Pakistan IT Market Study 2011

4,526 views

Published on

Published in: Technology, Travel, Business
1 Comment
7 Likes
Statistics
Notes
No Downloads
Views
Total views
4,526
On SlideShare
0
From Embeds
0
Number of Embeds
5
Actions
Shares
0
Downloads
0
Comments
1
Likes
7
Embeds 0
No embeds

No notes for slide

Pakistan IT Market Study 2011

  1. 1. 1
  2. 2. 1
  3. 3. Table of Contents1 – Executive Summary………………………………………………………………………….................62 – Background and Introduction……………………………………………………………………………113 –Study Objectives and Design…………….………………………………………………………………134 – Pakistan’s IT Market Revenue Classification and Assessment ……………………...………….14 4.1 – Past Estimates of Pakistan’s IT market and Software Export Revenue …………………..14 4.2 Pakistan’s Software / BPO Revenue Estimates…………………………………………………..…165 – State of Pakistan’s IT Industry: Survey of Industry Performance & Firm Characteristics…..22 5.1 – Pakistan’s IT Industry: Companies, Markets, and Offerings …………………………………..23 5.2 – The Pakistani IT Firm: Strategy, Management, and Resources ………………………………34 5.3 – Public Policy Environment and Infrastructure Bottlenecks ……………………………………..466 – Pakistan’s IT Market: A Review of Supply and Demand ……………………………………………49 6.1 – The Supply Side: Producers of IT and IT-enabled Services………………………………………49 6.2 – The Demand Side: Users of IT and IT-enabled Services………………………………………….627 – Conclusions and Policy Recommendations ……………………………………………………..........748 – Appendices A – LIST of Interviewees: PSEB MEMBER COs CEOs and Executives…………………………..77 B – LIST of Interviewees: IT USER COs / CIOs and IT Directors…………………………………..78 C – LIST of Interviewees: MNC Country Heads……………………………………………..............79 D – LIST of Interviewees: IT Policy Makers and Decision Leaders……………………………….79 E – PSEB IT Market and Revenue Estimation Study – PSEB Member Survey………………..80 F – PSEB IT Market and Revenue Estimation Study – CIO Survey……………………………….81 2
  4. 4. List of Figures and Tables1. Figure 1.1: Impact of 2007 recession on total revenue and spend of Pakistan’s IT industry2 Table 1.1: Estimated size of domestic and export revenues for 2008, 2009, and 20103. Figure 2.1: The data needs of a three-tiered evidence-based policy-making process4. Figure 3.1: Graphical representation of the work plan5. Table 4.1: Software export / BPO revenue estimates by various sources (and studies)6. Figure 4.1: Pakistan’s IT spend and global revenue (Source: P@SHA 2008)7. Figure 4.2: Impact of the 2007 recession on total revenues of Pakistan’s IT industry8. Figure 4.3: Growth in total revenue and spend of Pakistan’s IT industry9. Table 4.2: IT market revenue classification scheme – sectors and product-service offerings10. Table 4.3: “In sample” estimates of global revenue and domestic revenue and spend11. Table 4.4: Proportion of companies of various sizes within the sample and their median revenues12. Table 4.5: Corrected global and domestic revenue and spend of Pakistan’s software / BPO industry13. Table 4.6: Corrected global and domestic revenue and spend of Pakistan’s software / BPO industry14. Table 4.7: “In sample” estimates and population corrections for industry revenues15. Table: 4.8: Estimated size of domestic and export revenues for 2008, 2009, and 201016. Figure 5.1: Foreign roots and connections of Pakistan’s IT companies17. Figure 5.2: Geographical distribution of parent-subsidiary connections and front offices18. Figure 5.3: The recession and full-time employment in Pakistan’s IT companies19. Figure 5.4: Full time employment and employment growth in Pakistan’s IT industry20. Figure 5.5: Full time employment by type of work performed21. Figure 5.6: Product-service profile of Pakistan’s IT companies22. Figure 5.7: Platforms or development approaches of Pakistan’s IT companies23. Figure 5.8: Sectoral breakdown of total global revenues of Pakistan’s IT industry (2008)24. Figure 5.9: Sectoral breakdown of domestic and export revenues of Pakistan’s IT industry (2008)25. Figure 5.10: Global revenue by product-service category, platforms, and tools (2008)26. Figure 5.11: Domestic and export revenue by product-service category, platform, and tool (2008)27. Figure 5.12: Target market strategies of Pakistan’s IT companies28. Figure 5.13: Destination – offerings mix of Pakistan’s IT companies29. Figure 5.14: Client risk and diversification in Pakistan’s IT industry30. Figure 5.15: Expenditure profile of companies in Pakistan’s IT industry31. Figure 5.16: Percentage of CEO time spent on company activities in Pakistan’s IT industry32. Figure 5.17: Management and entrepreneurial characteristics of Pakistani IT companies33. Figure 5.18: Average proportion of full time employment in Pakistani IT company by type of work34. Figure 5.19: Pattern of employment in Pakistan’s IT industry by educational qualifications35. Figure 5.20: Part time and women employment in Pakistan’s IT industry36. Figure 5.21: Attrition in Pakistan’s IT industry37. Figure 5.22: Sources of initial funds for setting up companies in Pakistan’s IT industry38. Figure 5.23: Avenues to investment resources to support next phase of company growth39. Figure 5.24: Quality certifications in Pakistan’s IT industry40. Figure 5.25: Quality assurance teams and function in Pakistan’s IT industry41. Figure 5.26: General perception of policy and infrastructure issues in Pakistan’s IT industry42. Figure 5.27: Most important policy and infrastructure issues in Pakistan’s IT industry43. Table 7.1: “In sample” estimates and population corrections for industry software / BPO revenues 3
  5. 5. List of AbbreviationsADC Alternate Delivery ChannelsAHBL Arif Habib Bank Ltd.AKUH Aga Khan University HospitalARL Attock Refineries Ltd.BAP Business Acceleration ProgrammeBOP Balance of PaymentBPM Business Process ModernisationBPO Business Process OutsourcingBPR Business Process Re-engineeringB&F Banking & FinanceCARE Centre for Advanced Research in EngineeringCCNB Customer Care and BillingCDC Central Depository CompanyCEO Chief Executive OfficerCIO Chief Information OfficerCMM Capability Maturity ModelCMMI Capability Maturity Model IntegratedCMS Campus Management SystemDIY Do It YourselfDRS Domestic Revenue and SpendEGD Electronic Government DirectorateERP Enterprise Resource PlanningFMCG Fast Moving Consumer GoodsFTE Full Time EquivalentGIKI Ghulam Ishaq Khan InstituteGIS Geographical Information SystemsGSM Global System for Mobile CommunicationsHBL Habib Bank Ltd.HIMS Health Information Management SystemICT Information and Communications TechnologyICT4D ICT for DevelopmentIBA Institute of Business AdministrationIH Indus HospitalIPD IT Product DevelopmentISO International Standards OrganisationITES IT Enabled ServicesKESC Karachi Electric Supply CompanyKSE Karachi Stock ExchangeMCB Muslim Commercial Bank Ltd.MGA Mobile Applications, Gaming, and AnimationMITETF MIT Enterprise ForumMNCs Multinational CorporationsMS Managed ServicesNADRA National Database and Registration Authority 4
  6. 6. NASSCOM National Association of Software and Services CompaniesNUST National University of Sciences and TechnologyOGDCL Oil and Gas Development Co Ltd.PABX Private Automatic Branch ExchangePNS Private and Non-Profit SectorsPRAL Pakistan Revenue Automation Ltd.PS Public and Semi-Public SectorPSEB Pakistan Software Export BoardPTA Pakistan Telecommunications AuthorityPTCL Pakistan Telecommunications Corporation Ltd.P@SHA Pakistan Software Houses Association for IT and IT Enabled ServicesQA Quality AssuranceRBI Reserve Bank of IndiaRBS Royal Bank of ScotlandR&D Research and DevelopmentSaaS Software as a ServiceSBP State Bank of PakistanSCB Standard Chartered BankSDS Software Development and ServicesSECP Securities and Exchange Commission of PakistanSFA Sales Force AutomationSHMA Sidat Hyder Morshed AssociatesSICES Systems Integration and Consulting and Embedded SystemsSKMT Shaukat Khanum Memorical TrustSNGPL Sui Northern Gas Pvt. LtdSSGC Sui Southern Gas Co.TAN Tech Angels NetworkTiE The Indus EntrepreneursTRG The Resource GroupT&U Telecommunications and UtilitiesUBL United Bank Ltd.VAR Value Added ResellerVAS Value Added ServicesY2K Year 2000 5
