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If you’re planning to make it big in the world of technology outsourcing, youd do well to check out the competition in the neighbourhood. Especially if global outsourcing giant India is right next door.

Despite the formidable challenge and long risk list, Pakistan is up for the challenge. “Pakistan started late but now is catching up very fast in software development and business process outsourcing,” says Prime Minister Shaukat Aziz.

The software development industry took root in the mid-nineties but business was slow to come by in a low-growth economy that was saddled with mounting foreign debt and continuous political upheaval. When the economy began to turn a corner after 2001, the software industrys prospects also improved.

Prior to 9/11, software exporters simply stumbled along picking up a few contracts but unable to gain real momentum. Post 9/11, when the US technology sector slumped, even that business dried up. It was only in 2003 that Pakistani companies began to see dwindling sales gather steam. This was led by the recovery in the US technology sector and the effort by Pakistani software exporters to diversify to other world regions and simultaneously build local business too.

From being 100 per cent US-led, in the last two years, Pakistani software exports diversified to raise the share of EU and Middle East business to 35 per cent, says the Pakistan Association of Software Houses.

Even so, the export industry remains small. In 2004, although the software and IT enabled services business was worth $300 million, (including hardware the figure is $600 million), exports and outsourcing made up for just $33 million of that. By comparison, India logged $12.8 billion in software and services exports in 2004.

Still, the Pakistan Software Export Board, a federal body set up to promote outsourcing, forecasts that the business will grow by at least 45 per cent annually for the next five years. A lot of that growth will come from call centres and business process outsourcing which last year made up one-fourth of total exports.

The 120 call centres that have been set up over the last two years which employ some 3,500 people are expected to grow about 60 per cent a year.

“In the next ten years, we aim to be at the top of the class of tier two global IT companies from our tier three position now,” says Aamir Matin, managing director of the Pakistan Software Export Board.

To do this, the government has given software exporters and outsourcing companies a tax holiday till 2016, scrapped duties on technology imports and simplified the investment process. Within the next thee years, the government also plans to open three IT parks in Islamabad, Karachi and Lahore.

But that will not be enough to improve or even sustain growth. The industry must still battle a host of problems. First, the scarcity of trained IT professionals is one of the biggest constraints holding the industry back. The government projects that an additional 7,000 high-end professionals a year will be needed to add to the current base of 75,000. The countrys 50 IT institutes produce 5,500 graduates a year but only about one-fifth of those are considered competitive and well trained.

“We should have positioned ourselves for outsourcing 10 to 15 years ago,” says Ishrat Husain, governor of the State Bank of Pakistan. “But even now, as the western wage rate increases, opportunities for outsourcing will increase.”

Country image is another problem for the industry since most western companies perceive Pakistan as a troubled destination. Some companies have won big by shunning the traditional focus on the US where image problems for Pakistan are most acute and focusing instead on the Far East market. Salim Ghauri, President of Lahore-based Netsol Technologies Inc. which is listed on the Nasdaq index of technology companies, won his first contract from the Mercedez Benz Leasing Company in Thailand in 1996 to implement a leasing software developed in the UK. But a few years later, when the global IT slump hit, Ghauri decided to develop a leasing software which he went on to sell to Daimler Chrysler in nine countries.

“The problem with IT services is that when the economy dips, the industry crashes, but when you sell a product, you keep getting license fees so we dont get into that trap,” he says. That’s how he’s continued to grow his business to 270 employees and hopes of $10 million in revenues this year. In April 2005, they also signed a $2.3 million deal with Toyota Leasing using the same product. And now they plan to diversify into the EU market. For this, they’ve acquired a British company for $7 million which sells software similar to their own.

But perhaps the best way entrepreneurs have managed to beat security and perception problems is to have front offices in the US. Take Lahore-based TechLogix Pakistan Pvt Ltd which was one of Pakistans first few software exporters established in 1996. The company which gets 95 per cent of its business from US customers had $8.2 million in revenues in 2004. They bring in business through a front office in Boston while back office development is done by 90 software developers in Pakistan and another 35 in Beijing.

They hope to build revenues to $17 million by 2007 and count General Electric and Massachusetts Mutual Life Insurance Company in the US as their biggest clients. “The front end has to be perceived as a US company and because we do get questions about where the software is developed, our office in Beijing is a hedge against the perception that were sitting in a very risky location,”says Kewan Khawaja, co-CEO of Techlogix.

