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STRATEGY FOR INCREASING EXPORTS OF BPO

Powered by ProvenCourseSM Strategy for increasing exports of BPO

Prepared by BearingPoint For Pakistan Software Export Board September 20, 2005 Document Number: PSEB_VOL_9 Document Version: 0. 9 Disposition : Final Report

PUBLIC SERVICES Strategy for Pakistans BPO Industry September 20, 2005 STRATEGY FOR INCREASING EXPORTS OF BPO

AUTHORS This document was prepared by:


Adnan Kehar

Date May 4, 2005 May 6, 2005 May 24, 2005 June 8, 2005 June 20, 2005 July 11, 2005 August 5, 2005 August 24, 2005 September 20, 2005

Document Version 0.01 0.1 0.2 0.3 0.3.2 0.4 0.5 0.6 0.7 0.8 0.9

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This document is protected under the copyright laws of the United States and/or other countries as an unpublished work. This document contains information that is proprietary and confidential to BearingPoint, Inc. and/or affiliates or its technical alliance partners, which shall not be duplicated, used, or disclosed in whole or in part for any purpose other than to evaluate BearingPoint, Inc. and/or its

PUBLIC SERVICES Strategy for Pakistans BPO Industry September 20, 2005 STRATEGY FOR INCREASING EXPORTS OF BPO

affiliate(s). Any use or disclosure in whole or in part of this information without the express written permission of BearingPoint, Inc. and/or its affiliate(s) is prohibited. 2005 BearingPoint, Inc. and/or its affiliate(s) (Unpublished). All rights reserved. The ProvenCourse methodology is a component of BearingPoints ProvenCourse delivery framework and contains process, templates and techniques used to deliver BearingPoint services. ProvenCourseSM , BearingPointTM, and Business and Systems Aligned. Business EmpoweredTM are trademarks or service marks of BearingPoint, Inc. and/or its affiliates.

PUBLIC SERVICES Strategy for Pakistans BPO Industry September 20, 2005 STRATEGY FOR INCREASING EXPORTS OF BPO

TABLE OF CONTENTS
AUTHORS......................................................................................................................................................2 TABLE OF CONTENTS ................................................................................................................................1 1. 1.1. 1.2. 1.3. 1.4. 1.5. 1.6. 1.7. 1.8. 1.9. 1.10. 1.11. 1.12. 1.13. 2. 2.1. 2.2. 2.3. 3. 3.1. 3.2. 3.3. 3.4 EXECUTIVE SUMMARY .....................................................................................................................3 INTRODUCTION .......................................................................................................................... 3 SCOPE OF SERVICES................................................................................................................. 4 METHODOLOGY ADOPTED ......................................................................................................... 4 THE GLOBAL OUTSOURCING INDUSTRY ..................................................................................... 6 IT PROFESSIONAL SERVICES (ITPS) INDUSTRY OF PAKISTAN.................................................. 11 MAJOR ISSUES AND CONCERNS OF COMPANIES LOOKING TO OUTSOURCE TO PAKISTAN........... 17 TECHNOLOGY PARKS AND SPECIAL ZONES ............................................................................. 19 HIGH LEVEL SWOT ANALYSIS OF PAKISTAN AS ITPS HUB....................................................... 21 STRATEGY OF OTHER COUNTRIES............................................................................................ 22 STRATEGY ADOPTED BY INDIA ................................................................................................. 23 STRATEGY APPROACH MENU FOR ACCELERATING THE GROWTH OF LOCAL ITPS INDUSTRY .... 24 GO-FORWARD ACTION PLAN FOR GOVERNMENT OF PAKISTAN ................................................ 31 CONCLUSION........................................................................................................................... 32 OUTSOURCING AND OFFSHORING ........................................................................................... 35 CATEGORIZATION OF THE OUTSOURCED SERVICES OFFSHORED ............................................. 39 THE BIG PICTURE..................................................................................................................... 44 OVERVIEW OF OFFSHORING AND OUTSOURCING PROCESS ............................................... 45 OVERVIEW .............................................................................................................................. 45 DECISION TO OUTSOURCE....................................................................................................... 45 DECISION MAKERS .................................................................................................................. 46 GENERAL PROCESS A COMPANY GOES THROUGH WHEN OUTSOURCING ..................................... 46

OVERVIEW OF INFORMATION TECHNOLOGY PROFESSIONAL SERVICES (ITPS).............. 35

3.5 VENDOR SELECTION ................................................................................................................... 46 3.5.1 LOCATION SCREENING PROCESS ............................................................................................ 47 3.5.2 3.5.3 4. 4.1. 4.2. 4.3. 5. 5.1. 5.2. 6. 6.1. VENDOR SCREENING PROCESS ............................................................................................... 47 LOCATION AND VENDOR ASSESSMENT CASE STUDY ............................................................... 48 INVESTMENT POLICIES AND INCENTIVES .................................................................................. 57 COMPARATIVE ANALYSIS WITH OTHER COUNTRIES ................................................................. 60 REGULATORY FRAMEWORK FOR E-COMMERCE ....................................................................... 61 BARRIERS TO INVESTMENTS ...................................................................................................... 63 INHIBITORS TO ITPS SECTOR GROWTH .................................................................................. 64 ANALYSIS OF W ORLD BANKS REPORT ON DOING BUSINESS IN PAKISTAN 2005 .................... 73 HIGH LEVEL ANALYSIS OF EXISTING OUTSOURCING MARKET IN PAKISTAN ................... 76 INTRODUCTION ........................................................................................................................ 76
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HIGH-LEVEL ANALYSIS OF PAKISTANS BUSINESS AND COMMERCIAL ENVIRONMENT 57

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6.2. 6.3. 6.4. 6.5. 6.6. 6.7. 6.8.

HUMAN RESOURCES (HR)....................................................................................................... 77 INFRASTRUCTURE ................................................................................................................... 79 ITPS INDUSTRY OF PAKISTAN ................................................................................................. 83 COMPARATIVE ANALYSIS WITH OTHER COUNTRIES .................................................................. 91 HR TRAINING FOR IT- BPO SECTORS ..................................................................................... 91 FUTURE OUTLOOK ................................................................................................................... 93 RESULTS OF THE SURVEY OF SOME CALL CENTERS OF PAKISTAN ........................................... 94

7. HIGH LEVEL ANALYSIS OF PROSPECTIVE OUTSOURCING AND OFFSHORING VENDORS................................................................................................................................................. 107 7.1. IT SERVICES VENDORS ......................................................................................................... 108 7.2. 7.3. 7.4. 7.5. 8. 8.1. 8.2. 8.3. 8.4. 8.5. 8.6. 8.7. 8.8. 8.9. 8.10. 8.11.
8.12.

MARKET LEADERS ................................................................................................................. 109 BUSINESS PROCESS OUTSOURCING MARKET ........................................................................ 112 FUTURE PROSPECTS ............................................................................................................. 116 GLOBAL ITPS VENDOR SURVEY REPORT .............................................................................. 117 STRATEGY FOR INCREASING EXPORTS OF ITPS .................................................................. 127 INTRODUCTION ...................................................................................................................... 127 KEY SECURITY CONCERNS AND DEMANDS OF IT- BPO SERVICES CLIENTS ............................. 127 OVERVIEW OF ITPS INDUSTRY OF CHINA .............................................................................. 128 OVERVIEW OF TECHNOLOGY ZONES OF OTHER COUNTRIES ................................................... 131 SWOT ANALYSIS OF PAKISTAN AS AN ALTERNATIVE ITPS HUB ............................................ 134 ACTION POINTS FOR GOVERNMENT OF PAKISTAN FOR ITPS GROWTH ................................... 138 STRATEGY ADOPTED BY OTHER COUNTRIES .......................................................................... 146 STRATEGIC GO FORWARD APPROACH MENU:........................................................................ 147 FINANCIAL FEASIBILITY .......................................................................................................... 159 GRANULAR PLAN WITH TIME FRAME ....................................................................................... 160 BENEFITS .............................................................................................................................. 173
TANGIBLE BENEFITS ................................................................................................................ 173

8.13.

CONCLUSION......................................................................................................................... 174

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PUBLIC SERVICES Strategy for Pakistans BPO Industry September 20, 2005 STRATEGY FOR INCREASING EXPORTS OF BPO

1. EXECUTIVE SUMMARY
1.1.

Introduction

The advent of the Internet and the advancements in telecom has enabled organizations, referred to as client companies, to outsource their Information Technology (IT) as well as non-core human intensive functions to specialized companies who can do the work more efficiently and thus less expensively. The entire spectrum of products and services being outsourced is referred to as Information Technology Professional Services (ITPS), which can be categorized into Computer Hardware, IT Services and Software and IT enabled services (ITES). ITES is commonly referred to as BPO (Business Process Outsourcing) and the terms ITES, ITES-BPO and BPO refer to the same thing and are used interchangeably. However, in the context of this study ITPS does not include computer hardware. Another term also in common use is Managed Services, which includes the entire spectrum of ITPS except hardware and software products. The terms ITPS and Managed Services are also used interchangeably in studies / reports on the outsourcing domain. The specialized companies, referred to as ITPS vendors, provide their services to multiple client companies at lower prices than the in-house cost, which is made possible by their vertical expertise in the area of work as well as the economies of scale. Transfer of this work, to "foreign" or "offshore" locations by the client companies and/or by their ITPS vendors, either through a captive facility or by outsourcing to a local ITPS vendor, to take advantage of lower labor and occupancy rates in those countries, is commonly referred to as offshoring or offshore outsourcing. ITPS has immense potential to become a major source of foreign exchange and employment generation for countries having low labor and occupancy costs on one hand and developed IT capability and infrastructure on the other hand. Employment is created in the outsourcing destination country for approximately 100 people for each US $ 1 million in revenue1. In addition, benefits accrue to downstream sectors. Conversely, a trained pool of merely 100,000 people with exportable skills, which is just 5 times the workforce of a major public sector organization like PIA and Pakistan Steel Mills, can generate foreign exchange revenue of US $ 1 billion. Moreover, the rapid growth of ITES-BPO and the IT industry as a whole is having a significant impact on the socio-economic dynamic of such countries. IT sector is now amongst the largest employment creator in the emerging economies, with the number of jobs added almost doubling each year. It has also made a major contribution to the rising class of young consumers with high disposable income. In view of the above potential of ITPS industry, Pakistan Software Export Board (PSEB) has engaged BearingPoint to develop a strategy for the Off-Shoring industry in Pakistan. This strategy development program has also been initiated because all global industry indicators continue to project high growth in ITPS and expansion in the types of business processes being outsourced.

1 NASSCOM Report

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PUBLIC SERVICES Strategy for Pakistans BPO Industry September 20, 2005 STRATEGY FOR INCREASING EXPORTS OF BPO

1.2.

Scope of Services

In the initial phase BearingPoint has developed a strategy to expand the Off-Shoring industry in Pakistan. This required BearingPoint to look beyond typical short-term outsourcing initiatives and focus more on areas including Special Economic Zones and outsourced/offshored services, which offer longer-term sustainable growth to Pakistan. The scope of this assignment was limited to developing a strategy for increasing the BPO services only. However, the global IT-BPO space is undergoing significant changes and the ITES-BPO contracts are being increasingly packaged together. As a consequence, the share of ITES-BPO in majority of the new contracts is increasing. The customers are availing this option to better evaluate the Return on Investment (RoI) on outsourcing. Hence, Bearing Point has looked beyond BPO and into the broad spectrum of IT Professional Services to build a long-term sustainable and comprehensive strategy for developing the outsourcing industry in Pakistan.

1.3.

Methodology Adopted

1.3.1. Bearing Points ProvenCourseSM delivery framework

BearingPoint's ProvenCourse delivery framework is a framework that facilitates the integration of BearingPoint's extensive consulting experience that is deeply rooted in solution implementations, methodologies and delivery tools. ProvenCourse provides the framework that enables us to deliver services to our clients consistently across our global footprint, providing value for our clients.
Figure 1: ProvenCourse Framework

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PUBLIC SERVICES Strategy for Pakistans BPO Industry September 20, 2005 STRATEGY FOR INCREASING EXPORTS OF BPO

For this project ProvenCourse delivery framework provided: A single delivery framework to address PSEBs specific needs locally and around the world A single framework to enable integration of our solutions A set of repeatable delivery assets that improved accuracy and accelerated delivery
1.3.2. ProvenCourse Methodology

The ProvenCourse methodology, BearingPoint's global delivery methodology, consisted of the Manage work stream and eight life cycles work streams. The Manage work stream provided a single, consistent approach for managing the engagement. The life cycle work streams addressed unique competencies, while providing overall integration across the full engagement life cycle. The ProvenCourse methodology had the flexibility to be adapted to meet PSEB's unique requirements, while ensuring that our practitioners follow our established practices. It also provided us with the ability to integrate additional solution and technology specific content to further enhance the quality and speed of our delivery.

1.3.3. ProvenCourse Delivery Tools

ProvenCourse delivery tools enabled our practitioners to deliver the solution in a consistent and efficient manner, and enhanced overall project performance. Using the same established tools on multiple engagements allowed our practitioners to concentrate on your solution. In addition, ProvenCourse delivery tools were available to the entire program and project team to assist collaboration and overall engagement management.

1.3.4. ProvenCourse Solutions

Solutions are components of BearingPoint's delivery framework that provide an established approach to a specific business and technical need. Using the delivery assets in ProvenCourse, BearingPoint customized a solution to meet PSEBs individual requirements. Each solution encompassed one or more ProvenCourse phases and work streams. Using the ProvenCourse delivery framework, BearingPoint has integrated multiple solutions to address the varied needs of PSEB.

1.3.5. Report Structure

This section, i.e., section 1, contains the executive summary and attempts to provide the overall picture of the opportunities, constraints and the recommended strategy to exploit the opportunity and to eliminate/mitigate the constraints. Section 8 dwells on the strategy and contains the details of the strategies developed as a result of this study. It also contains information about the Special Economic Zones (SEZs), Dubai Internet city, information about the strategy of other countries and other details related to strategy development. This section also provides the Go-forward plan as well as the expected targets, if the recommended strategies are implemented.
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PUBLIC SERVICES Strategy for Pakistans BPO Industry September 20, 2005 STRATEGY FOR INCREASING EXPORTS OF BPO

The intervening sections contain background information and cover different topics/areas, which were basis of strategy development. More specifically, section 2 covers the ITPS domain and describes the main landscape of the study, i.e., the size of the global market, major players (countries and vendors), their market share and ITPS segments. Section 3 provides insight into the outsourcing process, including the criteria by which a country and an ITPS vendor company are judged for outsourcing. Sections 4 and 5 are focused inwards and indicate the current status of the local regulatory framework and the existing barriers related to ITPS respectively. Sections 6 and 7 provide information about the local and the global ITPS vendors respectively. Sections 6 and 7 also contain the survey; conducted by BearingPoint, of the local call centers and global vendors respectively. This is considered to be a logical sequence, as inputs from sections 2 to 7 have led to the development of the strategy. Hence all factors and background information is discussed before describing the strategy.

1.4.

The Global Outsourcing industry

1.4.1. Global Market size

It will be an understatement to say that the global ITPS market is enormous. As per the studies carried out by NASSCOM, Gartner and Forester, the current total spending on ITPS is estimated to be US $ 1.045 trillion, of this US $ 597 billion is IT Services and Software and the remaining US $ 448 billion is BPO. Out of the above spending, approximately US $ 280 billion is potentially Outsourcable to offshore locations, US $ 160 billion on IT services and Software and a further US $ 120 billion on BPO, the share of call center in this BPO market size being about 40 50 %. However, the actual Offshoring revenue is only US $ 40 billion, about US $ 28 billion on IT services and Software and the balance US $ 12 billion on BPO, i.e., a mere 4 % and 14 % of the total spending and potential Offshorable value respectively. All global industry indicators project high growth of about 7-8 % for the next 5 years in ITPS as a whole and about 11 % in BPO sector. The total spending on ITPS in the next 5 years, i.e., by the year 2010 is estimated to grow to US $ 3.31 trillion whereas the revenue of offshore sourcing in the next 3 years, i.e., by the year 2008 is projected to be about US $ 94 billion.1

1 Nasscom Report

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PUBLIC SERVICES Strategy for Pakistans BPO Industry September 20, 2005 STRATEGY FOR INCREASING EXPORTS OF BPO

Table 1: IT Professional Services


( values in U.S Billion Dollars)

Global IT Professional Services Market Total global spending Outsourceable 2 3 Value Value 597.1 57.1% 160.4 26.9%
197.3 399.8 18.9% 38.3% 53 107.4 26.9% 26.9%

1
A B

IT services and Software


Software products IT services

Actually being offshored 4 Value 27.9 4.7%


9.2 18.7 4.7% 4.7%

2
A B C D E F G H I

BPO
Human Resource Procurement Finance And accounting Customer Care Logistics Engineering R&D Sales and Marketing Trainings

447.8
10.8 1.7 15.1 44.9 182.4 12.5 147.2 3.6

42.9%
1.0% 0.2% 1.4% 4.3% 17.5% 1.2% 14.1% 2.8% 0.3%

120.4
5.4 0.3 12.1 35.9 27.4 7.5 29.4 0.6 1.8

26.9%
50.0% 17.6% 80.1% 80.0% 15.0% 60.0% 20.0% 2.0% 50.0%

11.7
0.52 0.03 1.176 3.489 2.663 0.729 2.857 0.058 0.175

2.6%
4.9% 1.7% 7.8% 7.8% 1.5% 5.8% 1.9% 0.2% 4.9%

Facility Operation and Management 29.6

Total

1,044.9

100.0%

280.8

26.9%

39.6

3.8%

1.4.2. Leading players 1.4.2.1. Countries

India and Canada are the two leading players. Collectively they have approximately 75 % share (or US $ 30 billion) of the market. Out of the total offshoring market size of US $ 40 billion, India and Canada have 43% and 32% of the market share or US $ 17.2 billion and US $ 12.6 billion respectively1. China is a distant 3rd with 5% of the market share or approximately US $ 2 billion in ITPS offshoring revenue. However, China is the market leader in the outsourcing of computer hardware products. Hardware revenues, including exports, accounted for 85% of Chinese IT Industry in 2004.5 China has established itself as a leader of the computer hardware in the same way as India has taken a lead in the IT services and software. Computer hardware constitutes a significant part of the worldwide IT spending and the projected hardware global revenue for the current year is expected to be about US$ 387 billion. The numbers of PCs in use worldwide are expected to increase from 575 million at the present time to almost 1.3 billion by the end of the decade. The share of the mature PC markets in Europe, US, and Asia in this phenomenal increase of about 725 million PCs is projected to be only about 150 million PCs, the rest will be provided by the emerging markets with China leading the way.

