Un Pan 040686

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,
1
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
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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
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ATURITY
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OREIGN IRM
UYOUTBY OCAL
GMT
HIFTING RIORITIES
LEVATIONOF AK
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.
10
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
11
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
12
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).
13
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.
14
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.
15
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:
16
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
2
Accordingtoonelongtimeindustryobserver,itmightbedifficulttoidentifybestpracticesinthe
relativelynascentPakistanisoftwareindustry,whatonemightgetinreturnforthequestfortheformerwouldbea
lotofworstpractices.
17
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.
18
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
19
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
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
21
Reflective
Lit. Review (LitR3)
x-Method
Analysis
Briefing &
Write-up
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.
22
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
7
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.
23
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.
24
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
25
TableI:KeyAggregateStatisticsOnRespondentCompanies*
Revenue&EmploymentinSurveyedCompanies
TotalNumberofSoftwareHousesSurveyed
CumulativeRevenues(calculatedthroughmidpointestimation)**
Total#ofProfessional/TechnicalEmployees
AveragesizeofCompany(#ofProfessional/TechnicalEmployees)
RevenueperTechnicalandProfessionalEmployee
%GrowthinProfessional/TechnicalEmployment(overlastyear)
%GrowthinRevenues(overlastyear)
#(%)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%
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$110.95Million.PleaserefertoTableIIforadetailedcategoricalbreakdown
***46softwarehousesweresurveyedinpersonwhile14submitteddatathroughonlinesurvey
****Thesecategoriesarenotmutuallyexclusivei.e.acompanycanoptforoneormorecategories
In terms of their product/service strategy and strategic posture in the market, 56% of the
companies described themselves as productfocused (packagedsoftware) companies, 48% as
software/ITservices companies, and 31% as software/IT consulting companies. It is worth
emphasizingherethatmajorityofthecompaniesthatdescribedthemselvesasproductfocused
dealtwithcustomizedratherthanshirkwrappedproducts.Intermsofindustryfocus,abouta
third of the companies described themselves as niche players, another third focused on an
industry vertical, and about 56% produced a product/service applicable to several industries.
Clearly,noneofthesecategoriesaremutuallyexclusive.Manycompanies(asmanyas42%and
26
23%) identified with more than one category in the product profile and strategic posture
respectively.
TABLEII:SIZEOFRESPONDINGCOMPANIESBYREVENUE*&
EMPLOYMENT
AnnualRevenuesinUS$(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%)
6(11.54%)
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.
29
A:
B:
(Export-Services > 50%)
(Export-Products > 50%)
Total #: 20
% of Total: 37%
Total #: 11
% of Total: 20%
D:
C:
(Local-Services > 50%)
(Local-Products > 50%)
Total #: 5
% of Total: 9%
Total #: 14
% of Total: 25%
Domesti
Market Served
Export
Services
Packages
Software Business
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.
30
100% Exports
100
75
100% Products
Domestic <--- Market Served ---> Export
50
25
0
0
25
50
75
Services <--- Software Business ---> Products
100
Fig-III: Product-Market Profile of Pakistani Software Cos.
31
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
(above)
presents
Fig-IV: Market Orientation of

Software Companies in Sample
breakdown of our respondents

between
domestic,
export
Hybrids
22%
focused, and hybrid operations.
Domestic
37%
Applying the above classification

on our sample, we get 18 (37%)
Export
41%
companiesasdomesticfocused,20
(41%) of the companies as export
Domestic
focused, and 11 (22%) of the
Export
Hybrids
companies as hybrids. We now

look at the technical, managerial, and marketing practices of companies in our sample from
bothanaggregateandacategoricalperspective.
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.
32