For most companies, funding is another perpetual problem since Pakistan has virtually no venture capital industry to speak of. “Banks are wary of lending to IT,” says Jehan Ara, president of Pakistan Software Houses Association. “But what were now seeing is overseas Pakistanis putting money in and local industrialists turning IT investors.”

Yet, Pakistani software exporters do have some things going for them. To start with, India’s industry dynamics may be changing. “India’s high attrition rates are forcing companies to look at other options and Pakistan is one of those options,” says Ara. She’s also hoping Pakistans tax-free industry will gain from India’s recent decision to tax the software sector.

Pakistan also has a large English-speaking population willing to work at low wages and operating costs are comparable to India, according to government estimates. Thats especially helpful in growing the call centre business. Owais Zaidi, chief operating officer of Arwen Tech (Pvt) Ltd, a Karachi IT services firm which runs a 600-seat call centre, plans to take advantage of that. He’s currently building a 1,500-seat call centre which would become Pakistans biggest in a bid to raise the share of his foreign call centre revenue from 20 to 60 per cent and take total revenues to $100 million in the next five years.

Today, 80 per cent of his $10 million in revenue comes from domestic call centre operations for companies like KFC and Pakistan International Airlines. He’s also negotiating acquisitions in the US, Middle East and Europe to help build business rapidly. “India has three per cent of the global IT market of $600 billion,” he says. “If we take just one per cent of that share,” this will beat textiles as our largest export.

Transcription is another area where low wages and a good crop of English speakers come in handy. In the last two years, about a dozen medical transcription companies have been set up. “Our business is fuelled by an insatiable want for lower costs from American companies,” says Osama Mustafa, CEO of E-voicescribe, a medical transcription company with 50 employees serving only US customers. Since Mustafa’s charges are 40 per cent lower than what American transcription companies charge, hes able to get business from those companies who subcontract out work to him as well.

It helps that major global IT corporations have already spotted Pakistan as an attractive venue to set up service centres. A total of 55 foreign IT and telecom companies have a presence in Pakistan which is a useful marketing tool in promoting outsourcing. Nortel recently announced that it plans to set up a software development centre in Islamabad and NCRs global consulting centre established in late 2004 in Islamabad now employs 250 people providing services to clients all over the world.

Another boost has come from heavy IT spending in the last few years by both the government and local industry. The financial sector, in particular, which has undergone major reform under World Bank funding in the last few years is now looking to boost efficiency through technology. In fact, the software industry trade group says, financial applications now make up the biggest business segment for IT companies. And the government has also stepped up on its use of IT. NADRA, the state-run issuer of national identity cards, for example, is said to be one of the biggest users of IT for ID cards in the world with 60 million cards processed through its system so far.

The change is also helping create an IT culture as well and over the last two years, paper-less airline tickets, package tracking for courier services and online share trading have all been made possible in a traditionally low-IT environment. The government forecasts that as local appetite for IT services grows, the $600 million domestic industry will grow to $1 billion within the next five years.

That’s why former expatriate Amer Hashmi left a job at IBM Global Services in the US to set up his Karachi IT services firm System Innovations (Pvt) Ltd. Hashmi saw IT as a vehicle that could infuse Pakistani companies with competitiveness which would raise productivity gains. “IT is like the plumbing of a country,” Hashmi says.

So shunning the global market, Hashmi began pitching technology solutions to state-owned enterprises. He created an electronic tracking system for National Logistical Cell, a government-owned trucking system to help monitor progress on the delivery of goods throughout the country. Today, he counts the Pakistan Army, Wapda, Citibank and Habib Bank, among his 50 clients.

Now, with 100 full time employees and $10 million in revenues this year, Hashmi plans to attack the global outsourcing business and triple revenues in the next 12 months. This he will do by tapping the 100,000 Pakistani expatriates working at major US corporations and opening up offices in Texas and Ontario.

Of course getting new business is an endless struggle when your neighbour is the biggest software producer in the world.

“As a natural course, American companies would not look at Pakistan,” says Ara. And thats exactly what entrepreneurs are hoping to change. If they can get enough customers to come back, Pakistan will have found its own little tech corner in one tough neighbourhood.