1 Source: Nasscom/ Gartner Group


2 % of Total Global Spending 3 % of Total Global Spending on the corresponding Sector 4 % of Outsourcable/Offshorable value of the corresponding Sector

5 Nasscom Report

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PUBLIC SERVICES Strategy for Pakistans BPO Industry September 20, 2005 STRATEGY FOR INCREASING EXPORTS OF BPO

Figure 2:

Market Share of Leading ITPS Offshoring Countries (Billion US $)1

4.7 0.5 0.9 1.8 1.9 17.2 India Canada China Eastern Europe Philippines Mexico Others

12.6

1.4.2.2. ITPS vendors

Our analysis reveals that a few major vendors control an overwhelmingly large market share of the ITPS revenue. The major IT services and software vendors include IBM, EDS,CSC and Accenture, whereas, the list of top BPO vendors includes ADP, Convergys, Ryder and Ceridan. The top 10 global vendors of IT services and software earn a major share of the outsourcing revenue (over 43% or US $ 102 billion). The top three (IBM, EDS, CSC) together control one third of the global market. Likewise, the top 10 global BPO vendors have approximately 28 % share of the market size, i.e., US $ 54 billion. The employment base of the ITPS global vendors is no less impressive. Accenture, IBM Global Services, EDS and CSC collectively employ approximately half a million people between themselves, out of which about 12 % are working at their offshore locations. Accenture has 18 % of its employees at offshore locations, closely followed by EDS with 15 %, IBM 9% and CSC 4%. Also, their offshore locations are spread all over Far East, South Asia, China, Europe, Canada and South America. In relatively saturated offshore locations like Ireland and the Netherlands, it has taken nearly 10 years for wages to increase from 50-75 % of those in the US. However this will take 25-30 years in a location such as Pakistan because of lower initial wages and a constantly growing educated work force.2

Nasscom Report
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2 http://www.outsource2india.com/why_outsource/articles/call_centers.asp

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PUBLIC SERVICES Strategy for Pakistans BPO Industry September 20, 2005 STRATEGY FOR INCREASING EXPORTS OF BPO

It is on account of the above reason that our strategy focuses on targeting the major ITPS vendors, instead of big end user companies.
Figure 3: Sector wise revenue of Leading BPO vendors
V lu sinU . B nD lla a e .S illio o rs
1

Oe th r .4 50 19 .7

44 .9

1 .2 20

H mnR so rce ua e u L g &S M o istics C F a cea dA u g in n n cco tin 1 .4 82 C sto e C re u mr a P cu mn ro re e t D cu e t Mn g mn o mn a a e e t 91 .2 D taMn g mn a aae et Oe th r

P cu mn ro re e t 03 .6

C sto e C re1 6 u mr a .9

1.4.3. Leading ITPS revenue provider countries

The major revenue sources for off-shore ITPS are USA and Western Europe with approximately 70% and 23 % of the market share respectively, the rest of the world contributing a mere 8%.

1 NASSCOM Report

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PUBLIC SERVICES Strategy for Pakistans BPO Industry September 20, 2005 STRATEGY FOR INCREASING EXPORTS OF BPO

Figure 4:

Key Export Markets for IT-ITES Industry (Offshoring Countries) FY 2003 2004

FY 2002 - 2003

FY 2003 - 2004

Europe 22.3%

ROW 8.7%

Europe 22.6%

ROW 8.0%

Americas 69.0%

Americas 69.4%

1.4.4. Outsourcing Process

The outsourcing/offshoring process is a time consuming exercise, as the outsourcing / offshoring company before deciding to outsource has to go through certain internal and external processes to assess ability of the service provider to meet companys expectations. Such internal corporate processes typically take anywhere between three to nine months. On average, it takes additional six months from the time the company takes the decision to outsource some of its business processes to commencement of work at the vendor location.
Figure 5:
Stage I Assessment & Business Case Organization Assessment

General Process a Company goes through when Outsourcing


Stage III Contract Review and Negotiation Vendor Management Stage IV Transition Planning and Design To be Process Design Stage V Operations

Stage II RFP and Vendor Selection Company selection

Vendor Management

1.4.5. Vendor and Location (country) selection process

During the outsourcing process, location (country) and vendor assessment is carried out prior to the vendor selection. The initial location screening identifies the countries with strong IT capabilities and then evaluates them based on certain parameters, including Base cost, Risk, Infrastructure and HR - revolving around the fundamental parameters - Political, Legal and Business. The Vendor assessment criteria
1 NASSCOM Report

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includes breadth of services provided by the vendor, size, number of centers, certifications, partnerships, clientele and cost. A thorough analysis of the country and the vendor selection criteria shows that a strict and detailed due diligence is carried out for vendor and location selection. The countries that have established themselves as outsourcing destinations score higher ratings on account of their proven track record and demonstrated ability; as such the new aspirants have a handicap to begin with. Factors and issues like IPR, Copyright, etc, which tend to get ignored for the major offshoring countries like India and China, would come under microscopic scrutiny when it comes to new entrants like Pakistan, requiring it to be at least 30-50 % better in some of the important factors like cost, incentives, resource availability, etc1. Furthermore, if a global ITPS vendor already has presence in the country, then the country risk is mitigated, by the same token the risk is much more pronounced if the outsourcing destination is both a new country and a new vendor.

1.5.

IT Professional Services (ITPS) industry of Pakistan

1.5.1. Market size

The size of Pakistans IT industry is about US $ 700 million, with annual software industry turnover of about US $ 70-80 million2. During the fiscal year 2003-04, more than US $ 200 million were invested by the financial services sector into IT products and services. Furthermore, the total value of some of the ongoing large IT projects of the public and private sector organizations exceeds US $ 100 million1. Software industry is experiencing an annual growth of 40% to 50 %, reason being that it is still in the developmental stages.3 Pakistans IT industry is still well below its potential. Ideally, it should be 1/5th of the size of the Indian IT industry, as Pakistans economy is generally 1/5th of the Indian economy. The size of the Indian ITITES industry is US $ 26 billion, with domestic market contributing US $ 8.2 billion and international ITITES revenue US $ 17.9 billion4, which implies that Pakistans IT industry has not kept pace with the other sectors of the economy and its size should have at least been about US $ 4-5 billion. It is also interesting to note from the following table that the ratio of Pakistans export revenue to the domestic revenue is only 17 %, whereas the same ratio of the Indian IT industry is 218 %, which indicates that there is a huge potential for growth of the ITPS export revenue in Pakistan. Moreover, since a much smaller domestic base can support a much bigger export market, Pakistans current ITPS domestic market has the potential to service a much bigger international market.

1 PSEB Website 2 PSEB Website and PASHA Website 3 PASHA Website 4 NASSCOM Report

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Table 2: Country

Comparison of IT-BPO industry sizes of Pakistan and India Exports revenue IT-BPO (including Hardware) US $ 100 million 17.9 billion

Domestic revenue IT-BPO (including Hardware) US $ 600 million 8.2 billion

Export revenue as a percentage of domestic revenue 17 % 218 %

Pakistan India

1.5.2. ITPS exports revenue

Share of Pakistan in the vast global ITPS market is insignificant and there are less than one hundred companies generating bulk of the IT and BPO export revenue in Pakistan. As against the total Offshoring revenue of US$ 39.6 billion, the export earnings of Pakistani IT and BPO companies, transacted through the State Bank of Pakistan, is about US$ 50 million2. There are no sources of information available to determine the value of the unreported export revenues brought into the country. However, it is estimated that such unreported revenue brought into the country would be about the same as the reported revenue, which puts Pakistans total ITPS export revenue earnings brought into the country at approximately US $ 100 million. However, the global revenues of Pakistani IT companies is estimated at US $ 200 million at the minimum, since they are bringing into the country US $ 50 million to cover their costs, and typically the company earns four times that amount globally, which is still very paltry as it is about half percent of the total Offshoring revenue. The percent growth in Exports during 2003-04 over 2002-03 was 45 %, which is attributable to the low exports in 2002-03. There is no record available about the share of the IT services and BPO services in the above export revenue of US $ 50 100 million. However, since the number of IT professionals engaged in export oriented software development (about 6,000-8,000) is significantly greater than the number of employees of call center and other BPO related companies working for international clients (about 5,000)1 and also because the chargeable rates of the software developer are higher (US $8 and $5 for software developer and BPO resource respectively, at the low rate for both), the estimated ratio of the earnings of the IT services and BPO sectors is 2:1, which is an approximation based on the above strength and chargeable rates. However, as the BPO exports are at the nascent stage, the share of IT services & Software and BPO in the ITPS exports revenue is estimated to be 60 % and 40 % respectively in the next 2 years.

1.5.3. BPO sector domestic revenue

Like its international counterpart, the domestic BPO industry is also at the infancy stage and the concept, merit and advantages of outsourcing of non-core functions to specialist ITPS vendors has not been given due consideration by public sector and large private sector organizations such as utility bill companies,
1

BearingPoint Analysis

2 PSEB Website

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banks, multinationals, etc. The two major priority areas for domestic outsourcing are call centers and utility bill processing, followed by administration, human resources, payroll and accounting services. However, it would take some cultural shift for administration, human resources and accounting services to be outsourced, but the first two can start immediately. Currently, there are only a handful of companies such as PIA, a few banks, telecomm companies and fast food franchises who are operating their call centers either themselves or through outsourcing. The number of call center agents serving the domestic clients through these call centers is about 2,0001, including those working in the company owned call centers as well as independent call centers. The need for call centers for the domestic sector is estimated to be 10 times more than the present capacity. This assessment is based on the international trend among the public sector organizations and large public dealing private sector companies to have their call center for enhancing the productivity of the organization and facilitating the public and servicing the clients. Another suitable candidate for domestic outsourcing is the bill processing of utility and telecomm companies. The current estimate of the domestic outsourcing revenue is approximately US $ 4-5 million, based on 1,000 domestic call center agents at US $ 2 per hour for a total of 2,000 hours per year per agent. The other domestic BPO segments are insignificant. There are a few accounting companies who are providing routine accounting, taxation and payroll services to small companies, but their combined revenue is minimal. The projected annual revenue from the enhanced capacity of the domestic call centers and the total outsourcing of utility bills processing is US $ 200 million and US $ 30-50 million respectively. The revenue from the other BPO segments is estimated to be US $ 50-100 million, which implies that a domestic outsourcing market of over US $ 300 million already exists1, which can be effectively utilized to nurture the local BPO industry.
1.5.4. Human Resources

The ITPS industry generates direct employment for over 120,000 people2. The total number of IT professionals, call center agents and the employees working in other BPO segments in the country is estimated at 75,000, 3,500 and 2,000 respectively.1 However, the corresponding numbers with exportable skills are about 4,000, 2,500 and 1,500 respectively, which implies that out of the total HR strength of 80,500, only about 10 % posses exportable skills. The number of IT graduates produced each year is 5,500 and there are 45 universities offering IT/computer science programs. The population of people who can understand and communicate in English with varying levels of skills is about 6.5 million1. However, a large number of them would require extensive training, grooming and experience before they can be expected to serve foreign clients. Availability of trainers is another limiting factor. The lack of sufficient number of middle management

1 NASSCOM Report 2 PSEB Website

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and supervisors is also an area of concern. The HR training needs have been identified in section 6 on the BPO companies of Pakistan. The main strength of Pakistan lies in the availability of a large pool of Accountants, Engineers, Bankers and Doctors who can be employed in the BPO sector.
1.5.5. Infrastructure

The three major components of the infrastructure, which affect the BPO sector, are Internet bandwidth, telephone and electricity. Electricity problem can be addressed through company owned power generators but the Internet and telecom, which are of crucial significance, are beyond BPO companys control. Currently, the reliability of the Internet connection is a major concern. At present, redundancy is not available as there is a single SEMEWE-3 undersea cable connecting the country to the Internet backbone. This has been brought in to sharp focus by the problems encountered during the last week of June 2005 and the beginning of July 2005 due to damaging of undersea cable. Based on the current strength of 2,500 agents in International Call centers, a utilization of 8 hours per agent per day and an average revenue of US $ 5 per agent per hour, the estimated revenue loss due to the severance of the link is approximately US $ 100,000 to US $ 50,000 per day for 100 % and 50 % utilization of the agents respectively from the time the problem started and the intangible losses are far greater (loss of contract, goodwill, reputation, etc). 1 PTCL is planning to add two more links for redundancy, one through undersea cable SEMEWE-4 (expected to be available by October 2005) and the other through underground fibre optic link with an Indian company VSNL, but until then, major foreign companies would not be keen to outsource to Pakistan. The availability / reliability of phones does not constitute any significant problem in the outsourcing of BPO business to Pakistan as, over a period of time, the land and mobile phone infrastructure has become reasonably developed. Over 85% of telecommunications infrastructure is on fibre2 optics and the positive impact of de-regulation of telecomm sector is beginning to be felt.

1.5.6. IT and BPO companies of Pakistan

As per the PSEB figures, there are total 300 software houses with valid registration in Pakistan. There are a total of 154 call centers registered with PSEB, out of which 116 are operational. Out of the 116 active call centers; the number of international and domestic call centers is 70 and 37 respectively. The number of companies providing other BPO services like medical and legal transcription, engineering services, etc, is about 20.3 The number of ISO 9000 certified IT-BPO companies is 70 and 30 other companies are in the process of acquiring certification. There are only seven companies with Capability Maturity Model (CMM) certification, which is a Software Quality Assurance Certification. One company is at CMM Level 5, one at Level 4 and other five are at CMM Level 3. The relevant certification for the call centers is COPC. No
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record is available about the COPC and certification status of the call centers in Pakistan. Similarly, International certification record of the medical transcription companies of Pakistan is also not available. Based on the talent pool in Pakistan and the types of work already in progress, Network Security (Monitoring and Management), Telecommunications, Call Center, Banking and Investment, Insurance, eCommerce/Online Retail, Finance and Accounting, Healthcare (incl. Medical Transcription, Billing and Claims Processing), Mortgage and Other Financial Services, Hospitality and Travel, Engineering Design and Petroleum are some of the matured BPO services, in addition to Software development, which Pakistan can build upon. The list of the local BPO companies is provided as an Annexure to this report.
1.5.6.1. Local Call center segment

The international call center industry in Pakistan started in 1998. However, after the meltdown of 2001, the oldest in the current wave of companies started in 2002. The HR strength of these companies ranges from 5 to 500+ and the companies age from 6 months to 25 years.1 Although there are no confirmed figures, but it is estimated that the total number of agents working in the international and domestic call centers is 2,500 and 1,000 respectively1. This number, however, includes only the call center agents working at the 3rd party call centers and does not include those working in the company owned call centers as company employees, because it does not fall under the ambit of outsourcing. The call center operators of Pakistan are marketing Pakistan, as an alternative to India and Philippines, especially after increased costs of operation in India. Estimates suggest that there are more than 100,000 call centers, 1.2 million seats and 2 million agent positions across the globe and the demand for agent positions is growing at the rate of approximately 23% to 25%2. The call centers of Pakistan have to compete in this market place to get their share. Also, call center is a risky business due to claims arising on account of data theft/misuse, improper conduct of agents, violation of local laws, contract violation, etc., not to speak of bad debts on receivables which are also a common occurrences, specially for telemarketing related projects. A number of Pakistani call centers are maintaining their presence in North America / Europe through their own offices or business alliances. Pakistani companies are also keen to buy running call centers in North America in order to farm out the business to their call centers in Pakistan. The top 25 international call centers in Pakistan collectively add up to about 1,500 seats3, majority of these are outbound, i.e. providing sales and telemarketing services, while a smaller fraction is inbound. The remaining international call centers, each with 10 seats or less, are either very specialized and integrated into other software or BPO businesses or have yet to establish their long-term viability. Only a few large call centers have long-term contracts and relationships with their customers. Most of these call centers are engaged in outbound services, such as telemarketing, and this tends to be a project-oriented low margin business and can be an easy victim of price-cutting by competitors elsewhere.

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2 http://www.outsource2india.com/why_outsource/articles/call_centers.asp 3 PSEB Website

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To put the call center and BPO business on a sound footing for sustainable growth, much focus is needed on efforts to diversify into other BPO segments where Pakistan has a large pool of trainable resources, such as, HR, Accounting, Medical and Legal documentation, etc. Concerted efforts are needed to move up the value chain. For instance, call centers can upgrade themselves into better-priced customer and technical support and other knowledge-based inbound services with long-term client relationships and contracts. Similarly, BPO services need to be aimed at knowledge - based value added services, way beyond data entry and simple operations.
1.5.6.2. Results of the survey conducted for BearingPoint of local Call Centers

A survey of selected 16 selected call centers in Pakistan was carried out in March April 2005, within the context of the Strategy for Increasing the Exports of BPO Services project awarded by PSEB to BearingPoint. The summary / analysis of the results of the study are provided below: The biggest hindrance to the rapid growth of call centers business is not a lack of demand or business from the US and Europe, but the shortage of suitably educated, qualified and trained professionals required for service delivery. An extensive training of the available large pool of HR is needed to impart to them exportable skills. The HR training needs are discussed in more detail in section 6. While there is a pool of unemployed educated young men and women yearning for jobs, there is a visible gap between their knowledge, skills and experience and what is required for reliable and high quality service delivery to global customers. Some respondents blamed the current educational system in the country, stating that a very low percentage of the students are getting proper education. The shortage of qualified individual contributors will severely impact the potential growth of the call center segment. The shortage of seasoned middle management is acute. The other critical problems highlighted were the lack of quality building space for near-term or future expansion and the redundant Internet link Generally, there seems to be no issue with capital or demand for their services. If the human resource bottleneck is addressed immediately and other critical issues are resolved, significant business growth in this sector can be attained. PSEB can help by facilitating matchmaking events with global businesses seeking BPO services. The actionable items mentioned above are included in the strategy section 8, under the action points for the GoP

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1.5.7. Global IT Companies with presence in Pakistan

Many global IT companies are present in Pakistan and their revenues are growing 30-40% annually1. They view the local IT market as very promising. Multinational IT companies such as Oracle, IBM, Cisco, PeopleSoft reportedly have annual total revenues in the range of US $ 200-300 million in Pakistan and their percent increase during the financial year 2003-05 was from 25% to as high as 70%.2

1.6.

