Best Practices Study

PAKISTANSSOFTWAREINDUSTRY
BESTPRACTICES&STRATEGICCHALLENGES
ANEXPLORATORYANALYSIS

MINISTRYOFINFORMATIONTECHNOLOGY GOVERNMENTOFPAKISTAN ISLAMABAD
FEBRUARY2005
Copyrights2005 PakistanSoftwareExportBoard(G)Ltd. MinistryofInformationTechnology GovernmentofPakistan Printing March2005 Publishedby PakistanSoftwareExportBoard TheFundingAgency The Best Practices in Pakistani Software Sector Project is funded by the Pakistan Software Export Board (PSEB). PSEBistheentitywithinGovernmentchargedwiththetaskofenhancingexportsofsoftwareandITenabledservices (ITES) from Pakistan. PSEB is a guarantee limited company totally owned and funded by the Government of Pakistan.AnyquestionsorcommentsaboutthisreportmaybedirectedtoPSEBIslamabadat9251111333666or throughemailatresearch@pseb.org.pk. Disclaimer
ThereportispublishedbyPSEBfortheuseofitsmembers&theITindustry.Thisreportisaresultofa3monthlongindependent researchstudyconductedbytheprincipalconsultantwithsupportfromPSEB.ThestudyalsoincorporatesfeedbackfromPSEB, MinistryofITandTelecom(MOITT)andstakeholdersofthePakistaniITindustry.Itfaithfullyreportswhattheconsultantfound theonthegroundrealityofthePakistanisoftwareindustrytobeandaccuratelyreflects(andwhereverpossibleattributestoothers) theopinionshewasabletoformonthebasisofhisdiscussionsandonsitevisitstoabout50Pakistanisoftwarecompanies.Tothat effect, the report solely reflects the views of the consultant and may or may not reflect those of Pakistan Software Export Board (PSEB),theMinistryofITandTelecom(MOITT),ortheGovernmentofPakistan(GOP).Thestudyadvisorsorthecontributorsare notresponsible,inanywaypossible,fortheerrors/omissionsofthisreport.
ThisreportisabestintentionedefforttodisseminateinformationaboutthePakistansSoftwareIndustryandshouldnotbeusedas asolemeansofadviceformakinginvestmentdecisions.PSEBdoesnotacceptanyliabilityforanydirectandconsequentialuseof thisreportoritscontents.ThecontentsofthisreportmaybereproducedonlyafterpriorpermissionfromPSEB.

PakistansSoftwareIndustry:BestPractices&StrategicChallenges2005
CONTENTS
1.EXECUTIVESUMMARY ......................................................................................................................................4 2.BACKGROUND&INTRODUCTION ..............................................................................................................11 2.1BACKGROUNDANDMOTIVATIONFORTHESTUDY......................................................................................12 2.2INTRODUCTORYREVIEWOFTHERELEVANTLITERATURE ...........................................................................13 3.THEOBJECTIVES,AUDIENCE,ANDFORMATOFTHESTUDY..............................................................16 3.1THEANALYTICAGENDA: .............................................................................................................................16 3.2THEBENEFITSANDINTENDEDAUDIENCE: ..................................................................................................18 3.3THEFORMATOFTHESTUDY: ........................................................................................................................18 4.ABRIEFNOTEONPROJECTMETHODOLOGY...........................................................................................19 5.ASTATISTICALSNAPSHOTOFPAKISTANSSOFTWAREINDUSTRY.................................................22 5.1ESTABLISHINGAPOINTOFREFERENCEFORPAKISTANSSOFTWAREINDUSTRY ................22 5.2SOFTWAREDEVELOPMENTINPAKISTAN:STATISTICSONMANAGERIALANDTECHNICALPATTERNS.....24 5.3SEARCHFORTHEHOLYGRAIL:DOSTATISTICSREVEALAPATTERNOFBESTPRACTICES? ...................49 6.UNDERSTANDINGPROMINENTBUSINESSMODELS&COMPETITIVEDRIVERS ...........................53 6.1ATAXONOMYOFGENERICSOFTWAREBUSINESSMODELS.........................................................................54 6.2THEEXPORTFOCUSEDLOCALFIRM(THESYSTEMSORNETSOLMODEL) ..........................................59 6.3THEDOMESTICFOCUSEDLOCALFIRM(THETPSORLMKRMODEL)...............................................68 6.4THEEXPORTFOCUSEDFOREIGNFIRM(THETECHLOGIXORETILIZEMODEL)..................................80 6.5THEDEDICATEDDEVELOPMENTCENTER(THEITIMASSOC.ORCLICKMARKSMODEL) .................90 7.ENVIRONMENTAL,INFRASTRUCTURE&PUBLICPOLICYCHALLENGES....................................101 7.1TELECOMINFRASTRUCTURECOST&AVAILABILITY .................................................................................105 7.2AVAILABILITYOFVENTUREANDRISKCAPITAL ........................................................................................106 7.3UNDERDEVELOPEDDOMESTICMARKET ...................................................................................................107 7.4AVAILABILITYOFPHYSICALINFRASTRUCTURE .........................................................................................108 7.5INTELLECTUALPROPERTYRIGHTS .............................................................................................................110 8.CONCLUSIONS&RECOMMENDATIONS..................................................................................................111 8.1SUMMARYOFRESEARCHRESULTSANDFUTUREDIRECTIONS ..................................................................112 8.2THEWAYOFTHEFUTURE:SOMETENTATIVECONCLUSIONS ...................................................................114 9.APPENDIXA:LISTOFORGANIZATIONSSURVEYED/INTERVIEWED ..............................................117 10.LISTOFBIBLIOGRAPHICREFERENCES ...................................................................................................119 11.ABOUTTHEAUTHOR/CONSULTANT....................................................................................................123
PAKISTANSSOFTWAREINDUSTRY
BESTPRACTICES&STRATEGICCHALLENGES ANEXPLORATORYANALYSIS
1.EXECUTIVESUMMARY
The software industrywidely seen as the great enablerprovides an opportunity to the developingcountriestoplayagreatereconomicroleinthefastglobalizingworld.Theexample of neighboring Indiawhose ambition and progress towards becoming a mini (software) superpowerisnomysteryfromtheworldisoftencitedinthedevelopmentliteratureasan evidenceofthefact.Pakistanssoftwareindustrywidelyperceivedtobesharinganumberof keyfactorswithIndiahasembarkeduponanambitiouseffortofitsowntoclaimitssharein therichesoftheworldssoftwaremarkets.Pakistaniscurrentlyviewedasatier3countryina widely quoted taxonomy of software exporting nations (Carmel, 2003). It is widely believed that,withthewealthoftalentandstrengthsavailable,thecountrydeservesabetterplaceinthis global pecking order of software exporting nationsatleast a tier2 status like Russia and China,orevenatier1statusalongsidearchrivalIndia1.
Pakistanssoftwareindustryhasbeenasubjectofthecuriosityofinterestedbystandersboth localandexpatriateentrepreneursindustryanalysts,andpotentialinvestorsalike.Yet,lackof credible data on the current state and competitive dynamics of the industry has often been a hindrance in engaging these individuals and materializing many prospective ventures. We wererecentlyinvolved,ontherequestofanexpatriateinvestor,inanefforttoincubateanIT focused venture capital in Pakistan. As we spoke with industry leaders and the financial community,werepeatedlyencounteredaseriesoftoughquestions,forexample:
Why hasnt the Pakistani software industry been able to produce a single worldclass softwarefirm(e.g.Wipro,InfosysorTCSofIndia)inthelast1015years? Why havent we been able to grow Pakistani software exports beyond a certain level ($3060millionperannum)forthelast5years? DoesPakistanisoftwareindustrymerelyrepresentalower levelofdevelopmentoran altogetherdifferentdevelopmenttrajectoryascomparedtoknownpeernations? What constitutes a generalized set of best practices in the local software industry (i.e. whatdifferentiatesbetterperformersfromthosethatdontperformthatwell)?
This study attempts to answer some of these questions. While several factors are widely believedtobeahindranceinthecountrysaspirationtobecomeasignificantsoftwareexporter,
A widely quoted GOP target of $1B in software exports by Y2000 would have propelled Pakistan into the exclusive tier-1 club.
nottheleastimportantofwhicharemacroandgeopoliticalinnature(e.g.lawandorderand securitysituation,imageofthecountryetc.),weadoptaninsideoutapproachthatasks:What can the various players, essentially software companies, in the industry learn from each other? There is a growing realization that we must truly understand the structure of the PakistanisoftwareindustryandthenatureofPakistanscompetitiveadvantageinthesoftware arena in order to devise better industrial and organizational strategies and public policy interventions.TheBestPracticesinPakistaniSoftwareSectorProjectbeingthefirstofitskind andscopeinPakistanisanexploratorystudyofthePakistanisoftwareindustrythatattempts todojustthat.
The study draws upon an onthespot survey of 40 of the most prominent and largest software companies in Pakistan, as identified by PSEB and PASHA. We conducted organizationalinterviewswithseniorexecutives(CEOs/CTOsorLocalofHeadsofOperations) of 47 of these companies to supplement the statistical data with qualitative insights. These interviews focused on understanding these organizations, their business and revenue models, competitivedrivers,strategicchallenges,andpolicybottlenecks.Wealsoconductedinterviews ofopinionleaders,policymakers,andseniorexecutivesofotherorganizationalentities(e.g.IT MNCs,financialinstitutions,andacademia)thathadasignificantbearingonthelocalsoftware industry.Inallweconductedover65interviewsbetweenOct.Dec.timeframe(seeAppendix)
The substantive findings of the study can be broadly divided into two components. The first part attempts at creating a brief statistical snapshot of the Pakistani software industry, as gleaned from the data on organizational, managerial, and technical practices of our respondents.Thesecondpartofthestudyusestaxonomyofgenericsoftwarebusinessmodels todevelopaqualitativesenseofsoftwaredevelopmentactivityinPakistan.Italsoidentifieskey strategic challenges (13 in all) typically faced by companies within each of these generic business models and managerial best practices (20 in all) adopted by various players in the industrytomeeteachofthesestrategicchallenges.Thereportconcludeswithadiscussionon environmentalandpolicybottlenecksandsometentativeconclusions
The results of the statistical analysis are quite illuminating. On the whole, the 60 software houses included in our statistical sample employ over 4000 technical and professional employeesfor an average of 62 employees per organization. Roughly one third (32%) of the software companies reported annual revenues of more than a million dollars with some reportingmorethan$5M,anotherthird(36%)between$200Kand$1M,andtherest(32%)less than$200K.6ofthecompanieshadmorethan250employeesandanother8hadbetween100 and250employees.Onthewholethese60companieshadexperiencedanemploymentgrowth ofabout27.5%andarevenuegrowthof37.4%overthelastyearpointingatbetterutilization of excess capacity or valueaddition per employee, or both. Around 40% of the companies in our sample were subsidiaries of foreign companieswith majority of them having a parent companyintheUnitedStates.55%ofthecompanieshadoneormorefrontofficesabroad(50%
in the US, 11% each in UK and Middle East, and 3% in the Asia Pacific region). 45% of the respondents had quality certification (mostly ISO9000 with only 3% having CMM). 73.7% of thecompanieshaddedicatedqualityassuranceteams.
Broadlyspeaking,ourrespondentsderivetheirrevenuesfromexportanddomesticmarketsina ratioof60:40.Ontheexportsside,theyderive22.5%and38.5%oftherevenuesfromproducts and services respectively. Although we did not ask directly, our conversations with the top leadersoftheindustrysuggestthatamajorityoftheproductexportsarecustomizedrather than shrinkwrapped products. On the domestic side, however, the ratios are somewhat reversedwithproductsandservicescontributing23%and16.5%respectively.Ourrespondents predominantly serve the private sector markets with around 85% of the total sales going to privatesector(localandforeigncombined)andtherestgoingtopublicsector,equallydivided betweendomesticandforeign.
We tried to parse the data into various classifications in an attempt to understand the organization and dynamics of software industry. For example, we looked at the differences between exportfocused, domesticfocused, and hybrid software operations; between product focused, servicesfocused, and hybrid operations; between large and small operations; and between operations formed prior to and after the DotCom Bubble burst in the United States. Ourresultsaresuggestiveofseveralinterestingtrends.
For example, on the managerial practices side, there is some suggestive evidence that export focusedsoftwareoperationsaremorelikelytodistributestocks/ownershipamongemployees, hold employee bonding activities, and benefit from employeedriven innovation while domesticfocusedsoftwareoperationsaremorelikelytoshareprofitswithemployees,provide additionalbenefitstofemaleemployees,havegreaterfinancialdiscipline,andprovidetimeto employeestoworkontheirowninterests.Despitethelatter,however,theyseemtobenefitless from employeedriven innovation and suffer more from a perception of lower delegation quality.Hybridsfallinbetweenthetwocategoriesonalmostallthesemeasures.
Exportfocusedoperationstendtospendmore,onaverage,onqualityassurancewhilehybrids tendtohaveagreaterpropensityforseekingaqualitycertification.Allcompanies,acrossthe board,prefertouseandexpressgreatersatisfactionwithhighcontactapproachesofmarketing (e.g.wordtomouth,oneononecontacts,andpreestablishednetworks).Wedonotfindalot of differences between the coststructures of exportfocused, domesticfocused, or hybrid operations, except that hybrids seemed to underinvest in productdevelopment to pay for expensive marketing and advertising, and training and certification. CEOs of exportfocused softwareoperationstendtospendmuchmoretimeintacticalratherthanstrategicmode(doing daytodaymanagementratherthanmarketingandbusinessdevelopment).
Our analysis of other classifications provides few interesting insights. The dedicated development centers tend to be smaller, more rigorous (from a technical and process
standpoint)thantherestoftheindustry.They,however,seemtoexperienceseriousconstraints torevenueandemploymentgrowthafactthatweinterpretasamanifestationoftheirmid life crisis. Although we see a trend towards productization in the industry, we found few significant differences between productfocused and servicesfocused operations. This lack of differentiation (e.g. in the cost structures of services and productfocused operations) is problematic, to say the least. There were also few significant differences between large and smallsoftwareoperationsandbetweenthosecreatedbeforeandaftertheDotComBubbleburst.
Onthewholethesefindingsalsopaintapictureoflackoffocusandspecializationwithinthe Pakistani software industry. Those productfocused operations are similar to servicesfocused operations and preDotCom operations are not qualitatively different from postDotCom operations does not speak well for the maturity of the industry as a whole. A related substantivefindingisthetrendtowardsthehybridizationofsoftwaredevelopmentactivity. The hybrid firm has emerged as an important organizational class on its own rather than the averageofthetwoextremes.Whilethehybridfirmtendstodobetterthanthetwoextremeson somemeasuresandhencemightbeseenasamanifestationoftheindustryssurvivalinstinct,it isnotquiteclearifitistheoptimalmodeloforganizationofsoftwaredevelopmentactivityin thelongrun.
In line with the study objectives, we also asked the question: Do aggregate statistics reveal a pattern of best practices within the software Industry? We use multiple comparison groups (e.g. 40 most prominent companies, top10 companies, 14 fastest growing companies, 14 companiesthatdescribethemselvesasgloballycompetitiveagainsttherestoftheindustry)and find mixed results on that account. For example, we find robust evidence to support the fact that betterperforming companies tend to adopt a set of employeefriendly management practices (e.g. flexibility, stock ownership, profitsharing etc.) and have access to high quality managerial talent (e.g. mix of technical and business backgrounds, prior venture experience, financial discipline etc.) than the rest of the industry. All companies, across the board, prefer highcontact marketing approaches over lowcontact ones but betterperforming companies reporthighersatisfactionwiththeformerthantherestoftheindustry.Ourresultsonvarious measuresoftechnicalandprocessqualityare,however,inconclusive,atbest.Here,wedonot find any clear patterns that differentiate betterperforming companies from the rest of the industry.Webelievethatbestpracticeswithintechnicalandprocessrealmsaredependenton thetypeofworkperformedandanumberofprojectspecificvariables.Asreportedelsewhere, therefore,projectleveldatamightbebettersuitedtoidentifythesedifferences.
Next,basedonourstatisticalfindingsandqualitativeinsights,wedevisea4parttaxonomyof generic business models. The four subclassifications, named after their most prominent examples, include: Exportfocused Local Firm (Systems or Netsol Model), Domestic Focused Local Firm (TPS or LMKR Model), Export Focused Foreign (Expatriate) Firm (TechlogixorEtilizeModel),andDedicatedDevelopmentCenter(ITIMorClickmarks
Model).Wepresentasnapshotofeachofthesegenericsoftwarebusinessmodelsandidentify key strategic challenges for each13 in all for the entire industry. As we discuss the ways relatively more successful firms in the industry have countered these strategic challenges, we alsoarriveattwenty(20)managerialbestpracticesthatcouldbereplicatedbyotherplayersin theindustry.
The Exportfocused Local Firm is one founded by a predominantly Pakistanbased entrepreneurial team (that may or may not have been aided/encouraged by a group of expatriates),butwithanexplicitpurposeofexportingsoftwareproductsorservices.Majorityof thefirmsestablishedinpreDotComBubblebursterawithanexpressedpurposeofexporting services to North America and FIGUREGENERICBUSINESSMODELS&THEIRTRANSITIONSSCENARIOS WesternEuropeancountriesfallin this category. Although there are DOMESTICFOCUSED EXPORTFOCUSED EXPORTFOCUSED DEDICATED DEVELOPMENTCENTER LOCALFIRM FOREIGNFIRM LOCALFIRM somethathavetakentheproducts ITIM Associates ThreeSixtyDegreez Etilize route,their numbersarerelatively ZRG MetaApps TPS Post Amazers Prosol Clickmarks Advanced Comm. Adamsoft smaller than those focusing on Lumensoft Enabling Tech. (Quartics) Yevolve Netsol Ultimus export of services. The most 2B Technologies Trivor Systems Makabu MixIT Strategic Systems Intl SI3 Autosoft Dynamics Techlogix defining feature of this class of Softech Systems ESP Global Systems Sidaat Hyder Morshed Xavor Avanza Solutions Elixir Technologies companies, namely, the local Genesis Solutions Alchemy Technologies GoNet presenceoftheirfoundersandthe AppXS Kalsoft Jinn Technologies exportorientation of their Oratech Askari Info Systems Secure Networks Systems Ltd products/ services, brings a Acrologix Progressive Systems Comcept number of unique and important LMKR Millennium Software K Cressoft T CARE challenges to this type of a firm. M&A /F F P S D B L M . E P O . M ,V We discuss three of these in great detailandalludetoseveralothers. The ones we discuss in depth include: customer acquisition in a foreign market, setting up a foreignmarketingpresence,andunderstandingthedomainandcontextofaforeigncustomer. Some salient examples of this type of business model in action are: ThreesixtyDegreez, Post Amazers,AdvancedCommunications,Makabu,Netsol,andAutosoftDynamicsetc.
3 RANSITIONS EY IVERSIFICATION W OREIGN IRM HIFTING RIORITIES LEVATIONOF AK ATURITY ALUE ADD UYOUTBY OCAL GMT PS
TheDomesticfocusedLocalFirm,withanexceptionofafewcompanies,isreallyonebecause ofcircumstancesratherthanchoice.Moreoftenthannot,andlogicallyso,thedomesticfocused local firm plans to export its products or services abroad and is merely using the domestic market as a vehicle to gain a track record with real life customers. Whether a firm is in this categorybychoice(Illdodomesticfirst,exportlater)orbycircumstances(Sincetheexport market doesnt seem very good right now, Ill survive by selling at home) the strategic challengesarequitesimilar.Wediscussthreeoftheseinsomedetail.Theseinclude:operating inanunderdevelopedlocalmarket,gettingaccesstocapital,andhavingabusinessplananda strategic/domainfocus.Otherchallengesalludedtoinclude:migratingfromthedomestictothe export market, developing relationships, delivering quality products/services, and even
marketing abroad. Some salient examples of this type of business model in action are: 2B Technologies, ZRG, TPS, Lumensoft, Yevolve, SI3, Softech Systems, AppXS, and Genesis Solutionsetc.
The Exportfocused Foreign Firm is one founded abroad (or jointly, in Pakistan), by a predominantlyforeign(usually,anexpatriate)entrepreneurialteam,withanexplicitpurposeof using the Pakistanbased offshore development facility to deliver a product or service demandedbytheforeignmarket.Thistypeofbusinessmodelhasbeenadoptedbyservicesand productfocusedcompaniesalike.Whilethisclassofcompaniesenjoysseveraladvantagesover thoseinearlierdiscussedcategories,namely,qualityofduediligenceonthebasicidea,foreign contacts/networksoffounders,andbetteraccesstocapitaletc.,therearesignificantchallenges aswell.Wediscussfourofthesechallengesinsomedetailandidentifyanumberofmanagerial bestpracticesfollowedbysomeoftheinterviewees.Thesechallengesinclude:dealingwiththe imageproblem,counteringthegeographicallyshiftinglaborarbitrageargument,scalingup the Pakistanbased operation, and getting to know the land and managing expectations etc. Some salient examples of this type of business model in action are: Elixir, Etilize, Ultimus, MixIT,TechLogix,Prosol,andXavoretc.
TheDedicatedOffshoreDevelopmentCenter,asthenamesuggests,isafairlylimitedoffshore operation of a foreign company. It is different from the ExportFocused Foreign (Expatriate) Firm in the sense that it is often an addon to an already existing company whose strategic andmanagerialprocessesandcontrolsarequitewellestablished.Duetoitsuniquenature(i.e. limited scope) it faces a number of challenges that are distinct from the earlierdiscussed category. We discuss three key challenges faced by organizations in this business model and identify innovative best practices to counter these. These include: managing the parent subsidiary relationship, setting up an offshore facility in Pakistan, and building a quality softwaredevelopmentoperation.Somesalientexamplesofthistypeofbusinessmodelinaction are: MetaApps, ITIM Associates, Clickmarks, Trivor Systems, and Strategic Systems Internationaletc.
The taxonomy of generic software business models may be helpful in several ways. Firstly, it gives us a relatively easy and comprehensive way to classify a particular software operation into a broad enough category of organizations and a hence a reference point to compare ourselves against. Secondly, it highlights the importance of understanding the strengths, weaknesses, prerequisites, and structural limitations of each of the generic software business models. It is also important here to understand that while transitions between these generic software business models are possible, they are not necessary or automatic. None of these business models is essentially good or bad, they are just different and one must pick the particularmodelthatbestsuitshis/herideaofferingdestinationmix.
Weconcludethestudywithabriefreviewonenvironmentalandpolicybottlenecksthathave hindered the growth and development of the software industry. This is, by no means, an
exhaustive study or even a comprehensive list of policy issues but rather a description of our statisticalandqualitativefindings.Thecountrysimage,overandabovethecompanysbrand, topsthelistastheproblemidentifiedbyasmanyas68%ofallrespondents.Thisisfollowedby qualityofmanpower(56%),thecostofIT/Telecominfrastructure(50%)andlawandorderand security situation (48%) as the most important problems from the perspective of alltypes of firmscombined.Whiletherearevariationsbetweenhoweachofthesemaydisproportionately affectvarioussubcategoriesoforganizations,image,IT/Telecominfrastructure,andHRappear to rate consistently as among the top5 problems in all categories. We also faithfully narrate severalproposals,putforthbyourinterviewees,toaddresssomeoftheseissues.
Onthewhole,thereareafewgeneralizedconclusionsthatonecandraw.Thefirstandforemost contributionofthisstudyistobringforththeveryvibrantfaceofPakistanssoftwareindustry. Pakistantoday,unlikeyesteryears,isfastturningintoahappeningplaceforIT.Althoughthe industryhascomealongwaysinceitsfirstcompanyopenedshopin1976,ithasonlybeenin thelimelightforinvestorsandpolicymakersalikesincetheearly1990s.Tenyearsisavery shorttimeforthedevelopmentofanentireindustryandtherearesignsthatPakistanssoftware industry, having laid the foundations for a tomorrow, maybe in for better times ahead. Last year alone, the industry has grown at around 37% in revenues and 27% in terms of technical and professional employment. Many of the CEOs we spoke to expect a betterthanlastyear performance in 2005. Another encouraging sign is the increasing number of Pakistaniowned foreign firms being located to Pakistan as well as the reverse brain drain being caused by returningPakistanientrepreneurswhoseetherelativelylesscompetitiveandvirginmarketat home as a tremendous opportunity for setting up a Pakistanbased company. Systems Integration, Innovation and Intelligence (SI3) and The Resource Group (TRG) are the poster childrenofthisundeniabletrend.Noneofthesewouldhavebeenpossibleadecadeago.
On the domesticfront as well, there is a growing likelihood of considerable opening up and modernization of traditionally conservative segments of the economy. If deregulation in the financialsectorisanycrediblesignofthingstocome,wearelikelytoseemassivechangesin the shape of the local manufacturing and service industries by virtue of telecom sector deregulation and the enhanced competition under the noweffective WTO trade regime. The former has already begun to show tremendous promise with around a billion dollars of promisedinvestmentinlastyearalone.Aninvestorwhomwespoketoseesthesituationasthe fading away of the Old Pakistan and the Emergence of the New Pakistan that is effectively linked to and a significant player of the global economic system. The New Pakistan presents considerablepromiseandopportunitytothosewillingtobiteatit.Thereareliveexamplesof companiesTRG, SI3, LMKR, Netsol, Techlogix, Etilize, TPS and many morethat have capitalizedonthisnewsetofopportunitiesandpositionedthemselvestoreaptherewards.
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There are, however, considerable, although not insurmountable, challenges too. The industry suffers from a serious professionalization and institutionalization deficit. The 200people barrier,althoughpsychological, isrealtillit is actually brokenandbrokenconvincinglyand forever. In addition to the 200people barrier, we also face a 20people and a 2people barrier that requires as much attention as the former. Many of our very innovative firms continue to resistprofessionalizationandthusfailtogrowbeyondaparticularsize.Theindustryishungry for capable investors/acquirers to come forth and bring about paradigm shifting structural changes to these companies and enable them to move to the next higher level of growth. The fastmaturingmarketofoutsourcingandoffshoringservicesnecessitatethatourentrepreneurs and business leaders think about new ways of doing things. It is unlikely, given the consolidation in the outsourcing industry, that we would see a new player replacing Wipros, Infosys, or TCS of this world. Rather than blindly copying the already wellestablished countries and players, we must think creatively to devise a model that best suits our own strengths and weaknesses. Our ability to lead in the business model innovation would determine,toalargeextent,ourplaceinthefuturepeckingorderofsoftwareexportingnations. Playingthevolumesgame(ITES/BPO),withouttherequisitescalabilityandHR,isunlikelyto succeedonanindustrywidescale.Untilwecanresolvethescalabilityissue,wemustlearnto playintheequallylucrativeideasgame.
InadynamicandfastchangingindustrylikeIT/Software,tomorrowcanandwillberadically different,andnotmerelyanextensionoftoday.Itwouldrequireinvestorsforesight,business managers insight, and entrepreneurs courage to capture the moment and build the next generationofnicheplayersandindustryleadersandbuilditintheNewPakistan.Profitsare certainly to be earned by those who break the rules and try the unthinkable. There is, however, a dire need to think deep and hard about the problems, patterns, and strategic challenges identified in this report, find explanations for these, and devise strategies to get aroundthem.
2.BACKGROUND&INTRODUCTION
Pakistanssoftware/ITindustryhasshownanunevenpatternofgrowththroughitsrelatively short history. While Information technology and software industries were not a government priority before early nineties, software houses have existed in the country since 1970s. From earlytomid 1990s, however, promoting the software/IT industry has been a stated, if not alwaysadheredto,governmentpriorityafactmotivatedpartlybyIndiasrisetoprominence asamini(software)superpower.Severalpolicyactionsandinfrastructuredevelopmentand upgradationprojectshavebeenundertakenbyGovernmentofPakistan(GOP)topromotenot onlyadomesticsoftware/ITindustrybutalsoexportsofsoftwarefromPakistan.Manyofthese
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aredocumentedintheNationalITPolicyanditsaccompanyingActionPlan(MOST,2000).The progressontheseactionsandinitiativeshas,however,beensketchy(UNCTAD,2004).Thelocal softwarescenedoesnotyetshowthekindofvitalityandgrowththatisacharacteristicofmajor tier1oreventier2softwareexportingnationasdescribedinCarmel(2003).
2.1BackgroundandMotivationfortheStudy
WhilethecausesofPakistansbelowparperformanceinthesoftwaresectormaybemany,the importanceofwithinindustrylearningandanorganicgrowthcannotbeoverlooked.Pakistans softwareindustry(anditsancillaryandrelatedindustriese.g.banking,venturecapitaletc.)isin direneedofsharingofbestpractices,ofitsownindustryiconsandheroes,andofalotofhope, optimismandthefocustosucceed.Itneedsanindepthunderstandingofthecurrentstateofits affairs, beyond the general rhetoric, and a vision of the future to motivate it to upgrade itself and capture its due share in the world software/IT market. A formal research study of best practicesandstrategicandcompetitivedriversofthePakistanisoftwaresectorhaslongbeenin order. The proposed study would develop a shared understanding of the problems and the promise of the Pakistani software sector and build a coalition of support around this shared reality.Itwouldalsoserveasanauthenticsourceofdataandinformationtoquicklyupgrade theunderstandingofpotentialinvestorsintendingtoinvestinthelocalsoftwarescene.Finally, andmostimportantly,itwouldhelptheindustryitselfinlearningfromeachotherssuccesses andfailures.
Several factors are widely believed to be a hindrance in the countrys aspiration to become a significant software exporter, not the least important of which are macro and geopolitical in nature (e.g. law and order and security situation, image of the country etc.). While resolving these issues is critical to developing a strong and robust industry, this study adopts a differentinsideoutapproach that asks the question: What can the various players, essentially software companies, in the industry learn from each other? In essence, we are attemptingtolearnfromthevariationsinperformanceofcompaniesoperatingunderthesame set of geopolitical and policy environment. Secondly, there is a growing realization that we must truly understand the structure of the Pakistani software industry and the nature of Pakistanscompetitiveadvantageinthesoftwarearenainordertodevisebetterindustrialand organizationalstrategiesandpublicpolicyinterventions. Afirmlevelanalysishasthepotential tounearththefactorsbehindwithinindustryperformancedifferentials(e.g.Netsolvs.Cressoft vs. Enabling Technologies) and identify best practices that can be adopted industrywide. Regardlessofwhatthefinalconclusionmaybe,theonethingthatiscertainaboutthePakistani
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software industry is that it is not a very well understood and researched one. For example, questionslike:
Why hasnt the Pakistani software industry been able to produce a single worldclass softwarefirm(e.g.Wipro,InfosysorTCSofIndia)inthelast1015years? Why havent we been able to grow Pakistani software exports beyond a certain level ($3060millionperannum)forthelast5years? DoesPakistanisoftwareindustrymerelyrepresentalower levelofdevelopmentoran altogetherdifferentdevelopmenttrajectoryascomparedtoknownpeernations? What constitutes a generalized set of best practices in the local software industry (i.e. whatdifferentiatesbetterperformersfromthosethatdontperformthatwell)?
Answeringthese(andother)questionswouldrequireconsiderableindustryresearch,sharingof bestpractices,anddiscussion/debate.Theultimateanswertothesequestionsismostsurelynot goingtobeasilverbulleteitherbutaformalinquiryhasthepotentialtosetinmotionaprocess that might give us some hints towards a possible answer or enable us to ask more intelligent questionsandthusleadusnearertothetruth. 2.2IntroductoryReviewoftheRelevantLiterature
There has been considerable increase in the interest in software industries within developing country contexts in the recent years. Proponents of the school of thought that sees IT and softwareasagreatenablerhavearguedthatinformationtechnologyingeneral,andsoftware industryinparticular,providesanopportunitytothedevelopingcountriestoinextricablylink themselves with the developed economies of the west. This globalization of work (or production), some believe, is a harbinger of subsequent phases of globalization that would reduce the disparities across the world and provide an equal opportunity for everybody to participateintheglobalproductionandcreativeprocesses.Inmanyinstances,thesepredictions have also been validated by initial experiences in some developing countries. Most notable of theseareIndia,IrelandandIsrael,famouslyknownasthethreeIsoftheglobalITrevolution andthenewentrantsinthetier1ofsoftwareexportingnationsthatalreadyincludesrelatively moredeveloped,mostly,OECDcountriesand,andtoalesserdegree,ChinaandRussia(tier2 countries).Followingtheexamplesofthesetier1and2nations,areahostofotherdeveloping countries, namely, Brazil, Mexico, Malaysia, Sri Lanka, Pakistan, Ukraine, Bulgaria, Hungary, Poland and the Philippines (tier3 countries) and Cuba, Iran, Jordan, Egypt, Indonesia and Bangladesh(tier4countries)andmanyothers(Carmel,2003).
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Whiletheboundariesbetweenthecountriesinthis4tieredtaxonomyarequitefuzzy,primarily bydesignbutalsoduetolackofcredibledataoneach,Carmel(2003)attemptstodifferentiate tier1 countries as having hundreds of companies, more than a billiondollars of export revenues,andtheindustrymaturityofmorethan15years;tier2countriesashavingatleasta hundredcompanies,exportsrevenuesofmorethan$200million,andgreaterthan10yearsof industry maturity; and tier3 countries as having tens of companies, more than $25 million in exportrevenues,andover5yearsofindustrymaturity.Allotheraspirantsthatdonotmake thecutfallinthetier4ofthetaxonomy.
Many researchers and analysts have tried to understand the dynamics of the Indian software industry (NASSCOM, 2001, 2002, 2003, 2004; Heeks et al, 1996, 1998, 2002; Bajpai and Shastri, 1998; Desai, undated; Arora et al., 2000). Software industries of other countries such as China (Tschang and Xue, 2003), Japan (Rapp, 1996), Iran (Nicholson and Sahay, 2003), Romania (GrundeyandHeeks,1998),SriLanka(BarrandTessler,2002),Korea(BarrandTessler,2002) and Malaysia (Mohan et al., 2004), among others, have also been documented in literature. Severalresearchershaveattemptedtotakethisknowledgeandapplyittothecontextofother countries(UNCTAD,2002,Tessleretal.,2003).Othershavetriedtodeveloppolicyframeworks and draw policy conclusions (Carmel, 2003b, Heeks and Nicholson, 2002) or develop generic analyticframeworksforanalyzingthecompetitivenessofsoftwareindustries(Heeks,1999;and Bhatnagar,1997).Heeks(1999)describesa2x2theoreticalframework(describedinsection5.2) thatclassifiessoftwarecompaniesonthebasisoftheirdestination(domesticorexport)andtype ofoffering(productorservice).Bhatnagar(1997),takingadifferentapproach,describesnations as going through four stages of maturity transitioning from building skills and reputation, to buildingservices,tobuildingproducts.
Heeks(1999)analyticframeworkisinterestingandusefulandroughlyformsthebasisofthis reports analytic framework. The four resultant categories of companies from Heeks 2x2 frameworksaredifferentintermsoftheirorganizationalcharacteristics,competitivestrategies, and enabling conditions and requirements. While it is clear where most companies from developing countries would like to be (i.e. exporting products and services), Heeks (1999) arguesthatgettingthereisnotallthateasy.Veryfewcompanieshavebeenabletosuccessfully executeonstrategiesdictatedbytheneedsofeachofthesefourquadrantsandHeeks(1999) claims that majority of what we see is a constrained kind of an optimizationhe calls them survivalstrategiesratherthanafreeplaywithinthesecategories.Drawinguponanearlier paper (Heeks, 1998) it also presents secondary and anecdotal evidence to support his conclusions.
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Thatthemuchtoutedsuccessofthesoftwareminisuperpowersmaynotbeasconvincingas it is portrayed can be gleaned from the following facts. Firstly, developing country packaged softwareexportsthe24caratgoldofthesoftwareexportsbusinessareminimalinthe5 10% range from even the best of the software exporters like India, with the sole exception of Ireland and perhaps to a lesser degree, Israel. Secondly, majority of the work done by the developing countries consist of lowskilled programming or coding services and while some countries,notablyIndia,mighthavedonewellinthistypeofactivity,itseriouslysuffersfrom issues of valueaddition and scalability. Thirdly, majority of the work being performed by developingcountriesislocatedinrelativelyfewconcentratedenclavesofsoftwaredevelopment activity worldwide (e.g. Indias Bangalore), being performed by foreigntrained programmers workinginsubsidiariesofforeigncompanieswhospendamajorportionoftherevenuesonsite (in the country of their clients) to pay for the travel and living expenses of their consultants, leavingmuchtodesiredintermsofvaluegainedbythedevelopingcountryitself.Heeks(1999) describes major challenges (or bottlenecks) that a firm may encounter in each of these four productmarketcategoriesanddescribesthereasonsofthetypeofperformanceweseeineach ofthesecategories.
Stillotherresearchershavetakenamulticountryviewofsoftwareindustries.Rubin(2000)isan interesting,though dated, overview of global software economics (Pakistan is notincluded as one of the countries surveyed). It presents data on several interesting variables (e.g. labor productivity,sizeofsoftwarestaff,sizeofportfolio,costperdeliveredanddocumentedlineof code,costpersupportedlineofcode,averagesalariesofdevelopersandmaintenancestaff,and defects per 1000 lines of code etc.) for a large number of countries. Coward (2003) takes an outsourcers view of the software industry looking at the 14 factors that influence the decisions of American SMEs to outsource software development activity to developing countries.Cusumanoet.al.(2003)isareviewofglobalsoftwaredevelopmentpractices.Based onastudysampleof104projects,itcomparesthesoftwaredevelopmentpracticesofAmerican, European,Japanese,andIndiancompanies.
Thisstudyfindsthatconventionalsoftwareengineeringpractices(e.g.functionalspecs,design reviews, code reviews etc.) are popular in India, Japan, and Europe but not the United States wheretheyareusedless,acrosstheboard.ItidentifiesIndiancompaniesasespeciallyadeptin mixing these conventional approaches with the relatively newer approaches like dailybuilds, testerdeveloperpairs,andpairedprogrammingtechniques.Overall,thereportfindsJapanese andEuropeansoftwareoperationstobemostproductive(intermsoflinesofcodeperaverage staff*calendar) followed by US and Indian operations. Japanese projects also produced the lowest number of defects, followed closely by Indian and US projects, and the Europeans finishinglastonthismetric.
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Thisstudyconfirmssimilarfindingsbyotherresearchersthatdescribethetechnicalqualityof software development processes employed by Indian software companies (Dutta and Sekhar, 2004) and the adoption of standardized quality practices like Six Sigma methodologies (Radhakrishnan, 2004) and CMM certifications. These geographical differences in software development practices, however, maybe attributed to both cultural and typeofwork related factors.Forexample,Cusumanoetal.(2003)observethatIndiaandJapansignificantlylagthe American and European software operations in terms of the innovative quality of their work. Dutta et al. (1997) finds similar acrosscountry differences within 16 different European countries.
Collectively, this constitutes a wealth of information about the development and evolution of softwaredevelopmentactivityindevelopingcountrycontextsfrommultipleperspectives.They point towards a number of factors, environmental, policyanalytic (e.g. Carmels Oval Model, Heeks National Export Success Model) and organizational (e.g. Cusumano et al., 2003, and Cusumano,2004)andidentifymajorbottlenecksthatmightaffecttheexecutionofaparticular strategy (e.g. Heeks, 1999). While development planners seek to extract prescriptions, this collective body of literature falls short of doing so hinting instead at the idiosyncratic factors andearlymoveradvantagesthatmightdistinguishsomecountriesprogressfromtherest.
The overall picture that emerges from various models and frameworks is a complex one. It underscores the importance of understanding a large number of policy, environmental, and organizational factors, and how they interact with each other, as well as the individualistic features of each of the countries and their target markets before a policy or an industrywide prescription can be made. Every country that we looked at (e.g. India, China, Japan, Ireland, Israel etc.) is different from every other country and understanding these unique features is important before any lessons can be drawn and applied from other contexts. We take up this challengeinthisreportonPakistanssoftwareindustry.
3.THEOBJECTIVES,AUDIENCE,ANDFORMATOFTHESTUDY
TheBestPracticesinPakistaniSoftwareSectorProjectbeingthefirstofitskindandscopein Pakistanis an exploratory study of the Pakistani Software Industry. Not only is the whole subjectoftheformationanddynamicsofsoftwareindustryaroundtheworld,andespeciallyin developingcountries,relativelynewandhenceunderstudied,thePakistanisoftwareindustry is a totally uncharted territory as far as the structure, management practices, technical ability, andtheindustrydynamicsareconcerned.
3.1TheAnalyticAgenda:
Thisstudyhasbeenundertakenwithatwoprongedanalyticagenda,namely:
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At the most basic level, the study attempts to collect qualitative (but also, whenever possible within the purview of the research, quantitative) information on the current state of software industryinPakistanwithanemphasisonfirmlevelcharacteristicsandcompetitivedynamics. This would help in identifying the various organizational success factors, develop a shared understanding around those, and enable stakeholders to derive strategic and policy prescriptions from these. It explores the importance and prevalence of the various structural constructs in the Pakistani software industry and documents perceptions of business leaders, entrepreneurs,andinfluentialindividualsintheindustrytowardseachoftheseconstructs.The studyattemptstodoaoneleveldeeperanalysisofwhyindividualsholdacertainperceptionto move the level of debate within the industry to the next higher level (i.e. from identifying problemstoidentifyingsolutions).Forexample,ifwehearalternativeexplanationsoflackofa culture of entrepreneurship, we would like to explore why and on what factors are those perceptionsbaseduponand,totheextentpossible,corroboratethatwithgroundreality.
Atthemoreadvancedlevel,thestudyattemptstoestablishbestpracticeswithinthePakistani softwaresector.Thisisaproblemriddledwithcontroversies,nottheleastimportantofwhichis the identification of highperformers in the absence of credible performance data. Additional issueshavetodealwithdefinitional(i.e.whatisabestpractice?)andmaturity(i.e.when doesapracticebecomeabestpractice)problems2.Thestudytriestotacklethiscontroversial subject in a number of ways. Firstly, we try to identify the relatively more successful and prominent software companies in Pakistan and compare their various organizational, structural, and process features against several others that have not been as successful. Although it is likely that the differences between the best and the notsogood performers may not turn out to be substantive enough (or worse yet, they may turn out to be quite obvious), the results of the study would, nonetheless, form a documented baseline against which changing trends in the Pakistani software industry may be compared in the future or againstthatofothercountries(e.g.India).
To the extent that a (semi) statistical/quantitative analysis is likely to be of limited utility, a qualitative/anecdotalapproachmaystillbeoftremendousvalueinidentifyinganddeveloping a shared understanding of best and unique practices (and whats possible) within the software sector in Pakistan. Similarly, a valid criticism of our approach maybe that in a relativelynascentandimmatureindustrylikeours,asinglecompanymaynotrepresentallthe desirablebestpracticefeatures.Weuseaqualitativeapproachtoidentifyandcherrypick specific innovative and successful features of the software development and marketing
Accordingtoonelongtimeindustryobserver,itmightbedifficulttoidentifybestpracticesinthe relativelynascentPakistanisoftwareindustry,whatonemightgetinreturnforthequestfortheformerwouldbea lotofworstpractices.
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processes (e.g. partnering and alliance building, customer acquisition, and product developmentstrategyetc.)todevelopalaundrylistofbestpracticesthattherestoftheindustry canemulate.Whileourprimaryfocusismanagerialbestpractices,wedobrieflytouchuponthe issueoftechnicalpracticesinthepassing.Thisisdonefortheprimaryreasonthatthereexists aninterplayanddependencebetweenthelatterandtheformer.Wedonot,however,attemptan exhaustiveanalysisofthetechnicalpracticesoforganizationsbeingstudied.
3.2TheBenefitsandIntendedAudience:
The primary purpose of undertaking this study is that of withinindustry learning with the secondarypurposebeinginvestmentpromotionandfacilitation.Thebenefitsof(andintended audiencefor)theaboveanalysiswould,therefore,bethreefold:
Firstly, the findings of the study would be of considerable value for the existing software entrepreneurs, executives, and managers seeking to learn from the collective experience of their compatriots. This learning could take the form of: What are the criticalsuccessfactors,theDosandDonts,sotospeak,ofrunningasoftwarebusiness in Pakistan? The industry managers would be able to gauge the performance of their companies against the bestinclass companies and derive recommendations for correctingcourse,ifnecessary.
Secondly, the study would also inform the interested (yet skeptic, at times) by standerspotential entrepreneurs, interested businessmen and managers, and investorscontemplating starting a software venture and looking for a good sense of what we can learn from the experiences of tens of successful and notsosuccessful entrepreneurs.Itwouldalsohelpinspireandilluminatethedecisionsofavastnumber of stakeholders, namely, business leaders, industrialists, managers, financiers and investors, regulators, policymakers etc, whose decisions to engage or disengage with thisnascentsectoroftheeconomycanmeanthedifferenceforthesoftwareindustry.
Thirdly,thestudybeingthefirstofitskindinPakistancouldbeofpotentialvalue for foreign investors, clients, and policymakers whose appetite for meaningful quality information on the subject goes unsatisfied for want of credible analysis done on the subject.Tothateffect,thisstudymayprovideacredibledatabenchmark(orreference point)forputtingPakistanssoftwareindustryinlargerglobalperspectiveandgetting themessageacrosstopotentialinvestors,clients,andpolicymakers.
3.3TheFormatoftheStudy:
Thestudycanbebroadlydividedintotwoparts.Thefirstpartcoversastatisticalsnapshotof the industry as gleaned by data on our respondents. The second part combines this with the morequalitativeinformationtodiscussstrategicchallengesandgoodpracticesintheindustry.
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The study is formatted as follows: Section3 provides some background that builds the motivationforthestudy.Section4dealswiththeobjectives,audience,andformatofthestudy. Section5 briefly describes the project methodology in a narrative and a graphical fashion. Section6 starts with the results of the survey and attempts to build a statistical profile of the Pakistanisoftwareindustryasgleanedfromanonthespotsurveyof60ofitsmajorplayers.
This section is divided into 4 major parts. The starting part sets the context of this statistical analysisbydiscussingresultsfromaverylimitednumberofearlierstudies.Thenwediscussa basicstatisticalsnapshotoftheindustryusingexportfocusedanddomesticfocusedfirmsasa basis for classification. Next we discuss various other classifications (e.g. productfocused vs. servicesfocused, small vs. large, preDotCom vs. postDotCom, and developmentcenters vs. rest of the industry) to assess how these varying organizational factors affect the managerial and technical processes of software companies in Pakistan. Finally, we assess whether the industrystatisticsrevealapatternofbestpractices?Inessence,weusethestatisticaldatato answerthequestion:Howdobetterperformingfirmsdifferfromtherestoftheindustry?
Section7supplementsthiswithinformationgainedfromaround65qualitativeinterviews.It usestaxonomyofgenericsoftwarebusinessmodelsinPakistantoidentifygenericprofilesand strategic and competitive challenges faced by software companies in Pakistan. We identify 13 such challenges, divided across 4 generic categories of software business models, and discuss ways in which our respondents have innovatively tried to address each of these. There are lessonstobelearnthereforthesoftwareentrepreneursandbusinessmen,bothyoungandold that could be applied and replicated across the industry. Section8 briefly touches upon environmental,infrastructure,andpolicybottlenecksconfrontingthesoftwareindustry.Finally, Section9discussessometentativeconclusionsandrecommendations.
Thisreportcanbereadinitsentiretyorselectivelydependinguponwhatareaderisspecifically lookingfor.Initsentirety,wehavetriedtostructurethereportinamannerthatcouldgivethe readeracomprehensiveviewofPakistanssoftwareindustry,itscurrentstate,itspeculiarities, and the major challenges faced by the software community. One can also, however, pick and choose what specific sections to read. For example, the generic profiles of different types of softwarebusinessmodelsandthechallengesspecifictoeachcanbereadwithoutreferenceto the rest of the report. Either way we hope the report would present considerable original informationandgeneratesomethoughtandreflectionamongitsreaders.
4.ABRIEFNOTEONPROJECTMETHODOLOGY
Inordertomeetbothqualitativeandquantitativerequirementsofthestudy,weadoptedatwo prongedapproachtotheproject,comprisinganonthespotstatisticalsurveyandqualitative interviewswithtoporganizationalexecutivesofmajorsoftwarecompaniesinPakistan.Owing to the relatively short timeline of the project, a convenience sample of software houses (or
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softwaredevelopmentoperations)wasselectedandcontactedtobecomepartofthestudy.An effort was made, however, to include key large and prominent players of the industry in the analysis.Foursourcesofinputwereutilizedforthispurpose.PSEBandPASHAofficialswere contactedtoidentify,fromamongsttheirmembercompanies,thelargest,mostprominent,and most significant software operations. The consulting team also utilized its own knowledge of the local software industry to add to this list of nominations. Finally, several companies were addedtothelistonanongoingbasisasnamesofcompaniesdoinginnovativeandinteresting workcameupduringinterviewswithindustryprofessionals.
In all, 22 companies in Karachi, and 13 each in Islamabad and Lahore (for a total of 47 companies) were personally visited and surveyed. 13 more companies were added to the statistical sample through the Online Survey of Best Practices in the Pakistani Software Industry3.Thisincreasedthetotalnumberofsurveyrespondentsto60.40ofthese60companies (or 2/3rd of the total) were identified and hence categorized as the more prominent and relativelysuccessfulsoftwareoperationsinPakistan.Thisenabledustodeveloptworeference groupsandallowedthepossibilityofstatisticalcomparisonsbetweenthesetwogroupswitha viewtoidentifyingdifferencesbetweentheminvariousmanagerialandtechnicaldimensions.
The PSEB Best Practices Online Survey is available at: http://www.hostedsurvey.com/takesurvey.asp?c=PSEB PakistansSoftwareIndustry:BestPractices&StrategicChallenges2005 20
R&DPERFORMANCEMAILSURVEY 1.Research 2. Survey 3. Survey Questions Parameters Instrument (RQ) (sample Preliminary Literature Review (LitR1) 4. 5. Survey 6. Analysis Instrument Administra & Results Testing -ion DataCollectionon Context & Background COMPANYINTERVIEWS Problem Policy & Perceived Policy 1.Thematic 2. Identify 3. Problem & Research Definition Opportunity Areas for Sample / Administer Questions (RQ) Interviews Participant Interviews ONGOINGLITERATUREREVIEW(LITR2) Figure-I: The Multi-Pronged Research Methodology
Reflective Lit. Review (LitR3)
x-Method Analysis
Briefing & Write-up
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Severalothercomparisongroupswerealsocreatedtohighlightdifferencesinmanagerialand technical practices. Throughout the following analysis, where appropriate, we invoke the differences between various categorizations (e.g. exportfocused vs. domesticfocused vs. developmentcenters,betterperformersvs.rest,productfocusedvs.servicesfocused,andlarge vs.smallsoftwarehouses)tomaketheresultsmoremeaningfultothesoftwarecommunity.
FigureI(below)presentsagraphicalsnapshotoftheprojectmethodology.Nextwelookat theresultsoftheanalysis.
5.ASTATISTICALSNAPSHOTOFPAKISTANSSOFTWAREINDUSTRY
Adiscussionofthesize,structure,anddynamicsofPakistanssoftwareindustrymustbeginby setting an appropriate reference for the same. This reference can either come from within Pakistan(i.e.comparingthecurrentindustrywithitsstateatsomepointinthepast)oroutside Pakistan(i.e.comparingitwiththestateofsoftwareindustryofacomparablecountry).There arepotentialproblemswithboththeseapproaches.Fortheformer,barringahandfulofreports, welackcomprehensiveandcredibledataofanykind,whatsoever,tosayanythingmeaningful abouttheindustryatdifferentinstancesintime.Whileforthelatter,onefacestheproblemof finding an appropriate country to make comparisons with. Most often, for reasons of prominenceandtradition,theexampleofIndiaisinvokedwhenanalyzingPakistanssoftware industrya practice that, although may have some value, can at times be quite counterproductiveorleadtowrongpolicyprescriptions4.Wewilldiscusseachofthesepoints ofreferenceingreaterdetailbelow. 5.1EstablishingaPointofReferenceforPakistansSoftwareIndustry
Looking for points of reference relevant to the Pakistani software industry, we could identify onlyahandfulofstudies/documentsofvaryingcredibilityfromthepast.Theseinclude:A1999 2000 CSPSEARCC5 ICT Manpower and Skills Survey; a 2002 PASHALUMS Study of PakistansSoftware/ITIndustry,a2004UNCTADStudy,anda2004EAC6StudyofPakistans ITIndustry.Eachofthesestudiesisfairlylimitedintermsofthescopeandcoverageofpolicy
This has been a case quite a few times in past, for example, the Government of Pakistans $1 Bn. Software Export Target by FY2000 was motivated in part by using the Indian software export figure and appropriately discounting it to a smaller value rather than any credible assessment of the industrys present or future capability. 5 This study was conducted by the Computer Society of Pakistan (CSP) in collaboration with South East Asia Regional Computer Confederation (SEARCC) and used methodology and instruments that were used among 14 countries of South-East Asia. 6 Experts Advisory Cell (EAC) is housed within Ministry of Industries, Government of Pakistan.
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andorganizational(technicalandmanagerial)issues.Thesestudies,likeanyotherstudyofthis nature, also have a fair number of methodological issues and problems. For example, CSP SEARCC&PASHALUMSstudiesarequitedated.Whiletheformerdoesfairlywellasfaras being representative of the industry and providing a good reference point for crosscountry comparisons,itisfairlylimitedinitsscope(i.e.onlydealswithmanpowerissues).Thelatter, however,whilebeingmuchbroaderinscopedoesfairlypoorlyonrepresentativeness7.
TEXTBOX#1:SALIENTFINDINGS&METHODOLOGIESOFPRIORSTUDIES
CSPSEARCCStudyofICTManpower(2000):314of441organizationsresponded(71%
responserate)ofwhich40.8%wereITsuppliers,14.5%publicsector,and44.7%privatesectorend users.2375of5000ITprofessionalsresponded(46%responserate)ofwhich60.3%workedin developmentand39.7%inservices.Somesalientfindingsare: 51.3%ITprofessionalsworkedinsoftwaredevelopmentwhile6.3%inITMgmt. ITprofessionalsagedbetween2529(33%),2024(23%),and3034(19%) Male:Femaleratiois9:1,withroughlyproportionalrepresentationinjobsincl.ITmgmt. Salarylevels:<$3000p.a.(44%),$35000p.a.(25%),$58000p.a.(14%) 85%oforganizationsreportshortageofmanpower(34%extreme,51%moderate) Top5skillsincriticalshortage:Applications/systemsdevelopment,network protocol/typologies,dBase,mobile/wirelesscomm..,andmultimediadevelopment
PASHALUMSSoftware/ITStudy(2002):Samplesizewas16organizations.Askedquestions
aboutdomains,revenuesizes,projectsacquisition,HRandqualitypracticesetc.Thesamplewas highlybiasedtowardssuccessfulsoftwarehouses.Salientfindingsare: Averageprogrammerhasthepotentialofgenerating$13,000inexportseveryyear 75%ofcompanieshaveISOcertificationand7%haveCMMcertification AveragestayofanITprofessionalinacompanyisabout2years Ofthetotalemployment,around5658%wereprogrammersand11%QAprofessionals. Largerfirms(>PKR25M)employeddoubletheQAprofessionalsthansmallerona%basis.
UNCTADStudy(2004):ComprisesreviewofsecondaryliteratureinthePakistaniand
internationalcontexts.Salientfindingsofthestudy,generallycriticaloftheindustry,are: Discernableactionononly18ofthe162(11%)commitmentsofNationalITPolicy Pakistan76thof102countriesinNetworkReadinessIndex ActualspendingunderITPolicy2000lagsallocations,esp.inExports/eCommerce RevenuesinExport:$12.2M(growthof84%)andDomestic:$5M(growthof49%) Currentestimateofsoftwareexportsatabout$12M
The latter two studies (i.e. UNCTAD, 2004 and EAC, 2004) are focused more on the policy environmentandlessonorganizationalissues.Theformermakesanattempttoimposepolicy prescriptions from other countries without adequately demonstrating an understanding the
The maximum sample size in PASHA LUMS (2002) is 16 with very strong statistical generalizations made, at times, with as little as 7 observations, without any mentioning of potential non-response biases.
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peculiardynamicsofthelocalsoftwareindustry.Thelatterprovidesalotofdata,whichisat best, sketchy, and aggregates a lot of mundane secondary information in an unimaginative fashion. These weaknesses notwithstanding, these studies provide a starting point for a discussion on the current state of Pakistans software industry. Text Box # 1 (above) provides someofthesalientfeaturesandfindingsofthesereports. Moreimportantly,however,thesereportsprovideanimpetusandamotivationtoundertakea moreextensiveontheground(handson)analysisofthePakistanisoftwaresector. 5.2SoftwareDevelopmentinPakistan:StatisticsonManagerialandTechnicalPatterns
PakistansSoftwareIndustryhascomealongwayfromitsstartin1976whenacompanyby thenameofSystemsPvt.Ltd.openeditsofficesinLahore.Overthelastthreedecadesorso,the industry has grown from zero to an approximate size of wellover a hundred million dollars and employs thousands of professionals8. During this time, the industry has seen periods of nascence, hope, euphoria, disillusionment, renewal, and rebuilding. The last decade has in particularnotonlybeenatimeofgreatpromise,butalsoatestfortheindustrythathasbeen throughafullcycleofreversalsfromaninsideout(domesticfirst,exportlater)toanoutside in(exportfirst,domesticlater)worldviewandbackagain.Intheprocess,itprobablyhasalso been through considerable maturation, not only in terms of its ability to develop good innovativesoftwarebutalsobuildsuccessfulbusinesses.Wefindconsiderableevidenceofthe fact that the countrys financial communitythe business houses, investors, and business managersare learning how to manage the IT and the IT professionals are learning how to manage the business parts of the IT business. The industry, however, has a long way to go beforeitcantrulyrealizeitspotential.Thestatisticalpicturethatwepresentbelow,therefore,is asnapshot,ataparticularpointintime,ofwhatessentiallyisamovingtarget.
Beforewediscussthestatisticalresults,however,adisclaimerisinorder.Thestudyinquestion onlylooksattherelativelywellknown50oddsoftwarehouses(ordevelopmentoperations)in Pakistanandhencedoesnotclaimtoberepresentativeoftheentireindustry.Totheextentthat an80:20rulecanbedemonstratedtoapplytoPakistanssoftwareindustry,oursurveysample
Although a significant number in its own right, these figures present a picture of an industry that is quite insignificant in the bigger scheme of things, namely, its contribution to Pakistans economy both in terms of revenue generation as well as employment creation capacity.
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couldeasilyclaimtocoverthelargestandthemostprominentplayersamongitsrespondents9. Wedonot,however,goanyfartherthanthatintryingtoassessorclaimhowrepresentativeour findings are for the rest of the industry. For some key statistics, for example, the study can providesomeveryaccurateandusefullowerandupperbounds.Thismaybethecasewithdata onindustryrevenues,employment,andqualitycertificationsetc.Forotherstatistics,thestudy mayonlybeabletoprovideagutfeelestimateofhowthingsareontheground.Thismaybethe casewithdataonmanagerial,marketing,andtechnicalpractices,andaccesstofundingetc.For others still (e.g. issues specific to smaller companies), the study may not represent the true picture of the industry at all. We leave it to the judgment of our audience to draw their own conclusionsonacasebycasebasis. TableI(below)presentsabriefstatisticalsnapshotofPakistanssoftwareindustryasgleaned fromoursample60respondents.Althoughthedataisquiteselfexplanatory,someaspectsare worthnotinghere.Inacumulativesense,the60softwarehousesinourstatisticalsamplehave combinedrevenuesofover$80million(seefootnoteandTableIIfordetails)andemployover 4000 technical and professional employees. This picture of revenues is, however, merely an estimate extrapolated through categorical data. TableII presents more accurate categorical estimatesoftherevenuesofourrespondents.Ofthe52companiesthatreportedtheirrevenues, slightlymorethanathird(19companiesor36%)hadannualrevenuesbetween$200Kand$1M, about a third (17 companies, or 32%) had annual revenues greater than $1M (4 of these had annual revenues in excess of $5M), and another third (16 companies, or 30%) had annual revenuesoflessthan$200K.Inanaggregatesense,thesesoftwarehouseshaveseenarevenue andemploymentgrowthofabout37.4and27.4percentrespectivelyoverthelastyearhinting ateitherimprovedcapacityutilizationintheindustryorvalueadditionperemployedtechnical andmanagerialemployee,orboth.Theaveragesizeofasoftwarehousecomesouttobeabout 62employeeswiththeperemployeerevenuepotentialbeingaround$21,800perannum.
UNCTAD (2004) makes a similar claim, attributed to PSEB, in that the top-15 or so software companies in Pakistan (e.g. the likes of Xavor, Techlogix, Netsol, Systems, Softech etc.) could account for as much as 75% of the overall industry revenues
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TableI:KeyAggregateStatisticsOnRespondentCompanies*

