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Factors Affecting Outsourcing Decisions in Pakistan

A CEO of an American firm decides to send engineering services to a Pakistani company—a rarity in itself—considering the hostility the two nations have for each other. During the 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.

The internet connection can be lousy, and power failures are rampant. Just when he thinks that perhaps he was wise to send work 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 ship jobs to India.

This is a realistic scenario for any outsourcing company, anywhere in the world, that wants to ship projects to Pakistan. Providing subsidized sops, in a strife-driven local economy, to local companies so that they hire relatively underperforming ill-paid talent hardly makes for a country that can be called an attractive 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. 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 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 job shipping 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 offshore. That is why any comparison of Pakistan with India as offshoring destination will have to appropriate the inception, growth and long-term strengths of their respective IT and job shoring industries.

The attractiveness of the two 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 has destroyed 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 situation, sending jobs to Pakistan will be like willingly walking on a minefield.

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

For instance, in order to be successful 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 pie, but whether it can compete with India, China, and the Philippines in executing large-scale, knowledge-intensive projects, remains to be seen.

India provides economies of scope and scale in job shipping 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 ship projects 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 BPOs outfits in 21 major locations across the country. Pakistan has just 516 BPOs registered with the Pakistan Software Export Board (PSEB)–with analysts saying that out of these–global clients send jobs to just a handful.

India has also lined up the next global offshoring hubs in 10-15 cities other than regular IT offshoring 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 projects.

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

Pakistan offshoring 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.

Pakistan as a quality and cheaper destination can be misleading :

Whether to ship projects to Pakistan or not can be a tough decision, and non-cost factors can override and affect input costs of doing long-term business.

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

But lower input costs in offshoring result in lower salaries. This is leading Pakistani manpower to move from IT and back-office offshoring 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 send jobs to India. If they plan to ship projects to 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 vendor.

And at a certain level, their calculated, planned, and expected cost of development per unit in a project goes up–while similar 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 company in Pakistan was flabbergasted to know that Pakistan cou be considered as a reliable destination for job shipping.

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 job shipping’s input costs:

Lower costs of infrastructure and manpower should not be over-valued as an attraction to ship jobs 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 ship jobs to build a leaner organization, this scenario will never be easy to ignore. Many companies are bound to not to send work due to internal strife in Pakistan: Think of Pakistan, and unfortunately, alarming thoughts about ruthless terrorism will push a prospective firm far off from any ideas to send jobs 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 offshore location. In effect, saying that just having cheap manpower and wireless connectivity is not enough for companies to ship jobs 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 ship projects 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 send 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 companies are not willing to ship jobs to Pakistan.

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

The US won’t ship jobs to Pakistan, and the feeling is mutual:

A recent survey by US’s Pew Research Center found that 84 percent 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 send work to Pakistan–leave alone choosing to send critical long-term offshoring. 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 send 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 vis-a-vis India:

If a client, based in the US or Europe, is mulling over whether to ship projects 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 send work 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 percent 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 percent 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 companies consider important before they send projects, 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 percent year on year.

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

Send jobs to Pakistan but be prepared for a reality check in telecom infrastructure:

Going by a recent testimonial given to BusinessWeek by a British company, the much talked-about telecom infrastructure in Pakistan is shoddy and stagnating–negating claims made by the Pakistani government and its 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 worst 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 percent every year.

In BPO, India is the mother ship, and Pakistan a minor space pod:

India alone commands 65 percent of the world’s BPO offshore market—just one among other reasons that companies are interested in getting their work done in 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 percent 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 ship product development and engineering services from their centers in India, leading them to send critical Research & Development.

Lack of local financing avenues in Pakistan is affecting job shipping:

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 companies, as they lack collateral.

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

This is severely affecting Pakistan’s ability to grow domestic job shipping and IT capabilities, making it very difficult for them to reach the scalability that Indian IT and other 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 send jobs through Indian companies–and get a project off the ground.

Companies that send jobs to Pakistan have to make do with its regressive education system:

Global firms have been shipping projects to India and will continue to do so, as they know that they will never be shortchanged. 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. This is why most American firms choose to give work to Indian companies instead of Pakistani companies.

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

It’s unlikely that companies would want to send 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.


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