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PSEB - Software and BPO Revenue Recognition and Assessment - A Policy Options Study
 

PSEB - Software and BPO Revenue Recognition and Assessment - A Policy Options Study

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Please contact fp@technomics-international.com.com for more information.

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    PSEB - Software and BPO Revenue Recognition and Assessment - A Policy Options Study PSEB - Software and BPO Revenue Recognition and Assessment - A Policy Options Study Document Transcript

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    • Table of Contents1 – Executive Summary…………………………………………………………………………..............52 – Introduction……………………………………………………………………………………………….83 – Background……………………………………………………………………………………………….94 – Research Design and Study Objectives……………………………………………………………145 – Understanding and Mapping of Revenue Recognition and Reporting Systems..………..166 – Pakistan’s IT Market and Revenue Estimates…………………………………………………….357 – Conclusions and Policy Recommendations ……………………………………………………....458. Appendices A – LIST of Interviewees: PSEB MEMBER COs CEOs and Executives…………………………..48 B – LIST of Interviewees: IT USER COs / CIOs and IT Directors…………………………………..49 C – LIST of Interviewees: MNC Country Heads……………………………………………..............50 D – LIST of Interviewees: IT Policy Makers and Decision Leaders……………………………….50 E – PSEB IT Market and Revenue Estimation Study – PSEB Member Survey………………..51 F – PSEB IT Market and Revenue Estimation Study – CIO Survey……………………………….52 G – RBI’s Software and Information Technology (IT) Services Exports: Survey……………..53 H – Note on Reconciliation of RBI Survey Data with SOFTEX & NASSCOM DATA…………58 2
    • List of Figures and Tables1. Table 1.1: Software export / BPO estimates by various sources (and studies)2. Table 1.2: “In sample” estimates and population corrections for industry software / BPO revenues3. Figure 3.1: The data needs of a three-tiered evidence-based policy-making process4. Table 3.1: Proportion of India’s IT exports using WTO Modes 1 to 4 for Trade in Services5. Figure 3.2: Differences in the BPM5 and BPM6 (2008) or MSITS (2002) Definitions of Software6. Table 3.2: Pakistan’s IT Exports using WTO Modes 1 to 4 of Trade in Services7. Figure 4.1: A graphical representation of the work plan8. Table 5.1: A Glossary of Different Software / IT Market Estimates9. Table 5.2: State Bank’s trade in services BPM5 figures for ICT related categories10. Figure 5.1: Graphical extract from Bearing Point Report11. Table 5.3: Pakistan IT export earnings FY0512. Table 5.4: Estimated domestic IT revenue, FY0513. Table 5.5: Comparison of IT revenue, personnel & bandwidth – Pakistan, India14. Figure 5.2: Pakistan’s IT Spend and Global Revenue Impact15. Figure 5:3: Flow chart representing revenue recognition process16. Figure 5:4: Graphical representation of the “R” form17. Figure 5:5: Graphical representation of RBI’s “SOFTEX” form18. Figure 5.6: Survey on Computer Software and Information Technology Services Exports 2007-919. Figure 5:7: Enterprise Ireland’s estimates of Irish software industry20. Figure 5.8: Forfás Annual Survey 200821. Figure 5.9: Forfás Annual Business Survey Table B1–Total sales of Irish companies 2000-822. Figure 5.10: Forfás Annual Business Survey Table B3–Total exports of Irish companies 2000-823. Figure 5.11: Forfás Annual Business Survey Table D12–Direct expenditure in Irish Economy 2000-824. Figure 5.12: Forfás Annual Business Survey Table D1 – Total sales from all companies 2000-825. Figure 6.1: Sectoral classification of Pakistan’s IT (software / BPO) market26. Figure 6.2: Pakistan’s IT (software / BPO) market – IT / Software classification27. Figure 6.3: Pakistan’s IT (software / BPO) market – IT-enabled services classification28. Figure 6.4: Impact of the 2007 recession on total revenue and spend of Pakistan’s IT industry29. Figure 6.5: Total full-time employment in Pakistan’s IT industry30. Figure 6.6: Product – service profile of Pakistan’s industry31. Figure 6.7: Sectoral breakdown of total global revenues of Pakistan’s IT industry (2008)32. Figure 6.8: Sectoral breakdown of export and domestic revenues and spend of Pakistani IT Cos.33. Figure 6.9: Sectoral breakdown of global revenue growth of Pakistani IT Cos. (FY 06 & 08)34. Figure 6.9: Sector-wise breakdown of global revenue growth of Pakistani IT Cos. (FY 06 & 08)35. Figure: 6.10: Global revenue of Pakistan’s IT industry by product-service category, platform, tool36. Table 6.1: “In Sample” estimates of Global Revenues and Domestic Revenue and Spend37. Table 6.2: Proportion of companies of various sizes within the sample and their median revenues38. Table 6.3: Corrected global and domestic revenues and spend of Pakistan’s IT industry39. Table 6.4: “In Sample” and population estimates of global revenue and domestic revenue-spend40. Table 6.5: “In sample” estimates and population corrections for industry software / BPO revenues41. Table: 6.6: Estimated size of domestic and export revenues for 2008, 2009, and 2010 3
    • List of AbbreviationsABSEI Annual Business Survey of Economic ImpactAD Authorised DealersBOP Balance of PaymentBPM Balance of Payments ManualBPM5 Balance of Payments Manual version 5BPM6 Balance of Payments Manual version 6BPO Business Process OutsourcingCEO Chief Executive OfficerCIO Chief Information OfficerCSO Central Statistics Organisation (of Ireland)DOE Department of Electronics (India)DRS Domestic Revenue and SpendERP Enterprise Resource PlanningFBR Federal Bureau of RevenueFBS Federal Bureau of StatisticsFEMA Foreign Exchange Management ActFTE Full Time EquivalentGAO Government Accounting OfficeGATS General Agreement on Trade in ServicesICT Information and Communications TechnologyIMF International Monetary FundIS Information SystemsISA Irish Software AssociationITRS International Transactions Reporting SystemITES IT Enabled ServicesMOITT Ministry of IT and TelecomMSITS Manual on Statistics of International Trade in ServicesNASSCOM National Association of Software and Services CompaniesNSC National Statistics Commission (of India)PRAL Pakistan Revenue Automation Ltd.PSEB Pakistan Software Export BoardPTA Pakistan Telecommunications AuthorityP@SHA Pakistan Software Houses Association for IT and IT Enabled ServicesRBI Reserve Bank of IndiaSBP State Bank of PakistanSEI Services Exports and ImportsSME Small and Medium EnterprisesSTPI Software Technology Parks of IndiaUSD United States DollarWTO World Trade Organisation 4
    • 1 – Executive SummaryWhile Pakistan’s software and IT Industry is now more than a decade and a half old, it has so far lackedauthentic and credible data necessary to evaluate its performance of the industry and benchmark itagainst similar industries around the world. This data deficit constrains our ability to design policies andinitiatives necessary to help the industry move forward. In particular, the issue of arriving at the overallsize and revenues of the industry has long been mired in some controversy.The primary reason for the ambiguity is that several sources that seek to calculate these data usedifferent definitions of what is being measured, how it is being measured, and what the relevantpopulation is. In addition, they adopt different methodologies for measuring these data.Thus far, the government has used State of Bank of Pakistan’s (SBP) balance of payment (BOP) figureson trade-in-services compiled through its authorised agents (ADs) against the foreign exchange receiptsas the only “official” estimate of the country’s software / BPO exports. Other sources, such as PakistanSoftware Export Board (PSEB), Pakistan Software Houses Association (P@SHA), among others, have alsoput forward other estimates based on a variety of methodologies, namely, “rules of thumb”, multiples,and survey-based extrapolation etc. The figure below presents the variety of sources and estimates forsoftware / BPO exports: Revenue Estimate Source Software / BPO Export Estimate and Year MethodologyState Bank of Pakistan 2009 – Software: $115.95m, Call Centre: $17.52m Compilation of BOP dataPSEB 2005 2004 – Software: $81.5m (SBP for 2004 = $32m) Survey based extrapolationBearing Point 2005 2005 – IT/BPO Export: $100m (Total: $700m) Multiples and Rules of Thumb 1PSEB 2006 2006 –Export Earnings: $150m (Global: $600m) Rules of Thumb 2P@SHA 2008 2007 – Export Earn/Spend: $269m (Global: $640m) Survey based extrapolationGartner 2008 No independent estimate N/A Source: Technomics Compilation Table 1.1: Software export / BPO estimates by various sources (and studies)The difficulty in accurately assessing software / BPO exports comes from the unique nature of theservice being exported. Software, unlike other goods and services, does not require an entity to navigatenational borders. A mere click of a keyboard can transfer a software service to another country withoutthe knowledge of relevant authorities. These challenges have recently been the subject of severalregulatory changes championed by multilateral institutions like the WTO (through guidelines on Mode 3and 4 trade-in-services) and IMF (through its Balance of Payment Manual – ver. 6).In order to resolve this quagmire, this study looked at a set of peer countries with similar aspirations forsoftware / BPO exports, namely, India and Ireland, to assess how other countries deal with the challengeof creating reliable and consistent software / BPO export figures. Several important themes emergefrom this analysis:First, in both India and Ireland, the primary source of software export data used for policy-makingpurposes comes from self-reported survey data collected by an independent public, semi-public, orprivate entity with credibility and integrity. In the case of India, an attempt to use Reserve Bank of1 PSEB 2006 estimated the overall Pakistani IT Market to be at $2 billion.2 P@SHA 2008 estimated the overall Pakistan IT Market (Hardware & Software) to be between $1.7 – 2.25 billion. 5
    • India’s (RBI) BOP figures, initially, ultimately gave way to the institution of an independent survey nowbeing carried out by RBI.Second, in both India and Ireland, the data collected through the surveys is then corrected for non-response biases before being presented to an outside audience. The response rate for Indian RBIsurvey is about 16% (993 of 6140 firms responding) while that of the Irish Forfás Survey is much higher(around 50%). This is broadly in line with the practice deployed in PSEB 2005 and P@SHA 2008 surveys.Regardless of which way to minimize and correct for the non-respondent bias, however, the analysisof peer countries suggests that direct survey of software / BPO companies is the only credible way tocapture software / BPO export data.In order to develop and test a similar measure for software / BPO export revenues, Technomics carriedout a new survey of PSEB Member Companies involved in export of software and BPO products andservices. We applied three different approaches for correcting for non-response bias to the survey datato arrive at overall figure for the entire industry. Results are compiled below: Global Population Correction Domestic Population Revenue for Global Revenue Revenue Correction for [Sample] [Sample] Domestic Spend Stratified Medians Correction $332.0m $429.93m $129.31m $263.99m Modified “80:20” Method $332.om $157.00m $129.31m $96.51m India (RBI) Model $332.om $137.19m $129.31m $119.97m Stratified Medians Correction $761.93m $393.30m Modified “80:20” Method $489.83m $226.57m India (RBI) Model $469.19m $249.28m Source: Technomics Estimates [2010] Table 1.2: “In sample” estimates and population corrections for industry software / BPO revenuesClearly, these figures are based on the assumptions that are made about the characteristics of the non-respondents. On the whole, though, the estimates suggest upper and lower limits on Pakistan’ssoftware / BPO global exports revenues to be between $761.93 million and $469.19m respectively anddomestic revenue and spend to be between $393.3million and $249.81million respectively.Technomics recommends the constitution and deployment of such a population census on a regularbasis to provide better and more refined approaches to correct for non-response biases within limitedsample surveys.The importance of quality and reliable data on Pakistan’s software / BPO industry, in particular, and theoverall IT market, in general, is well-established. Several important policy conclusions andrecommendations result from the above analysis:Technomics believes that the Government of Pakistan’s practice of using SBP’s Balance of Paymentsdata as the official figure for the country’s software / BPO exports is seriously flawed and has noserious parallels in other countries around the world. 6
    • To that effect, Technomics recommends:Recommendation 1: PSEB undertake an educational and awareness building exercise throughmeetings and briefings to government leaders, policy-makers, senior bureaucrats, as well as domesticand external stakeholders to build support for the creation of an independent revenue capture andreporting system.Recommendation 2: PSEB, in consultations with MOITT and other agencies of the Government ofPakistan (e.g. State Bank of Pakistan, Statistics Division, Ministry of Finance, Ministry of Planning etc.)formulate a Task Force to study and deliberate upon the challenges of setting up a broader and morecomprehensive survey-based system for capturing and reporting software / BPO industry exportrevenue.Recommendation 3: PSEB must follow the examples of India and Ireland to develop an independentcapability to capture primary data from software / BPO companies through an annual census ofsoftware / BPO companies within Pakistan.Recommendation 4: As an interim measure, PSEB may use its annual membership application form tocollect limited population information that may be used for error correction in subsequent samplesurveys. It is also recommended that the Government make it mandatory for software / BPOcompanies seeking to avail the tax holiday to register as a PSEB member.Recommendation 5: PSEB must work with relevant government entities (such as MOITT and Ministryof Finance etc.) to institute policies that would encourage software / BPO companies to declaretruthfully and bring a greater share of their revenues within the country.Pakistan Software Export Board (PSEB), as the key beneficiary of the process, has a critical role to play inconvening this coalition of partners from across the public, non-profit, and private sector divide. 7
    • 2 – IntroductionWhile Pakistan’s software and IT Industry is now more than a decade and a half old, it has thus farlacked authentic and credible data necessary to not only evaluate the performance of the industry andbenchmark it against similar industries around the world but also design policies and initiativesnecessary to help the industry move forward.There have only been a few attempts to systematically study the state and evolution of the Industry sofar. Studies that have sought to document the industry with varying degrees of accuracy andcomprehensiveness include, among others: • 2003-4 PSEB Best Practices Study of Pakistan’s Software Industry; • BearingPoint ITES-BPO Study of 2006; • 2007-8 P@SHA’s Annual Review of Pakistan’s Software Industry; and • 2009 Gartner Study of IT Industry in Pakistan.These studies vary in their coverage of industry’s various segments and sectors and the type of datathey collect. In addition to these more systematic efforts, a number of other “informal” approacheshave also been made to try to size the software / BPO exports from Pakistan.Collectively, through these efforts, there is now a growing volume of credible baseline data on certainaspects of the industry’s performance and structure. However, estimates of the overall size andrevenues of the industry is still mired in some controversy. The primary reason for this ambiguity isthat several sources that seek to calculate these data use different definitions of what is beingmeasured, what the relevant population is, and also adopt different methodologies for measurement.For instance, State Bank of Pakistan is able to ascertain – with fair degree of accuracy – the imports ofsoftware by major government departments and large public and private organizations across thecountry as well as the IT/ITES export revenue earned and repatriated back to Pakistan by the ITcompanies. These statistics are published in SBP’s quarterly and annual balance of payment figures.PSEB has, in the past, used a “rules of thumb” approach to calculate industry revenues that put theoverall size of the software industry in the $2.2 billion ballpark. P@SHA, on the other hand, has carriedout an extensive data collection exercise of its membership and arrived at a revenue estimate of $1.0(plus) billion in domestic IT expenditures and sales and another $1 billion (plus) in global revenue impactof its member countries.This lack of credible and consistent data on the software and ITES industry in Pakistan not onlyhampers the policy making process but also affects the industry’s own ability to market itselfcompetitively against other similar industries around the world and the firms’ ability to plan productdevelopment decisions well in advance based on realistic and actionable market estimates.A Better understanding of Pakistan’s IT Market – export and domestic – will require the creation of an ITmarket revenue classification system that may be used to accurately estimate the size and nature of thedemand and supply of IT products within and from Pakistan. This analysis must then become thebackbone for a nation-wide policy-making process that would use real and credible data for developinga refined case for public policy support for IT and software industry in Pakistan. It will also provide usefuland credible “market signals” to new start-ups seeking to enter the market and the more establishedones in planning new product and service rolls-outs. This study takes a deeper look at the problemsand challenges of calculating industry revenues and seeks to make recommendations to developbetter estimates. 8
