Better to outsource to dependable India than to outsource to unsafe and over-estimated Pakistan

A CEO of an American outsourcer decides to outsource engineering services to a Pakistani outsourcing company-a rarity in itself-considering the mutual hostility the two nations presently have for each other. During the outsourcing company's start-up phase, he finds that though there's low-cost talent, it's not at par with India or even far-off Brazil.

Also, the internet connection can be lousy, and power failures are rampant. Just when he thinks that perhaps he was wise to outsource to Pakistan, because he got a cheap deal a bomb blast forces many of his employees indoors. The outsourcer, fed up of the war-like situation, and the local government's failure to get its act together, opts to pack up, and outsource to nearby India.

This is a realistic scenario for any outsourcing company, anywhere in the world, that wants to outsource to Pakistan. Providing subsidized sops, in an aid-infected and strife-driven local economy, to local outsourcing companies, so that they hire relatively underperforming ill-paid talent hardly makes for a country that can be called "an attractive outsourcing location".

To be fair to Pakistan, its IT and outsourcing industry did grow at a rapid rate during 2004-07, but that was only because it was a new destination. And, as recently as May 2009, the country took to beating its collective chests, when management firm A.T. Kearney's 2009 Global Services Location Index ranked Pakistan as the 20th most attractive outsourcing location-up from 30th in 2007-08.

The Index, on which India has consistently ranked number one since 2004, the year of its inception, cited Pakistan's outsourcing industry's lower salaries and improved infrastructure as reasons to upgrade the country. Clearly, many outsourcing clients polled disregarded Pakistan's internal situation, and a stagnant local economy-one would say, much to their own detriment.

Indeed, low input costs, which the Index has pointed to, are important in deciding where to outsource. That is why any comparison of Pakistan with India as outsourcing destinations will have to appropriate the inception, growth and long-term strengths of their respective IT and outsourcing industries.

The attractiveness of the two outsourcing destinations can best be seen in how India is continuously building on its 'first mover' advantage - while also providing a nurturing and stable political and economic environment.

Pakistan, did start off well, but has not been able to build on the initial momentum. Year after year, the home-grown religious fundamentalism that Pakistan would outsource to other countries, now threatens to outsource itself back, and destroy the country's economic and civil apparatus like a cancer.

The country's leadership, instead of utilizing international financial aid and internal revenues in improving education, healthcare and IT infrastructure, are diverting it for subversive activities.

In this deteriorating scenario, for an outsourcing company of any size to outsource to Pakistan, which doesn't seem to be addressing its 'bad image', will be like willingly walking on a minefield.

For these reasons, it's getting difficult for Pakistan to move up the outsourcing value chain.

For instance, for clients to outsource in knowledge based fields, Pakistan will require a high quality of human capital and Information Communication Telecommunication enablement like that which India possesses. More critically, India's IT-ITES-enabled companies are already very well established.

Undoubtedly, Pakistan will carve out a share from the total outsourcing pie, but whether it can compete with India, China, and Philippines in executing large-scale, knowledge-intensive projects, remains to be seen.

India provides economies of scope and scale in outsourcing that Pakistan will take years to match. Facts and figures, which we will discuss later in detail in this article, will show how much effort is needed by the Pakistani outsourcing industry for clients to consciously choose to outsource to the country.

To give a preview, India has more than 7,500 Software Technology Parks (STP), whereas Pakistan has just 11 STPs. India presently has 1,600 registered Business Process Outsourcing (BPO) outfits in 21 major locations across India to which clients outsource business services. Pakistan has just 516 BPOs registered with the Pakistan Software Export Board (PSEB) - with analysts saying that out of these - global clients outsource to just a handful.

India has also lined up the next global outsourcing hubs in 10-15 cities other than regular IT off shoring and outsourcing hubs such as Bangalore, Gurgaon and Hyderabad.

It's also not dependent on these captive centers, because its home grown companies such as Infosys, TCS and Wipro are taking global giants head on in competing with large outsourcing projects.

Ironically, it was India that Pakistan adopted as its role-model to develop its IT and outsourcing capabilities. About four to five years back, its IT and outsourcing companies hired Indian outsourcing professionals from Delhi, Mumbai, Pune and Bangalore, to help train Pakistani middle and senior management in outsourcing operations, HR and IT helpdesk services.

And the Pakistan outsourcing industry is still on a learning curve. In 2008, the Pakistan Software Houses Association (PASHA) sent two delegations to India. Then in February, 2009, it invited a group from Bangalore to Karachi and Lahore in an effort to learn from the Indian experience in outsourcing.