Revenue&EmploymentinSurveyedCompanies TotalNumberofSoftwareHousesSurveyed CumulativeRevenues(calculatedthroughmidpointestimation)** Total#ofProfessional/TechnicalEmployees AveragesizeofCompany(#ofProfessional/TechnicalEmployees) RevenueperTechnicalandProfessionalEmployee %GrowthinProfessional/TechnicalEmployment(overlastyear) %GrowthinRevenues(overlastyear)
Ownership Structure and Quality Characteristics of Companies

%ofCompaniesthataresubsidiariesofForeignCompanies %ofCompanieshavingFrontOfficesabroad(US,UK/EU,ME,AP) %ofCompanieshavingaQualityCertification(ISO,CMM) %ofCompanieshavingaDedicatedQualityAssuranceTeam
Product & Strategic Posture of Companies
ProductProfile**** ProductfocusedorPackagedSoftwareCompany Software/ITServicesCompany Software/ITConsultingCompany StrategicPosture**** Nicheproduct/serviceforaNicheMarket Product/serviceapplicabletoseveralindustries Product/serviceapplicabletoanindustryvertical *Thesearebasedonselfreportedannualrevenues *^TheStateBankofPakistanestimatesthecountrysexportsfiguresoflastyeartobe$32M. **Thisestimateneedstobeusedwithgreatcaution.Thecorrespondinglowerandupperlimits are$39.35and$110.95Million.PleaserefertoTableIIforadetailedcategoricalbreakdown ***46softwarehousesweresurveyedinpersonwhile14submitteddatathroughonlinesurvey ****Thesecategoriesarenotmutuallyexclusivei.e.acompanycanoptforoneormorecategories
#(%)ofSoftwareHouses 60*** $81.15Million*^ 4070 62 $21,814 27.47% 37.4% 40% 55% 45%(3.3%haveaCMM) 73.7% 56.67% 48.34% 31.67% 36.67% 56.67% 33.34%
In terms of their product/service strategy and strategic posture in the market, 56% of the companies described themselves as productfocused (packagedsoftware) companies, 48% as software/ITservices companies, and 31% as software/IT consulting companies. It is worth emphasizingherethatmajorityofthecompaniesthatdescribedthemselvesasproductfocused dealtwithcustomizedratherthanshirkwrappedproducts.Intermsofindustryfocus,abouta third of the companies described themselves as niche players, another third focused on an industry vertical, and about 56% produced a product/service applicable to several industries. Clearly,noneofthesecategoriesaremutuallyexclusive.Manycompanies(asmanyas42%and
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23%) identified with more than one category in the product profile and strategic posture respectively.
TABLEII:SIZEOFRESPONDINGCOMPANIESBYREVENUE*& EMPLOYMENT

AnnualRevenuesinUS$(PKR**) #(%)ofSoftwareHouses N=52*** Greaterthan$5Million(>PKR300Million) 4(7.69%) Between$1and5Million(~PKR60300Million) 13(25%) Between$500Kand1Million(~PKR3060Million) 9(17.31%) Between$200Kand500K(~PKR1230Million) 10(19.23%) Between$100Kand200K(~PKR612Million) 6(11.54%) Between$50Kand100K(~PKR36Million) 5(9.62%) Lessthan$50K(~PKR3Million) 5(9.62%) Total 52(100%) FulltimeEmployment N=60 Greaterthan250Employees 6(10%) Between100and250Employees 8(13.33%) Between25100Employees 23(38.33%) Between525Employees 22(36.57%) Lessthan5Employees 1(1.67%) Total 60(100%) *Thesearebasedonselfreportedannualrevenues **1US$=60PKR ***Eightcompaniesinoursampledidnotreportfullyearrevenueseitherbecauseitwastheir firstyearofoperationorbecausetheyweredevelopmentcentersofforeigncompanieswithno independentrevenueestimatesoftheirown.

TableIIIpresentsastatisticalprofileoftheindustrystargetcustomers.Broadlyspeaking,our 60respondentsderivetheirrevenuesfromexportanddomesticmarketsinaratioof60:40.One the exports side, our respondents derive 22.5% and 38.5% of the revenues from products and services respectively. Because of the preponderance of customizable products in the product servicemix,wecontemplatethattheproportionfromexportofproductsmaybeoverestimated andthusrepresentanupperboundonly10.
Somelocalsoftwarehousesengagedindevelopmentofsoftware(i.e.programmingandcoding)a service,fromthestandpointofthelocaloutfitforforeignproductbasedcompaniesmayhaveidentified theirrevenuesasarisingfromproducts.

10
27
TABLEIII:WHOMDOPAKISTANISOFTWARECOMPANIESSELLTO?