    • 3 – BackgroundOne of the primary challenges of policy-making for the IT Industry in Pakistan is the absence of credibleand reliable industry data across the entire software industry value chain including inputs (e.g. humanresources, employment etc.), outputs (revenues distributions by sectoral and technology categoriesetc.), and outcomes etc. The absence of credible data on the industry outcomes of interest results in acritical weakness in the policy-making processes thus hampering the use of evidence-based policypractices in the first place and limiting the ability to improve upon the policy and programme designonce a policy regime has been put into place.Another critical gap that may result from lack of credible data is the inability to clearly define acoherent, cogent, and defendable case for public policy support of the software industry. This becomesparticularly important in times of economic recessions when government revenues are already decliningand all public expenditures are under increased scrutiny for effectiveness and ability to deliver public (orprivate) returns. Under these circumstances, credible data on industry inputs, outputs, and outcomescan provide the necessary basis to develop a case for public support for the industry.3.1 – The need for credible data for evidence based policyWell designed and executed policy programmes are developed on the basis of due and appropriate carein carrying out upfront analysis and assessment, evidence-based policy design, and seamlessimplementation with key stakeholders on board. Policies and programmes designed with detailedplanning, analytical rigor, and a high implementation focus are most likely to deliver best results.A well crafted evidence-based policy is often a result of an iterative process that begins with a detailedsituational assessment that collects data, from both a market and a policy standpoint; develops a broadnational policy outline that draws from or builds upon the support of key stakeholders; and thenformulates specific detailed policy packages within key focus areas leading to implementation. Thefollowing figure provides a graphical depiction of the three-step evidence-based policy-making process: Detailed Dubai Framework Broad National Specific Detailed Situational Policy Outline Policy Packages Assessment (Case for Public Support) Market Side: -Stakeholder exercise to ascertain -Detailed analysis of individual objectives and thrusts policy instruments and packages -Revenue Assessment (e.g. HR, Certifications, Marketing -International policy benchmarking and Branding, IT Parks, -Strategic Market Analysis and Opportunity Assessment -Preliminary review of policy costs Procurement, etc.) and benefits -Detailed cost and benefit and -Opportunities and Trends Analysis -Creation of an Evidence-based impact analysis of individual policy policy package / regime instruments Policy Side: -Broad National Policy Outline - Detailed design of policies and -Policy and Programme programmes -Stakeholder buy-in and Effectiveness Assessment implementation plan -Detailed implementation plans for - Cost and Benefit Analysis policies and programmes Figure 3.1: The data needs of a three-tiered evidence-based policy-making process 9
    • The critical issue of collecting accurate and credible data is thus central to creating a case for publicsupport for IT industry and the aspiration of developing evidence-based policy in Pakistan. This criticalissue suffers from lack of coherence and coordination between various agencies that collect data for avariety of reasons.As things currently stand, the primary responsibility of collecting accurate IT / ITeS export data inPakistan seems to be that of the State Bank of Pakistan (SBP) which compiles this balance of payment(BOP) data from the banks under a policy framework that requires IT / software companies to registerwith the State Bank for the purpose of retaining part of the foreign exchange that they bring within thecountry. In the past, State Bank has, on the request of MOITT / PSEB, shared the export revenues of thetop-10 companies in the country for the purpose of distributing export awards and trophies to the same.However, SBP’s mandate for collection and dissemination of this data is limited.SBP is facilitated – to varying degrees – by other entities such as Federal Bureau of Statistics (FBS),Federal Board of Revenue (FBR), Pakistan Revenue Automation Ltd (PRAL), Ministry of IT and Telecom(MOITT) etc. These entities, especially the SBP, have continually recorded revenues that are much lessthan the estimates put forth by PSEB and P@SHA. There have been instances in the past wherediscrepancies have been identified in the classification systems and processes that are used by theseentities and were ultimately corrected. However, considerable gap remains between what these officialentities – most notably SBP – report and what is put forth by PSEB and P@SHA.Further confusion is added to the mix by a number of figures floating around the media that areproduced and used by leading private data collection entities such as Gartner, IDC, CIO etc. These figuresuse formula-based approaches and hence may be even less accurate. Finally, countries like India thatmay use indigenous, sometimes controversial, methodologies to report industry revenues furtherdistort the already complex picture and create an incentive to over report.The lack of credible revenue data on the overall industry as well as various sub-classifications andcategories and a method to produce figures that are comparable with other similar industries aroundthe world is a major hindrance to strategic planning and policy-making, on the one hand, and publicrelations, marketing, and branding of the industry, on the other hand.3.2 – Challenges in IT market and revenue classification and estimationCalculating software / BPO revenues is an accounting challenge, Trade-in-services is much harder tomonitor than trade in physical goods. Physical goods pass through air, sea or land ports, and areaccompanied by detailed financial and other documentation. Services trade, on the other hand, can betransacted over the Internet, through post, or through travel of personnel, with revenue flowing intocompany or personal accounts, which can exist anywhere in the world. The problem is even starkerwhen we consider software services as these are even harder to track and account for.The World Trade Organisation (WTO) through its General Agreement on Trade in Services (GATS) seeksto mitigate this problem by prescribing four-mode model aimed at capturing trade in services. Inaddition to the two usual modes of trade employed by physical goods, the World Trade Organization(WTO) lists Mode 3, revenue generated by commercial offices overseas, and Mode 4, compensationreceived by temporary workers who have travelled abroad, as export revenue streams which must beincluded in trade revenue calculation. There is also strong evidence to suggest that other countries, suchas India, in fact employ global services export figures when reporting or estimating revenue. The fourmodes of trade are summarised in the figure below: 10
    • India’s IT Exports using WTO Modes 1 to 4 of Trade in Services WTO-Mode Description Indian Share of Software for FY2007 Mode 1 Cross Border Supply 60.4% Mode 2 Consumption Abroad 0.6% Mode 3 Commercial Presence 13.9% Mode 4 Presence of Natural Persons 25.1% Source: RBI - Survey on Computer Software and Information Technology Services Exports 2007-08 Table 3.1: Proportion of India’s IT exports using WTO Modes 1 to 4 for Trade in ServicesClearly, including Mode-3 and 4 within the software / BPO revenue estimation makes considerabledifference to the final figure.An additional twist to the story comes through the introduction of several versions of the Balance ofPayment (BOP) Manual (BPM) of the International Monetary Fund (IMF) and the calculation ofcomputer services revenues according to the activities allowed with these two different versions,namely, BPM5 and BPM6 (also known as MSITS). The BPM6 / MSITS allows the inclusion of hardware,computer facilities management, and a range of consultancy services (including disaster recoveryservices and consulting) within the activities allowed over and above those allowed by BPM5. Thedefinitional differences are produced below: Figure 3.2: Differences in the BPM5 and BPM6 (2008) or MSITS (2002) Definitions of Software 11
    • State Bank of Pakistan (SBP) currently calculates its balance of payments (BOP) figures on the basis ofBPM5. The Reserve Bank of India (RBI), on the other hand, uses BPM6 / MSITS for its BOP calculations.This, according to PSEB, creates a major discrepancy in the figures of SBP and RBI: “The State Bank of Pakistan in its statement for the year 2008-09 reports the export figures of software and IT-enabled services to be US$ 201 million which shows a consistent annual growth. State Bank of Pakistan adopted BPM 5 reporting system to report the IT exports revenue, which restricted the export figures to US$ 201 million only in 2008-09. In India, the Reserve Bank of India follows the BPM 6 (also called MSITS) Reporting System, which raises its exports to billions of US dollars. BPM 6 includes sales to multinationals, earning of overseas offices & salaries of non-immigrant overseas workers to export revenue. Using the MSITS Reporting System, Pakistan IT Industry exports are estimated at US$ 1.4billion while the industry size is estimated at US$ 2.8 billion.”[Source: PSEB Website]The essence of PSEB’s claim is that the use of BPM5 vs. BPM6 reporting system creates a discrepancy ofabout 7 times in the software export revenues reported by State Bank of Pakistan. This is anunsubstantiated claim and the mistake here, we believe, is to confuse the BPM6 with the WTO Mode 3and 4 mechanisms which are two entirely different constructs put forth by two different entities.PSEB goes further to claim that using the WTO Mode 3 and 4 mechanisms for trade-in-services willresult in the country’s exports to $1.483 billion: Pakistan’s IT Exports using WTO Modes 1 to 4 of Trade in Services Mode Description IT Exports ($) 1 Represents services that are sold by the exporting country 242m (16.3%) to the importing country, with only the service crossing Cross Border the border e.g. architectural drawings sent by courier, consultant report sent by email, call centre support provided over the Internet, or software programs sent over the Internet. 2 Represents services sold in the exporting country to 300m (20.2%) foreigners or foreign-owned entities in the exporting Consumption country itself e.g. IT services sold to the World Bank, the (Average USD 250,000 expenditure by over 800 Abroad USA embassy or to one of the 700 multinational companies operating in Pakistan. entities) 3 675m (45.5%) Represents the revenue of national firms established Commercial abroad, selling services in a foreign market. Presence 4 Represents services that are sold or delivered through the 266m (17.9%) presence of the service provider temporarily in the foreign Temporary market e.g. the annual salaries of all H-1, L-1 and B-1 (At least 5000 workers earning at least USD Movement Pakistani IT workers in the USA. 40,000 per year on average) Source: PSEB Website, 2010 Table 3.2: Pakistan’s IT Exports using WTO Modes 1 to 4 of Trade in ServicesThese figures are clearly “guesstimates” rather than actual estimates of balance of payments or trade-in-services for Pakistan’s IT industry. The corresponding figures for India, as per RBI’s latest 12
    • reconciliation attempt, are: Mode 1 (60.4%), Mode 2 (0.6%), Mode 3 (13.9%), and Mode 4 (25.1%). It isworth noting here the wide discrepancies in at least two of the four Modes, namely, Mode 2 and 3. Therespective percentages for Modes 2 and 3 for Pakistan and India are 20.2% and 0.6% (Mode 2) and45.5% and 13.9% (Mode 3) respectively. The differences are unexplainable even if one takes intoaccount the differences in the structure of the Pakistani and Indian software industry. There is clearlysomething amiss here.Although these multiple frameworks and revenue recording and assessment approaches are partlyintroduced to adapt to the changing nature of the software / BPO work and trade in services around theworld and to make the reporting of data more harmonised and consistent, they clearly introduce a lot ofcomplexity and confusion within the debate.Rectifying these discrepancies in the accounting of the software / BPO export revenues would lead tobetter information that may be fed into evidence-based policies focussed at these sectors. 13
    • 4 – Study Objectives and DesignThe objectives of the study, as defined in the Terms of Reference document, are as follows: • To better understand the prevalent practices, methodologies, and processes of recognizing revenues from export of IT/ITeS industry – especially software services industries – from multilateral institutions (such as WTO and IMF) and countries (such as India, Ireland etc.); • To map the process of recognising revenue by the State Bank of Pakistan through its official “balance of payment” figures for trade-in-services and speculate on the causes for discrepancy between PSEB estimates and SBP official figures; and • To make recommendations to improve the accuracy of software services export revenue recognition and recording through modifications in existing data collection systems in Pakistan.In line with the above objectives, a three pronged strategy was adopted:Task 1: Understanding and Mapping of Revenue Collection and Reporting SystemsIn the first phase, Technomics sought to better understand, map, and benchmark IT revenue recordingand data collection in Pakistan including IT revenue collection mechanism currently used by the SBP andelsewhere. This analysis focussed on identifying the sources of discrepancy in the figures put forward bydifferent entities and explaining the reasons for the same. In addition, a benchmarking exercise wascarried out for peer group of countries, namely, India and Ireland to better understand how thesesystems function in these countries and to draw lessons for Pakistan.The key methodological approaches used in this analysis were data collection, analysis, and synthesisthrough desk research, literature review, and policy benchmarking analysis.Task 2: IT Market Revenue Classification and EstimationIn the second phase, Technomics sought to collect IT market revenue data – including domestic andexport revenues – on Pakistani software, IT, and IT-user companies and public sector organizations tocreate a comprehensive and credible picture of the country’s total IT spend and revenue across variouscategories. These data were then extrapolated to account for non-response bias to arrive at an estimatefor the overall IT market.The key methodological approaches used for the above analysis was survey research followed byqualitative interviews with CEOs and CIOs of the development and user communities respectively.Task 3: Recommendations for Public PolicyIn the third phase of the study, Technomics made recommendations to improve the quality andcoverage of the data collected to enable relevant government departments and ministries tomake policies that informed and driven by accurate data on the industry. 14