Pakistan as a quality and cheaper outsourcing destination can be misleading:
Whether to outsource to Pakistan or not can be a tough decision, and non-cost factors can override and affect input costs of doing long-term outsourcing business.

Pakistan's so-called advantage in low cost labor in outsourcing is a twin-edged sword. Basic outsourcing cost can be 10-30 per cent lower (not taking into consideration currency values, one Indian Rupee is equal to 1.78 Pakistani Rupee).

But lower input costs in outsourcing result in lower salaries. This is leading Pakistani manpower to move from IT and back office outsourcing to telecom and banking industries - or even abroad.

Many local Pakistani business houses, in local press reports, say that it would be more prudent to outsource to India. If they plan to outsource projects to outsourcing companies in Pakistan, to lower production costs, they negotiate at every level to compensate for all factors of uncertainty and increase their chances of reliability from the outsourcing vendor.

And at a certain level, their calculated, planned and expected cost of development per unit in an outsourcing project goes up - while similar outsourcing setups in India offer a more secure and profitable business environment.

Quality, which affects cost, and vice-verse, is another issue, that can't be overlooked. A US outsourcing company in Pakistan was flabbergasted to know that Pakistan could be considered as a reliable outsourcing destination.

Nick, an employee of a US company told American magazine BusinessWeek that his "company had outsourced two mid-sized projects to two different Pakistani development companies, and the experience was really bad. The work was not delivered on time, there was poor communication, and they kept on making excuses. If you are looking to lose your own clients then feel free to outsource to Pakistan."

International aid to Pakistan subsidizes outsourcing's input costs:
Lower costs of infrastructure and manpower should not be over-valued as an attraction to outsource to Pakistan - as international financial and military aid is artificially propping up its economy.

If one removes money accruing from US aid, Pakistan's weak domestic economy will quickly move into an upward inflationary spiral, resulting in higher input costs. For a serious businessman who wants to outsource to build a leaner organization, this scenario will never be easy to ignore.

Many companies are bound to not to outsource due to internal strife in Pakistan:
Think of Pakistan, and unfortunately, alarming thoughts about ruthless terrorism will push a prospective outsourcer far off from any ideas to outsource to Pakistan.

Just a few months back, the head of Capgemini's BPO in North America, David Poole, while responding to BusinessWeek magazine, disagreed with A.T. Kearney assessing Pakistan positively.

Poole told the magazine that he did not agree with Kearney that companies are increasingly willing to overlook violence and security as critical factors in selecting an outsourcing location. In effect, saying that just having cheap manpower and wireless connectivity is not enough for companies to outsource to Pakistan.

"I work with clients each day on their decision to outsource in particular locations. When it comes to outsourcing, it's rarely about the cheapest price - companies are willing, and do pay for a stable environment," said Poole.

Clients unwilling to outsource to Pakistan due to data security issues:
Many Pakistani software and outsourcing companies are not even aware of local and federal laws in cybercrime and data protection. One can't expect a client to outsource services - when awareness about cyber-legal issues is negligible in the country.

Considering the reach and resources of religious militants within the country, and the extent to which they can go to get back at the civilian government, major outsourcing companies are not willing to outsource to Pakistan.

To outsource business processes, and entrust sensitive data to such a troubled country, is not a profitable proposition.

The US won't outsource to Pakistan, and the feeling is mutual:
A recent survey by US's Pew Research Center found that 84 per cent of Pakistanis polled expressed complete dissatisfaction with the US. The US is desperately trying to eliminate terrorists and religious warriors from Pakistan's north-west regions.

Not surprisingly, due to this mindset, very few American companies outsource to Pakistan - leave alone choosing to outsource critical long-term off shoring. In India, the US is still the leading outsourcer, followed by Europe, and Indian people want to engage with the US in every way.

Many Pakistanis see the US as the latest in a long line of usurpers. "It's like history repeating itself, from the time the East India Company came out here. People don't want to do business with the Americans," Mazhar Salim, 52, a local businessman in Islamabad, told a Pakistani newspaper recently.

Across the border, India, not having nurtured religious mercenaries, provides a safer and stable environment for US companies to outsource business processes and even offshore knowledge intensive projects. In India, Americanization is seen everywhere, from McDonalds to Hollywood and MTV, Indian's are embracing the American way of life.

In IT outsourcing and infrastructure Pakistan is way out of league with India:
If a client, based in the US or Europe, is mulling over whether to outsource to Pakistan, it will find that its telecom infrastructure can be found wanting.