Exportsvs.Domestic&Productsvs.Services ExportProducts ExportServices DomesticProducts DomesticServices Exportsvs.Domestic&Publicvs.PrivateSectors PublicSector(Govt.)Domestic PublicSector(Govt.)Foreign PrivateSectorDomestic PrivateSectorForeign *Thesearebasedonselfreportedpercentagesofannualrevenues

%ofTotalRevenues* N=54 22.56% 38.52% 23.37% 16.53% N=54 8.51% 5.90% 30.79% 54.77%
On the domestic side, our respondents derive around 23% and 16.5% of their revenues from products and services respectively. Again, a major chunk of the products revenue would comprise customized or customdeveloped products rather than shrinkwrapped products. Another factor worth considering on the domestic side is a certain number of hybrid companies that, for reasons having to do with the necessities of their business and revenue models, bundle hardware with the software they develop. Examples maybe banking automation companies, callcenter solutions companies, and mobile/handheld devices companies and others whose offerings depend on simultaneous sale of specialized hardware. This, once again, would necessitate that the figure on revenues from domestic products is an upper bound rather than an accurate estimate of sales from purely software development activity.
Atthesectorallevel,ourrespondentsderiveanoverwhelmingportionoftheirrevenues(>85%) from the privatesector with only 8.5% of the sales coming from govt. or public sector on the domestic front and another 6% on the foreign front. This essentially confirms the observation about the relatively insignificant role played by public sector and the government as a sophisticatedbuyerofsoftwareproductsandservicesinPakistan.Manyintervieweesthatwe spoke to stressed the need for the government to jumpstart the demand for local software
28
development by intelligently using its demandcreating ability. We will discuss this theme in muchgreaterdetailinalaterpartofthisreport.
As we dig deeper into this statistical analysis, it is quite obvious that while these toplevel (aggregate)statisticshavetheirownvalue,theytendtomaskthevitalityandheterogeneityof the underlying data. That exportfocused operations may be different from domesticfocused operations, larger operations maybe different from smaller operations, and productbased operations maybe different from servicesbased operations not only in terms of their organizationalandmanagerialarrangementsbutalsothestrategicandcompetitivedriversisa foregone conclusion. What we need, therefore, is a much more finegrained analysis that focusesontheseimportantsubcategoriesinadditiontotheaggregatelevelstatistics.Thiskind ofanalysisalsohasimportantimplicationsforthebusinessmodelandstrategyissuesthatwe address,inaqualitativesense,insection6ofthisreport.
Asweattempttoderiveimportantsubcategoriesofourdata,ourfirstreferencepointmaybe Dr.RichardHeeksworkonsoftwarestrategiesfordevelopingcountries(Heeks,1999).Figure II (below) presents a graphical representation of Heeks software strategies framework that dividesthepotentialuniverseofstrategiesinto4distinctcomponents,namely,exportservices (StrategyA), exportproducts (StrategyB), domesticproducts (StrategyC), and domestic services (StrategyD). For comparison purposes, he names the former (Strategy A &B) as 24 CarotorFoolsGold,andthelatter(StrategyC)asThirdWorldMicrosoftand(StrategyD) as Small Fish in a Small Pond. According to Heeks (1999) each of these four strategies is distinct in the sense that each has its own set of organizational requirements, competitive drivers, environmental prerequisites, and riskfactors. Yet, as Heeks (1999) points out with illustrations from Indias case, companies try to adopt each of these strategies to varying degreesofsuccess.
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Export
A:
(Export-Services > 50%)
B:
(Export-Products > 50%)
Total #: 20 % of Total: 37% Market Served
Total #: 11 % of Total: 20%
D:
(Local-Services > 50%)
C:
(Local-Products > 50%)
Total #: 5 % of Total: 9% Domesti
Total #: 14 % of Total: 25%
Services Software Business
Packages
FigureII:RichardHeeksTaxonomyofSoftwareBusinesses,asappliedtoPakistan WhileHeeks(1999)discussesrelevantfactorsthatmightmakeeachoftheseapproachesmore orlessrisky(andthusmoreorlesslikelytosucceed)withoutactuallypresentingempiricaldata onhowmanyIndiancompaniesadopteachoftheseapproachesandwhatpercentageofthem do so successfully, we are able to put data on Heeks framework for the case of Pakistans softwareindustry.ThesedataarepresentedinfigureII(above).Inall,37%ofourrespondents seem to follow strategyA, 20% seem to follow strategyB, 9% seem to follow strategyC, and another 25% seem to follow strategyD. The overall picture that emerges from overlying our dataonHeeksframeworkisthatofoverrelianceontherelativelyriskierofthefourstrategies (StrategiesA&B)thatHeekscalls24CarotorFoolsGoldandunderrelianceontherelatively less riskier one (Strategy D) that he calls Small Fish in Small Pond. FigureIII presents this datainagraphicalformat.Wewilldiscussgenericbusinessstrategiesthataremodificationof Heeks4partframeworkinsomewhatdetailinthenextsection.
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Domestic <--- Market Served ---> Export 100% Exports 100
50
25
0 0 25 50 75 Services <--- Software Business ---> Products 100
Fig-III: Product-Market Profile of Pakistani Software Cos.
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100% Products
75
Another way to look at the data is to classify software companies solely according to their marketorientationi.e.thosethatarepredominantlyexportfocusedvs.domesticfocusedwitha lot of hybrids working in between in both export and domestic markets in almost equal proportions. From the standpoint of being able to identify differences in organizational, managerial, marketing, and technical processes, this seems to be a more promising approach thanHeeks(1999)asitremediesfortheabruptboundarychangesacrossthefoursegmentsin Heeksclassification11.Weuseanarbitrarylimitof75%(exportsvs.domesticandproductsvs. services) to define a new typology. Thus, we define an exportfocused company as one that derives more than 75% of its revenues from exports and a domesticfocused company as one that derives more than 75% of its revenues from the domestic market (products and services combined). In between these two categories are a bunch of companies that are categorized as hybrids(almostequallyactiveinexportanddomesticmarkets).Asimilarscheme,basedona 75%cutoff,canbedevisedforproductandservicesfocusedcompanies.
Given the importance of marketorientation (rather than productservice orientation) as a definingfactorintheconceptualizationofsoftwareventuresinthePakistanienvironment,we first look at that in greater detail. FigureVI between (above) presents a breakdown of our respondents domestic, export focused, and hybrid operations. Applying the above classification on our sample, we get 18 (37%) companiesasdomesticfocused,20 (41%) of the companies as export focused, and 11 (22%) of the companies as hybrids. We now look at the technical, managerial, and marketing practices of companies in our sample from bothanaggregateandacategoricalperspective.
Domestic Export Hybrids
Export 41%
Fig-IV: Market Orientation of Software Companies in Sample

Hybrids 22% Domestic 37%
11
One can speculate that the company doing 51% product-exports is not likely to be very different from doing 49% product-exports, yet the former would be placed in a different category than the latter under Heeks (1999) scheme.
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Before we discuss the results of this analysis, however, it is important recognize that almost none of the differences between export and domesticfocused operations are statistically significantatthe5% significance level and, therefore, may atbestbetermedas suggestive. In the
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TEXTBOX#2:WHATDOESITMEANFORARESULTTOBE(NOT) STATISTICALLYSIGNIFICANT?
qaproll 40
30
following discussion, we would finding significance statistical standpoint. Also, what is practically talk mean when of a of from
10
0 1 2 3 4
significance, we
Two subpopulations e.g. different types of software houses, are considered to be different,atastatistically significantlevel, if one can rule out, with a measure of confidence thatindeedtheyarenot
practicalratherthan
generated from the same underlying population. For example, for a 5% significanceleveltohold,onemustbesurethat19outof20times,adraw fromonesubpopulationwouldcomeouttobedistinctlydifferentfroma drawfromtheothersubpopulation.Wedonotgetstatisticallysignificant results when either the subpopulations are not dissimilar in which case there is little variation between them or there is too much variation, as is thecaseinthefigureabovewherethestandarddeviationbands(variation) around the means are so large that none of four subpopulations is distinctly different from others. Smaller sample sizes can sometimes, not always,beahindranceingettingstatisticalsignificance.
significantmayvaryfromsituationtosituationandconstructtoconstruct(e.g.a10%difference maybe of little value in one context but of great value in another). With that caveat in mind, herearesomeofthestatisticalfindings:
Theformation&fundingstrategiesforexport&domesticoperationsarechanging.Goingback toourdata,exportfocusedsoftwarehousesaremuchlesslikelytobefundedwithsavingsof localfoundersthaneitherthedomesticfocusedorhybridoperations(TableIV).Webelievethis to be a representation of an afterthefact conclusion i.e. it is not that there is a dearth of the desiretoexploretheexportrouteamonglocalfoundersbutratherthanthelatterhavenotbeen able to successfully do so, either because of inadequate capital or lack of networks abroad. Investmentbyaventurecapitalfundoralocalpartner(e.g.abusinesshouse)isalmostequally likely to result in a domestic, an exportfocused or a hybrid software operation. Domestic focused software houses are much more likely to be focused on financial and automation systems, and sell a mix of hardwaresoftware offerings than exportfocused software
33
operations.Theyhave,onaverage,smallerrevenuesizesbutalsolesserdependenceonasingle client.
TABLEIV:WHEREDOSOFTWAREHOUSESGETFUNDEDFROM?
SourcesofInitialFundingforSoftware Ventures
MarketOrientationofSoftwareHouses All Combined
Domestic Hybrids Focused*
Export Focused
N=58 N=19 N=11 N=20 Savingsoflocal(Pakistanbased)founders 43% 52% 72% 35% Investmentby(savingsof)foreignpartners/founders 32% 26% 18% 20% Investmentbyalocalpartner(e.g.abusinesshouse) 13% 15% 18% 15% Fundedthroughinitialprojectwork(orcashflows) 15% 15% 0% 20% Venturecapitalorbankingsources 17% 21% 18% 20% Other 7% 10% 0% 5% *Domestic/Exportfocusedsoftwarehouseisonewith>75%salesindomestic/exportmarketsrespectively
Exportfocusedsoftwarehousestendtosufferfromlackofgrowthinprofitability(operations continue to grow in revenues but not in profitability) much more than domesticfocused or hybridsoftwarehouses.Thismightbeduetoadversetermsoftradearisingfromrecessionin majorsoftwareexportmarketsintherecentyears,aninabilitytoclimbupthevaluechain,oran overrepresentationofdevelopmentcentertypeworkdonebycompaniesinthiscategory.
There is no clearcut winner among domestic/exportfocused operations in managerial practices.>Fromthestandpointofmanagerialpractices(seeTableV,below),thereseemstobe virtually no statistically identifiable difference between domestic, hybrid, and exportfocused software operations in terms of the technical backgrounds of the entrepreneurial team (i.e. founders).Thereissomesuggestiveevidencethatexportfocusedsoftwareoperationsaremore likely to distribute stocks/ownership among employees (a practice that seems to have permeated from their foreign origins), hold employee bonding activities, and benefit from employeedriven innovation while domesticfocused software operations are more likely to share profits with employees, provide additional benefits to female employees, have greater financialdiscipline,andprovidetimetoemployeestoworkontheirowninterests.Despitethe latter, however, they seem to benefit less from employeedriven innovation and suffer more fromaperceptionoflowerdelegationquality.Hybridstendtoperformsomewherebetweenthe twoextremecategoriesoratleastaswellasoneofthetwoinalmostallmanagerialpractices exceptafew.Theytendtodobetterthaneitherofthecategoriesintermsofbenefitstofemale
34
employees and employeedriven innovation and worse in terms of improvements in profitability of the operationsa fact that might reflect a lack of focus on the part of their inexperiencedentrepreneurialteams.
TABLEV:PREVALENCEOFKEYMANAGEMENTPRACTICESINSOFTWAREHOUSES
KeyManagerialPracticesEmployed
MarketFocusofSoftwareHouses All Categories Domestic Focused
Hybrids
Export Focused
N=58 N=18* N=11 N=20 MP1.Topmanagementteamprimarilycomprises 81% 78% 81% 80% peoplewithtechnicaldegrees MP2.Companystopmanagementteamhas 44% 52% 27% 40% startedsuccessful/unsuccessfulventuresbefore MP3.Incentives(orprofits)aresharedamongthe 51% 63% 54% 50% companysemployees MP4.Companyoffersstockownershiptoits 34% 26% 36% 40% employees MP5.Companyoffersadditionalbenefits(e.g. 65% 68% 81% 55% flextimes,maternityleave)tofemaleemployees MP6.Providessomepaidtimetoemployeesto 22% 31% 18% 25% workontheirowninterests MP7.Companyholdsregularemployeebonding 68% 52% 72% 70% events(e.g.TechForums,Picnics) MP8.Topleadershipclosestrackscashflows 79% 89% 90% 65% severalmonthsintothefuture MP9.Companysemployeesareregularlybriefed 77% 78% 81% 80% aboutstrategyandgoals MP10.Companycontinuestogrowinrevenues 20% 10% 36% 30% butnotintermsofprofitability MP11.Employees/managersoftenfeel:Ihaveto 39% 42% 36% 35% doitmyself,ifIhavetogetthingsdone MP12.Portionofcompanyscurrent/future 36% 26% 45% 40% productlinecomprisesemployeeconceivedprojects *Thesesubcategoriesexcludeoperationsstrictlycategorizedasoffshoredevelopmentcenters.
Exportfocused operations spend more on quality assurance, and hybrids on certifications. TableVI (above) presents a view of technical and process quality of our respondents. Again, some differences are worth emphasizing here. While there is no significant difference in the proportion of companies having a dedicated quality assurance team, the exportfocused operationstendtospendmoreeffortonqualityassuranceasevidencedfromtheaveragesizeof the quality assurance teams and % of employee payroll dedicated to the quality assurance
35
function.Oneinterestingfindingisthatagreaterproportionofhybridsseemtohave(orseek)a qualitycertification,followedbyexportandthendomesticfocusedsoftwarehouses.Thelower propensity of domesticfocused software houses to seek a quality certification is quite understandablegiventherelativelylesspremiumthatthedomesticcustomerputsonquality, butthedifferencebetweentherelativepropensitiesofhybridsandexportfocusedoperationsis quite surprising. If anything, we would have expected an opposite relationship in that the exportfocusedoperationspayingmoreemphasisonqualitycertificationsthanthehybrids.We believewhatweareseeinghereisasortingofsoftwareexportingcompaniesinexportfocused and hybrid categories based on the sort of competitive pressures that they face. Hybrids generally compete more openly for the export business and thus require quality certification while exportfocused software operations leverage their longestablished relationships to do businessinexportmarkets.
TABLEVI:KEYTECHNICALPRACTICESINPAKISTANISOFTWAREHOUSES
CharacteristicsofTechnicalQuality
%ofCompanieswithdedicatedQATeam Ave.sizeoftheQAteam(as%oftotalemployment) %ofemployeepayrollspentonQAfunction %ofCompanieswithISO/CMMCertification ProgrammertoPMRatio(PMincl.Teamleads)
All Categories
N=58 73% 17% 13.96% 45% 5.87
Domestic Focused
N=19 73% 9.8% 11.64% 36% 4.16
Hybrids
N=11 72.7% 13% 11.8% 72% 8.4
Export Focused
N=20 68% 26% 16.9% 50% 5.7
SoftwareEngineeringDesignMethodologyUsed Waterfall Iterative Prototyping Homegrown Other
% 32% 44% 50% 29% 18%
% 36.8% 36.8% 68.4% 15.7% 15.7%
% 54% 63% 54% 9% 9%
% 15% 40% 30% 45% 30%
HowOftenAreTechnicalBestPracticesUsed Projectplantracking Codeanddesignreviews Documentationofthecode Systemtolearnfromongoingprojects Measurementandreviewofprocessquality

Freq* 1.87 2.72 2.58 2.74 2.85
Freq 1.66 2.55 2.36 2.46 2.53
Freq 2 3.2 2.88 3.11 3.09
Freq 1.94 2.44 2.8 2.76 2.93
*Frequencyscoresarepresentedasanaverage#,1=daily/continuously,2=weekly,3=monthly,and4=asneeded(generally, smallisbetter).Excludedfromthesefiguresarecompaniesthatdontuseaparticularapproach.
There is no clearcut trend, suggestive or real, in the use of software design methodologies, except perhaps that the exportfocused software houses rely more on homegrown or more
36
esotericapproacheswhiledomesticfocusedandhybridoperationsshowagreaterrelianceon themoretraditionalones(e.g.waterfall,iterative,andprototyping).Althoughonlysuggestive, an interesting pattern emerges from figures on the use of technical bestpractices. Domestic focusedsoftwarehousestendtocarryoutfourofthefivebestpracticesmorefrequentlythan eithertheexportfocusedorthehybridcompanieswiththelatterdoingworstofall.Needlessto say,however,thatthisparticularfindingisquitetheoppositeofthecommonperceptionabout domesticfocusedoperationsandneedsacloseranalysis.
Companies,acrosstheboard,focusonhighcontactmarketingstrategiesandchannelstoseek customers. We look at various marketing approaches used by software houses and their perception of successfulness of the same. TableVII presents this analysis. As before, while noneofthebetweencategorydifferencesarestatisticallysignificant,somebroadfindingsand trends can be gleaned from the data. Most importantly, selling software is a highly contact intensive sport. All types of organizations identify highcontact methods like onetoone contacts, network and relationships, and wordofmouth referrals as the most successful (all rated>3.5onascaleof5,onaverage)ofthemarketingapproachesandlowcontactoneslike advertisingandgoingtoconferencesandexhibitionsasleastsuccessful(rated<2.5onascaleof 5, on average) of the approaches. The use of alliances and agreements with channel partners seemtofallinbetweenthesetwoextremeswiththeimportantcaveatthatthesedonotseem to work as well for domesticfocused operations as they do for hybrids and exportfocused ones. Consequently, in line with the perceptions of successfulness, companies seem to have focusedtheirenergiesonapproachesthatappeartoworkbest.Thisclearlyhasimplicationsfor the marketing and networking initiatives designed by PSEB and PASHA for the software entrepreneurs.
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TABLEVII:SUCCESSOFMARKETINGSTRATEGIESUSED
SuccessofMarketingStrategiesUsed
MarketOrientationoftheSoftwareOperation AverageRating*(%DontUse) Export All Domestic Hybrids Focused Companies Focused
N=57 N=19 N=11 N=20 MA1Wordofmouthapproach(clientreferralsetc.) 3.76(19%) 3.88(10%) 3.90(0%) 3.53(25%) MA2Advertisingintradelocal/foreignjournals 2.21(59%) 2.20(47%) 2.20(54%) 2.14(65%) MA3Attendinglocal/foreigntradeconferences 2.48(38%) 2.23(31%) 2.25(27%) 2.66(40%) MA4Initiate1to1communicationw/potentialclients 3.70(19%) 4.11(5%) 3.53(0%) 3.45(25%) MA5Usepreestablishednetworks/personalrelationships 3.52(29%) 3.6(26%) 3.75(27%) 3.13(25%) MA6Alliancesandagreementsw/channelpartners 2.94(36%) 2.53(31%) 3.00(36%) 3.14(30%) MA7Dependonacaptiveclientsinceformation 3.16(57%) 3.67(68%) 2.90(63%) 2.25(45%) *Respondentswereaskedtoratetheperceptionofsuccessfulnessofeachoftheseapproachesonascaleof15 (1=leastsuccessful,2=somewhatsuccessful,3=moderatelysuccessful,4=quitesuccessful,5=mostsuccessful.)

Exportfocusedcompaniesseemtodomorerelationshipsellingratherthandirectmarketing & advertising; hybrids underinvest in productdevelopment, perhaps, to pay for costlier marketing and certifications. How do software houses spend their money to develop and market their productservice offerings? TableVIII (below) tries to present a picture of their operations in terms of percentages of expenditures on key expenseheads. There are some noticeabledifferences.Hybridstendtospendmore(35percentagepointslevel)thaneitherof thetwocategoriesonmarketingandadvertising.Thatexportfocusedsoftwarehousestendto spendtheleastonthesameissurprising.Thisfindingmightsupportourearlierhypothesisthat exportfocusedsoftwarehousestendtodomorerelationshipsellingandhenceneedtospend less on marketing and advertising as compared to hybrids that compete more openly in the export markets. This, however, can only be a partial explanation. One would have expected thesefigurestoshowtheveryhighcostsofsettingupmarketingfrontofficesintheAmerican and European markets that has become somewhat of a norm these days. According to our estimates, foreign frontoffice and marketing operations, on average, are 300500% more resource intensive than local operations. The survey data suggests that for companies having frontofficesabroad,onaverage,75%oftheexpenditureismadeontheforeignoperationthat onlyaccountsfor25%oftheworkforce.Possibleexplanationsfortheabovediscrepancymight bethatfirmsareusingdifferentcompanies(orlegalentities)tofundtheoverseasoperationsor entering in partnering agreements with foreign companies to share the cost of selling abroad. Wecertainlyfindstrongevidenceinsupportoftheformer,andsomehintofthelatter.

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TABLEVIII:HOWDOSOFTWAREHOUSESSPENDTHEIRMONEY?
MajorExpenditureHeadsofSoftware Houses
MarketOrientationofSoftwareHouses All Combined Domestic Focused*
Hybrids
Export Focused*
N=57 N=17 N=11 N=21 MarketingandAdvertising 9.5% 11.1% 14.3% 9.5% ProductDevelopment/ServiceDelivery 46.4% 48.35% 39.8% 45.7% Product/ServiceSupport 15.5% 15.1% 15% 15.9% ResearchandDevelopment(R&D) 8.4% 9.58% 9.27% 7.4% QualityAssurance 8.5% 6.05% 7.95% 7.7% TrainingandCertification 4.6% 4.17% 8.45% 4.1% Other 6.4% 6.17% 5.36% 7.47% *Domestic/Exportfocusedsoftwarehouseisonewith>75%salesindomestic/exportmarketsrespectively
Hybridsalsotendtospendmore,almosttwiceasmuch(inpercentageterms),onqualityand
certificationthaneitherofthetwocategories.This,again,isinlinewithourearlierobservation that hybrids are much more likely to seek a quality certification than either of the two categories. They, however, underinvest in productdevelopment and servicedelivery by as muchas510%.Thisisafindingthatwecannotexplainonthebasisofdifferencesindemand forproducts/servicesinthedomestic/foreignmarkets.Perhaps,whatweareseeinghereisthe effect of a squeeze on expenditures to make room for their highthanaverage investment in certification/trainingandmarketing/advertisingetc.Inotherwords,thehybridsmaybecutting corners to pay for these expenses and the expensehead that most often gets cut is product development.Theremightbealternateexplanationsforwhatwesee.Forexample,theproduct servicecharacteristicsofthesefirmsmightbedifferentthaneitherdomesticorexportfocused companies and thus require lesser productdevelopment expenditure. We, however, do not haveanyevidencetosupportorrejectthathypothesis.
ExportCEOs operate in a relatively tactical profilefocusing more on daytoday management and less on product and strategic planning & marketing/advertising. Finally we look at how software CEOs (or local heads of operations) distribute their time on various aspects of the business in an average month. The quality of topleadership has often been described as a key bottleneck in the development of software industries in third world and emerging market contexts. How the topexecutive (in particular) and senior management (in general) distribute their time isalso an indicator of professionalizationand delegation quality within an organization. For example, within our data, we find a strong negative correlation
39
betweenthepercentageoftimeaCEOspendsondaytodaymanagementofthebusinessand theperceivedqualityofdelegation.Wealsofindthatthemoreeffortacompanyputsintobrief itsemployeesaboutitscorporatestrategyandgoals,thelesstheirCEOshavetospendtimeon daytoday management of the companya possible sign of greater involvement and ownershiponthepartofthecompanysemployees.Thecorrelationmaybespuriousbutitisa correlationnonetheless.

TABLEIX:HOWDOSOFTWARECEOSSPENDTHEIRTIME?
BreakdownofTimeSpentinanAverage Month
MarketOrientationofSoftwareHouses All Combined

N=57 32% 20.5% 6.0% 24.6% 7.95% 8.65%

Domestic Focused*
N=18 20% 24% 9.4% 31% 5.6% 8%
Hybrids
N=11 34% 20% 2.7% 30.4% 4.81% 7.9%
Export Focused*
N=20 36.5% 15.5% 7.25% 20.65% 11% 9.25%
Daytodaymanagement Strategic&ProductPlanning Fundraising Marketing&BusinessDevelopment Hiring&Recruitment Other
*Domestic/Exportfocusedsoftwarehouseisonewith>75%salesindomestic/exportmarketsrespectively
TableIX(above)presentstherelevantdataonCEOsinoursample.Asbefore,whilethereare noclearcutpatterns,wedohavesomesuggestivefindings.CEOsofdomesticfocusedsoftware houses tend to spend much less time on daytoday management of their business than the othertwocategories.SomehowbeinginvolvedintheexportmarketstendstogetCEOsmore handsonontodaytodaymanagementofthebusiness,eitherbecauseofconcernsforqualityor havingtodeal,onadaytodaybasis,withforeignoperationsandcustomersetc.CEOsofmany smallerstartupsalsodoafairbitofprogramming/codingthemselves.CEOsofexportfocused companies tend engage significantly less in marketing and business development activities. This can either be due to their limited role as a local head of operations of a development centertypesettingorinlinewithourearlierobservationofexportfocusedcompanieshavinga greater propensity to engage in relationship selling rather than direct marketing/advertising. ExportCEOs also spend considerably more time (~ 5% more, on average) in hiring and recruitmentafactthatsupportstheperceivedneedforhigherqualityintheexportmarkets.
What does all this mean for software development industry in Pakistan? At the most fundamentallevel,wefindalackofrealfocusandspecializationwithintheindustry.While there do exist some definite differences between subcategories of companies on the basis of
40
theirmarketdestination(i.e.domestic,export,orhybrid)thesearenotverypronounced.For example, one of the things we often heard from industry executives was that running a domestic focused business and software exports were two entirely different types of businesses.Manysuggestedthateventhecoststructuresofcompaniesexportingsoftwareand developingitforlocalconsumptionweresoradicallydifferentthatitbecameimpossibleforthe formertoselllocally.Wedonotseemtofindanevidenceofthisconjectureinourdata.Infact, we found a lack of statistically significant differences on majority (almost all) measures of relevance between the three categories. Even from a practical standpoint, the data seems to suggest that companies engaged in domestic and exportoriented software development are moresimilartoeachotherthannot.
What we are probably seeing, from an industrywide perspective, is a move away from the exportfocused firm to a welldiversified firm with quite a few companies completely abandoning their desire to play in the software export game and focusing instead on the domesticmarket.ThepostDotComand9/11scenariohasbroughtquitearudeawakeningfor the(ir)rationalexuberanceofthelocalsoftwareentrepreneurandhis/herexpatriatesponsor andhasbeenawatershedeventforthePakistanisoftwareindustry.Someofthisisprobably reflectedinourdata.Anotherinteresting,yetrelated,findingisthedistinctivenessofthewell diversifiedhybridfirm.Ratherthanfallingsomewhereinthemiddle,thehybridstendtodo better or worse than the other two categories on several accounts thus elevating them to an interesting category, in and of themselves, rather than merely the residual of the other two categories.Withthehybridmodelincreasinglybecominganormintheindustry,ratherthanan exception,withitsownstrategicandcompetitivedriverswarrantaninvestigation.
Themarketdestination(domesticorexport),althoughoneofthemostimportant,isnottheonly important factor confounding the strategic choices, organizational structures, and technical managerial practices of software companies. There are several other factors, some exogenous othersendogenous,thatimpingeuponthedecisioncalculiofsoftwareentrepreneursandCEOs. Among them are the productservice mix, the size, and other environmental factors (e.g. economic booms and busts). We looked at some of these in an attempt to try to gain a finer grainedunderstandingoftheindustryanditsdynamics.Followingisabriefdiscussion:
The dedicated development centers present considerable promise but, thus far, have shownlimitedcapacitytogrowinsizeandscope. Amongoursubjects,wefoundcompanies
with a number of different business models and strategic foci. One interesting class of operations can be termed as a dedicated offshoredevelopment center (more on that later).
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Althoughmostsubsidiariesofforeigncompaniesandthereare24oftheminoursample(40% of the total)use the Pakistanbased operation in a development center format as evidenced fromdataonrevenuecontributiontotheforeignparent(60%oftheforeignparentsrevenues, on average, can be attributed to Pakistanbased operation), 8 of our respondents can be describedasthepurestformsofdedicateddevelopmentcenters(FigureV).Theseorganizations aredifferentinthesensethattheyhaveaverylimitedstrategicmandate,namely,tosolelyserve asabackupoperation(forproductdevelopment)oftheforeignparent.Theyarealsodifferent from other, more hybrid software developmentcenter operations in the sense that they are very tightlyalmost exclusivelylinked to their foreign parents and do not operate domesticallyorevenseekotherclientsintheinternationalmarket.
>Fromastrategicstandpoint,theyarevirtuallyunattachedto,andtoalargeextentunaffected by,thedevelopmentsonthePakistani software sceneandthestrategicandcompetitivedrivers of the local industry, except for their dependence on availability of IT/Telecom infrastructure and access to quality human resources. Because of these qualities, many of the organizational and managerial statistics related to these operations are thus not comparable with the rest of the industry. Nevertheless,theyareanimportantsegmentof the Pakistani software scene that must be looked at closely, with a view to identifying differences,similarities,andbestpractices,andwedosointhefollowingparagraphs.
Fig-V: Proportion of "Dedicated" Development Centers
Develop Center 15% Others 85%
Development Center
Others
The dedicated developmentcentertype operations, almost universally, have a strong expatriateconnectionassubsidiariesofforeigncompanies.Theyhaveagreaterdependenceon a smaller client base (~50% from a single client, and as much as 90% from top5 clients), a greaterthanaverage export and productfocus and an almost negligible domesticfocus that confirmsourassertionsabouttheirisolatedenclavenatureonthelocalsoftwaredevelopment scene.Theseoperationstendtospecializemoreinautomationsystemsacrossvariousdomains (e.g. printing, stock trading, workflow etc.) These operations have a greaterthanaverage expenditureonproductdevelopment/servicedeliveryandlowerthanaverageexpenditureon certification/training.Theyarealsolesslikelytohaveaqualitycertification.Thedevelopment centertype operations are much more intensive from a technical process standpoint (as
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measuredfromavarietyofindirectmeasureslikeprogrammertoprojectmanagerratio,%of payrollspentonQA,sizeofQAteamaspercentageoftotalstaffetc.)butlessintermsofactual rigid application of known methodologies (e.g. waterfall, iterative, prototyping etc.) and technicalbestpracticeslikeprojecttracking,codeanddesignreviews.Thismightbeattributed to the nature of the work they perform or their adherence to unique parentspecific methodologiesratherthanthestandardsuiteofdesignapproachesandtechnicalbestpractices.
From an organizational standpoint, these development center operations are smaller (almost halftheaveragesize)andhaveahigheremployeeturnoverafindingthatmaybeexplained by the relatively easier outward mobility of their employees to the countries of their parent companies. This is in spite of the fact that they tend to pay more in salary than the average software house in Pakistan. They are, however, less likely to distribute profit among their employees. Development centertype operations are predominantly established with funds/investment from foreign partners and the bettermanaged ones are often headed by a foreign founder relocating to Pakistan to serve as a local head of operation. These heads of operations,orlocalCEOs,aremuchmoreinvolvedindaytodaymanagementofthecompany (spend 15% more time, on average) and much less involved in marketing and fundraising (spend20%lesstime,onaverage).
Another interesting and potentially consequential finding is that development centertype operationsshowasignificantlylowerrateofrevenueandemploymentgrowth(asmuchasone half of the average revenue growth, and one third of the average employment growth) thus highlighting the relatively limited scope of their operations and difficulties inherent in the scalability of this organizational model. While some of this lack of revenue and employment growthmaybeattributabletothedepresseddemandofthesoftwareoftheirparentcompanies intheirrespectivemarkets(abroad)asituationthatmightimproveovertimewhetherornot the developmentcenter model can outgrow its limited character and resolve certain managementchallenges(discussedinsection7.5)is,however,anopenquestion. Weseeagradualshifttowardsproductizationofservices.However,servicesandproducts focusedcompaniesinPakistanisoftwareindustrymaybe morealike thandifferentfromeach other, thus pointing out towards a lack of specialization in the industry. Product or service orientation of a software operation has been a subject of considerable debate within the academicandpractitionercommunities.Whilesomeassertthatacompanycannothopetodo well in both types of offerings simultaneously, others have argued and documented the inevitability of the convergence between product and servicesfocused companies. Cusumano
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(2004) asserts that increasingly, productfocused companies are increasing their share of revenues from service offerings and the servicesfocused companies are moving towards productization. It views this convergence as a robust middleway for large western software companiesstrugglingtosurviveduringeconomicrecessions.
In the context of software industries of emerging markets, like Pakistans, the productservice dimensionassumesanevenmorecriticalmeaningasitmaybeconfoundedorevendrivenby thedemandsoftheintendedmarketratherthantheinherentproductorservicecharacterofthe firmsoffering.Manycompaniesseemtohaveadoptedaservicesposturemerelybecauseofthe founders interest to export rather than any other competitive factor. Also, a large number of these companies often find themselves in a projectstrapmoving from one project to the next,andintheprocess,oftenunabletobuildcriticalintellectualpropertyoradomainexpertise that could serve as valuedifferentiator in the longer run. That majority of Indias exports comprise lowend services or bodyshopping rather than more profitable shrinkwrapped productsarewelldocumentedinliterature(Heeks,1998).
Given the importance of the productservice distinction and the peculiar organizational and strategicrequirementsofeach,wesoughttolookatthesedistinctsubsegmentsseparately.As before, we defined a productfocused company as one that earned more than 75% of its revenuesfromproductsalesandaservicefocusedcompanyasonethatearnedmorethan75% ofitsrevenuesfromservices.Inbetweenthesetwocategoriesisthehybridcompanythewell diversifiedfirmthatmayearnitsrevenuesfromasmuchas50%ofproductsandserviceseach. This categorization, we believe, is most likely to identify the key differences between organizational structures and competitive strategies of product and servicesfocused software operations.Ofthe52companiesinour sample (dedicated development centers excluded), 23 (44%) were thus categorized as servicesfocused, 13 (25%) as productsfocused, and 16 (31%)ashybrids(FigureVI).
Fig-VI: Product Profile of Software Companies in Sample

