopping was the single most important factor that put India's software industry on track of where it stands today. Not only did it provide the critical demand-side impetus to the IT/software profession in India and enabled hundred and thousands of Indians to learn "on-the-job" and develop much necessary client-relationship skills but also enabled India Inc. to place its sons and daughters into the corporate echelons of the United States from where they were able to deliver the goods for their country. For Pakistan, with some minor exceptions ( e.g. Systems Pvt. Ltd. and Millennium Software Pvt. Ltd.) bodyshopping never really became as predominant a force as it did for India. Whether it would ever be in the near future also seems like a distant possibility. With the increasingly stringent US visa policy (post-9/11) and the backlash against foreign workers in the US, bodyshopping seems like a lost opportunity for Pakistan.

In this first of the series of two articles, I have outlined the primary motivation behind undertaking this analysis. I also laid some ground rules and identified sources for comparing the early performance of India's software/IT industry with that of Pakistan today. I then went on to trace the beginnings of the Indian software "miracle" while at the same time comparing its salient features with Pakistan's. Finally, I attempted to introduce some statistics, that are available through various sources, to develop a more concrete sense of the state and dynamics of the Indian software industry up until mid-1990s.

I hope this exercise in historical retrospection and analysis in the tradition of "looking behind to look ahead" would provide some food for thought and reflection in the debate on the replicability of the Indian software miracle across other aspiring countries of the world, especially Pakistan. I close this first article at that thought without drawing any conclusions of my own. Instead, I would let the readers pour through these facts about the early development of the Indian software industry and derive their own conclusions vis-a-vis similarities and differences with the current reality in Pakistan as well as the follow-on implications of these conclusions. For the readers who would like to have a crash course on Pakistan's software industry, I would gladly refer them to PSEB project website ( http://paksoftwarestudy.vttp.org/) or my blog (http://pakistan-inc.blogspot.com/).

In the second of this two-article series, I would look at several other qualitative aspects of the Indian software Industry and present my own conclusions about what that means for Pakistan's software Industry. (to be completed)


Athar Osama is a Doctoral Fellow in Policy Studies at the RAND Graduate School for Policy Analysis in Santa Monica, California. He specializes in technology and innovation strategy and policy areas. He maybe contacted at athar.osama@gmail.com

Making up for IT’s lost decade

Making up for IT’s lost decade
By Athar Osama
Published in Dawn, Economic & Business Review, July 4, 2005

ONE question that is often raised among Pakistani IT/software entrepreneurs, investors, and policymakers alike is whether or not and to what extent does Pakistan today represents a dynamic industry that is similar to India’s from a decade ago?

This is a perfectly legitimate concern for those aspiring to follow the example of Indian software industry and replicate it at home. And it is, by no means, an unworthy goal to seek. Last year alone, India exported over $17 billion worth of IT/ITES/BPO services to the world. Pakistan’s software industry appears to be relatively small in terms of manpower and employment. The PSEB Best Practices study puts the total employment at 60 of the most prominent (and larger) firms that it surveyed at around 5000 people.

Another internal PSEB study whose results were shared with this writer puts the entire software industry size at around 8000 people. Even if one adds a tentative number of another 10,000 or so people who are involved in various kinds of ITES/BPO operations ( e.g. call-centres) in the mix, the total industry size is certainly not more than 20-25,000 people.

This makes the Pakistani software industry today around half to a third of the size of India’s software industry in 1995. While it would be a mistake to read too much into these figures—primarily because of their suspect credibility and lack of rigour—the broader trend is unmistakable. Industries in both countries developed primarily in the shadow of their hardware counterparts, albeit with a lag of a few years.

Although the Indian governments’ early policies towards computer industry (and hardware in particular) was much more restrictive than that in Pakistan, the two industries share a strikingly similar pattern of evolutionary trajectory. Striking similarities are also evident in the target setting process, the product-services mix, and the early quality dilemmas etc. In addition to the above similarities, there are several significant differences too.

First, the degree of concentration in the Pakistani software industry is much less than that in India’s. There are no Tatas or Wipros in Pakistan. The ratio of revenues between the most successful and the median firm in Pakistan is around 1:100 against 1:2000 in India. In Pakistan, as against India, we find very little involvement of the country’s large business houses in the software industry. Not that Pakistani business houses have not ventured into software but they have failed to create sustainable software businesses. While the reasons for this fact may be debatable, the trend itself is undeniable.

Second, Pakistan has never been seriously considered by multinational sofware firms as a software development hub for their activities. This is in contrast to the early recognition of India’s potential by multinationals that gave a certain boost to the Indian software industry.

Third, Pakistan has seriously suffered (and continues to do so) from a weak human resource pipeline, both in terms of quality and quantity of its product. This, to our mind, is the single most important hindrance in the development of Pakistan’s software industry and the key differentiator between where it stands today vs where India’s software industry stood a decade from now.

For India, a “blessing in disguise” was the departure of IBM in 1978 that left India with 1,200 unemployed ex-IBM employees, many of whom quickly opened up small software operations and computer bureaux (operations that leased out computing capacity to firms in need of that resource. In 1980, Indian software companies exported $4 million worth of software. The exports touched $100 million mark in 1989/90 and stood at around $500 million in 1994/95.