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
TEXTBOX#2:WHATDOESITMEANFORARESULTTOBE(NOT)
STATISTICALLYSIGNIFICANT?
qaproll
and, therefore, may

atbestbetermedas
40
30
suggestive. In the
20
following
discussion,
we
when
talk
of
10
0
1
significance, we
would
mean
finding
a
of
significance
from
practicalratherthan
statistical
standpoint.
Also,
what is practically
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
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?
MarketOrientationofSoftwareHouses
SourcesofInitialFundingforSoftware
Ventures
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
MarketFocusofSoftwareHouses
KeyManagerialPracticesEmployed
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
All
Categories
CharacteristicsofTechnicalQuality
N=58
73%
17%
13.96%
45%
5.87
%ofCompanieswithdedicatedQATeam
Ave.sizeoftheQAteam(as%oftotalemployment)
%ofemployeepayrollspentonQAfunction
%ofCompanieswithISO/CMMCertification
ProgrammertoPMRatio(PMincl.Teamleads)
SoftwareEngineeringDesignMethodologyUsed
Waterfall
Iterative
Prototyping
Homegrown
Other
HowOftenAreTechnicalBestPracticesUsed
Projectplantracking
Codeanddesignreviews
Documentationofthecode
Systemtolearnfromongoingprojects
Measurementandreviewofprocessquality
Domestic
Focused
Hybrids
Export
Focused
N=19
73%
9.8%
11.64%
36%
4.16
N=11
72.7%
13%
11.8%
72%
8.4
N=20
68%
26%
16.9%
50%
5.7
%
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%
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.
37
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.
38
TABLEVIII:HOWDOSOFTWAREHOUSESSPENDTHEIRMONEY?
MajorExpenditureHeadsofSoftware
Houses
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%
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
All
Combined
Domestic
Focused*
Hybrids
Export
Focused*
N=57
32%
20.5%
6.0%
24.6%
7.95%
8.65%
N=18
20%
24%
9.4%
31%
5.6%
8%
N=11
34%
20%
2.7%
30.4%
4.81%
7.9%
N=20
36.5%
15.5%
7.25%
20.65%
11%
9.25%
Daytodaymanagement
Strategic&ProductPlanning
Fundraising
Marketing&BusinessDevelopment
Hiring&Recruitment
Other
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).
41
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
Fig-V: Proportion of "Dedicated"

Development Centers
dependence on availability of IT/Telecom

infrastructure and access to quality human
Develop
Center
15%
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.
Others
85%
Nevertheless,theyareanimportantsegmentof
the Pakistani software scene that must be
Development Center
Others
looked at closely, with a view to identifying

differences,similarities,andbestpractices,andwedosointhefollowingparagraphs.
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
42
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
43
(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
Fig-VI: Product Profile of Software

Companies in Sample
centers excluded), 23 (44%) were thus
Hybrids
31%
categorized as servicesfocused, 13
Product
25%
(25%) as productsfocused, and 16

(31%)ashybrids(FigureVI).
Looking at our data, we find that

productfocused operations are much
Service
44%
more likely to be domesticfocused

Product
ratherthanexportdriven,althoughin
Service
Hybrids
an aggregate they are much more
44
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.
45
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
Fig-VII: Proportion of Small/Large

Companies in Sample
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
Large
38%
Small
62%
exportlocal mix. They are also more

dependentonasingleclient,onaverage,than
Small
Large
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).
46
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
Fig-VIII: Proportion of Cos. Established

Before/After DotCom Bubble Burst
software industry, we categorized

allrespondentsin2classesthepre
and postdotcommersdepending
on whether they were incorporated
prior to or after FY2001. Using this
approach,
we
categorized
PostDotcommer
33%
35
PreDotCommer
67%
software operations (67%) as pre