Hybrids 31% Product 25%
Looking at our data, we find that productfocused operations are much more likely to be domesticfocused ratherthanexportdriven,althoughin an aggregate they are much more
Service 44%
Product
Service
Hybrids
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likely to be wellbalanced between domestic and foreign markets than servicefocused operations.Theyarealsomuchmorelikelytobefocused(notonlyintermsoftheirdomain offering e.g. financial, telecom, or automation systems, but also in terms of their overall organizational strategy), and much more likely to sell a mix of softwarehardware offerings. Productfocused companies are more likely to be established through investment by a local source (e.g. a business house) or a venture capital fund. They are also more likely to share profits, depend on intellectual property for their continued vitality, be financially disciplined, andbenefitfromemployeeledinnovation.Theyarealsomuchlesslikelytobeaffectedbythe imageproblemthantheservicesfocusedcompanies.
Productfocusedoperations,however,seemtodoworsethanservicefocusedcompaniesasfar asrevenuesizeisconcernedbutarelikelytobelessdependentonasmallernumberofclients. They spend more on R&D and service/support, less on certification/training, and as much on marketingandadvertisingastheservicesfocusedoperations.Productfocusedcompaniesalso paid less (to their employees) than servicesfocused companies but experienced greater sales andemploymentgrowth(about30%pointgreateroneachmeasure),onaverage.Thereisalso some hint, although a relatively weak one, of a lessthan onetoone correspondence between revenue and employment growth in the productfocused category as against the more manpower intensive servicesfocused category. For most of these measures, hybrids fall in between these two categories. They do, however, tend to do better than either of the two extremesasfarasrevenuesizesareconcernedbuttheyarealsolikelytoemploymorepeople, on average. Hybrids also seem to have experienced faster growth than servicesfocused companies,bothinrevenueandemploymentterms.
Onthetechnicalprocessside,productfocusedcompaniesarelesslikelytobequalitycertified (30% ISO certified as against 60% for service companies), are much less likely to have a dedicatedQAteam(46%asagainst81%forservicesfocusedcompanies),andtheyspendhalf as much as the latter on the quality assurance function (about 9% vs. 16% of total employee payroll). While the relatively less propensity to seek quality certification is somewhat understandable and can be explained by a perceived lesser demand of the same from their foreigncustomers(forproductsonly)thelessemphasisonqualityassurancemustbeasource ofsomeconcernfortheindustry.Althoughbetatestingisbecomingsomewhatofanorminthe software industry, testing and quality assurance functions for productbased companies are atleastasimportant,ifnotmore,astheyareforservicesfocusedcompanies.
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One possible explanation for why productbased companies might be able to survive despite thislackofemphasisonqualityassurancemaybethelackofmaturityofthedomesticmarketto whom they sell a major chunk of their products. According to several industry insiders, the domesticcustomerismuchlesstechnologysavvy,andhencemoretolerantofthepoorquality. As one interviewee pointed out, it is not hard to find examples where a software company, unabletodelivertheproductofrequisitequality,eitherduetofaultyprocessesorspecification creep, ends up blaming the customer for lack of his/her technical sophistication. Barring this anomaly,thetrendofincreasingproductizationisahealthymovetowardsamorebalancedand robustindustrialstructure.
Although organizational size can be an important predictor of key strategic & managerial characteristics (e.g. focus and professionalization etc.), we find very few statistically significant differences. Size of a company has also been a strong predictor of organizational practicesandthusasubjectofconsiderabledebateintheindustrialorganizationliterature.Itis also the only categorization on which past data may be available in the context of Pakistani software industry12. We categorize organizations as large and small using the number of its professionalandtechnicalemployees.Wecategorize31organizations(or62%)assmalland19 organizations (or 38%) as large (FigureVII). This classification roughly compares with the findings of PASHALUMS study that categorized 7 companies as small (63%) and 4 as large (37%)onthebasisofFY2000revenues.
In our sample, smaller organizations are more likely to be focused than larger organizations. Theyarealsolesslikelytobeasubsidiaryofa foreign company or have a frontoffice abroad. Smaller organizations also derive a greater proportion of their revenues from sellingservicesabroadandproductsathome than larger organizations that have a more balanced portfolio of serviceproduct and exportlocal mix. They are also more dependentonasingleclient,onaverage,than
Small Large
Large 38% Small 62%
Fig-VII: Proportion of Small/Large Companies in Sample
12
PASHA-LUMS study focused on organizational size as a determinant of performance and managerial practices. It defined size, however, in terms of revenues (i.e. organizations having revenues > or < PKR 25 Million being the cutoff for large and small organizations respectively). Due to lack of accurate continuous data on revenues, we use professional and technical employment as a parameter for organizational size with 50 employees being the cut-off. This, however, roughly corresponds with the PASHA-LUMS studys cut-off of revenues of $200,000 (PKR 25 M).
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theirlargercounterparts.Smallercompaniesspendmore,onaverage,onproductdevelopment servicedeliveryandlessoncertification/training.Theyarealsolikelytopaylowersalaries,on average, than larger organizations. They are less likely to share profits or distribute stocks (ownership) to its employees, and less likely to provide appropriate additional benefits to femaleemployees.Topexecutivesofsmallersoftwarecompaniesarelesslikelytobefinancially disciplined (monitor cashflows several months in advance) and they spend less time, on average,onmarketing/businessdevelopmentandhiring/recruitmentandmoretimeonactual programmingandcoding.
From a technical standpoint, although smaller companies are less likely to have a dedicated quality assurance team and have a quality certification, they tend to spend much higher percentage of their payroll on the quality assurance function (ratio of QA employees to total employment in smaller companies is almost four times that of larger ones) and have half the number of programmers per project manager or teamlead. Although there is no clearcut pattern, smaller companies tend to do worse than larger companies on several technical best practices.Thereissomeevidenceofgrowingpainsamongsmallercompanies.
Despiteexpectationsandperceptiontothecontrary,DotComBubbleburstseemstohavelittle statistically identifiable impact on strategic direction of the industry. In order to assess whether the DotCom Bubble burst had any identifiable impact on the structure and organization of the Pakistani software industry, we categorized allrespondentsin2classesthepre and postdotcommersdepending on whether they were incorporated prior to or after FY2001. Using this approach, we categorized 35 software operations (67%) as pre dotcommers and 17 operations (33%) as postdotcommers (Figure VIII). As a class, postdotcommers tend to be smaller, on average, in both revenue and employment terms. They have, however, experienced much faster growth rates (as much as 30% higher, over the last year) than pre dotcommers.
Fig-VIII: Proportion of Cos. Established Before/After DotCom Bubble Burst
PostDotcommer 33% PreDotCommer 67%
Pre-DotCommer
Post-Dotcommer
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Postdotcommers are much less likely to have been established through the savings of local foundersorinvestmentbyalocalpartner(e.g.abusinesshouse),andmorelikelytobefunded by a venture capital sourcea fact that might merely represent the going outoffavor of software investing among business houses and coming in vogue of venture capital financing arrangements in Pakistan. PostDotCom operations are equally likely to have an expatriate connection,althoughtheyaremuchlesslikelytobesubsidiariesofaforeigncompany.Thepre and postdotcommers are virtually identical in terms of their productservice and export domesticofferings,exceptforsomeveryminordifferences(e.g.thelatter,onaverage,sellmore exportproducts and domesticservices than former). Both the categories are also virtually identicalintermsoftheirexpenditureprofileandtheiremployment(worktype)profiles.There also is no significant difference between the strategic focus of organizations conceived during these two time vintages. This finding, if correct, is a potentially damaging to our defacto argumentthatDotComBubblebursthasledtoconsiderablelearningwithintheindustrythat may be reflected in betterfocused firms being formed in the first place. One potential explanation, somewhat substantiated by qualitative interviews, for this lack of finding is that the DotCom revolution might have affected the software industry more by modifying the offerings and behaviors of already established firms than by affecting the formation of new firms. Moreover, the sizes of the firms in latter category might be too small to register a significanteffectattheindustrylevel.
The predotcommers are slightly less likely to distribute profit and more likely to distribute equity among employees, they seem to do better at providing additional benefits to female employees, and are better disciplined at managing cashflows. Postdotcommers, on the other hand, tend to suffer more from issues of delegation quality and a profitability crunchissues thatmightbeattributabletoyoungerorganizationalstructuresandlessmatureproductservice profiles.Postdotcommerssuffermorethanpredotcommersfromretentionissueswiththeir average employment length almost a fullyear shorter than predotcommers. Topexecutives (CEOs)ofpostdotcommersalsotendtospendlesstime,onaverage,onstrategicandproduct planning and marketing/business development and moretime on fundraising anddaytoday management.
Postdotcommers are almost 35% less likely to have a quality certification than the pre dotcommers.However,theyarealmostasequallylikelytohaveadedicatedqualityassurance team, and outspend the latter, in percentageofexpenditure terms, on the quality assurance function.TheyhavedoublethenumberofQAprofessionalsforeverytechnicalandmanagerial employee and a slightly favorable programmertoproject manager ratio than the pre
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dotcommers. While there is no clearcut pattern in favor of a particular software design methodology, postdotcommers seem to consistently employ the technical best practices in a regularfashion.
Inaggregate,whiletheremaybedifferencesamongpreandpostDotComventures,andmany would like that conjecture to be true, we did not find, at a statistical level, many of the hypothesizedones.Analternateexplanationwouldbethattheindustryasawhole,andhence our data, contains too much variation to identify any significant patterns. Perhaps the pre DotComoperationsaresobig,fromarelativestandpoint,thattheyendupovershadowingthe uniqueness of the postDotCom operations. On this count, therefore, our analysis is, at best, inconclusive. 5.3SearchfortheHolyGrail:DoStatisticsRevealaPatternofBestPractices? Clearly the results discussed above indicate a pattern that, although informative, is quite inconclusiveandsomewhatdisturbing.Wedonotfindmanystatisticallysignificantdifferences between companies specializing in exports vs. domestic markets, and products vs. services, those that are small vs. large, that were created before the DotCom Bubble burst vs. those created after that. This might be an artifact of the data (e.g. nonrepresentative sample) or suggestive of lack of maturity and specialization in the industry (e.g. large variations around estimates).Inviewoftheaboveproblems,wedecidedtofurtherrestrictourcategorizationof companiesusedforidentificationofBestPracticeswithinthePakistanisoftwareindustry.
Thinking that one particular categorization scheme may not adequately represent a multi dimensional concept like success, we used 4 different ways to categorize our sample using classificationschemesdependingonthirdpartyjudgment,researchersjudgment,anobjective criterion, and selfdescribed measure of performance. The first of these schemes consists of a comparison of 40 most prominent and successful organizations (identified by PSEB and PASHA)againsttherestofthesample.Thesecondschemeusesareferencesampleconsisting ofcompaniesthat,intheresearchersviews,werethe10bestinclasscompaniesandcompared itagainsttherestofthesample.Thethirdcategorizationschemeconsistsofthefastestgrowing companies (over last year) in thesample against the restwith the caveat that the companies thatachievedasalesgrowthofgreaterthan40%onarevenuebaseofatleastamilliondollars wereincludedinthisreferencegroup.Wefound14suchcompaniesinoursampleandgrouped them together for comparison purposes. Finally, we also compared companies that had identified themselves as amongthe topquartile, globally in terms of overall performance againsttherestofthecompanies.Webelievetheseweregenerallycompanieswithinnovative
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products/servicesthatweredeemedgloballycompetitiveinthemarketplacebytheirinitiators. 14companieswereincludedinthisreferencegroupaswell.
Although there are possibilities of different types of biases in each one of these categories, together, we believe, they can lead to robust conclusions about how better performing companiesmaydifferfromthenotsogoodperformersinthePakistansoftwareindustry.Inthe following narrative we would use the nomenclature betterperforming for the above describedreferencegroups.TheresultsofthisanalysisarepresentedinTableX(below).
Weseeamixedpattern.Generallyspeaking,forallclassificationschemes,anaveragecompany inthebetterperformingofthegroupsislargerintermsofrevenuesastatisticallysignificant finding at the 5% level. An average company in the better performing of the groups is also larger in terms of technical and professional employment, more likely to seek quality certification, retain its employees for a longer period of time, more likely to earn a greater portionofitsrevenuesfromexportsandservices.Thesefindingsare,however,notstatistically significant.Forallclassificationschemes,exceptglobaltopquartile,thereisagreaterlikelihood thatthecompanyinthebetterperforminggroupwouldbeasubsidiaryofaforeigncompany andwouldhaveafrontofficeabroad.
Companiesinthebetterperforminggroupsconsistentlyratedhigherintermsoftheprevalence of key managerial practices that made them more attractive to employees, namely, profit sharing and stockownership among employees, additional benefits for female employees, regular employee bonding events, and provision of some flexible time to work on employees interests.Whiletheseresultsarenotstatisticallysignificant,theyareconsistentenoughthatwe can comfortably describe them as managerial best practices or attributes of better performing organizations.Wealsofoundaclearandconsistentpatternwithregardstowhatwebelieved wereindicatorsofmanagementquality,namely,betterperformingcompaniesweremorelikely todisplayqualitieslikeamixoftechnicalbusinessbackgroundsoftopmanagement,financial discipline,involvementinconveyingstrategyandgoalstoemployees,aclearstrategytoensure growth in both revenues and profitability, and prior experience of creating new ventures etc. Onceagain,thepatternwasconsistentenoughthatweareconfidentinclaimingtheseaspectsof managementquality to be best practices within the industry. We did not, however, find any clear and consistent pattern in the proportion of time spent by the CEO on daytoday managementofthecompany.
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There is a clear and consistent pattern in the use and satisfaction with various marketing approaches. The companies in betterperforming categories, except for the global topquartile classification,tendtoexpressgreatersatisfactionwiththehighcontactmarketingapproaches, like wordofmouth (clientreferrals), onetoone contacts, and networks of personal relationships. Lowcontact marketing approaches like advertising in trade journals and attendingconferencesetc.aredeemedmuchlesssatisfactory.Partnershipsandalliancesscore inbetweenthesetwocategories.
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TABLEX:THEHOLYGRAILOFINDUSTRYBESTPRACTICES?

ImportantStructuralVariables
ForeignSubsidiary FrontOfficeAbroad CompositionofRevenues&Growth AverageRevenues(MidpointEstimate,$M) ExportDomesticMix ProductServiceMix DependenceonLargestClient RevenueGrowthoverLastYear EmploymentFigures&Growth Average#ofEmployees EmploymentGrowthoverLastYear AverageLengthofEmployment(yrs) ManagerialPractices(ComplexIndices) EmployeeAttractiveness15(MP3,4,5,6,7) MgmtQuality15(MP1,MP2,8,9,10) TopMgmtTimeSpentonDaytoDayActivities(%) MarketingPractices(ComplexIndices) AverageRatingofHighContactApproaches(MA1,4,5) HighestRatingofLowContactApproaches(MA2,3,6) ProcessandTechnicalQualityMeasures %ofcompanieswithQualityCertification %ofemployeepayrollspentonQA ProgrammertoProjectManagerRatio

All Aggregate (N=60) 40% 55% $1.35M 61:39 45:55 36.5% 56.8% 68 45% 2.61 2.43 3.0 32% 3.66 2.94 45% 14% 5.87
Top40Companies TenBestinClass T40 Rest T10 Rest (N=40) (N=20) (N=10) (N=50) 41% 38% 50% 38% 58% 47% 70% 52% $1.9M* $368K $2.8M* $1.06M 59:41 63:37 59:41 61:39 48:52 42:58 35:65 48:52 33.7% 42% 32% 37% 58% 51% 47% 59% 87 32 91 64 23%* 94% 23% 49% 2.7 2.42 3.65* 2.37 2.7* 1.89 2.9 2.33 3.02 2.94 3.2 2.95 32% 31.6% 26.5% 33.2% 3.73 3.52 4.38 3.48 3.00 2.77 3.50 2.78 51% 33% 80%* 38% 14.5% 12.4% 10.4% 14.76% 7.09* 3.36 9.62 5.14

FastestGrowing FG Rest (N=14) (N=46) 64%* 32% 71% 50% $2.5M* $992K 75:25 58:42 36:64 47:53 33.7% 37% 105%* 46% 98 59 61% 40% 2.86 2.55 3.07 2.24 3.23 2.93 32% 32% 3.88 3.58 3.55 2.74 57% 41% 13.45% 14.1% 5.55 5.97

GlobalTopQ GTQ Rest (N=14) (N=46) 35% 41% 50% 56% $2.5M* $980K 67:33 59:41 39:61 47:53 47% 34% 64% 54% 90 62 80% 35% 3.65* 2.37 3.07 2.24 3.15 2.95 30% 32% 3.61 3.67 3.25 2.85 57% 41% 11.3% 14.7% 3.91 6.48
*indicatesa5%significancelevel,Samplesizesareforcompletedentries(individualfiguresmaydifferduetoitemnonresponse).
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Results are mixed on measures of technical and process quality. While betterperforming organizations show a greater propensity to have a quality certification, there is no consistent patternintermsofspendingonqualityassurance(asapercentageofemployeepayroll)andthe ratio of programmers to a project manager. That companies in better performing categories companies tend to spend less on QA (as percentage of employee payroll) and hire more programmers per project manager seems counterintuitive at first sight. There can be several possibleexplanationsforthesefindings.Ourinterviewswithtopexecutivesandtechnicaland process quality managers revealed several of these. For example, the less QA expenditure by better performing companies can be attributed to more streamlined and welldefined processesthe dividend of upfront investments in process quality, so to speak. Similarly, higher programmer to project manager ratios among better performing companies can be explainedthroughthefactthatmostbetterperformingandwellestablishedoperationstendto usebilayeredhierarchicalstructureswithteamleadsmediatingbetweenprojectmanagersand programmersthusartificiallyincreasingtheprogrammertopmratio.Clearly,weneedtolook atthedataontechnicalandprocessqualityinfinerdetailalongwiththetypeofproductservice offerings and software development work being performed in the companies. Other studies have looked at technical and process quality using project rather than companylevel data to accountforthesedifferences(Cusumanoet.al.,2003).Perhapssuchanapproachisinorderto identifytechnicalbestpracticesamongourrespondents.
Theoverallpicturethatemergesfromthisanalysisisbothencouraginganddiscouraging,albeit inconclusive,attimes.Firstly,whilethelackofspecializationandfocusintheindustryisquite evident from the raw statistics, what is not so evident is whether or not this lack of specializationandfocusisanaturalandhencedesiredconsequenceofthelevelofdevelopment or maturity for the industry. This conjecture somewhat resonates with the consensus of participants at a consultative meeting. Secondly, while there exists, broadly speaking, a clear setofbestpracticesinmanagerialandmarketingdomains,thepictureonmeasureoftechnical andprocessqualityisfarlessilluminating.Thislackoffindingwhetherdrivenbydataorthe underlyingprocessisconsequentialandhenceneedsmoreattention.Amoredetailedanalysis thatattemptstotestalternatehypothesisand/orincorporatequalitativefactorsisinorder.
6.UNDERSTANDINGPROMINENTBUSINESSMODELS&COMPETITIVEDRIVERS
Aswetrytomoveawayfromanindustrywideperspectivetothatofanindividualfirm,itis important,onceagain,todefinecertainsetsoffeaturesthatdeterminefirmlevelstrategicand competitivedynamics.Theseareessentiallyasetofgenericfeaturesthatarecommonacrossa
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large number of firms thus enabling us to analyze them in groups rather than individually. Before we do so, however, we would like to flesh out taxonomy of generic software business modelstoguidethisprocess. 6.1ATaxonomyofGenericSoftwareBusinessModels
Forthepurposeofconvenienceandbrevity,wedefinefourprominentcategoriesofgeneric softwarebusinessmodels.Thedefiningcharacteristicsofthesegenericbusinessmodelsarethe intended market of the software product/service (i.e. domestic or export) and the place of conceptionofthefirmsidea.
Thatthefirstofthesefactorsisgoingtobeakeydifferentiatorofthefirmsorganizationandits strategicandcompetitivedriversshouldcomeasnosurprisetous(i.e.anexportfocusedfirmis very likely to face an entirely different set of challenges than a domesticfocused firm) and hence does not require an elaboration. The second of these factors, namely, the place of conception/origin of the firms idea, however, warrants some elaboration. We believe that it does matter, considerably, in terms of the eventual organizational structure of firm (e.g. the incentives sharing, issues of coordination and control, parentsubsidiary relationships etc.) as well as the marketing challenges that it faces (e.g. developing networks, domain expertise, marketing arrangements etc.), whether the firms primary proponents are based at home (in Pakistan) or the target market of the firms products/services. Before we name the four sub categories of generic business models, we would also like to emphasize the following. The placement of companies in the category as well as the nomenclature of the categories themselves refers to the circumstances at the inception/start of the company or the idea. Therefore, a company that started as export focused with an entrepreneurial team based in Pakistan is placed in the exportfocused local firm category. Over time, the company may developalocalfocusoraforeignidentitybuttheinitialchallengesitfacedingettingthereare bestrepresentedbyitsexportfocusedlocalfirmidentity.Thisisasubtlepointbutanimportant onenonetheless.Wewouldbrieflyintroduceeachofthesemodelsbelowanddiscussthemin moredetaillater.
The ExportFocused Local Firmis one founded by a predominantly Pakistanbased entrepreneurial team (that may or may not have been aided/encouraged by a group of expatriates),butwithanexplicitpurposeofexportingsoftwareproductsorservices.Majorityof thefirmsestablishedinpreDotComBubblebursterawithanexpressedpurposeofexporting servicesa name given to the dominant Indian model of doing offshore programming and
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codingforforeignclientswouldprobablyfallwithinthiscategory.Althoughtherearesome thathavetakentheproductsroute,theirnumbersarerelativelysmallerthanthosefocusingon exportofservices.Thereareconsiderablechallengesinworkingunderthisbusinessmodel,not onlywithregardstosettingupasoftwaredevelopmentoperationthatcoulddeliverthesortof qualityproductorservicedemandedbyasophisticatedforeigncustomerbutalsointermsof puttinginplaceacosteffectivemarketingfrontendinaforeignland.Somesalientexamplesof this type of business model in action are: ThreesixtyDegreez, Post Amazers, Advanced Communications,Makabu,Netsol,andAutosoftDynamicsetc.
TheExportFocusedForeign(Expatriate)Firmisonefoundedabroad(orjointly,inPakistan), by a predominantly foreign (usually an expatriate) entrepreneurial team, with an explicit purpose of using the Pakistanbased offshore development facility to deliver a product or service demanded by the foreign market. This type of business model has been adopted by servicesandproductfocusedcompaniesalike.Withinboththeservicesandproductsdomains, thistypeofbusinessmodelhasbeenmorevaluablethantheExportFocusedLocalFirmmodel, primarily because of the ability of this firms expatriate founders to capitalize on their own personalpresenceandnetworksinforeignlands.Thekeychallengeforthisbusinessmodelhas lesstodowithnotfindingdomainfocusorcustomersabroadwhichtheexpatriatefounders often have a very good grasp ofand more to do with successfully pulling off the task of setting up a development facility in Pakistan by finding appropriate talent, setting up work systems, and getting over the hill as far as offshoreonshore coordination is concerned. Some salient examples of this type of business model in action are: Elixir Technologies, Etilize Inc., Ultimus,MixIT,TechLogix,Prosol,andXavoretc.
The DomesticFocused Local Firmwith an exception of a few companies, is really one becauseofcircumstancesratherthanchoice.Moreoftenthannot,andlogicallyso,thedomestic focused local firm plans to export its products or services abroad and is merely using the domesticmarketasavehicletogainatrackrecordwithreallifecustomers.Whetherafirmisin this category by choice (Ill do domestic first, export later) or by circumstances (Since the export market doesnt seem very good right now, Ill survive by selling at home) the challenges are quite similar, namely, first, to do enough large projects fairly quickly in the local market to build a reputable portfolio of customers but more importantly, to develop a domainexpertise,andtomigrateeffectivelyfromaproducerofproducts/servicesforarather unsophisticateddomesticcustomertoamuchmoresophisticatedandqualityconsciousforeign customer.Themoresuccessfulofthesefirmshavealreadybeguntolookoverseas,primarilythe MiddleEasternregion,forapieceoftheexportmarketandhavebeenfairlysuccessfulatthat.
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Somesalientexamplesofthistypeofbusinessmodelinactionare:2BTechnologies,ZRG,TPS, Lumensoft,Yevolve,SI3,SoftechSystems,AppXS,andGenesisSolutionsetc.
The missing category of this taxonomy, namely, the DomesticFocused Foreign (Expatriate) Firmisalmostnonexistentforreasonshavingtodowiththesmallsizeandlackofmaturityof the local market. It does, however, find some expression in the relocation of Pakistani expatriatesbacktoPakistanwithadesiretosetup companiesthateitherservethelocalthe prime example being SI3 whose expressed purpose is to work on the domestic frontor the export market but who end up doing quite a fair bit of work in the domestic market as well. Insteadweinclude,asourfourthcategory,theDedicatedOffshoreDevelopmentCenter.This model, although somewhat of a variation of the ExportFocused Foreign (Expatriate) Firm is differentenough,intermsofsomeoftheorganizationalandstrategicissuesitfaces,towarrant aseparatetreatment.
DedicatedOffshoreDevelopmentCenteris,asthenamesuggests,afairlylimitedoffshore development operation of a foreign company. It is different from the ExportFocused Foreign (Expatriate)Firminthesensethatitisoftenanaddontoanalreadyexistingcompanywhose strategic and managerial processes and controls are quite wellestablished. It, therefore, does not get an equal say in the longterm vision and strategic direction of its parent. This is true atleastfromtheshorttomediumtermandmaychangedependingonhowtheparentwantsthe offshore development operation to evolve over the longer run and on what terms and conditionswasthePakistanisubsidiaryconceived.Thekeychallengesofthisbusinessmodel, therefore,alsodifferwithreferencetothetimeframeinquestion.
In the shorttomedium run, the challenge is to setup a facility that could deliver quality products/services in support of the productservice strategy of its foreign parent, to do it in a mannerthatthelocaloperationisinsyncwiththeforeignparentanditsclients,andtotransfer the necessary domain expertise and customer experience to the local developers. In the mediumtolongrun,however,asthelocaloperationmaturesandacquiresalifeofitsown,the keychallengethenistocontinuetoalignitsinterestsandrequirementswiththatoftheforeign parent. If not managed well, this may give rise to considerable management tension and employee discontent. While most companies established under such an arrangement in Pakistan have not yet reached the longerrun of their existence, some have, and one can clearlyseethemnavigatingthroughtheselaterstagechallenges.Somesalientexamplesofthis typeofbusinessmodelinactionare:MetaApps,ITIMAssociates,Clickmarks,TrivorSystems andStrategicSystemsInternationaletc.
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FIGUREIXGENERICBUSINESSMODELS& THEIRTRANSITIONSSCENARIOS
DOMESTICFOCUSED LOCALFIRM
ZRG TPS Lumensoft Yevolve 2B Technologies SI3 Softech Systems Genesis Solutions Alchemy Technologies AppXS Oratech Askari Info Systems Acrologix Comcept LMKR CARE
EXPORTFOCUSED LOCALFIRM
ThreeSixtyDegreez Post Amazers Advanced Comm. Netsol Makabu Autosoft Dynamics Sidaat Hyder Morshed Avanza Solutions GoNet Kalsoft Jinn Technologies Secure3 Networks Systems Ltd Progressive Systems Millennium Software Cressoft
EXPORTFOCUSED FOREIGNFIRM
Etilize Prosol Adamsoft Ultimus MixIT Techlogix Xavor Elixir Technologies
DEDICATED
DEVELOPMENTCENTER
ITIM Associates MetaApps Clickmarks Enabling Tech. (Quartics) Trivor Systems Strategic Systems Intl ESP Global Systems
TRANSITIONSKEY DIVERSIFICATION MATURITY,VALUEADD
M&AW/FOREIGNFIRM
SHIFTINGPRIORITIES ELEVATIONOFPAKOPS.
BUYOUTBYLOCALMGMT.
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Itisalsoimportanttomentionherethatnoneofthesecategoriesareasblackandwhiteasthey seem.Thereisconsiderablegrayareainbetweenandacompanymightshowcharacteristicsof morethanonetypeofgenericsoftwarebusinessmodel.Forexample,whetheracompanyisan ExportFocused Foreign Firm or a Dedicated Offshore Development Center depends on the specific details of the founding arrangement of the Pakistani and foreign directors. The Pakistaniversionoftheexportfocusedforeignfirmmightappearlikeadedicateddevelopment centeriftheformerendsupgettingintoastrictparentsubsidiaryrelationshipwithitsforeign counterpart. In case where that happens, it is likely that it would encounter the challenges identifiedforthelattercategoryofbusinesses.Onthecontrary,itisalsolikelythat,depending upon the nature of its relationship with its foreign parent, a dedicated development center wouldbegintolookmoreandmorelikeaexportfocusedforeignfirmandthusmaynotface the laterstage challenges alluded to above. In essence, it is not the organizational or legal arrangement between the parent and the subsidiary, but the more invisible and intangible relationshipsthatwoulddeterminethefinaloutcomefortheselocalforeignhybrids.
Similarly,anotherpossibilityisthatofonetypeoffirmtransitioningintoanothertypeduring itsownlifecycle.Themostcommonexamplesthatcometomindareadomesticfocusedlocal firms transitioning into exportfocused local firms or vice versa. We could also identify instances when exportfocused foreign firms had to turn to the domestic market for survival during harsh economic times in the US and European markets. Again, as a particular type of businessmodeltransitionsintoanother,partiallyorfully,temporarilyorpermanently,weare bound to see hybrids that would show characteristics of several of the business models identified above. It is not uncommon for an entrepreneurial venture to undergo a major transformationofitsoriginalbusinessmodelasconceivedinthefirstbusinessplanandwe see the evidence of that on the Pakistani software scene as well. Many companies that were formed during the peak of the dotcom euphoria with the sole purpose of capitalizing on the Internet/eCommerceboomhaveundergoneamajorreassessmentoftheirbusinessmodelsin thelightofthechangedrealitiesintheirtargetmarkets.
Wenowdiscusseachofthesemodelsandtheirstrategicandcompetitivedriversinsomedetail. While the narrative on each of the four generic software business models describes the key structural features and competitive drivers, strategic challenges and best practices specific to eachclassificationofcompanies,thereisalsoafairdegreeofcommonalityacrossthesegeneric businessmodels.We,therefore,useanumberingsystemforthestrategicchallenges(thirteenin all)andbestpractices(twentyinall)thatrunscontinuouslyacrossallgenericbusinessmodels. Another observer might differ with our placement of a particular strategic challenge and best
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practice under one specific business model and not the other. Readers seeking to thoroughly understandthestrategicchallengesfacedbyPakistanisoftwareindustryarehenceadvisedto readthroughallfourdescriptionsandtheirrespectivestrategicchallengesandmanagerialbest practicestogetabetterfeelofthelandscapeaseachcontainssomeelementsoverlappingwith others.
6.2TheExportFocusedLocalFirm(TheSystemsorNetsolModel)
The Export Focused Local Firm (defined above) is the most prevalent of all generic business modelsinoursampleoffirms.AsshowninFigureIX(above),itaccountsofaboutathird(32%) or 15 of the 47 firms in our sample. The key reason for the high degree of popularity of this model is the Millennium (Y2K) and DotCom Boom in major software export markets of the world, especially the United States, that resulted in lot of new firm creation activity in developing countries, like India and Pakistan. We also expect that an even greater number of software houses were created during the midtolate 1990s in response to the expectations of getting lucrative software development contracts from the United Statesmany of which ultimately failed after the US market for software went into a recession (starting early 2001) whichwasfurtherreinforcedbythe9/11TerroristsattacksintheUSlaterthatyear(Sept.2001).
Tobefair,however,notallthefirmsinthismodelwerecreatedsolelyinresponsetotheY2Kor theDotComboom.ManywerealreadyinbusinesswhentheY2KorDotCombubblehappened and were only influenced, to varying extents, by the bubble. Systems Pvt. Ltd, Netsol, Autosoft Dynamics, and Sidaat Hyder Morshed Associates (SHMA) are some of the examples of companies that preceded the DotCom bubble. Manyothers,(e.g.AvanzaSolutions, ThreesixtyDegreez, Kalsoft, and Millennium Software etc.) were createdattheheight(orwithaslight lag) of the DotCom bubble with plans to get into the software services outsourcing business. For manyofthesecompanies,thereality
TEXT BOX # 3: THESYSTEMSORNETSOLMODEL, INANUTSHELL Total # of Companies in Category: 16 Average Employment: 90 #/% of Foreign Subsidiaries: 12.5% % w/ Front-Office Abroad: 31% Exports : Domestic Market: 85:15% Product : Services Offerings: 28:72% Average Sales Growth (last year): 48% Average Employment Growth: 42% #/% of Companies with ISO/CMM: 44% Programmer-to-PM Ratio: 5.03 QA Employees as % of Employment: 9.5% QA Function % of Payroll: 10.3% Top-3 Policy Challenges: Image (43%), Quality of Manpower (31%), Venture Capital (31%)
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turned out to be quite different from the expectations. Several others, (e.g. Post Amazers, Secure3Networksetc.)havejumpedintothefraywellaftertheDotComBubbleburstandhave business plans incorporating the changed geopolitical environment at home and business environmentabroad.
We have named this generic business model in recognition of two of the most prominent companiesinthiscategory,namely,SystemsLtdtheoldestsoftwareoperationinPakistan and Netsola CMMLevel4 company that is currently perceived to be one of the most successfulcompaniesinthiscategory.Thisnamingconventionispurelyformemorizationand referencepurposesanddoesnotaimtounderemphasizethecontributionsofothercompanies mentioned (and those not mentioned) in this category. Text Box # 3 presents some salient statistics on organizationalmarket characteristics of companies in our sample. Text Box # 4 presents a list of companies classified in this generic business model along with their key productservicesofferingsanddomainexpertise. Regardless of the exact timeframe at which these companies might have entered the market, theirmostimportantanddefiningfeatureisthelocalpresenceoftheirfoundersandtheexport orientation of their products/ services.Thiscombinationbringsa number of unique and important challenges to this type of a firm. These are illustrated in Text Box # 5. The most important of these problems have to do with the difficulty in marketing abroad, with or without a marketing presence in the companys foreign markets. Other related challenges, arising out of and accentuated by the distance/separation between the development and marketing operations, include: understanding andmasteringaforeigncustomers domain, dealing with the image problem, penetrating the Indian monopoly in the foreign markets, answering the quality question, etc. We discuss each of
TEXT BOX # 4: LIST OF COMPANIES IN SAMPLE & THEIR DOMAIN EXPERTISE / OFFERINGS:
Netsol Financial, Leasing Solutions Systems Ltd.-- Mortgage, System Integration Avanza SolutionsBanking, CRM, ATM Solutions Sidaat Hyder Morshed Financials, ERP Solutions Kalsoft Financials-Accounting, ERP Solutions Millennium Software Y2K, HR, ERP Solutions Progressive e-Commerce, CRM, Accounting Jinn Technologies Multi-media, Animation Secure3Networks VPN Security (Startup) GoNet Call Center Automation, Healthcare Solutions Post Amazers Animation & Post-Production Advanced Communications VoIP Billing Autosoft Dynamics Banking Automation Makabu Outsourced NPD / Software Development ThreeSixtyDegreez ERP, Banking Solutions
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thesechallengesinsomedetail(below)andidentifybestpracticesadoptedbyfirmsthathave beenrelativelysuccessfulinaddressingthese.
Strategic Challenge # 1: Difficulties of Customer Acquisition in a Foreign MarketOf the several major challenges faced by this class of companies, the most important one has been, beyond doubt, the difficulties of the customer acquisition process in a foreign market. The relativelymoresuccessfulofthecompaniesinthiscategoryseemedtohavedonebetteronthis count more so by design, than by conscious efforts of the companys leadership. There are severalexceptions,however.Majorityofthebetterperformingcompaniesinthiscategorywere foundedbyreturningexpatriatesi.e.individuals(orentrepreneurialteams)whoeitherhad510 years of experience living abroad and hence had connections or firsthand knowledge of the targetmarkets.
Wherever these companies were founded by people without a firsthand experience of their target markets, we have generally found that the entrepreneurs expectations had been rather misplacedorjusttoosimplistic,especiallyonthecustomeracquisitionfront.Consequently,a fairly common regularity among the notsogood performers in this class of companies is the inabilityoftheirfounderstocorrectlyestimatethedifficultyinmarketingproducts/servicestoa foreignclient.TheDotComeuphoriaandthethencommonperceptionthatexportingsoftware wastheeasiestofthebusinessestogetintoandalloneneededtodowastogetadesktopPC andaninternetconnectionmayhaveencouragedalotofnaveprofessionalstoventureintothis domain.Thetruth,however,wasfarfromthatsimplistic.
Indeed,aconnectionorintimacywiththetargetedmarketseemstohavepaidoffquitewellfor atleast some of the ventures in this category. The more successful of these businesses have leveraged the foreign networks and contacts of their founders to get a footinthedoor or even, at times, the first customer. Most of our interviewees believed that their first foreign customerhasalmostalwayscomethroughapriorcontactoratrustedreferralratherthancold calling, advertising, or visiting trade conferences. And it was only after one begins working with foreign clients and developing longterm trusted relationships and a customer portfolio that other marketing approaches begin to work. This observation is also in line with our statistical findings where an overwhelming majority of respondents rate preestablished networks/contacts as far more successful than any other marketing approach (with the other two highly rated approaches, namely, wordofmouth client referrals and coldcalling only becoming a possibility after one has acquired the initial few contracts). The importance of
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networks is even more critical in some very hightrust and exclusive domains like banking solutions,onlinetradingsystemsetc. This gives rise to a managerial best practice for creating and sustaining successful software operationsinPakistan.Namely:
ManagerialBestPractice#1(MBP1)Todevelopeffectiveexportfocusedoperations, to the extent possible, seek a strong expatriate connection (e.g. a founder or cofounder either based abroad or operating equally from home and abroad) and use his/her personal connectionsandnetworkstogetafootinthedoororevenacquirefirstcustomers.
Strategic Challenge # 2: Setting Up a Marketing Operation in a Foreign MarketA problem somewhat related to acquiring the first customer is scaling up the marketing operation to handlealargernumberofpotentialcustomers andcontinuallymanagingtheinteractionwith them. Companies, understanding the limitations of an interaction at a distance, have tried to setup onshore marketing operations to achieve greater penetration and acceptability in their target markets. Opening frontoffices abroad (especially in America) has thus been a fairly commontacticforthosewhocanaffordsuchaproposition.Havingafrontofficeabroadisalso seen as a means to counter the negative perception of having to deal with an unknown and neverseenforeignoutfit,especiallyinthehighlyskepticalpost9/11scenario. Settingupaforeignmarketingfrontoffice,however,isanexpensiveproposition,evenforthe relatively better endowed software operations in Pakistan. The general consensus among our interviewees was that a very small (23 person) operation can cost as much as half a million dollars a year. One can perhaps defray some of this cost by finding an appropriate Pakistani alreadysettledabroadtodothejobbutsucharrangementsaresometimesperceivedtobenotas effective,fromanimagestandpoint,asemployingabunchofgora(s)forthesamejob.
One of the companies that we surveyed took the former route at the height of the DotCom bubblebyrelocatingoneofitsfounderstoNorthAmerica,butsawitseffortsgoinginvainas the doors of opportunities closed soon after the bubble burst. It has since then lowered its expectations from its foreign operation and shifted its business priorities to focus on the domesticmarket.Thisisnottosaythatthiscantbedone,orhasnotbeendonesuccessfully, but only that openingafront office abroad is not an automatic remedy for this challenge and that, given the costs involved, must be undertaken after a good amount of duediligence on possible alternatives. We expect the larger and more resourceful of the companies to still continue to try using this optionalbeit with no guarantees of successbut the smaller companiesmayhavebettermorecosteffective(orlowerrisk)alternativestoconsider.
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One such alternative is the use of alliances and marketing partnerships (arrangements) with foreign companies whose business models are deemed synergistic with the Pakistani counterpart. If properly undertaken, there is tremendous potential in this kind of an arrangement, and we recommend that more companies must consider this as one of the few alternativesonthetable.Pakistanicompanieshavetriedmarketingalliancesandpartnerships, primarilyinthecontextofMiddle Easternmarketswheretheyaremoreofanecessitythana conscious strategy. We must look at the possibility of doing so in North American and EuropeanMarketsaswell.Atleastafewofthecompaniesthatwestudied,hadrecentlypenned marketing arrangements with foreign affiliates that looked quite lucrative and promised to greatlyenhancethemarketingreachofthePakistanientity.Manyotherswereactivelyseeking suchanarrangement.
TEXT BOX # 5: KEY STRATEGIC CHALLENGES & MANAGERIAL BEST PRACTICES-I