Throughout the 1981-1994/95 timeframe, the United States represented the single largest market for Indian software averaging around 60-65 percent of the total exports. One observer estimates, based on very narrow market segmentation, reveals that India took about 20 per cent of the foreign “opportunity” for internationally subcontracted software services in mid-1990s. It, however, only represented 0.15 per cent the total world computer services and software market and 1.7 per cent of the total US market in 1994/95. While these figures represent a minuscle portion of the overall US software market and even India’s total exports, they , nonetheless, reflect the strong above-average growth of the software sector in India.

While it is hard to imagine how the Indian software industry might have evolved had there been no IITs or had they not practiced and perfected bodyshopping, the fact remains that these events did happen, either consciously or unconsciously, and changed the face of the Indian software industry.They also probably set it apart from the Pakistani software industry and essentially gave India the headstart—and a decisive first-mover advantage—that it enjoys till this day, not only over Pakistan but also the rest of the world.

Did the decade of the 1990s, the one that Joseph Stiglitz describes as the “roaring nineties”, constitute a lost decade for Pakistan’s software industry? In many ways, the above analysis provides an inkling into a possible answer to that question.Having started at pretty much the same time (mid 1970s) and progressed in similar fashion, Pakistan’s software industry of today stands, like shadow of a much larger and well-recognized Indian behemoth, but it is very similar to what India was in 1995.

What does it all mean for Pakistan’s software industry, and that of other countries at similar level of development and facing competition from India? Would Pakistan’s software industry, having lost the opportunity by a decade, continue to grow in the manner similar to India’s? Does the above analysis point towards a future where much of the disparity between India and Pakistan might be bridged someday? These are not easy questions for any industry analyst to answer.There are several trends and counter-trends that point to different outcomes and development trajectories for the players in question.

What is quite clear to even the most cursory of the observers, however, is that the IT/software industry worldwide is now entering a phase of maturity after the crazy nineties. Not only have the investors who lost big time in the dotcom revolution—if there was ever one—are now more intelligent about investing in IT as are corporate and individual users ( e.g. CIOs) and entrepreneurs.

Many of the trends that accentuated India’s emergence on the world software scene (e.g. the internet bubble, the millennium bug, and bodyshopping etc.) are perhaps a thing of the past—never to be repeated again, not at least in the manner in which their confluence led to the dotcom bubble and its burst. There are some counter-forces and mitigating factors as well.

Firstly, the India of today is not India of the early 1990s. With somewhere between half-a-million to a million people already engaged in IT/ITES area, India is suffering from a huge strain on its HR and infrastructure capacity. The costs of setting up businesses and hiring talented programmers and managers are increasing by the day.The trends are so strong that government and private sector have been forced to look beyond the traditional Indian IT/ITES destinations like Bangalore etc. for software talent.

Secondly, the Indian government recently revoked the tax holiday on offshore operations of foreign software companies operating in India.The 35 per cent additional cost is likely to hugely affect the cost-benefit calculations of foreign companies who have long viewed India as a cheap development centre.

Many industry observers, among them Anthony Mitchell of International.net who has long helped US companies outsource to India, view this as the single most significant action that has suddenly put other countries, like Pakistan, in the run for the big game.

While India has successfully milked its early-mover-advantage for years, there might be some late-mover-advantages up for grabs too. Pakistan, and other countries, might benefit from tremendous know-how and experience that has been generated as a result of a decade of experimentation that has gone into the Indian software industry and strategically place themselves in a well-defined and less competitive niche.

This would, however, require business acumen and innovation so as not to follow the pack but rather innovate from a market-offering and organizational standpoint. Looking at things as they stand today, one can probably make a fairly credible guess of the fact that Pakistan’s software industry would not have the “luxury” of learning-by-doing at the clients’ premises as India had in the form of bodyshopping in mid-to-late 1990s.But could there be something else?

One of the very important lessons that one can take away from India’s success story is the virtue of being prepared to capitalize on opportunities rather than actually seeking the “next big thing”—a lesson often lost on the Pakistani policymakers and business leaders alike.

When India’s political leaders laid the foundation of a well-functioning tertiary education system in 1950s, they certainly did not have the current IT revolution in mind. IT had not even been invented in India at that time. Yet, by creating quality human resources—scientists, engineers, managers, and policymakers—they positioned India as a country that could capitalize on an opportunity as and when it arose. That’s precisely what happened in early 1990s.

The public policy lesson, for Pakistan and its likes, is to emphasise on long-term foundational investments in infrastructure, international goodwill, and human resources so as to quickly position themselves for the next big thing, as and when it becomes apparent what that is going to be.

Till that happens, Pakistani software professionals, business leaders, and policymakers must approach the strategic and policy-environmental challenges identified in the PSEB Best Practices study to forge ahead against formidable reputational and capability-based entry barriers.

As many who toil for the cherished goal have discovered, it will certainly not be a walk-over that many naively expected in early 1990s, but rather a long and hard slog. But, in the end, it might be one well worth all the effort.

— Athar Osama is a doctoral fellow in Policy Studies at the RAND Graduate School for Policy Analysis in Santa Monica, California.

