PSEB has provided an export plan for incorporation into overall export strategy

Dec 25 - 31, 2006

Information Technology (IT) industry of Pakistan has taken a good start in 2006 with Prime Minister Shaukat Aziz's visit to US in January, which the industry leaders dubbed as a good start as the IT industry got representation for the first time in any official delegation. The IT exports in FY 2005-2006 exceeded the target of US$ 72 million, representing an annual increase of 56% over exports of US$ 46.355 million in fiscal 2004-2005. It has also been noted that the SBP reports call center revenue under telecommunication services rather than IT services.

Pakistan Software Exports Board (PSEB) proposed a four-year draft strategic plan, which will increase the IT industry's size to US$ 10 billion in the calendar year 2010. Eight strategic areas with missions and annual targets have been identified. These include facilitation, human resource development; industry finance, marketing, office space provision, public policy, quality and telecom bandwidth provision.

PSEB has provided an export plan to the Planning and Development Division for incorporation into Pakistan's overall export strategy and targets. No organization can strategically plan, manage and interact with its stakeholders in the absence of accurate data. PSEB has also taken into account the industry's statistics, and notices variations in order to have an insight regarding its needs and expectations from its partners. The board commissioned a survey of Pakistan's IT companies in June 2006 with objective of getting the latest data regarding the number of companies, growth, space requirements, and classification by type of business.

The goal was to visit each IT company in Pakistan by September 2006. Preliminary results indicated that there are almost 700 active IT companies in Islamabad, Karachi and Lahore, which are roughly evenly divided among the three cities. Other cities are being surveyed, and it is expected that there are around 50 IT companies in other smaller cities and towns. Growth in Islamabad over the last three years has been around 300%, Karachi has been around 180% and Lahore has been around 150%.

Lahore has been most adversely affected by the downturn in the USA and global IT markets - probably because it houses the most export-oriented IT firms. Pakistan's IT industry is still well below its potential. Ideally, it should be 1/5th of the size of the Indian IT industry, as Pakistan's economy is generally 1/5th of the Indian economy. The size of the Indian ITITES industry is US $ 26 billion, with domestic market contributing US $ 8.2 billion and international ITITES revenue US $ 17.9 billion, which implies that Pakistan's IT industry has not kept pace with the other sectors of the economy and its size should have at least been about US $ 4-5 billion.

It is also interesting to note that the ratio of Pakistan's export revenue to the domestic revenue is only 17 %, whereas the same ratio of the Indian IT industry is 218 %, which indicates that there is a huge potential for growth of the ITPS export revenue in Pakistan. Moreover, since a much smaller domestic base can support a much bigger export market, Pakistan's current ITPS domestic market has the potential to service a much bigger international market.

Share of Pakistan in the vast global ITPS market is insignificant and there are less than one hundred companies generating bulk of the IT and BPO export revenue in Pakistan. As against the total offshore revenue of US$ 39.6 billion, the export earnings of Pakistani IT and BPO companies, transacted through the State Bank of Pakistan, is about US$ 50 million. There are no sources of information available to determine the value of the unreported export revenues brought into the country. However, it is estimated that such unreported revenue brought into the country would be about the same as the reported revenue, which puts Pakistan's total ITPS export revenue earnings brought into the country at approximately US $ 100 million.

However, 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, which is still very paltry as it is about half percent of the total Off shoring revenue. The percent growth in Exports during 2003-04 over 2002-03 was 45 %, which is attributable to the low exports in 2002-03.

There is no record available about the share of the IT services and BPO services in the above export revenue of US $ 50 - 100 million. However, since the number of IT professionals engaged in export oriented software development (about 6,000-8,000) is significantly greater than the number of employees of call center and other BPO related companies working for international clients (about 5,000) and also because the chargeable rates of the software developer are higher (US $8 and $5 for software developer and BPO resource respectively, at the low rate for both), the estimated ratio of the earnings of the IT services and BPO sectors is 2:1, which is an approximation based on the above strength and chargeable rates.

However, as the BPO exports are at the nascent stage, the share of IT services & Software and BPO in the ITPS exports revenue is estimated to be 60 % and 40 % respectively in the next 2 years. Like its international counterpart, the domestic BPO industry is also at the infancy stage and the concept, merit and advantages of outsourcing of non-core functions to specialist ITPS vendors has not been given due consideration by public sector and large private sector organizations such as utility bill companies, banks, multinationals, etc.

The two major priority areas for domestic outsourcing are call centers and utility bill processing, followed by administration, human resources, payroll and accounting services. However, it would take some cultural shift for administration, human resources and accounting services to be outsourced, but the first two can start immediately.

Currently, there are only a handful of companies such as PIA, a few banks, telecomm companies and fast food franchises which are operating their call centers either themselves or through outsourcing. The number of call center agents serving the domestic clients through these call centers is about 2,0001, including those working in the company owned call centers as well as independent call centers. The need for call centers for the domestic sector is estimated to be 10 times more than the present capacity. This assessment is based on the international trend among the public sector organizations and large public dealing private sector companies to have their call center for enhancing the productivity of the organization and facilitating the public and servicing the clients. Another suitable candidate for domestic outsourcing is the bill processing of utility and telecomm companies. The current estimate of the domestic outsourcing revenue is approximately US $ 4-5 million, based on 1,000 domestic call center agents at US $ 2 per hour for a total of 2,000 hours per year per agent.

The other domestic BPO segments are insignificant. There are a few accounting companies which are providing routine accounting, taxation and payroll services to small companies, but their combined revenue is minimal. The projected annual revenue from the enhanced capacity of the domestic call centers and the total outsourcing of utility bills processing is US $ 200 million and US $ 30-50 million respectively. The revenue from the other BPO segments is estimated to be US $ 50-100 million, which implies that a domestic outsourcing market of over US $ 300 million already exists, which can be effectively utilized to nurture the local BPO industry.

Human Resources: The ITPS industry generates direct employment for over 120,000 people. The total number of IT professionals, call center agents and the employees working in other BPO segments in the country is estimated at 75,000, 3,500 and 2,000, respectively. Nevertheless, the corresponding numbers with exportable skills are about 4,000, 2,500 and 1,500 respectively, which implies that out of the total HR strength of 80,500, only about 10 % posses exportable skills. The number of IT graduates produced each year is 5,500 and there are 45 universities offering IT/computer science programs. The population of people who can understand and communicate in English with varying levels of skills is about 6.5 million. However, a large number of them would require extensive training, grooming and experience before they can be expected to serve foreign clients.

Availability of trainers is another limiting factor. The lack of sufficient number of middle management and supervisors is also an area of concern. The HR training needs have been identified in section 6 on the BPO companies of Pakistan. The main strength of Pakistan lies in the availability of a large pool of Accountants, Engineers, Bankers and Doctors who can be employed in the BPO sector.

Infrastructure: The three major components of the infrastructure, which affect the BPO sector, are Internet bandwidth, telephone and electricity. Electricity problem can be addressed through company owned power generators but the Internet and telecom, which are of crucial significance, are beyond BPO company's control. Currently, the reliability of the Internet connection is a major concern. At present, redundancy is not available as there is a single SEMEWE-3 undersea cable connecting the country to the Internet backbone. This has been brought in to sharp focus by the problems encountered during the last week of June 2005 and the beginning of July 2005 due to damaging of undersea cable.

Based on the current strength of 2,500 agents in international call centers, a utilization of 8 hours per agent per day and an average revenue of US $ 5 per agent per hour, the estimated revenue loss due to the severance of the link is approximately US $ 100,000 to US $ 50,000 per day for 100 % and 50 % utilization of the agents respectively from the time the problem started and the intangible losses are far greater (loss of contract, goodwill, reputation, etc).

PTCL is planning to add two more links for redundancy, one through undersea cable SEMEWE-4 (expected to be available by October 2005) and the other through underground fibre optic link with an Indian company VSNL, but until then, major foreign companies would not be keen to outsource to Pakistan. The availability / reliability of phones does not constitute any significant problem in the outsourcing of BPO business to Pakistan as, over a period of time, the land and mobile phone infrastructure has become reasonably developed.

Over 85% of telecommunication infrastructure is on fibre optics and the positive impact of de-regulation of telecomm sector is beginning to be felt. For Pakistan to graduate from the present level of US $ 100 million ITPS export to the next quantum level of US $ 500 million (before making its first billion), it would be required to enhance its HR resources of international quality from the present 8,000 to about 50,000 and would be needing the office space of about 3.5 million sq. ft as against the available space of about 0.5 million sq ft. of all the STPs of the country taken together, i.e., 7 times more.

To address the shortage of space for big projects, factories lying unused / closed could be used for BPO projects requiring 500 plus employees. The industrial sites associations should be approached for obtaining details about the closed factories and the contact addresses of their owners, so that a pre-feasibility could be carried out. This would be a short-term solution till SEZs and STPs are developed, which would take over one year to develop and build, from the time the construction begins.

As regards Human Resource requirement, an additional 40,000 resources will need to be trained in the next two years to achieve the next level of US $ 500 million ITPS export revenue, as about 50,000 resources are needed to generate an export revenue of US $ 500 million. This translates to about 1,600 trainees per month, which can be further broken down to about 400 per city per month (Karachi, Lahore, Islamabad and Peshawar), which is a high but achievable number.

The strategy should be to train the trainers in parallel so that more and more trainees can be trained in the later stages. The HR training needs have been indicated in section 6 of this report. Furthermore it should be understood that the market dynamics of the global economy have changed over the last 5 years, with the big players getting more and more unchallengeable due to numerous factors like the expertise acquired by them over the years, economies of scale, branding, networking, contacts, large investments capacity, etc.

For the same reason, the position of Microsoft and Oracle is becoming more and more impregnable. Automobile industry is another example - it has become far more difficult now for a new car making company to emerge and compete with established players than it was before. Even in India, no new big companies of the size of Tata, Infosys, Wipro and Satyaram have come up in the last 2-3 years.

Another major factor to contend with is the perception issue of Pakistan, both real and imaginary, which more than neutralizes the great cost advantage that Pakistan possesses. One isolated act of terrorism or one alarming news about political situation of the country sets the whole process back and it amounts to taking one step forward and two steps back. Then there are issues concerning IPR, copyright, data security and integrity, regulatory framework, etc, which become far bigger issues in vendor and location assessment processes for new entrants like Pakistan than for established ITPS destinations for whom such issues are overlooked or swept under the carpet. Lack of availability of good quality Human Resource, mainly due to the poor standard of education in the public schools and the colleges, especially in English language, absence of middle management backbone and good trainers and training institutions are the other major inhibitors in the growth of the ITPS industry.