Strategic Challenge # 1: Difficulties of the Customer Acquisition in a Foreign MarketThere are many manifestations of this problem, namely, acquiring the first customer and building a customer portfolio etc. MBP1Using personal connections and networks of expatriates (returning, or based abroad) to get a foot-in-the-door or even acquire first customers. Strategic Challenge # 2: Setting up a Foreign Market PresenceCompanies seeking to develop and intimate connection with the customer have tried various approaches e.g. opening front offices abroad, pursuing partnership arrangements and alliances etc. MBP2Actively pursue alliances with synergistic entities and off-shoring and marketing relationships with past clients MBP3Engage with software multinationals (e.g. Microsoft, IBM, SAP, NCR, Oracle etc.) in development and marketing arrangements Strategic Challenge #3: Understanding Foreign Domains & ContextsThis problem arises in multiple contexts, namely, the idea-focused company and the generic provider of off-shoring services MBP4 Understand the importance of developing a domain expertise and maintaining a focus. Develop a domain expertise by learning to take the big-picture view of the clients business operations and look for opportunities to sell business rather than a technology solution. Get domain experts involved, if need be. Avoid the temptation of on-today-offtomorrow type of contracts. Other Challenges (discussed in detail elsewhere): The image problem, scaling the operation to deal with a larger customer base etc.
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Seekingtherightpartnerandinkingtherightarrangement,howeverremainsthekeytosuccess inthismodeofoperation.Oneofthefoundersaverysuccessfullocalbrandtalkedabouta situationwhereapotentialforeignpartnerwantedtosellthecompanysproductunderitsown namea prospect that did not look too appealing to the Pakistani founder. Another of the foundersthatwespoketojustifiedthearrangementthathegotintointhefollowingwords:I madeasmanyas10tripstotheMiddleEastlastyear,andfinallyfoundapartnerwithwhomIcoulddo businesswith.Althoughthesetripscostmealotoftimeandmoney,Ihaverecoveredallmyinvestment inasingleyearsincemypartnerhasallowedmetocolocateandhostmyMiddleEasternoperationsin hisownpremises,freeofcost.
Anotherpossibilityistheuseofonesownclientstoactivelypursueoffshoringandmarketing arrangements. One of the software houses that we looked at prides itself for caring for its customers. We would do the first projects atcost or even belowcost, just to allow the customer to assess ourusefulness anddependability.Once theprojectisdone,wewoulddefinitelyletthecustomer knowwhatallwecandoandexpressourinterestinbecomingatrustedpartnerforanyoutsourcing/off shoringworkthattheymightwanttosendourwayoriftheywouldliketomarketourproductsintheir region.Manyatimesyouwouldfindasatisfiedcustomerwillingtotalkaboutsucharrangements,says thebusinessdevelopmentmanagerofthislocaloperation.
Such favorable arrangementsmust be actively sought and, when possible, definitely pursued. Thekeyproblemhereisthatsucharrangementsdonotenjoythesamekindofvisibility,atthe industry level, as opening up a frontoffice abroad, and thus for lack of awareness or fear of misadventure, many entrepreneurs fail to think about and/or capitalize on them. It is also important to focus the interactions and discussions of PSEB/PASHAs trade delegations towardstryingtofacilitatePakistaniandforeigncompaniestoworktowardsthesekindsofan outcomesratherthanmerelytryingtomakeapointsale.
Another possible way to forge a marketing alliance is to align oneself with a large developer, namely, likes of Microsoft, Intel, SAP, Oracle, NCR, IBM etc. and benefit from their clout and networkintheregionalandinternationalmarkets.Manyhavetriedtodothisandafairnumber of our interviewees had positive things to say about these arrangements. Using the local subsidiariesofthesebigforeignbrandsthathaveovertherecentpastbecomemoreactivein supporting the development of the local software industry by providing development opportunities, free or subsidized training, product promotion, and/or cobranding is a startingpointofsuchastrategy.
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OneCEOsharedaninterestinginsightwithusinthisregard,namely,toseekadirectaffiliation withoneofthedivisionsoftheselargecorporationsratherthanthelocalsubsidiaries.Hewasof theviewthatthelocalsubsidiarieswerereallyverysmallinbusinesssizeandimportancein theoverallschemeofthingsandhenceitwasunlikelythatanythingbigwouldcomehisway ifhedealtwiththem.Hisapproachwastogetafootinthedoorofamajordivisionofoneof these companies in its own homecountry, do a small project, and gradually build upon that relationship. When possible, such an approach can bring ones company into play for major contractsontheinnovativeendofthemarket.Whilewedidnotfindenoughcompaniesdoing this successfully enough to consider it a managerial best practices but this is certainly an approachinnovativeenoughtowarrantsomecarefulattention.
Based upon their widespread use among relatively successful software operations and perceivedsuccessfulness,twoclearmanagerialbestpracticesemergefromtheabove.Namely:
Managerial Best Practice #2 (MBP2) Enter into partnering agreements and marketingallianceswithentitieshavingsynergisticgoalsandobjectives,especially,when thepartnercontributesmarketknowledgeandreachofthetargetmarkettotherelationship. Imaginativepartneringagreements,executedtactfully,cangreatlydiminishthedifficulties facedbyacashconstrainedstartupattemptingtobreakintoaforeignmarket.
ManagerialBestPractice#3(MBP3)Engageandpartner,bothlocallyandglobally, with software/IT multinationals (e.g. IBM, SAP, Microsoft, Oracle, Intel etc.) on software/applications development, marketing, and cobranding opportunities. These arrangementsallowastartupfirmtoleveragethefinancialresources,domainknowledge, andmarketingreachofthesebehemothswithoutspendingcomparableresources.
Strategic Challenge # 3: Understanding Foreign Domains and ContextsAnother major challengehasbeenthatoffirstunderstandingonescustomersdomainandthendevelopinga domainspecializationthatcouldprovidethefirmwithitsdifferentiationinacutthroatforeign market.Onthiscountaswell,therecordofthisclassofPakistanicompanieshasbeenmixed,at best. While some star performers in this class of companies have done fairly well at quickly understanding and mastering a foreign domain, others have failed to so. Some of the most noteworthy examples of the more successful companies in this class are Systems Ltd. and Netsol. The former specializes in software for mortgage industry in the US and has an entire suiteofproductsforthatindustry.Thecompanysexpertiseinthisdomainissuchthatsixof thetop10USmortgagecompaniesareonitsclientslist.Thelatterspecializesinsoftwarefor
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the leasing industry. One of its star clients is DaimlerChrysler that uses Netsols leasing software to manage its autoleasing operation in several countries in Asia and Pacific. More recently, however, in recognition of Netsols expertise in this domain, DaimlerChrysler has decided to deepen its commitment to Netsol by agreeing to use its software for the entire WesternEuroperegion.
Here,Pakistanicompanieshavefacedtwotypesofissues,dependingontheexactfocusoftheir business. One the one hand is the ideacentric company that is trying to break into a foreign market of a particular niche and suffers from the typical issues of trying to guess what the customerwants.Inmajorityofthecaseshere,thefirmalreadyhasaspecificdomain(expertise) in mind and is only looking to finetune the idea to make the sale to its targeted customers. Althoughdauntingasitis,thisisarelativelycommonchallengeforallstartupsandhenceeasy relatively straightforward. The only complicating factor here is whether and how much does thedistancefromthecustomermakeitmoredifficultforthefirmtofeelthecustomerspulse and make the necessary modifications to the idea to make the sale. The founders prior experiencewiththedomainisoftremendoushelpindealingwiththebasicunderstandingand finetuningofthedomain,ashasbeenthecasewithAutosoftDynamics(inBankingsolutions) andPostAmazers(inAnimation&postproductionservices).
Ontheothersideofthespectrumistheservicecentriccompanythatisformedwiththeexplicit purposetoundertakecontractsentailingoutsourcingofprogrammingorcodingservices.These types of operations are generally conceived as commodity operations designed to make money onthe differential in labor rates between the local and foreignmarkets. While there is nothinginherentlywrongwiththeaboveargument,thetighteningandrecessionintheexport markets(especiallyUS/UK/EU)hasstiffenedthecompetitionforsuchcontractsaswell.Domain expertise has thus become quite importantalmost a differentiatorin what is in the post DotCom era a commodity market. Increasingly, US/EU outsourcers are looking for firms experienced in doing a particular type of outsourcing work (e.g. in hospital management or medical systems, financial software etc.) rather than a software outsorucing outfit per se. Consequently these types of businesses have also found it necessary to develop a domain expertise to differentiate themselves in the marketplace. That differentiation has been hard to comebyinanenvironmentwherefirmshavebeentakingwhateverprojecttheycouldgetinan efforttosurvive.Whilesomeofthesefirmshavebeenabletodevelopsomedomainexpertise althoughquiteaweakoneatthattheprocesshasbeenratherslowandpainfulformanyof thoseinvolved.
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Forthosethathavedonewellinthiscategory,theinitialcontractsorbreakthroughshavebeen the deciding factor. Examples of companies like Netsol and Systems (cited above) are illustrativeofthisdynamic.Evenforthesefirms,andotherslikethese,ithastakenquiteabitof insightandfarsightednessonthepartofthefounders,tomaintaintheirfocus,makethebestout of what they got, and not be tempted by the ontodayofftomorrow type of opportunities. Somehavedoneitbetterthanothersandmanyanentrepreneurhavefumbledontheway.This underscores the importance of maintaining ones focus and having a solid business planan alterable but solid business panto follow as one navigates through this critical challenge. Many nave entrepreneurs have been found offguard in this respect. Although the development of domain expertise has been a critical differentiator between successful and relativelyunsuccessfulcompanies,acaveatisinorder.TheCEOofoneofthemoresuccessful softwareoperationsunderscoredthevalueofmuddlingthroughforawhilebeforedecidingon a particular domain focus. It is difficult to imagine if we had survived this long had we decided to focusonaspecificdomainupfront.Itisimportantnottoforceyourselfintoatightcornerbydeclining work that help you survive in a tough marketplace and, perhaps, lets you experiment with several domainsbeforeyoucanpickyourparticularsweetspot.Domainisimportantbutrushingintoonetoo soonmightbedisastrous.Youoftenonlygetoncechanceatgettingitright.
We definitely do concur with this executive. Ultimately, developing a successful software operation is about making the right choices at the right time and developing the domain expertise is just one of the several challenges an entrepreneurial team has to master. Making thesechoicesisclearlyanart,notascience,thatcanonlybelearntthroughexperience.Every entrepreneurial team finds itself in a slightly different situation from every other entrepreneurial team and hence there is no generalizable solution to the problem. What is important, however, is the realization that developing a domain expertise is important. This gives rise to another managerial best practice for creating and sustaining successful software operationsinPakistan,namely:
Managerial Best Practice #4 (MBP4)Understand the importance of developing a domain expertise and maintaining a focus. Develop a domain expertise by learning to take the big-picture view of the clients business operations and look for opportunities to sell business rather than a technology solution. Get domain experts involved, if need be. Avoid the temptation of on-today-off-tomorrow type of contracts.
Inadditiontothechallengesatthemarketendofthebusinessplan(alreadydiscussedabove) these companies also faced severalif not equally dauntingproblems at home. The most importantofthesearehiringqualitytalent,trainingthemonitsspecifictoolsanddomains,and
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developing the flexibility to rampup or scaledown the operation according to the business conditionsprevailinginthetargetmarkets.Eachoftheseisachallengeinitsownright,butnot uniquetothefirmsinthiscategoryofbusinessmodelsandwewilldiscusstheminsomewhat detail in other contexts. We would, however, close the discussion on the exportfocused local firm model by briefly highlighting the importance of scale and scalability in the context of servicesorientedbusinessesinthiscategory.Availabilityofqualityhumanresourcesisoneof themajorissuesconfrontingthelocalindustry.ManyCEOsconfidedwithusthatevenifthey hadbusinessinhand,itwouldbeverydifficulttoscaleuptheiroperationsbyonlyasfewas fifty(50)additionalpeoplewithinashortspanoftime.Thesedifficultiesinscalabilitymightbe affectingtheservicesfocusedbusinessesmuchmorethantheywouldaffectaproductfocused operationthusprovidingfoodforthoughtfortheindustryleaders.
6.3TheDomesticFocusedLocalFirm(TheTPSorLMKRModel)
The DomesticFocused Local Firm (defined above) is the second of the two most prevalent businessmodelsinthePakistanisoftwaresector,comprisinganotherthird(36%)or17ofthe47 companiessurveyedforthepurposeofthisstudy.Wehavenamedthisgenericcategoryafter themostprominentofthecompaniesinthisclassofbusinessmodels,namely,TPSandLMKR. TransactionProcessingSystems(orTPS)issoftwareoperationinvolvedinfinancialtransactions processing systems (e.g. ATMs etc.). TPSa hybrid softwarehardware operationhas developed and maintained the countrys largest multibank ATM system. It is a hybrid (softwarehardware) operation. LMKR, on the other hand, touts its strength from its GIS solutions,especiallyforthepetroleumindustry.Itmaintainsthecountrysonlysuchsystemfor the Government of Pakistan. LMKRsince its acquisition by a US companyis focusing on diversifyingitsofferingstobecomeafullspectrumITservicescompanythatisalsolookingto expand its export offerings. While LMKR has adopted a typical profile of a domesticfocused operation, TPS was originally conceived as an exportfocused company but quickly found success on the domestic front. As before, this nomenclature is for easy memorization and recognition only and does not mean to undermine the success of other companies mentioned (andthosenotmentioned)inthiscategory.TextBox#56presentskeystatisticalfeaturesofthis genericclass,asawhole.TextBox#7presentsalistofcompanies,fromoursample,thatfallin thiscategoryofsoftwarebusinessmodels.
Asstatedearlier,afairlysignificantproportionofthecompaniesinthedomesticfocusedlocal firmcategoryaretherenotasmuchbychoiceasduetocircumstances.Duringourdiscussions with CEOs of these companies, we hardly found an example where there was no desire to
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engageintheexportmarkets.Thequestionwasnotoneofwhetherornotonewouldexportbut rather when would it be possible and costeffective to do. A large number of the companies identifiedinthiscategory(seeTextBox#7)arealreadyengagedinsomekindofexportactivity or are contemplating doing so in the future. Many of these and several others, however, are currentlyfocusingonthelocalmarketandplanningtomakeagradualtransitionintotheexport domain.Thisapproachtotargetmarkethasitsrootsinthecollectiveexperienceoftheindustry.
In the postDotCom Bubble scenario, many entrepreneurs who played in the highstakes exports game and totally shifted their core focus to greener pastures abroad got their fingers burnt as result. Consequently, there is a growing realization that a permanent and steady stream of domestic revenues, if
TEXT BOX # 6: THE TPS OR LMKR MODEL, IN A NUTSHELL
Total # of Companies in Category: 14 Average Employment: 89 only to sustain operations in the #/% of Foreign Subsidiaries: 28.5% bad times, is important for the % with Front-Office Abroad: 78% companies longterm viability. Exports: Domestic Market: 32:68% Many narrated the oftencited Product: Services Offerings: 35:65% example of Cressoftone of Average Sales Growth (last year): 74% industrys icon of the yester Average Employment Growth: 29% 50% yearsas one that left its #/% of Companies with ISO/CMM: 7.89 domestic base and went all out Programmer-to-PM Ratio: 14% to the export market and in the QA Employees as % of Employment: 15.6% process was all but eliminated. QA Function % of Payroll: Top-3 Policy Challenges: Image (64%), Govt. Learning from this example, not Procurement (35%), Telecom cost (28%)
only are many new export focusedsoftwareoperationsnowlookinwardstoestablishadomesticpresencebeforesetting shopabroadbutalsomanyothers,havingadoptedthedomesticfirst,exportlaterphilosophy for reasons of necessity or strategy, are focusing on strengthening the local operation as an insuranceagainstthefluctuationsoftheinternationalsoftwaremarket.
Amongthecompaniesbeingestablishedinthiscategory,weseeamuchgreaterdomainfocus than the earlier category (discussed above). The primary reasons for this is that, unlike the exportssegment,thereislittleornolureofpuresoftwareprogramming/codingserviceson the domestic front. Thus everyone must be in the business to solve a fairly welldefined problemornotbeinthebusinessatall.Thishasledtoamuchfasteraccumulationofdomain knowledge and maturity and perhaps to some degree better and more focused business
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strategiestostartwithinthefirstplace.Thisdoesnot,however,meanthatthisgenericbusiness modelhasbeenwithoutitsfairshareofchallengesandproblems. StrategicChallenge#4:OperatinginanUnderDevelopedDomesticMarketLiketheexport focusedlocalfirmmodel,weseeaherdmentalityinthedomesticfocusedlocalfirmsegmentas wellalbeit one of a different kind. One of key challenges of firms trying to create a viable software business on the domestic front has been that of avoiding the tendency toreinventthewheel.Yet,froma practical standpoint, this has beena struggle for reasons having to do withthelowerlevelofdevelopment of the market and lack of demand for highend innovative products etc. It is difficult to conceive of the domesticfocused product when local the software level of firmtryingtodevelopacuttingedge automation in the local industry makes it impossible to sell such a product. Taking the cue from the marketslevelofdevelopment,andaperceivedneedforautomationofindustryandbusiness houses, a large number of software companies have ventured into the ERP segment of the markettrying,inessence,tocreatethemuchtoutedPoorMansERP.Somehavesucceeded butmanymorehavefailedinthisendeavor.
TEXT BOX # 7: LIST OF COMPANIES IN SAMPLE & THEIR DOMAIN EXPERTISE / OFFERINGS: ZRG Call Center & Telephony Solutions TPS Banking and Switching Solutions Lumensoft ERP & Inventory Systems Yevolve Software for Handhelds in Transport/SCM 2B Technologies Call Center Solutions SI3 System Integration & Back-Office Outsourcing Softech Systems Financial & Trading Systems Genesis Solutions ATMs, Info &Vending Kiosks Alchemy Technologies Risk-Mgmt Solutions AppXS Financial & Trading Systems Oratech Oracle-based Applications Askari Info Systems ERP, Financials-Accounting Acrologix ERP, Archiving, foreign-language OCR Comcept Communications Systems LMKR Large DBs, GIS, Petrochemicals etc. CARETelecom Eqpt., ASICs, EDA Tools etc.
The problem has been so endemic that almost every mediumtolarge name on the domestic softwaresidehasanERPsystem,ageneralledgerapplication,abillingoranHRsolutioninits productsshowcase.Yet,veryfewofthemhavebeenabletosuccessfullysellthesametoeven recoverafractionoftheirinvestmentonitsdevelopment.Asoneofourintervieweespointed out, there are no high profile success stories of ERP implementations in Pakistan. An even smaller number of firms have really been able to use this products showcase inmeeting their statedobjectiveofmigratingtotheexportmarkets.Amongthosethathavebeenabletodoso,
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MiddleEasthasbeentheonlypossibleexportdestination.Thus,thedreamofdomesticfirst, exportlaterhasremainedunrealizedsofarinanybigway.Wewouldliketoqualifytheabove observation with a caveat, however. This is by no means a wholesale rejection of business modelsorcompaniesinthebusinesstodevelopERPsbutmerelyastatementoffactaboutthe way things have worked out for majority of those who ventured along this road. There are exceptions, however. Algorithm Consultinga company engaged in developing and implementingERPsystemsforthetextileindustryisonesuchexample.Whatwearetryingto emphasizehereissomethingfarsubtlethananadviceagainstventuringintocreatinganERP. Weareessentiallyagainsthavingunrealisticexpectationsfromonesventure.Ifonetakesonthe task of creating a market one must realistically gauge the resources and timehorizons requiredtodosoandplanaccordingly.
There are many reasons for the lackluster performance of the domesticfocused software industrynot all of them are of their own doing. The general lack of awareness and developmentontheuser/buyersideofthelocalsoftwaremarketisawellknownfact.Severalof our interviewees talked about the difficulties in selling to local industrialist or owner of a business housethe muchmaligned seth, so to speak. One of our interviewees complained abouttheattitudeofthesethinthefollowingway:theindustrialistorthebusinesshouseowner thatwearedealingwithwouldspendtwicetheamountofmoneyongettingtilesforhisofficeandten timestheamountofmoneyonhiscarbutwhenIquotehimapriceofhalfamillionrupeesforanERP applicationthatwouldsavehimatleastasmuchmoneyeveryyear,hewouldsitonit,tossandturn,and never come around to saying yes. This seemingly myopic attitude of the local industrialist or business house owner is a common feature of the Pakistani societyalthough it is further accentuatedinthecontextofthesaleofanintangibleproductlikesoftware.
There is, however, some good news on the userside of the equation. The next generation of industryandbusinessleadershastaken,orisintheprocessoftaking,controlofthecountrys businessandindustrialempires.ThisprogressivesethasonesoftwareCEOcallsthemis the son/daughter of the seth and is mostly educated abroad. This new breed of business leadership, many believe, is much more aware and receptive to new technologies or value enhancingmodernization.Inthecomingyears,themajorchallengewouldbetobridgethegap between the much improved and business savvy software entrepreneur and the much improvedandtechnologysavvybusinessleader.
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TEXT BOX # 8: KEY STRATEGIC CHALLENGES & MANAGERIAL BEST PRACTICES-II