Major issues and concerns of companies looking to outsource to Pakistan

Apart from Political stability, HR availability and Internet link redundancy issues, the other major concerns, in a cold objective evaluation processes are Intellectual Property Rights (IPR), copyright, data security, legal and regulatory environment. Software piracy is a key cause of revenue loss for the ITPS segment as the unauthorized copying and distribution of data, information as well as the software development / in use deprives the owner company of competitive edge and revenue. Based on the findings of a survey conducted by IDC, it is estimated that over 35% of the software in use is pirated - translating to a revenue loss of over US $ 30 billion per year. However, the revenue loss is less dependant on the extent of the piracy and more on the installed base. In China, 92 % of all software in use is pirated but the estimated loss of revenue is just US $ 3.8 billion, whereas, the incidence of piracy in the US is significantly lower at 22 %, yet on account of a larger installed base, the loss of revenue in the US market is estimated at US $ 6.5 billion.2 Data security, confidentiality and integrity are other prime concerns and compromises are not accepted. Clients consider network security, personnel security, physical security, and customer privacy and information protection to Pakistan is no worse than the be critical while deciding about offshore outsourcing. major players like India, China, Companies demand implementation of various network Philippines, etc, but these issues security technologies from offshore vendors and in some cases become greater hurdles for new physical security arrangements, like body searches and comers than for established complete ban on bringing in of copying media to the work members of the club. place. Another major concern is the lack of information available about Pakistans IT and BPO industry. Very little authenticated information is available in this regard, like the HR skills available, software exports, capabilities of leading software development companies, etc. It is to be particularly seen from the perspective of an individual or a company looking for a suitable ITPS company to outsource to Pakistan or an investor investigating the prospects of establishing an ITPS company in Pakistan. The hard data / information needed by such entities is not easily available. As opposed to this, the information available with NASSCOM about the ITPS industry of India is enormous on all subjects, be it the local industry, export sector, HR or the industry outlook.

1 PSEB Website 2 NASSCOM Report

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1.6.1. Results of the survey conducted by BearingPoint of global ITPS Vendors

In April 2005, BearingPoint, US, conducted a survey of 17 global Business Process Outsourcing (BPO) vendors in order to develop a more thorough understanding of those factors that would make Pakistan an attractive location for offshore outsourcing. The vendors expressed similar views on Pakistan, based upon which the strategy has been developed. Overall, the following points can be gleaned from the survey: Among the most important criteria companies cited in considering outsourcing destinations are legal and regulatory framework for ICT, the development of educational capabilities/skills, and the reduction of bureaucracy/red tape. In general, vendors consider the availability of labor with required skills as the most important in selecting an outsourcing destination. Other important factors are English language capabilities and political stability. Less important are time zone advantages and incentives. Companies have lack of information about Pakistan, and in general have not considered Pakistan as an outsourcing location. In some instances where there prospects for Pakistan, they tend to be influenced by negative views of political and regional instability. For many factors Pakistan was rated between very poor to average, with its labor costs being ranked as its most favorable criteria. Beyond this, each of the criteria considered by vendors did receive generally high rankings, leading to the conclusion that Pakistan should seriously consider improvement in each of the poorly rated factors.

1.6.2. Risk Mitigation by Asian Development Bank (ADB)

The Asian Development Bank plans to provide a security risk guarantee against sabotage or terrorism to foreign firms that are willing to invest in Pakistan1. When approved by the government., it will be one possible mean to mitigate business risk. ADB has submitted the proposals to GoP, and the scheme will be launched after their approval. Under the scheme, the bank will provide a risk guarantee to foreign investors against possible terrorist attacks or sabotage and it will work as an insurance scheme. A foreign investor would have to pay 0.5 %-0.6 % of its total investment to the bank to avail the guarantee. The planned scheme would be limited to foreign firms as the idea is to attract foreign investment to Pakistan. Though foreign direct investment has increased 55.3 % to US $ 597.6 million in the first eight months of the fiscal year that began July 1, but the foreign investment inflows have still been below international levels because of risk perception. The insurance sector was facing problems in obtaining reinsurance from the overseas companies to provide cover to the local business to meet losses incurred in the backdrop of terrorism activities. ADBs guarantee will be used for obtaining reinsurance facility from multinational insurance companies and it will help the local insurance sector to cover up losses especially those relating to terrorism. The domestic investors would not be eligible for the scheme on their own; they would be eligible only if they are investing in a joint collaboration with foreign partners. The proposed scheme will run parallel to
1

ADB official
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the banks political risk guarantee scheme, under which domestic investors can seek risk guarantees against changes in governments policies. Although, it has more relevance to manufacturing industries and power generation plants, but is also relevant to ITPS sector because a number of concessions are available to this industry and an ITPS investor may feel apprehensive about reversal of some of the concessions in the future.

1.7.

Technology Parks and Special Zones

The concept of creating an exclusive zone for technology and BPO companies is not new. A number of countries have created software technology parks, special economic zones, IT cities and IT parks, essentially for the same purpose, which is to provide workspace, top class infrastructure and one window operation. This is aimed at enhancing the ITPS exports by providing congenial and enabling environment to the ITPS companies. Pakistan has 4 software technology parks (STPs), India has 27 special economic zones (SEZs), Philippines has 5 SEZs, Dubai has Internet city and Brazil is developing a 303 acre IT park, named digital park. Brief information about some of the technology zones is being provided below.

1.7.1. Software Technology Parks (STPs)

The purpose of the STPs is to provide workspace, utilities, telecom, one window operation and minimum regulatory overheads and other infrastructure facilities of international standard at minimal costs to technology companies involved in export of IT and BPO services. The Government of Pakistan has established Software Technology Parks (STPs) in Islamabad, Karachi, Lahore and Peshawar with the objective of encouraging, promoting and boosting the Software / BPO Exports from Pakistan. The total office space currently available in the above Software Technology Parks (STP) is 600,000 sq ft., which is sufficient for about 8,000 programmers or about 12,000 call center agents/BPO employees. However, it would fall well short, if we target to achieve US $ 1 billion in ITPS export revenue, which would require a space for about 100,000 employees, or 5 million sq. ft of office space and for US $ 5 billion of revenue, the office space requirement would be 25 million sq ft, for BPO offices.1

1.7.2. Special Economic Zones (SEZs)

The purpose of setting up Special Economic Zones, generally known as SEZs, is to provide a conducive and duty-free environment for manufacturing, services and trading activities related to exports. These special zones were set up in India in April 2000 by the government and are quite similar in concept to the STP, except that it is not only restricted to technology companies and manufacturing as well as trading activities are also allowed in the SEZs, albeit for export purpose only.

1 PASHA Website

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Private sector is allowed to build and operate an SEZ and there are two sets of rules, one for the developers/builders and the other for the occupants (referred to as units). For developers / builders, there are further two sets of rules, one for development and the other for operation and maintenance At present, there are 27 SEZs in India, including the erstwhile Export Processing Zones (EPZs), which were converted into SEZs. The units located in SEZs are entitled to import all goods, including capital goods, required for their activities, exempt from customs duties. TERMS AND CONDITIONS (of the Indian SEZs) The SEZ units have to abide by the following terms and conditions SEZ units have to be a positive Net Foreign Exchange Earner. Performance of the unit has to be monitored by a Committee consisting of Development Commissioner of the Zone and Customs. Units have to maintain proper accounts and furnish details regarding value of import, export etc. to Development Commissioner on a quarterly basis More details about the SEZs of India are being provided in section 8 of this report.

1.7.3. Virtual Special Economic Zones (Virtual SEZs)

A new concept of free zone is now developing - that is of declaring a private building not located in the designated SEZs, as a Special Economic Zone (SEZ), if the organization located in that building is exclusively involved in the export of IT and/or BPO services and meets other benchmarks applicable to the units physically located in the designated SEZs. This concept has merits because inputs and outputs of such an enterprise are done electronically or via the Internet in form of a video, audio or data. Therefore, traditional regulatory customs monitoring and inspection is not possible and only post audit inspections of Outsourcing Agreements and revenue receipts can be pragmatically executed. As such, the need for the location of such enterprises in any fenced-in customs controlled areas becomes redundant. Such virtual Special Economic Zones would be an extension of the Software Technology Parks already created by the GoP and would enjoy the same tax holidays and other benefits. The companies desirous of getting their premises declared and treated, as SEZ would be assessed against a laid down benchmark. Upon obtaining the SEZ status, they would be extended the same one window regulatory facility as would have been done to a company physically located in an STP. Any violation of the applicable terms and conditions would result in the revoking or suspension of their virtual SEZ status. This would also help to alleviate the space shortage at the STPs, which is only 600,000 sq ft and enough for 12,000 BPO employees or for an export earning of about US $ 120 million only.1 High-level regulations regarding these virtual SEZ have been given in section 8 of this report.

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1.7.4. Dubai Internet City (DIC)

Another modern facility created for technology and BPO companies is Dubai Internet City, which opened in October 2000. DIC provides a Knowledge Economy Ecosystem that is designed to support the business development of Information and Communications Technology (ICT) companies. It is the Middle East's biggest IT infrastructure, built inside a free trade zone, and has the largest commercial Internet Protocol Telephony system in the world. There are now 16 office buildings in Dubai Internet Citywith an 80% occupancy rate. Dubai Internet City is home for about 1,200 companies having more than 10,000 skilled workers. Construction is soon set to begin on 14 new high-rise towers. The total investment to date by the Dubai Technology and Media Free Zone Authority in the project stands at US$700 milliona figure that does not include land-acquisition costs. A new phase in the expansion of this project will see an additional investment of US$800 million. In line with Dubai's liberal economic policies and regulations, Dubai Internet City offers foreign companies 100% tax-free ownership, 100% repatriation of capital and profits, no currency restrictions, easy registration and licensing, stringent cyber regulations as well as protection of intellectual property. The global ICT giants Microsoft, Oracle, HP, IBM, Compaq, Dell, Siemens, Canon, Logica, Sony Ericsson and Cisco have presence here and these companies represent a community of over 5,500 knowledge workers. The cluster of ICT companies in Dubai Internet City comprise of Software Development, Business Services, Web Based and e-Commerce, Consultancy, Education and Training, Sales and Marketing and Back Office Operations. DIC provides a scalable state-of-the-art technology platform, which allows companies looking to provide cost effective business process outsourcing (BPO) services such as call center operations.
1.8. High level SWOT analysis of Pakistan as ITPS Hub

A review of the internal and external environment is an important part of the strategic planning process. SWOT Analysis has been used to identify the Strengths and Weaknesses and examine the Opportunities and Threats currently faced by the ITPS sector in Pakistan. The strategy would focus on areas where Pakistans ITPS sector is strong and where the greatest opportunities lie. Also, it would enable us to build on strengths, exploit opportunities, remove weaknesses, and develop a strategy for dealing with threats. The detailed SWOT analysis is provided in chapter 8, which shows that the greatest strength of Pakistan lies in its low cost base and it had topped the list of 36 countries with IT capability for a benchmark of 200 full time employees. Its other main strengths include availability of trained and experienced IT resources, MBAs, Accountants, Engineers, Lawyers, Doctors, etc. Amongst its strength can also be counted the fact that Pakistan is becoming known internationally as a country with IT capability, although of moderate quality and quantity. The available tax and other incentives are also at par with the concessions available in the major outsourcing destinations. The weaknesses identified include poor perception of Pakistan, both on account of acts of terrorism, political uncertainty and lack of consistency in governments policies. The absence of redundant fibre optic Internet link and the shortage of HR resources for call center agent as well as middle management
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positions can be counted as major impediments in the growth of ITPS industry. Also included in the list of weaknesses is the lack of professional certification of the ITPS companies and the overall absence of quality culture and awareness. The thriving ITPS market with projected BPO growth of about 11 %, existence of large untapped offshorable ITPS market, concentration of about 40 50 % ITPS business in the hands of a few global vendors1, proximity with the most successful ITPS player, requirement of software and English language skills in China and existence of a large number of international companies in Pakistan are some of the major opportunities which can be exploited. The threats identified include the competition from the established leaders, lack of a proven track record and the migratory nature of the BPO business.

1.9.

Strategy of other countries

The more successful offshore outsourcing destinations in this region are India, China, Philippines, Malaysia and Singapore. Although the formal strategy adopted by these countries for achieving high growth in ITPS exports is not available, except for some indication of the same in respect of India vide the strategic review 2005 of the IT Industry in India, carried out by NASSCOM, our research identifies the following common policies pursued by the above countries: 1. The government played the role of facilitator and enabler, creating modern infrastructure and removing the barriers, both proactively as well as in response to the requirements brought to its attention by the professional bodies. 2. Top priority was given to high quality education from school to the university 3. Extraordinary incentives were provided to the ITPS sector investors and companies. 4. Regularity framework was created and maintenance of law and order was accorded utmost priority. 5. In India, states competed with each other to foster the growth of the ITPS exports industry in their own state. 6. Contacts were made in major outsourcing countries (US and Western Europe) with the top decision makers at the highest government levels (Ministers, Chief Ministers, Ambassadors) both for technology and skill transfer as well as for attracting the business. 7. Above all, there has been constant effort and planning, based on the analysis of the previous performances and the future trend of the industry.

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1.10.

Strategy adopted by India

India did not start on this route through a well thought of strategy. The outsourcing flood was triggered by Non-resident Indians, NRIs, as they are commonly known. It started as a mutually expedient arrangement when the Indian expatriate holding senior positions in US IT industry, created captive facility in India for transfer of low-end jobs like data entry to the offshore facility. (GE was one of the first companies, which opened its own facility in India. It now employs 18,000 workers in India and has seen a total savings of US $ 350 million a year.1) Thereafter, it caught the imagination of the Indian Government who saw the potential and developed the strategy to exploit the opportunity, in close coordination and in conjunction with the private sector in general and with the IT industry in particular. The corner stone of the strategy was to create conducive infrastructure with emphasis on telecomm, produce a large HR pool and approach the decision makers in the outsourcing companies and in the technology creation companies like Microsoft, Oracle, etc. Stress was also given on the creation of high quality educational institutions and availability of high quality education from school to the universities. In parallel, regulatory frameworks were also created to meet the expectations of the clients. The phases of the IT-BPO evolution of India can be categorized into 3 phases, Pioneers 1996-2000; Early adopters 2000-2003 and Cautious followers (2003-2008). The detailed attributes of each phase, as provided in the NASSCOM report, are included in the Annexure to this report. The above NASSCOM report suggests strategy for both the ITPS industry as well for the government. For the ITPS industry, it proposes four point plan as next steps, namely, building a truly global delivery model to focus on building delivery capabilities in other low-cost geographies, building consultative selling capabilities by creating vertically aligned sales force, offering solutions capabilities by building partnerships with hardware and software providers and building a sales force with domain skills and building multi-cultural organizations with unifying values but a global workforce and global career tracks. The recommended next steps for the Indian Government include supplementing the efforts of the industry, opening new opportunities through country specific initiatives, investing in enhancing the supply of knowledge workers and developing the domestic market. Some of the major specific issues identified for being addressed by the Indian Government and the industry include, increasing awareness among customers of the countrys capabilities in higher value added activities, proactively addressing questions/misconceptions about Offshoring in the worldwide media through inter-government interactions and trade negotiations, strengthening the data protection and privacy laws, ensuring availability of skills e.g., English speaking workforce, US GAAP accounting skills in ITES-BPO and trained IT personnel, Introducing spoken English courses at all graduate colleges across the country by lobbying with the state governments and relevant education boards like UGC, AICTE etc. More details bout the strategy suggested by NASSCOM for its government and industry are provided in section 8 of this report.

Source: Economic Times, Nasscom, and BearingPoint Study


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1.11.

Strategy Approach Menu for accelerating the growth of local ITPS industry

The approach below is designed to provide Pakistan with a strategic direction to capitalize on the stated global opportunities. The focal point of the Strategy is to attract the leading global ITPS outsourcing vendors (providers) to make Pakistan one of their ITPS Hubs. They will bring a big name, know how, new technology and skill for the ways of doing business which will attract other global vendors. Global companies will not be targeted initially as most of these companies have directly outsourced their processes to the Global vendors, thereby mitigating their direct risk. These companies can be directly approached once Pakistan begins to emerge as the Global ITPS Hub, which is a distinct possibility, subject to the GoPs sustained commitment. It is not an easy task to motivate these companies to set up their operations in Pakistan. The GoP would have to build their confidence to invest in the ITPS sector in Pakistan. In order to achieve this; GoP would have to ensure that the policy changes do not occur to the disadvantage of the ITPS vendors. Furthermore, the market has to be developed for the entire spectrum of ITPS, i.e., IT Services and Software and BPO as the two segments complement each other and the BPO sector cannot flourish / take roots in the absence of matured and demonstrated IT capability of the country - the history of the success of the BPO industry of India being a clear example. The major export revenue earner is the IT sector and the BPO sector can be built on the success in the IT sector and not the opposite. It is not uncommon these days for the clients to bundle the IT and BPO services contracts together. Hence a strategy developed in isolation for the growth of the BPO sector alone will not be very effective. There are three components of the strategy, namely, WHAT, WHY and HOW. The strategies identified are mentioned below, that answers the WHAT part. The answer to the WHY question emerges from the analysis of the data, the information about the local and global ITPS industry as discussed summarily above and in detail in separate chapters on the respective topics. As regards the HOW part of the strategy, it is discussed below, in brief, and in more detail in chapter 8, which is the Strategy Chapter. However, it will be covered more exhaustively in the phase 2 of this project, which is for the implementation of this plan. STRATEGY FOR GLOBAL VENDORS - TARGET APPROACH The Global Vendors - Target Approach strategy is as follows: 1. Target the leading 25-30 ITPS global vendors. a. Immediately target Vendors with a presence in Pakistan to commence ITPS locally b. Approach all other global vendors to invest in Pakistans ITPS sector c. Facilitate global vendors to partner/JV with local ITPS vendors and /or to invest in Pakistan by providing one window and seamless facility for the immediate startup of their operations in Pakistan.