    • The figure (below) presents a diagrammatic representation of the work plan carried out to achieve theabove objectives along with aims, key activities and deliverables for each phase of work: Task 1 Task 2 Task 3 Understanding and Pakistan IT market Recommendations Mapping of Revenue Revenue Classification for Public Policy Reporting Systems and Estimation Aim: To better understand Software Aim: to create a IT Market Revenue Aim: To make recommendations for / IT revenue recording and Classification and Estimation System public policy to enhance the accuracy estimation systems in Pakistan (e.g. and create estimates of domestic IT of recording software / BPO / IT by SBP, PSEB, and others) and spend and export revenues for revenue for evidence-based public comparable peer countries Pakistan policy design and execution 1A: Understand Pakistan’s 2A: Developing a revenue 3A: Develop estimates of Software / BPO / IT revenue classification system to record Pakistan’s Software / BPO / IT recognition system(s) Software / BPO / IT revenue Market using most appropriate • Understand and Map SBP’s • Develop a revenue classification mechanisms recognition of BOP (BPM5) model drawing upon industry • Develop an estimate of Pakistan’s software exports figure sectors, platforms-tools, developer software / BPO market (domestic • Understand alternate revenue vs. user distinctions and foreign) using different figures put forth by other entities • Incorporate WTO / BPM5 or BPM6 approaches including NASSCOM, BPM6 considerations in the revenue approaches classification scheme • Identify possible problems and • Pilot test the system bottlenecks with each. 2B: Surveys and Interviews with 3B: Recommendations for Public 1B: Understand Software / BPO leading Pakistani Software / Policy to enhance the accuracy / IT revenue recognition in a BPO / IT companies to of recording software / BPO / peer group of countries estimate current market and IT revenue • Understand the Software / BPO future direction • Make recommendations for public revenue recognition approaches • Surveys and interviews of 50-70 policy to help improve the software used by peer countries largest software / BPO companies / BPO revenue recognition system • Identify possible options for in Pakistan in Pakistan Pakistan for improving its software • Surveys and interviews of top-50 • Make policy recommendations for / BPO revenue recognition leading IT users in Pakistan Encouraging software / BPO process. companies to bring money into Pakistan. Deliverables and Outcomes: A Deliverables and Outcomes: A Deliverables and Outcomes: clearer understanding of Pakistan’s new revenue classification and A set of policy recommendations to Software / BPO revenue recognition estimation approach along with first allow PSEB to improve the quality and system. set of data to populate it. coverage of software / BPO revenue data available to it. Figure 4.1: A graphical representation of the work planThe following chapter presents the findings. 15
    • 5 – Understanding and Mapping of Software / BPO RevenueReporting SystemsThis chapter looks at various software / BPO export revenue reporting systems and mechanisms beingused within and outside Pakistan. In section 2.2, we looked at the challenges of recording software /BPO revenues and the confusion and complexity created by various schemes and mechanisms, namely,BPM5 and BPM6 of the IMF and Modes 3 and 4 of Trade-in-Services of the WTO.In the sections that follow, we will look at various other estimates of Pakistan’s software / BPO exportfigures that have been put forward and discuss the relative merits and demerits of each. We will thenseek to carefully understand and map the software / BPO revenue recognition system used in Pakistanand compare this with two comparable peer countries, namely, India and Ireland.5.1 – Past Efforts at Estimating Pakistan’s IT market and Software Export RevenuePrimarily because of the relatively nascent software / BPO industry but also owing to the challenges ofestimating the software / BPO services revenues outlined above, the estimates of the overall size ofPakistan’s IT and BPO industry vary considerably. In addition to the current PSEB position 3 that usesBPM6 (MSITS) method for calculation of industry revenues, a number of studies have attempted todevelop estimates of the software / BPO revenues using a number of different methods, namely, “rulesof thumb” to estimate various components of the overall revenues, multiples from comparablecountries to estimate demand, and systematic data collection at the company level to create anestimate of market size.In this section, we will review and illustrate five of these approaches and evaluate the relative meritsand de-merits of each. The following chart provides some key characteristics of these estimates: Estimate / Entity Estimates Mechanisms Used State Bank of Pakistan Trade in Services – 5 classes of IT BOP estimates under BPM5 reported by [SBP, 2010] products services Authorised Agents (Banks) on Form “R” Software Best Practices Software Export Revenues of 60 Survey Questionnaire – Self reported Study [Technomics, 2005] firms surveyed categorical data Bearing Point Study Domestic and Export Revenues of “Bearing Point Analysis”, Rules of Thumb, [Bearing Point Inc., 2006) IT/BPO and PSEB/P@SHA data PSEB Concept Note Domestic IT market and Software Rules of Thumb and Multiples of Export Revenues Comparables Analysis [PSEB, 2006] P@SHA Annual Review Global Revenue Estimates and Survey Questionnaire – Self reported 2008 [Technomics, 2008] Domestic IT Spend of 85 cos. categorical data, some estimates Source: Technomics Compilation Table 5.1: A glossary of different software / IT market estimates3 http://www.pseb.org.pk/item/industry_overview available on PSEB Website (accessed: June 21, 2010) 16
    • Each of these five estimates is being described below in some detail.5.1.1 – State Bank of Pakistan (SBP)The State Bank of Pakistan collects data on Pakistan’s trade in services under different trade accountsusing the Balance of Payment Manual 5 (BPM5) classification methodology. Under this, two heads areparticularly relevant, namely, communication services which includes, among others,telecommunication services and call centres (since FY07) and computing and information services whichincludes, among others, hardware consultancy services, software consultancy services, repair andmaintenance of computers, export of computer software, and other computer services. The followingtable describes the position under each of these heads for the last 5 years (FY05 to FY09). Trade in Services Account / Exports $m FY05 FY06 FY07 FY08 FY09 Communications Services 333.85 197.87 122.89 117.02 195.57 9101-Telecommunications Services 330.85 195.96 110.94 99.79 117.04 9102-Call Centres - - 10.242 14.097 17.52 Computing and information Services 47.35 72.24 104.09 154.02 183.82 9181-Hardware Consultancy Services 0.407 1.20 1.44 0.89 2.09 9182-Software Consultancy Services 10.16 18.14 20.56 28.14 25.09 9183-Repair & Maintenance of Computers 0.187 0.11 0.039 0.15 0.41 9184-Export of Computer Software 32.13 46.39 73.02 100.69 119.95 9185-Other Computer Services 4.08 5.93 8.63 21.76 34.93 Total Exports within Select Categories 46.97 71.79 103.71 151.65 182.49Table 5.2: State Bank’s trade in services BPM5 figures for ICT related categories [Source: SBP, 2010]These figures are taken as the most authentic ones on exports of software and consultancy services thatare collected by any public agency in Pakistan. They have integrity by virtue of their accuracy as they arebacked by actual flows of revenues. However, there have been questions about whether or not thesenumbers actually capture the construct of interest (namely, software exports) and to what extent dothese capture the export earnings of the industry.5.1.2 – Software Best Practices Study (PSEB 2005)The Software Best Practices Study commissioned by Pakistan Software Export Board (PSEB) waspublished in Feb 2005 and, for the first time, collected revenue data from 60 of the country’s leadingsoftware and services companies. It estimated the combined software exports of these 60 companies at$81.15 million. The State Bank figure for the preceding year was $32 million. The obvious shortcomingof this estimate is its limited sample size. The study tried to correct for this by adopting the 80:20 rule(i.e. assuming that 20% of the industry’s largest companies will contribute to 80% of its revenues) whichis a defendable estimation. 17
    • 5.1.3 – Bearing Point Study (Bearing Point 2005) Figure 5.1: Graphical extract from Bearing Point Report (Source: Bearing Point, 2005)The Bearing Point Study estimated the size of Pakistan’s IT market and software export as follows: • The size of Pakistan’s IT industry is about US $ 700 million with annual software turnover of about US $ 70-80 million. • The total value of some of the ongoing large IT projects of the public and private sector organizations exceeds US $ 100 million.However, in putting forth these figures, Bearing Point cites P@SHA and PSEB sources for the data. Thesecan, therefore, not be considered independent estimates. In addition, the report estimates that theglobal revenue of Pakistani software companies is considerably larger than what is brought in Pakistan.For instance, it says: “… the global revenues of Pakistani IT companies is estimated at US $ 200 million at the minimum, since they are bringing into the country US $ 50 million to cover their costs, and typically the company earns four times that amount globally...”5.1.4 – PSEB Estimates 4 (PSEB 2006)In March 2006, PSEB put forward a concept paper titled “Pakistan’s IT Revenue May be GrosslyUnderestimated” in which it claimed: “A recent BearingPoint study1 places Pakistan’s Global IT Export Revenues in FY04 at around USD 400 million. The basis of the figure was State Bank of Pakistan IT export revenue figures of just under USD 50 million. BP multiplied this figure by two to account for IT export revenue brought into the country but not registered as such with the State Bank. BP further estimated that for each dollar brought into the country three dollars is retained by Pakistani IT companies overseas. Therefore global IT revenue of Pakistani companies added up last year to USD 400 million”4 Hussain, Y., Pakistan’s IT Revenue Maybe Grossly Underestimated, dated August 2006, available at:http://www.pseb.org.pk/UserFiles/documents/IT_Revenue_Understated_V1.4.pdf 18
    • Using the latest State Bank of Pakistan’s projection of 50% growth rate in software export earnings,PSEB arrived at the figure of $600 million for the country exports in FY05: Forecast State Bank Estimated Total Domestic Estimated Global Export Reporting Earnings Export Earnings Earnings USD 75 USD 150 USD 600 Table 5.3: Pakistan IT exports earnings FY05 (Source: PSEB 2006)The concept note then goes on to ask: “Should global IT export revenue – rather than export earnings – be used as the key measure for exports? It should – if that is the international norm. The World Trade Organization (WTO) lists Mode 3, revenue generated by commercial offices overseas, and Mode 4, compensation received by temporary workers who have travelled abroad, as export revenue streams which must be included in trade revenue calculation.1 Further there is strong evidence, discussed latter, to suggest that other countries such as India in fact employ global services export figures when reporting or estimating revenue.”The concept note goes ahead to use certain anecdotal estimates and rules of thumbs to arrive at thetotal size of Pakistan’s domestic IT market. The figures are reproduced in the table below: Estimates of Domestic IT Market of Pakistan Using “Rules of Thumbs” Approach Spend / Market Category Revenue / Spend PC/Laptop/Servers USD 700 million 1,000,000 new and used CPU @ USD 700 per CPU Peripherals USD 200 million 30 % of computer sales International Software Vendors USD 150 million IT Services USD 350 million Software and services, IT enabled services, ISP Total Domestic IT Revenue USD 1,400 million Table 5.4: Estimated domestic IT revenue, FY05 (Source: PSEB 2006)Therefore Pakistan’s Global IT Revenue for FY05 will probably be around two billion dollars – USD 2billion.The concept note then suggests the comparison of key IT personnel and internet bandwidth usageparameters as a means to validate the above hypothesis. The analysis is reproduced below: 19
    • Country Estimated Global IT IT Personnel Internet Bandwidth Revenue Usage Pakistan USD 2 billion 75,000 5 600 MBS 6 India USD 36 billion 7 965,250 8 6.21 GBS 9 Ratio 1: 18 1: 12.87 1: 10.35 Table 5.5: Comparison of IT revenue, personnel and bandwidth – Pakistan, India (Source: PSEB, 2005)This kind of analysis must satisfy several critical assumptions for it to be valid. However, even if not anaccurate estimate of the size of IT industry in Pakistan, it sets a formidable challenge to the SBP figures.5.1.5 – P@SHA Annual Review (P@SHA 2008) Figure 5.2: Pakistan’s IT Spend and Global Revenue Impact (Source: P@SHA 2008)P@SHA Annual Review of 2008 carried on from where PSEB 2005 left by trying to introduce greater rigorin the estimation of Pakistan’s overall IT market. In particular, instead of using estimates and rules of5 PSEB conducted an internal study entitled “Assessment of IT Professionals in Pakistan” in 2005 which reportedthe figure at 75,000. An “IT HR Needs Assessment Study” conducted by BCCI FAST and sponsored by PSEB in2005, that excluded large Government Research and Defense Organizations, reported the figure at approximately54,000.6 PSEB, Domestic Business Department, 20057 “Indian IT-ITES Sector to Exceed USD Billion in FY 2006,” February 2006. (www.nasscom.org)8 “Indian IT-ITES Sector to Exceed USD Billion in FY 2006,” February 2006. (www.nasscom.org) FY 06 estimate of1,287,000 for FY 06 was reduced by growth rate of 30% to arrive on figure for FY 05.9 NASSCOM Strategic Review, 2004, p 207 20
    • thumbs, the P@SHA Annual Review returned back to the tradition of PSEB 2005 by asking companies todisclose their revenue and basing its estimation of the size of the software industry on those disclosures.One of the major contributions of the P@SHA Annual Review 2008 Study was to introduce, for the firsttime, in any rigorous way the idea of Global Revenue Impact of Pakistani IT companies. This new metrictook into account the challenge of attributing the portion of the global revenue of a Pakistani companyeven though it may have never brought into the country. Bearing Point Study of 2006 had estimated theglobal revenue of Pakistani companies to be four times what was brought within Pakistan. The GlobalRevenue Impact metric went a step further by attributing to the Pakistani company a share of theoverall revenue of its foreign parent based on its contribution to the creation of those revenues.The report estimated the domestic IT revenue and spend of the 85 software / IT companies surveyedfor 2007 at around $269 million (estimate) and their overall global revenue impact at around $909million (estimate).5.1.6 – Gartner IT Strategic Review (Gartner 2009)Gartner Inc’s Strategic Review, while reviewing Pakistan’s Software / IT industry and making somestrategic recommendations, did not delve into the task of sizing Pakistan’s Software or IT industry. * * *Taken together, these figures collectively present a somewhat confusing picture. On the one hand, it isquite clear that most credible (i.e. transactions backed) data is being collected by the State Bank ofPakistan, it is also true that State Bank figures do not represent the complete picture of softwareexports from Pakistan. There is a growing – almost overwhelming – body of evidence to suggest that theState Bank’s estimates seriously under-estimate the size of Pakistan’s software / BPO exports. On theother hand, are the numerous other estimates that use either survey-based self-disclosure or rules-of-thumb-based estimation approaches to calculating the country’s software export revenues may not beas accurate as the SBP’s balance of payment figures but provide a much better coverage of the type oftransactions that make up the overall software exports.Abstracting from Pakistan’s specific situation, however, there are a number of other aspects of thisproblem that make it particularly complex and challenging. First, there are legitimate needs of softwareexporters to keep at least a portion (sometimes a major portion) of their export earnings abroad whichmust be accounted for in any calculation of software and IT-enabled exports. Second, furthercomplicating the picture is the expanding definition of software and IT-enabled services. This is clearlyevident from the definitional changes between IMF’s Balance of Payments Manual version 5 and 6(BPM5 and BPM6) whereby the latter quite legitimately takes a much more expansive view of softwareand IT-enabled services.The challenge for the IT industry policy-makers, corporate leaders and marketers, and interestedinternational stakeholders such as investors, analysts, and ranking entities, therefore, is to identifythe most reliable estimate of the size of country’s IT market and its software / BPO revenues. 21