  7. 7. 1 – Executive SummaryThe global recession during the last 2-3 years (2007-2010) has tested the industry’s grit and resilience.Not unlike other countries, Pakistan’s software and BPO industry underwent a substantial period ofchange and turmoil. It has, however, emerged as much stronger and more resilient than ever before.In 2007, The P@SHA Annual Review 2008 noted that Pakistan’s Software and BPO industry was on theverge of a take-off. In FY2006, the software / BPO industry had stood at $193.4 million of local revenuesand spend and a global revenue impact $779.7 million. Industry leaders were project another year ofgrowth with the domestic revenue and spend to reach a projected $269 million and the global revenueimpact of around $900+ million.The projected growth, however, did not materialise. Even before the global recession of the early2008 had hit, the relative political-economic stability within the domestic environment in Pakistanhad begun to falter. A “limited” judicial crisis that started around the middle of 2007 became a fullblown constitutional row between the government and the judiciary. As 2007 turned into 2008, thecountry was shrouded with considerable political uncertainty that paralysed the government resulting inconsiderable policy uncertainty that hit domestic IT spending.As these developments unfolded on the domestic front , the credit crunch and sub-prime mortgagecrisis had turned into a full-fledged recession across much of the developed world. The globalrecession hit in the early 2008 and with it came considerable belt tightening in IT spending in thecountry’s major export markets – most notably United States, Canada, and Europe. In the West, therecession resulted in business closures and lay-offs whose impact ricocheted through the industriesacross the developing world, including Pakistan’s.For most companies in Pakistan’s software / BPO industry, 2007 and 2008 became the years when thebrakes were applied. The effect of these twin crises could be amply gleaned from the following figure: Impact of 2007 Recession in On Total Revenue and Spend of Pakistans IT Industry 1000 900 800 Revenue (US$, 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 1.1: Impact of 2007 recession on total revenue and spend of Pakistan’s IT industry 6
  8. 8. On the whole, domestic revenue and spending declined by 40% between 2006 and 2007 while exportswere hit by up to 60%. Growth seem to return back starting 2009. It is estimated that by the end of 2010the industry would have recovered to pre-2007 levels.Despite the painful reality that these figures reflect, though, largely the industry did quite well toweather the storm and in certain sectors even continued to grow bigger.Estimating industry size and future projectionsThe 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: 1.1: Estimated size of domestic and export revenues for 2008, 2009, and 2010On the whole, though, the estimates suggest upper and lower limits on Pakistan’s software / BPO globalexports revenues to be between $761.93 million and $469.19m respectively and domestic revenue andspend to be between $393.3million and $226.57million respectively. Beyond these figures, a number ofother quantitative and qualitative findings stand out:Overall size of the industry: • Of the total of 75 companies surveyed, 8 (10.6%) had more than $10 million of revenues, 21 (28%) had between $501k-$10 million, and 41 (61.3%) had less than $500k in revenues. • The industry has been undergoing a trend of greater diversification across multiple geographies. In particular, there is a stark trend away from the United States and towards new and emerging markets such as Africa, the Middle East, and Asia Pacific.Market – offerings mix: • Around 40% of the companies develop and customise their own proprietary platforms. An increasing number of companies (about 25%) develop on established proprietary platforms (Microsoft, Oracle, or SAP etc.). Over 50% also work with Open Source (OS) platforms. 7
  9. 9. • Among the leading product – service categories on the basis of global revenue for software development are: e-business (web 2.0 etc.), capital market software, and specialised vertical specific ERP solutions that account for around 7%, 4%, and 3.5% respectively. The same or outsourcing are: voice-based BPO, outsourced application management, and outsourced support account for 24%, 14%, and 5.7% respectively. • Pakistan’s software / BPO industry’s revenue continues to remain dependent on a small number of high growth sectors, namely, telecommunications and finance accounting for three- fourths of the industry’s total global revenue impact. Other sectors such as retail (6%), computing and electronics (4%) healthcare and life sciences (4%) have emerged and some such as government (down to 3%) declined during the last few years.Company management and operations: • The 75 companies surveyed employ around 7500 full time staff for an average firm size of approximately 131 full time equivalents (FTEs). Employee attrition rates decreased considerably from 2.62 years (2005) of average employment to to 3.52 years (2009). • The Pakistani Software / BPO firm has continued to evolve in terms of its strategic focus. While the vast majority of the firms are multi-product (or service) firms, there has been a gradual shift towards niche market orientation and vertical focus. • The industry does quite bad, although it continues to gradually improve, on its ability to utilise part-time talent and encourage women employment thus hinting towards an industry that makes sub-optimal use of the talent available to it.Funding needs and growing pains: • The industry’s relatively narrow set of options for start-up funding continue as before with organic cash-flows based funding and foreign venture capital registering some increase and local venture capital available to companies declining in terms of number of deals available to companies. • Industry CEOs overwhelmingly favour public (or private) spending programmes focussed at improving the hard and “soft” infrastructure to support their international marketing and alliance-building activities as against other programmes such as training or venture capital.Public policy and infrastructure challenges: • The perception of country’s image and law and order made a resurgence as the most important public policy and infrastructural bottlenecks that affects company’s growth. This time around, though, these “perceptions” may be much more real than in earlier years. • There is also a sense that telecommunications gains made in late 1990s may be eroding. The availability of quality HR and physical infrastructure remain bottlenecks to company growth. 8