dotcommers and 17 operations
Pre-DotCommer
(33%) as postdotcommers (Figure
Post-Dotcommer
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.
47
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
48
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
49
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.
50
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.
51
TABLEX:THEHOLYGRAILOFINDUSTRYBESTPRACTICES?
All
Aggregate
(N=60)
40%
55%
$1.35M
61:39
45:55
36.5%
56.8%
68
45%
2.61
2.43
3.0
32%
3.66
2.94
45%
14%
5.87
ImportantStructuralVariables
ForeignSubsidiary
FrontOfficeAbroad
CompositionofRevenues&Growth
AverageRevenues(MidpointEstimate,$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
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
*indicatesa5%significancelevel,Samplesizesareforcompletedentries(individualfiguresmaydifferduetoitemnonresponse).
52
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
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
53
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
54
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.
55
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.
56
FIGUREIXGENERICBUSINESSMODELS& THEIRTRANSITIONSSCENARIOS
DOMESTICFOCUSED
LOCALFIRM
EXPORTFOCUSED
LOCALFIRM
EXPORTFOCUSED
FOREIGNFIRM
ZRG
ThreeSixtyDegreez
Etilize
ITIM Associates
TPS
Post Amazers
Prosol
MetaApps
Advanced Comm.
Adamsoft
Clickmarks
Netsol
Ultimus
Makabu
MixIT
Autosoft Dynamics
Techlogix
Sidaat Hyder Morshed
Xavor
Avanza Solutions
Elixir Technologies
Lumensoft
Yevolve
2B Technologies
SI3
Softech Systems
Genesis Solutions
Alchemy Technologies
GoNet
AppXS
Kalsoft
Oratech
Jinn Technologies
Askari Info Systems
Secure3 Networks
Acrologix
Systems Ltd
Comcept
Progressive Systems
LMKR
Millennium Software
CARE
Cressoft
DEVELOPMENTCENTER
Enabling Tech. (Quartics)

Trivor Systems
Strategic Systems Intl
ESP Global Systems
TRANSITIONSKEY
DIVERSIFICATION
MATURITY,VALUEADD
M&AW/FOREIGNFIRM
SHIFTINGPRIORITIES
BUYOUTBYLOCALMGMT.
ELEVATIONOFPAKOPS.
DEDICATED
57
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
58
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%)
59
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
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
problem, penetrating the Indian

monopoly in the foreign markets, answering the quality question, etc. We discuss each of
60
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
61
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.
62
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.
63
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
65
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.
66
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
67
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
68
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
TEXT BOX # 6: THE TPS OR LMKR MODEL, IN A

NUTSHELL

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%)
stream of domestic revenues, if
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
69
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
local
software
firmtryingtodevelopacuttingedge
product
when
the
level
of
automation in the local industry

makes it impossible to sell such a

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.
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.
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,
70
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.
71
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.
72
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
73
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
74
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
76
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
77
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
78
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
79
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.
80
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
TEXT BOX # 9: THE TECHLOGIX OR ETILIZE

MODEL, IN A NUTSHELL

7
Average Employment:
77
% of Foreign Subsidiaries:
100%
% with Front-Office Abroad:
100%
Exports: Domestic Market:
98:2%
Product: Services Offerings:
40:60%
82%
28%
#/% of Companies with ISO/CMM:
57%
10.44
13.7%
12.67%
Top-3 Policy Challenges: Image (57%), Manpower
Availability (42%), Telecom cost (42%)
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.
13
Many industry experts have made that argument in the context of outsourcing of US IT work to Indian companies.
81
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
TEXTBOX#10:LISTOFCOMPANIESINSAMPLE&
THEIRDOMAINSEXPERTISE/OFFERINGS:
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
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
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
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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.
84
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,
86
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.
87
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
88
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
89
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
90
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
TEXT BOX # 12: THE ITIM ASSOCIATES OR

CLICKMARKS MODEL, IN A NUTSHELL

7
Average Employment:
42
% of Foreign Subsidiaries:
71%
% with Front-Office Abroad:
57%
Exports : Domestic Market:
98:2%
Product : Services Offerings:
33:67%
17%
6%
% of Companies with ISO/CMM:
42%
6.12
22%
20%
Top-3 Policy Challenges: Image (71%), Manpower
Availability (43%), Venture Capital (43%)
identifies their domain expertise

andproductservicesofferings.
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.
91
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

THEIR DOMAINS EXPERTISE / OFFERINGS:
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
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,
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.
92
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,
93
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 describes

typical steps, along with
TEXT BOX # 15: SPECIMEN STEPS AND TIMELINE FOR

SETTING UP A DEVELOPMENT CENTER IN PAKISTAN
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.
timelines, that one of the

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
94
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,
95
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
96
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
97
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
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
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%
All
Combined*
Domestic
Focused*
Hybrids
Export
Focused*
N=19
26%
15%
42%
31%
5%
31%
15%
26%
21%
15%
N=11
10%
9%
81%
27%
18%
9%
0%
45%
18%
27%
N=20
20%
20%
35%
35%
5%
15%
0%
35%
20%
10%
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
106
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
107
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
110
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
111
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
112
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.).
113
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
114
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.
115
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.
116
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
117
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
118
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[51] Rapp, Willam V., Customized Software: Strategies for Acquiring and Sustaining
CompetitiveAdvantage:AJapanesePerspective,CenterforEconomicRelationswith
Japan,UniversityofVictoria,1996
122
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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PAKISTANSSOFTWAREINDUSTRY

The Exportfocused Local Firm is one founded by a predominantly Pakistanbased

Strategic Systems Intl

Askari Info Systems

We discuss three of these in great

On the domesticfront as well, there is a growing likelihood of considerable opening up and

To the extent that a (semi) statistical/quantitative analysis is likely to be of limited utility, a

The PSEB Best Practices Online Survey is available at: http://www.hostedsurvey.com/takesurvey.asp?c=PSEB

Figure-I: The Multi-Pronged Research Methodology

Ownership Structure and Quality Characteristics of Companies

Product & Strategic Posture of Companies

(Export-Services > 50%)

(Export-Products > 50%)

(Local-Services > 50%)

(Local-Products > 50%)

Domestic <--- Market Served ---> Export

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

Given the importance of marketorientation (rather than productservice orientation) as a

Fig-IV: Market Orientation of

breakdown of our respondents

focused, and hybrid operations.

Applying the above classification

focused, and 11 (22%) of the

companies as hybrids. We now

and, therefore, may

generated from the same underlying population. For example, for a 5%

There is no clearcut winner among domestic/exportfocused operations in managerial

employees and employeedriven innovation and worse in terms of improvements in

Exportfocused operations spend more on quality assurance, and hybrids on certifications.

ExportCEOs operate in a relatively tactical profilefocusing more on daytoday

Fig-V: Proportion of "Dedicated"

dependence on availability of IT/Telecom

resources. Because of these qualities, many of

looked at closely, with a view to identifying

The dedicated developmentcentertype operations, almost universally, have a strong

Another interesting and potentially consequential finding is that development centertype

Fig-VI: Product Profile of Software

centers excluded), 23 (44%) were thus

(25%) as productsfocused, and 16

Looking at our data, we find that

more likely to be domesticfocused

an aggregate they are much more

likely to be wellbalanced between domestic and foreign markets than servicefocused

Fig-VII: Proportion of Small/Large

abroad. Smaller organizations also derive a

exportlocal mix. They are also more

Fig-VIII: Proportion of Cos. Established

software industry, we categorized

software operations (67%) as pre

(33%) as postdotcommers (Figure

VIII). As a class, postdotcommers

dotcommers. While there is no clearcut pattern in favor of a particular software design

The ExportFocused Local Firmis one founded by a predominantly Pakistanbased

The DomesticFocused Local Firmwith an exception of a few companies, is really one

Sidaat Hyder Morshed

Askari Info Systems

Enabling Tech. (Quartics)

Morshed Associates (SHMA) are

Millennium Software etc.) were

TEXT BOX # 3: THESYSTEMSORNETSOLMODEL,

TEXT BOX # 4: LIST OF COMPANIES IN SAMPLE &

Netsol Financial, Leasing Solutions

problem, penetrating the Indian

Strategic Challenge # 1: Difficulties of Customer Acquisition in a Foreign MarketOf the

Managerial Best Practice #2 (MBP2) Enter into partnering agreements and

Managerial Best Practice #4 (MBP4)Understand the importance of developing a

ManagerialBestPractice#5(MBP5) Building successful businesses is as much about

Managerial Best Practice #6 (MBP6) Sell a business-solution, rather than a

Managerial Best Practice #17 (MBP17) Smoothen the transition by temporarily