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2. The top decision makers should be contacted at the highest Government. levels (ambassadors, ministers and above) to address their concerns about investing in Pakistan. A face to face deliberation would have much more chances of success for Pakistan than a cold objective assessment during an outsourcing decision making process as no one from Pakistan is then present to argue its case. As against this, when the case of the country is presented in person by someone in authority then the vendor concerns can be addressed promptly and assurances can be provided and such assurances are likely to have greater impact on them (vendors) than those coming from someone not in a position to do anything about their concerns. 3. They (vendors) should be provided details about the advantages of outsourcing to Pakistan, informing them about the incentives available to the ITPS industry and also that Pakistan has a large pool of human resources who can be converted into a skilled labor force through training. The GoP should also offer to provide / facilitate the HR training free of cost to the intending vendors. It should also try the matchmaking of the local BPO vendors with the global vendors by shortlisting, through a separate process, the local BPO vendors who have international delivery capability. Although, there are only a few major BPO companies in Pakistan, but the shortlisting process would bring improvements in their capability as a result of their effort to comply with the shortlisting requirements and it can also be a selling point for them that they have been shortlisted by the GoP. STRATEGY FOR GLOBAL VENDORS - DEAL APPROACH The recommended strategy in this respect would involve targeting the leading International ITPS vendors with a Deal Approach. As part of the deal, vendors would be provided an identified opportunity with available Ready to Move-in Facilities and they would have an opportunity to: a. Transfer outsourcing projects from their other locations to the local office b. Obtain outsourcing projects from the local public and private sector for which they would have an edge considering their internationally recognized delivery capability. The costs involved for implementing such deals would be about US $ 75,000 per year on free office space for 100 full time employees and a further US $ 25,000 per year on free electricity. On the benefit side, it would generate over US $ 1 million of export revenue. The transparency issues and the objections from the local players can be addressed by limiting the offer to the first 5 or 10 companies who sign up and also requiring them to meet certain benchmarks of the number of full time employees and/or export revenues per year. The suggested benchmarks are minimum 200 full time employees and minimum export revenue of US $ 5 million. This way it would immediately double the existing ITPS export revenue transacted through the State Bank. Such a deal approach is all the more needed since the existing incentives already available in Pakistan to the ITPS vendors are not proving to be enough motivating factor, as determined during the survey of the US based global ITPS vendors. Hence, it is imperative to find an inventive and out of the box solution. The deal approach aims to make a one time Hard To Refuse offer, which would make a substantial difference to the bottom line of the ITPS vendor being offered this deal. The whole idea is to generate a critical mass, delivery capability and an image of a feasible outsourcing location for Pakistan, so as to
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encourage the other major international vendors to shed their apprehensions and reservations about establishing their offshore outsourcing center in Pakistan. STRATEGY FOR NICHE MARKETS This strategy identifies the NICHE market sectors of Utility companies, financial services and telecomm sector for targeting. There are a number of reasons for taking this approach. At the moment, utilities companies, financial services sector and telecom industries of USA and Western Europe appear to have reached a plateau, are facing immense competition and their margins are diminishing. To remain competitive they require cost reduction, which can be achieved through outsourcing to low cost destination. Also, new opportunities have been created for the financial services segment of the BPO sector as a result of the international regulatory requirement. Moreover, opportunities also exist for the financial institutions and telecomm sectors in Asian and African countries. The above opportunities are very well complemented and supported by the fact that Pakistan has thriving local telecom, financial services and Oil and Gas sectors and outsourcing can also be done for these sectors to the local ITPS vendors, which would not only develop their capability to handle similar assignments from international companies but would also lend credibility to their proposal and build their confidence. This would help create Market segmentation of ITPS, in which Pakistan can have a competitive edge and differentiation. The strategy for targeting NICHE markets is provided below. 1. Develop expertise in the above NICHE market by approaching the decision makers in the corresponding domestic sectors and offering them certain concessions / benefits for outsourcing the work to the local ITPS. Special allocations should be made by GoP for providing such incentives. 2. Approach International companies within the Utilities, Financial Services and Telecom Sector firstly by identifying them and then encouraging the local ITPS vendors to approach them. The GoP should then address on priority basis the issues confronting the local BPO companies in getting the outsourcing work from the identified companies, such as, HR training and Company certification. 3. Leverage the NICHE sector ITPS services from Pakistan to various developing regions Local/International partner companies can provide BPO services to financial institutions and telecomm sectors in Asian and African countries. Embassies should do the exploratory work to identify the prospects and arrange the matchmaking event with the BPO companies of Pakistan. Embassies should do the exploratory work to identify the prospects and arrange the matchmaking event with the short listed BPO companies. The embassies not having the required skills for such an assignment should be provided the necessary assistance and guidance through GoP initiatives to meet the objective. A temporary cell can be created within the IT ministry for a specific period of 3 to 6 months with the mandate to work with the embassies either onsite or remotely to identify such companies and help in match making.
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STRATEGY FOR ALLIANCE WITH CHINA The IT industry in China is heavily dependent on its hardware segment with hardware revenues, including exports, accounting for about 85% of the Chinese IT industry1. However, it does not have the same strength in Software development, which, the Indian software companies have by virtue of extensive experience in Software projects. Owing to this reason, Indian software development companies are rushing to partner with the hardware manufacturing companies of China to provide the embedded software for their computer hardware. The value of the Indian IT Services and Software exports to China were about US$ 15 million in the year 2003-04. This is also an opportunity for Pakistan, since it has comparable skills in matured IT sectors. Pakistan does have skills in embedded software coding, although not in large numbers, but once there is a demand, sufficient resources can be trained in 6-12 months from a large pool of experienced software engineers/programmers. Moreover, the alliance in IT services should not be restricted to embedded coding alone, but other services should also be offered like customized software development, IT consulting, ERP selection and implementation, system integration, Network management, etc., in which expertise is available in Pakistan. Siemens Pakistan has a number of successful SAP implementations to its credit and local expertise is also available in other ERP major international applications like Oracle Financials, Peoplesoft, etc. Furthermore, proficiency in the English language is not commonly available in China, which is a major concern to them since their major customers happen to be the English speaking countries. This situation creates another opportunity for countries like Pakistan who has a large number of work force with proficiency in both spoken and written English. Such countries can fill the gap and provide the much needed customer support / services to the English speaking customers of Chinese products and services. GoP should leverage its longstanding and fraternal relations with China for creating a strategic alliance with Chinese export oriented manufacturing and service sectors. It should be targeted towards making Pakistan the Hub for providing customer services support to the Chinese companies clients in English speaking countries. GoP should also work towards creating alliances between Pakistani software development companies and Chinese hardware manufacturing companies. To accomplish this, a two-way exchange of delegations will be required; the major computer hardware companies of China should be invited to Pakistan for meeting with the IT companies of Pakistan and the experts and managers of top local IT companies should also be sent to their locations in China. However, preparatory work should begin much earlier, and the Chinese companies should be approached to find out the kind of expertise in software they would be requiring from Pakistan, which should be provided to the local IT companies. However, the payment rates from the Chinese companies for the above services could be an issue, as Chinas business model is based on low cost. Some other limiting factors could be the availability of significant number of IT experts to write the system level codes as well as the copyright issue. These issues are challenges but do not constitute a no go hurdle. The payment will not be as high as from US or Western Europe, but will still be much higher than the domestic rates and that too in foreign exchange. Moreover, rates will become more relevant when there is a high demand in which event, opportunity costs will become a factor, but till that happens, rate issue will not be decisive. The recommended strategy is as follows:
1

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1. GoP should pursue with the Chinese Government, at a high level, to form a strategic business alliance for providing customer centric services in English through Pakistan for the Chinese Governments state owned entities exporting to North American and European countries. 2. Help set-up call centers/customer contact centers to support Chinese manufacturing and service sector companies in English speaking countries 3. Foster collaboration of Software Development companies of Pakistan with the Hardware Manufacturing companies of China (for developing hardware embedded software) 4. Promote setting up of the Chinese language teaching institutes for improving interface between Chinese and local companies and enhancing their preference for Pakistan, so as to mitigate the limiting factor. There will be a requirement of 50 100 resources who can interact with the Chinese companies in the Chinese language and the training can be conducted in batches of 10.

STRATEGY FOR PARTNERING WITH INDIAN ITPS COMPANIES India is moving up the value chain and its costs are also rising. Their new strategy is to build a truly global delivery model. As of 2004, all Indian vendors have an overwhelmingly large proportion of their workforce in India; now they are realizing the need to focus on building delivery capabilities in other lowcost geographies. This presents a bright opportunity for Pakistani BPOs, who should be encouraged and facilitated to target the outsourcing of the work from the Indian vendors looking for low cost options. This would be beneficial to Pakistan in multiple ways. Firstly, it will lead to the transfer of delivery management skills and secondly, it will prove a big marketing advantage for a company to say that it has handled the same work that was originally outsourced to the Indian company. The strategy for partnering with the Indian ITPS countries is as follows: 1. Invite the decision makers of top 5-10 ITPS companies from India for matchmaking with the local BPO companies. 2. Hold workshops for the Pakistani ITPS companies to understand the processes followed by the Indian ITPS companies, so as to create the right impressions about the capability of the local companies and to facilitate understanding. 3. Provide incentives for partnering/JV and help fast track the process of starting the JV. 4. Facilitate visit of senior management of Pakistani companies to India to explore business opportunities. STRATEGY FOR JOINT COLLABORATION WITH DUBAI INTERNET CITY As can be seen from the details provided above regarding Dubai Internet City (DIC), it has the perfect environment for IT-BPO work. In addition to this, Dubai is a business friendly and welcome place for
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investors. As opposed to this, investors are shy of coming to Pakistan due to image perception and it also lacks quality office building for 500+ employees. However, Pakistan has a pool of trainable human resources for the ITPS work, which Dubai does not have. As such, it makes a good business case for the joint collaboration between Pakistani IT-BPO companies and DIC. The use of the infrastructure of Dubai Internet City by Pakistani IT-BPO companies should, therefore, be seriously explored. It would serve to address the two major problems that the local IT-BPO companies are facing, that is, of investors reluctance to come to Pakistan and the lack of quality office building for large projects at least in the short to medium terms. The strategy for joint collaboration with the Dubai Internet City is as follows 1. Facilitate visit of senior management of Pakistani companies to the DIC to explore business opportunities. 2. GoP should have top-level contacts with UAE Government to explore the possibility of collaboration between local IT-BPO companies and DIC. 3. GoP should support start up of a pilot project in DIC as a base for future growth. More details regarding this strategy have been provided in section 8 of this report.

STRATEGY FOR PAKISTANS EXISTING ITPS MARKET The strategy to foster the growth of the existing local ITPS market is as follows: 1. Match up local ITPS vendors with Small and Medium sized ITPS vendors from North America and Western Europe providing similar range of services (as the corresponding Pakistani ITPS vendor) to form alliances/Joint Ventures and acquire and branch out certain services to Pakistan for cost reduction. 2. Extend GoP incentives and support / remove barriers for various ITPS sectors to enable the existing ITPS companies to transform themselves into global companies. These barriers and incentives have been identified in chapter 5 of this report. 3. Conduct aggressive international marketing campaigns to position Pakistan as the Global ITPS Hub through relevant worldwide media, country specific initiatives, inter-government interactions and trade negotiations. Roadshows and conferences should be held in USA, UK as well as in Pakistan and for those who are reluctant to come to Pakistan, the conferences can be held in Dubai. In these marketing campaigns, the humane face of Pakistan, its history, culture and heritage, in addition to the IT capability should be projected. Similar presentations of the leading ITPS destinations like India, Malaysia, Philippines, etc. should be studied in this respect.

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4. Encourage non-resident Pakistanis in USA and Europe to invest/form JV or market ITPS. The list of whos who of Pakistani expats settled in USA and Western Europe and occupying the position of influence should be prepared and they should be feted by the local ambassadors and offered incentives for bringing in ITPS business to Pakistan. They should also be encouraged and supported for creating their own captive facility by assisting with the start up of the set up, including hiring of the resources and other free consultancy services. Appeal should also be made to their sense of identity and patriotism for the country and also what an important role they can play in uplifting of peoples economic condition. Most importantly, they should be safeguarded against harassment and other inconveniences by anyone and such occurrences should be dealt with promptly and strongly. To create healthy competition, the top 5 should be accorded the privilege to be invited to state dinners/functions at state expense. Award should also be instituted for rendering meritorious service in this field, as is being done for outstanding achievements in sports, culture and other fields. 5. GoP should set up one stop shop for companies desiring to establish outsourcing centers in Pakistan. This is important because setting up a business is still a cumbersome process involving numerous visits to different Government agencies and also the information in this regard is not easily available. GoP should open consultancy services, which would help complete all the paper work, freeing the investor to focus on the core business. More details regarding this strategy have been provided in section 8 of this report. STRATEGY FOR MULTINATIONAL COMPANIES OPERATING IN PAKISTAN The multinational companies (MNCs) usually have a unified business process and common application software operational in all their branches worldwide. The back office processing is either done by the individual unit itself or by some other unit of its region. This strategy aims to target multinational companies located in Pakistan to provide their international units with certain backend processing services through the Pakistani Multinational Company (MNC) itself or through a local ITPS vendors or through alliances with local ITPS vendors. The most relevant example is of ABN Amro Bank who had created a software development center in Pakistan to develop the software for the entire company. The top management and the decision makers of the local MNCs should be approached by the GoP at a high level (provincial minister or above) and encouraged / motivated for the execution of the back office processing in Pakistan of their counterparts from other countries. In return, they should be facilitated with any other issues they might be facing in their operations. Other packaged benefits can also be provided to them, e.g., free HR training, preferred business status, etc. More details regarding this strategy have been provided in section 8.

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STRATEGY FOR INDIGENOUS CAPABILITY BUILDING The strategy for indigenous capability building includes: 1. Outsourcing by GoP of some of its existing functions to local ITPS vendors to help them develop capability and credentials, to foster growth of the ITPS industry and build international confidence for staking claim to outsourcing work from abroad. 2. Local banks which are providing BPO / backend services internally for their international and local branches (some numbering over 1000 branches), and are currently upgrading and making substantial investments into IT, can team up with global vendors to offer their existing infrastructure for similar banking backend services globally or regionally, as a non core but high income banking business. 3. GoP should approach the decision makers in the local banks to create an outsourcing division to explore, plan, obtain and deliver outsourcing contracts. It should be seen more like contribution to the national cause for putting Pakistan on the global offshore outsourcing map, than a purely commercial venture. The embassies and GoP should extend full support in identifying the potential sources as well as for providing the necessary information. Benefits of Strategy Implementation1
Human Resource
2005
Human Resource

2006 & 2007 37,000 29,000

2008 70,000 33,000

2009 110,000 40,000

8,000

Job Creation

Creation of 100,000 Jobs in 4 Years

Other Benefits
I I I

Foreign Investment of $ 660 million in ITPS sector Increase in ITPS exports revenue from the current $ 100 million to $ 1 billion in 4 years Downstream impact on other products and services

.
1.12. Go-forward Action Plan for Government of Pakistan

The strategy developed by BearingPoint to make Pakistan one of the major destinations of outsourcing services, hinges upon a number of key initiatives which need to be undertaken. The government to an extent has created various fiscal and non-fiscal incentives to promote the industry, however, it is necessary for the government to make further investment in the ITPS sector in order to highlight Pakistan on the world ITPS map. To achieve this, the following line of action by the GoP is suggested:

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GoP should recognize the importance of developing the ITPS as an Industry, in real sense and implement the GoP action points mentioned in section 8. Launch a sustained marketing campaign to promote Pakistan as the Global ITPS Hub and to address the perception issue of Pakistan in the western world. Some practical suggestions in this regard have been provided in section 8, under the GoP action points. Make continuous sustained investments in the ITPS sector in the form of improvements and upgradation of the infrastructure, HR training and ITPS companies certifications. For example, an expense of about US $ 700,000 is currently being incurred on the CMMI level 2 and level 3 certification of 21 software houses. Such investments are required consistently. Support and strengthen Human Resources development and capacity building, including the training of the trainers. Maintain State of the Art Telecom and IT Infrastructure with constant capacity expansion and technology upgrades. Create regulatory framework for Special Economic Zones (SEZs). Create more STPs to enable seamless move in by global and local ITPS vendors Provide tangible support to acquire international business through initiatives by embassies, high-level Government contacts and other marketing activities. More details have been provided in section 8 in this regard. Provide Fiscal and Non-Fiscal Incentives as listed in section 8.

1.13.

Conclusion

This report and the strategy are based on the objective realities of the local environment. It not only points out the strengths but also the weaknesses and, as such, it is advisable not to release the entire report to the public. However, it is left to the discretion of the PSEB and the Government, to decide about the contents to be made public knowledge and the contents to be retained for internal consumption only. It is also emphasized that the above or any other strategy would not be able to produce instant results as persistent and consistent efforts are needed over a time frame of 1 2 years in both the education and industry sectors to achieve sustainable growth in the ITPS sector and to be able to compete with the leading players with any degree of success. The BPO outsourcing sector has not received the same attention of the GoP as has been given by the Governments of the leading ITPS destinations who have been proactively engaged in attracting the ITPS business, as way back as the late nineties. Pakistan cannot therefore, expect to achieve the same level of ITPS export revenue through quick fixes or instant remedies. However, Pakistan can accelerate the growth of ITPS exports by implementing the strategies suggested in this study report. It needs one major catalyst event like the starting of operations in Pakistan by 1-2 top 20 ITPS global vendors to trigger a chain of outsourcing investments by other global vendors. For this reason the main focus of our recommended strategy is to target the major global ITPS vendors.
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For Pakistan to graduate from the present level of US $ 100 million ITPS export to the next quantum level of US $ 500 million (before making its first billion), it would be required to enhance its HR resources of international quality from the present 8,000 to about 50,000 and would be needing the office space of about 3.5 million sq. ft as against the available space of about 0.5 million sq ft. of all the STPs of the country taken together1, i.e., 7 times more. To address the shortage of space for big projects, factories lying unused / closed could be used for BPO projects requiring 500 + employees. The industrial sites associations should be approached for obtaining details about the closed factories and the contact addresses of their owners, so that a pre-feasibility could be carried out. This would be a short-term solution till SEZs and STPs are developed, which would take over one year to develop and build, from the time the construction begins. As regards to the Human Resource requirement, an additional 40,000 resources will need to be trained in the next 2 years to achieve the next level of US $ 500 million ITPS export revenue, as about 50,000 resources are needed to generate an export revenue of US $ 500 million. This translates to about 1,600 trainees per month, which can be further broken down to about 400 per city per month (Karachi, Lahore, Islamabad and Peshawar), which is a high but achievable number. The strategy should be to train the trainers in parallel, so that more and more trainees can be trained in the later stages. The HR training needs have been indicated in section 6 of this report. Furthermore it should be understood that the market dynamics of the global economy have changed over the last 5 years, with the big players getting more and more unchallengeable due to numerous factors like the expertise acquired by them over the years, economies of scale, branding, networking, contacts, large investments capacity, etc. For the same reason, the position of Microsoft and Oracle is becoming more and more impregnable. Automobile industry is another example - it has become far more difficult now for a new car making company to emerge and compete with established players than it was before. Even in India, no new big companies of the size of Tata, Infosys, Wipro and Satyaram have come up in the last 23 years. Another major factor to contend with is the perception issue of Pakistan, both real and imaginary, which more than neutralizes the great cost advantage that Pakistan possesses. One isolated act of terrorism or one alarming news about political situation of the country sets the whole process back and it amounts to taking one steps forward and two steps back. Then there are issues concerning IPR, copyright, data security and integrity, regulatory framework, etc, which become far bigger issues in vendor and location assessment processes for new entrants like Pakistan than for established ITPS destinations for whom such issues are overlooked or swept under the carpet. Lack of availability of good quality Human Resource, mainly due to the poor standard of education in the public schools and the colleges, especially in the English language, absence of middle management backbone and good trainers and training institutions are the other major inhibitors in the growth of the ITPS industry. There is a huge domestic outsourcing potential of about US $ 300 million2, which can be exploited to build the domestic ITPS capability and confidence. The existing buoyant mood amongst the local ITPS investors and chief executives and availability of funds with them coupled with the expanding global
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ITPS market are few of the things which lend optimism to the large scale growth of the local ITPS industry. The best case scenario: Taking everything together and keeping in view the natural constraints to a fast growth, assuming that the Government implements the strategy developed and recommended by BearingPoint, Pakistan can expect to achieve US $ 500 million in the next 2-3 years, and US $ 1 billion in the next 4 years. Once the critical mass is achieved, any target would not look very ambitious. Out of the above projected ITPS export revenue of US $ 500 million, 60-65 % is expected from the global vendors, as a result of our strategy, and the remaining 35-40 % from the existing ITPS companies of Pakistan. However, if the strategy is not implemented or is implemented only partially, then Pakistan can expect a normal organic growth of 40-50 % initially and then 20-30 % after the ITPS export revenue reaches over US $ 300 million. There is a lesson to be learnt from the Indian example, who have been doing simple things like giving high priority to the growth of the ITPS industry and preparing and implementing strategies to that effect without any shift in focus. The example of India is more relevant to Pakistan than of any other country like Philippines or Ireland, because of similarities in many relevant factors, like geographical locations, language, educational and business environment, etc. The strategies followed by them can be relevant and applicable for Pakistan more than that of the other countries. India has grown from the export revenue of US $ 5 billion in 199798 to US $ 17.2 billion in the year 2003-04, an increase of about 250 % in six years. What is achievable in their environment can be achieved in Pakistans environment, as what is being done in India to achieve this growth can be replicated in Pakistan, with planning and commitment. To illustrate this; it is a known fact that there is no difference in the performance and outputs of the IT professionals, call center agents, accountants, engineers, etc, at the working levels at least, from Pakistan and India working in North America (US and Canada). They are considered to be of equal merit and an individual who had obtained education and experience in India is not considered preferable over the individual who had studied and worked in Pakistan before immigrating there and their performances also do not differ much on the average. Also, the fact that Pakistan has been able to compete with India in sports, culture and other fields, is another positive indicator that with the right policies, Pakistan is also capable of achieving what India has achieved in the ITPS sector which is a very reassuring since India is the leading ITPS exporting country.