  10. 10. The silver lining: emerging new demand and supply segmentsWhile the revenue and spend statistics provide a particular view of Pakistan’s IT and IT-enabled servicesindustry, they fails to fully capture and appreciate the highly dynamic and vibrant nature of the industry.Pakistan’s IT and IT-enabled services industry has continued to evolve and mature despite the politicaland financial turmoil – and the global economic recession. As the more traditional sub-sectors such aspure software development services experienced erosion of market demand, new and exciting areashave emerged promising potential for innovation and market growth.In the last few years, for instance, systems integration and embedded systems seem to have come ofage as an important sub-sector of the Pakistani IT and IT-enabled services industry. While systemsintegration has been a part and parcel of the IT industry since its inception, its growth has beensomewhat limited. Increasingly, though, domestic IT spend as well as export opportunities is breathingnew life in this particular sub-sector of the overall IT market. The industry has also climbed up the valuechain within the customised software development services sub-sector as the firms have increasinglyspecialised in customisation of well-established platforms (like Microsoft, SAP, and Oracle etc.) insteadof trying to create in-house proprietary platforms.Similarly, mobile applications, gaming, and animation is an emerging new area with considerablepromise to become a key driver for the industry in the years to come. Supported by strong underlyingdemand, cut throat competition and the need for innovation and low cost and barriers to entry, mobileapplications and gaming seem to have produced a few exciting players. A number of Pakistani start-upshave done very well in producing content and games that have hit the Top-10 lists in their respectivegenres at the Apple Store. Cricket Revolution – a full fledged cricket game – is the first of its kinddeveloped in Pakistan.On the demand side of the IT industry as well, there has been considerable change within various sub-segments of demand for IT products and services. Financial and telecommunications industries remainthe largest users of IT and IT-enabled services within the country – although the former has experiencedsome flattening of demand in the recent years. The share of multinationals in spurring demand for ITproducts and services seems to be going through a trough that is broadly in line the global trendtowards rationalisation and centralisation of IT procurement budgets of multinationals worldwide.There are several opportunities for IT firms to engage with the emerging areas of local demand.New avenues of IT spending growth that are likely to drive growth in the future are opening up.Mobile Banking, for instance, is an exciting new area that may bring together two IT demand drivers andset the stage of another spurt of explosive spending growth in the coming years. Value-added services(VAS) represent yet another lucrative frontier that still presents an untapped opportunity for theindustry.The dynamic character of Pakistan’s IT and IT-enabled services industry continues to evolve and re-invent itself to meet the new challenges and opportunities that it faces. It is an industry that survivesand thrives in spite of the various geo-strategic, political, and socio-economic challenges that areuniquely the country’s own. Perhaps no other industry in the world with such ambition has beenburdened with graver challenges than Pakistan. No other country has demonstrated more tenacityand a greater will to succeed despite the odds. 9
  11. 11. 2 – Background and IntroductionThe years 2007-9 have been a period of considerable turmoil for the global software industry. The onsetof the global recession brought about by the credit crunch of 2008 is still affecting demand for IT and IT-enabled services around the world. Around the world, IT industry’s focus has primarily been on thepreservation of existing markets and margins rather than on expansion.While Eastern destinations, particularly in Asia and the Pacific, have survived the massive lay-offs thathave haunted the West, the former have nevertheless been affected by a dampening of growth in the ITsector and the broader economy. In addition to the direct impact of slowing demand for IT products andservices, job losses and unemployment in the West have lessened the appeal of IT outsourcing.Today, the software / BPO industry is operating in an entirely different environment than what was amere couple of years ago. While traditional drivers of the growth in IT demand may have dampened inthe current recessionary environment, new drivers have emerged to take their place. Crises – andrecessions – could serve as stepping stones towards new avenues and opportunities for those who arewilling to see new possibilities and strategically manoeuvre to take advantage of these.It is important, however, to keep track of what the current state of play is and where one is headingeven under the most turbulent and confusing of times. This must apply to both the company and theindustry as a whole. The ability to see the trends, opportunities, and challenges in almost real timebefore they either become reality and hence too late to act upon or do not materialise as expected iscritical to making quality organisational and policy decisions.Collecting timely data on the industry to benchmark its performance over time and against othercompetitor industries is critical to taking stock of its performance and understanding the dynamics andchanging trends. Over the years, a number of studies have been carried out to achieve this for thePakistani IT industry. These have documented the industry with varying degrees of accuracy andcomprehensiveness and include, among others: • PSEB Best Practices Study of Pakistan’s Software Industry (2003-4); • BearingPoint ITES-BPO Study (2006); • P@SHA Annual Review of Pakistan’s Software Industry (2007);These studies vary in terms of their coverage of industry’s various segments and sub-sectors and thetype of data collected. In addition, a number of other “informal” approaches have also been made tocapture data relevant to the industry but their coverage has been limited to trying to estimate industrysize. Most notable of these attempts is a paper published by PSEB in 2006 and State Bank’s Balance ofPayments (BOP) statistics.One of the primary challenges for the strategic planners and policy-makers in Pakistan is the absence ofcredible and reliable industry data across the entire software industry value chain including inputs (e.g.human resources, employment etc.), outputs (revenues distributions by sectoral and technologycategories etc.), and outcomes etc.The absence of credible data on the industry outcomes of interest results in critical weaknesses in thepolicy-making processes thus hampering the use of evidence-based policy practices in the first place andlimiting the ability to improve upon the policy and programme design once a policy regime has been putinto place. 10
  12. 12. Well designed and executed policy programmes require upfront analysis and assessment, evidence-based policy design, and seamless implementation with key stakeholders on board. Policies andprogrammes designed with detailed planning, analytical rigor, and a high implementation focus aremost likely to deliver best results. Timely and accurate data is central to this endeavour. 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 2.1: The data needs of a three-tiered evidence-based policy-making processA related benefit of having credible and reliable data on the industry is the ability to better market theindustry abroad. A mature and fast growing industry, like Pakistan’s, must take the necessary steps toensure timely and adequate data collection and project these, locally and internationally, in a proactiveand professional manner.It is, therefore, important to regularly survey the industry to collect data on its current state and futuredirection and make this data available for strategic planners, marketers, and policy-makers alike.This report is a fresh attempt – in a series of attempts over the last few years – to capture credible andreliable data on Pakistan’s software / BPO industry. It puts forth and builds upon a data collectionframework that seeks to collect data on revenues and markets, employment, management andoperations, quality of technical operations, funding needs, and public policy. It also, for the first time,uses a detailed revenue classification scheme to create a finer grain understanding of revenues andactivity across various IT and IT-enabled services sectors as well as tools, platforms, offerings. 11