Diaspora Entrepreneurship Leads to "Win-Win" Scenarios

Diaspora Entrepreneurship Leads to "Win-Win" Scenarios
By: Athar Osama
Published in eCommerce Times, Monday, June 6, 2005
At: http://www.ecommercetimes.com/story/Mei8JtAAVDL0mR/Diaspora-Entrepreneurship-Leads-to-Win-Win-Scenarios.xhtml

One of the most interesting, though predictable, empirical regularities in the new software exporting nations' (e.g. India, Pakistan etc.) quest for prominence is the importance of diaspora entrepreneurship. The stories of the instrumental role played by successful non-resident Indians (NRIs) in the relatively short history of the Indian software and ITeS industry is well documented in literature. Tale has it that Vinod Khosla--a former co-founder of SUN Microsystems and one of the leading venture capitalists in the Valley--and an Indian American by background spent a lot of time travelling back and forth between United States and India in the early 1990s to jumpstart what we now term as the IT revolution in India. Vinod Khosla and his likes made possible the enormous creation of wealth in both India and the United States by doing what they did.

The Importance of the Diaspora Factor

A recent study by Pakistan Software Export Board (http://paksoftwarestudy.vttp.org) clearly establishes the important role of expatriate entrepreneurship in the development of the software industry in Pakistan, in particular, and developing countries, in general. It elevates the involvement of diaspora in the conception and execution of a business idea to one of the defining characteristics of a set of generic software business models that in turn derive the strategic landscape and competitive drivers of a new venture.

Much more than any other factor, the study suggests, it does matter whether the founder or the founding team of the company is based in Pakistan or the target market (e.g. United States) on what sort of challenges it faces and whether it can successfully execute upon the idea. The study found a clear positive correlation between ventures that had "foreign-based" founders (generally, expatriate Pakistanis) and their success and growth over the last year. The study surveyed and interviewed CEOs/Directors of around 60 software companies in Pakistan and finds corroborating qualitative evidence to support the above statistical finding.

What is it about diaspora/expatriate entrepreneurship that makes it work the way it does? The study provides several clues on that question.

Benefits of the Expatriate Entrepreneur

Firstly, an expatriate-connection helps ease the challenges of understanding and targeting a foreign market. For companies attempting to compete in the innovation-intensive US/European markets, it is important to understand the customers' context and continue to innovate at the cutting edge. An expatriate founder (or founding team) already residing in the target market is in a much better position to get those innovative insights than one residing 10,000 miles away. Not that the latter has not been attempted but, statistically speaking, it has a much lesser chance of success. The reason being that many in the developing countries do not even have the right kinds of life-experiences to allow them "dream" innovative ideas and applications for their ideas.

Secondly, an expatriate-connection helps bridge the cultural differences between the customer and the marketeer to a level that considerably eases the selling process. A founder who has never stepped onto the United States or Europe is at a great disadvantage against one who has a cultural understanding, pre-established networks and connections here. Even minor things--such as starting a conversation, addressing a person, understanding cultural jokes and appropriately responding to them etc.-- that create a cozyness in a business conversation don't come so easily to those who haven't had a cultural experience of living in ones market.

Thirdly, an expatriate founder (or founding team) generally brings much more than just cultural awareness, connections, and new ideas to the table. S(he) is often an invaluable source for capital and the much needed due-diligence for an idea. Expatriate founders are generally better off (financially) than a wholly domestic founding team and bring capital (either their own savings or from angel and venture networks abroad) to the table. This can be the much needed lifeblood for the venture in a developing country environment with ill-developed (venture) capital markets. Along with this capital also comes the due-diligence of the owners of the capital, namely, the US angels and venture investors, as has been the case with the numerous diaspora-owned ventures that have been created, over the last few years.

Win-Win Scenarios for All Involved

The result of the confluence of the these factors is a much better chance of success for the proposed venture and a "win-win" scenario for all involved. One can cite several instances where diaspora-led entrepreneurship has led to outcomes that have not only created valuable jobs and employment in the developing country but also tremendously benefitted the end-consumer in the developed country.

One example is Etilize Inc.--a Southern California based provider of electronic cataloging systems--that operates a 200+ person facility in Karachi, Pakistan. Not very unlike other ventures, Etilize was first conceived for a different purpose but, over time, evolved into a provider of electronic catalogues and knowledge databases with clients like Amazon.com, Best Buys, Walmart, OfficeMax, and other major US retailers. What is relevant here is that during its re-incarnation post-dotcom bubble-burst, Etilize realized that it could not raise enough capital to execute a labor-intensive data-base development operation in the United States, thus forcing it to look offshore for support. It was thus an idea that could not have happened without an offshoring component attached to it thus depriving the US consumer of the very important--now a part of our every day life--feature of having to search online for the latest digital camera or a rare piece of electronic equipment in several ways before ordering it from the comfort of his/her home.

Etilize now plans to move into intelligent catalogues that would make it even easier to search what consumers are looking for based on their pre-disclosed preferences and purchases. It is precisely these kinds of labor intensive ventures that wouldn't have been possible without an offshore element of the strategy that create a win-win situation for both the developed and the developing countries involved. The expatriate founders, like Hameed and Baig of Etilize Inc., are the real heroes who make it happen for all of us.

Two Models of Expatriate Involvement

There are signs that diaspora entrepreneurship of the kind described above might be growing with time, albiet in different shapes and forms. One model of disapora entrepreneurship is the "straddling expatriate" who lives in the United States or Europe (the developed "market") but operates a company whose development hub is in a developing country ( e.g. Pakistan). The Resource Group (TRG) that is often cited in the business literature provides call-center services to tens of its clients in the US through its thousand-odd agents in Karachi, Lahore, and Islamabad, Pakistan. Zia Chishti, the founder and the brains behind this innovative call-centers business model, is a Pakistani-American expatriate who straddles the two worlds and makes all this possible through his deep understanding of and connections in both Pakistan and the United States.

The second model of diaspora entrepreneurship is the "returning expatriate" who, after spending several years abroad, has now returned back to his native country--atleast partially, if not fully--and now by helping develop a foundation for innovation and employment in his native country is helping create a more globalized world order. One example of such a venture is Systems Integration, Innovation and Intelligence (SI3) in Karachi that is founded by Amer Hashmi--an ex-IBM Global Services executive last year. In an interview in Karachi, Amer highlighted the "domestic-first, export-later" policy of SI3. During the post-dotcom years, Amer came across the vast opportunity that exists for system integration services in Pakistan and moved back to capitalize on it.

"All Pakistani software houses that I looked at during my pre-assessment phase were doing low-end software development or BPO type work. None was looking at the real opportunity which was system integration and high-end services. Pakistani companies ( e.g. in financial and telecom sectors) are going through a major renewal and modernization at the front end but they are still working with obsolete legacy systems at the back-end that do not provide the opportunity for customer innovation that they would need to compete in the post-WTO order. I positioned SI3 to help them modernize their IT and Data management systems.", explains Amer. If SI3 and their likes were to succeed, it would contribute in putting Pakistan on a path to greater economic competitiveness. When that happens, we would have created a more equitable, just, and secure world than todays.

Its a Matter of Timing too

In many ways, countries and markets undergo stages of development before they are ripe for major investment and reach the kind of inflexion points that, many believe, Pakistan is seeing now. There is a sense of urgency in these expatriates' ambitions never seen before in the history of Pakistan. "None of this would have been possible 10 years ago--but now it is here and happening", says Dr. Aamir Matin, the Managing Director of Pakistan Software Export Board (PSEB).

As demonstrated in the examples of India and Pakistan, diapora-driven entrepreneurship represents a safe way to enter a new market like Pakistan or some of the other countries of the South East Asia, South Asia, Eastern Europe and Middle East. It minimizes risks for foreign companies seeking to operate and, when it succeeds, provides a win-win scenrio for all parties involved and the rest of the world.


Athar Osama is a Doctoral Fellow at the Fredrick S. Pardee RAND Graduate School of Policy Studies in Santa Monica, California. His research and consulting focusses on Technology and Innovation Management Issues. He maybe reached at athar.osama@gmail.com

Fighting an "Image" Problem, IT Industry Arises in Pakistan

Fighting an "Image" Problem, IT Industry Arises in Pakistan
By: Athar Osama

Edited version Published in TechNewsWorld.com on May 17, 2005
(http://technewsworld.com/story/XQP0gK0pkEemEp/Fighting-Image-Problem-An-IT-Industry-Rises-in-Pakistan.xhtml )

Nadeem Malik, the CTO of Pakistan's oldest software company narrates an interesting story about his company, Systems Pvt. Ltd--a software development and system integration company formed in 1976. The tale has it that Steve Ballmer, Microsoft's current President and CEO, was once visiting Lahore, Pakistan in late 1970s to attend a wedding of one of his room-mates, a Pakistani fellow, at Stanford University. The gentleman happened to know Nadeem and his associates who had just opened shop in Lahore by the name of Systems Ltd and asked Ballmer to visit them while he was in Lahore. Ballmer--who, along with Bill Gates, had just opened a small software company in the United States--visited Systems' offices in the Chambers of Commerce building in Lahore and was pleasantly surprised. He also suggested some possibilities of "doing something together".

Microsoft Corporation was, back then, a promising yet small venture hoping to make it big someday, and Ballmer, in all fairness, probably thought that they could use the help of these cool guys in Lahore to get there. " Of course, we thought otherwise", reflects Malik, "we were Pakistan's first and largest software company at that time. We thought it a little strange to partner with a small relatively unknown entity (back then) called Microsoft. It turned out to be the single largest mistake that we ever made in our entire careers". Not that one can fault Nadeem or Systems Ltd. for not foreseeing Microsoft's enviable rise as a software behemoth and hence foresee the value of the partnership at that time, the anecdote illustrates the fact that Pakistan's IT entrepreneurs were way ahead of those from other countries in thinking about the opportunity in IT and setting up companies to capitalize on it as back as in 1976 but also that they missed the boat on a number of occasions very early on in the process.

The Industry on the rise, despite handicaps and missed opportunities

The country, and its software industry, has come a long way since that day a couple of decades back. A recently conducted study of software development activity in Pakistan paints a promising picture of the future of software development in Pakistan, provided the industry leaders, entrepreneurs, and policymakers continue to work together, as they have in the last decade or so, and build upon the foundation for future growth that is now there. Pakistan is increasingly becoming a part of the global software development activity and even moving up the value chain.

According to the results of this study--that looked at over 50 of Pakistan's leading software development operations--over 40% of the companies are foreign subsidiaries of foreign companies, around 55% have front offices abroad--primarily in the United States but also increasingly in the UK/EU and the Middle East. While the average size of these companies and the entire industry is small, there are obvious signs that it is growing through a new wave of ex-patriot led company formation activity.

Despite the industry's impressive performance in the recent years, two factors have been major "bottlenecks" to the continued expansion and growth of the industry. The first of these is its rather late arrival on the world's software map. In Pakistan, as elsewhere, IT and software was, for a long time, a career option for those who could not make it to the more "lucrative" university programs--Electrical Engineering, Medicine, Business, and Acccountancy etc. It wasn't a coincidence, then, that the country's most creative and brainy people chose other career options. It was not until the mid 1990s that software became a craze and a favored career for bright young Pakistanis.

By that time, however, the Millennium Bug contracts had already been made and the DotCom/Internet bubble was about to burst. While Pakistan prepared itself for the challenge--its archrival India took it head on and reaped the rewards. The next few years had been a painful learning experience for the industry as well as its leaders--and there are signs that, as the world's software markets come out of the recession, this learning may be on the verge of paying off. Last year alone, as per the survey, the industry's employment grew at a rate of around 27% while the revenues were up 37%. The industry executives believe that 2005 would probably be even better than the last.

When "Image becomes the reality"...

The second major bottleneck for Pakistan's software industry is none other than the country's "image" problem. The industry agrees. According to the above-cited study, "image" was named the single most important hindrance in the expansion/growth by as many as 70% of the companies surveyed. There are atleast two dimensions to the problem. The first dimension is political/geo-strategic. After the Sept. 11, 2001 attacks on the United States and the ensuing hostilities in Afghanistan--one of Pakistan's western neighbors--compounded with some tension on its border with India around 2002, the country has been widely perceived as a riskier place to do business in. The US State Department has also been quick at slapping a travel advisory against US Citizens visiting Pakistan. The software business, as a result, has suffered hugely. The second dimension of the "image" problem is purely commercial in nature, namely, Pakistan's software industry (unlike India's) has not been able to "brand" itself as a natural destination for the world's wealthy corporations to get their outsourcing needs met. These problems are, however, to a large extent "chicken-and-egg" problems and the industry is gradually learning to get around these.

Pakistan, more than any other country in the world, is a prime example of where the "image becomes the reality". It sometimes does not matter who you are, but rather how the world sees (or perceives) you to be, goes a common saying. This has been one of Pakistan's major problems as far as "marketing" itself and attracting investment is concerned. The software industry is only gradually learning to deal with it, Individually and in remarkably creative ways. And in the process effectively linking itself to the global software value chain.

... Small is beautiful, and sometimes very effective

Salim Ghauri, the CEO of Netsol, one of the largest software companies in Pakistan--specializing in financial-leasing software and IT management consulting areas--that has a parent operation based in Calabasus, California and is also listed on NASDAQ agrees with the notion that sometimes image can become a reality but contends that one can counter that by actually convincing ones customers to experience the reality themselves. "We have never had a customer who has come to Lahore (Pakistan) and has not given business to us. Although it might take us a while to convince our foreign collaborators/customers who are skeptical of the law-and-order and security situation in Pakistan and misperceive it to be an under-development and tribal country, once we get over that initial bottleneck— sometimes through gradual persuasion and other times assurances of security etc.— and get him/her to land in Lahore, we've almost always won the deal. I once took a potential customer, first to Mumbai and then brought him to Lahore. The contrast between the squalor and lack of infrastructure of Mumbai and the orderly and classy infrastructure of Lahore couldn't have been more pronounced. Needless to say that his/her fears and perceptions were based more on hearsay and less on reality. That one trip to Lahore did the trick for us in winning over his business."

Khalid Razzaque, the CEO of Genesis Solutions, a company specializing in software and hardware of ATM machines, encrypted communication systems, and information kiosks etc. couldn't agree more. "I once had a customer who was visiting India and I convinced him to pay a visit to Karachi (Pakistan) on his way back to the UK. He was a little skeptical at first but my persuasion skills prevailed in the end and he ended up landing at Karachi. When we met him at the airport, he was wearing a pair of shorts and a t-shirt, and here we were, receiving him in business suits and luxury cars. As we escorted him to our campus and brought him to a meeting in a conference room full of company leaders and well-wishers, he became visibly uncomfortable. It was much later that he confessed to me that he had a very different picture of what Pakistan was like, and that it turned to be much more advanced, from an infrastructure standpoint than even his earlier stop, India, came as a pleasant surprise to him." Stories like these are not uncommon in the local Industry--and while the mention of India as a rival is rather ironic--they and are increasingly becoming a norm for the industry bent up shattering its long-persisting negative image in the western world.

A Supportive Government joins the Fray

Even the government is joining the ranks in this regard. In addition to helping create a favorable policy environment and continually slashing telecom bandwidth prices, the government of Pakistan recently co-sponsored "Expo Pakistan", one of the largest "show and tell" events to market Pakistan to its potential clients in a whole variety of industries--software being one of them. Special arrangements were made, through the Ministries of Foreign Affairs, Commerce, Industry, and IT and Telecom, to invite western CEOs, business leaders, investors, opinion-makers, and journalists as state-guests to attend the conference and the exhibition and to meet local businessmen with common interests.

"We are ready", says Shahid Tarrar, the Commercial Councellor at the Consulate General of Pakistan in Los Angeles, "to take American business leaders to Pakistan and help them see for themselves the 'real' face of Pakistan and the opportunity it represents--a face that is very different from the one often potrayed in US media" . Tarrar intends to execute upon his plan by taking upto ten US businessmen and investors to Pakistan shortly and, by doing so, hopes to nullify the ill-effects of the country's misperceived negative image and level the playing field for Pakistan's software industry.

Americans who make it to Pakistan find an altogether different world than the one they had expected, as Anthony Mitchell--a regular columnist for eCommerce Times and InternationalStaff.net--found out this February. When it comes to Pakistan, the "image" belies the reality and seeing is believing. From the shadows of a misplaced image has thus emerged an innovative strategy that seems to do the trick for Pakistan's IT entrepreneurs. This might just be the right kind of "break" the country's software industry needs from its rather lackluster past. Pakistan is fast becoming a happening place for IT.


Athar Osama is a Technology Policy Analyst and a Doctoral Fellow at Fredrick S. Pardee-RAND Graduate School for Public Policy in Santa Monica, California. He also consults on issues of technology management and strategy and maybe reached for comments at Athar.Osama@gmail.com.

Software Development in Pakistan: Lessons From The Trenches

Software Development in Pakistan: Lessons From The Trenches
By: Athar Osama

In the first of this series of articles, we looked at a statistical snapshot of software development in Pakistan. While our sample is not representative of the entire software industry in this country, it nonetheless includes a vast majority of the more significant players on the Pakistani software scene. Hoping to develop a better understanding of the structure and dynamics of the Pakistani software scene, not only facilitate investment and entrepreneurial activities but also to better inform public policy debate, we reported a number of fairly interesting findings. For example, although last year has seen considerable growth in both revenues and employment, Pakistan’s software industry is still going through a period of early-stage development and shows lack of maturity in many respects—that is only recently beginning to change. The most significant evidence in support of the above, that the study was able to bring to light, was lack of differences between domestic and export-focused software operations, between product and services-focused operations, and between pre- and post-dotcom operations—differences that one would have expected in a relatively mature industry.

We also found the prevalence of several best “managerial” best practices that differentiates the relatively better performing software houses from the not-so-good performing ones. The study, however, failed to find significant differences in technical practices of the better performing software operations as compared to not-so-good performing ones thus calling into question the assertion whether quality of software development processes makes a difference in the successfulness of a software operation. Indian software firms have been renowned in their ability to continually improve their processes through wholesale adoption and implementation of western process management approaches, like Six Sigma type approaches of the General Electric and Texas Instruments fame. No wonder then that major portion—as many as 50-75%--of the global CMM-SEI level-5 certified software operations are based in India. Indeed, a recent study by Dr. Michael Cusumano of MIT—a keen observer and researcher of software development best practices around the world—highlighted the fact that Indian software development operations have been especially successful in melding together older software development process approaches with the relatively newer ones in a manner that have made distinct and competitive.

While our own lack of finding is certainly a shortcoming of the study it cannot be perceived as an indictment of the industry. Certainly “lessons from the trenches” belie the simplistic conclusion of the statistical on that particular point. More research is certainly needed to understand the role of process quality in the development and evolution of Pakistani software industry. In this second of the two pieces drawing upon the results of the study, we highlight some of the lessons learnt from over 65 interviews of the leaders—CEOs/CTOs/Directors—of at-least 50 of the industry’s major players.

Before we do so, however, we must lay out an organizing framework for this discussion. We attempted to organize software companies within a smaller number of distinct groups—based on their salient characteristics. The purpose for this classification was to allow us to draw generalizations across the experiences of a large number companies into a set of prescriptions for the industry as a whole. Drawing from the qualitative insights of interviews and statistical findings, we devised a four-part taxonomy of generic software business models. The four sub-classifications were named after their most prominent examples, including: 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). These generic models are explained, through the help of a graphic, in Figure-I. It is also important to mention here that none of these categories are as black-and-white as they seem. There is considerable gray area in between and a company might show characteristics of more than one type of generic software business model at a given time.

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. While we discuss each of these strategic challenges in the context of the generic software business model to which it is most relevant—they may be common across several (or all) of the business models. Readers seeking to thoroughly understand the strategic challenges faced by Pakistani software industry are hence advised to read through all four descriptions and their respective strategic challenges (thirteen in all) to get a better feel of the landscape as each contains some elements overlapping with others.

Before we begin this discussion on the taxonomy of generic software business models, it is important to highlight its several qualities and characteristics—as well as its proper and improper uses—to allow the readers to put this taxonomy in its proper perspective.

Firstly, the taxonomy gives us a relatively easy and comprehensive way to classify a particular software operation into a broad enough category of organizations, giving us a reference point to compare ourselves against, and quickly begin looking for certain organizational features, managerial characteristics, strategic challenges, and critical success factors that might apply to our own experience. This act alone somewhat simplifies the complexity of the Pakistani software scene narrowing down the search for comparables to look at or seek advice from.

Secondly, it is important to understand the fact that none of these generic software business models are inherently good or bad—just that each has its own place in the overall scheme of things. It is somewhat meaningless to compare firms across business models. It takes a fairly different set of initial conditions and skills to start, and overcoming a different set of challenges to successfully execute upon each. Each of these models, however, have better-performing and not-so-good performing firms within them and what one can do, again to a degree only, is to compare the performance of a firm against another within the same category.

Thirdly, while transitions between the generic business models are possible—they are not automatic. Depending on what a firm intends to do (its unique idea-offering-destination mix), there is a right model to look at and adopt. Although it may seem natural for a specific firm to transition from a domestic-focused firm to an export-focused firm, it is not automatically logical for every firm and certainly not for the entire industry to make that transition. One can remain within a particular model and aspire to be best in class within that model. An entrepreneur-investor must, therefore, clearly understand model implications, scalability challenges, and transition possibilities, before starting a firm.

Finally, it is important for aspiring entrepreneurs and business leaders and managers of existing ventures to understand the strengths, weaknesses, pre-requisites, and structural limitations of each of the generic software business models. They must vet their ideas through the lens of these business models and ensure that they fully understand their various dimensions and then adopt one that bests fits the idea-offering-destination profile of their venture and their short and long-term aspirations from the same. Understanding the model limitations is critical to the long-term growth of firms and the industry as a whole. Depending upon the circumstances and the goals and aspirations of the founders, many firms—trapped in the structural limitations of a particular model—try to outgrow it by doing more of the same.

Following is a brief discussion on each of these four sub-categories of models.

1—The Export-focused Local Firm (“Systems” or “Netsol” Model) 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. Within our own sample, it accounts of about a third (32%) or 16 of the 47 firms in our sample. 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. Many such firms have been created post-DotCom Bubble burst as well. Some salient examples of this type of business model in action are: ThreesixtyDegreez, Post Amazers, Advanced Communications, Makabu, Netsol, and Autosoft Dynamics etc.

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. The most important of these strategic challenges, or critical success factors, is the ability to establish a first contact and a long-lasting linkage with the foreign customer. Gaining a foothold in the foreign market, signing up a first customer, and then quickly diversifying ones’ customer base has been a major challenge as well as a differentiator between successful and not-so-successful companies. A somewhat related challenge has been the setting up of a front-office abroad, generally for the purpose of marketing but also customer support etc. The dominant strategy here has been to set up a marketing office—manned by Pakistani or foreign staff. Not only is the cost of setting up a marketing operation in a foreign market prohibitively high (in $0.5M a year range for the smallest of the operations), it also hasn’t always paid off as per the expectations. An industry good practice is to consider other, more cost-effective, approaches like marketing alliances and reseller agreements as possible alternatives to front-office-type arrangements. These are especially suitable for smaller startup type operations. The aspiring entrepreneurs must look for such partnering opportunities and use them to their advantage.

A third strategic challenge (or critical success factor is the ability to understand a foreign domain and context—a factor made complex in this context by the geographical and cultural difference between the customer and the seller. For majority of these challenges, a regular expatriate connection (through a foreign/expatriate co-founder) and/or face-to-face visits to foreign clients and their markets certainly help. But more importantly, even the realization that one faces a particular challenge (e.g. understanding a foreign domain or diversifying the customer base) that needs to addressed would go a long way in getting one to the path of seeking the right kind of help/partnerships/arrangements. Having definite, well-thought-out, strategies in place could determine the difference between success and failure of an export-focused local software operation.

2—The Domestic-focused Local Firm (“TPS” and “LMKR” Model), with an exception of a few companies, is really one because of circumstances rather than choice. 14 of 47 (or 30%) of our respondents fall into this category. 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. Among the companies being established in this category, we see a much greater domain focus than the earlier category (discussed above). The primary reasons for this is that, unlike the exports segment, there is little or no lure of pure software programming (or coding) “services” on the domestic front. Thus everyone must be in the business to solve a fairly well-defined problem or not be in the business at all. This has led to a much faster accumulation of domain knowledge, maturity and perhaps, to some degree, better and more focused business strategies to start with in the first place. 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

That this type of firm enjoys some advantages vis-à-vis the export-focused firm does not, however, mean that they don’t face serious strategic challenges. The most serious challenge this firm faces has to do with operating in an under-developed domestic market. There are many manifestations of this problem, namely, a psychological price barrier, lack of buyer-user awareness, lack of business volume, dealing with the seth mentality, and little appreciation of the value of software etc. We allude to a number of critical success factors and industry good practices to counter this strategic challenge, namely, avoiding the herd mentality, focusing on better developed segments of the market (e.g. financials, telecom etc.), correctly estimating the difficulties of “creating” a demand, making a business case rather than selling a technology, using innovative pricing strategies, and operating on the innovative end of the product-services spectrum etc.

Another major challenge for this category of firms is getting access to venture, expansion, and working capital. For a variety of reasons having to do with lack of demand, perception of success, and inability of financial and software communities to understand each other’s perspectives, domestic-focused local firm suffers from serious shortage of capital. Consequently, a realistic estimate of capital required to execute a business idea and a realistic fundraising strategy, through external or internal sources, is a critical ingredient of successful operations. A third major challenge for a domestic-focused firm is having a clear domain focus and a solid businessplan—and adaptable but solid businessplan—to start with. Box # 1 clearly identifies some industry good practices used by relatively more successful companies to address these issues.