    • 5.2 – IT Market Revenue Classification and Estimation - Comparison of Peer CountriesThis section looks at a group of peer countries, namely, India and Ireland, to address the issue of validityand authenticity of calculating software / IT revenues. The primary issue of concern in Pakistan’s contextis whether the software export revenue figures produced by the State Bank of Pakistan (SBP) could beused as a reliable measure of the country’s software / BPO exports or must an alternate means ofgenerating this data be employed to arrive at more reliable estimates.It has already been demonstrated above that a preponderance of evidence suggests that SBP figures forSoftware / BPO exports grossly underestimate the software / BPO export revenues of Pakistan.Nevertheless, in policy discussions within the government, the SBP figure has become as an anchor -the “only” official estimate – for the country’s software / BPO exports.In order to assess the appropriateness of SBP’s balance of payment numbers as a reliable top-line figurefor Pakistan’s software / BPO exports and to find an explanation of the discrepancy between the SBPfigure and other estimates, it might be useful to look at how other peer countries collect data onsoftware / BPO exports and what is the level of discrepancy between software / BPO export figures putforth by central banks, national income accounting entities, statistical bodies, policy-making bodies, andindustry associations.What follows below is an analysis of two peer countries, namely, Ireland and India, that are chosen forthe availability of relevant data as well as similarity in “aspirations” as software exporting nations.Before we discuss how software / BPO export revenues in Ireland and India are calculated, we wouldfirst look at how the process works in Pakistan.5.2.1 – Software / BPO Revenue Recognition in PakistanIn Pakistan the primary set of official software / BPO export revenue figures quoted come from the StateBank of Pakistan. Pakistan Software Export Board (and its parent Ministry, The Ministry of InformationTechnology and Telecom – MOITT) is one of the most important consumer of this information for policypurposes. In particular, PSEB is charged with enhancing the country’s software / BPO export earningsand justifies the existence and effectiveness of its programs on the basis of an increasing trend in thesoftware / BPO earnings. To that effect, PSEB is an interested – rather than independent – party to thisdebate.The figures that SBP is able to produce are, in essence, not really the software / BPO exports of thecountry but the balance of payments arising due to trade in software and BPO services that areregistered at the foreign exchange desk of the SBP. In order to reconcile the difference between the ITexports revenue estimated by PSEB and the external transactions data reported by SBP, it is importantto understand what SBP figures constitute of and the mechanism of compilation of this data.The Statistics Department of the State Bank of Pakistan uses standard practices of data collection,compilation, and dissemination to compile the balance of payments statistics, money and bankingstatistics and corporate sector statistics. However, unlike an ordinary data collection operation, SBPbenefits from its unique position as the central bank regulator within the country. In connection withthe compilation of balance of payments statistics, for instance, the information is received fromAuthorized Dealers (ADs) in Foreign Exchange. 22
    • State Bank of Pakistan, under authority of Foreign Exchange Act of Pakistan (1947), has made itmandatory for the ADs to report all the transactions in foreign exchange described under Chapter XXII ofForeign Exchange Policy Manual (2002). The data on these transactions are presently being collectedunder International Transactions Reporting System (ITRS).The ITRS is the most comprehensive system of data collection on foreign exchange transactions used bythe compilers of BOP worldwide. ITRS of banks is the major data source for the current accounttransactions of the BOP. It is very helpful to counter check the flows in the financial account and providetimely and most accurate data on the BOP.The State Bank of Pakistan uses definitions of the fifth edition of the International Monetary Fund’s(IMF) Balance of Payments Manual (BPM5). This is achieved through code guide that provide guidelinesto the banks and exchange companies authorized by the SBP to deal in foreign exchange business forreporting data under ITRS. The “Code Guide” is aimed to give ADs all the relevant code lists that wouldfacilitate the accurate classification of foreign exchange transactions.The authorised dealers are Process of ‘R’ form reporting against export proceedsrequired to report alltransactions to the State Bankof Pakistan using the code SWIFT Message is receivedguide. Code list 5 is used forcapturing invisible receiptsand payments on account of Field 70 ispurchase and sale of foreign checked for commercial Payable in FCYcurrencies by authorised purpose of funds account – No ‘R’ form requireddealers relating to invisibleitems like services. Payment for No commercialIn addition, the State Bank of purposesPakistan also requires Payable in LCYauthorised dealers to provide Yes account – ‘R’ form required if other thansupporting documentation Customer is approached for family remittancecontaining details of declaring purpose of fundstransactions reported bythem. This supporting A monthly return isdocumentation includes, Remittance No sent to the State Bank of Pakistanamong others, Forms R and > US $ 10,000 for providing themIRV which are relevant for with the datareporting receipts on account Yesof transaction with purposes ‘R’ form submittedother than exports and family to the State Bank of Pakistan – on amaintenance. monthly basisForm R is declaration in respect Figure 5:3: Flow chart representing revenue recognition processof receipts above US $ 10,000for purposes other than exportand family maintenance. Form IRV is a voucher that captures details of all inward remittances for familymaintenance and other receipts up to US $ 10,000 for the purposes other than exports. 23
    • As soon as the authorised dealer (Bank) receives a foreign exchange remittance in the account of aclient, he or she will ask the client (the software company) to declare the source of the funds by fillingout the Form R. In particular, the ADs are required to get the client to fill out a code (as per BPM5) thatwill classify the activity for which the remittance is received. Relevant codes for software / BPO are:Communications Services • 9101- Telecommunications Services • 9102-Call CentresComputing and informationServices • 9181- HardwareConsultancy Services • 9182-Software Consultancy Services • 9183-Repair & Maintenance of Computers • 9184-Export of Computer Software • 9185-Other Computer ServicesGenerally, ADs will advise thesoftware / BPO companies tocode the foreign exchangereceipts of software / BPO servicecontracts as either 9102 (callcentre) or 9184 (Export ofComputer Software). Figure 5:4: Graphical representation of the “R” form (Source: SBP)Clearly, the use of the balance of payment figures from Form R as nothing more than a rough proxy forsoftware / BPO revenues is fraught with possibilities of potential biases and errors.First, and foremost, the number on Form “R” that is being used as software / BPO export earnings isnot that. It is merely the record of payment rendered from non-residents of a country to its residents 10.To that effect, a country’s balance of payment figures will capture receipts on account of sales fromsoftware / BPO sales between residents and non-residents that are was voluntarily disclosed by theaccount holder as such. Clearly, this leaves ample room for potential mis-coding and biases. Forexample: • Scenario 1: It could be, as is often claimed, that the company that exported software or BPO services from Pakistan did not bring the revenue back into the country. This could be true for a number of valid and legal reasons other than tax evasion. Given that there is no corporate tax on software / BPO earnings in Pakistan there is very little incentive for companies to avoid bringing money to Pakistan due to tax avoidance.10 As per BPM, Balance of Payments is defined as is a statistical statement that systematically summarizes, for aspecific time period, the economic transactions of an economy with the rest of the world. 24
    • • Scenario 2: The company (or its leadership) may want to retain a certain portion (or all) of their earnings abroad. These reasons may include, but are not limited to, the desire to maintain flexibility of foreign funds transfer, to fund international operations of the company, or to avoid “forced” devaluation due to changes in currency value etc. The validity and legality of these reasons may also differ. Ascertaining the legality of companies’ motives is beyond the scope of this report. • Scenario 3: The company may have given extended payment terms to the customer or may have agreed to deferred payments in which case although the incidence of the sale has occurred, balance of payment figures will not record until the receipts and made and voluntarily disclosed as such.Second, filling out Form “R” is a manual process whose accuracy depends on the discretion,knowledge, and diligence of the company and its bank (authorised agent). There could be several waysin which this process might go wrong even though neither the company nor the bank intentionallywanted it to go wrong the first place and thus end up under (or over) estimating the software / BPOrevenues.Technomics interviewed relevant State Bank of Pakistan (SBP) officials within the Foreign Exchange andStatistical Departments of the Central Bank. Our conversations suggest that SBP maintains that itsBalance of Payment (BOP) statistics are not designed to measure software / BPO export revenues. Theyconsistently deny having encouraged any department (or Ministry) of the government to measurePakistan’s software / BPO export earnings through the use of the BOP statistics. They claim having beenforced into providing these statistics for purposes other than the reporting of Country’s balance ofpayments (e.g. for the purpose of identifying largest exporting companies) and have only hesitantlydone so.If the balance of payment statistics are not a good way to measure the country’s software / BPO exportrevenues, what would it be? Other than survey techniques that PSEB and P@SHA have employed in thepast – albeit with limited coverage of the population of interest – there are no other mechanismsavailable to the policy-makers in Pakistan.In order to seek an answer to this question and understand the statistical challenges involved, welooked at two other peer countries – namely India and Ireland –that have made considerableadvances in IT (software / BPO) exports.5.2.2 – Software / BPO Revenue Recognition in IndiaThis section describes India’s approach to determining the size of its IT industry. The research belowbrings forth some stark similarities and differences between the Pakistani and the Indian systems ofreporting.In India, there are two sources that are normally quoted when defining the industry’s performance;these are: NASSCOM and Dataquest. Neither of these is a public agency. Previous research has shownthat their estimates of IT industry revenues do not match but, of the two, NASSCOM figures have hadgreater acceptance and longevity. The only “official” source that produces any figures on export ofsoftware or computer services is the Reserve Bank of India (RBI) which, not unlike State Bank ofPakistan, does so as part of the collection of external sector data. 25
    • In India, the external sector data are received from the banking system as part of the Foreign ExchangeManagement Act (FEMA), 1999. The data are received by the Reserve Bank of India mainly from thebanking system (authorized dealers) as part of the Foreign Exchange Management Act (FEMA), 1999.Theauthorised dealers follow a process not unlike the Banks in Pakistan – albeit with some significantdifferences – to compile figures on exports of computer services.In India, Software Export Forms (SOFTEX forms) are used for declaring software exports. These forms areobtained from the regional offices of the Reserve Bank of India. The valuation of software is certified bydesignated officials of the Department of Electronics (DOE) at the Software Technology Parks of India(STPI). The SOFTEX form is filled in triplicate, the original copy is sent by designated official of DOE to theExchange Control Department of the RBI. The duplicate is returned to the exporter and the triplicate isretained by DOE for its own record.Within 21 days, fromthe date ofcertification of theSOFTEX form by DOE,the exporter shouldsubmit the duplicatecopy together with acopy each of thesupportingdocuments to theauthorised dealer.The duplicate copy ofthe form togetherwith documents areretained by theauthorised dealer tillfull export proceedshave been realisedand repatriated andthereafter submittedto RBI, duly certifiedunder cover of anappropriate R Returnalong with a copy / Figure 5:5: Graphical representation of RBI’s “SOFTEX” formcopies of invoice/s.After the documents havebeen negotiated/sent for collection, authorised dealer report the transaction to RBI. This is done in afortnightly statement in form ENC under the cover of appropriate R Return.For long duration contracts involving a series of transmissions, the exporter bills their overseas clientsperiodically, i.e. at least once a month, or on reaching a “milestone” as provided in the contract enteredinto with the overseas client and the last invoice/bill is required to be raised not later than 15 days fromthe date of completion of the contract. The exporter then submits a combined SOFTEX form for all theinvoices raised in a month on a particular client, including advance remittances received. For contracts 26
    • involving only one shot operations, the invoice/bill should be raised within 15 days from the date oftransmission.The exporter submits SOFTEX form to the concerned official of Government of India at STPI for valuation/ certification not later than 30 days from the date of invoice or date of last invoice raised in a month, asindicated above. The invoices raised on overseas clients are subject to valuation by the officials ofGovernment of India at STPI of the export value declared on the SOFTEX form and subsequentamendments are made in the values, if necessary. The full value of the software exported as declared onthe SOFTEX form, or as certified by the officials concerned of Government of India, whichever is higher,is realised on due date of payment or within 180 days from the date of invoice, whichever is earlier.This rather tedious process is especially designed to ensure the accuracy of data received by the ReserveBank of India and its exact correspondence which the actual contract being signed and invoices raised bythe exporting company. The additional involvement of a “certifying authority” (i.e. STPI, which would bethe Indian counterpart of PSEB) in the process seeks to build checks and balances to ensure that properprocedures are followed. The involvement of additional bureaucracy could also possibly introduceelements of corruption and extortion in the process.In India’s balance of payments (BoP), transactions are recorded in accordance with the guidelines givenin the fifth edition of IMF’s Balance of Payments Manual (1993), with minor modifications to adapt tothe specifics of the Indian situation. One such modifications relates to compilation of services relatedreceipts and payments and its reconciliation: “Data on BoP are primarily compiled on the basis of International Transaction Reporting system (ITRS) in the form of fortnightly R-Returns filed by ADs/banks dealing in forex transactions. In accordance with the Foreign Exchange Management Act (FEMA), 1999, all foreign exchange transactions must be channelled…the above information is further supplemented by information available from…National Association of Software Service Companies (NASSCOM)...[among others]”The supplementing of receipts data on account of services with NASSCOM figures is a crucial ratherthan a minor modification. It enables NASSCOM – an interested party – to bias the RBI figures.The controversy around the strikingly close correspondence between figures put forth by NASSCOM andReserve Bank of India has been raging for quite a while in both Indian and International press. Inparticular, a March 2008 article in the Daily Hindu Business Line written by journalists C.P.Chandrashekhar and Jayati Ghosh titled “How Big is IT” 11 made the following headlines: “Rapid growth of sales and export revenues are regularly quoted to establish India’s remarkable information technology success. But though the IT phenomenon has been celebrated for close to two decades now, data on industry performance is limited and inadequate. It is definitely time to correct this”11 Chandrashekhar C. P., Ghosh, Jayati, “How Big is IT”, Business Line, published on March 11, 2008 available at:http://www.thehindubusinessline.com/2008/03/11/stories/2008031150170900.htm 27