Strategic Challenge # 4: Operating in an Under-developed Domestic Market There are many manifestations, namely, the psychological price barrier, lack of user awareness, lack of business MBP5Focus on the better-developed segments of the market. Understand the requirements and difficulties in creating a market single-handedly and plan accordingly. MBP6Sell a business-solution, rather than a technology. Price innovatively. Strategic Challenge #5: Getting Access to CapitalSoftware industry in Pakistan greatly suffers from lack of capital at the venture initiation, expansion, and working capital stages: MBP7Find a strategic first customer who is willing to fund (a part of) the startup and is willing and patient enough to transfer domain knowledge and let you experiment. MBP8Use the financial clout, domain knowledge, and regional network of locally operative multi-nationals (MNCs) to fund startup. Strategic Challenge # 6: Have a Business Plan and a Strategic/Domain FocusMany of the domestic focused software companies have been formed on a herd mentality rather than a clear focus: MBP9Understand where you need help (e.g. management, marketing, institutionbuilding, legal, accounting) and seek it. Remember: a minority stake in a larger (more successful) venture is worth more than majority stake in a smaller (less successful) one. Other Challenges (discussed in detail elsewhere): Migrating from a domestic to an exports company, developing trust in relationships, delivering quality products and services etc. Some part of the blame must also lie with the software entrepreneur who has often failed to really make a convincing enough business case for the modernization of the industrial and businesshouses.WeaskedseveralofoutintervieweesiftheyhadevertriedtomakeanROI based case for implementation of ERP or automation systems. Did they ever see one being made in the industry? Did anybody they know of talk about flexible pricing strategies (e.g. gainsharingetc.)?Didpeopleconsistentlytrytosellthesolutionofabusinessproblemrather than a technology with a fancysounding name? We did not get a lot of examplesand certainly none that could rise to a level of prominence. There is definitely a need for greater sophistication in the way technology people think about selling. One entrepreneur that we talkedtoafterhavingspenttwolongyearsstrugglingtogetabreakforhisembeddedsystems companyacknowledgedthathehadthoughtthatsellingthetechnologyonceitismadewont besuchabigdeal.Henowbelievesthatthemarketingpartisasmuchimportanttothesuccess ofasoftwarecompanyasthetechnologyitself.Thisisarealitythathastakenalotoftimeto sinkinwiththepredominantlytechnicallytrainedPakistansoftwareentrepreneur.
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Anothermajorinhibitor,besidesthelackofawarenessonthedomesticfronthasbeenalackof general economic growth in various sectors of the economy. The prime example of how this might have affected the fortune of the local software firm is the financial and telecommunicationssector.SincetheDotComBubbleburstandthe9/11,Banking/Financeand Telecommunication sectors are the only ones that have experienced major growth in the countrys economy. Manufacturing and industry has been rather depressed, and new investment in industrialization, with the exception of some in textiles, has been minimal. Consequently, software companies associated with financial and telecom sectors have done muchbetterthantherestoftheindustry.
In fact there is a fairly strong positive correlation between revenue growth of software companiesandtheirinvolvementinfinancialortelecomindustriesandanegativecorrelationif theyareinvolvedintheERPbusiness.This,onceagain,issomethingbeyondthecontrolofthe softwareindustryalonewhattotalkofasingleresourceconstrainedsoftwarefirm.Manyan entrepreneurhastakenonthechallengeofcreatingademandfortheirproductsandservices andseriouslyunderestimatedthedifficultyindoingso.Mostentrepreneursthatwetalkedto, especially those dealing with subsectors that suffered from depressed demand for software, believed in the governments ability, as a regulator or a facilitator, to create demand in the depressedsectorsoftheeconomyasameanstojumpstartgrowth.Wewilladdressthisissuein somedetailinthepublicpolicysegmentofthisreport.
The above discussions provides us with two managerial practices adopted by the relatively moresuccessfulcompaniesandthusmaybedescribedasmanagerialbestpractices.Theseare:
ManagerialBestPractice#5(MBP5) Building successful businesses is as much about doing the unthinkable as it is about identifying opportunities ready to be exploited and executing upon them. Focus on the untapped opportunities in the better-developed or fastemerging segments of the market. When creating a market, understand the requirements and difficulties of doing so single-handedly and plan accordingly.
Managerial Best Practice #6 (MBP6) Sell a business-solution, rather than a technology. Look at your (potential) clients business processes and think of ways in which your product may make a difference to his/her bottom-line. Make an ROI-based argument for the sale and price innovatively. StrategicChallenge#5:AccesstoRisk,Working,andExpansionCapitalOnecriticalissuefor allsoftwarestartupsbutanacuteoneforthedomesticfocusedlocalfirmsisthatofaccessto riskorevenexpansioncapital.Thesoftwareindustryisespeciallydisadvantagedinthisrespect
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becauseofthestructureandthenatureofitsbusinessnamely,amajorchunkofitsassetsare intangible(e.g.itsemployees,andsoftwareetc.)andhencedifficulttovaluateorevenliquidate, ifneeded.Thisessentiallyclosesthedoorsoftraditionalcollateralbasedlendingchannelstothe softwareindustry.
The alternative approach, namely, risk/venture capital is a relatively nascent experiment in Pakistan and would take sometime, and a few big successes, before both investors and entrepreneurs could become used to it as a mainstream financing instrument for early stage startups. This leaves the software industry with very few alternative sources to access capital from. In the days prior to and during the DotCom Bubble, one channel of capital sometimes accessibletosoftwareentrepreneurswasinvestmentbylargebusinesshouses.However,after thehighprofilefailuresofseveraloftheseventures,namely,Cressoft,AtlasSoftwareetc.that toohasbeenseverelyrestricted.Whilethereasonsforthesefailuresarestillundocumented,the fact remains that only a handful of business houses have any significant investments in IT/softwareoperationstoday.ThesalientonesbeingKalsoftandAskariInformationSystems.
Foundersequity(bothcashandkind)andfriendsandfamilysfinancialsupporthavelargely remained as the key vehicles for funding of domesticfocused software ventures. This has sometimes,thoughnotalways,putalotofentrepreneursinafairlytightsituation.Manyhave abandonedproductdevelopmentactivitiesmidway,andstillothershavebeenforcedtotakeon projectsthathaveresultedinthedilutionandlossofcompanysfocus.Whileonthehand,one canarguethatrestrictedaccesstocapitalmighthaveresultedinanaturalselectionofthebest ideas in the market, stricter financial discipline in the industry, and in keeping one focused towardsmakingmoney.Ontheotherhand,however,thereisapossibilitythatsome(orquitea few) promising ideas never saw the light of the day primarily because of the entrepreneurs inabilityto sellittoafinancier.Thisalsomakesprominentthepeoplesandmarketingskill aspectofbeingasoftwareentrepreneuratraitthatmaynotnecessarilybeinabundanceinthe Pakistanisoftwareentrepreneurs.
Consequently,thedomesticfocusedsoftwarefirms,especiallythosethathavenothadthegood fortunetoattractoneofthefewlocallyavailablesourcesofinvestmentfrombusinesshousesor venturecapital,haveeitheradoptedapathoforganicgrowthorhavebecomeunsustainable and diversified into (unrelated) areas. Many have gone out of business. One of the most commonstrategies,evenfortodaysproductorientedbusinesses,hasbeentostartasaprojects based company and gradually move your way towards a generic product. This strategy has worked especially well in places where the final product has been innovative enough that a
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potentialbuyerwaswillingtopayforallorpartoftheproductdevelopmentandlearningcost. Prominentexamplescanbecitedfromareasofbankingautomation(ATMsetc.)andfinancial tradingsystemsetc.Heretoo,however,somecompanieshavebeenabletotransitionwellfrom aprojecttoaproductscompanywhileothershavefumbled.
There are a lot of technical and business issues involved in trying to do this right, e.g. the technicalities of creating a generic product platform from a specific project (e.g. parameterization)andcomplexitiesoftryingtoguesstheneedsofageneralaudiencefromthat of a specific customer etc. The key challenge and the differentiating factor between those that have done this well and those that have not, is the ability to convince an eager and patient firstcustomerwhoiswillingtotransfercriticaldomainknowledgeandbethesubjectofsome experimentationbythesoftwarecompany.
The example of Softech Systems as best practice case is worth emphasizing here. While designingtheonlinetradingplatformforamajorbrokeragehouseinthecountry,Softechwas able to negotiate a nonexclusivity agreement with its first customer that allowed Softech Systemstosellthelaterversionsofthetradingplatformtootherclientsinexchangeforsome royalty, free upgrades, and a subsidy on annual maintenance fees. Needless to say that the arrangement has been a winwin situation for both the brokerage house and the software companyand more generally for the Pakistani industry and the endconsumer. Many other successful companies have adopted similar approaches and have succeeded in adding successfulproductsintheirportfolios.
Another innovative strategy for funding, or partially offsetting, the cost of product development activity in a resourceconstrained environment like Pakistans, is the intelligent use of MNCs. Being able to use the financial wherewithal of Multinational Corporations (e.g. FinancialinstitutionsandBankslikeABNAMRO,StandardChartered,andCitibankandothers likeShellandP&Getc.)hasbeenafairlysuccessfulstrategyformanycompanies,notonlyfor productdevelopment but also followon marketing. The example of Genesis Solutionsa providerofATMsandotherfinancialtransactionequipmentisacaseinpoint.
The foundation of Genesis was laid when a multinational bank, having ruled out the ATM equipmentavailableintheinternationalmarket,approacheditsfounderandaskedifhecould develop something specific that it had in mind. The gentleman signed an agreement as per whichthebankprovidedsomeexperimentationcapitaltodevelopaprototype,amajorportion ofthecontractasadvance,andanorderof20oddmachines.Notonlywasthisclienthimself
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satisfied with the product delivered, it also introduced and showcased Genesis ATM equipmentatitsregionalmeetingsinDubaiandopenedupdoorsforGenesissubsequentforay into the Middle Eastern and South Asian market. Other similar stories of satisfied multinationals leading the software vendor to a larger regional audience are not very uncommonthusmakingitapotentiallyusefulstrategyforsoftwarehousestolookat. Anothercommonway,sometimesavailable,togetaroundtheissueoffinancesistouseanother parallel operationa consulting or a hardware companyas a means to finance the development of the product. This is essentially a variation of using a projectbased business model to fund product development. Depending on the synergy between the two businesses, somecompanieshavebeenabletodoitmoresuccessfullythanothers.AnexampleisAlchemy Technologiesa company spawned out of Alchemy Associatesan actuarial consulting and trainingpractice,thatislaunchingariskmanagementsoftwareforfundmanagersoffinancial institutions.ItispossiblethatSidaatHyderMorshedAssociatesalsoleverageditsestablished consultingpracticeindevelopingitsfairlysuccessfulfinancialssoftware.
WesawanotherinterestingandingenuousmodeloffundingastartupatworkatLumensoft a Lahorebased ERP company that was incubated, under quite generous terms, at LUMS. In additiontoLUMSsupport,thatgraduallytaperedoffandforcedthecompanytograduateto anoffcampuslocationinjustover2yearstime,Lumensoftalsousedquiteaningenuousway of distributing the firms ownership among several partnerswho rotated in and out of the firmduringtimeswhentheoperationwasnotsustainableorevenworkedelsewheretopayfor thesubsistencesalariesofotherpartnersengagedinproductdevelopment.Wehadsomepeople who were working fulltime in the companythe working partnersand some who were merely contributing money every month to keep the operation goingthe sleeping or capital partners. These were working professionals, like us, who were putting in money to incubate the idea. is how one of Lumensofts founders described their approach of sharing and diversifying the risks and burdensofstartingtheirnewventure. ManagerialBestPractice#7(MBP7)Find a strategic first customer who is willing to fund (a part of) the startup and is willing and patient enough to transfer necessary domain expertise and let you experiment with it. Innovative non-exclusivity contracts that give you the right to productize a particular solution and sell it to other clients in exchange for a royalty to the strategic first customer can lead to win-win solutions for both parties. ManagerialBestPractice#8(MBP8) Use the financial clout, domain knowledge, and regional network of locally operative multi-nationals (e.g. Financial institutions like ABN
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AMRO, Citibank, Standard Chartered etc., FMCG companies like P&G and Nestle etc.) to fund startups. A satisfied MNC customer is not only a great addition to the customer portfolio but can also help with introductions to its regional network of associates, partners, and clients.
StrategicChallenge#6:HaveaBusinessPlanandaStrategic/DomainFocusWhileonecan quoteseveralexamplesofsuccessfulandunsuccessfulventuresinthedomesticmarketspace, the factor that is inextricably associated with the success of a domestic venture is the opportunity to quickly build a domain and ably navigate the projectstoproducts transition. Therearemanycompanieswhoseemtohavedonethatadmirablywelland,asaresult,have createdconsiderablevaluefortheirinvestors.Manyhaveevenbeenabletoattracttheinterest of large foreign companies as potential acquisition candidates. One of the examples is LMKR that began its operations as a domesticfocused outfit, quickly developed a strong domain expertise,andwasabletoattractmajorinvestmentbyaforeigncompany.
Developingadomainexpertiseorstartingoffwithonealreadyinplacehasbeenoneofthe majorissuesconfrontingthePakistanisoftwareentrepreneur.Majorityofthecompanieswere established by the nave entrepreneur in the hopes of attracting good foreign business or findinginstantutilityforhistechnology.(S)hedidnotworrymuchabouttheimportanceof havingadomaintostartwith.Indeed,ifIcanbuildit,theywillbuyitseemstohavebeenthe mantra of industrys earlier entrepreneurs. Things have changed a bit and DotCom Bubble bursthasbeeninstrumentalinhasteningtheprocess.Domainexpertise(oratleasttheneedto have one) is gradually emerging in the industry with the newer ventures are much more focusedintermsofwhattheywanttoachievethantheearliestones.Therealizationthatthereis no free lunch in exports and the competition for commoditytype programming and coding operations is fairly cutthroat has forced the IT entrepreneursold and newto think hard about strategy, domain knowledge, and productorservices issues. Needless to say, however, thatthisprocessoflearninghasbeengradualandsometimespainfulforthoseinvolved.
The local entrepreneur is still far from the type of business sophistication you would expect from his/her American or even Indian counterpart. Another important element that has been lackingonthePakistanisceneistheteamingupoftechnical,business/management,marketing, and domain expertise at the inception of ventures. The predominant model has been one in whichtheITprofessionalstartsaventure,andovertimeandthroughtrialanderror,acquiresa domainexpertiseandlearnshowtorunasuccessfulbusinessaswell.Weencounteredseveral suchentrepreneurswhohadexcellenttechnologyundertheirbeltbutwereseriouslylackingin terms of their ability to grow their organizations and thus realize the full potential of their
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operations. One of our interviewees prided himself in the fact that the company culture in his/her organization is such that the CEO is involved in everything from product design and development to preparing quotations and writing responses to RFPs. This CEO was working 12hourdaysandhardlyfoundtimetogetintothestrategicmodeofoperationfromthetactical mode in which he was so used to operating. Needless to say, however, that the company, despiteitstremendouspotential,wasoperatinginadaytodaymodeandsufferedfromserious deficitofstrategicandforwardthinking.ThegoodthingaboutthiscasewasthattheCEOhad realizedthatheneededhelp.Hejustdidnotknowwheretolookforit.
Manyatimes,therefore,thesoftwareentrepreneurunderstandswhat(s)helacksandislooking forhelpbutmaynotfindit.Thereasonbeingthatthesoftwareindustrydoesnotyetfeatureas a place where topquality business and management graduates and experienced managers would like to go and work. That would not happen until we have success stories of software companiesandtheindustryisseenasaplacewherepeoplecouldfindlifetimeemploymentor amonetarilylucrativecareer.Again,helpmightbeonthewayinnontraditionalways.Avast number of students in the current MBA class of the countrys leading business school have a Bachelor degree in computer science. Unable to find jobs abroad, these discouraged young computerscientists/programmershavedecidedtocallitadayandjointheMBAbandwagon. Theymight,however,somedayreturntotheirfirstprofessionsasbusinessleaders,managers, marketers, and domain experts. When that happens, it would be a welcome sign for the countryssoftwareindustry.
Programsaimedatfacilitatingtheblendingandteamingupofbusinessvisionarieswiththose capable of executing on a technical concept are a step in the right direction. One way is to developthecultureofmultidisciplinaryuniversityeducationprogramstohelpcreatenetworks offriendshipandaffiliationbetweenprofessionalswithintechnicalandmanagerial(andother softer)disciplines.Theoftenprevalentconceptofunidisciplinaryeducation(e.g.ITInstitutes, Management Institutes, but not robust multidisciplinary universities) may be contributing to thestovepipingoftechnicalandmanagerialtalentinthecountry.
LUMSistryingtomakesomeinroadsinthisdirectionbyleveragingandblendingitsstrong multidisciplinary undergraduate program and good quality graduate programs in business and computer science. Other schools maybe following suit. Another problem is more cultural than academic. While there is plenty of entrepreneurship culture among the trading and businesscommunityinPakistan,therelativelywelleducatedmiddleanduppermiddleclasses from which the countrys gets most of its software professionals feels less inclined towards
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entrepreneurship.Educationseemstobemakingpeoplemoreriskaverse.Oneofthedeansofa privatesectoruniversitythatwetalkedtobelievesthatencouragingpeopletoexperimentwith entrepreneurshipduringtheirstudentyearsisonewaytoinculcatethisoftenlackingattribute among our more educated (professional) classes. When you are a student, your riskreturn calculusisverydifferentfromthataftergraduation.Nobodyexpectsyoutoberesponsibleandgetajob thus giving you ample opportunity to experiment with doing something on your own, like running a business.Thismightbethebesttimetoteachentrepreneurship,heasserts.Programsthatfacilitate suchundertakingsmustbeencouraged.LUMSsupportforoncampusbusinessincubationis, onceagain,astepintherightdirection,andhencemustbecarefullylookedat,evaluated,and replicated.Lumensoftisafineexampleofthepotentialofsuchprograms.Theabovediscussion bringsforthanothermanagerialbestpracticeinthePakistanisoftwareindustry,namely: Managerial Best Practice #9 (MBP9) Understand where you need help (e.g. management, marketing, institution-building, legal, accounting) and seek it. Remember: a minority stake in a larger (more successful) venture is worth more than majority stake in a smaller (less successful) one.
These are only few of the more important challenges facing a domesticfocused software operation. Others might include migrating from a domesticfocused operation to a well diversified or even exportfocused one, organizing to deliver quality software products and services, and institutionalizing and professionalizing the operation etc. We will not delve deeperintoeachoftheseissueshereastheyarenotuniquetodomesticfocusedoperationsonly andhencehavebeenlargelycoveredinthediscussionwithinothermorerelevantcontexts.We would, however, highlight the importance of and difficulties and pitfalls in migrating from a domesticfocusedtoawelldiversifiedorexportfocusedoperation.
This is an inherently difficult undertakingmade further critical by the sheer number of companies trying to accomplish it. Yet, we do not have many success stories or a very solid roadmaptohelpacompanytryingtomakethistransition.AvastnumberofPakistanisoftware companiesthathavemadethistransitionhavedonesointheMiddleEasternorAfricanregions where the local domain experience is much more readily acceptable than the far better developed North American or Western European market. There is an urgent need for the industrytoidentifysuccessstoriesofdomesticfirst,exportlatermodel,documentthem,and learnfromthecriticalsuccessfactorsresponsibleforsuchtransitions.
Inthefinalanalysis,thedomesticsoftwaresceneisquitevibrantandhasalotofpotential.Itis onlyamatteroftime,andthewantofafewsuccessstories,beforetheherdbehaviorofthelocal
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marketcouldbechannelizedtoitsownadvantage.Themuchawaitedautomationofthelocal industry will arrive one day. Some sectors may lead the rest of the industry but others are bound to follow. The government can play a role in hastening the process by intelligent and carefuluseofpublicpolicy.Whatismostneededisashiftintheattitudesandsophisticationof theITentrepreneurs,thebusinessleadersandmanagers,thefinanciers,theindustrialists,and thepolicymakersandgovernmentbureaucratsforeverythingtofallintoplace.
Trust is the most critical ingredient of success in this multifaceted set of relationships. We talked to a number of entrepreneurs who seemed to be uncomfortable bringing in domain expertise,especiallybusinessmanagers,onboardforthefearoflosingcontroloftheirventure. Sometimes, their fear may be justified but many a times it is not. Public policy and legal arrangements that strengthen the intellectual property environment and provides essential safeguards for each can sometimes help in creating a minimum threshold of trust among various stakeholders and bring them to the table. LMKRs Atif R. Khanwho sold majority stakeofhisventuretoaforeignacquirerbutstillremainsinchargeisashinningexample.It isbettertobeaminorityownerofalarge(moresuccessful)companythantobeamajorityownerof a smaller(lesssuccessful)one.
6.4TheExportFocusedForeignFirm(TheTechLogixorEtilizeModel)
The ExportFocused Foreign Firm (defined above) is the third most prevalent of the generic businessmodels,accountingforaboutafifth(1720%)or8ofthe47companiesinoursample. Wehavenamedthisbusinessmodelaftertwocompaniesrepresentingthevariationswithinthis generic model. Techlogix is a wellrecognized and respected name in the Pakistani software industry. The company operates in the customized software development and consulting servicesspaceandleveragesitsUSownershiptobringbusinessfromNorthAmerican/Western EuropeanmarketstobeexecuteduponinitsdevelopmentcenterinLahore,Pakistan(andnow Beijing).OthercompaniesinoursamplethatoperateonthesamegeneralprincipleasTechlogix are Prosol, Adamsoft, and Xavor etc. Etilize, on the other hand, is a relatively lesserknown operationofabout200+employeesthatrepresentstheothertypeofexportfocusedbusinesses, namely,thoseoperatinginthemoreinnovativeproductsspaceofthemarket.Othercompanies inoursamplethatoperateinafashionsimilartoEtilizeareMixIT,Elixir,andUltimus.
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With its clearly international orientation, the exportfocused foreign firm model is also considered one of the more lucrative and prestigious of the four business models in our taxonomy. The canonical form of this business model comprises a foreign entity (an individual or a firm, generally an expatriate individual or an expatriateowned firm) coming up with the general ideaofthebusiness,andforreasons ofcostsorpatriotismorboth,setting up a company with a front office in the target market and backoffice, generally a product development facility, in Pakistan. This model is different from the dedicated developmentcenter(tobediscussed next) in the scope and nature of its Pakistanbased operations. Unlike the dedicated development center model,thePakistanbasedoperationoftheexportfocused foreignfirmisacriticalelementof thebasicbusinessidea. More often than not, the value proposition of this class of firms is clearly the arbitrage in the labormarket of IT professionals. Many firms were established for precisely this purpose and wouldnothavebeenabletoattracttheirstartupcapitalorsuccessfullyexecutetheirbusiness models13withoutthelowcostoffshorebackoffice/developmentoperationbeinganelementin thebusinessplan.ManyofthefirmsinoursamplewerecreatedattheheightoftheDotCom Bubbleorslightlylaggingthat.Infact,inthecapitalscarcepostDotComEra,manywestern (especiallyUSbased)investorshavelookedfavorablyonventuresthathavedemonstratedthe commitmenttokeepproductdevelopmentcostsattheminimumbyshiftingthebackofficeor development operations offshore, mostly to India, Eastern Europe, or republics of the former SovietUnion.
TEXT BOX # 9: THE TECHLOGIX OR ETILIZE MODEL, IN A NUTSHELL Total # of Companies in Category: 7 Average Employment: 77 % of Foreign Subsidiaries: 100% % with Front-Office Abroad: 100% Exports: Domestic Market: 98:2% Product: Services Offerings: 40:60% Average Sales Growth (last year): 82% Average Employment Growth: 28% #/% of Companies with ISO/CMM: 57% Programmer-to-PM Ratio: 10.44 QA Employees as % of Employment: 13.7% QA Function % of Payroll: 12.67% Top-3 Policy Challenges: Image (57%), Manpower Availability (42%), Telecom cost (42%)
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Many industry experts have made that argument in the context of outsourcing of US IT work to Indian companies.
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EtilizePvt.Ltd.,forexample,isacaseinpoint.EtilizeisaKarachibased,200+peoplecompany with a frontoffice in Southern California. It specializes in developing catalogues for online retailersandhasclientswithworldwidenamerecognition,likeAmazon,BestBuyetc.Oneof the important parts of Etilizes business operations is the development and maintenance of producttaxonomiesandknowledgebasesamanpowerintensivetaskthatisthebackboneof itsbusinessmodelbutwouldhavetakenawholelotofmorecapitaltosetupandruninthe United States. Etilizes Karachi operation does it at a fraction of the total cost thus giving the idea a chance to succeed. The result is a winwin situation for both the local and the foreign stakeholders of the company. Although the degree of dependence on labor arbitrage might varyacrossventures,thebasicthemerunsacrossmajorityoftheorganizationsinthisclassof businessmodels.
Asthenameindicates,therearetwo defining features of this business model, namely, the idea is largely applicable to a foreign (target) market and the key proponents of the idea i.e. the founders of the venture are generally based abroad (in the target market itself). What this means is that majority of the companies in this segment of generic business models do not suffer from the weaknesses in domainexpertiseorprelaunchduediligencethatisendemictosomeofthelocallyconceived venturesthatwerediscussedinthecontextofexportfocusedlocalfirms.Theforeigninvestor (or entrepreneur) is assumed to be much more business savvy than their local counterpart. Sincemostofthesecompaniesalsoseekinitialcapitalfromandhopetogopublicinafarmore intelligentmarketabroad,theyalsohavetheadditionaladvantageoffairlyquickandruthless feedbackonthebasicidea.ThisiscertainlytrueofthepostDotComBubbleErathantheheight oftheDotComBubblewhen,eveninthemoresophisticatedmarketsofthewest,alotofmoney was thrown into fairly mediocre business ideas. What this means from the perspective of the Pakistanisoftwareindustryisagreatlydiminishedpossibilitythatacompanywouldpursuea notsogood idea because of the lack of business sophistication of a nave
TEXTBOX#10:LISTOFCOMPANIESINSAMPLE& THEIRDOMAINSEXPERTISE/OFFERINGS:
Etilize Online & Smart Cataloguing, Knowledge ProsolLotus Notes, .Net Applications AdamsoftHospital & Patient Mgmt. Systems UltimusWorkflow Automation Systems MixITOnline Trading Systems TechlogixERP, BP Automation, EI, DB XavorEnterprise Applications Integration, BPR Elixir TechnologiesAutomation of Volume Printing
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entrepreneur/investora factor that has been an anathema of the earlier discussed classes of businessmodels.
Another possible advantage available to companies in this class of generic business models, besides a betterthoughtthrough idea and a more business savvy and aware entrepreneur investor, is a relatively better access to venture and expansion capital. An overwhelming majority of companies in this class of business models have been formed either with foreign venturecapitalroutedthroughtheforeignparentorinvestmentsavingsofexpatriatefounders. We clearly see the effect of this enhanced access to capital on the productservice offerings of companiesinthissegment.Majorityofthecompaniesinthissegment,therefore,areproduct based, to start with and thus depend on the creation and preservation of critical intellectual property. Majority of these companies have also been able to fund major portions of their productdevelopment efforts internally. This is in sharp to the companies in the earlier two businessmodelsthathadtoresorttoprojectbasedfundingforproductdevelopmentandthus runtheriskofdilutingthefocusofthebusiness.Anadditionalpositivefactorforthisclassof companies is a better chance of attracting an exit eventan acquisition by a larger foreign company or an IPO on a foreign stock exchangethat has been a major bottleneck for the domesticfocusedoreventheexportfocusedlocalcompany.Theseadvantagesaside,however, therearesomesignificantinfactdauntingchallengesinsuccessfullyexecutinguponanidea inthisspace
Strategic Challenge # 7: Dealing with the Image ProblemOf the several challenges encountered by these companies, not the least important of which is the infamous image problem that these companies have to face in the foreign markets. Although there are several dimensions of the image problem, it all boils down to one single bottomline. Due to factors beyond the control of an individualfirm, or even a single government, the western customer/investor is hesitant in doing business with Pakistan or an entity with significant presenceinPakistan.ThemostoftenquotedexampleisthatofAlignTechnologiesandthefate ofitsfairly largeoperationinLahore.ThecommonindustryfolklorehasitthatZiaChishti AlignsCEOattheheightoftheUSWarinAfghanistanandPakistanIndiatensionsin20002 fell out with its Board of Directors who thought that, given the geopolitical situation in the world and South Asia in particular, the risk of war in the subcontinent was far too much for Aligntobearandaskedthatthedevelopmentcenterbemovedtoasaferlocation,likeTaiwan orMexico.UnabletomakehiscasetohisBoardofDirectors,Ziaresignedinprotest,andthe Pakistanoperationsofthecompanywerelaterwrappedandshiftedelsewhere.
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Whilethereisnopointindenyingeithertheseriousnessofthischallengetocompaniesinthis classofbusinessmodelsortheneedforaconcertedgovernmentleveleffortatexecutingeither aharmreductionstrategyintheinterimorputtingtogetheraproactivestrategyforrepairingof the countrys image abroad in the longrun, several companies that we looked at have counteredthischallengeintheirownuniqueandinnovativeways.
The most basic approach, that is partly inherent in this model, is to work with a frontoffice abroad and underemphasize the Pakistanelement of the companys operations. Many companies, in an effort to underemphasize Pakistan, tend to use the term South Asia as a proxyforwheresome(ormost)oftheirbackofficeoperationsarecarriedout.Whilethismay be an acceptable approach for shorttomedium term, it has two basic flaws. First, that the company has a significant linkage with Pakistan cannot be permanently hidden from key foreign stakeholders, as amply demonstrated in Aligns example. The issue then becomes, at whattimewoulditbemostappropriatetolettheskepticalforeignstakeholdersfacethereality. Second,underemphasizingthePakistanconnectionandnotlettingpositiveexamplesofdoing business in Pakistan become a part of the industry grapevine, further reinforces the negative perception and feeds back into the image problem itself. Small actions like these, sometimes justifiable from an individual companys standpoint, end up creating a bigger collective problemfortheentireindustry.
Many senior executives that we interviewed, however, also emphasized upon the fact that sometimesimageindeedbecomestherealityandsomeeffortandpersuasionontheirparthas beenfairly effectivein nullifyingtheeffectsofthecountrysmisperceivedimage. TheCEOof one of the largest companies in Pakistan that has incorporated in the US and enlisted on NASDAQtonullifytheimagefactorhasthistosayabouthisexperiences:Wehaveneverhada customerwhohascometoPakistan(Lahore)andhasnotgivenbusinesstous.Althoughitmighttakeus a while to convince our foreign collaborators/customers who are skeptical of the lawandorder and securitysituationinPakistanandmisperceiveittobeanunderdevelopmentandtribalcountry,oncewe get over that initial bottleneck sometimes through gradual persuasion and other times assurances of security etc. and get him/her to land in Lahore, weve almost always won the deal. I once took a potentialcustomer,firsttoMumbaiandthenbroughthimtoLahore.Thecontrastbetweenthesqualor andlackofinfrastructureofMumbaiandtheorderlyandclassyinfrastructureofLahorecouldnthave beenmorepronounced.Needlesstosaythathis/herfearsandperceptionswerebasedmoreonhearsayand lessonreality.ThatonetriptoLahoredidthetrickforusinwinningoverhisbusiness. Storieslike thesearenotuncommon,highlightingtowardsawaytodealwiththeimageproblem.
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Anotherdimensionoftheimageproblemistheenhancedsecurityneedsofmanycountriesand the resulting difficulties in obtaining visas for Pakistanbased staff to travel to the country of their customers. Here again, many companies have found intelligent workarounds, e.g. by ensuring a minimal number of staff that have valid visas to the country of destination or by hiringdualnationalsorPakistaniswithlongtermvalidvisasofthetargetcountry.Manyofour interviewees,however,believedthatthegovernment,throughtheForeignOffice,canandmust playapositivepartinfacilitatingbusinessvisastosoftware(andother)professionals.
Thisbringsustoacoupleofmanagerialbestpracticesindealingwiththisparticularstrategic challenge.Theseare: ManagerialBestPractice#10(MBP10)Countertheimageproblembyincorporating inforeigncountriesandopeningdevelopmentcentersinsaferlocations(e.g.Dubai,China etc.).Hiredualnationalsorpeoplewithlongtermvalidvisastogetaroundvisarestrictions. Managerial Best Practice #11 (MBP11) Do not let the image become the reality. Be creative and innovative about projecting Pakistan as a responsible country. Persuade your customersandforeignpartnerstovisitPakistanandseeforthemselves.
Strategic Challenge # 8: The Geographical Shifting of Labor ArbitrageAnother potential challenge and a serious one at that, to this class of companies is the shifting of the labor arbitrage.Fortheveryreason,apartofthepatrioticleaningsofthefounderentrepreneur,thata backoffice/developmentcenterinPakistanbecameanintegralpartofthecompanysbusiness plan, it can also become a liability. The case in point is the geographical shifting of the labor arbitragesetinmotionduetoovercrowdingofthefirstgenerationoflocationsforoffshore softwaredevelopment(e.g.India,Russia,Irelandetc.)andthecomingofageofseveralsecond generation locations (e.g. China, Ukraine, and other lessproblematic countries). Most recently,forexample,theIndiantechtownsofBangalore,Mumbai,andHyderabadhavebeen marredwithshortagesofqualitymanpowerandskyrocketinginfrastructurecoststhusforcing investorsandIndianplannerstoseekotherdestinationsinIndiaandacrosstheworld.
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TEXT BOX # 11: KEY STRATEGIC CHALLENGES & MANAGERIAL BEST PRACTICES-III
Strategic Challenge # 7: Dealing with Image ProblemForeign customers and partners are hesitant doing business in Pakistan or with an entity associated with Pakistan. MBP10Counter the image problem by incorporating in foreign countries and opening development centers in safer locations (e.g. Dubai, China etc.). Hire dual nationals or people with long-term valid visas to get around visa restrictions. MBP11Do not let the image become the reality. Be creative and innovative about projecting Pakistan as a responsible country. Persuade your customers and foreign partners to visit Pakistan and see for themselves. Strategic Challenge #8: Countering the Geographically Shifting Labor ArbitrageFor the very reasons an offshore operation in Pakistan became a possibility, it can turn into a liability: MBP12Develop strong domain expertise to lock in customers, move towards valueaddition to avoid being pressed by the pressures of the commodity business, or continually cut costs by automating your own processes. MBP13The second best is better than none at all. Open alternate development centers in fast emerging new destinations (e.g. in Dubai, the Philippines, and China) Strategic Challenge # 9: Scaling Up the Pakistani Operation by Hiring Quality PeopleThe dark-side of cheap labor i.e. shortage of quality professionals has emerged as a major challenge for software companies: MBP14Counter the shortage of quality labor by hiring expatriate or returning Pakistanis. Hire people with the right attitude, not skill-set or coursework. Strategic Challenge # 10: Getting to Know the Land and Managing ExpectationsExpatriates are at a disadvantage as far as knowledge of local business customs is concerned, they also come to Pakistan with expectations that belie the reality: MBP15Know the land, its people and their customs and, to the extent possible, play by its rules. Make use of connections to get your way around. Make use of facilitation agencies e.g. PSEB. BOI, or PASHA where possible. Other Challenges (discussed in detail elsewhere): Setting up an operation in Pakistan, and managing the parent-subsidiary coordination etc.
There are some signs of this trend hitting Pakistans software industry in the nottoodistant future, as well. If that happens too soon, the global software revolution would have skipped Pakistanasafavoreddestinationwithoutassimilatingitinanybigandmeaningfulway.One potential sign and also a way to encounter such an event is the recent opening of the Beijing officeofTechlogixInc.oneofPakistansstarperformersinthismodel.Manyothercompanies that we spoke to are looking at possibilities of opening developmentoperations in Dubai,
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Taiwan,thePhilippines,orevenIrantocounterthistrendandsomeoftheotherlongstanding weaknesses(e.g.accesstoqualitylabor)intheirPakistanioperations.
Apart from becoming a part of the shifting labor arbitrage and capitalizing on it (described above),thereareseveralotherwaysofcounteringitaswell.Onesuchapproachistodevelop strongdomainexpertisethatcouldbeusedasalockinstrategybythesoftwarefirm.Several companieshavebeensuccessfulincreatingsuchdependenciesamongtheirclientsandarethus successfully countering the above threat. Another approach is to move higher up the value chain from providing commoditytype software development services to more expertise dependent consulting services that are less prone to regional fluctuations. Still another approach would be to further lower the cost of ones operations through automation of the laborintensiveprocessesinthesoftwaredevelopmentcycle.Onecompanythatweinterviewed wasdevelopingitsownprocessautomationandspeechrecognitiontoolstofurtherreducethe costofitscallcenterandBPOoperationthuscounteringthepossibilitythatitsclientswouldbe abletofindcheaperalternativeselsewhere.
Regardless of what ones approach is, it is important to recognize that the labor arbitrage argument cannot last forever and that one must strategize and plan for it, primarily through innovation,costreduction,andvalueaddition,andthusremaincompetitiveinthelongrun. Managerial Best Practice # 12 (MBP12) Develop strong domain expertise to lock in customers, move towards value-addition to avoid being pressed by the pressures of the commodity business, or continually cut costs by automating your own processes. ManagerialBestPractice#13(MBP13)The second best is better than none at all. Open alternate development centers in fast emerging new destinations (e.g. in Dubai, the Philippines, and China.
Strategic Challenge # 9: Scaling Up the Pakistani Operation by Hiring Quality Manpower Oneofthemostimportantofourweaknesses,apartfromgeneralshiftingofthelaborarbitrage argument,isthedifficultyofscalinguptheoperationsi.e.adding/hiringqualitytechnicaland managerial talent in Pakistan. This might come as a surprise to the proponents of the cheap and abundant (software) labor advantage but it isnt a surprise for the executives in the Pakistani software industry. While there emerged some conflicting opinions on this issue during the course of our industry interviews, the substantial consensus of the executives interviewedand amply supported by statistical findings on policy and environmental bottlenecksseemedtobeonviewingthelabormarketofsoftwareandrelatedprofessionalsas aweaknessratherthanastrength.
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Majority of our interviewees seem to think that Pakistans educational infrastructure is producing a large number of software professionals that are seriously deficient in important skills and capabilities. A large number of these CEOs only prefer to hire from the topthree institutesofthecountry,namely,FAST,LUMS,GIKandperhapsafewmore.However,there wereexceptionsaswellasafewcompaniesemphasizedthefactthatitistheattitude(tolearn andadjust)ratherthanthealreadyacquiredknowledge/expertisethattheylookforinarecent graduatewhicharesometimesequallylikelytobefoundinsecondtierinstitutionsaswell.No matter what you teach an IT graduate in school, it would become obsolete in a matter of years, if not months. Therefore, what we need to emphasize on, and create in our students, is the ability and willingnesstolearn.Thatswhereattitudecomesintothepicture.Wetrytohirethosewhodemonstrate therightattituderatherthananacademictrackrecordoracoursehereorthere,ishowoneexecutive describedhiscompanyshiringphilosophy.
Inadditiontothetechnicalskills,thereareotherweaknessesinthetypicalPakistanisoftware professional. Many of these are basic (e.g. communication skills, basic critical thinking, conceptualizationandmathematicalabilityetc.)andsoft(e.g.peopleskills)skillssometimesnot emphasized in their technical programs. Although many of these skillrelated deficiencies are applicablegenerally,thesearefurtheraccentuatedwhenaprofessionalbeginstoworkinafirm closely linked to a foreign market. What do you do when your chief software architect or project managercannotcommunicateproperlywithyourclientaskedaCEOofonecompany.Thisentry level skillsshortage combined with an equally strong, if not more, deficiency in project management expertise has led many of these companies to seek and relocate people with requisiteprojectmanagementexperiencefromabroad.
It is very difficult to find people with 25 years of work experience in the local market and almost impossible to find those who have and can manage large projects as well, is the way one industry executivedescribestheHRsituation.Manyblamethelackoflargeprojectsinthelocalmarket itself as contributing to the situation. Brain drain to the foreign (especially the US) markets is another important factor in this equation. Others believe the development practices of the softwareindustryaretobeblamedforthequagmireaseventhosecompaniesthatdidgetlarge projects from foreign clients and successfully executed upon them have, with an exception of thefew,notbeenabletoproducegoodqualityprojectmanagersfortheindustry.Youcannot hopetotrainalotofprojectmanagersifyouendupfollowingahaphazardprocessoveralargeperiodof timeoverandoveragain,assertedoneexecutivethatwespoketo.Regardlessofwhatonesexact statedpositionisonthisissue,therearenotwowaysofemphasizingtheneedfordeveloping
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quality software professionals with both technical and soft skills in large enough numbers to reallyplaythelaborarbitragecardinahighlycompetitiveinternationallabormarket.Oneof thesolutions(emphasizedabove),namely,openingupdevelopmentcentersinotherlaborrich locations(e.g.DubaiorChina)mightalsolessentheimpactoflaborshortagesintheshortto mediumtermandgivethecountryseducationalinfrastructurethelongleadtimeitmightneed tobeginproducingqualitysoftwarelaborinadequatenumbers.Untilthatisdone,however,the followingqualifiesasamanagerialbestpractice: ManagerialBestPractice#14(MBP14)Counter the shortage of quality labor by hiring expatriate or returning Pakistanis. Hire people with the right attitude, not skill-set or coursework.
Strategic Challenge # 10: Getting to Know the Land and Managing ExpectationsAnother importantchallengeforcompaniesinthisspaceisthatofsettingupshopinPakistanwiththe right set of expectations and parentsubsidiary relationships. This is critical, not only at the startupphase,butalsoforcontinuedsustainabilityandthehealthoftheentity.Wewilldiscuss thedynamicsandchallengeoftheparentsubsidiaryrelationshipinmoredetaillater,butwould like to address the issue of getting to know the land and managing expectations here. This is oneareawheretheforeignfounderentrepreneurmightbeatacomparativedisadvantageand needsomehelpfromthelocalsoftwarecommunityandsupportinginstitutions(e.g.PSEB,BOI, PASHAetc.)Thereissomeevidencethatmanyeffortsofforeignentrepreneurs/professionalsto translate their desire to work with a Pakistani company or create one in Pakistan are riddled with difficulties having to do with their lack of understanding of the local market and the norms of doing business in Pakistan. Many enthusiastic entrepreneurs have come to Pakistan with high expectations and gone back disappointed when they do not find a receptive local partner or found one that is deceptive in his/her dealings. Those who are shrewd enough to understandthelocalcustomsandrulesandhencecomewiththerightsetofexpectationsorare willingtotoughitoutmanagetodobetterthanothers.
AtthePakistansideoftheequation,thereisaneedtomanagetheseexpectationsthroughamix ofbetterinformationandfacilitation.Governmententities,likePSEB,candefinitelyplayarole in this regard. One of the companies that we surveyed, narrated an incident where the local PTCLexchangewouldnotsetupaleasedInternetlineatitsfacilitywithoutthepaymentofa bribe to the linesmana situation that was only resolved after the direct involvement of the PSEB.Weneedtobedoingabetterjobthanallowingthelinesmanofatelephoneexchangeto pull the plug on a potential foreign investment opportunity in this country. This incident is
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somewhat indicative of the situation generally true for a host of other support agencies and mustbeaddressedinaresolutemannerandattheveryearliest.
At the other side of the expectations management issue as well, a lot can be said and learnt abouthowto(andhownotto)structuretheparentsubsidiaryrelationship.Againthereisa need here for better awarenessnot only on the part of the expatriate founderentrepreneur investor but also on the part of the local teamof how to do this right in the first place. Experience has shown that the right set of expectations and wellstructured institutional arrangements lead to better managed interactions and breed more trust while the converse leadstomistrustandfrictionsbetweenthetwoorganizationalentities.Thisiscertainlyanarea wherethelocalprofessionalandtheforeignentrepreneurarebothgraduallylearningovertime.
Structuring an appropriate relationship and expectations (e.g. distribution of financial resources, reporting relationships, incentives structures, possibilities of wealth transfer and expansion, the rights of the subsidiary to seek alternate clients other than the parent, and avenues to contribute in the parents global strategy etc.) that could last the test of time is certainlyanareaworthallcarefulattentionthatonecangive.Ironically,itisnotanareathat getsasmuchimportanceatthetimeofinceptionasitdeservesandthusmaybecome,overtime, a cause of friction in the parentsubsidiary relationship. In fact, there are signs that some fast maturingventuresmightbesufferingfromthesefrictionstoday(wewilldiscussthisinthenext subsection). There is a need for the industry to learn from its own past (e.g. adopting the practices from the wellmanaged relationships and avoiding ones from those gone sour) and builduponittodobetterinthefuture. Managerial Best Practice #15 (MBP15) Know the land, its people and their customs and, to the extent possible, play by its rules. Make use of connections to get your way around. Make use of facilitation agencies e.g. PSEB. BOI, or PASHA where possible. 6.5TheDedicatedDevelopmentCenter(TheITIMAssoc.orClickmarksModel) The Dedicated Development Center Model is the fourth and final of the class of generic softwarebusinessmodels,accountingfor7ofthe47(or15%)oftheorganizationssurveyedfor the purpose of this study. This isessentially alimited version of theexportfocused foreign firm model. We have named this model after two relatively wellknownthough slightly differentcompanies in this class of business models. ITIM Associates is a 10year old, well established, dedicated development center of a UKbased conglomerate. It provides software development services to various divisions/sistercompanies of that conglomerate or for third
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partyclientsthroughtheconglomerate.Itcannot,however,seekorundertakeadditionalclient work on its own. Clickmarks, on the other hand, is a dedicated developmentcenterofaUSbased company established purely for the reasons of benefiting from the differential in the labor rates between Pakistan and the US market. These organizations differ intermsofthenatureandscopeof theirrelationshipwiththeirparent entitiesafactthatwewouldtake up shortly. Text Box # 12 presents some summary statistics on the dedicated development centers in our sample. Text Box # 13 enumerates these companies and identifies their domain expertise andproductservicesofferings.
TEXT BOX # 12: THE ITIM ASSOCIATES OR CLICKMARKS MODEL, IN A NUTSHELL Total # of Companies in Category: 7 Average Employment: 42 % of Foreign Subsidiaries: 71% % with Front-Office Abroad: 57% Exports : Domestic Market: 98:2% Product : Services Offerings: 33:67% Average Sales Growth (last year): 17% Average Employment Growth: 6% % of Companies with ISO/CMM: 42% Programmer-to-PM Ratio: 6.12 QA Employees as % of Employment: 22% QA Function % of Payroll: 20% Top-3 Policy Challenges: Image (71%), Manpower Availability (43%), Venture Capital (43%)
Thatthededicateddevelopmentcenterisavariationofexportfocusedforeign(expatriate)firm necessitates that many of the same challenges and bottlenecks affect firms in this business model as well14. However, as we noted elsewhere in this report, the dedicated development centerisdifferentfromtheexportfocusedforeignfirminseveralsignificantwaysarisingoutof theverylimitednatureandscopeofitsrelationshipwiththeforeignparent.Thesedifferences give rise to several unique challenges or may accentuate some of the challenges discussed above.Inthefollowingdiscussion,wewillbrieflyhighlightthesimilaritiesanddifferencesin challengesinmakingthismodelworkbetteranddiscussthenewonesinmoredetail.
Majorityofthecompaniesinthisbusinessmodelsegmenthaveasimilarvalueproposition(i.e. laborarbitrage)andmotivation(parteconomics,partpatrioticandassociational)forsettingup their development center in Pakistan. One of the CEOs, whose company recently moved its development center to Pakistan, justified the economic case for the move in the following words:Oncetheinitialonetimesetupinvestmenthasbeenmade,itcostsme$8,500permonthtorun
14
To that effect, we recommend that this section be read in conjunction with the earlier section on the ExportFocused Foreign Firm.
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my21persondevelopmentoperationinPakistan.Inthatkindofmoney,Icouldonlyhireonesoftware professionalatmySiliconValleyoffice.WhenyoudecidetorelocatetoPakistan,thatsthesortoflabor savingsyouarelookingat.AnotherbusinessmanwhomovedhisdevelopmentcenterfromLos Angeles toKarachi proudly claimed that his Karachi setup was delivering thesort of quality that is equal to, if not better than, his Southern California operation. Encouraged by the quality of work that can be delivered by the operations in Pakistan, many of these companies have even moved their highend product design and product enhancement work to Pakistan. Many of thesesetupsareabletoattractthebesttalentfromthemarketbypayingpremiumwagesor simply due to the lure of moving abroadprovide them with a good working environment, and still show respectable savings for their foreign parents. Setting up a quality development center operation, however, is not as easy as it seems. There are important challenges to the returningexpatriatewhoisoftennotverywellawareofthelocalbusinessandsocialnorms.We discussthesestrategicchallengesindetail.
TEXT BOX # 13: LIST OF COMPANIES IN SAMPLE & THEIR DOMAINS EXPERTISE / OFFERINGS:
ITIM AssociatesRetail (ePos) and Travel Mgmt MetaAppsOffshore Software Development ClickmarksMobility Products for Portals Enabling TechnologiesVideo over IP Solutions Trivor SystemsEngineering Graphics, Gaming Strategic Systems IntlSupply Chain Optimization ESP GlobalBanking-Financials, ERP, e-Commerce,
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TEXT BOX # 14: KEYSTRATEGICCHALLENGES&MANAGERIALBESTPRACTICESIV
Strategic Challenge # 11: Setting Up a Development Center In PakistanSeveral factors play a role, namely, making a case to the foreign management, doing a preliminary assessment of potential, hiring talent from the local market, planning for disruption etc. Sometimes, it is said, successfully setting up in Pakistan requires a certain kind of perseverance by the entrepreneur: MBP16Do a detailed analysis of the local scene, including one or more visits to Pakistan. Use contacts and references as much as you can, in setting up and hiring. MBP17Smoothen the transition by temporarily relocating a senior member of the technical staff to Pakistan. Ensure frequent interaction, including face-to-face interaction, between the Pakistan-based and foreign employees of the company, atleast in the initial days of the operation, to facilitate transmission of corporate culture and tacit knowledge. Strategic Challenge #12: Building a Quality Software Development OperationThe issue of technical and process quality comes up in multiple contexts, namely, certifications and delivery capability: MBP18Understand the hidden value of quality. Build it in the processes and culture from day-one. Never take a short-cut to process qualityan action done for wrong reasons is worse than one not done at all. MBP19Get a certification only if you need to but develop quality processes because you have to. Make certification a means to an end, rather than an end in itself. Think hard about process and methodology, dont follow blindly. Strategic Challenge #13: Managing the Parent-Subsidiary RelationshipAs the development center matures, it takes a life of its own, giving rise to possibilities of serious (mis)alignment in the objectives and interests of the parent and the subsidiary. MBP20Clearly define the scope and nature of the parent-subsidiary relationship in the founding agreement. Provide a mechanism for the subsidiary to have a say in parents strategic direction. Other Challenges (discussed in detail elsewhere): Hiring and training the local workforce and integrating them in the parents culture, dealing with the image problem, countering the shifting labor arbitrage argument etc. Strategic Challenge # 11: Setting Up a Local Development Center OperationThere is a commonapproachtosettingupadevelopmentcenterinPakistan.Theprocessgenerallystarts withaperceivedneed,bytheparentstopmanagement,forsettingupsuchafacility.Theidea mayalsobefloatedbyachampiongenerallyanexpatriatePakistaniwhodoessomeinitial homework before presenting it to the parents management committee and directors. This is followed by detailed homework on the Pakistani software scene with special emphasis on infrastructure availability and costs and the human resource situation. At some point in time,
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the informal consultation (i.e. asking friends and contacts) may also lead into a more formal study(e.g.acoupleofvisitstoandmeetingswithkeystakeholdersinPakistan).
Once the topmanagement of the parent becomes comfortable with the idea and is willing to seriously consider the alternative, a concurrent search for legal arrangements, officelocation, andalocalheadofoperationsisundertaken.Onlyafteracceptableprogresshasbeenmadeon each of these fronts is the decision made to actually begin undertaking some of the more engaging parts of the move.Thesemightinclude formal incorporation of a subsidiary in Pakistan or requisiteapprovalfromthe BoardofInvestment,hiring and training of head of operations and the initial staff, and the preparation of the foreign parents existingstaffandprocesses to undergo the disruption associated with the move. The process may take anythingfrom612months dependingupontheextent of operations being moved and its agreed upon pace orurgency.
TEXT BOX # 15: SPECIMEN STEPS AND TIMELINE FOR SETTING UP A DEVELOPMENT CENTER IN PAKISTAN
Text Box # 15 describes typical steps, along with timelines, that one of the
June-July 2003: The idea champion started playing with the idea of setting up an offshore development center to serve an already established US-based company. December 2003: (S)he visited Pakistan, informally, to look at the HR/talent-situation in the country. Wanted to get a feel of what is possible by understanding the level of sophistication of the local IT-graduates. Went back to the US quite satisfied (visit time: 5 weeks, part-private) March 2004: Convinced the CEO of the company (an expatriate who had never been to Pakistan) to come down and look at the labor market/other factors himself and to get comfortable with its potential (visit time: 1.5 weeks) May-June 2004: Started to recruit for the company by advertising in the newspapers. Hired a corporate lawyer to incorporate the company as a Private Ltd. Co (4-weeks). Search for office-space began simultaneously with the help of a local friend (visit time: 6 weeks) July 2004: Moved from States and began operations. Issued appointment letters to employees. and effective July-1 people began working from home. Moved in a renovated residential building on Sept. 2004. September 2004: First day in the new office building.
companieswesurveyedundertookinthebeginningofthisyeartocompletetheprocessinjust undera9monthperiod(fromfirstvisittoPakistantotheinaugurationofitsoffice).Theidea champion, not initially planning to relocate to Pakistan, started off his/her quest with just a faintideaofwhat(s)hewantedtodoandlittleornoknowledgeofthelocalland.TheCEOto whom(s)hewashopingtoselltheconcept,againanexpatriate,hadneverbeentoPakistanand
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wasevenmoreskepticalofwhetheranarrangementliketheonebeingproposedcouldactually work. During the informal survey of the local labormarket, it became apparent to the idea champion that while the market was brimming with talented young minds, project managementandmiddlemanagementskillswereinshortsupply.Wecametoarealizationthat you would literally have to bring middle management from abroad in order to develop a successful operation in Pakistan. This conviction grew as the ideachampion spent time looking for managementtalentandultimatelymorphedintohis/herowndecisiontotemporarilyrelocate toPakistan.
Putting together an initial team was again a challenging task. Friends and acquaintances warnedtheideachampionofconsiderablenoiseinthelocallabormarket.Wewereworkingon an assumption that finding and hiring one good person per month would be a good target, and not to expect any more than that. However, an innovative strategy paidoff as the ideachampion teamedupwithsomeprofessorsofareputedcomputerscienceschoolwhorecommendedsome oftheirbrighterstudentsandevenconvincedafewtojointhecompany.Theteamwasthusput together in a much betterthanexpected period of time. Another factor that has often been associated with improving the possibility of hiring good talent is the emphasis paid on advertising. Bigger and more prominent advertising space is more likely to capture the attention of potential employees than small advertisements. Many executives we spoke with viewed this additional investment in advertising space as something that ultimately pays off handsomely in terms of better access to talent for the company. Finding appropriate office space,puttingtheIT/Telecominfrastructure(readasBandwidth)inplace,andincorporating thelegalentitywereothersignificantstepsbutnoneofthemseemedtoturnouttobeasbad asaskepticwouldlikeyoutobelieve.Theteamwasreadytoworkin6monthsandmovedto anofficelocationin9monthsfromstarttofinish.
This is a fairly typical story of the experience of setting up a development center in Pakistan. Severalfactors,thatmayappearasminoratfirstsight,playasignificantroleinimprovingthe possibility of navigating this tricky process in a successful manner. These are encapsulated in thetwomanagerialbestpracticesbelow: Managerial Best Practice #16 (MBP16) Do a detailed analysis of the local scene, including one or more visits to Pakistan. Use contacts and references as much as you can, in setting up shop and hiring talent for the same.
Managerial Best Practice #17 (MBP17) Smoothen the transition by temporarily relocating a senior member of the technical staff to Pakistan. Ensure frequent interaction,
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including face-to-face interaction, between the Pakistan-based and foreign employees of the company, atleast in the initial days of the operation, to facilitate transmission of corporate culture and tacit knowledge.
StrategicChallenge#12:BuildingaQualitySoftwareDevelopmentOperationAsdiscussed elsewhere, the issue of technical and process quality arises in atleast a couple of contexts, namely, the propensity to seek a certification and the ability to deliver a quality product or service per se, with or without a certification to show for it. That companies use quality certifications,primarilyISO9000butincreasinglyCMM,asameansofsignalingthequalityof their processes is a wellestablished fact in literature (Arora and Asundi, 1999). Indian companieshavebeen,byfar,themostsophisticatedusersofqualitycertificationwithoverhalf ofthetotalworldwideCMMLevel5certificationsgoingtoIndiancompaniesalone.InPakistan too, this has had a ripple effect, with an increasing number of Pakistani companies trying to acquireaqualitycertification.NCRsTeradataDivisionrecentlyannounceditselftobethefirst CMMLevel5companyinPakistan.NetsoliswidelybelievedtobeatCMMLevel4andKalsoft claimstobeatCMMLevel3.TakingthewidelyperceivedCMMISOequivalencestandardsinto account, another 3040 companies may be assessed as CMMLevel2 compliant. The cost of certificationhasthusfarbeenamajor,althoughaswewillargue,nottheonlyprohibitivefactor in an even larger number of companies acquiring a CMM certification. Consequently, the government, through PSEB, has stepped in to subsidize first the ISO9000 and now CMM certificationofafairlyrespectablenumberofsoftwarecompanies.
To be fair, the importance of quality certification, where it makes sense, cannot be denied. There are, however, clear indications in our sample of various types of companies showing different propensities to seek a quality certification. For example, companies in the exports of services, especially hybrids, are most likely to seek a quality certification. Alternatively, productfocused companies are least likely to seek oneprobably because the track record of theirproductsservesasanamplesignalingmechanism.Oneoftheoftencitedandveryvisible examples is that of Microsofta company that is not CMM certified nor does it plans to be. Microsofts example is also relevant here from another standpoint. When operating at the cuttingedgeofinnovativeproducts,goodenoughqualitymaybeacceptabletothecustomer (Cusumano, 1995). We found some evidence of that within the Pakistani market. One of the CEOs that we spoke to, whose company specialized in cuttingedge VoIP billing solutions, asserted that in his particular product segment, the underlying technology or the business solution being offered is so innovative that he can afford to ship a product that may not be totally defectfree. This is a kind of luxury not available to most Pakistani productfocused
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companies as they focus on lessinnovative end of the products market, namely, ERPs, accounting software, and runofthe mill billing and automation systems. Another empirical regularity is that the dedicated development center operations are considerably less likely to seek certification but much more likely to adopt rigorous technical and process quality approaches.
Herein lies the other key element of the quality issue. Many in the industry believe that certificationisnottheonlymeasureoftechnicalandprocessquality.Severalofourinterviewees shared the oftenexpressed apprehension about the certification process. The very act of going throughacertificationprocess,attimes,overshadowstheactualsoftwaredevelopmentprocessitself.We tendtodoalotofthingsbecausetheyareneededbythecertificationprocessratherthantheirvaluein termsofimprovingthequalityoftheprocess,saysonegentlemanthatwespokewith.Itisalways abadideaforthecertificationtobecomeanendinitselfratherthanameanstoanend(process quality). Most organizations are, therefore, quite cautious about whether or not they seek a certification and how they bring up the quality of their technical (software) development processestogetthere.
While our statistical findings on software engineering methodologies used, and technical best processes employed, failed to show a clear trend, the interviews did add some perspective to thepicture.Afairnumberofcompaniesuseoneoftheseveralsoftwaredesignapproaches(e.g. waterfall, iterative, prototyping etc.) and the final choice is dictated by the type of product service offering and its demands on the development process. Another factor that seemed to influence the choice of particular software design methodologies was the need to have a connection and alignment with the processes of the intended customer. For the five technical best practices, namely, project plan tracking, design and code reviews, documentation of the code, system to learn from ongoing projects, and measurement of process quality, while we encountered some kneejerk reactions from respondents (oh, of course we do it, was a response of one respondent who, we were not quite sure, clearly understood what the term meant), the data suggests that betterperformers consistently did better than the rest of the sample. These relationships were not quite as simple for other more complex metrics like % spentonQA,programmertoprojectmanagerratioetc.
Oneoftheissuesthatseveralofourrespondentsfaced,specificallyinthecontextofdecidingon whether to have a dedicated quality assurance function but also more generally, was the inability to foresee benefits from such a process. We found several of our respondents strugglingwiththeideaofwhethertohirea12personQAteamforarelativelysmalloperation
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of 1015 employees. Wouldnt it make better sense to use a person who works parttime on quality assurance?Thatwaytheutilizationofresourcescanbeoptimized,explainedoneintervieweewhen askedabouthis/herdecisioncalculus.Yet,companiesthatseemedtohavedonewellintermsof providingqualitytotheircustomersseemtodisagreewiththatlogicandemphasizeinsteadon havingfaith.Investmentsinprocessqualitybutalsoinprofessionalizationoftheventure initiallytakealotoffaithonthepartofthecompanyexecutives.CEOs/Entrepreneurswhohave cometotermswiththisfactandarequicktoseetherewardsattheendofthetunnelendup developingqualityprocesses,othersdonot.Also,qualityculture,ifithastobedonewell,must be emphasized from the dayone of the company rather than left for convenient good times when one would be able to afford it. Several of the interviewees described the difficulties in changingtheworkpracticesoftheiremployees,onceformed.
Another issue that has considerable bearing on the quality practices of the local software operations is simply inexperience and lack of adequate amount of work. In the end, process maturity is importantregardless of whether it comes with a certification or without. Many entrepreneurshavecometorealizethatovertime,asmostpointouttothefactthatmaturity comes with gaining experience in doing projects. Ones processes cannot become mature overnightthusmakingitaclassicchickenandeggproblem.OneoftheCEOscautionedagainst trying to artificially fasttrack this process, especially in the context of Governments CMMI Initiative,assertingthatthewordcapabilitymaturityistheessenceoftheentiremodelanditwould notbegoodpracticetomovefromoneleveltothenextinsixmonths,ifthemodeldemandsthesortof maturity of processes that could only come in 2 years. The following two sets of managerial practicesdescribethebestpracticeintheindustry: ManagerialBestPractice#18(MBP18)Understand the hidden value of quality and have faith in it. Build it in the processes and culture from day-one. Never take a short-cut to process qualityan action done for wrong reasons is worse than one not done at all.
Managerial Best Practice #19 (MBP19) Get a certification only if you need to but develop quality processes because you have to. Make certification a means to an end, rather than an end in itself. Think hard about process and methodology, dont follow blindly.
StrategicChallenge#13:ManagingtheParentSubsidiaryRelationshipThemostimportant challenge,inourview,thatisbeingfacedbyanumberofdedicateddevelopmentcentertype operations in Pakistan today and would be faced by an increasingly number of younger operations in the years to come relates to the (mis)management of the parentsubsidiary relationship.Althoughalsoachallengefortheexportfocusedforeignfirm,itassumesamuch
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criticalimportanceinthecontextofthededicateddevelopmentcenterbecauseofitsexclusive (dedicated)andlimited(readasdevelopmentcenter)roleintheoverallschemeofthings.
There are differences in the timeframe and scope of the establishment of a dedicated development center operation as compared to the exportfocused foreign firm model. Unlike the latter model, where the Pakistan operation is an integral part of the firms businessplan rightfromtheinceptionandhenceconceivedassuch,thededicateddevelopmentcentermayor maynothavethesimilarluxuryofstartingfromthecleanslatedaysofthecompany.Whatthis means is that the dedicated development center starts its life in a wellestablished organizationalenvironmentwithstrategicprocessesandmanagerialcontrolsalreadylaidoutin advance. More often than not, in the initial years of the development centers life, the parent continues to remain engaged in productdevelopment at its headquarters or an alternate locationanactivitythatisgraduallytransferredtothenewlyestablishedoffshoreoperation. Thisputsthedevelopmentcenterundergreatermanagerialcontrolandoversight,andreduces itssayinthestrategicdirectionoftheparentcompanyafactthatmayormaynotchangewith the passage of time. This set of initial conditions can have interesting repercussions on the evolutionofthisoperationandposesomeseriouschallengesinthemidtolongterm.
What really happens as a result of this restrictive relationship between the parent and the subsidiaryisthatthelatter,asitevolvesintoamatureoperation,takesalifeofitsown.Asthis parentsubsidiaryrelationshipentersinthisphaseofitslife,theinterestsofthesubsidiarymay not always align well with the interests of the parent and in the absence of an appropriate mechanismforaligningthese(e.g.byallowingthesubsidiarytohavesomesayintheparents strategy)theycanendupbeinginsharpconflictwitheachother.
We clearly saw this dynamic at work at severalalmost allof the more mature dedicated development centers in our sample. For example, one of the development centers that we lookedathadalotofpotentialforexpandingitsusefulproductservicesofferings,butbeinga dedicated operation was constrained by the strategic objectives of its parent company that sawlittleneedfordoingso.Consequently,thisoperationhasbeeninanalmosthiringfreezeor had even declined in times when other less capable and endowed companies had grown. We found a clear sense of something is amiss in our relationship while talking to the senior managementofthisdevelopmentcenteroperation.
Anotheroperationwelookedatisinaninformalorganizationalarrangementwithitsprincipal, andonly,clientwherebyitrentsoutteamsofprofessionalstoprojectmanagersintheclients
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organization. Painfully aware of the fragility of the arrangement, especially in the case of an M&Aevent,theoperationislookingforwaystograduallyshiftitsdependenceonitsprincipal client. A third operation that we looked at recently suffered a painful breakup as a result of misunderstandingandmismanagementofthemutualexpectationsofthecontractingparties.In thepostDotComBubbleburst,asthemarketbegantolookbadfortheparent,thesedifferences inexpectationsandincentivesledtofrictionandmistrustintheparentsubsidiaryrelationship. Astensionsaroseonbothsidesoftheequation,therelationshipcollapsedasifitwasdestined tofailinthefirstplace.
Onecanlearnalotintermsofhowtostructureorhownottostructurearelationship,what pitfalls to avoid, and how to manage expectations across large distancesfrom a detailed analysisoftheseexamples.Settingupadedicateddevelopmentoperationismerelyasmallpart oftheoverallschemeofthings.Deliveringqualityproductsservicesrequireputtinginplacenot only a technical infrastructure but also critical managerial processes and organizational structures,rulesandregulationsthatcouldservetheorganizationwellthroughoutitslifecycle. Navigatingthesechallengesthroughcarefulattentiontothesepitfallsisthekeytosuccessfully executinguponthededicateddevelopmentcentermodel.Onthemostbasiclevel,however,the followingmaybecategorizedasamanagerialbestpracticeforsoftwarecompanies:
Managerial Best Practice #20 (MBP20) Clearly define the scope and nature of the parent-subsidiary relationship in the founding agreement. Provide a mechanism for the subsidiary to have a say in parents strategic direction.
In addition to setting up an office and putting in place a quality software development operation,thededicateddevelopmentcentermodelalsosharesasleuthofchallengeswiththe exportfocusedforeignfirmandothermodels,namely,trainingthelocallyhiredworkforceon tools and methodologies being used at the parents original location, getting them acquainted with the customs and culture of the parent company and its clientele, transferring the all importantdomainexpertise,counteringtheimageproblem,andthegeographicalshiftingor vanishingofthelaborarbitrageargument.
As we conclude this discussion on the taxonomy of generic software business models, it is important to highlight its several qualities and characteristicsas well as its proper and improperusestoallowthereaderstoputthistaxonomyinitsproperperspective. Firstly,thetaxonomygivesusarelativelyeasyandcomprehensivewaytoclassifyaparticular softwareoperationintoabroadenoughcategoryoforganizations,givingusabroadreference point to compare ourselves against, and quickly begin looking for certain organizational
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features, managerial characteristics, strategic challenges, and critical success factors. This act alone, somewhat simplifies the complexity of the Pakistani software scene, not only from the perspectiveoftheindustry(e.g.apolicymaker/investor)butalsoafirm(e.g.entrepreneur).In doingso,itnarrowsdownthesearchforcomparablestolookatorseekadvicefrom.
Secondly, it is important to understand the fact that none of these generic software business modelsareinherentlygoodorbadjustthat eachhasitsownplaceintheoverallschemeof things. It is somewhat meaningless to compare firms across business models. It takes a fairly differentsetofinitialconditionsandskillstostart,andovercomingadifferentsetofchallenges tosuccessfullyexecuteuponeach.Eachofthesemodels,however,havebetterperformingand notsogoodperformingfirmswithinthemandwhatonecando,againtoacertaindegreeonly, istocomparetheperformanceofafirmagainstanotherwithinthesamecategory.
Thirdly, while transitions between the generic business models are possiblethey are not automatic.Dependingonwhatafirmintendstodo(ideaofferingdestinationmix),thereisa right model to look at and adopt. Although it is possible, it is not necessary that a company musttrytomigratefromadomesticfocusedoperationtoanexportfocusedoperationorfroma localfirmtoaforeignfirm.Onecanremainwithinaparticularmodelandaspiretobebestin classwithinthatparticularmodel.Anentrepreneurinvestormust,therefore,clearlyunderstand modelimplicationsbeforestartingafirm.
Finally, it is important for aspiring entrepreneurs, business leaders and managers of existing venturestounderstandthestrengths,weaknesses,prerequisites,andstructurallimitationsof each of the generic software business models. They must vet their ideas through the lens of thesebusinessmodelsandensurethattheyfullyunderstandtheirvariousdimensionsandthen adoptonethatbestsfitstheideaofferingdestinationprofileoftheirventureandtheirshortand longterm aspirations from the same. Understanding the model limitations is critical to the longtermgrowthoffirmsandtheindustryasawhole.Dependinguponthecircumstancesand the goals and aspirations of the founders, many firmstrapped in the structural limitations a particularmodeltrytooutgrowitbydoingmoreofthesame.This,theyultimatelyfindoutis the fruitless approach. This taxonomy also attempts to drive home the fact that, when in a situationlikethat,onemustchangethestructureratherthanfightit.
7.ENVIRONMENTAL,INFRASTRUCTURE&PUBLICPOLICYCHALLENGES
Inadditiontothecompetitive,strategic,andorganizationaldrivers,wealsosoughttoidentify variousenvironmental,infrastructure,andpublicpolicychallengesfacingtherespondents.The survey questionnaire contained a question asking the respondents to identify, from a list of twenty possible factors, what they perceived to be the most important environmental and
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publicpolicybottleneckstothedevelopmentofsoftwareindustryinPakistan.Theresultsofthe surveyaretabulatedinTableXI(below).
The simple aggregation of the data, on perceived prevalence of environmental and policy bottlenecks, suggests a clear picture. The table presents the percentage of respondents that identified a particular environmental/policy bottleneck as applicable to the Pakistani software industry and highlights (in bold) the top5 problems identified by each subcategory of organizations. Countrys Image, overandabove the companys brand, tops the list as the problem identified by as many as 68% of all respondents. This is followed by quality of manpower (56%), the cost of IT/Telecom infrastructure (50%) and lawandorder and security situation (48%) as the most important problems from the perspective of alltypes of firms combined. We, however, do see some variations within subcategories. While the image problemremainsaconcernformostnumberoforganizationsacrossallcategories,thereissome evidence that cost of IT/Telecom infrastructure might affect domesticfocused operations disproportionatelythanexportfocusedorhybridoperations.Similarly,agreaterproportionof domesticfocusedoperationstendtoidentifycustomsandtariffbarriers,availabilityofphysical infrastructure(e.g.power,officespaceetc.),credibleinformationonvendors/customers(lackof market maturity), and absence of intellectual property rights as serious policy issues while a greater proportion of exportfocused software operations tend to see the image problem and qualityofmanpowerasmajorconcerns.Hybridstendtofallinbetweenthesetwocategories.
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TABLEXI:PERCEPTIONOFPOLICY&INFRASTRUCTUREBOTTLENECKS
Policy&InfrastructureBottlenecks
MarketOrientationofSoftwareHouses All Combined*
Domestic Focused*
Hybrids
Export Focused**
N=58 N=19 N=11 N=20 63% CostofIT/TelecomInfrastructure(e.g.Bandwidth) 50% 36% 30% AvailabilityofITTelecomInfrastructure 43% 47% 36% 30% 63% 63% 70% Countrysimage,overandabovecompanysbrand 68% 56% 54% 65% Qualityofmanpower 52% 48% 63% Lawandorderandsecuritysituation 52% 25% 45% Braindrainandretentionoftalentedemployees 43% 44% 27% AbsenceofIntellectualPropertyRegime(IPR) 43% 52% 45% 25% 50% AvailabilityofHumanResources 43% 38% 45% 57% Problemsindealingwithcustoms&tariffs 34% 18% 20% 63% Lackofcredibleinformationoncustomer/vendors 32% 27% 20% 57% 54% LackofPhysicalInfrastructure(estate,poweretc.) 39% 15% 45% Availabilityofventure/riskcapital 36% 42% 27% 54% 25% Difficultiesindealingwithregulatorybureaucracy 39% 52% **Domestic/Exportfocusedsoftwarehouseisonewith>75%salesindomestic/exportmarketsrespectively *Top4/5ineachcategoryarehighlighted(bold)
Inordertofurtherconfirmtheseresults,wealsoaskedtherespondentstoidentifytheTop3 environment and policy problems that had actually affected the growth and development of their company. This, we thought, would further substantiate the earlier results and identify differencesintheperceptionandthereality.TheresultsaresummarizedinTableXII(above). Theimageproblemagainemergesasonethathadaffectedthemostnumberofcompaniesin oursample,closelyfollowedbyqualityandavailabilityofmanpower.Thelawandorderand securitysituationseemstobeacomponentoftheimageproblemanddoesnotalone,byitself, causealotofconcerntotherespondents.Therearesomeinterestingdifferencestoo.Braindrain of talented employees tends to be a significant inhibitor for domesticfocused software operations,asdoesthecostofIT/Telecominfrastructure.Lackofgovernmentcontractsappears to disproportionately affect hybrids. Absence of intellectual property does not seem to be among the topthree growthinhibiting factors for either the hybrids or the exportfocused operations.Only15%ofthedomesticfocusedoperationsbelievelackofIPregimehasbeenone thetop3inhibitingfactors.Apartfromtheseminordifferences,however,theresultsaremore orlessconsistentandseemfairlycredible.
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TABLE XII: REALITY & PERCEPTIONTOP3 POLICY & INFRASTRUCTURE BOTTLENECKSAFFECTINGGROWTHOFSOFTWARECOMPANIES
Policy&InfrastructureBottlenecks
TypesofSoftwareHouses All Combined*
Domestic Focused*
N=19 26% 15% 42% 31% 5% 31% 15% 26% 21% 15%
Hybrids
N=11 10% 9% 81% 27% 18% 9% 0% 45% 18% 27%
Export Focused*
N=20 20% 20% 35% 35% 5% 15% 0% 35% 20% 10%
CostofIT/Telecominfrastructure(e.g.Bandwidth) AvailabilityofITtelecominfrastructure Countrysimage,overandabovecompanysbrand Qualityofmanpower Lawandorderandsecuritysituation Braindrainandretentionoftalentedemployees Absenceofintellectualpropertyregime(IPR) Availabilityofhumanresources Lackofavailabilityofventure/riskcapital Lackofgovernmentcontractstosoftwarefirms *Top3ineachcategoryarehighlighted(bold)
N=58 24% 15% 48% 31% 12% 20% 5% 32% 20% 13%
Developing a detailed analysis of these problems, identification and recommendation of remedial measures, or even a detailed discussion on each of them is beyond the scope of the currentresearch.Itisstronglyrecommendedthatanexercisebeundertakentoidentifythemost critical of these issues, develop status/position papers on each of these issues, elucidating the problemanditsvariousdimensionsusingtraditionalpolicyanalyticparadigmofa)defininga problem,b) constructingtheevidence,c)constructingalternatives,d)conductinganalysise.g. costbenefit, businesscase, or market/governmentfailure analysis, e) selecting a criteria, f) analyzing tradeoffs, and g) making a decision. The final solution must also carry a detailed roadmap along with performance measures for each stage of the roadmap, and must be developed in consultation with key stakeholders, including privatesector entities and the softwarecommunity.Wesuggest puttinginplaceacomprehensivepublicprivatepartnership basedonaseriesofconfidencebuildingmeasuresandcontingentcommitmentsbybothparties. Thedetailedconceptualframeworkandactionplanforputtingtogethersuchaneffortcanbe developedwithguidancefromarealisticassessmentofproblemsonthegroundandothersuch arrangementsintheworld. While the Government of Pakistan has done some work in many critical areas, especially in puttingafriendlierregulatoryandtaxenvironmentinplaceandbringingdownthecostofIT infrastructure,oursurveyindicatesthatalotstillneedstobedonetobridgethegapbetween the current and the desired state in almost every environmental/policy bottleneck area, but
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more specifically, in the areas of image management, infrastructure cost and availability, human resources quality, localmarket development and demand creation, availability of ventureandriskcapital,andintellectualpropertyrightsetc.Whilewehavealreadydiscussed several of these issues in some detail above (e.g. HR availability and quality, image problem etc.) we would briefly touch upon the lessdiscussed ones and see how they affect our respondents. We would also talk about some of the suggestions put forward by our interviewees.However,wedowarnourreadersthatthis,bynomeans,isacompleteanalysisof theproblemsandshouldnotbeconstruedassuch.Followingisabriefreviewofsomeofthe key issues, as identified by the survey responses and qualitative interviews with over 65 industryofficialsfromaboutasmanyorganizations.