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2. OVERVIEW OF INFORMATION TECHNOLOGY PROFESSIONAL SERVICES (ITPS) The advent of the Internet and advancements in telecom and Voice Over Internet Protocol (VoIP) has enabled organizations to shift their human resources intensive functions to more cost effective locations. Companies have discovered that they could shed both their core and non-core functions by outsourcing them to companies that could do them more efficiently and, thus, less expensively. Outsourcing makes sense. Specialized companies, referred to as ITPS vendors, provide their services to many client companies at lower prices than the in-house cost. Both companies, the service provider (ITPS vendor) and the client, profit from the arrangement. Outsourcing this work, to "foreign" or "offshore" locations by the Client companies and/or by their ITPS vendors, to take advantage of lower labor rates in those countries, is commonly referred to as offshoring. However, the terms Outsourcing and Offshoring are frequently used interchangeably in studies and reports on the IT services and BPO Outsourcing. The client companies/ITPS global vendors manage the offshoring either by establishing their own captive facility at the low cost foreign location and/or by sub-contracting the work to a local ITPS vendor with mutually agreed benchmarks, after carrying out a thorough vendor and location selection process. According to studies conducted by Nasscom and Gartner Group, companies are currently spending US $ 1.045 trillion on IT Professional services. Approximately, over 25 % of this spending or US $ 281 billion can potentially be outsourced. However, a mere US $ 40 billion of ITPS is actually being currently offshored. The complete spectrum of products and services being outsourced/offshored is referred to as Information Technology Professional Services (ITPS), which can be categorized into hardware, IT Services and Software and IT Enabled Services (ITES). ITES is commonly referred to as BPO (Business Process Outsourcing) and the terms ITES, ITES-BPO and BPO refer to the same thing, have the same meaning and are used interchangeably. Technology is essentially used as a tool to provide these services. There is another term in common use, namely Managed Services. It refers to the entire breadth of services that ITPS covers, except hardware and software products. Hence, Managed Services can be categorized into IT Services and BPO and will be referred as such in this study. For the purpose of this study, Managed Services can be explained in the following mathematical terms: Managed Services = ITPS - Hardware - Software Products

2.1.

Outsourcing and Offshoring

With the rise of globalization, many companies are turning to either offshoring or offshore outsourcing. The stock markets are pressing companies to do more for less. This forces corporate decision-makers to seek the cheapest solution possible. Companies such as IBM, Microsoft, Cisco Systems, Hewlett Packard, and Novell choose to get services from sub-contractors in low cost countries with strong IT capability, HR capital and proper infrastructure. These companies are also moving many development and support jobs to such locations. Furthermore, the large multinational companies, especially in the US and increasingly in Europe, already understand and have in many cases utilized advantages presented by outsourcing/offshoring for software development and maintenance. Companies like GE, American Express, and British Airways, have
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successfully demonstrated the benefits of the model, with total annual savings of a few hundred million dollars between them alone. This practice has become even more popular after the dot-com crash of the early 21st century. As many businesses struggled with cash-flow problems, investors were reluctant to invest their money in high-tech companies, as they felt that these were still vulnerable to the dot-com effect. Struggling to do more with less, companies looked for less expensive avenues of development and support. For many companies in the United States, countries with a large English speaking population, low costs and strong IT capabilities seemed like the perfect solution to their needs. A company could hire a software engineer in such countries for US$ 10,000 a year while, in comparison, an equally qualified engineer in the U.S. could cost as much as $60,000-$90,000 a year. The external entity/outsourced company may be located within or outside the country of the outsourcing company and the outsourced tasks/work may be performed within or outside the country of origin. The majority of outsourcing that occurs today still occurs within the countrys boundaries, especially in North America. However, the tasks/jobs are being increasingly outsourced outside to low cost countries such as India, China or the Philippines. Over the years, China has emerged as the preferred destination for production offshoring while India has emerged as the dominant player in the services offshoring domain. In practice, this trend has experienced mixed results. Several companies encounter communication barriers and high foreign personnel turnover rates. Product quality has also been an area of concern. Attrition in the offshore company is another issue. Conversely, some companies report favorable results citing that the low cost of the offshore development team allows them to hire leading American developers. A side effect of this practice has caused unemployment of high-tech professionals, especially new college graduates.
CRITERIA FOR JOBS THAT CAN BE OUTSOURCED

2.1.1. Outsourcing versus Other Business Relationships

Outsourcing takes place when an organization transfers the ownership of a business process to a supplier. The key to this definition is the aspect of transfer of control. This definition differentiates outsourcing from business relationships in which the buyer retains control of the process or, in other words, tells the supplier how to do the work. It is the transfer of ownership that defines outsourcing and often makes it a challenging process. In outsourcing, the buyer does not instruct the supplier how to perform its task but, instead, focuses on communicating the desired results; it leaves the process of accomplishing those results to the supplier.

There is a high wage difference between the original and offshore countries The job does not require direct customer interaction The job can be telework; (known in the USA as Telecommuting and also as e-work), that is, the work can be performed from a distance, typically over a network such as the Internet, as opposed to work performed directly on site. The work has high information content The work is easy to set up The work is repeatable Potentially better service levels Continuous improvement Innovation in process

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2.1.2. History of Outsourcing and Offshoring

In the United States, moving jobs out of the country began in the 1970s and continued throughout the 1980s. It was characterized primarily by the closing of factories, frequently with corporations opening new factories in Mexico. Many of these new factories were called Maquiladoras. In 1994 NAFTA the first of the major free trade agreements went into effect. With the development of the internet, it became possible to outsource/offshore many new categories of work such as call centers, computer programming, reading medical data such as X-rays and MRI's, medical transcription and income tax preparation, bill processing, etc.

2.1.3. Enablers and Drivers of Outsourcing and Offshoring Services

The growth of Services Offshoring is linked to the availability of immense amounts of reliable and affordable communication infrastructure following the telecom bust of the late 1990s. Coupled with digitization of many services, it was possible to shift the actual delivery location of services to low cost locations in a manner theoretically transparent to end-users. The advent of the Internet has enabled small businesses to contract ITPS providers from all over the world to complete projects at minimum costs. This trend runs in parallel with the tendency towards big corporations' outsourcing, and may in the future serve to strengthen small business' capacity to compete with their bigger competitors capable of setting up offshore locations or of entering into major contracts with offshore companies. The recent driving factor behind this development has been the need to cut costs during the recession following the events of September 11, 2001, while the enabling factor has been the global electronic network that allows digital data to be accessed and shipped instantly, from and to anywhere in the world.

2.1.4. Major outsourcing/offshoring destinations

Major outsourcing/offshoring destinations are India (IT and BPO), Canada (IT and Call center), China (Programming), Philippines (Data Entry and Customer Support), Ireland (IT and BPO) and Eastern European countries (Programming and R&D). India and Canada have major share of the global services outsourcing market with US$ 17.2 and US$ 12.6 billion, respectively, out of the total market size of US$ 39.6 billion, i.e. over 75 %. Also, the gap between the market share of the large players and that of other countries keeps growing, as companies increasingly feel comfortable sending bigger and bigger projects to such countries. India has benefited from the outsourcing trend. Its offshoring industry took roots in IT functions in the 1990s, and has since progressed to back-office processes such as call centers and transaction processing, as well as high end jobs such as research and development, equity analysis, etc.

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2.1.5. Issues with outsourcing/offshoring 2.1.5.1. Protectionism Versus Free Trade

Offshoring has been a controversial issue, eliciting differing views concerning its overall impact on society, ranging from Protectionist to Free Trade attitudes. Some see it as a potential threat to the domestic job market and request government to take protective measures, while others see it as an opportunity. On one hand it is seen as benefiting both the origin and destination country through free trade. While on the other hand, job losses in developed countries have sparked opposition to outsourcing / offshoring. However, several critics agree that both sides will benefit in terms of GDP and numbers of jobs created.
2.1.5.2. Findings of McKinsey Global Institute

In a study conducted by the McKinsey Global Institute, every dollar spent on offshoring by US creates a net value of 12-14 cents in excess of the dollar spent. This combined with the 33 cents of value accrued to the offshore destination translates to a total value creation potential of 45-47 cents for the global economy.1

2.1.6. Future prospects of Outsourcing/Offshoring

The offshore outsourcing trend is still gathering momentum. 86% of the 101 IT executives surveyed last year by CIO said they already offshore application development, and 26% offshore their call centers. Those surveyed also predicted these numbers will rise. 2 Another trend is U.S. companies balancing their offshore risk by going to neighbors like Canada and Mexico. Canadian suppliers can handle highly complex projects better than other nations as they have deep familiarity with U.S. business mores, whereas Mexico continues to offer an attractive cost structure. Both have the advantage of geographic proximity in the race for U.S. outsourcing contracts. Finally, new members of the European Unionsuch as the Czech Republic, Poland and Hungaryare an enticing near shore option for Western European enterprises and Europe-based U.S. businesses. Their costs are low for now, but they are expected to rise.

1 2

http://www.mckinsey.com/mgi/publications/win_win_game.asp http://www.michigandaily.com/vnews/display.v/ART/2004/10/05/41627ece4e62d
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2.2.

Categorization of the Outsourced Services offshored

The services, which are being outsourced/offshored, can be categorized in many ways. Different terms have been coined to this end by various consulting companies / organizations, e.g. Gartner, Forrester, IDC, NASSCOM, etc and these terms are sometimes used interchangeably and have overlapping domains. The sub-categorization of ITPS, along with the offshore-outsourced revenues in US $, is indicated in the following figure. Offshored ITPS Sub-Categorization1
Offshored ITPS Industry: 39.6 B

IT Services and Software 28.6 B

ITES-BPO 11 B Human Resource

IT Services Project Oriented Services IT Outsourcing Training and Support

Software Products Procurement


Enterprise application software

Finance and Accounting Packaged Customer Care Logistics R& D Services Engineering R& D Sales and Marketing Embedded software & Systems
Facility operations & management

Offshore product development Training

2.2.1. Managed Services

Managed Services is the other widely used term for outsourced/offshored services. It is used frequently in studies/reports by consulting companies such as Gartner, IDC, etc to estimate and project the market size of the outsourced/offshored services. In the context of this study, Managed Services would include all ITPS, except hardware and software products. Hence, the term Managed Services, wherever used in this study/report, would mean the IT services and BPO.

BearingPoint Analysis
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Figure 6: IT Services Segments


Project Oriented Services

Segmentation and differentiation of IT Services and BPO


IT Outsourcing Training and Support

R&D Services

IT Consulting System Integration Customized Application Development Computer Aided Design Network Consulting and Integration

Application Management IS Outsourcing SQA and Testing Outsourcing Network and Desktop Outsourcing System Infrastructure Services Application Maintenance and Support

Hardware Deployment and Support Software Deployment and Support IT Education and Training Onsite Consulting Services

Embedded software and Systems Offshore Product Development

Function-wise BPO Segments


Human Resources Payment Services Logistics

Payroll/Benefits processing Training and development Hiring/Staffing Employee Benefits Management 401K (Retirement plan)

Loan administration Credit/Debit Card Services Check Processing

Inventory and warehousing Industry management Order fulfillment/procu rement Transportation and distribution

Sales, marketing, and customer care (CRM)

Finance administration

and

Customer services Customer analysis Call centers Consumer information services

Document management Billings Claims processing Accounts receivable Accounts payable General ledger Accounting services Shareholder services

Specialized BPO Segments Medical transcription Legal database processing Digital content development/animation General BPO Segments Contact centers Telemarketing/pre-sales Consumer care Technical support Back office operations accounts, financial services, etc. and Data processing
1

Online education Remote maintenance

BearingPoint Analysis
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Figure 7:

Horizontal and Vertical BPO Segments

Horizontal BPO

Vertical BPO

Finance Accounting

and Human Administration Supply Chain Financial Services/ Financial Services/ Resources Payment Process Accounting Process

Accounts Payroll Payable/Receivable

Tax Processing Material Card Process Management

Share Accounting

Holder

General Accounting Benefits

Claims Processing

Warehouse Loan Processing Management

Fund Accounting

Risk Management Trainings

Asset Management

Transportation Health Care Payment Asset Valuation

Financial Reporting Hiring/ Recruiting

Document Management

Procurement Check Processing

Due Diligence

Financial Management

Retirement Benefits

Order Fulfillment

EDI

Asset Servicing

Share Services

holder

Trouble Remediation

Asset

2.2.2. Pricing / Pricing structures (in USA) 2.2.2.1. Technical Support

Technical support requiring specialized skills and other specialized areas like genomic research etc are priced at higher rates, depending on the service provided. These activities are usually billed on per hour basis and rates in some cases are as high as US$50-70 per hour. These efforts require specialized skill sets and advanced training, and are typically difficult to scale to very large numbers.

BearingPoint Anlysis
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2.2.2.2. Call Center

Various price structures are used for call center contracts. Details on several of these structures are provided below:
I. Per unit time variable (per seat, per hour) is the most common pricing method being followed in the

sector. CRM software licenses are also passed on to the client. Moreover, minimum amount of business is guaranteed in these contracts, after which per unit variable calculation is applied. Voice support typically ranges from $12-24/hour, and web-based e-mail, chat, knowledge-based support from $7-12/hour. 1
II. Gain share: compensation is based on actual success (demonstrable through preset parameters); which

could be actual savings by moving the process to the vendor or sales leads generated through a telemarketing campaign (or actual sales).
II. Incident or activity based: This again works with a certain minimum amount agreed to, with

additional payment made depending on the actual volume of transactions or actual incidents.

2.2.3. Sales Pitch

The sales pitch adopted by IT Professional Service provider countries are generally structured around the following: When you work with Our Offshore Internet Solution Providers youll enjoy the comfort of knowing that our IT Services and BPO Services providers have demonstrated their ability to: Deliver significant cost reductions Scale up operations rapidly on short notice Keep attrition levels significantly lower than that of U.S. counterparts Provide robust infrastructure and connectivity Offer a strong business continuity plan with redundancies in power, communication links, equipment, and even co-location facilities Deliver high-quality training including American accent and culture training Understand customers' businesses Have financial stability Maintain high levels of quality service Clearly communicate with customers Provide quality, responsive customer service Provide proven references Be flexible Add value to customers businesses
1 BE Study

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Deliver on time Be a strategic player Display technological leadership

2.2.4. Market forecast

ITPS is an ever-expanding market, in view of the high growth rate both in ITPS spending as well as the offshore outsourceable component of total ITPS spending. In 2004, only about 4 % of total spending was offshore outsourced, whereas potentially up to 14 % of the total spending is outsourceable, implying that a large portion of the market remains untapped. Growth potential exists both in the IT Services and Software as well as BPO sectors. The projected total ITPS spending, IT Services and Software Spending and BPO spending in the year 2010 is projected to be US$ 1,657; 886; and 771 billion, respectively. Whereas the total potentially outsourceable ITPS revenue, IT Services and Software revenue and BPO Services revenue for the same year is projected to be US$ 445; 238; and 194 billion, respectively. Also, the projected compound annual growth rate (CAGR) for the total ITSP spending, IT Services and Software spending and BPO services spending is 7.9 %; 6.6 %; and 11.10 %, respectively
2.2.4.1. Population of Software Developers

IDC forecasts that the total number of professional developers worldwide will grow at a compound annual growth rate of 9.8% between 2003 and 2008, reaching 14.9 million in 2008. This forecast is based on worldwide population statistics, changes in literacy, and growth in IT spending. The 10 countries with the largest developer populations are U.S., Russia, India, Japan, Canada, Germany, China, the U.K., France, and Italy (with Spain close to 10th place). According to an IDC study, China and India will experience the highest growth in professional software developers between 2003 and 2008 with compound annual growth rates (CAGR) of 25.6% and 24.5%, respectively. The Asia/Pacific region will surpass North America in the overall number of professional developers beginning in 2006 while the Middle East and Africa will experience the highest regional growth with an 18.3% CAGR between 2003 and 2008. North America continues to lead all other regions worldwide in the highest penetration of professional developers by a wide margin. However, for the large economy of North America, which has historically been the home of most developers, program development automation techniques, offshoring, and increasing productivity are all likely to put downward pressure on the rate at which the number of professional developers in North America increases.
2.2.4.2. Call center growth

As per a survey by ACA Research, Singapore and Michigan-based Fortune 500 BPO staffing firm Kelly Services, Inc, the Asian call center market is poised to witness an astonishing 60% growth in 2005. The call center industry in India, Philippines and China is expected to expand operations in the next 12 months by as much as 64 %, 53 % and 50 % respectively.
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Callcenters.net's "2004 Asian Call Center Industry Benchmark Study - Dynamic Asian Markets" also carried out a survey covering a total of 762 call centers in India (397), China, South Korea and Philippines. It predicts expansion in about two-thirds of the call centers of the above region and that most of the expansion will be witnessed in IT and Banking/Finance domains. It also predicts that in the year 2005, more than 100,000 call center seats will be added to the existing 172,000 call center seats in India alone.1 Call centers are also focusing on improving the existing telecom infrastructure. During 2004, all countries in Asia, except the Philippines, spent considerable time and effort upgrading their technology and phone systems.
2.2.4.3. Knowledge Services segment growth

The growth in knowledge services, of which investment research is a part, has been phenomenal and BPO companies are looking for research analysts fairly regularly. The knowledge services market is estimated to grow from 12,000 people presently, to 50,000 by 2010. Revenues are also estimated to grow four-fold from a quarter of a billion to one billion dollars by 2010.2

2.3.