The chasm is even wider when comparative figures in information technology are dug up. Rapid changes in IT, declining standard of talent, is forcing companies to not to outsource to Pakistan-as is evident by earned revenue.

As per PASHA, the total IT industry is worth $2.8 billion. In India, IT services (excluding BPO, Engineering Services, R&D and Software products), contribute to 57 per cent of the total software and services exports. It remains the dominant segment in IT, and is estimated to be worth $26.9 billion - a growth of nearly 16.5 per cent in FY2009.

If one includes the excluded segments, the total worth of India's IT services is more than $42 billion-14 times bigger than Pakistan's.

In IT manpower, a factor that outsourcing companies consider important before they outsource, Pakistan falls dismally short of the resources that Indian IT has at its disposal.

About 110,000 people work in Pakistan's IT sector today. The country's technology schools produce just 20,000 graduates a year - and only about a fifth of those are competitive and well trained, says PSEB.

In India, IT and ITES-BPO professionals have grown from 284,000 in 1999-2000 to 2.23 million in 2008-09 (excluding employment in the Hardware sector) - a growth of 10.9 per cent year on year.

India's fundamental advantages in IT-abundant talent and cost-are sustainable and attractive for clients to continue to outsource to India over the long term.

Outsource to Pakistan but be prepared for a reality check in telecom infrastructure:
Going by a recent testimonial given to BusinessWeek by a British outsourcing company, the much talked-about telecom infrastructure in Pakistan is shoddy and stagnating - negating claims made by the Pakistani government and its outsourcing companies.

Responding to a query by the magazine, the unnamed source from the company said, "The dial-up connections in Pakistan are the cheapest but also the worse to use. The connection speed is slow. The 56K connection normally downloads the data at 3K."

He added that "the quality of telephone lines in most areas of Pakistan, except a few major cities, is very poor. Sometime the connectivity is not possible through these poor quality telephone lines."

According to BuddeComm, the Australia-based world's largest telecommunication research website, Pakistan has four million total internet subscribers - India has 18 million. Total mobile services subscribers in Pakistan are 99 million. India has more than 350 million subscribers (as of January 2009), which are set to rise to a phenomenal 650 million by 2012.

There were an estimated 90 million internet users in India by January 2009. Pakistan has only 18.5 million internet users.

In every telecommunication parameter, India is far ahead, and will continue to grow rapidly, given that its economy is growing between 5-7 per cent every year.

In BPO, India is the mother ship, and Pakistan a minor space pod:
India alone commands 65 per cent of the world's BPO offshore outsourcing market-just one amongst other reasons that companies outsource to India.

Business Process Outsourcing is the fastest growing segment within the Indian IT-BPO sector with a five year Compounded Annual Growth Rate of 29 per cent over the past five years. BPO exports from India stand at over $10.9 billion in 2007-08. Pakistan earned $165 million in the same period.

Over 600 MNCs outsource product development and engineering services from their centers in India-leading them to outsource critical Research & Development.

Lack of local financing avenues in Pakistan is affecting outsourcing:
According to PASHA, local IT and ITES companies in Pakistan have been set up by people from their personal money or by borrowing from friends and family. Young people with bright ideas are barred from financing their own outsourcing companies, as they lack collateral.

Thus, if a company wants to outsource business processes to Pakistan, and gets in touch with local prospective business partners, financing the outsourcing company can be an overwhelming hurdle.

This is severely affecting Pakistan's ability to grow domestic outsourcing and IT capabilities-making it very difficult for them to reach the scalability that Indian IT and other outsourcing companies have attained in the international markets.

In India, domestic and foreign angel and venture capital investors, apart from local and MNC banks, make it possible for any company to outsource through Indian outsourcing companies - and get a project off the ground.

Companies that outsource to Pakistan have to make do with its regressive education system:
Global companies outsource to India, and will continue to outsource to India, as they know that it will never be short of qualified and well-trained manpower. And every passing day, India is strengthening its educational system to take on challenges of the future.

Pakistan, on the other hand, is struggling to provide qualified manpower of both genders, resulting in most American companies choosing to outsource to India instead of Pakistan.

The World Bank says that Pakistan's educational system, which companies consider critical before they outsource, suffers from inadequate government investment, corruption, and a poor curriculum that often incites religious intolerance.

It's unlikely that companies would want to outsource sophisticated knowledge processes in the long-term given the state of Pakistan's educational system.

With a young demographic profile and over 3.5 million graduates and postgraduates that are added annually to India's talent base, no other country offers a similar mix and scale of human resources.