7.1TelecomInfrastructureCost&Availability Telecom infrastructure or simply Internet connectivity and bandwidth remain an area critical to the industrys shortterm survival and longterm viability and growth. High quality bandwidth assumes an even more important role for the exportfocused industry whereitsimportanceisakintotheimportanceofairportsandseaportsfortrade.Tobefair, thebandwidthavailabilityandcosthassignificantlyimprovedinthelastfewyearswitha dedicatedleasedlinenowcostingaslittleasRs.45,000permonth(~$800)andahighspeed T1linecostingaboutUS$2000amonth.Thisisinsharpcontrasttothesituationafewyears back when the former was almost not available and the latter was prohibitively costly. While the costs would still have to come down and there is some evidence that they are, availabilityandreliabilityofsupplyisasmuchanissueascost.
Manyofourrespondents,whileappreciativeofGovernmentseffortsintermsofproviding telecom infrastructure, highlighted the need for further improvements. Many of our interviewees asserted that for most missioncritical applications or support functions (e.g. doing backofficework, hosting applicationsforthem etc.) a connectivity of anything less than 24x7 is not acceptable to potential clients. One of the persons we interviewedwho hostbankingtransactionsystemsforseveraloverseasclientsfromhisfacilityinPakistan narrated the story of one such blackout when the entire countrys backbone went dead withoutpriorwarningandhecouldnotgetanyalternativeroutetoconnectivity.Withhis cellphoneringingcontinuously,hehadtouploadhisentiresoftwareonhislaptop,embark onaflighttoLondon,andplugthelaptopintotheInternetfromhishotelroominLondon to restore the availability of his clients systems. While this example may be unique, the problemisquitegenericandneedsfurtherattentionofpolicymakersinthiscountry.
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Another problem that our respondents often alluded to was selective availability of bandwidth. While, the Internet connectivity at Software Technology Parks (STPs) around thecountrymaybemuchmorereliablethantherestofthecountry,theselocationsarefew and far between and are not equally accessible to all types of clients. To start with, availabilityofspaceinSTPsinIslamabadseemedtobeanissue.Secondly,becauseoflarger lotsizes,locatingintoanSTPisnotreallyanoptionforanewstartupcompanywith35 employeesyetcostofbandwidthandavailabilitymightbeascriticaltothemasitistoa large company.Thereis certainlya need to improve the accessibility of highspeed, high qualityroundtheclockbandwidthtomorelocationsaroundthecountry.
7.2AvailabilityofVentureandRiskCapital Theavailabilityofrisk/ventureaswellaslaterstage(expansion)andworkingcapitalis anothercriticalpolicyissueforthesoftwareindustry.Thereareatleasttwoanglestolook at this issue, namely, the software industry and the financial community. That there are onlylimitedavenuestogetstartupfinancingandmajorityoftheseendupbeingcontrolled by unsophisticated, from the software standpoint, individuals/groups would not be an understatement. The belowpar performance of software ventures created through the investment of business houses, and the reluctance of the financial sector to make investmentsinsoftwarestartupsforreasonsoflackofindepthknowledgeoftheindustry dynamics and inability to correctly evaluate and execute upon a software venture further complicates the situation. There is a dire need to educate the relevant stakeholdersthe entrepreneursandthefinancialcommunitytoappreciateeachothersperspectives.There isalackofunderstandingandsophisticationonbothendsofthespectrumthatneedstobe addressed through networking and education. Although, this process is happening graduallyonesignofwhichistheexperimentationofthefinancialsectorwiththeventure capital instrumentit may be receptive to wellthoughtout interventions by the relevant stakeholdersoratrustedintermediary.
Is there a role of a publicsector venture capital fund to support software and technology focusedbusinesses?Whilethisquestionwasnotdirectlyaskedtous,itwashinteduponby severalentrepreneursinourdiscussions.Publicsectorventurecapitalhasbeenadominant theme in the technology policy literature for a while now. While there are examples of a publicsectorventurecapitalprogramsdonewell(e.g.IsraelsYozmaProgramhasbeenan unqualified success) or one that have had a catalytic effect on the industry (e.g. SBIC program in US, or the public venture capital funds established in India in the 1980s), the technology policy community generally sees it as an instrument that needs very careful
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analysis and planning, and equally adept execution. That does not, however, imply that lessons cannot be gleaned from such programs around world and an effective program cannot be developedjust that it may require great caution and carethings that do not generallycomenaturallytopoliticallymotivatedpublicsectorbureaucracies.Shouldsuch aninitiativebeplannedforthelocalindustry,wewouldrecommendanunbiasedclearly defined objective and an indepth analysis of alternative organizational arrangements to housetheinitiative.
7.3UnderdevelopedDomesticMarket Theunderdevelopmentofthedomesticmarketforsoftwarewasanotherrecurringtheme in our discussions with the industry executives. Barring few areas (e.g. financials, Telecommunicationsetc.)whereweseesomeactivityanddemandforlocallydeveloped softwarethe local industry suffers from a serious lack of demand for software products andservices.Therecanbemanyreasonscontributingtowardsthestatusquo,namely,the prevalence of piracy and resulting fixation of the customer on lowpriced highquality piratedsoftware,theinabilityofthecustomertodefinehis/herrequirementsandevaluate software vendors effectively, the inability of the developer to make an effective business case to the customer, and the absence of many replicable success stories etc. The general level of maturity and awareness in the market is something that would take its time althoughtheprocessmaybe,andinsomecaseshasbeen,facilitatedandexpeditedthrough appropriate interventions. The current government program of developing standardized specifications for major industrial sectors is one such example. Not every past or present programhasbeenassuccessful,though.Manyintheindustrypointouttowardsthefaux paxinexecutingtheIndustryAutomationandGEMS2000initiatives.
Governmentsroleindemandcreationonthedomesticfrontisfairlycontroversial.While some seem to appreciate its role, especially more recently, others are still very skeptical. Manyofourintervieweeshighlightedtheneedforawardinglargegovernmentcontractsto localsoftwarefirms.Theyexpectustodolargeprojectsforforeigncompanies.Howcanwedoit if we have never done a large project in our lives. When the government wants to award a large contract,itgivesittoaforeigncompanyorcreatesitsown(NADRAwastheoftencitedexample), howcanwebegindoingqualityworkwhenthereisnoworktodo,wasacommentmadebyone executivebutreflectsasomewhatgeneralfeelingwithintheindustry.Severalideasinthis regard ranged from an exportcredit scheme specifically targeted at encouraging the software industry to export to focusing on nontraditional markets, namely, Middle East andtheIslamicBloc,toputtinginplaceagovernmentprogramofpickingwinnersand
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creating keiretsus or superfirms as done in Korea and the European Union respectively, to starting up plainvanilla procurement programs of significant magnitude. Eachofthesealternativeshasitsownmeritsanddemeritsandmustbecarefullyevaluated in the light of these. Although we are fairly skeptical of the whole use of an infant industryargument,webelievethereissomemerittothesesuggestionsandthusaneedfor soulsearchingandanalysisofvariousalternatives.
Smallimaginativestepscantriggerandcatalyzeaprocessthatmaypayoffinthelongrun. We came across a number of ideas in this regard. One CEO of a large software house pointedoutonemajorkinkinthetaxationsystem.Whileexportsareexemptfromtaxation forafewyears,companieshavetopayataxonsaleofdomesticsoftware.Thereishardly anyrevenuesonthedomesticside,whatgooddoesitdototaxwhateverlittlecompaniesareableto makefromit?questionedthisexecutive.Whatitperhapsdoesisthatitdistortsthedecision calculusofmanyfirmsatinceptionandforcesthemtoworkontheexportfrontratherthan the domestic side. In a perfectly wellmeaning intention to promote export, this policy ultimatelyendsupproducingacounterproductiveeffecti.e.hinderingthedevelopmentof a domestic market for software that might in turn feed into the software exports of the country.Manyotherintervieweesseemedtoagreewiththeabovenotion.
AnotherCEOalsopointedoutthefactthattheeffectiveindirecttaxationonthesoftware industry may be much more than other industries in a relative sense. The reason for this discrepancy, he believes, is the different organizational nature of the software production business. We do not use a lot of inputs that are subsidized by the government in the same proportions that other industries do and thus do not benefit from the tax subsidies by the government.Ifyoudoaccountingcalculations,asoftwarebusinessendsuppaying4045%higher taxthanotherbusinesses.Again,withoutgoingintothemeritsordemeritsofeachofthese arguments,wewouldliketounderscoretheneedforacarefulexamination.
7.4AvailabilityofPhysicalInfrastructure Availability of physical infrastructure (e.g. officespace, power and water, parking etc.) is anotherareathatmaybeactingasahindranceinthewayofsoftwareindustry.Oneofthe mostimportantissuesconfrontingsoftwareindustryperhapsasimportantasroundthe clockbandwidthisuninterruptedpowersupply.Withthequalityofthecountryspower supply, most ventures must also make provisions for the additional costs of putting UPS and supplemental power generation capability. Another irritant that many of our intervieweespointedouttouswasthedifferencesinratesatwhichpowerwasprovidedto the software industry. Specifically, despite being acknowledged as an industry, the
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softwareindustrycannotgetapowerconnectionatindustrialrates.Thecommercialrates that software houses get for their power connections are about 3040% higher than the industrialratesthusputtinganaddedandunwarrantedburdenonanascentandfledging industry.
Incertainareaswhereitismostneeded,officespaceisincriticallyshortsupply.Islamabad isoneexamplewheresoftwareexecutivestoldusthatitisverydifficulttogetdecentand affordableofficespacewithalltheinfrastructuralparaphernaliathatisneededtosetupa software operation. One of the executives told us that he/she has been looking for somethingthat(s)hewouldlikeforthelast2yearsbuthaventbeenablefindit.Myforeign partnerwantstoopenupanofficeinIslamabadandkeepsonaskingmehowtogoaboutit.Ivebeen avoidingcomingtothepointwithhimforthelastyearorso.WhenIcantevenspaceformyself, how can I possibly help him, says this executive claiming that this is a possible foreign investmentopportunitygonewasteforPakistan.
Onthecontrary,manyofourintervieweespointedouttousthatmajorityofSTPsarebeing setup in locations that are not as rich from a human resources standpoint, as many company executives would like them to be. One of our respondents questioned the logic behindsettingupanSTPinaposhKarachilocalitywhile90%ofhis/heremployeesand thiswasafairlycommonfeatureinKarachicommutedfromGulshaneIqbalandNorth Karachiareas.IhaveacarandcantraveltoGulshaneIqbaleveryday,claimsthisAmerica returnedDirectorofthecompany,butwhatusetomeisthisofficespaceifmyemployeeshave tospend2hourscomingtoworkeverydayandchangetwobuseseachwayandendupcomingto workinaframeofmindnotsoconduciveforcreativeworkandthentheywanttogobackhomeearly becausetheywontfindabusiftheysitlateintheoffice.Yet,asthisDirectorpointedout,there is no move to set up an STP in areas where they could be most productive for software developmentactivity.AnotherCEOinIslamabadpointingouttothefactthatIslamabad based companies have already consumed most of the quality manpower available expressed reservations about a mismatch between where the demand for highquality infrastructureisandwhereitisbeingprovided.
Whilemanymaynotagreewiththeexperiencesofthesegentleman/ladies,webelieve,they have enough merit to warrant a detailed analysis of the demandsupply patterns in the softwareindustrytoguideandsetinmotionshorttolongterminfrastructuredevelopment plans.
Several other interesting ideas came up in our conversations with other interviewees. For example,oneoftheintervieweeslookedatthevastunutilizedlandsofPunjabUniversityin
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Lahore and wondered if the University could develop a part of it into office spaces for technology ventures. I can bet that in a few years, Punjab University would be earning much more revenues from this alone than what it gets from HEC. This is precisely what Stanford Universitydidinthe1950sthatledtothecreationofSiliconValleyinCalifornia.Perhaps therearelessonstobelearntfromthisexample.
Another interviewee suggested a way to get around the security and congestion issue in KarachibydevelopingSTPsneartheQuaideAzamInternationalAirport.Thelandbelongs to CAA and as far as I know, they have also been receptive to leasing out the land to forprofit ventures.Perhapsinafewyears,peoplewouldplantodevelophotelsrightnexttotheSTPandthe airport. For an isolated area like this, one can develop a better functioning and foolproof security arrangementaswell.ThismightopenupawayforforeignerstovisitPakistan.Youjustlandatthe Airport, go to your hotel, hop into the STP, do your work and fly out. There is some merit in both of these proposals. But more importantly, it underscores the need for our policymakers to think outofthebox in dealing with issues like, image, lawandorder, congestion,infrastructureetc.
7.5IntellectualPropertyRights The fifth and final issue that we would like address in this list of hitherto undiscussed issues is that of intellectual property rights. The issue is sensitive in the way it is often talkedaboutinthelocalliteratureandpolicycircles.Itisoftenassociatedwiththeimages ofBSAsantipiracycampaignsandMicrosoftsdesiretoextractrevenuesfrompoorthird worldcustomers.However,thereismoretoitthanthat.Tobefair,thePakistanisoftware industry is both a beneficiary and the affectee of software piracy. A lot of reasons for the lack of demand of software development in the local market may be attributed to the availability of pirated software. Many executives highlighted the notion that the local customerwasmentallysofixatedatRs.50beingthepriceofsoftware,anysoftware,that (s)hewasunwillingtoappreciatetheactualcostofdevelopingasoftwarelocally.WhenI cangetitinRs.50,whyshouldIpayyouRs.200,000orevenRs.10,000isatypicalresponse they get from their customers. Yet, on the other hand, all software houses, whether they acknowledge it or not, benefit from these cheap software CDs indirectly, if not directly, eitherthroughthegraduallyincreasingsoftwareliteracyofthelocalmarketorthecheaply trainedmanpowertheycangetbecauseofit.
Theissueofdevelopinganappropriateregimeofintellectualpropertyrightsindeveloping worldingeneral,andPakistaninparticularissocomplex,thatitwouldwarrantaseparate independent investigation of its own. Whether Pakistan can develop a viable and world
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class software industry or attract significant foreign investment without arriving at an acceptable solution to software piracy is a question that requires much detailed analysis andisbeyondthescopeofthisresearch.Whatwecansayfromoursurvey,however,isthat theabsenceofintellectualpropertyrightsisseenasamoderatelevelenvironmental/policy bottleneck4050% companies believe sobut is hardly seen as something that has significantly hampered their developmentonly 515% companies categorize it as a significant(top3)bottleneck.Manycompaniesthatwespoketohavedevelopedwaysand means (e.g. security arrangements, alternate business models, and sourcecode sharing policies)togetaroundtheissueandtheirCEOsseeitasanissuethattheywouldliketo getsolvedsomedaybutdontlosetoomuchsleepover.
8.CONCLUSIONS&RECOMMENDATIONS
InSummary,thisstudyrevealsamixedpictureofthePakistanisoftwareindustry.Onthe onehand,wefindanindustrythatisevolvingandgraduallymaturingovertimefromits muchhyped beginnings in the earlytolate 1990s, while on the other hand, we see some serious challenges that still need to be addressed if it is to make it mark on the worlds softwaremarkets.TheunrealizedexpectationsandpromiseoftheDotComerahasresulted in much thinking and reflection on the part of the entrepreneurs and businessmen about issuesthatarecriticaltothelongtermviabilityofasoftwarebusiness.Termslikedomain expertise, strategic focus, and productservices tradeoffs are now becoming a part of the industry lingo. While we could not statistically identify the effect of the DotCom Bubble burstontheindustry,wecanrelateseveralpiecesofanecdotalevidenceaboutthesobering effect it has had on the structure of some of the largest firms in the industry. Those that havesurvivedthisdifficulttimearemuchstrongerandmorefocusedcompaniesandthey arenowbeginningtoseethingsturnacornerforthem.
Tenyearsorslightlyalittlemoreisaveryshorttimeinthelifeofanindustry,claimstheCEO ofoneofthelargestsoftwarehousesinPakistan.IthastakenIndiaatleastacoupleofdecades andalotofgoodluckbeforetheycouldreachapointweretheystandtoday.Wehaveonlysownthe seedofanindustrythatIamhopefulwouldbecomestrongoneday.Whatwehavebeenabletodo inthelastdecadeorsoistoputinplacethebasicorganizationalandinfrastructuralparaphernalia onwhichwecanbuildastrongindustry.Iampositivethatthenextfewyearswouldseeusdoing muchbetterasindividualfirmandasanindustry,headded.Whilenotallthatwespoketo would agree with this optimistic assessment of the future, we believe, todays software
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industryismuchwiserandmorepreparedtotakeonthefuturechallengesthanatanytime during the past decade. True, there are several weaknesses and bottlenecks, both at the organizationalandthepolicylevels,thatwewouldhavetocollectivelyaddress,butitcan bedone,providedwehavethewilltodoit.
8.1SummaryofResearchResultsandFutureDirections
Fromtheresearchstandpoint,thisstudypointstowardsseveralinterestingandsubstantive findingsandhighlightsareaswheremoreresearchworkneedstobeconducted.
First, we failed to find conclusive evidence in support of a trend of specialization and focus, at the level of an industry, if not the firm. Are we, as an industry, doing better at creating more focused firms? Can we detect differences in the organization of software development activity that might point towards greater specialization or optimality? For example, the organizational processes of a company trying to do software outsourcing shouldbesignificantlydifferentfromonefocusingonaproductmarket,afactthatshould be reflected in organizationallevel data on these two types of organizations. While there areexamplesofbestinclassfirmsoperatingwithinwelldefinedproductservicesniches and doing a good job at that, we do not find, on average, significant differences between productfocusedvs.servicesfocusedfirms,exportfocusedvs.domesticfocusedfirms(etc.) in terms of their organizational structures and managerial practices. This is one area that needsmoreworkonthepartoftheindustryandamoreindepthanalysistoidentifythe reasonsforthesame.
Second, there is some suggestive evidence of best practices within the industry. The relatively betterperforming firms tendto adoptmore employee friendly policies than the rest of the industry. Also, they tend to have better quality management talent. These are robust findings across multiple reference and control groups (e.g. top10 firms, fastest growingfirms,andglobaltopquartilefirmsetc.).Similarlyfirmsofallsubspecializations tend to favor the more highcontact marketing approaches (e.g. word of mouth, pre established networks, and onetoone contacts) against the relatively lowcontact ones. There might be lessons in this for the policymakers designing programs (e.g. trade delegations, conference attendances) to improve the networking and customer acquisition ability of Pakistani software firms or for the industry entrepreneurs themselves
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contemplating a new venture. We further supplement these statistical results with qualitativefindingsofstrategicchallengesandmanagerialbestpractices.
Third, although our results on measures of technical practices and process quality are mixedand sometimes counterintuitivethey point towards some consequential findings. From the standpoint of technical and process quality, we find a lot of variation within the Pakistani software industrya fact that may or may not auger well for the industrys maturity. That firms maybe acquiring quality certifications (e.g. ISO 9000) for reasonsthatmaynothavealottodowiththeactualqualityoftheirprocessesisyetanother findingworthsomethought.Wealsofoundevidenceofdifferentialpropensitiestoseeka quality certification (e.g. hybrids seem to have a greater propensity to seek a quality certification than either the exportfocused or the domesticfocused software operation) among our sample of respondents. This was in contrast with the actual expenditure on qualityassurancewheretheexportfocusedsoftwareoperationstendtodobetterthanthe rest. Similarly, there are no clear patterns in terms of the type of software engineering methodologies or technical best practices (drawn partially from the CMM methodology) preferred by various subcategories of software operations. A more detailed projectlevel analysis of the technical and process quality of software operations that adequately accountsforthedifferencesinthetypeofworkperformed,theintendedmarket,andother projectleveldeterminantsiswarranted.
Fourth, there are a number of generic strategic challenges that need to be addressed by entrepreneurialventuresofvarioustypes.Wefindanumberofinnovativewaysinwhich companieshavetriedtoaddressthesechallengessomemoresuccessfullythanothers.We discuss several different approaches to each of the thirteen (13) strategic challenges identified in the report and document twenty (20) managerial best practices adopted by relatively successful companies that others might consider using as well. While many of these challenges have a clearly organizational focus (e.g. developing a domain expertise, setting up a quality software development operation, managing parentsubsidiary relationshipsetc.)othersmaybebeyondtheinfluenceofasinglefirm(e.g.counteringthe image problem, getting access to quality human resources etc.) and others still may require a partnership between public and private sector entities (e.g. setting up an operationinPakistan,scalingupthePakistanioperationetc.).
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Anexampleofonesuchchallengefortheindustryisscalingupthesizeofaveragesoftware developmentoperationtoundertakelargerprojects.The(in)famousnumberbeyondwhich onlyafewfirmshavemanagedtogrowapsychologicalbarrierofsortsoftenquotedas a part of the industrys grapevine is 200 people. Several reasons are put forth for this seemingly intriguing regularity, including, the lack of quality professionals, inability to acquireenoughcustomerstopredictdemandinthefuture,alackofmiddlemanagement and project management professionals, a lack of trust between various stakeholders, a hesitancetoprofessionalizingtheventure,andalackofexperienceininstitutionbuilding etc. Needless to say that there are companies that have grown to a size of 200 or more employees but the fact that we have not been able to do so more regularly and build companies that are an orderofmagnitude or more bigger than what we have, is still a criticalstrategicchallengefortheindustry.
Finally, despite considerable progress on a number of public policy and infrastructural bottlenecks, the industry still faces a number of environmental and public policy challenges.Theprevalenceoftheimageproblemasacriticalbottlenecktothegrowthof the industry and perceived to have actually affected the largest number of firms in our sampleisoneexample.Othersignificantenvironmentalandpolicybottlenecksinclude:the quality and availability of human resources, cost and availability of IT/Telecom infrastructure, and lack of availability of physical infrastructure (e.g. officespace, water, poweretc.).Weunderscoretheneedforcarefulanalysisoftheextentoftheseproblemand their impact on the industry, some creative and outofthebox thinking on possible solutions,andputtinginplaceapublicprivatepartnershipframeworkbasedoncontingent commitments of the two parties and governed by a transparent performancebased assessmentframeworktoaddressthese.
8.2TheWayoftheFuture:SomeTentativeConclusions
Wheredowegofromhere?Theimplicationsofthedataandfindingspresentedaboveare quite clear. We would not try to go beyond the mandate of this report and suggest alternativescenariosforthedevelopmentofthePakistanisoftwareindustryand/orsuggest a concrete roadmap to get to the most desired scenario. Our objective was to create the awareness and an unbiased assessment of where we are so that those responsible for deciding where to go, and how to get there, at both organizational and policylevels, can usetheinformationtomakebetterinformeddecisions.Wehave,however,takentheliberty
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tomakesometacticalrecommendationsasandwhenwehavefoundonestaringatourface duringthecourseofthisanalysis.
On the whole, however, there are a few generalized conclusions that one can draw. The first and foremost contribution of this study is to bring forth the very vibrant face of Pakistans softwareindustry.Pakistantoday,unlikeyesteryears,isfastturningintoahappeningplacefor IT. While the industrys first documented firm Systems Ltd.opened shop in 1976, the industryhasonlybeenasubjectoffocusedattentionforjustoveradecadenow.Thedecadeof the 1990s and the DotCom Bubble burst have brought considerable maturation and reality check to industry players. Ten years is a very short time for the development of an entire industryandtherearesignsthatPakistanssoftwareindustry,havinglaidthefoundationsfora tomorrow,maybeinforbettertimesahead.Lastyearalone,theindustryhasgrownataround 37% in revenues and 27% in terms of technical and professional employment. Many of the CEOswespoketoexpectabetterthanlastyearperformancein2005.
Another sign of the industrys maturity and coming of agefacilitated by the global geopolitical environment and offshoring trends is the fact that an increasing number of PakistaniownedforeigncompaniesaresettingupdevelopmentcenteroperationsinPakistan. Whilemanyofthesechoosetooperateundertheradarscreen,theyaredefinitelygoingtobring aboutconsiderabletransferofknowhowandideasfromwesternsoftwaremarketstoPakistan andresultinthegenerationoflocalentrepreneurialactivity.Also,anotherunmistakablesignis the trend of reverse braindrain of quality Pakistani professionals from abroad who, given significantlylesscompetitionforideasandtalentandarelativelyvirginmarketathome,seea tremendous opportunity in setting up a Pakistanbased company. Systems Integration, InnovationandIntelligence(SI3)andTheResourceGroup(TRG)aretheposterchildrenofthis undeniabletrend.Noneofthesewouldhavebeenpossibleadecadeago.
On the domesticfront as well, there is a growing likelihood of considerable opening up and modernization of traditionally conservative segments of the economy. If deregulation in the financialsectorisanycrediblesignofthingstocome,wearelikelytoseemassivechangesin the shape of the local manufacturing and service industries by virtue of telecom sector deregulation and the enhanced competition under the noweffective WTO trade regime. The former has already begun to show tremendous promise with around a billion dollars of promisedinvestmentinlastyearalone.Aninvestorwhomwespoketoseesthesituationasthe fading away of the Old Pakistan and the Emergence of the New Pakistan that is effectively linked to and a significant player of the global economic system. The New Pakistan presents considerablepromiseandopportunitytothosewillingtobiteatit.Thereareliveexamplesof companiesTRG, SI3, LMKR, Netsol, Techlogix, Etilize, TPS and many morethat have capitalizedonthisnewsetofopportunitiesandpositionedthemselvestoreaptherewards.
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There are, however, considerable, although not insurmountable, challenges too. The industry suffers from a serious professionalization and institutionalization deficit. The 200people barrier,althoughpsychological, isrealtillit is actually brokenandbrokenconvincinglyand forever.Inadditiontothe200peoplebarrier,wealsofacea20peopleanda2peoplebarrier thatrequiresasmuchattentionas theformer.Manyofourveryinnovativefirmscontinueto resistprofessionalizationandthusfailtogrowbeyondaparticularsize.Theindustryishungry for capable investors/acquirers to come forth and bring about paradigm shifting structural changes to these companies and enable them to move to the next higher level of growth. The fastmaturingmarketofoutsourcingandoffshoringservicesnecessitatethatourentrepreneurs and business leaders think about new ways of doing things. It is unlikely, given the consolidation in the industry, that we would see a new player replacing Wipros, Infosys, or TCS of this world. Rather than blindly copying the already wellestablished countries and players, we must think creatively to devise a model that best suits our own strengths and weaknesses.Ourabilitytoleadinthebusinessmodelinnovationwoulddetermine,toalarge extent, our place in the future pecking order of software exporting nations. Playing the volumesgame(ITES/BPO),withouttherequisitescalabilityandHR,isunlikelytosucceedon anindustrywidescale.Untilwecanresolvethescalabilityissue,wemustlearntoplayinthe equallylucrativeideasgame.
InadynamicandfastchangingindustrylikeIT/Software,tomorrowcanandwillberadically different,andnotmerelyanextensionoftoday.Itwouldrequireinvestorsforesight,business managers insight, and entrepreneurs courage to capture the moment and build the next generationofnicheplayersandindustryleadersandbuilditintheNewPakistan.Profitsare certainly to be earned by those who break the rules and try the unthinkable. There is, however, a dire need to think deep and hard about the problems, patterns, and strategic challenges identified in this report, find explanations for these, and devise strategies to get aroundthem.