  13. 13. 3 – Study Objectives and DesignThe objectives of the study are as follows: • To improve and enhance the statistical knowledge and qualitative understanding of Pakistan’s software development and IT-enabled services (ITES) industry leading to an assessment of where it currently stands and where it is heading. This will be achieved by carrying out a survey of CEOs / CTOs of the country’s leading software development and ITES operations; and • To develop an appreciation of the size and nature of the country’s IT user market. This will lead to a fine-grained understanding of the needs and challenges faced by some of the largest users of IT within Pakistan. This will be carried through interviews with of CIOs (and Heads of IT) of the country’s largest IT users in the financial, telecom, utility, MNCs, and public sectors.This analysis will lead to better understanding of the opportunities and challenges confronted byPakistan’s software / BPO industry and will provide a critical link in the information feedback loopbetween producers and users of IT and IT-enabled services in the country. In line with these objectives,a three pronged strategy was adopted. This is depicted below: Task 1 Task 2 Task 3 Design of Analytical Collection of Analysis and Strategy Industry Data Findings 1: Refinement and development 2: Surveys of producers and 3: Findings: Analysis of of data collection instruments users of IT and ITES in qualitative and quantitative Pakistan data • Develop an analytic strategy (i.e. • Carry out quantitative surveys • Analysis of survey data of PSEB methodology, population / PSEB Member Companies. Companies to benchmark industry’s samples, bias adjustment etc.) to • Carry out surveys and interviews performance over the last 2-3 address the objectives of the of the top-50 leading IT users in years, understand emerging trends, study. Pakistan including Banks, and document policy challenges • Draw upon the earlier survey work Multinationals, Telecom and • Writing of final report and carried out on the Pakistani Utilities, and Public Sector. conclusions. software / BPO industry to develop • Carry out interviews with CEOs of a refined version of a survey 50-70 largest software / BPO instrument. companies in Pakistan. • Test the new survey instrument. Figure 3.1: Graphical representation of the work planTwo separate set of interviews, namely, CEOs of about 50 of the Pakistan’s leading and most prominentIT and ITES companies and more than 45 CIOs (and Directors of IT) of Pakistan’s largest and mostprominent IT users were carried out between mid-2009 and early-2010. Special care was undertaken toensure representation of important sub-sectors within each of these categories. Within the IT and ITEScompanies, companies with IT products, services, systems integration, mobile application and gaming,and business process outsourcing sub-sectors were selected. Within the IT user companies, banks andfinancial institutions, multinationals, telecommunications and utilities, public sector organisations, andprivate and non-profit sub-sectors were selected. The results of these quantitative (chapter 4 and 5) andqualitative (chapter 6) analyses are documented in the chapters that follow. 12
  14. 14. 4–Pakistan’s IT Market Revenue Classification & AssessmentThis chapter attempts to calculate the software / BPO revenue of Pakistan’s IT (software and BPO)industry. It looks at various estimates of Pakistan’s software / BPO export figures put forward by varioussources in the past and uses data from a specially designed survey to arrive at current estimates of theindustry revenues.4.1 – Past estimates of Pakistan’s IT market and software export revenuePakistan’s Software / BPO industry is relatively nascent as compared to many similar industries aroundthe world. Systematic data collection on the industry has, therefore, been an even more recentdevelopment. Over the last 5-7 years, a number of attempts have been made to better document thesize and nature of this industry. A number of different estimates exist that attempt to calculate theindustry’s size (and characteristics) at various points in time. These use different methods and formulaeto estimate the industry size leading to results that are often not comparable.In particular, five different studies carried out thus far have attempted to estimate the size of Pakistan’ssoftware / BPO industry. These are summarised in the figure below: Revenue Estimate Source Software / BPO Export Estimate and Year Estimation MethodologyState Bank of Pakistan 2009 – Software: $115.95m, Call Centres: $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 – Domestic Spend: $269m (Global: $640m) Survey based extrapolationGartner 2008 No independent estimate N/A Source: Technomics Compilation Table 4.1: Software export / BPO revenue estimates by various sources (and studies)These figures represent a somewhat confusing picture of Pakistan’s software / BPO industry. The mostaccurate of the above estimates – one backed by a verifiable accounting data trail – is that of State Bankof Pakistan’s balance of payment statistics for trade-in-services. However, this does not capture the fullextent of the revenues and earnings of the Pakistani software / BPO industry. Bearing Point (2005) andPSEB (2006) represent the use of multiples and rules of thumb to arrive at an overall figure for Pakistan’sIT industry. These approaches have their own limitations and may be highly inaccurate when appliedinappropriately. PSEB (2005) and P@SHA (2008) represent survey based approaches that, althoughlimited in scope and coverage, have the potential to be quite accurate and lend themselves to biascorrection.To date, P@SHA (2008) is by far the most comprehensive attempt to calculate the overall size of theindustry’s revenues. This study used a well-tested survey methodology to collect data on a sample of 80companies (out of over 300 P@SHA members). It then used an “80:20 Rule” to extrapolate these resultsto arrive at revenues / exports for the entire industry. The results are documented in the figure below:2 P@SHA 2008 estimated the overall Pakistan IT Market (Hardware & Software) to be between $1.7 – 2.25 billion. 13
  15. 15. Figure 4.1: Pakistan’s IT spend and global revenue (Source: P@SHA 2008)P@SHA (2008) sub-divides the overall IT market into five sub-caterogies. These are: • Revenue Category A: Domestic Revenue and Spend of Pakistan’s Software / BPO industry was estimated on the basis of survey of 80 software / BPO companies at around $269 million (2006). This was extrapolated to produce an overall industry figure of $322.8 million. • Revenue Category B: Global Revenue Impact of Pakistan’s Software / BPO industry was estimated on the basis of a survey of 80 software BPO companies at around $640 million. This was extrapolated to arrive at an overall industry figure of $768 million. • Revenue Category C: Domestic Revenues of Leading IT multinationals (e.g. IBM, Cisco, NCR, Oracle, Microsoft, SAP, SaaS, and Intel etc.) forms a major share of the domestic IT spend and was estimated at around $200-250 million a year. • Revenue Category D: Domestic hardware market, over and above that captured by the IT multinationals, was estimated at $300-500 million a year. • Revenue Category E: IT spend on in-house operations of major IT users (such as MNCs, Banks, and government entities) was estimated at around $200-400 million of additional IT spend.These estimates put Pakistan’s software / BPO industry at around $1.7 to 2.25 billion. One of the majorcontributions of the P@SHA Annual Review 2008 was to introduce, for the first time, a rigorous estimateof the industry’s global impact. The idea of Global Revenue Impact of Pakistani IT companies wasintroduced that sought to address the challenge of attributing the portion of revenue of a Pakistanicompany but that was never brought into the country to Pakistani exports. Bearing Point Study of 2006had estimated the global revenue of Pakistani companies to be four times what was brought withinPakistan. The Global Revenue Impact metric went a step further by attributing to the Pakistani companya share of the overall revenue of its foreign parent based on its contribution to the creation of thoserevenues. 14
  16. 16. 4.2 Pakistan’s software / BPO revenue estimatesIn 2007, at the time of the P@SHA Study, Pakistan’s software / BPO industry was projected to havedouble digit revenue / export growth over the foreseeable future. The 2006 full-year revenues of thesoftware / BPO industry had been at $193.5 million of domestic software / BPO revenues and spend and$779 million of global revenue impact. The projections for 2007 stood at $269 million of domesticrevenues and spend and $909 million of global revenue impact. However, before the 2007 projectionscould become a reality, a mix of domestic (a political and constitutional crisis) and international (globalfinancial meltdown and the resulting recession) crises had hit the industry. These crises ended upchanging the industry considerably. The effects are illustrated in the figures below: Impact of 2007 Recession in On Total Revenue and Spend of Pakistans IT Industry 1000 900 800 Revenue (US$, 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 Number of Companies in Various Revenue Categories and the 2007 Recession (2004-10) 35 30 < $50K Number of Companies 25 $50K-100K $101-500K 20 $501K-1M 15 $1M-5M $5M-10M 10 > $10M 5 0 2004 2005 2006 2007 (Projected) 2007 (Realised) 2008 2009 2010 (Projected) Year Figure 4.2: Impact of the 2007 recession on total revenues of Pakistan’s IT industryThe twin crises resulted in a 40% decline in domestic revenue and export-related revenue and spendand an even greater (60%) decline in global revenue impact of the industry. The second of the two 15
  17. 17. figures shows the number of companies within various revenue categories over a 7-year period piecedtogether across three different surveys. The two years clustered in the middle represent the numbersprojected and realised for 2007. The contrast is striking. The projected transition from 2006 to 2007clearly tells a story of considerable growth with several companies hoping to transition to $10 million ofrevenues through the course of the year. That transition never took place.By early 2009, the industry seemed to have turned a corner and began to see prospects of a return to itsearlier growth trajectory. By 2010, the industry is projected to have fully recovered the declineexperienced during the recession and return back to its 2006 level. Several CEOs that Technomics spokewith talked has begun to see positive signs of a market that was beginning to open up after two years ofspending freezes and cost-cutting. One of the CEOs Technomics spoke with described the recessionaryperiod as “one full-year of growth missing from the company’s record.” ‘“From January to December of 2008, we grew by 15% in Rupee terms against a forecast of 35%. From January to December of 2009, it looks like we will be able to manage 19-20% if the year pans out as it appears like it would. The end result of these two years has been to reduce one full year from the company’s long range growth plans.” .This company, and many others, saw modest revenue growth with flat or slight decline in profitabilityover the two year period. Growth in Total Revenue and Spend of Pakistans IT Industry 900 800 Revenue (US$, Million) 700 600 Global Revenue Impact 500 Local IT Revenue & 400 Spend 300 200 100 0 2004 2005 2006 2007 2008 2009 2010 (Projected) Year Figure 4.3: Growth in total revenue and spend of Pakistan’s IT industryClearly, 2007 was a bad year for the industry as it saw many companies slip their revenue targets andprojections. The chart also depicts the turnaround that began to take place by end-2008 and had takenfirm roots by 2009. The number of companies in various revenue categories is expected to surpasswhere they were at end-2006 by the end of the current year (2010). Revenue figures tell a similar story.The above data provides a starting point for estimation of software / BPO export revenues for the entireindustry. This is carried out below: 16
  18. 18. IT Market Revenue Classification Scheme A Sectoral Classification of Pakistan’s IT Market1 Financials 12 Healthcare and Life Sciences2 Computing and Electronics 13 Media, Entertainment, Advertising3 Education 14 Real Estate4 Government 15 Energy excluding Utilities (e.g. Petroleum)5 Automotives 16 Hospitality (including Airlines)6 Telecommunications 17 Shipping, Couriers, and Logistics7 Retail Services 18 Professional and Business Services8 Utilities 19 Fashion and Textiles9 Manufacturing 20 High Technology (e.g. Ebay, Yahoo! Etc.)10 Transportation 21 Others11 Aerospace and Defence A Product – Services Offerings Classification of Pakistan’s IT Market – Software & IT1 IT Governance and Strategy 16 Network Consulting and Integration2 IT Consulting 17 Animation and Graphics3 ERP – General 18 Gaming4 ERP – Specialised (Vertical Specific) 19 Mobile – Content and Applications5 ERP – Middle Market (SMEs) 20 Virtualisation and Cloud Computing6 Financial – Specialised (Core Banking) 21 Location-based Services7 Financial – Specialised (Banking Apps) 22 e-Business (e.g. Web 2.0, Search etc.)8 Financial – Specialised (Capital Market) 23 Information Security9 Financial – Specialised (Non-Banking) 24 eGovernment10 Document Management 25 Business Performance Management11 Office Productivity 26 Data Warehousing – Business Intelligence12 Billing and Payments 27 Embedded Systems Software13 Customer Relationship Management 28 Product Development, Engg, and Design14 Education and Training 29 Business Continuity and Recovery15 Systems Integration 30 Software Testing and Assurance A Product – Services Offerings Classification of Pakistan’s IT Market – IT-enabled Services1 Finance and Accounting 9 Knowledge and Content Services2 Human Resources 10 Analytic Services3 Procurement and Logistics 11 Sales and Marketing4 Customer Interaction & Support (Voice) 12 Transcription Services5 Customer Interaction & Support (Non-Voice) 13 Managed Services6 IS Outsourcing 14 Applications Management7 Transactions Processing 15 Others8 Outsourced Support Table 4.2: IT market revenue classification scheme – sectors and product-service offerings 17
  19. 19. The survey of PSEB member companies resulted 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 4.3: “In sample” estimates of global revenue 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. 2010 figures are merely projections. As with similar surveys carried out by other countries such asIndia and Ireland, these figures are based on small sample sizes and need to be corrected for biases andadjusted to account for entire populations.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 2009-10, Median Revenue figures are for 2008. Table 4.4: Proportion of companies of various sizes within the sample and their median revenuesAlthough, PSEB boasts a total of 1739 members on its website, its active (fee paying) membersnumbered around 673 3 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.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 could be an appropriate measure for the revenue of non- respondents.A correction was applied to the “in sample” estimates to arrive at figures for the entire population:3 As per PSEB Website’s Industry Overview Section available at: http://www.pseb.org.pk/item/industry_overview 18