The big picture

The global market size of Software, IT services and ITES-BPO was approximately US$ 1.044 trillion in 2004, out of which about US$ 39.6 billion (3.79 %) was being met through outsourcing/offshoring. The major market share was taken by India (US$ 17.2 billion), followed by Canada (US$ 12.6 billion) and China (US$ 1.9 billion). Share of India in the total market and the outsourcing revenue was 1.65 % and 43.4 %, respectively. This shows that almost half of the IT-ITES-BPO outsourcing/offshoring revenue went to India (excluding hardware), which is over three times that of Canada, the next preferred destination for outsourcing. About 92 % of the outsourcing business comes from North America and Western Europe. The total market size of outsourced services in IT services and BPO sectors is expected to grow from US$ 39.6 billion to US$ 120 billion, i.e. an increase of US$ 81 billion or 203 %.

1 2

http://www.sharedxpertise.org/modules.php?op=modload&name=News&file=article&sid=2559 http://infotech.indiatimes.com/articleshow/1040554.cms
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3. OVERVIEW OF OFFSHORING AND OUTSOURCING PROCESS

3.1.

Overview

The outsourcing/offshoring process is a time consuming exercise, as the outsourcing / offshoring company before deciding to outsource has to go through certain internal and external processes to: Assess ability of the service provider to meet companys expectations Ascertain delivery mechanism Ensure seamless transfer Avoid exposing the company to any type of risk. Subsequently, contract, transition planning and operations management issues must also be considered. Such internal corporate processes typically take anywhere between three to nine months. On the average, it takes a further six months from the time the company takes a policy decision to outsource some of its business processes until such time as actual work at the vendor location is able to begin.

3.2.

Decision to Outsource

Companies outsource for a variety of reasons, the most important of which are to reduce operating costs and focus on core business. The following table summarizes the key elements involved in making the outsourcing decision.
Figure 8: Top 10 Reasons Companies Outsource 1 2 3 4 5 6 7
Reduce and control operating costs Improve company focus Gain access to world-class capabilities Free internal resources for other purposes Resources are not available internally Accelerate reengineering benefits Function difficult to manage/out of control

Key Elements of Outsourcing Top 10 Factors in Vendor Selection


Commitment to quality Price References/reputation Flexible contract terms Scope of resources Additional value-added capability Cultural match

Top 10 Factors for Successful Outsourcing Understanding company goals and objectives A strategic vision and plan Selecting the right vendor Ongoing management of the relationships A properly structured contract Open communication with affected individual/groups Senior executive support and involvement

BearingPoint Study
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8 9 10

Make capital funds available Share risks

Existing relationship Location Other

Careful attention to personnel issues Near term financial justification Use of outside expertise

Cash infusion

3.3.

Decision Makers

Offshoring/Outsourcing involves the key decision-makers of the organization. These individuals are responsible for choosing which process to outsource and which vendor to use. Typically, such decisionmakers include a combination of the following: Chief Executive Officer (CEO) Chief Financial Officer (CFO) Chief Information Officer (CIO) Chief Operating Officer (COO) Director Marketing (DM) Consultants Vendors

3.4 General Process a Company goes through when Outsourcing1

Stage I Assessment & Business Case Organization Assessment Process Assessment Portfolio Assessment Contractor Assessment Financial Assessment Risk Analysis and Mitigation Plan Business Case and Baseline Cost Development

Stage II RFP and Vendor Selection Company selection Criteria Definition RFP Scope Definition Vendor short list RFP Creation Vendor Interviews and Presentations Vendor Proposal Review Vendor Selection

Stage III Contract Review and Negotiation Vendor Management Contract Management Contract Review Contract Negotiation and Support

Stage IV Transition Planning and Design To-be Process Design To-be Organization Design Personnel Skills Assessment Tools Outsourcing Scope Selection / Finalization

Stage V Operations

Vendor Management SLA Monitoring Contract Monitoring Performance Monitoring Benefit / Goal Monitoring

3.5 Vendor Selection

In most cases the vendor selection entails going through the following processes:
1

BearingPoint Study
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3.5.1

Location Screening Process

The initial location screening identifies the countries with strong IT capability and then evaluates them based on certain parameters. The country criteria includes:

o o o o o o o

Risk Technical capability Outsourcing capability Operating environment Human resources Macro/political Base cost
3.5.2 Vendor Screening Process

The country criteria, while a critical input, are not considered independently from vendor criteria in the outsourcing decision. This is because leading vendors can mitigate some country factors (e.g. infrastructure), and do have different pricing structures from base country costs.

The general screening process of vendors comprises both profiles and comparisons of an outsourcing service provider. The vendor criteria includes:
Number centers Desirable location

of and

Breadth services

of

Size

Certifications

Partnerships

Credentials/ Customer Base


Special / vertical skills Success stories from past projects Guarantees to customers, e.g., reduction in costs by x % Demonstrated ability Other standards/ben chmarks achieved by the vendor in the past

Cost

No. of Centers the Vendor has Country of Location Country Assessment Separately Country Assessment has a bearing on Vendors Assessment

Range of Services provided by the vendor, e.g.: Application Development Quality Assurance Web Services Infrastructure Management

Number of employees / developers Clientele Revenues earned

Company certification (CMM, ISO, etc) Employee certification (MCSE, etc)

Partner/Distributor/ Authorized agent of: Cisco SUN Oracle Intel Microsoft Siebel SAP

Unit costs / Per hour costs of: Project Manger Analyst Developer Tester

The vendor criteria are reviewed in conjunction with country criteria before determining the ultimate sourcing solution. This is because country factors (e.g. political stability) can have a significant impact on the effectiveness of any vendor regardless of their other qualifications.

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3.5.3

Location and Vendor Assessment Case Study

Some parameters and results of an actual location assessment are as follows. Among the findings are that Pakistan ranks as the leading country based solely on cost parameters, however with the consideration of other factors, it was pushed out of the competitive evaluation category. This evaluation started with 36 countries and the basic criteria was IT capability. The selected countries were then subjected to base cost analysis, where Pakistan leads the list with the lowest cost. Further evaluation was based on Risk, Technology Achievement and Outsourcing Capability and Pakistan was excluded on Risk factor. Based on the study, Pakistan would be a strong contender if the risk factor were mitigated. The detailed parameters and extracts of the assessment results are mentioned below, which show that Pakistan was assessed as the least expensive country on labor and occupancy costs. The Location Screening Process comprised of 4 steps designed to identify the most suitable location (country) for the outsourcing company (Table 3). The stages of the evaluation process are listed below. Step 1 - Selection of Countries Process: The countries were selected on a basis of their IT Capability. Result: 36 countries were selected for evaluation in the following step (Table 4). Step 2 - Base Cost Analysis Process: An evaluation check was conducted for Base Cost - Operation Cost, comprising of occupancy and labour cost in the country. Result: Pakistan topped the list of the 36 countries and it was assessed as the least expensive country on labour and occupancy costs (Table 5). Step 3 - Quality Analysis Quick Scan Process: This step consisted of evaluation of the countries on the basis of the Risk involved, Technological Achievement and Outsourcing Capability, the weightages being: Risk 40% Technological Achievement 40% Outsourcing Capability 20%
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Result: Pakistan was competitive in its Outsourcing Capability but was excluded due to the risk, 39%. China, India, Philippines, US and Canada were in the list of the eligible countries and their risk factors were 76, 70, 72, 90 and 90 respectively (Table 6). Step 4 - Dual Approach Analysis Process: Finally, each country was assessed on the basis of its Human Resource, Operating Environment and Macro Economic Environment (Table 7), which were further broken-down as follows: 1. HUMAN RESOURCE The countrys population, labour force, educational attainment, and quality and availability were taken into account; each of which were given a score on a scale of 1-100. This score was given a weightage of 40%, as a whole. 2. OPERATING ENVIRONMENT The country was assessed on its technology, infrastructure technology and basic, natural hazards, and operating convenience; each of which was given a score on a scale of 1-100. This score was given a weightage of 35%. 3. MACRO ECONOMIC ENVIRONMENT This aspect of the process analyzed the risk ratings, corruption perception index, bribe payers index, and intellectual property protection; each of which was given a score on a scale of 1-100. This score was given a weightage of 25%. Result: After the in-depth assessment as above, US ended as the most successful, followed closely by Canada; India, China and Philippine. In all, 24 countries out of the original 36 countries were considered eligible after the Location Screening Process was completed (Table 8).

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Table 3: Location Screening Process


STEP 1 Purpose Action Parameter Result Purpose Action STEP 2 Parameters1 Result Purpose Action Parameters and Weightages Result

Location Screening Process

Select 36 countries for initial screening Select 36 Countries for Initial Screening IT Capability Pakistan is Included Ensure the above 36 countries meet base cost savings of 35 % Carry out Base Cost Analysis Base Cost Must be 35% Less than NYC, USA Cost: Cost is Assessed on 2 Geo-Variable 200 employees in 30,000 square feet and only the total cost is taken into consideration; individual weight is not given to labor and occupancy costs Pakistan is Included Narrow the initial list of 36 countries for Initial Screening of the selected countries Carry out Quick Scan to eliminate countries that do not meet initial acceptance levels
2

STEP 3

Risk - 40%, Technology Achievement - 40% and Outsourcing - 20% 23 out of 36 Countries are selected for in-depth research ; Pakistan Excluded on Risk

Purpose Action Parameters and Weightage 2 Result


1

In-depth research / location assessment of the 23 selected countries Carry out Dual Approach Analysis

STEP 4

HR - 40%; Operating Environment - 35 %; Macro Economic Environment - 25 % Base Cost Must be 35% Less than NYC, USA

Details available in Table 1 of Result Table worksheet Details available in Quality Analysis worksheet Details available in Weightages worksheet

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Table 4:

List Of Assessed/Selected Countries- All Steps

Assessment Process Results


Step 1 ON Vendor Availability and IT Capability Selection a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a 36 Step 2 Initial Screening on Base Cost a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a 36 Step 3 Quick Scan a a r a r a a a r a a a r a a a r a a a a r a r r a a a r r r a a a a r 24 Step 4 Dual Approach Analysis r a r a r a a a r a r a r a a a r r a r a r a r r a a a r r r a a a r r 19 Finally Selected

Sr # 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36

LIST OF COUNTRIES Argentina Australia Baltic States Brazil* Bulgaria Canada* Chile China Costa Rica Czech Republic Egypt Hungary Iceland India Ireland Israel Jordan Korea Malaysia Mexico* New Zealand Pakistan Philippines* Poland* Portugal Russia South Africa Spain Taiwan Thailand Turkey UK England UK - N. Ireland UK Scotland US Venezuela Countries Selected

a a a a a a a a a a a a a a a a

a a a 19

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Table 5:
Base Cost Analysis
Sr # Country

Base Cost Analysis - Step 2


30,000 sq ft Cost difference office Operation cost with US % Of US Cost 600,000 312,152 431,996 267,559 390,190 1,003,344 395,764 291,479 587,783 706,522 657,748 794,314 602,909 721,851 2,394,091 1,075,808 376,254 760,870 1,070,234 1,836,678 811,037 1,092,531 1,170,569 1,474,359 1,039,576 1,151,059 1,468,785 918,000 995,680 1,744,705 1,510,591 1,482,720 1,502,230 1,524,526 1,066,500 1,473,900 1,022,270 1,076,280 1,421,878 1,466,508 1,784,772 2,100,542 2,324,336 2,422,787 2,702,466 2,971,402 3,260,000 3,340,669 3,359,866 3,788,703 4,090,363 4,277,664 4,314,260 4,317,124 4,841,679 5,104,942 5,262,607 5,691,389 5,753,609 6,130,937 6,242,206 6,880,215 7,035,976 7,666,762 7,670,200 7,849,153 8,056,794 8,288,276 8,307,786 8,440,779 8,516,348 13,344,879 -12,322,609 -12,268,599 -11,923,001 -11,878,371 -11,560,107 -11,244,337 -11,020,543 -10,922,092 -10,642,413 -10,373,477 -10,084,879 -10,004,210 -9,985,013 -9,556,176 -9,254,516 -9,067,215 -9,030,619 -9,027,755 -8,503,200 -8,239,937 -8,082,272 -7,653,490 -7,591,270 -7,213,942 -7,102,673 -6,464,664 -6,308,903 -5,678,117 -5,674,679 -5,495,726 -5,288,085 -5,056,603 -5,037,093 -4,904,100 -4,828,531 0 8 8 11 11 13 16 17 18 20 22 24 25 25 28 30 32 32 32 36 38 39 43 43 46 47 52 53 57 57 59 60 62 62 63 64 100

200-IT-Full Time Employees 422,270 764,128 989,882 1,198,949 1,394,582 1,097,198 1,928,572 2,131,308 2,114,683 2,264,880 2,602,252 2,546,355 2,756,957 3,066,852 1,696,272 3,201,856 3,938,006 3,556,254 3,771,445 3,268,264 4,451,570 4,598,858 4,583,040 4,656,578 5,202,630 5,729,156 5,567,191 6,748,762 6,674,520 6,104,448 6,546,203 6,805,556 6,916,253 7,449,848 11,870,979

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36

Pakistan South Africa Philippines Thailand Jordan Bulgaria Malaysia Baltic State Egypt China Chile Czech Republic Cost Rica Hungary India Brazil New Zealand Turkey Venezuela Russia Portugal Mexico Poland* Taiwan Australia Israel Argentina UK-N-Ireland Iceland Korea Spain UK - England Ireland Canada US

UK Scotland 6,805,556

Pakistan Telecommunication Authority


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Table 6:

Quality Analysis-Quick Scan Step 3

Quality Analysis / Quick Scan Weightage On (Scale of 1-100)


Sr # Country

Risk Technological Achievement 40% 40% 39% 23 90% 80 97% 83 93% 77 93% 70 86% 83 93% 83 93% 91 79% 63 81% 80 95% 54 79% 75 95% 63 79% 53 72% 41 88% 49 78% 46 68% 56 76% 41 88% 66 72% 42 72% 52 70% 27 73% 32 85% 57 77% 56 76% 56 79% 49 82% 0 79% 0 67% 0 57% 41 71% 0 94% 0 47% 46 90% 100

Outsourcing Capability 20% 75 100 100 100 100 50 50 50 75 0 75 0 50 75 100 50 75 75 75 0 75 50 100 75 0 0 0 0 50 50 0 0 50 0 0 100

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36

Pakistan Canada UK-N-Ireland Ireland Israel UK England UK - Scotland Korea Hungary Australia Malaysia New Zealand Czech Republic Mexico Philippines Chile South Africa Russia China Spain Brazil Argentina India Egypt Portugal Poland Bulgaria Costa Rica Baltic State Jordan Turkey Taiwan Venezuela Iceland Thailand US

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Table 7:

Dual Approach Analysis - Step 4

Dual Approach Analysis Qualitative Score


1 Human Resource Population Current Metropolitan Estimates Annual Population growth rate for 16 years Labor force National labor force for the year National labor force growth National unemployment rate for the year Labor management relations: Industrial relations Labor management relation: Industrial dispute Educational Attainment Education Index Gross Tertiary Science Enrollment Ratio Educational System Meets Needs of a Competitive Economy University Education Meets Needs of a Competitive Economy Combined Primary, Secondary and Tertiary Gross Enrollment Ratio Conversational Knowledge of English Language Brain Drain (Well-educated people do not go abroad) Quality and Availability Labor Regulations Favorable (Hiring/Firing Practices, Minimum Wages) Worker Motivation Level Average Number Of Working Hours Per Year Index for Relative Labor Market Tightness For Qualified Engineers Index for Relative Labor Market Tightness For IT- Skills Index for Relative Labor Market Tightness For Skilled Labor 30 12 10 30 10 10 10 20 10 1.2 3.6 1.2 1.2 1.2 2.4 1.2 10 4 20 20 20 20 20 0.8 0.8 0.8 0.8 0.8 % 40 Overall % 40 % 5 Overall % 2 60 40 1.2 0.8 % Overall %

55

22 10 10 10 10 40 20 2.2 2.2 2.2 2.2 8.8 4.4

2 Operating Environment Technology Technology Achievement Index Information Society Index Technological Cooperation Common between Companies Technology Transfer between Companies Development and Application of Technology Supported by Environment E-Commerce Sufficiently Developed for Business Opportunities New IT Meets Business Needs Computer Per Capita (Per 1000 Inhabitants) Internet Hosts (Per 1000 People) InfrastructureTech. and Basic Telecom- Investment in Telecom (Percent of GDP) Telecom- International Telephone Costs Pakistan Software Export Board Document Number: PSEB_VOL_9 Doc Version - Disposition: Final 54

35

35 20 7 10 10 10 10 10 10 20 10 10 0.7 0.7 0.7 0.7 0.7 0.7 1.4 0.7 0.7

40

14 25 25 3.5 3.5

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Dual Approach Analysis Qualitative Score


% Telecom/Utilities/Basic: Maintenance and Development Basic Goods and Services: Distribution Infrastructure Natural Hazards Earthquake/ Volcanic Risk Hurricane/ Cyclone/ Typhoon Risk Tornado Risk Operating Convenience Time Zone- Hours Overlap With NYC 8A-5-P Air Accessibility: No. of Flights from NYC Air Accessibility: Flights Duration time 3 Macro Eco. Environment Risk Ratings Political Risk Financial Risk Economic Risk Composite Rating: Current Month Composite Rating: One-Year Forecast Composite Rating: Five-Year Forecast Corruption Perception Index Bribe Index Payers 15 3.75 100 3.75 25 25 35 8.75 20 20 20 10 15 15 1.75 1.75 1.75 0.875 1.3125 1.3125 Overall % % Overall % % 25 25 Overall % 3.5 3.5

20

7 35 35 30 2.45 2.45 2.1

20

7 50 25 25 3.5 1.75 1.75

15

3.75

100 3.75

Intellectual Property Protection

35

8.75

100 8.75

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Table 8:
Country Sr. #

Dual Approach Analysis Step 4 Results


Total Score 100% Human Resources 40% 77.6 72.4 79.5 73.0 77.0 65.3 65.2 65.1 65.3 67.6 68.8 60.6 60.7 66.6 61.3 64.5 53.9 61.1 57.8 71.5 52.2 69.1 66.7 48.5 Operating Environment 35% 86.3 86.0 67.2 64.3 60.4 60.9 60.7 59.3 59.0 58.7 58.0 58.2 62.8 54.1 55.1 49.1 59.0 54.1 52.3 35.2 44.3 28.5 34.5 34.2 Macro Economic Environment 25% 89.6 97.1 94.9 93.4 86.5 95.5 93.5 93.5 93.5 88.3 81.2 87.6 77.0 72.7 79.4 78.8 78.0 72.5 74.5 71.9 75.9 69.8 65.0 73.3

1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22. 23. 24.