    • The Hindu article was specifically written as a part of a debate on whether Indian software / BPOindustry which had been under a tax holiday should ultimately be taxed. Those against the imposition ofa tax had argued that the industry’s significant contribution to employment and GDP growth builds asufficient case for keeping it free from tax. The two journalists argued that: “The argument of the industry is that, given the dramatic increases in output, exports and employment it has delivered, this benefit should continue. While the rapid growth of the industry cannot be denied, there is increasing evidence that the size of the industry’s revenues and contribution to GDP is exaggerated, because there is no proper effort being made to independently evaluate the industry’s performance.”The article raised a number of concerns regarding the accuracy and authenticity of NASSCOM and RBIdata being quoted as India’s exports and surveys the many controversies that have arisen in theircalculation. In particular, the objections made to NASSCOM figures by World Trade Organisation (WTO)that led to the acknowledgment by NASSCOM that they used the earnings of Indian workers abroad (i.e.H1B temporary visa holders) to calculate Indian software export earnings was alleged to haveconsiderably biased the export numbers. NASSCOM defended their inclusion on the grounds that theseworkers provided “onsite” software export services. However, this approach remains in violation of IMFregulations that state that earnings of temporary workers can only be used for the first year in theparent country’s GNP.In 2005, a US Government Accounting Office (GAO) Study 12 also produced estimates that showed amarked (more than 20 times) difference in the balance of payment figures produced by Reserve Bank ofIndia and those captured by GAO analysis. GAO calculated the US affiliated software imports from Indiafor years 2002 and 2003 to be $240 and $420 million respectively at a time when RBI was reportingIndian companies exports to US at $6,464 and $9,725 million respectively. This discrepancy of more than20-30 times, GAO ruled, could be attributed to at least 5 different factors, namely, (1) the treatment ofservices provided by foreign temporary workers in the United States; (2) the definition of some services,such as computer programs embedded in goods and certain information technology-enabled services;(3) the treatment of transactions between firms in India and the overseas offices of U.S. firms; (4) thereporting of country-specific data on trade in affiliated services; and (5) the sources of data and othermethodological differences in the collection of services trade data. GAO estimated that a major portionof this discrepancy (about 40-45%) can be attributed to inclusion of salaries of Indian workers in theexport figures deemed it a violation of IMF BOP reporting regulations.The Hindu article cited above closes by stating the following: “The problem of a lack of robustness of the Indian figures remains. Given that the industry has been celebrated and pampered for long, the least the Government could do is get down to measuring how big Indian IT really is.”In keeping with these objections and anticipating these, the National Statistical Commission (NSC) in its2001 report made the following recommendation 13:12 GAO (US Government Accounting Office), 2005, US and India Data on Offshoring Show Significant Differences,Publication No. 06116, available at: http://www.gao.gov/new.items/d06116.pdf13 This section draws heavily from RBI Bulletin of Sept 10, 2009. 28
    • ‘Although the Reserve Bank of India collects the data on software exports through Software Exports (SOFTEX) forms, it uses the National Association of Software & Services Companies (NASSCOM) data as a controlling total for gross receipts from software exports. There is, however, a need to re-examine the current methodology on collection of software exports data. Reserve Bank of India should constitute a technical group consisting of members from the Reserve Bank, Ministry of Commerce, Central Statistical Organisation (CSO), NASSCOM and few major software companies to comprehensively examine the data reporting mechanism for software exports’.A Technical Group was also set up to resolve the issues regarding compilation of software exports dataas per Balance of Payments Manual, fifth edition (BPM5). The Group submitted its report to the ReserveBank in March 2003. The Group recommended, among others, to conduct a Comprehensive Survey (inthe nature of a Population Census) every three years followed by quarterly representative surveys tocollect data on software and IT exports. Based on the recommendations of the Technical Group, the firstcomprehensive survey covering all companies engaged in information technology (IT) and computerservices exports activities was conducted for the period 2002-03 in December 2003. A second suchsurvey titled “Survey on Computer Software and Information Technology Services Exports” was carriedout during 2007-08 covering 6,140 companies for compiling data on computer services exports as wellas exports of Information Technology Enabled Services (ITES)/Business Process Outsourcing (BPO). Thesurvey also collected the software services trade data as per the mode of supply, introduced by GeneralAgreement on Trade in Services (GATS). Figure 5.6: Survey on Computer Software and Information Technology Services Exports 2007-9 14From a total of 6,140 firms approached by RBI, 993 companies (16.7%) responded to the survey. RBIclaims that the survey respondents included all major companies within the country thus making thenon-response bias skewed towards the smaller companies. Results of the survey were published in the14 “Survey on Computer Software and Information Technology Services Exports 2007-08” published in RBIBulletin Sept 10, 2009 available at: http://www.rbi.org.in/scripts/BS_ViewBulletin.aspx?Id=10520#a1a1 29
    • RBI Bulletin of Sept 2009 and are reproduced above. An analysis was also carried out to establish theequivalence of the RBI Survey Data, SOFTEX forms, and NASSCOM data and the comparison is producedin the Appendix G.The above narrative about the evolution of Reserve Bank of India’s (RBI) policy towards reporting ofsoftware export revenues clearly illustrates the inadequacy of SOFTEX forms in capturing credible andadequate data on the country’s software exports. RBI, having used the data from SOFTEX forms forseveral years, nevertheless had to rely upon NASSCOM figures as a controlling total to make its figurelook credible to an outside audience. Once RBI’s bluff was called by US GAO and WTO (among others),it resorted to an entire revamp of its data collection approach and began undertaking direct surveysof software exporting companies as the most reliable and only means of producing an “all-encompassing” estimate of the country’s software / BPO export revenues.5.2.3 – Ireland: Software / BPO Revenue AssessmentIn Ireland, unlike Pakistan and India, the Central Bank is virtually silent on the issue of software / BPOexport earnings. In fact, the balance of payments or trade statistics published by the Central Bank andFinancial Services Authority of Ireland (CentralBank.ie) are not even at the level of granularity to allowthe analyst to differentiate between software services or BPO.The Irish Central Statistics Organisation (CSO) produces a Services Exports and Imports (SEI) dataabstract that contains a line item called “Computer Services”. The corresponding figures for exports,imports, and net trade incomputer services for 2007and 2008 as quoted in theDecember 11th 2009 SEIBulletin were €21,726 million,€660 million, €21,066 millionand €23,284 million, €686million, and €22,598 million.A substantial portion of thesefigures include earnings offoreign software companiesdoing business in Ireland.While these figures areuseful, they are quite highlevel and do not giveadequate insights into the Figure 5.7: Enterprise Ireland’s estimates of Irish software industrystructure of Irish software /BPO industry or be useful for policy-making purposes.Apart from the Central Bank and the Central Statistics Organisation, there are at least three otherentities that have a direct stake in accurately calculating Irish software / BPO export revenues. These areEnterprise Ireland – the National Economic Development Agency of Ireland; Irish Software Association(ISA) that represents companies engaged in software development activity in Ireland; and ICT Ireland – asupra-organisational lobby group of which ISA is also a member. Neither of these bodies, however,compiles their own statistics. 30
    • Instead, the statistics on Irish software / BPO industryare collected by Forfás – an entity established withinDepartment of Enterprise, Trade, and Employment thatfunctions as a high level policy advisory body onenterprise and science but has its own analytical anddata collection arm that collects a range of nationalstatistics, including, an Annual Survey ofUnemployment, an Annual Survey of Business Impact,and Innovation, and Gender Equality etc. EnterpriseIreland’s National Software Strategy (2008-2013), forinstance, quotes figures from Forfás Annual BusinessSurvey 2008 to indicate the size of the ‘indigenous’software industry in Ireland.The Annual Business Survey of Economic Impact (ABSEI)captures a fairly vast array of businesses and, in 2008,included approximately 4000+ companies from apopulation of firms with 10+ employees within themanufacturing and internationally traded servicessectors. The 2008 Forfás Survey had a response rate ofaround 50%. The survey results are “corrected” for the Figure 5.8: Forfás Annual Survey 2008non-response bias before publication. Once this data iscollected, Forfás then creates a number of highlydetailed statistical tables that produce data that is highly actionable and relevant to policy. The figures(below) illustrate some of the data tables that are produced from the Annual Business Survey ofEconomic Impact (ABSEI) data.Figure 5.9: Forfás Annual Business Survey Table B1 – Total sales of Irish owned companies 2000-8 31
    • Figure 5.10: Forfás Annual Business Survey Table B3 – Total exports of Irish owned companies 2000-8Figure 5.11: Forfás Annual Business Survey Table D12 – Direct expenditure in Irish Economy 2000-8 32
    • Figure 5.12: Forfás Annual Business Survey Table D1 – Total sales from all companies 2000-8In the table D12, for instance, direct expenditure in Irish economy for computer programming firms isseen to decrease from 39.3% in 2000 to 23.8% in 2008. For the same period the direct expenditure inIrish economy for publishing, broadcasting, and telecommunications sub-sector remained more or lessconstant. This particular set of data could be invaluable in determining the relative microeconomics ofthese two subsectors and could form a basis for important policy interventions.These data provide tremendous amount of information and insight about the Irish IT industry. Inparticular, data on items such as total sales, total exports, direct expenditures, payroll costs, materialsand direct purchases etc. can be calculated for each sub-sector (i.e. computer programming, computerconsultancy, computer facilities management, and other IT and computer services) and provideimportant policy insights to Irish planners. * * *Several important themes emerge from the analysis of software / BPO services export recognitionsystems in peer countries and may shed some light on the challenges being faced within Pakistan.First, in both India and Ireland, the primary source of software export data used for policy-makingpurposes comes from self-reported survey data collected by an independent public, semi-public, orprivate entity with credibility and integrity. In the case of India, while an attempt was made to use RBI’sBOP figures to bring credibility to this exercise, it was soon found that this did more harm than good tothe cause of collecting credible software / BPO export data. Subsequently, RBI began carrying out itsown survey to enhance the accuracy and credibility of the concerned statistic. 33
    • Second, in both India and Ireland, the data collected through the survey is corrected for non-responsebiases. The response rate for Indian RBI survey is about 16% (993 of 6140 firms responding) while thatof the Irish Forfás Survey is much higher (around 50%). However, both represent a fraction of the overallpopulation and thus need to be corrected for non-response bias. This is broadly in line with the practicedeployed in PSEB 2005 and P@SHA 2008 surveys.Third, the precise assumptions used to correct for non-response bias varies from country to country.The Reserve Bank of India assumes that the respondents are slightly skewed towards larger firms andreports correcting for non-response bias by attributing to the non-respondents similar characteristics asthe respondents. Specifically, RBI will classify the non-respondents by category (e.g. software export,BPO, services etc.) and will assign the median revenue from within each category to the non-respondingfirms. This will have the effect of increasing the revenue figure by several folds. Forfás, on the otherhand, claims to use additional information (from other sources) such as employment, output etc. toassess and correct for non-response bias.PSEB 2005 and P@SHA 2008 have employed “80:20 rule” 15 to correct for non-response bias andextrapolate the figures to represent overall population. The correction would then be about 20% on topof what is captured by the survey.Regardless of the precise manner of correcting for the non-respondent bias, however, the analysis ofpeer countries suggests that direct survey of software / BPO companies is the only credible way tocapture software / BPO export data.15 This makes an assumption that 20% of the largest (and most important) firms within the industry produceabout 80% of the industry’s revenues. 34
    • 6–Pakistan’s IT Market Revenue Classification & Assessment6.1 – IT Market Revenue Classification SchemeBuilding upon PSEB 2005 and P@SHA 2008, An IT Market Revenue Classification System to provide thegranularity and accuracy needed to be of use for policy decisions was developed. This additionalgranularity across industry sectors as well as platforms, tools, and services will also provide importantmarket insights and future direction about the country’s software / BPO market. A Sectoral Classification of Pakistan’s IT Market 1 Financials 12 Healthcare and Life Sciences 2 Computing and Electronics 13 Media, Entertainment, Advertising 3 Education 14 Real Estate 4 Government 15 Energy excluding Utilities (e.g. Petroleum) 5 Automotives 16 Hospitality (including Airlines) 6 Telecommunications 17 Shipping, Couriers, and Logistics 7 Retail Services 18 Professional and Business Services 8 Utilities 19 Fashion and Textiles 9 Manufacturing 20 High Technology (e.g. Ebay, Yahoo! Etc.) 10 Transportation 21 Others 11 Aerospace and Defence Figure 6.1: Sectoral classification of Pakistan’s IT (software / BPO) marketA Classification Scheme for Pakistani IT Market by Product-Service offerings (i.e. Platforms, Tools, andService Offerings) was also developed. This is produced below: A Product – Services Offerings Classification of Pakistan’s IT Market – Software & IT 1 IT Governance and Strategy 16 Network Consulting and Integration 2 IT Consulting 17 Animation and Graphics 3 ERP – General 18 Gaming 4 ERP – Specialised (Vertical Specific) 19 Mobile – Content and Applications 5 ERP – Middle Market (SMEs) 20 Virtualisation and Cloud Computing 6 Financial – Specialised (Core Banking) 21 Location-based Services 7 Financial – Specialised (Banking Apps) 22 e-Business (e.g. Web 2.0, Search etc.) 8 Financial – Specialised (Capital Market) 23 Information Security 9 Financial – Specialised (Non-Banking) 24 eGovernment 10 Document Management 25 Business Performance Management 11 Office Productivity 26 Data Warehousing – Business Intelligence 12 Billing and Payments 27 Embedded Systems Software 13 Customer Relationship Management 28 Product Development, Engg, and Design 14 Education and Training 29 Business Continuity and Recovery 15 Systems Integration 30 Software Testing and Assurance Figure 6.2: Pakistan’s IT (software / BPO) market – IT / Software classification 35
    • A Product – Services Offerings Classification of Pakistan’s IT Market – IT-enabled Services 1 Finance and Accounting 9 Knowledge and Content Services 2 Human Resources 10 Analytic Services 3 Procurement and Logistics 11 Sales and Marketing 4 Customer Interaction & Support (Voice) 12 Transcription Services 5 Customer Interaction & Support (Non-Voice) 13 Managed Services 6 IS Outsourcing 14 Applications Management 7 Transactions Processing 15 Others 8 Outsourced Support Figure 6.3: Pakistan’s IT (software / BPO) market – IT-enabled services classificationTechnomics recommends the use of the above sectoral and product-services classification schemes tohelp better capture industry data and provide critical sectoral and market intelligence for theindustry.6.2 – Survey of Pakistan’s Software / BPO IndustryA survey was carried out to test the above sectoral and product-service classification system. Thesurvey built upon PSEB 2005 and P@SHA 2008 Surveys to ensure consistency with already existing datacollection efforts. A selected sample of less than 300 PSEB member companies were approached to fillout the survey and around 75 companies participated for a response rate of about 25%. Most largecompanies within the industry were among the respondents. The figure (below) shows two differentmeasures (global revenue and local revenue and spend) of Pakistani companies over a 7-year periodwithin the industry as gleaned from 3 different surveys. The two years in the middle represent thenumbers projected for 2007 in early 2007 and those actually realised for that fiscal year after the fact.The contrast is striking. These two numbers, boxed in red in the figure below, represent the impact ofthe 2007 recession. Impact of 2007 Recession in On Total Revenue and Spend of Pakistans IT Industry 1000 900 800 Revenue (US$, Million) 700 600 Global Revenue 500 Impact 400 Local IT Revenue & 300 Spend 200 100 0 2004 2005 2006 2007 (Projected) 2007 (Realised) 2008 2009 Year Figure 6.4: Impact of the 2007 recession on total revenue and spend of Pakistan’s IT industry 36
    • These revenue figures tell an interesting story. At the end of 2006, the industry – as represented by the80 companies in the 2007 survey sample – stood at local IT revenue and spend of approximately $193million and a global revenue impact figure of just over $779 million. These companies then estimated aprojected 2007 local IT revenue and spend of just under $269 million and global revenue impact of $909million. Instead, the industry closed FY2007 at an astonishing figure of $115.9 million in local IT revenueand spend and $315.8 million in global revenue impact thus resulting in a 40.7% decline in local ITrevenue an spend and a 59% decline in global revenue impact. Although the local and global economicimpact figures have gradually picked up since 2007, it has been a rather slow recovery. Total Full Time Employment (FTE) in Pakistans IT Industry 14000 Number of Professionals 12000 10000 8000 Total FTE 6000 4000 2000 0 2004 2005 2006 2007 2007 2008 2009 2010 Projected Actual Projected Year Figure 6.5: Total full-time employment in Pakistan’s IT industryThe 75 companies in the 2008 survey sample surveyed employed around 7500 full time staff for anaverage firm size of approximately 131 FTEs. The figure above pieces together full-time employmentfrom 2006 and 2008 surveys. The sample sizes for the two years are 85 and 75 respectively.The product – service strategy of Pakistan’s software / BPO companies has continued to evolve. Overthe years, there has been an increasing trend towards greater specialisation and refinement of theproduct – services strategies. The figure below amply demonstrates this trend. Companies were askedto describe their strategic focus as product, services, consulting, BPO, system integration, or othercompany. They could nominate themselves in as many categories as they deemed fit. The figure showsdecline in each of these categories pointing towards a trend of greater specialisation.There has also been a steady growth in the number of companies claiming to be engaged in systemsintegration, IT consulting, and embedded systems business. Although the question has not been askedin earlier surveys, more than 10% companies classified themselves as systems integrators in the currentsurvey. However, what is evident in the figure below is not a greater than average growth of one type ofcompany or another but rather a trend towards growing specialisation as more companies than everbefore define themselves either within one category or the other but not both. 37
    • Product - Service Profile of Pakistans IT Companies 80.00 Proportion of Companies 70.00 60.00 50.00 40.00 2004 30.00 2007 20.00 10.00 2009 0.00 Packaged IT Services IT Consulting Business Systems Other Software Process Integration Outsourcing Product - Service Profile Figure 6.6: Product – service profile of Pakistan’s industryPakistan’s software / BPO industry’s revenue continued to remain dependent on a small number of highgrowth sectors, namely, telecommunications and finance. These two sectors combined accounted forthree quarters of the total global revenue for Pakistan’s software / BPO industry. Sector-wise Breakdown of Total Global Revenues of Pakistans IT Industry (2008) 4% 1% 4% 18% 2% Financials Computing & Electronics 6% 4% Education 1% Government 3% Telecommunications Retail Manufacturing Healthcare and Life Sciences High Technology Others 57% Figure 6.7: Sectoral breakdown of total global revenues of Pakistan’s IT industry (2008) 38
    • Looking at domestic software / BPO revenue and spend and software / BPO exports figures separately,one can begin to appreciate the differences between the competitive dynamics of these differentindustrial sectors and Pakistan’s position within each of these. Sector-Wise Breakdown of Domestic Revenues of Pakistani IT Companies (FY-2008) 0% 1% 1% 1% 1% Financials 29% Computing & Electronics Education Government Telecommunications Retail Utilities 3% Manufacturing 53% Professional Services 4% Others 7% Sector-Wise Breakdown of Export Revenues of Pakistani IT Companies (2008) 4% 2% 1% 13% 5% 2% Financials 4% Computing & Electronics 9% 1% Government Telecommunications Retail c Manufacturing Healthcare and Life Sciences High Technology Hospitality Others 59%Figure 6.8: Sectoral breakdown of export revenues and domestic spend of Pakistan’s IT companiesThe figure below represents the global revenue of Pakistan’s software / BPO companies across twodifferent time periods (2006 and 2008). As is obvious from the figure, the very strong growthexperienced in the telecommunications sector across both domestic and export fronts has been a majordriver of demand for IT for the Pakistan software / BPO industry. 39
    • Sector Wise Breakdown of Total Global Revenue Growth of Pakistani IT Companies (FY 06 and 08) Others High Technology Fashion and Textile Professional Services Shipping, Airlines and Logistics Hospitality Energy Real Estate Media, Entertainment, Advertising Total Global Revenues Healthcare and Life Sciences 2006 ($M) Sectors Aerospace and Defense Transportation Total Global Revenues 2008 ($M) Manufacturing Utilities Retail Telecommunications Automotives Government Education Computing & Electronics Financials 0.00 20.00 40.00 60.00 80.00 100.00 120.00 140.00 160.00 180.00 200.00 Total Global Revenue ($M) Figure 6.9: Sectoral breakdown of global revenue growth of Pakistani IT companies (FY 06 & 08) Global Revenue Impact by Product - Service Cateogies, Platforms, and Tools (FY-2009) IT Governance and Strategy 0% 2% 1% IT Consulting 9% 4% ERP - General 1% ERP - Specialized (Vertical-Specific) 1% ERP - Middle Market (SMEs) 2% Financial - Specialized (Core Banking) Financial - Specialized (Banking Applications) 4% Financial - Specialized (Capital Markets) Financial - Specialized (Non-Banking) Document Management 0% Office Productivity 14% 1% 0% Billing and Payments 1% 0% Customer Relationship Management Education and Training 1% System Integration 2% Network Consulting and Integration Animation and Graphics 0% Gaming 0% 1% Mobile - Content and Applications 0% 0% Virtualization and Cloud Computing 0% 0% Location-based Services 0% eBusiness (e.g. Web 2.0, Search, eCommerce) c Information Security eGovernment 3% Business Performance Management (BPM) 7% Data Warehousing - Business Intelligence Embedded Software Systems Product Development, Engineering, and Design Business Continuity and Recovery Software Testing and Assurance 5% 0% Outsourcing - Finance and Accounting 1% Outsourcing - Human Resources 1% Outsourcing - Procurement and Logistics 0% 0% 0% Outsourcing - Customer Interaction and Support (Voice) 0% Outsourcing - Customer Interaction and Support (Non-Voice) 2% 3% Outsourcing - IS Outsourcing 0% 1% Outsourcing - Transaction Processing Outsourcing - Outsourced Support 3% Outsourcing - Knowledge and Content Services Outsourcing - Analytic Services 1% 0% Outsourcing - Sales and Marketing Outsourcing - Transcription Services Outsourcing - Managed Services Outsourcing - Applications Management 25% None of the AboveFigure: 6.10: Global revenue of Pakistan’s IT industry by product-service category, platform, and tool 40
    • The above figure lays out the breakdown of global revenue impact of Pakistan’s software / BPOcompanies by product service categories, tools, and platforms.6.3 – Estimating Pakistan’s Software / BPO RevenuesThe above figures begin to provide a sense of the size and structure of Pakistan’s Software / BPOindustry and its export revenues. The Survey of PSEB Member Companies carried out by Technomicsresulted in the following figures: Revenue Classification FY2007 (Actual) FY2008 (Actual) FY2009 (Est.) FY2010 (Proj.) Domestic Revenue & Spend $115.92 million $130.06 million $135.78 million $177.71 million Global Revenue $315.80 million $332.83 million $315.54 million $389.38 million Source: PSEB Member Survey 2009-10, figures based on 75 responding companies (RR=25%). Table 6.1: “In sample” estimates of global revenues and domestic revenue and spendThe PSEB Member Survey was carried out towards the end of 2009 and early-to-mid 2010. The figuresare, therefore, most accurate for FY 2007 and FY2008. Figures for 2009 are estimates based on half-yearsales and those for 2010 are projections.As with the RBI and Forfás Surveys in India and Ireland respectively, these figures are based on smallsample sizes that needs to be corrected for biases and adjusted to account for entire population. Toaccount for non-respondent bias, the Reserve Bank of India (RBI) extrapolates on the assumption that allnon-respondents are similar to the respondents in characteristics but size. It then assigns the mediansales and revenue figures of the respondents to the non-respondents to arrive at the final adjustedfigure for the whole industry.Technomics believes that this is a very aggressive assumption to make. In the past, Technomics has useda much more conservative assumption (i.e. “80:20 Rule”) to account for non-respondent bias. However,our understanding of the Pakistani Software / BPO industry suggests that this assumption leads tounder-estimation of industry revenue. We suggest the following alternative correction:We divide the non-respondents into 3 groups, namely, large, medium, and small sized companies. • Large companies include Revenues > $10 million per annum • Medium companies include Revenues between $501K to $10 million per annum • Small companies include Revenues < $500K per annumAmong the respondents, these groups form about 10.66%, 28%, and 61.33% of the total population. Company Size Number of Proportion Median Global Median Domestic Cos. Revenue Revenue & Spend Large (>$10 million) 8 / 75 10.66% $12.767million $9.375million Medium ($501k-$10million) 21 / 75 28.00% $2.000million $1.125million Small (<$500k) 46 / 75 61.33% $120k $104k Source: PSEB Member Survey 2008-09, Median Revenue figures are for 2008. Table 6.2: Proportion of companies of various sizes within the sample and their median revenues 41
    • Although, PSEB boasts a total of 1739 members on its website, its active (fee paying) membersnumbered around 673 16 in 2009. However, there are still a large number of small and medium sizedcompanies that operate under the radar and may contribute towards software / BPO export 17.Assuming that: • with the exception of large companies – that are over-represented – the survey sample is broadly representative of the proportion of small and medium companies in the general population; and • the respondents overall and within each size segment are biased towards larger sized operations such that the median for each segment size could be an appropriate measure for the revenue of non-respondents.The following correction could be applied to “in sample” estimates to arrive at figures for the entirepopulation: Company Size Companies in Global Companies in Correction based on Sample Revenue Population Median Revenues Large (>$10 million) 8 (10.66%) 18 $260.53m 4 19 $51.06m 20 21 Medium ($501k-$10million) 21 (28.00%) $63.20m 167 $334.88m 17 18 Small (<$500k) 46 (61.33%) $8.34m 367 $43.98m Sub-Total 75 (100%) $332m 673 $429.93m Total Global Revenue $761.93million Company Size Companies in Domestic Companies in Correction based on Sample Spend Population Median Revenues Large (>$10 million) 8 (10.66%)15 $78.60m 416 $37.5m Medium ($501k-$10million) 21 (28.00%)17 $43.19m 16718 $188.37m 17 18 Small (<$500k) 46 (61.33%) $7.52m 367 $38.12m Sub-Total $129.31m 67319 $263.99m Total Domestic Revenue & Spend $393.30million Source: Technomics Estimates. PSEB Member Survey 2009-10, Median Revenue figures are for 2008. Table 6.3: Corrected global revenues and domestic revenue and spend of Pakistan’s IT industry (2008)Two alternate approaches for calculating software / BPO earnings, namely, “RBI Software SurveyCorrection Model” and a “modified” 80:20 Rule lead to more conservative estimates:16 As per PSEB Website’s Industry Overview Section available at: http://www.pseb.org.pk/item/industry_overview17 For example, PSEB’s records suggest that more than 300 entities purchase internet bandwidth that is availablefor call centre operations. Many of these companies may utilise this bandwidth for non-revenue uses such asclient communications and/or browsing etc. but many do operate small-to-medium sized call centres that haveremained beyond the reach of this survey.18 Over represented in the Survey Sample19 Estimate based on industry knowledge of large non-respondents20 Slightly under-estimates the proportion21 31% and 68.5% of non-respondents respectively after correction for over-representation of large companies 42
    • Company Size Sample Population Sample Population Global Revenue Correction Domestic Spend Correction Modified “80:20” Rule 22 Large (>$10 million) $260.53m $52.10m $78.60m $15.72m Medium ($501k-$10million) $63.20m $63.2m $43.19m $43.19m Small (<$500k) $8.34m $41.7m $7.52m $37.6m Corrected – Modified “80:20” Total $332m $157.0m $129.31m $96.51m Grand Total $489.83million $226.57million 23 India (RBI) Method Company Size Sample Population Sample Population Global Revenue Correction 24 Domestic Spend Correction Large (>$10 million) $260.53m 1.02m $78.60m $0.89m Medium ($501k-$10million) $63.20m 42.69m $43.19m $37.33m Small (<$500k) $8.34m 93.47m $7.52m $81.74m Corrected – India (RBI)Method $332m 137.19m $129.31 $119.97m Grand Total 469.19million $249.28million Source: Technomics Estimates. PSEB Member Survey 2009-10, Median Revenue figures are for 2008. Table 6.4: “In Sample” and population estimates of 2008 global revenues and domestic revenue-spendSummarising the results of the population estimates for the three methods used: Global Population Correction Domestic Population Revenue for Global Revenue Revenue Correction for [Sample] [Sample] Domestic Spend Stratified Medians Correction $332.0m $429.93m $129.31m $263.99m Modified “80:20” Method $332.om $157.0m $129.31m $96.51m RBI’s Median-based Correction $332.om $137.19m $129.31m $119.97m Stratified Medians Correction $761.93m $393.30m Modified “80:20” Method $489.83m $226.571m India Model $469.19m $249.28m Source: Technomics Estimates [2010] Table 6.5: “In sample” estimates and population corrections for 2008 software / BPO revenuesClearly, these figures are based on the assumptions that are made about the characteristics of the non-respondents. On the whole, though, the estimates suggest upper and lower limits on Pakistan’ssoftware / BPO global exports revenues to be between $761.93 million and $469.19m respectively anddomestic revenue and spend to be between $393.3million and $226.57million respectively.22 Modified 80:20 Rule uses extraneous information from the ground to make the following assumptions. Forlarge companies, the in sample estimates represent 80% of the population revenue, for medium companies thesample only captures 50%, and for the smallest companies the sample only manages to capture 20% of the totalpopulation revenue.23 The India (RBI) Model corrects for non-response bias by assigning overall sample median to all non-respondents.24 Based on additional revenue for 598 non-respondents at a median global revenue impact of $255k per companyand a domestic revenue and spend of $223k per company 43
    • The Technomics’ Survey of PSEB Member Companies (2010) which is the subject of this report wascarried out towards the end of 2009 and early-to-mid 2010. The figures are, therefore, most accurate forFY 2007 and FY2008. “In Sample” and population estimates for FY2008, 2009, and 2010 are: Revenue Classification FY2008 (Actual) FY2009 (Est.) FY2010 (Proj.) “In Sample” Estimates Domestic Revenue & Spend (DRS) $130.06 million $135.78 million $177.71 million Global Revenue (GR) $332.83 million $315.54 million $389.38 million Population Adjusted Figures Using Three Correction Models Stratified Medians Method - DRS $394.05 million $399.77 million $ 441.70 million Stratified Medians Method – GR $762.76 million $745.47 million $819.35 million Modified 80:20 Model – DRS $226.57 million $232.29 million $274.22 million Modified 80:20 Model – GR $489.83 million $472.55 million $546.38 million India (RBI) Model – DRS $250.03 million $255.75 million $297.68 million India (RBI) Model – GR $470.01 million $452.73 million $526.56 million Source: PSEB Member Survey 2009-10, figures based on 75 responding companies (RR=25%). Table: 6.6: Estimated size of domestic and export revenues for 2008, 2009, and 2010The assumptions used to correct for non-response biases could be tested over time throughimprovements in the quality of a relatively small amount of data available over all companies within thecountry. Technomics recommends the constitution and deployment of such a population census on aregular basis to provide better and more refined approaches to correct for non-response biases withinlimited sample surveys.Irrespective of which approach (more or less conservative) is used, however, the global revenue as wellas local revenue and spend figures for the software / BPO sectors exceed the SBP balance of paymentfigures by a factor of 2 to 4 – depending upon which figure is deemed appropriate for comparison withBOP figures – thus calling into serious doubt the validity of SBP figures as an accurate estimate forsoftware / BPO exports and further substantiating our analysis in Section 5 above. 44
    • 7 – Conclusions and Policy RecommendationsThe importance of quality and reliable data on Pakistan’s software / BPO industry, in particular, andthe overall IT market, in general, is well-established. Access to timely data can not only help in buildinga case for public support for the software / BPO industry but also lead to policy formulation based onactual data and hence promote the practice of evidence-based policy within the sector. It could also bea very useful input for industry leaders and planners as they seek to market themselves and thecountry’s capabilities abroad as well as make critical product planning and resource allocation decisions.Keeping in view the importance of the task, a number of peer countries, namely, India and Ireland,among others, have gradually developed the capability to produce, capture, and report data on therevenues and exports of software / BPO industry. Technomics’ analysis of international practice revealsimportant lessons for ICT policy-makers in Pakistan.In particular, while there are some similarities between Pakistan and other countries, there are also veryimportant differences. For instance, the similarities include: • Across peer countries, a number of estimates of software / BPO exports produced by a number of different bodies (e.g. industry associations, national income accounting and central statistics entities, private data providers, and other interested parties) exist. • Both Pakistan and India have looked towards their respective Central Banks for the “most credible” figures of software / BPO export data for the consumption of the policy-makers, industry leaders, and wider global audiences. • Across both India and Ireland – and to a lesser extent in Pakistan – there has been a growing acceptance of the limitations of BOP data and an enhanced appreciation of the validity of survey-based estimation techniques. This is evident in the use of Forfás Survey data by Irish government bodies as well as the recent deployment of Software and Services Companies Survey by Reserve Bank of India.With regards to differences: • In Pakistan, SBP’s BOP statistic is still considered the “only” official record of software / BPO exports from the country. In India, the Reserve Bank of India’s BOP statistics are just one of several such indicators that are often quoted within industry literature and the media and used for policy-making purposes. This, given the lack of coverage of the balance of payment data, puts Pakistan’s ICT industry at a considerable strategic disadvantage vis-à-vis the relatively more established industries where other data sources are available. • In Pakistan, unlike India, SBP’s process for collecting BOP data is considerably less rigorous than RBI’s and is subject to high degree of inaccuracy due to voluntary disclosure and lack of verification. In India, for instance, an additional layer of verifiability is provided through Department of Electronics (DOE) / Science and Technology Parks of India (STPI) officials and the entire process is designed to eliminate errors in invoicing and disclosure.Several important policy conclusions and recommendations result from the above analysis: 45
    • Technomics believes that the Government of Pakistan’s practice of using SBP’s Balance of Paymentsdata as the official figure for the country’s software / BPO exports is seriously flawed and has noserious parallels in other countries around the world.The balance of payment is a precise indicator that only captures certain types of activities within acountry’s overall foreign trade. To that effect, the balance of payment statistics will always under-estimate the actual software / BPO exports from the country. Our discussions with SBP officials validatethis conclusion. While SBP is very hesitant in becoming a party to an idea which they find flawed – andhence refuse to be dragged into this debate – there may be willingness and inclination to help PSEB (orMOITT) in designing a credible process and a system for capturing software / BPO exports data shouldsuch a public mandate become possible.To that effect, Technomics recommends:Recommendation 1: PSEB undertake an educational and awareness building exercise throughmeetings with and briefings to government leaders, policy-makers, senior bureaucrats, as well asdomestic and external stakeholders to build support for the creation of an independent revenuecapturing and reporting system.This could be done through the use of specialised briefings, policy meetings, and through promotionalmaterial (e.g. newsletters, website, reports, and discussions) aimed at different audiences. PSEB mayuse the example of Reserve Bank of India’s decision to institute an annual census of software / BPOcompanies within India as “conclusive” evidence to build its case. What is needed is nothing short of aclear and final abandonment of the “myth” that the State Bank of Pakistan’s (SBP) balance of paymentfigures alone are an accurate estimate of the country’s software / BPO export revenues.Recommendation 2: PSEB, in consultations with MOITT and other agencies of the Government ofPakistan (e.g. State Bank of Pakistan, Statistics Division, Ministry of Finance, Ministry of Planning etc.)formulate a Task Force to study and deliberate upon the challenges of setting up a broader and morecomprehensive system for capturing and reporting software / BPO industry revenue.This Task Force must look at the entire universe of data collected by various entities and seek toharmonise these as well as delve into issues of technical relevance such as the relative accuracy of andbias in data being collected from various sub-sectors (e.g. small vs. large firms, software vs. BPO firms,and domestic vs. export firms). The Task Force must deliberate upon the means and mechanismsthrough which this data will be collected on an annual basis and institute mechanisms to ensure theaccuracy of these surveys through limited sample verification techniques. Once a consensus is achieved,the Task Force must endorse an “official” approach that may provide high degree of credibility andaccuracy to software / BPO export data and take necessary measures to enforce the use of these officialfigures at all levels of the government.Recommendation 3: PSEB must follow the examples of India and Ireland to develop an independentcapability to capture primary data from software / BPO companies through an annual census ofsoftware / BPO companies within Pakistan.This capability could rest within PSEB or another credible entity like the State Bank of Pakistan (as is thecase with RBI in India) or a third party entity (such as Forfás in Ireland). Such a survey should fullycomply with the BPM6 requirements but also take into account other considerations such as WTO’sMode 3 and 4 trade-in-services categories that are of critical importance within the global software / 46
    • BPO services trade. Options for the creation of this capability could be separately commissioned annualsurveys by a government entity or an outside third party.Recommendation 4: As an interim measure, PSEB may use its annual membership application form tocollect limited population information that may be used for error correction in subsequent samplesurveys. It is also recommended that the Government make it mandatory for software / BPOcompanies seeking to avail the tax holiday to register as a PSEB member.Until a separate system of data collection is set up – or in lieu of it – an interim solution could be tosimply make it mandatory for PSEB Member Companies to fill out an extensive survey at the time ofannual renewal of their membership. A specimen survey now being used on annual basis by ReserveBank of India is being attached as an appendix to this report. While this process maybe be (semi)voluntary, it would ensure the best possible coverage of the various kinds of financial transactions thatcompanies engage with during the course of their businesses.Recommendation 5: PSEB must work with relevant government entities (such as MOITT and Ministryof Finance etc.) to institute policies that would encourage software / BPO companies to bring agreater share of their revenues within the country.Technomics believes that an attempt to force software / BPO companies to bring revenue into thecountry is likely to be counter-productive. The nature and demand as well as the competitive landscapeof the global software services export business will make such provisions counter productive to theaspiration of growing a strong and vibrant software industry within the country. The Government ofPakistan must, therefore, recognise the contribution of software / BPO sector to the national economy(e.g. through its high growth rates and contribution to high-skilled employment) and acknowledge thelegitimate needs of software / BPO companies to keep their export earnings abroad for as long as theydeem fit so long as they disclose these earnings to a competent authority. Instead, it may – through ajudicious use of policy – create conditions and circumstances that encourage companies to voluntarilybring their revenues within the country. Options that may be studied in the future include lower taxrates (once tax holiday is phased out), tax credits (e.g. to fund new product development), priorityaccess to certain government services, and national recognition etc.Only by working together can the government and the industry gradually improve the collection,reporting, and usage of industry data and enable Pakistan to project an image of a vibrant and matureIT industry that is increasingly capable and confident of taking its place as one of the leading softwareexporting nations of the world.Pakistan Software Export Board (PSEB), as the key beneficiary of the process, has a critical role to playin convening this coalition of partners from across the public, non-profit, and private sector divide. 47
    • 8 – AppendicesAPPENDIX A: LIST OF PSEB MEMBERS COS. INTERVIEWED (July 09–April 10) INTERVIEWEE COMPANY SECTOR DATE / LOCATION 1. Yusuf Jan, CEO MixIT Product 13/07/09 – KHI 2. Ashraf Kapadia, MD Systems Product / BPO 13/07/09 – KHI 3. Shahzad Shahid, Director TPS Product 13/07/09 – KHI 4. Ted Marra, VP Sybrid ITES 13/07/09 – KHI 5. Sajjad Kirmani, VP Netsol Product 15/07/09 – LHE 6. Abbass Khan, Partner Abacus Consulting Services (SDS) 15/07/09 – LHE 7. Hassan Rizvi, CEO Five Rivers Technologies Product 15/07/09 – LHE 8. Salman Iqbal, CEO Softech Systems Product 15/07/09 – LHE 9. Shahid Ali, GM Palm Chip Product 15/07/09 – LHE 10. Zia Imran, CEO Vahzay Services (SDS) 15/07/09 – LHE 11. Rana Saad, CEO PSG Services (SDS) 16/07/09 – ISB 12. Ovais Ashraf, CEO Bentley Services (SDS) 16/07/09 – ISB 13. Atif R. Khan, CEO LMKR Services (SDS) 16/07/09 – ISB 14. Syed Ahmed, CEO Digital Prodigy Services (SDS) 16/07/09 – ISB 15. Faizan Buzdar, CEO Scrybe Product 17/07/09 – ISB 16. Adnan Lawai, CEO Folio3 Services (SDS) 23/07/09 – TEL 17. Fahd Bangash, CEO Amana Product 24/07/09 – TEL 18. Salman Akhter, CEO Techlogix Services 28/07/09 – TEL 19. Zafar Khan, CEO Sofizar Product 03/08/09 – TEL 20. Jawwad Farid, CEO Alchemy Product 03/08/09 – TEL 21. Saquib Saeed, CEO Algorithm Consulting Product 04/08/09 – TEL 22. Khurram Minhas, CEO Emmaculate Services (?) 04/08/09 – TEL 23. Ghias Khan, CEO Inbox Systems 05/08/09 - TEL 24. Umar Saif, Advisor See N Report Product 24/08/09 – TEL 25. Anjum Ansari, CEO Arwentech Systems 07/09/09 – TEL 26. Saeed Qadri, CEO Voxel ITES 14/09/09 – TEL 27. Shahzad Khokhar, CEO Digident Solutions Services (?) 14/09/09 – TEL 28. Aamer Zahoor, CEO NDC BPO ITES 17/09/09 – TEL 29. Shahryar Hydri, CEO iTrango Mobile (MGA) 31/03/10 – TEL 30. Sohail Minhas, CEO Computer Research (CPRL) Services (?) 31/03/10 – TEL 31. Babar Ahmed, CEO Mindstorm Studios Product 01/04/10 – TEL 32. Arooj Alam Khan, Sr. Mgr Sidaat Hyder (SHMA) Services (?) 01/04/10 – TEL 33. Nadeem Malik, CEO Infotech Pvt. Ltd Systems 02/04/10 – TEL 34. Umair Javed, CEO TkXEL Mobile (MGA) 02/04/10 – TEL 35. Khurram Samad, CEO GeniTeam Mobile (MGA) 02/04/10 – TEL 36. Faisal Khan, CEO Ovex Technologies ITES 02/04/10 – TEL 37. Abdur Rahman, Director Plexus Services (?) 03/04/10 – TEL 38. Mohammad Sohail, CEO Shams Group Product (?) 02/04/10 – TEL 39. Murad Akhtar, CEO Tintash Mobile (MGA) 03/04/10 – TEL 40. Zahoor Motiwala, COO Post Amazers Mobile (MGA) 03/04/10 – TEL 41. Sajid Qadri, CEO Catcos ITES 03/04/10 – TEL 42. Owais Zaidi, CEO Access Group Product (?) 05/04/10 – TEL 48
    • 43. Nadeem Elahi, Director TRG ITES 05/04/10 –TEL 44. Fahad M., CEO iTack Product 05/04/10 – TEL 45. Fahad, Director Lakson (LBS) Services (?) 05/04/10 – TEL 46. Najam Khan, CEO Softech Systems Services (?) 05/04/10 – TEL 47. Raza Saeed, CEO Confiz Mobile (MGA) 05/04/10 – Email 48. Umar Saif ChOpaal Product 24/08/09 – LHE 49. Owais Ashraf Trivor Software Services 16/07/09 – ISB 50. Farrukh Kamran CARE Pvt. Ltd Systems 04/06/10 – ISBAPPENDIX B: LIST OF IT USER COMPANIES / CIOs INTERVIEWED (Sept 09–March 10) INTERVIEWEE COMPANY SECTOR DATE / LOCATION1a. Zuhair Siddiqi, CIO SSGC Telecom & Utilities 14/07/09 – KHI1b. Irfan Zafar, CITO SSGC Telecom & Utilities 14/07/09 – KHI2. Tulu Islam, CIO HBL Banking & Finance 14/07/09 – KHI3a. Zafar Alvi, Director IT SNGPL Telecom & Utilities 15/07/09 – LHE3b. Waqar Nisar, CIO SNGPL Telecom & Utilities 27/07/09 – TEL4. Nasiruddin Khan, CEO PRAL Public Sector 16/07/09 – ISB5. Faisal Khaliq, CIO Ufone Telecom & Utilities 23/07/09 – TEL6. Usman Mobin, CTO NADRA Public Sector 25/09/09 – ISB7. Javed Minhas, CIO SECP Public Sector 28/09/09 – ISB8. Haris Zahoor, CIO Fuaji Foundation Private & Non-Profit 29/09/09 – ISB9. Zafar Ahmed Khan, CEO ARL Private & Non-Profit 29/09/09 – ISB10. Dr Fawad Rauf, CIO OGDCL Telecom & Utilities 29/09/09 – ISB11. Tahir Ali, CIO RBS Banking & Finance 30/09/09 – KHI12. Sabah Zaman, CIO SBP Public Sector 30/09/09 – KHI13. Asif Shah, CIO CDC Banking & Finance 30/09/09 – KHI14. Hasan Jafri, CIO Arif Habib Bank Banking & Finance 30/09/09 – KHI15. Sohail Siddiqui, CIO Philips Pakistan MNC 01/09/09 – KHI16. Javed Edhi, CIO Silk Bank Banking & Finance 01/09/09 – KHI17. Asad Aleem, CIO Bank Al Islami Banking & Finance 01/09/09 – KHI18. Imran Daudi, CIO Engro Pakistan Private & Non-Profit 01/09/09 – KHI19. Ahmed Rehmani, CIO Lakson Group MNC 02/09/09 – KHI20. Kumail Wala, CIO UBL Banking & Finance 02/09/09 – KHI21. Mujtaba Hussain, Head IT Shell Pakistan MNC 02/09/09 – KHI22. Asad Saquib, CIO SCB Banking & Finance 02/09/09 – KHI23. Abdullah Jan, CIO KSE Banking & Finance 02/09/09 – KHI24. Jawed Desmukh, Director AKUH Private & Non-Profit 30/10/09 – KHI25. Syed Amer Iqbal, IT Mgr. PC Hotels Private & Non-Profit 30/10/09 – KHI26. Faizan Siddiqi, Director DHL MNC 30/10/09 – KHI29. Faraz Siddiqi, CIO Reckett & Beckeizer MNC 28/01/10 – TEL30. Shakil Akhtar, CIO Indus Hospital Private & Non-Profit 01/02/10 – TEL31. Syed Ishtiaq Bokhari, CIO Honda MNC 02/02/10 – TEL32. Khurram Kazmi, Director AKD Securities Banking & Finance 02/02/10 – TEL33. Atif Aziz Ahmed, Director KASB Securities Banking & Finance 02/02/10 – TEL34. Shabbir Gadriwala, CIO GSK MNC 09/02/10 – KHI 49
    • 35. Amir Munsif Khan, CIO Wateen Telecom & Utilities 03/02/10 – TEL36. Nadeem Siraj, CIO Nestle MNC 03/02/10 – TEL37. Shariq Saifuddin, CIO ICI MNC 04/02/10 – TEL38. M. Idrees Khokhar, IT Mgr. SKMT Private & Non-Profit 04/02/10 – TEL39. Shahid Saeed, CIO MCB Banking & Finance 04/02/10 – TEL40. Shafat M. Bazaz, HOD GIK Private & Non-Profit 19/02/10 – TEL41. Usman Qureshi, CIO Telenor Telecom & Utilities 19/02/10 – TEL42. Kh. Tanweer Saleem, CIO Unilever MNC 19/02/10 – KHI43. Asad Ahmed, CIO Seimens MNC 23/02/10 – TEL44. Khurram Khwaja, CIO Makro MNC 30/03/10 – TEL45. Naufil Mahmud, CIO KESC Telecom & Utilities 30/03/10 – TELAPPENDIX C: LIST OF IT MULTINATIONALS INTERVIEWED (April 10 – June 10) INTERVIEWEE COMPANY DATE / LOCATION1. Aamer Matin Cisco Systems 05/04/10 – TEL2. Ashar Zaidi Intel Corporation 05/04/10 – TEL3. Sajjad Syed SAP 05/04/10 – TEL4. Humayun Bashir IBM 05/04/10 – TELAPPENDIX D: LIST OF IT Policy Makers and Decision Leaders (July 09 – April 10) INTERVIEWEE COMPANY DATE / LOCATION1. Talib Baloch, Acting MD Pakistan Software Export Board 16/07/09 – ISB2. Jehan Ara, President P@SHA 13/07/09 – KHI3. Azhar Rizvi, CEO Tech Angels Network 30/07/09 – TEL4. Zia Imran, MD Pakistan Software Export Board 24/02/10 – ISB5. Dr. Jawed Ghani, Chairman Punjab IT Board 17/04/10 – LHE6. Athar Mian, Chief of Strategy Punjab IT Board 17/04/10 – LHE7. Yusuf Jan, Chairman of Board P@SHA 16/04/10 – KHI 50
    • APPENDIX E:SURVEY INSTRUMENT – SURVEY INSTRUMENT: PSEB IT Market and Revenue Classification andEstimation Study – PSEB MEMBER CO SURVEYDear Member Company:Pakistan Software Export Board (PSEB) began a national data collection effort to better document and benchmarkPakistan’s software and BPO industries in 2004/05. PSEB’s Best Practices Study of Pakistan’s Software Industry wasthe pioneering attempt to begin benchmarking industry’s progress in Pakistan. In 2007-8, P@SHA carried forwardthe exercise by publishing P@SHA Annual Review 2008 that further improved our understanding of the industryand the underlying and emerging trends within both software development and IT-enabled services sectors. Whilethese efforts improved the quality of data available considerably, they still left major gaps in our understanding ofthe overall IT market – especially within the IT user segment.Keeping in view the importance of having accurate and up-to date data on the IT market on an ongoing basis,PSEB has recently initiated an extensive study to estimate the size of IT market. The study is being carried out byTechnomics International (here).The purpose of the Study, is as follows: • To improve and enhance our statistical knowledge and qualitative understanding of software development and IT-enabled services sectors in Pakistan leading to an assessment of where we are and where we are heading in these important sectors of our economy. This will be achieved by carrying out a survey of CEOs / CTOs of the country’s leading software development and ITES operations. • To develop an IT market revenue classification and estimation system to assess the size of the IT user industry to provide critical market intelligence to plan future offerings to domestic market. This will be carried by a survey of CIOs (and Heads of IT) of the country’s largest IT users in the financial, telecom, utility, MNCs, and public sectors etc. • To make recommendations for enhancing the quality of data available for policy-making and to make policy recommendations and a case for future public support for IT and ITES industry in Pakistan that is based on accurate picture of the IT industry revenues, trends, and forecasts.The study would entail an online survey and may also require an organizational interview with the top-management (CEO/CTO/Resident Head of Operations). The Survey can be found online (here) and is availableonline for 4 weeks and will take between 15-20 minutes to fill out.Your participation in the survey is critical to ensure that we are able to devise policies and marketing collateralbased on rigorous data on the industry. PSEB reserves the right to retain this data for ongoing surveys. However,the data would be kept confidential and presented in aggregates only. We hope this study will be of value to you infurthering your business worldwide and creating a case for policy support for Pakistan’s IT industry.Should you have any further query, please do not hesitate to contact the undersigned.Best Regards,Zia ImranManaging DirectorPakistan Software Export Board 51
    • APPENDIX F:SURVEY INSTRUMENT: PSEB IT Market and Revenue Classification and Estimation Study – CIO SurveyDear CIOAs you may know, Pakistan Software Export Board (PSEB) has commissioned a National IT Market RevenueClassification and Estimation Study. The purpose of the study is to develop an accurate assessment of PakistansTotal IT Revenue / Spend and a useful classification for reporting that spend. The study builds upon previous workdone at PSEB (2005) and P@SHA (2008) but will extend this to include the IT user sectors as well.For the first time, we are carrying out a survey of the countrys leading IT users (CIOs) to develop a morecomprehensive picture of total IT revenue and spend in the country. The study is being strongly supported byPakistan Software Houses Association (P@SHA).As a part of the study process, we have been carrying out detailed interviews with CIOs and Directors of IT ofPakistans leading IT user organisations (including Banks, Telecoms, Utilities, Multinationals and Public SectorUsers) to develop an up to date picture of how IT usage trends are evolving within the country to size the marketand to understand emerging trends within the IT sector in Pakistan.Several of you have already been contacted for telephone or in-person interviews to discuss the state and trendswithin IT in your particular sector and we will continue to do so over the next month or so. In addition, an onlinesurvey is now being made available to allow systematic collection of data on the industry. A similar survey hasbeen launched for the development side of the IT industry. The PSEB CIO IT Market Survey will be online from Dec10, 2009 to Dec 31st 2009 and is available at the following:https://www.hostedware.com/secure/hs/takesurvey.asp?c=PSEBCIOSurvey2009On behalf of PSEBs Leadership, we would like to invite you and strongly urge you to take a few minutes of yourprecious time to fill out the survey as a mark of national service and to enhance the visibility and professionalismof the IT industry in Pakistan. The results of this survey will be included in a PSEB study (to be released later in2010) and will help us immensely in internal stocktaking and benchmarking, marketing Pakistans IT capabilities,making meaningful policy for the IT sector.Please feel free to write to me or call me at +44 7711 198092 if you have any questions.Best Regards,Zia ImranManaging DirectorPakistan Software Export Board 52
    • Appendix G:SURVEY INSTRUMENT: RBI’s Software and Information Technology (IT) Services Exports: Survey CONFIDENTIAL RESERVE BANK OF INDIA Department of Statistics and Information Management (Balance of Payments Statistics Division) Software and Information Technology (IT) Services Exports: Survey Schedule Reference Period : April 2007 to March 2008 (Annual)PART-A: Profile of the Company 1. Name and address of the Company Name of the Company Registered Address 2. Contact Details (i) Name in Full (ii) Designation (ii) Tel. No. (iv) Fax. No. (v) Email:3. Business Activity(According to the principal source of operating revenue)Please provide approximate percentage share of various business activities, describing your company in totalbusiness (A+B+C+D) Business Activity % Share A. IT Services (i) Hardware and software consultancy and implementation services (ii) Maintenance and repair of computers and peripheral equipment (iii) Data recovery services, provision of advice, and assistance on matters related to the management of computer resources (iv) Analysis, design and programming of systems ready to use (including web page development and design), and technical consultancy related to software (v) Development, production, supply and documentation of customised software, including operating systems made on order for specific users (vi) Systems maintenance and other support services such as training provided as part of consultancy; (vii) Data processing services such as data entry, tabulation, and processing on a timesharing basis; 53
    • Annex - II (Contd.) (viii) Web page hosting services (i.e., the provision of server space on the internet to host clients’ web pages) (ix) Computer facilities management (x) Non-physical exports of packaged software (xi) Any other service (please specify) Total (IT Services) 0.0 B. ITES/BPO (i) Customer interaction services (ii) Finance and Accounting, auditing, book keeping and tax consulting services (iii) HR Administration (iv) Procurements and logistics (v) Legal services (including IP management services) (vi) Business and corporate research (vii) Animation (viii) Gaming (ix) Medical transcription (x) Document Management (xi) Content development and management and publishing (xii) Pharmaceuticals and biotechnology (xiii) Any other service (please specify) Total (ITES/BPO) 0.0 C. Engineering Services (i) Embedded Solutions (ii) Product Design Engineering (mechanical, electronics excluding software) (iii) Industrial automation and enterprise asset management (iv) Architectural and other technical services (v) Any other service (please specify) Total (Engineering Services) 0.0 D. Software Products (i) Software products (ii) Own software products license revenues (iii) Resale of software (iv) Offshore Product Development (v) Any other service (please specify) Total (Software Products) 0.0 E. Total (A+B+C+D) 0.0 Total (E) Should be = 100 4. Form of Organisation (Please select the organisation type] Organisation type Please Enter Organisation TypePART -B: Software and IT Exports5. Information on Software and IT Services Exports(a) Exports - Major Activities: Total Invoice value in Rupees [including billing to subsidiary(s) associate(s) abroad ]during the reference period according to major activities 54
    • Exports - Major Activities Invoice Value (Rupees) (i) IT Services (ii) ITES/BPO (iii) Engineering Services (iv) Software Products Total (I + ii + iii + iv) 0(b) Exports- Major Currencies: Invoice value in terms of actual currency of invoice and in Rupees [including billingto subsidiary(s)/ associate(s) abroad] during the reference period according to major currencies Exports - Major Currencies Invoice Value Actual Rupees Currency US $ Euro Pound Sterling Japanese Yen Canadian Dollar Australian Dollar Indian Rupee Others (converted in Indian rupees) Total 0(c) Exports- Type of Service: Total Invoice value in Rupees [including billing to subsidiary(s)/ associate(s) abroad]during the reference period as per type export service Exports - Type of Service Amount (Rupees) (i) On-site services (ii) Off-shore services in non-physical form (i.e., exports through data communication links etc.) (iii) Off-shore services in physical form Total (i + ii + iii) 0(d) Exports - Major Areas: Total Invoice value in Rupees [including billing to subsidiary(s)/ associate(s) abroad]during the reference period to major countries/ regional groups Exports - Regional Groups Amount (Rupees) (i) USA (ii) Canada (iii) Europe Annex - II (Contd.) of Which : (a) Germany (b) Hungary (c) Netherlands (d) Switzerland (e) United Kingdom (iv) East Asia of Which : (a) Hong Kong (b) Japan (c) Singapore (v) West Asia 55
    • (vi) South Asia (vii) Australia (viii) New Zealand (ix) Latin America (x) Others Total (i + ii + ……+ ix + x) 06. Exports - Modes of SupplyTotal invoice on software and IT services exports as per the Modes of Supply during the reference period Exports - Modes of Supply Amount (Rupees)Services rendered to foreign entities/persons from Indian office (Cross border supply)Consumption of services by foreign entities/persons in India (Consumption abroad)Onsite services provided by deputing employees abroad (Presence of natural persons)Total 07. Exports Proceeds- Receipt, Expenditure and Held AbroadInformation on amount received, spent and held abroad [including billing to subsidiary(s)/ associate(s) abroad] onaccount of software and IT exports during the reference period Exports Proceeds - Receipt, Expenditure and Held Abroad Amount (Rupees) (i) Amount received from abroad during the reference period (ii) Total amount paid to employees abroad by the Indian company (iii) Total amount spent on office expenses etc. abroad (excluding amount paid to employees abroad) by the Indian company (iv) Total amount held abroad at the beginning of the reference period by the Indian company (v) Change in amount held abroad during the reference period (Increase +, Decrease -)PART -C: Employment Details8. Information on Number of Employees Employment Indian Citizen Foreigner Total (Citizens of other countries) (1) (2) (1+2) a) Indian Company 0 b) Subsidiary(s)/Associate(s) abroad 0 Total (a+b) 0 0 0PART -D: Subsidiary/ Associate Abroad9. Information on subsidiary(s)/ associate(s) abroadIf your company owns any subsidiary/associate, please give number of subsidiaries/ associates abroad and providethe following information for each subsidiary(s)/ associate(s) separately. 56
    • Number of Subsidiaries/ Associates AbroadPlease Enter Number of Subsidiaries/ Associates Subsidiary(s)/ Holding by Period of Total software/IT services Associate(s)’s your company operation rendered by the Subsidiary(s)/ Name Country Name (in %) (in years & months) Associate(s) during the reference period (in Rupees) locally to India to other Total Countries COUNTRY 0 COUNTRY 0 COUNTRY 0 COUNTRY 0 COUNTRY 0 COUNTRY 0 COUNTRY 0 COUNTRY 0 COUNTRY 0 COUNTRY 010. DeclarationI hereby declare that the information given in this return is complete and correct to the best of my knowledge andbelief.(i) Name in Full(ii) Designation(iii) Date: 57
    • Appendix H:RBI’s Note on Reconciliation of RBI Survey Data with SOFTEX and NASSCOM DATAReserve Bank of India publishes the software exports data in BoP using NASSCOM data as a controlling total. TheReserve Bank also collects the information about the non-physical offsite software exports data through SOFTEXforms. NASSCOM releases annual software exports data on their website, based on the global software business ofIndian software companies, i.e. software exports of Indian companies together with the software exports of theiroverseas subsidiaries.The Reserve Bank has conducted a survey on Software & IT Services Exports during 2007-08 to collect theinformation about the software & ITES/BPO services exports. In order to make the survey result comparable withNASSCOM data, the software business of overseas subsidiaries of Indian companies have been added to India’ssoftware exports. The comparison of software exports of India based on the survey results has been made with thedata released by NASSCOM for 2007-08 and also with the data received through Softex forms.Based on the survey, software exports from India during 2007-08 was estimated at Rs 1,40,200 crore (US$ 34,841million). Also, software business done by the Indian subsidiaries abroad in 2007-08 was to the tune of Rs 25,338crore (US$ 6,297 million). Together with the subsidiaries business, global software business based on the surveywas Rs 1,65,538 crore (US$ 41,138 million), as against Rs.1,62,020 crore (US$ 40,300 million) published byNASSCOM.Further, non-physical (offsite) software exports, as declared on Softex forms by Indian companies, during 2007-08was Rs.1,07,464 crore. Adding the onsite software exports of Rs.35,673 crore, as reported in the survey, the totalsoftware exports during 2007-08 worked out to Rs 1,40,137 crore, which was close to the estimated softwareexports as per survey result. The survey results are quite comparable with the software exports data released byNASSCOM and also with the software exports data collected through Softex forms by the Reserve Bank. 58
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