  20. 20. Company Size Companies in Global Companies in Correction based on Sample Revenue Population Median Revenues Large (>$10 million) 8 (10.66%) 4 $260.53m 45 $51.06m 6 7 Medium ($501k-$10million) 21 (28.00%) $63.20m 167 $334.88m 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%) $78.60m 4 $37.5m Medium ($501k-$10million) 21 (28.00%) $43.19m 167 $188.37m Small (<$500k) 46 (61.33%) $7.52m 367 $38.12m Sub-Total $129.31m 673 $263.99m Total Domestic Revenue & Spend $393.30million Source: Technomics Estimates. PSEB Member Survey 2009-10, Median Revenue figures are for 2008. Table 4.5: Corrected global and domestic revenue and spend of Pakistan’s software / BPO industryTwo alternate approaches for calculating software / BPO earnings, namely, “RBI Software SurveyCorrection Model” and a “modified” 80:20 Rule lead to more conservative estimates: Company Size Sample Population Sample Population Global Revenue Correction Domestic Spend Correction Modified “80:20” Rule 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 India (RBI) Method Company Size Sample Population Sample Population Global Revenue Correction 8 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 4.6: Corrected global and domestic revenue and spend of Pakistan’s software / BPO industry4 Over represented in the Survey Sample5 Estimate based on industry knowledge of large non-respondents6 Slightly under-estimates the proportion7 31% and 68.5% of non-respondents respectively after correction for over-representation of large companies8 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 19
  21. 21. Summarising the results of the population estimates for the three methods 9 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 $157.00m $129.31m $96.51m RBI (India) Model $332.om $137.19m $129.31m $119.97m Corrected Population Estimates: Stratified Medians Correction $761.93m $393.30m Modified “80:20” Method $489.83m $226.57m RBI (India) Model $469.19m $249.28m Source: Technomics Estimates [2010] Table 4.7: “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. The Technomics’ Survey of PSEB Member Companies (2010) which is the subject of thisreport was carried out towards the end of 2009 and early-to-mid 2010. The figures are, therefore, mostaccurate for FY 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: 4.8: Estimated size of domestic and export revenues for 2008, 2009, and 2010On the whole, though, the estimates suggest upper and lower limits on Pakistan’s software / BPO globalexports revenues to be between $761.93 million and $469.19m respectively and domestic revenue andspend to be between $393.3million and $249.81million respectively.9 Please refer to PSEB Software / BPO Export Revenue Recognition and Assessment: A Policy Options Study,PSEB 2010 for assumptions underlying each of the three models. 20
  22. 22. 5 – State of Pakistan’s IT Industry: Survey of IndustryPerformance and Firm CharacteristicsThe global recession during the last 2-3 years (2007-2010) has tested the industry’s grit and resilience. Inmid-2007, P@SHA Annual Review 2008 noted that Pakistan’s software and BPO industry was on theverge of a take-off. In FY2006, the software / BPO industry stood at $193.4 million of local revenues andspend and global revenue impact $779.7 million. A survey of industry’s leading CEOs projected thesefigures to growth to $269 million and $909 million respectively in 2007. With the industry growing inhigh twenties and low-to-mid thirties, for much of the last half decade, there appeared no reason toexpect any less for the foreseeable future.In addition to a general growth trend that seemed to go on unhindered, several other factors supportedan optimistic picture of industry growth. In particular, the last 2 years had seen a considerable openingup of the domestic market for Pakistan’s software / BPO industry. Telecommunications, financial sector,and public-sector were the three largest spenders of IT and each had experienced solid growth in theyears before. Pakistan had become a world leader in mobile penetration with around 60% of thecountry’s population having a mobile phone connection. This created the right environment for severalbillion dollars of foreign direct investment within the telecom sector. Financial sector was in the midst ofa consumer finance revolution driven by continued deregulation, strong growth in foreign exchangereserves, and considerable excess liquidity in the market. The country’s largest Banks had been goingthrough massive IT modernisation projects thus driving up the demand for IT products and services atleast part of which were being serviced by the local IT industry. The government had, for the first time inmany years, begun to invest heavily in IT through (planned) modernisation of major public sectorfunctions. While the eGovernment Directorate (EGD) primary responsible for making investments in IThad not found its element, other players within the government and defense, in particular, had begun todrive growth in public-sector IT spending.The global recession hit in the early 2008 and with it came considerable belt tightening in IT spendingaround the world in the country’s major export markets – most notably United States, Canada, andEurope. However, even before the effects of the global economic recession had begun to make a dent,the relative political-economic stability within the domestic environment in Pakistan had begun to falteras well. A “limited” judicial crisis that started around the middle of 2007 became a full blownconstitutional row between the government and the judiciary. As 2007 passed, the country wasshrouded with considerable political uncertainty that paralysed the government. By early 2008, newelections were called in and new governments came into power at federal and provincial levels.Although peaceful and democratic, this resulted in considerable turmoil at the political level and, from abusiness standpoint, the country found itself in the midst of a period of policy uncertainty.As these developments unfolded at the domestic front through much of the 2007 and early 2008, thecredit crunch and sub-prime mortgage crisis had turned into a full-fledged recession across much of thedeveloped world. The recession resulted in business closures and lay-offs in the country’s major exportmarkets in the West. If the hit to country’s IT revenues on the domestic front (60% of the total revenuesin 2007) was not bad enough, by early to mid-2008 these had been hit yet again on its external frontthus drying up the export demand as well. By the time the dust was settled on the 2007-2008 recession,the industry revenues had experienced a 40% decline in domestic revenue and a 60% decline in exports. 21
  23. 23. For most companies that had gone through year-after-year of double digit growth in the past, 2007 and2008 became the years when the brakes were applied. The industry largely muddled through theeconomic downturn without the kind of massive lay-offs and failures that became the fodder for 24-hour news channels in the West, the impact of the twin-crises was quite massive. However, largely theindustry did quite well to weather the storm and in certain sectors even continued to grow bigger.The resultant turmoil, perhaps, also provided the industry players with much-needed respite to beginthinking afresh. During this period, a number of new exciting developments took place that have thepotential of becoming major new future revenue streams for the industry. Most notable of these hasbeen the growing popularity and coming of age of mobile applications and gaming sub-sector within theindustry where a number of exciting start-ups have begun to make a mark. The second developmentwas the advent of mobile commerce (branchless banking) where Easy Paisa ™ - the joint product ofTelenor and Tameer Bank became a success story and point to the possibilities ahead.5.1 – Pakistan’s IT industry: companies, markets, and offeringsA number of surveys of software / BPO industry have been carried out since 2003-4 that provide insightsinto characteristics of Pakistan’s Software / BPO industry, and its evolution, through time. This sectiondraws from the data gleaned through a number of surveys to create a picture of the industry’sperformance and evolution. These surveys are:PSEB Best Practices Study (2005) involved a detailed survey of company performance, organisationalcharacteristics, and infrastructure and policy challenges of Pakistan’s largest software companies. Aconvenience sample of 50 of the country’s largest companies was created and face-to-face interviewsand