US Canada Australia Ireland Israel New Zealand UK N. Ireland UK - England UK - Scotland Chile Hungary Spain Czech Republic Argentina Malaysia Korea South Africa Brazil Mexico Philippines China India Russia Egypt

83.7 83.3 79.0 75.1 73.6 71.3 70.7 70.2 70.1 69.7 68.1 66.5 65.5 63.8 63.7 62.7 61.7 61.5 60.0 58.9 55.4 55.1 55.0 49.7

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4. HIGH-LEVEL ANALYSIS ENVIRONMENT

OF

PAKISTANS

BUSINESS

AND

COMMERCIAL

Today, Pakistan stands at the threshold of historic opportunities and challenges. The process of globalization fueled by the revolutions in the IT and communications industries revolution, and complemented by the catalytic role of the WTO, seem to have created a truly global market. The vast opportunities offered as a result are that the size of the market, the key determinant of economic development, has increased almost infinitely for every country, whereas the challenges are that the competition has also increased by the same measure. Fortunately, at this critical juncture, Pakistan is favorably placed and poised with a strong economy projected to grow over 7%, with macro-economic stability and robust fundamentals. The country has a a large growing foreign exchange reserve, stable currency, controlled inflation and increasing tax revenues. With stress on good governance, accountability and transparency, it looks set for second-generation reforms.

4.1.

Investment Policies and Incentives

Pakistan has positive and liberal investment policies with concessions, facilities, legal protection and a great deal of incentives. Foreign Direct Investment can be made into any economic sector of Pakistan with the exception of four industries (Arms / ammunitions and High Explosives, Radioactive substances, Security Printing, Currency and Mint), for which prior sanction of the government is required. Foreign investors are allowed to hold 100% equity in such projects, which do not require any prior permission from government. NOC / permission from the provincial government or local authorities is not required, barring a few locations. Computer Software and Information Technology has been declared as an industry by virtue of which it is entitled to a set of generous facilities allowed under this policy. Foreign investment in Pakistan is fully protected under the following Acts and Agreements: o Foreign Private investment (Promotion and Protection) Act, 1976 o Protection of Economic Reforms Act, 1992 o Foreign Currency Accounts (Protection) Ordinance, 2001
o

Bilateral agreements for investment protection and avoidance of double taxation with various countries

o Investors in IT and Telecom Services, however, are required to obtain specific license from the concerned agency, which is normally issued promptly but against a license fee. They also have to register themselves with the Securities and Exchange Commission of Pakistan, as well with the State Bank of Pakistan under the Foreign Exchange regulations.
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4.1.1. Pakistans IT Policy

Following are some key features of Pakistans IT policy: o The Government will play the role of a Moderator, Facilitator and an Enabler, rather than a Director, in the development of the IT and Telecom sector. o Software companies can retain 35% of their export earning in FOREX to meet the expenditure on purchase of hardware/software, foreign travel, marketing and hiring of consultants. o Banks are allowed to invest in the form of equity in dedicated IT ventures. o State Bank of Pakistan (SBP) has allowed banks to open Internet Merchant Account within Pakistan. o PTCL will provide international bandwidth and Internet connectivity to the ISPs and corporate customers within 4 to 8 weeks of the application date. o The cost of Internet bandwidth is presently $2,000 per month for 2 mbps connection1. o Internet delivery on Cable TV has been permitted. o Universal Access to the Internet even to non-connected areas using the unique 131 Universal Internet Numbers of ISPs has been extended to 1350 cities /towns.
4.1.2. Pakistans Telecom Policy 4.1.2.1. Policy Objectives

Services at competitive and affordable rates. Promoting infrastructure development for increasing teledensity. Encouraging private investment. Minimize exposure to Governments (PTCL) revenue in the short term. Encouraging fair competition. Maintaining consistency with Pakistans IT and Internet promotion policy to make Internet access affordable. An effective and well defined regulatory regime, consistent with the best international best practices Promotion of efficient use of spectrum.

PTCL Website
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4.1.3. Tax and other Incentives

Tax and other incentives available are indicated in the following table
1

Table 9: Income Tax Incentives:

Tax Incentives

Income Tax on software exports from Pakistan Income tax on IT training institutions Income tax on venture capital firms Income tax liability for software firms. Sales Tax Incentives Sales tax on all computer hardware Sales tax on all computer software Excise and Custom duty Excise and custom duty on PME in the area of IT Telecom Incentives Current Rate of annual royalty fees from gross revenues of ISP License processing time Table 10: Fiscal Incentive Repatriation of profits allowed to IT companies Foreign Equity allowed in IT sector Rate of depreciation on computer equipment Initial Depreciation Allowance (IDA) Levies on re-export of capital goods by Software Houses / Software Companies Levies Export re-finance limit for the Software House/ Software Companies Fiscal Incentives
1

0% until 2016 0% for 5 years from the date of set up 0% until 2007 0%

0% 0%

0%

0.66% of gross revenue Guaranteed 7-day

Value 100% 100% 30% 50 % Yes No

BearingPoint Study
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4.1.4. Comparison between the IT and Telecom Policy of Pakistan and Other Countries
Table 11: Country Thailand India Pakistan Philippines Percentage of Foreign Equity Allowed in Telecom Sector Activities Wireless Services 20% 49% 100% 64% Satellite Services 20% 74% 100% 64%
1

Internet Services 40% 100% 100% 64%

4.2.

Comparative Analysis with Other Countries


Table 12: Comparative Analysis of Policy/Incentive Pakistan Y/N India Y/N Y China Y/N Y Ireland Y/N Y

Descriptions of Policy/Incentive No. 1

Information technology parks with low rents, fiber optic connectivity, libraries and Y conference rooms. Provision of funds for software companies to get ISO-9000 and CMM level Y certifications. Foreign investors allowed 100 %ownership of equity in Software Houses / Software Y Companies Tax exemptions for IT companies Y

N/A

N/A

3 4 5 6

Y Y N/A Y

N/A Y Y Y

N/A N/A N Y

100% Repatriation of profits allowed to IT Y companies Instant, reliable and connectivity available high speed Y

7 8 9 10

Cellular companies using transmission (GSM and TDMA) Exceptional spoken English

digital

Y Y

Y Y Y Y

Y N Y Y

Y Y Y N

In-house training conducted by multiY national firms Availability of Labor pool Y

Source: Various (Pakistan Telecommunications Company Ltd.; Asean telecommunications Regulators Council; Pacific Rim Review: Ministry of Information Technology, India) Pakistan Software Export Board PSEB_BPO_Report_February 7,2006.doc Document Number: PSEB_VOL_9 Doc Version - Disposition: Final 60 2005 BearingPoint, Inc. and/or its affiliate(s)

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4.2.1. Tariff

To encourage economic growth, especially in the IT sector, the Government of Pakistan has given substantial exemptions on duties and taxes. Following are the common IT related items exempted from duties; with comparison to major IT service providers.
Table 13: Sr. No. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 Items Videophones Line telephone sets with cordless handsets Facsimile machines Tele printers Telephonic or telegraphic switching apparatus Modems Routers Microphones Loudspeakers Headphones and earphones Magnetic tapes Hard disc pack Floppy disc or diskettes Compact disc record able Digital video discs Information Technology software on disc Wireless microphone Cellular telephone SIM cards Memory cards Electronic micro assemblies Comparative Analysis of IT Related Items Exempted from Duties Pakistan China a a a a a a a
1

India a a a a a a a a a a a a a a a a a a a a

a a a a a a a a a a a a a a a a a

a a a

a a a a

4.3.

Regulatory Framework for E-Commerce

4.3.1. E-Commerce / E-Commerce Ordinance in Pakistan

The Electronic Transaction Ordinance 2002 seeks to achieve the following objectives of E-commerce. 1. Privacy: E-business transaction is protected against access by attackers who seek to make copies of them or to insert fraudulent data into the process. 2. Authentication: Access to e-business applications and data is restricted to those who can provide appropriate proof of identity. 3. Integrity: E-business data and applications are protected in such a way that any effort to change them is detected and prevented.
1

BearingPoint Study
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4. Non-repudiation: The flow of data through an e-business application and the flow of transactions that drive the data are logged and reported in such a way that should a dispute arise about any transaction, proof of what actually happened can be produced. More details about the E-Commerce Ordinance of Pakistan and some important issues concerning Ecommerce / E-commerce ordinance in Pakistan are provided in the Annexure to this report.

4.3.2. Pakistan Intellectual Property Rights Organization Ordinance, 2005

The regulatory framework for the protection of Intellectual Property Rights is of utmost concern for companies interested in outsourcing IT and BPO services to any country. As new technologies have to be imported for this of type of business, its protection becomes a primary concern. There is a general perception that Pakistan has not done enough to mitigate this risk. Responding to this crucial requirement, the GoP has promulgated the Pakistan Intellectual Property Rights Organization Ordinance, 2005 on April 08, 2005. The above Ordinance, interalia, has created Property Rights Organization for the purpose of promulgating and regulating the protection of intellectual property rights. The highlights of the ordinance are provided in the Annexure to the report.

4.3.3. Cyber Laws In Pakistan

The awareness about Cyber Laws in Pakistan is not widespread. Pakistan started taking steps against cyber crimes much later, with the promulgation of the Pakistan Electronic Transaction Security Ordinance (ESO-2002) in September 2002. The government has also introduced the 'Electronic Crime Bill', but it has yet to be enacted into law. The bills of Electronic Crimes Act and Data Protection Act are scheduled to be presented soon for approval of the parliament. ESO-2002 was mainly promulgated to regulate and develop e-commerce in Pakistan. The salient purpose of ESO-2002 is to provide legal recognition to the system of Cyber Contracts. It provides definitions of both an Electronic Document and an Electronic Signatures and accords legal recognition to both. The electronic signatures can either be one provided by a licensed certification service provider or any other system that is capable of unique identification and integrity protection. Experts on cyber security have urged the government to strictly implement the Pakistan Electronic Transaction Ordinance 2002 for safety of computer networks and secured transactions through the Internet.

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5. BARRIERS TO INVESTMENTS For the growth of the ITPS export, strength is needed in both the areas, i.e., Marketing and Delivery. There are some barriers that adversely affect the former more than the later, but most of the barriers adversely affect both the areas, i.e., Marketing and Delivery capabilities. For example, as can be seen from the location screening process discussed in section 3, countrys image perception and lack of IPR enforcement predominantly affect the flow of the business to the country having little or no impact on the execution capability, whereas the non-availability of redundant Internet link is one of the barriers that impede both the flow of the business and its execution. Also, all the barriers, whether affecting Marketing only or affecting both, belong to either of the following categories: 1. POLITICAL 2. LEGAL 3. BUSINESS This section identifies the barriers and inhibitors to ITPS growth, domain wise. It also indicates the initiatives needed from the GoP to mitigate the problem and to create the enabling environment for this industry. The following table indicates some key factors affecting the investment decisions
Table 14: Barriers POLITICAL
Terrorism Geopolitical Political Instability High High High
1 2

Key factors affecting investment decisions

Priority for Removal of Barriers

LEGAL
Non enforcement of Intellectual Property Rights Failure to enforce New York Arbitration convention Medium Low

BUSINESS
Perception issue Inconsistent GoP policies High Medium GoP has indicated to launch second line by July 2005 No redundant fiber sea line Domestic and International call centers prohibited to operate under one roof Non-existence of virtual Special Economic Zones PSEB should work on removing this barrier Will stunt growth and discourage large scale ITPS providers to establish company presence Remains an issue- especially for Karachi

US travel advisories against Pakistan

1 2

BearingPoint Study From ITPS growth perspective


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5.1.

Inhibitors To ITPS Sector Growth

5.1.1. POLITICAL 5.1.1.1. International Politics

International terrorism is a key perception issue, followed by unstable political setup, geopolitical instability in the region and countries internal law and order. While Pakistan has played a key role in the war against terrorism, regional geopolitical instability has led to a negative perception of the country and concerns over its association with terrorism prevails within the international community. This is compounded further due to occasional law and order situations, even though, the overall law and order situation has shown significant improvement over the last five years. The above perception issue is one of the major causes of Pakistan getting a low score in the risk ratings during the location and vendor assessment process. However, recently, an initiative for mitigating political risk has been taken by the Asian Development Bank. Under the policy, the Asian Development Bank plans to provide a security risk guarantee against sabotage or terrorism to foreign firms that are willing to invest in Pakistan1. Once approved, it will provide one of the options for mitigating the political risks of the foreign ITPS sector investor. ADB has submitted the proposals to the Pakistan government, and the scheme will be launched after their approval and under the scheme, the bank will provide a risk guarantee to foreign investors against possible terrorist attacks or sabotage and it will work as an insurance scheme. A foreign investor would have to pay 0.5% - 0.6% of its total investment to the bank to avail of the guarantee. The planned scheme would be limited to foreign firms as the idea is to attract foreign investment to Pakistan. Though foreign direct investment has risen 55.3% to $597.6 million in the first eight months of the fiscal year that began July 1, foreign investment inflows have been below international levels because of risk perception. The insurance sector was facing problems in obtaining reinsurance from the overseas companies to provide cover to the local business to meet losses incurred in the backdrop of terrorism activities. ADBs guarantee will be used for obtaining reinsurance facility from multinational insurance companies and it will help the local insurance sector to cover up losses especially those relating to terrorism. The domestic investors wouldnt be eligible for the scheme on their own; they would be eligible only if they are investing in a joint collaboration with foreign partners. The proposed scheme will run parallel to the banks political risk guarantee scheme, under which domestic investors can seek risk guarantees against changes in governments policies.

ADB official
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5.1.1.2. Domestic Politics

The next general elections are scheduled for 2007, with local government elections scheduled for this fall. The absence of deep-rooted democratic institutions and political power transfer traditions contributes to the perception of political instability, which, in turn, puts the country risk factor in poor light in the location selection process.

5.1.1.3. Pakistans Risk Ratings

However, there are some encouraging indicators as well. Pakistans macroeconomic conditions; which include risk factors related to economic and political stability and national policy toward foreign trade, have been positive and are forecasted to continue remarkable improvement in all areas of macroeconomic reforms. As an outcome of the same, there has been an improvement of two points in Pakistans Risk Ratings in the last three months. Economist Intelligence Unit in its recent report on country risk analysis1 indicates improvement in Pakistans ranking from 54 to 52 in just three months from December 2004 to March 2005, which is shown in the following table. The subsequent table provides the Comparative Analysis of a few countries with Pakistan for the year 2004, which shows that Pakistan is in the same bracket as China, Philippines and Egypt for Country Risk Rating, but its scores are poorer than these countries and the global rank of Pakistan is 57 out of 60. While some of these indicators by themselves do not provide a confident picture of Pakistan as a location for offshore outsourcing, the rapid improvement in these indices definitely positions Pakistan as an emerging economy for FDI and is a positive development for the growth of ITPS exports. COUNTRY VIEW
Table 15: Overall Rating March 2005 December 2004 C C Overall Score 52 54 Pakistans Risk Ratings Political Risk D E
1

Economic Policy Risk C D

Economic

Liquidity

Structure Risk Risk C C C B

Country View, The Economist Intelligence Unit, Risk ratings


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Table 16: 2004 County Risk Rating Country Risk Score Value Index Global Rank of A is best, E is worst 100 is most Risk prone Maximum 10 Out of 60 China

Comparative Analysis of Risk Ratings India Pakistan

Philippines

Egypt

42

40

57

50

48

6.37

6.29

5.2

6.51

5.48

40

41

57

37

52

5.1.2. Legal

In looking for offshore locations, companies are highly concerned with the efficacy of a countrys regulatory framework. The main concern is whether the relevant regulations are being implemented expeditiously and without harassment and corruption and facilitate efficient outcomes. Some of the Legal factors relevant to ITPS are related to the existence and enforcement of regulatory frameworks, e.g., enforcement of Intellectual Property Rights (IPR), New York Arbitration Agreement, entry for starting a business, labor relations and flexibility in labor use, etc. Some of these barriers are being discussed below:
5.1.2.1. Intellectual Property Rights

This area of regulatory framework is of utmost concern for companies interested in outsourcing IT and IT enabled services as new technologies have to be imported for this of type of business and its protection becomes a primary concern. The regulatory framework for electronic data protection, IPR and cyber crimes exists in Pakistan but its enforcement is weak. Since the data security and IPR issues play a much more significant role in the country evaluation process for a new entrant like Pakistan than for the established players like India, China, Philippines, etc, even though the situation is no better there, enforcement of these rules assumes a much higher priority for Pakistan. Hence, the IPR enforcement issue needs to be addressed seriously to project Pakistan as a Trusted and Secured Sourcing destination
5.1.2.2. Contract Enforcement

In addition, the regulatory framework for the enforcements of contracts, entry and starting of a new business, hiring and firing of workers along with related labor laws are also of significant interest to firms
1

Country View, The Economist Intelligence Unit, Risk ratings


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seeking off shoring to the new destinations like Pakistan. The American Business Council (ABC) cites absence of law and order, and ability to enforce contracts as a constraint its members face. The US investment community cites Contract Enforcement, Commercial Dispute Resolution, Alternative Dispute Resolution, and Transparency in the judiciary as amongst the main investment constraints in Pakistan. Furthermore, the Judiciary is constrained in making legally rational interpretations of the legislative and regulatory environment based on the Common Law, due to a combination of political interference and patronage. The Pakistani judicial system, under which judges are pressured and cases linger for years, is a major constraint to business. Parties use the Court system to stall contract enforcement. Furthermore, interlocutory injunctions are used abusively in the Pakistani judicial system, with all judges having on average 40-50 injunctions before them at any given time, resulting in hefty out-of-Court settlements. The legal community views the need for Court reform as urgent. Court administration (which remains manual in all areas) is viewed as archaic. The reforms in Administration of Justice in Pakistan are slowly moving in the right direction. The following statistics collected by the World Bank Doing Business study reveals that comparatively Enforcement of Contracts in Pakistan is approximately in the middle of all other countries in comparison.
Table 17: Country China India Pakistan Philippines Sri Lanka Contract Enforcement Analysis Time (days) 241 425 365 380 440
1

No. of Procedures 25 40 30 25 17

Cost (% of debt) 25.5 43.1 45.8 50.7 21.3

However, this issue is relatively of less concern as the foreign clients of ITPS contract insist that the agreements should be covered under the courts of their own country or that of a neutral country.
5.1.2.3. Labor Regulatory Framework o Labor Registration and Reporting Requirements

Many of Pakistans labor laws are outdated, maladapted to modern realities, and unnecessarily restrictive (e.g., interdiction of womens night shifts). A large number of labor registrations, record keeping, and notification requirements are required under a series of labor laws.2 Labor registration has to be made with Directorate of Labor, Social Security Directorate and Employee Old-Age Benefit Institution. To ensure compliance with these labor laws, Pakistani labor law
1 2

Further, major changes have to be made in a lot of labor laws to align them with the objective realities and the peculiar demands of the ITPS industry

World Bank Doing Business Study The Factories Act (1934); Shop and Establishments Act; Employee Old-Age Benefits Institution Act (1976); Social Security Ordinance; Workers Welfare Fund Act; Workers Companies Profits (Workers Participation) Act (1968); Workers Compensation Act (1973); Standing Orders Ordinance (1968); Industrial Relations Act (2002); Payment of Wages (1936), Minimum Wages Ordinance (1961), West Pakistan Industrial and Commercial Employment (1968), and Factories Act (1969).
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involves numerous inspections. Companies expend a great deal of time and effort on this task. The laws also create opportunities for rent seeking, through their various outdated requirements and associated penalties. One window operation for both the set up as well as regulation of the ITPS exports companies can circumvent this problem.
o Hiring and Firing of Workers (local and foreign)

Limitations on the hiring and firing of workers are another key challenge of doing business in Pakistan. Changes in labor law enacted since 1999 have in several respects produced flexible, business-friendly yet International Labor Organization-compliant, labor norms, and a generally peaceful labor environment. However, Pakistani labor legislation also includes such rigidities as a requirement for court approvals for the retrenchment of 15%+ of a companys labor, and one-year severance pay upon lay-off. For foreign workers seeking to work in Pakistan, non-resident employment visas are relatively easy as regards the nationals of 45 countries, who benefit from 3-5-year multiple entry Work Visas. The following statistics collected by the World Bank Doing Business study reveals that the comparative cost of hiring and firing workers in Pakistan is more problematic than all other countries in comparison. However, the resolution of this issue is also desirable but not essential for the growth of ITPS sector in Pakistan. It is not an issue on its own, but these minor irritants add up to give a bad picture of the overall business environment of the country.
Table 18: Country Difficulty of Hiring Index Hiring and Firing Workers Difficulty of Firing Index
1

Rigidity of hours Index

Rigidity of Employment Index

Firing Cost (weeks)

China India Pakistan Philippines Sri Lanka

11 33 78 22 0

40 20 40 60 40

40 90 30 40 80

30 48 49 41 40

90 79 90 90 108

5.1.3. Business

Macroeconomic reforms that include stabilizing the domestic politics, improving international relations, maintaining the stability of all macroeconomic indicators have insured real GDP growth. These reforms have now been sustained for close to five years and Pakistan is poised to maintain this track record on a consistent basis in the future. Despite strong growth in exports in 2004, even higher import growth (driven by largely high international oil prices) resulted in the trade deficit widening substantially last year. As a result, the current account is estimated to have moved from a surplus equivalent to 4.3% of GDP in 2003 to a deficit of 0.8% of GDP

World Bank Doing Business Study


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in 2004. It is expected that the current-account deficit will rise to US $ 1 b (0.9% of GDP) in 2005, and to US $1.3 b (1.1% of GDP) in 2006. The development of the ITPS sector that is currently at a nascent stage in Pakistan and has a bright potential presents a good opportunity for Pakistan to narrow down the trade deficit.
5.1.3.1. Investment Environment

Fully repatriable foreign investment is allowed1 and enjoys non-expropriation guarantees2 in several sectors, including IT and BPO sectors. Foreign companies may be registered in Pakistan without any prior permission requirements, provided they meet the minimum investment level of $0.3 million and no restrictions are applicable to the IT industry.
5.1.3.2. Starting a New Business

Compared to most countries in its rank, the general view held by most is that registering a new business entity in Pakistan does not pose much difficulty, which is one of the positives for the growth of the investments in all sectors, including ITPS. The median time to start a new business in Pakistan, India, China and in Philippines is indicated in Figure 19, as per the World Banks Doing Business Indicators Report. As shown in the table, starting a new business in Pakistan is faster than all other countries in comparison and similarly closing a business is also easier. However, it is not a one-window operation either. There are 11 distinct procedures (same number as in India and the Philippines) to register a new business. Obtaining good counsel does help to simplify the registration process. The Securities and Exchange Commission of Pakistan (SECP), the Companies Registrar Office and Board of Investments are relatively sound as compared to other emerging and preemerging markets but not at par with international best practices.
1

Table 19: Starting a new Business Country Number of Procedures

Starting and Closing Business

Closing a Business Time (days) Cost (% of Income per capita) 48 41 89 22 50 50 36.9 14.5 49.5 46.8 19.5 10.7 Minimum Time Capital (% of (Years) Income per capita) 184.4 1,104 0 0 2.2 0 4.7 2.4 10.0 2.8 5.6 2.2 Cost (% of Recovery estate) Rate (cents on the dollar) 14 18 8 4 38 18 22.7 35.2 12.5 38.1 3.8 33.1

AVERAGE China India Pakistan Philippines Sri Lanka


1 2

10 12 11 10 11 8

Foreign Private Investment (Promotion and Protection) Act (1976), Sections 3-4 Protection of Economics Reform (1992)
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5.1.3.3. Getting Credit

Problems in accessing financing are often cited as another major impediment to the performance of businesses in Pakistan. There is a lack of banking sector capacity to evaluate some long-term credit risk exposures, especially the new investors without credit histories. Even the Pakistan Bankers Association has indicated that there is a lack of risk analysis capabilities and a lack of familiarity with equity/scorecard financing. Further, while all commercial and investment banks and leasing companies are subject to mandatory credit ratings, credit ratings for private corporations are entirely voluntary unless they are publicly listed bonds. As a result, only a small percentage of registered companies, and only 130 of the approximately 600 listed companies in Pakistan, have a credit rating. The SBPs Credit Information Bureau (CIB) engages in both positive and negative reporting but only on established firms and its directors. Most banks have, however, evolved their own Credit Tier Pricing System on their clients, to formulate corporate borrower credit histories, and share this information with one another through the State Banks Credit Information Bureau, but the new borrowers without credit history still have trouble getting credit because no CIB report exists on them. The lack of banking sector capacity to evaluate some long-term credit risk exposures, especially the new investors without credit histories, the lack of risk analysis capabilities and a lack of familiarity with equity/scorecard financing and the non-availability of credit history of small companies and consequential problems faced by them in accessing financing are some of the barriers to ITPS investment that need to be addressed.
5.1.3.4. Infrastructure

Pakistans tariffs for utilities, which are amongst the highest in the world, are considered a major obstacle to doing business. This is largely due to utility company mismanagement and inefficiency. The already high utilities tariffs are aggravated by various utility taxes and surcharges, and the cost of procuring ones own stand-by generators and such. Included in the quality of utilities infrastructure is the state of supply of telecommunication services, Internet connectivity, electricity, water supply, gas supply, transport, etc. For BPO the first three services are important while the last two are for supporting functions.
o Telecom

The GoP, recognizing telecom as a vital infrastructure element for the IT-BPO industry, has taken a number of initiatives for the improvement of basic telecom facilities in the country. Starting with privatization of the state run telecom monopoly and telecom services in general; the telecommunications infrastructure has tremendously improved. Instead of having to wait for months for a new telephone connection, now new mobile phones and fixed wireless telephone connections are available within an hour. Today the six mobile operators are each looking to add more than 1 million connections in a year. Similar if not higher growth rates are expected in the fixed line sector after the recent removal of the monopoly in fixed line service provision. The open fixed line deregulation policy has resulted in 12 LDI

World Banks Doing Business Indicators Report


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(Long Distance International) operators and 80 Local Loop service providers.1 This competitive environment is expected to result in further reductions in rates and higher level of services. As such, Telecomm sector is not causing any hurdle to ITPS growth and is, in-fact, reasonably developed to support the industry.
o Broadband

In June 2004, there were 29,000 broadband subscribers (89% cable, 10% DSL and less than 1% satellite and wireless) in Pakistan, i.e. penetration of 1.16%. All broadband subscribers are in the main cities of Karachi, Lahore and Islamabad. The low quality and small scaled HFC networks, quality issues with the copper beyond 1.5 Km from the exchange and allocation, availability of frequency bands for BWA according to ITU standards and the lack of availability of local content have been barriers to the proliferation of broadband connectivity2. As the IT companies in general and the BPO companies in particular need a stable and efficient broadband connectivity to the Internet, investments are needed in this area to provide good quality and reliable broadband connectivity to the ITPS companies with redundancy and at affordable cost and in quick time.
o Electrical Power

Government-run organizations such as the Water and Power Development Authority (WAPDA) and Karachi Electric Supply Corporation (KESC) are responsible for the supply of electricity. There have been high transmission losses (at around 35-40%), largely due to theft.3 The Government reportedly spent 3% of GDP in 2002-2003 in an attempt to bail out KESC and WAPDA. The power supplied by these government-controlled giants is generally erratic, unstable and expensive. IT enabled services require highly stable power. To meet this requirement most vendors in this business set up their own power generating facilities. Most of the newly established Software Parks have their own prime generators and do not rely on government-supplied electricity at all. As indicated in Figure 22 below, the cost of electricity in Pakistan is more then double of the cost in UK and US, which disadvantages the local ITPS industry, because the cost of electricity is about 7-10 % of the operational cost, which is quite high. This high cost is on account of the fact that electricity is charged at commercial rate for the ITPS companies and not at the industrial rate, in-spite of the fact that ITPS has been declared as an Industry. To create the enabling environment, the electricity charges of the ITPS companies should be at the industrial rate and not the commercial rate.

1 2

Sept 2004 figures form PTA website. Taken Broadband Policy dated December 22,2004 made available at www.moitt.gov.pk 3 KESC- 91st Annual Report, 06/30/2003, p.5
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Cost of Electricity1
Country Cost of Electricity US $ per KWH Pakistan USA UK/Europe 0.08 0.035 0.039

5.1.3.5. Transparency

In the country-by-country ranking of The Capacity Index2 Pakistan is rated 75 on the corruption index, the same as the Philippines, while India and China are both rated at 74. The complete rating for these four countries, together with the U.S. for comparison, is given below which shows that Pakistan has got similar ratings as other countries in the region that have more established BPO capabilities.
Table 20: Country Corruption Efficacy of the Legal System 39 44 49 56 19 The Capacity Index Inadequate Accounting and Governance Practices 56 30 33 33 20
2

Deleterious Economic policy

Detrimental Regulatory Structures

Opacity

Opacity Premium compared to U.S. 6.49 6.09 5.35 6.51 0.00

China India Pakistan Philippines U.S.

74 74 75 75 28

39 49 47 52 27

43 46 22 36 10

50 48 45 50 21

Prima facie, these issues may not appear relevant to the growth of ITPS industry, but in-fact play an important part as these are high on the list of criteria for country assessment.
5.1.3.6. Tax Administration Interface

There are several key pieces of federal tax legislation and regulations.3 Under the framework they create, the Government is still highly dependent upon a variety of indirect taxes, which constitute 68% of Pakistans fiscal revenues (with 40% made up by the GST alone).4 The importance of the taxes is real, given the absence of a taxpayer culture, but their complexity from a tax administration standpoint must be addressed. An effort to consolidate different indirect taxes is thus currently underway.5

1
2

BearingPoint Study

The Opacity Index is developed by the Kurtzman Group. 3 The Income Tax Ordinance (2001); General Sales Tax Act (1990); General Sales Tax Refund Rules; and Central Excise and Salt Act (1944) 4 Shaheed Hussein, Tax Commission CBR Reform Report, 4 Volumes, World Bank/Ministry of Finance 5 The Wealth Tax, the Gift Tax, the Debt Duty, and the Differential Tax have for instance been abolished in recent years at the federal level. Pakistan Software Export Board PSEB_BPO_Report_February 7,2006.doc Document Number: PSEB_VOL_9 Doc Version - Disposition: Final 72 2005 BearingPoint, Inc. and/or its affiliate(s)

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Tax Burden

Excessive tax rates are a direct result of the governments inability to enforce tax collection across all sectors of the economy. The high rates are in turn leading to a shrinking tax base, leading to a seemingly interminable cycle. The government has acknowledged this issue. However, this area does not affect the ITPS sector as ITPS exports are totally exempted from any kinds of taxes.
5.1.3.7. Foreign Exchange Regulations

Full repatriation of capital, capital gains, dividends, and profits (including on appreciation and reinvestments) is allowed under Pakistani law. Pakistani law further stipulates that no person holding a foreign currency account shall be deprived of his right to hold and operate such account.1 Pakistani law finally allows remittances by foreign employees employed by Pakistan for the maintenance of their dependents abroad.2 As such, Foreign exchange regulations do not impose any constraints on ITPS growth.

5.2.

Analysis of World Banks report on Doing Business In Pakistan 2005

The World Banks report "Doing Business in Pakistan 2005 attempts to compare the regulatory environment across countries. Some insights from the report are presented here for Pakistan and key countries from ASEAN and South Asia.
Pakistan Economy Characteristics GNP per capita (US $) Population in millions Informal Economy (% of increase) Starting a Business Number of Procedures Time (days) Cost (% of income per capita) Minimum capital (% of income per capita) Hiring and Firing of Workers Flexibility of Hiring Index Conditions of Employment Index 65 75 46 92 33 85 33 52 17 67 33 26 78 73 10 22 46.8 0 5 65 64.3 220.3 7 30 75.5 0 8 58 18.3 0 12 46 14.3 3855.9 8 31 27.1 0 9 42 7.3 0 410 141.5 36.8 480 1032.4 23.1 360 133.3 35.6 840 18.7 44.6 940 1271.8 13.1 3540 23.8 31.1 1980 61.2 52.6 India Bangladesh Sri Lanka China Malaysia Thailand

1 2

Foreign Currency Accounts (Protection) Ordinance (2001) Foreign Exchange Regulations Act (1947) and Foreign Private Investment (Promotion and Protection ) Act (1976), Sections 6 and 7 Pakistan Software Export Board PSEB_BPO_Report_February 7,2006.doc Document Number: PSEB_VOL_9 Doc Version - Disposition: Final 73 2005 BearingPoint, Inc. and/or its affiliate(s)

PUBLIC SERVICES Strategy for Pakistans BPO Industry September 20, 2005 STRATEGY FOR INCREASING EXPORTS OF BPO Flexibility of Firing Index Employment-law Index Enforcing a Contract Number of Procedures Time (days) Cost (% of income pre capita) Procedural-complexity Index Getting Credit Public Credit registry operates? Public Credit registry (borrowers/1000 capita) Public registry index Private credit information bureau operates? Private bureau (borrowers/1000 capita) Creditors-rights Index Closing a Business Steps to (years) go through Insolvency 2.8 4 100 0 63 33 11.3 8 33 0 21 33 N/A N/A 100 0 25 67 2.3 18 33 0 35 65 2.6 18 100 0 51 67 2.2 18 100 0 52 33 2.6 38 67 1 62 33 coverage coverage Y 1 42 Y N 0 0 Y Y 1 51 N N 0 0 Y Y 3 159 Y Y 105 59 Y N 0 0 Y 30 365 45.8 53 17 365 5.4 57 15 270 48.2 51 17 440 7.6 59 20 180 32.0 52 22 270 19.4 41 19 210 29.6 53 33 58 23 54 32 50 40 42 57 47 15 25 30 61

<1 1

15 2

0 2

9 2

<1 2

461 2

98 3

Cost to go through insolvency (% estate) Absolute priority preserved Efficient outcome achieved Goals-of insolvency index Court-powers index

5.2.1. Analysis

Starting a business in Pakistan requires the smallest number days and the lowest cost but the highest number of procedures. This area offers Pakistan an opportunity for quick improvement. The availability of a true one-window operation would help significantly to cut down the number of procedures and costs for start-ups. GoP has addressed this issue by setting up Software Technology Parks (STP) where a onewindow operation for most local regulatory requirements for setting up and continuing to operate the business is made available.
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One of the advantages of the IT Outsourcing sector is that it has very little need for any other infrastructure requirement besides power and telecom. Therefore, other administrative and regulatory issues such, as customs clearance or transport do not apply.
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The overall employment law index suggests that Pakistans labor market is subject to rigid regulations, ranked at second worst. There does not appear to be any easy solution to this problem, as the introduction of legislation to increase labor market flexibility is likely to prove controversial. Nonetheless, international experience does indicate that very rigid labor laws increase inefficiency and reduce productivity in an economy. Businesses have to face about 30 legal procedures to enforce contract procedures in Pakistan, the highest amongst the selected countries. It also requires substantially more time and cost for a settlement in Pakistan. Efforts towards judicial reforms, etc. are in progress in Pakistan. Credit market failures are a major cause of low investment in a country even when profitable business opportunities are available. Pakistan has the lowest score in the index for creditors rights. This area is expected to see significant improvement as financial sector reforms take root. The efforts to extend the coverage of the existing credit information bureau to cover all loans by financial institutions as well as the increase in financial intermediation should significantly improve Pakistans standing. The above analysis paints a mixed picture for all selected countries - even China, which was the top recipient of FDI in 2003, has various rigid regulations in place such as a high minimum capital requirement for a new business (approximately US$ 3.6 million; in comparison most countries have no restriction at all). Pakistan lies approximately in the middle of the sample, with significant advantages in some regulatory areas being eroded by visible weaknesses in others. Despite significant improvements in the domestic economy and increased political stability, the investment environment in the country continues to be negatively affected by other factors (such as the negative perception), many of which are either exogenous or not addressable in the short term. