Outsourcing to Pakistan

• July 24, 2009

Pakistan is trying to copy India's success in luring IT work, but it's slow going

Think software and services outsourcing, and places like Bangalore, Manila, and perhaps Budapest spring to mind. But Lahore or Karachi? The Pakistani cities might not be on the outsourcing map yet, but the country's software shops are out to change that. "As a natural course, American companies would not look at Pakistan," acknowledges Jehan Ara, president of the 250-member Pakistan Software Houses Assn. "So we have to get them to look at us, and once they do business with us and credibility is established, they come back for more."

It makes sense for Pakistan to follow in India's footsteps and try to boost its outsourcing business. The country, after all, shares India's British colonial history and has some 17 million English speakers. It has a huge community of émigrés with experience in technology. And like India, it has a culture that values education and hard work. Wages, meanwhile, stand at about the same level as in India, with call center workers earning about $12 per day and starting software engineers pulling in $5,000 or so annually.

Still, Pakistan remains far behind India. Last year the country's software and IT services business hit just $300 million, and exports made up only about 11% of that. India, by contrast, booked $12.8 billion in software and services exports in 2004. But the Pakistan Software Export Board, a federal body set up to promote outsourcing, forecasts that the business will grow by at least 45% annually in coming years. "Pakistan started late but now is catching up very fast in software development," says Prime Minister Shaukat Aziz.

Lower-level operations such as call centers are expected to grow even faster: Some 120 centers have opened in Pakistan in the past two years. Today they employ 3,500 people, and that number is expected to grow by 60% a year. Arwen Tech, a Karachi company that runs a 600-seat center, saw its sales double last year, to $10 million, serving clients such as Pakistan International Airlines and the local franchisee for KFC Corp. (YUM! ). Now the company is building a 1,500-seat facility and hopes to boost revenues tenfold, to $100 million, in the next five years as it attracts more international clients.

Pakistan could use the boost that outsourcing provides. Unemployment is officially pegged at 8%, although in reality it's far higher than that, and the government is looking for ways to fuel economic growth. Pakistan needs technology to increase efficiency and productivity. And software exports will help the country move away from its reliance on textiles, which make up 65% of total exports.

YOUNG TECHIES 
Still, Pakistan faces major hurdles. First, there's the question of security: Few Western execs are willing to entrust sensitive data to such a troubled country. And despite its 55 tech institutes, Pakistan may face a shortage of IT workers. About 75,000 people work in the sector today, and the government believes a further 7,000 will be needed each year to keep the industry growing at current rates. But the country's tech schools produce just 5,500 graduates a year -- and only about a fifth of those are competitive and well trained, the Software Export Board says.

The country is working to fix those problems. A new government commission aims to beef up education standards. Since 2001, Parliament has scrapped corporate taxes on software exports and simplified the investment process. In the next three years, the government also plans to open IT parks in Islamabad, Karachi, and Lahore. And the Pakistan Software Houses Assn. last year sent two delegations to India, then in February invited a group from Bangalore to Karachi and Lahore in an effort to learn from the Indian experience.

Outsourcing companies have developed their own strategies for beefing up their business. One is to look for customers in places other than the U.S., where Pakistan's image problems are most acute. In 1996, Lahore's NetSol Technologies Inc. (NTWK ) won a contract from Mercedes-Benz Leasing Co. in Thailand to install a software program from Britain. Later the company developed its own package, which it went on to sell to DaimlerChrysler (DCX ) in nine Asian countries. The NASDAQ-listed company now has 270 employees and this year expects sales of $10 million. In April NetSol signed a $2.3 million deal with Toyota Motor Corp. (TM ) and hopes to expand into Europe.

Karachi IT services firm System Innovations looked for work even closer to home. The company was conceived five years ago by Amer Hashmi, a six-year veteran of IBM's (IBM ) Global Services division in Toronto. The 34-year-old Hashmi saw an opportunity supplying software to state-owned Pakistani companies, and today counts the electric monopoly, Citibank's (C ) Pakistan operations, and Habib Bank Ltd. -- the country's second-largest -- among his 50 clients. Now, with 100 employees and $10 million in sales this year, Hashmi hopes to triple the company's size in the next 12 months by boosting sales to U.S. corporations. He plans to open offices in Texas and Ontario this summer.

Others have set up front offices in the U.S. to win customers. Lahore's Techlogix Pakistan, one of the country's first software exporters, gets 95% of its business from the U.S. Most of that comes in from a four-member sales team in Boston, which funnels work to 90 software developers in Pakistan and a further 35 in Beijing. The company booked $8.2 million in revenues in 2004 serving 18 clients, including General Electric Co. (GE ) and Massachusetts Mutual Life Insurance Co. "Our U.S. office has to offer the same kind of relationship-management as top-notch U.S. companies," says Kewan Khawaja, co-CEO of Techlogix. It may be a while before Karachi or Lahore has the resonance of Bangalore or even Budapest. But plenty of ambitious Pakistanis are working to make it happen someday.


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