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9.APPENDIXA:LISTOFORGANIZATIONSSURVEYED/INTERVIEWED LISTOFORGANIZATIONS&INDIVIDUALSINTERVIEWED
NameofIndividual

Position,Organization
InterviewDate
ListofOrganizationalInterviews 1.Mr.AdnanAgboatwalla 2.Mr.RahimHasnani 3.Mr.AbdulGaffarMemon 4.Mr.QamberHydery 5.Mr.MazharHasan 6.SyedAsifIqbalQadri 7.Mr.AmerHashmi 8.Mr.SuhailMunir 9.Mr.ArshadKhalil 10.Mr.AamirBaig 11.Mr.AshrafKapadia 11b.Mr.NadeemMalik 12.Mr.JawwadFarid 13.Mr.AkbarMunir 14.Dr.QasimShaikh 15.Mr.AtifR.Khan 16.MrMohdAzam 17.Mr.NevilPatel 18.Mr.SalmanRana 19.Dr.FarrukhKamran 20.SyedNaumanHashmi 21.Mr.Mohd.Shamim 22.Mr.OvaisAshraf(CEO) 23.Mr.MansoorAKhan 24.WgCdr.(Retd.)ShahidTufail 24b.Mr.BasimMirza 25.Mr.MohsinAziz 26.Mr.ShoaebShams 27.Mr.SalimGhori 28.Mr.NaumanA.Zaffar 29.Dr.SalmanIqbal 30.Mr.ShahabAshraf 31.Mr.AliA.Sheikh
MD,ClickmarksPvt.Ltd. CTO,ITIMAssociates CEO,KalSoftPvt.Ltd. CEO,2BTechnologiesPvt.Ltd. CEO,YevolvePvt.Ltd. CEO,PostAmazersPvt.Ltd. CEO,SiiiSystemsInnovation CEO,Secure3Networks Chairman,JinnTechnologies CTO,EtilizePvt.Ltd. MD,SystemsPvt.Ltd Director,SystemsPvt.Ltd. CEO,AlchemyTechnologies Director,ElixirTechnologies LocalHeadofOperations,Quartics CEO,LMKR(Pvt)Ltd CEO,AskariInfo.Systems COO,ProsolTechnologies GM,UltimusPakistan CEO,CAREPvt.Ltd CEO,AdvancedComm. CEO,ComceptPvt.Ltd. CEO,TrivorSystems CEO,MakabuPvt.Ltd. EVP,OratechSystemsPvt.Ltd. Mgr.,MITPvt.Ltd. CEO,XavorPakistanPvt.Ltd. EVP,ESPGlobalITServicesPvt.Ltd CEO,NetsolPvt.Ltd. VP,TechlogixPvt.Ltd. CEO,SoftechSystems(Pvt)Ltd GM,StrategicSystemsIntl CEO,AcroLogix(Pvt).Ltd
19/10/04 20/10/04 22/10/04 24/10/04 21/10/04 25/10/04 21/10/04 20/10/04 21/10/04 21/10/04 23/10/04 11/11/04 14/10/04 27/10/04 27/10/04 26/10/04 28/10/04 28/10/04 01/11/04 29/10/04 29/10/04 29/10/04 28/10/04 02/11/04 27/10/04 27/10/04 04/11/04 10/11/04 12/11/04 05/11/04 09/11/04 08/11/04 04/11/04
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32.Mr.LutfullahKhan 33.Mr.RazaSaeed 34.Mr.ZiaImran 35.Mr.AbdulAziz 36.Mr.MasoodKhan 37.Mr.UroojA.Khan 38.Mr.JunaidKhan 39.Mr.AsadAlim 40.SyedYousuf 41.Mr.KhalidRazzaq 42.Mr.YousufJan 43.Mr.AhmedAllauddin 44.Mr.MohdSohail 45.Mr.AyubButt 46.Mr.FarooqA.Khan 47.Mr.ZafarA.Sheikh
CEO,AutosoftDynamicsPvt.Ltd. CEO,UraanPvt.Ltd. COO,MetaAppsPvt.Ltd CEO,LumensoftPvt.Ltd. CEO,AdamsoftPvt.Ltd. Sr.Mgr.,SidaatHyderMorshed CEO,AvanzaSolutionsPvt.Ltd. CEO,ThreeSixtyDegreezPvt.Ltd ProgressiveSystemsPvt.Ltd. CEO,GenesisSolutionsPvt.Ltd. MD,MixITUSAPvt.Ltd. CEO,MillenniumSoftwarePvt.Ltd. CEO,TPSPakistan.Pvt.Ltd. CEO,ZRGIntlPvt.Ltd. COO,GONet/AMZVentures CEO,APPXSPvt.Ltd.
08/11/04 09/11/04 09/11/04 10/11/04 11/11/04 26/11/04 25/11/04 19/11/04 16/11/04 20/11/04 24/11/04 19/11/04 25/11/04 20/11/04 26/11/04 25/10/04
Individuals(MNCs,PolicyMakers,Academicsetc.)Interviews
48.Ms.SaminaRizwan 49.Mr.FaisalKhaliq 50.Mr.NasirLone 51.Ms.JehanAra 52.Mr.TariqBadsha 53.Mr.AamirKhan 54.Dr.FakharLodhi 55.Dr.AltafA.Khan 56.Dr.ZahirSyed 57.Dr.SohaibA.Khan 59.Mr.IkramKhan 60.Mr.AsadUrRahman 61.Mr.SohaibUmar 62.Mr.UmarSuleman 63.Mr.NasimBeg 64.Mr.ZaheeruddinKhalid 65.Mr.MuradAnsari
CountryManager,OraclePakistan Manager,NCRPakistan CountryManager,TRG President,PASHA MemberIT,MOITT Siii,ExIBM,Pakistan Professor,FASTLahore Dean,UMT(ExKASBVentures) Director,KIIT Asst.Professor,LUMS CEO,BusinessBeamPvt.Ltd. President,PonderAlliance CEO,TMTVentures Entrepreneur,ExEmbeddedSystems CEO,ArifHabibSecurities BDManager,FirstCapitalEquity HeadofResearch,KASB
26/10/04 26/10/04 05/11/04 20/10/04 29/10/04 02/11/04 11/11/04 08/11/04 18/11/04 05/11/04 02/12/04 02/12/04 21/10/04 11/11/04 06/12/04 02/12/04 06/12/04

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10.LISTOFBIBLIOGRAPHICREFERENCES
[1] Aberdeen, Offshore Software Development: Localization, Globalization, and Best Practices in an Evolving Industry, Aberdeen Group Inc., Boston, Massachusetts, USA,2001 [2] Aberdeen, Offshore Software Outsourcing Best Practices, Aberdeen Group Inc., Boston,Massachusetts,USA,2002 [3] Aberdeen, The Global Sourcing Benchmark Report, Aberdeen Group Inc., Boston, Massachusetts,USA,2003 [4] Arora et al., The Globalization of Software: The Case of the Indian Software Industry,Pittsburgh,USA,CarnegieMellonUniversity,1997 [5] Aroraetal.,TheIndianSoftwareServicesIndustry,Pittsburgh,USA,AlfredP.Sloan Foundation,2000 [6] Arora, Ashish and J. Asundi, Quality Certification and the Economics of Contract Software Development: A Study of the Indian Software Service Companies, NBER workingpaper7260,Cambridge,MA.,1999 [7] Ashish Arora, V.S. Arunachalam, Jai Asundi, and Ronald Fernandes, The Indian Software Services Industry: Structure and Prospects, Alfred P. Sloan Foundation, 2001 [8] Arora, Ashish, Alfonso Gambardella, and Salvatore Torrisi, In the footsteps of the Silicon Valley? Indian and Irish software in the international division of labour, Stanford Institute for Economic Policy Research (SIEPR), Stanford University, CA, USA,June2001 [9] Bajpai, Nirupam and Vanita Shastri, Software Industry in India: A Case Study, DevelopmentDiscussionPaper#667,HarvardInstituteofInternationalDevelopment (HIID),1998 [10] Barr,Avron,andShirelyTessler,DevelopingSriLankasSoftwareIndustryReportto theWorldbank,AldoVentures,Inc.,2002 [11] BarrAvron,ShirelyTessler,WilliamMiller,KoreaandtheGlobalSoftwareIndustry: FinalReporttotheKoreanITIndustryPromotionAgency,October2002 [12] Barr, Avron, Shirley Tessler, and Nagy Hanna, National Software Industry Development: Considerations for Government Planners in Electronic Journal for InformationSystemsinDevelopingCountries,2003
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11.NOTEABOUTTHEPRINCIPALCONSULTANT&PROJECTADVISORS/CONTRIBUTORS:
The Principal Consultant for this project was Mr. Athar Osama. The Principal Consultant was advised and facilitated by Mr. Najam U H Kidwai (CEO CCMedia Live Inc., UK), Mr. Irfan Virk (CEO, CambridgeDocs,USA)andDr.ZahirSyed,Director,KarachiInstituteofInformationTechnology(KIIT). Several other individuals contributed, informally and formally, to this report. The most notable contribution that ranged from detailed feedback on the study design and the survey instrument and frequentcomments,insights,andsuggestionscamefromMr.JawwadFarid,CEOofAlchemyAssociates Pvt. Ltd. Other contributors include: Mr. Zia Imran, Mr. Nauman A. Sheikh, Mr. Zamir Farooqi, Mr. SohaibAthar,Mr.SaqibRashid,Ms.GhazalJavedBeg,Mr.RaheelZia,Ms.RabiaGarib,andMr.Adnan Shahid.ThestudywasoverseenbyaTechnicalAdvisoryCommitteecomprisingDr.AamirMatin,MD PSEB,Mr.TariqBadsha,MemberIT,MOITT,andMs.JehanAra,PresidentPASHA.
11.ABOUTTHEAUTHOR/CONSULTANT
Mr.AtharOsamaistheManagingPartneratTechnomicsInternational,andaDoctoralFellow at the Fredrick S. PardeeRAND Graduate School (PRGS) for Public Policy in Santa Monica, CaliforniawithaspecializationinTechnologyandInnovationPolicy.HehasaBachelorsdegree in Avionics engineering (PAF College of Aeronautical Engineering, Risalpur), and a Masters degree in Public Policy (RAND Graduate School, Santa Monica), as well as a postgraduate qualification in Business Administration (IBA, Karachi). Athar has worked widely in several areasoftechnologyandinnovationmanagementandpolicy,includingbutnotlimitedto,R&D and innovation policy, regional technology policies, technology strategy, technomarket risk assessment, venture capital funds in developing countries and publicsector, organizational strategy,performance,andincentivessystemsinR&Dlabsandhightechnologycompaniesetc. Hehasalsowrittenwidely(over50Op/Eds)forPakistaniNewspapers(Dawn,TheNewsetc.) on issues related to technology and economics. Athar has also presented at a number of conferences, representing Pakistan and otherwise, including the World Energy Congress (Tokyo,1995;Houston,1998)andtheResearchSymposiumforNextGenerationofLeadersin ScienceandTechnologyPolicy(WashingtonDC,2002)organizedbytheAmericanAssociation of Advancement of Science (AAAS). Athar is the founder of the Pakistan Research Support Networka virtual group of over 1200 Pakistani researchers and researchenthusiasts (students) from around the world. Athar may be contacted for comments and suggestions at ProudPakistani@ieee.org.

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Best Practices Study

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PAKISTANSSOFTWAREINDUSTRY

MINISTRYOFINFORMATIONTECHNOLOGY GOVERNMENTOFPAKISTAN ISLAMABAD

Reflective Lit. Review (LitR3)

Briefing & Write-up

Ownership Structure and Quality Characteristics of Companies

Product & Strategic Posture of Companies

Somelocalsoftwarehousesengagedindevelopmentofsoftware(i.e.programmingandcoding)a service,fromthestandpointofthelocaloutfitforforeignproductbasedcompaniesmayhaveidentified theirrevenuesasarisingfromproducts.

Total #: 20 % of Total: 37% Market Served

Total #: 11 % of Total: 20%

Total #: 5 % of Total: 9% Domesti

Total #: 14 % of Total: 25%

Services Software Business

0 0 25 50 75 Services <--- Software Business ---> Products 100

Fig-III: Product-Market Profile of Pakistani Software Cos.

Fig-IV: Market Orientation of Software Companies in Sample

MarketOrientationofSoftwareHouses All Combined

Domestic Hybrids Focused*

MarketFocusofSoftwareHouses All Categories Domestic Focused

SoftwareEngineeringDesignMethodologyUsed Waterfall Iterative Prototyping Homegrown Other

% 32% 44% 50% 29% 18%

% 36.8% 36.8% 68.4% 15.7% 15.7%

% 54% 63% 54% 9% 9%

% 15% 40% 30% 45% 30%

HowOftenAreTechnicalBestPracticesUsed Projectplantracking Codeanddesignreviews Documentationofthecode Systemtolearnfromongoingprojects Measurementandreviewofprocessquality

Freq* 1.87 2.72 2.58 2.74 2.85

Freq 1.66 2.55 2.36 2.46 2.53

Freq 2 3.2 2.88 3.11 3.09

Freq 1.94 2.44 2.8 2.76 2.93

MarketOrientationoftheSoftwareOperation AverageRating*(%DontUse) Export All Domestic Hybrids Focused Companies Focused

MarketOrientationofSoftwareHouses All Combined Domestic Focused*

MarketOrientationofSoftwareHouses All Combined

Daytodaymanagement Strategic&ProductPlanning Fundraising Marketing&BusinessDevelopment Hiring&Recruitment Other

Fig-V: Proportion of "Dedicated" Development Centers

Develop Center 15% Others 85%

Fig-VI: Product Profile of Software Companies in Sample

Fig-VII: Proportion of Small/Large Companies in Sample

Fig-VIII: Proportion of Cos. Established Before/After DotCom Bubble Burst

PostDotcommer 33% PreDotCommer 67%

TRANSITIONSKEY DIVERSIFICATION MATURITY,VALUEADD

TEXT BOX # 5: KEY STRATEGIC CHALLENGES & MANAGERIAL BEST PRACTICES-I

TEXT BOX # 6: THE TPS OR LMKR MODEL, IN A NUTSHELL

TEXT BOX # 8: KEY STRATEGIC CHALLENGES & MANAGERIAL BEST PRACTICES-II

becauseofthestructureandthenatureofitsbusinessnamely,amajorchunkofitsassetsare intangible(e.g.itsemployees,andsoftwareetc.)andhencedifficulttovaluateorevenliquidate, ifneeded.Thisessentiallyclosesthedoorsoftraditionalcollateralbasedlendingchannelstothe softwareindustry.

potentialbuyerwaswillingtopayforallorpartoftheproductdevelopmentandlearningcost. Prominentexamplescanbecitedfromareasofbankingautomation(ATMsetc.)andfinancial tradingsystemsetc.Heretoo,however,somecompanieshavebeenabletotransitionwellfrom aprojecttoaproductscompanywhileothershavefumbled.

TEXT BOX # 14: KEYSTRATEGICCHALLENGES&MANAGERIALBESTPRACTICESIV

MarketOrientationofSoftwareHouses All Combined*

TABLE XII: REALITY & PERCEPTIONTOP3 POLICY & INFRASTRUCTURE BOTTLENECKSAFFECTINGGROWTHOFSOFTWARECOMPANIES

TypesofSoftwareHouses All Combined*

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