on-the-spot surveys were carried out with these companies. A response rate of 96% ensured veryhigh integrity for this analysis. An additional 12 companies filled out an online version of the survey for atotal sample size of 60 companies. The sample included data for FY2004 for software developmentoperations (products and services) and purposefully excluded business process outsourcing (BPO).P@SHA Annual Review (2008) involved a detailed survey of company performance, organisationalcharacteristics, and infrastructure and policy challenges of P@SHA member companies. P@SHA membercompanies are an approximate sub-set of PSEB membership and hence represent a sample from withinthe broader population. The survey resulted in responses from 80 software and BPO companies (fromaround 250 who were contacted) for a response rate of about 33%. Up to 25 of these 80 were alsorepresented in PSEB (2005) sample. P@SHA (2008) also, for the first time, systematically surveyedbusiness process outsourcing (BPO) companies. The data collected included actual data for FY2006 andestimates for FY2007.PSEB IT Market Assessment (2010) is a detailed survey of company performance, organisationalcharacteristics, and infrastructure and policy challenges of PSEB member companies. The surveyincludes a much expanded revenue classification scheme that builds upon the data collected earlier andincludes domestic and export earnings within a set of 20 domains and 35 product-service categories(e.g. offerings, tools, and platforms). The PSEB (2010) data includes companies specialising in softwareproducts development and services delivery, business process outsourcing, mobile applications, gamingand animation, and systems integration. A total of 75 companies (from a convenience sample of about300) responded to the survey for a response rate of 25%. 22
  24. 24. The following subsections draw upon these three surveys to present a snapshot of Pakistan’s IT industry.The picture may not be completely representative of the entire industry as it only represents a limitedsample rather than the population. However, appropriate extrapolation techniques have been used,where possible, to extend the findings to the population. Also, the potential for large biases is pointedout, when necessary.5.1.1 – Company parentage and geographical focusThe Pakistani Software / BPO industry has its roots firmly grounded in the export-focussed developmentand outsourcing movements that became popular during the late 1990s. Consequently a number ofPakistani companies have foreign roots or connections. While these roots have weakened somewhatsince the 2004 with fewer number of companies now having front offices abroad (down from over 50%in 2004-5 to around 36% in 2008-9), they have still remained quite significant. Foreign Roots and Connections of Pakistans IT Companies 60.00 Proportion of Companies 50.00 40.00 2004 Surveyed 30.00 2007 20.00 2009 10.00 0.00 Subsidiaries Front Offices Foreign Connections Figure 5.1: Foreign roots and connections of Pakistan’s IT companiesThis has happened for two reasons. First, the considerable growth in the domestic market has resultedin noticeable re-orientation of the companies away from the export business. Second, the model ofopening foreign front offices for companies without any prior connections in the foreign market (e.g.through an expatriate founder) has had as much as success as had been originally anticipated thusleading to a rethinking of that model of market entry within a foreign marketing. Instead, todaycompanies are increasingly seeking alliances, joint ventures, and other forms of licensing arrangementsto establish a foreign marketing presence. Nevertheless, foreign operations, in particular in the UnitedStates, remain a very critical feature of Pakistan’s IT industry and perhaps the most logical market entrystrategy where an expatriate founder is involved.The Pakistani software / BPO industry continued to diversify geographically. For companies with parentsabroad, for instance, United States continued to dominate other destinations by an order of magnitudewith over 20 of the 75 companies reporting to be a subsidiary of a US company as against 3 from Europe/ UK and one each from Middle East and Asia. Majority of these “parent-subsidiary” relationshipsrepresent the aspirations of an Pakistani expatriate entrepreneur who has either moved back to set up acompany here or is managing a development centre while himself (or herself) living in North America orWestern Europe. 23
  25. 25. Geographical Distribution of Parent Entities of Pakistani IT Companies 25 Number of Companies 20 15 2004 2007 10 2009 5 0 United Europe / Middle Asia Canada South Africa Australia China States UK East Pacific America & New Zealand Country of Origin Geographical Distribution of Front Offices of Pakistans IT Companies Number of Companies with Front Offices 35 30 25 20 2004 15 10 2007 5 2009 0 United Europe / Middle Asia Canada South Africa Australia China Other States UK East Pacific America & New Zealand Geographies Figure 5.2: Geographical distribution of parent-subsidiary connections and front officesWith respect to the industry’s marketing focus i.e. having a [marketing] front office abroad, there seemsto be much greater geographical diversification. In particular, there is a stark trend away from theUnited States and towards new and emerging markets. The companies with marketing presence in theUS is down from 30 of the 45 companies (66%) in 2005 to 28 out of 80 companies (36%) in 2007 to 15out of 75 companies (20%) in the 2009. While European (mostly UK) and Middle Eastern front offices areslightly down as well from 2007 to 2009, there is clearly a trend towards Africa, Asia Pacific, China, andAustralia.Traditionally, these have not been major markets for Pakistan’s software / BPO industry and the trendtowards geographical diversification is a positive development. Part of what we are seeing here is theeffect of the global recession that impacted North America and Western Europe much more than it 24
  26. 26. impacted China and Asia Pacific. However, that is only part of the story. There is a definite movetowards new and emerging markets in Africa and Asia and greater alliances in the Middle East. Netsol –one of the country’s largest software exporting companies boasts a major share of its relevant IT marketsegment within China and is making inroads into the Middle East through strategic alliances. Techlogix –another one of the industry’s well-respected companies is aggressively pursuing the Asia Pacific marketfor products and services aimed at the higher education sector in partnership with Oracle. Severalfinancial products companies have found Africa as promising geographical market segment for theirproducts and services.The final picture that emerges of Pakistan’s IT industry is one firmly grounded in the United States but isgoing through geographical diversification in search for more promising and hospitable markets in thenew and emerging markets in Africa, the Middle East, and Asia.5.1.2 – Employment in Pakistan’s Software / BPO industryThe following figure lays out the industry employment as gleaned from the survey of 75 software / BPOcompanies. As with revenues and other statistics, there is a discontinuity that is commensurate with thehit taken during the recession of 2007 and 2008. As with other indicators, today the industry is almost atthe same level as it was at its peak in FY 2006 just before the recession had begun to hit the industry. 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 5.3: The recession and full-time employment in Pakistan’s IT companiesToday, the 75 companies surveyed employ around 7500 full time staff for an average firm size ofapproximately 131 full time equivalents (FTEs). Apart form the overall employment, a number ofindicators of employment continue to improve over time. Employee attrition rates, for example,decreased considerably with length of employment increasing from 2.62 years (2005) to 2.89 years(2007) to 3.52 years (2009). The jump in employee retention is considerably higher in the recent years(between 2007 and 2009) than the earlier period (between 2004 and 2007). This might partly beattributable to the economic climate and lack of job security and alternative options for workers. 25