3--The Export-focused Foreign Firm (“Techlogix” or “Etilize” Model) 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. 7 of the 47 (15%) companies in our sample fall in this category. This type of business model has been adopted by services and product-focused companies alike. Some salient examples of this type of business model in action are: Elixir Technologies, Etilize Inc., Ultimus, MixIT, TechLogix, Prosol, and Xavor etc.

While companies in this class of software business models 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. The most important challenge facing this class of companies is to deal with the “image” problem. Simply speaking, foreign entities—for reasons having to do with negative perception of the country or geopolitical environment of the world/region—are reluctant to do business with a Pakistani entity. While there are a number of things that can and must be done at the public policy level to address or atleast counter some of these concerns, several good practices of companies trying to address these issues on their own also emerge from the study (see the study for detailed findings).

Another significant challenge is the geographical shifting of the “labor arbitrage” argument whereby as the outsourcing movement matures, newer (less problematic) regions with even cheaper labor come into the competition with the more established ones. The example of Dubai (for it accessibility and investment and HR-attractive policies) and China (for its cheap and abundant labor and large domestic market) are cases in point. Consequently, the Export-focused foreign firm must adopt active strategies to continually counter the threat of becoming non-competitive in the market of cheap labor. Several good practices emerge from our sample of respondent, including but not limited to, developing domain expertise to lock-in customers, relocating part of the production activity to cheaper havens (e.g. Beijing, Dubai, the Philippines), climbing up the value chain, and automating their own systems to remain cost-competitive.

A third key challenge that the export focused foreign firm shares with companies in other generic business models is that of scalability of Pakistan operations. There is a widely perceived and talked about psychological barrier of 200-people in Pakistani software industry. Although the exact number is immaterial, what matters here the fact that the 20,000+ employees of the top companies of our closest competitor—India—dwarf the size of our entire industry. The largest Pakistani company in our sample is not even 2.5% the size of the largest Indian company—putting a big question mark on our ability to deliver serious large-scale projects. Companies face formidable supply (HR availability, lack of middle/project managers) and demand (inability to predict demand and hence scale up) side challenges in this regard.

4—The Dedicated Offshore Development Center (“ITIM” or “Clickmarks” Model), as the name suggests, is a fairly limited offshore operation of a foreign company. 7 of the 47 (15%) of the companies in our sample fall within this category. The dedicated development center 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 and say within the parent’s strategic processes) it faces a number of challenges that are distinct and different from the earlier-discussed category. The nature and extent of the challenges also differ between the various phases of the entities life-cycle. Some salient examples of this type of business model in action are: MetaApps, ITIM Associates, Clickmarks, Trivor Systems, and Strategic Systems International etc.

The initial set of challenges encountered by entrepreneurs trying to set up a dedicated development center generally have to do with the actual setting up of a Pakistan operation and doing it in a manner that minimizes the disruption to the foreign operations of the parent company, putting in place a quality software development team that understands the foreign domain, quickly learns the parent’s corporate culture, and is both capable and motivated to deliver a quality product or service to an unseen entity. These challenges, however, are not insurmountable and a number of companies are using fairly good and innovative practices to effectively respond to the above-cited challenges.

The most important of the strategic challenges facing a dedicated development center type operation, however, is that of effectively managing the parent-subsidiary relationship. This is essentially a challenge that, unlike those discussed above, presents itself in the later (more mature) stages of the subsidiary’s life-cycle. It can, however, be addressed somewhat painlessly by planning for it at the very inception of the parent-subsidiary relationship. What actually happens is that, owing to the rather limited scope of the development center operation, there can come a time in its life when its interests may diverge from that of the parent company resulting in organizational confusion, serious management tension, and a loss of employee morale.

We find a number of companies in our sample suffering from such a “midlife” crisis and struggling to remain “purposeful” in the overall scheme of things. Despite being the most technically sound operations, they also faced serious bottlenecks vis-à-vis revenue and employee growth. There are many industry good practices that one can adopt to effectively counter this serious challenge, namely, diligently working out a “written” parent-subsidiary agreement to avoid later confusion and heartburn, providing the subsidiary with a voice in the parent’s strategic processes, allowing the subsidiary the freedom to seek other business, having separate top-management for the parent and subsidiary etc. In addition to these model-specific challenges, this model shares several other challenges and critical success factors with the rest of the industry but more specifically with the export-focused foreign firm model.

By using the lens of this four-part taxonomy of generic software business models, we can greatly reduce the complexity of the relevant organizational landscape. Pakistan’s software industry comprises a handful of different types of firms that face a remarkably common set of strategic challenges. While some of these challenges may be unique to the particular idea-market mix that a particular firm is targeting others are common across firms within a generic business model and the industry as a whole. As Pakistan’s software industry attempts to hasten its move up the “learning curve”, its executives must pay attention to the shared experience of the successful and not-so-successful entrepreneurs among them. While many of these problems are substantial and hence may requires years of hardwork, planning, and execution, it is refreshing to know that a number of companies have found ways to get around these in one way or the other and are willing to share these insights with others. The study highlights the thirteen strategic challenges and twenty-five industry best practices that industry leaders would find worth their while to think about and implement.

Athar Osama, the author of the PSEB Study, is a Science and Technology Policy Analyst based in Santa Monica, California. He maybe contacted for comments and queries at Athar.Osama@gmail.com