  27. 27. Total Full Time Employment (FTE) in Pakistans IT Industry 12000 Number of Professionals 10000 8000 6000 Total FTE 4000 2000 0 2004 2005 2006 2007 2008 2009 (E) 2010 (P) Year Percentage Employment Growth in Pakistans IT Industry 80 60 40 20 Employment % Growth Growth 0 2004-5 2005-6 2006-7 2007-8 2008-9 2009-10 -20 -40 -60 -80 Year Figure 5.4: Full time employment and employment growth in Pakistan’s IT industryThere are still two conflicting ways to look at the issue of HR quality and availability. Interviews withindustry CEOs reveal a divided opinion. Some CEOs believe that the HR availability may not be an issueanymore, especially in light of the strategies, coping mechanisms, and “workarounds” adopted by theindustry to deal with shortages. The overall HR pool, however, does not seem to have the depthnecessary to scale up at will, if needed. The highest shortage categories are project management, jobsrequiring high level of English language composition and comprehension, and specialist domain skills.Another skill particularly lacking in the industry is the professional middle management skill that hasoften been credited with difficulties in scaling of software businesses within the industry. 26
  28. 28. Average Proportion of FTE in Pakistans IT Companies, By Type of Work 60.00 50.00 Average Proportion of Professionals 40.00 30.00 2004 2007 2009 20.00 10.00 0.00 Top Project Developers Business Client / Business Customer Others Management Managers / Analysts Technical Development Service Agents Leads Support Type of Work Figure 5.5: Full time employment by type of work performedThe quality of HR, however, remains a critical issue for most CEOs. Availability of quality HR remains oneof the most important policy and infrastructural bottlenecks identified by the CEOs. More than 30-50%CEOs continue to identify HR availability and quality as critical issues hampering business growth.5.1.3 – Product – service strategiesPakistan’s software / BPO industry has its roots in the software services and body shopping movementof the Y2K era and the business processing outsourcing bonanza that happened after the recession ofthe year 2001. Many of these businesses, initially, lacked product-service focus as they sought to fill inthe needs of whatever work was on the offer. The product – service strategies of Pakistan’s software /BPO companies have continued to evolve since those early days.Over the years, there has been an increasing trend towards greater specialisation and refinement of theproduct – services strategies across the industry. The figure below amply demonstrates this trend.Companies were asked to describe their strategic focus as product, services, consulting, BPO, systemintegration, or other company. They could nominate themselves in as many categories as they deemedfit. A higher proportion of companies describing themselves against several of these categories is a signof lack of specialisation. The figure shows decline in each of these categories pointing towards a trend ofgreater 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 we do not have the benefit ofprior data on this, but more than 10% companies classified themselves as systems integrators in thecurrent survey. What is amply evident from the results, however, is the increasing precision with whichcompanies define their area of focus. 27
  29. 29. 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 5.6: Product-service profile of Pakistan’s IT companiesThe figure below digs deeper into particular platforms and development approaches used by therespondent companies. Platform or Development Approaches of Pakistans IT Companies 70.00 60.00 Proportion of Companies 50.00 40.00 Percentage of 30.00 Companies 20.00 10.00 0.00 Custom Own Proprietary Open Source Platform Other development Proprietary Platform (e.g. Platform neutral Platform SAP) Platform or Development Approach Figure 5.7: Platforms or development approaches of Pakistan’s IT companiesThere are several things of interest here. Around 40% of the companies develop on top of their ownproprietary platforms but an increasing number of companies (about 25%) us well-establishedestablished proprietary platforms (such as Microsoft, Oracle, or SAP etc.). This has been a major changein the industry over the last few years as companies have move towards greater specialisation andvalue-addition using established platforms and away from the tendency of “re-inventing the wheel”. 28
  30. 30. There is also a growing move to use open source platforms with at least 50% of the companies doingsome work with OS.5.1.4 – Sectoral DistributionPakistan’s software / BPO industry revenue continues to remain concentrated in a small number of highgrowth sectors, namely, telecommunications and finance. These two sectors combined accounted forthree fourth of the total global revenue for Pakistan’s software / BPO industry. In 2006, for instance, thetop-5 industry sectors included finance (32%), telecommunications (18%), government (10%), energy(4%) and education (4%). In 2008, on the other hand, telecommunications accounted for 57% of thetotal global revenue figure and finance accounted for 18%. Other trends worthy of note are theemergence of sectors such as retail (6%), computing and electronics (4%), and healthcare and lifesciences (4%) and decline in other sectors such as government (down to 3%). On the whole, though, theindustry growth is still highly lop-sided and is a source of some concern. Even within the two mostimportant sectors, but also beyond that, there is considerable variation in output and sales. Sector-wise Breakdown of Total Global Revenues of Pakistans IT Industry (2008) 1% 4% 4% 2% 18% Financials 6% Computing & Electronics Education 4% Government 1% Telecommunications 3% Retail Manufacturing Healthcare and Life Sciences High Technology Others 57% Figure 5.8: Sectoral breakdown of total global revenues of Pakistan’s IT industry (2008)Looking at domestic software / BPO revenue and spend and software / BPO exports separately, one canbegin to appreciate the competitive dynamics of these different industrial sectors and Pakistan’sposition within each of these.The two figures below lay out the sectoral break-down of domestic IT revenue and spend and exportrevenues of Pakistani software / BPO companies. 29
  31. 31. Sector-Wise Breakdown of Domestic Revenues of Pakistani IT Companies (FY-2008) 1% 1% 0% 1% 1% Financials 29% Computing & Electronics Education Government Telecommunications Retail Utilities 3% Manufacturing 53% 4% Professional Services Others 7% Sector-Wise Breakdown of Export Revenues of Pakistani IT Companies (2008) 4% 2%1% 13% 5% Financials 2% Computing & Electronics 4% 9% 1% Government Telecommunications Retail c Manufacturing Healthcare and Life Sciences High Technology Hospitality Others 59% Figure 5.9: Sectoral breakdown of domestic and export revenues of Pakistan’s IT industry (2008)While the financials sector played a much greater part (29%) in domestic demand for IT products andservices, it played a lesser role in country’s exports (13%). This is broadly in line with the effect of theglobal recession that affected the financial sector the most, internationally, but did not affect the Banksas much in the Pakistan. Over the last several years, most Banks in Pakistan have been going through acycle of IT investments that have carried through even during recessionary times. Telecommunicationsplay an equally strong role in domestic (53% of total revenue and spend) and export (59% of total exportearnings) markets. 30

×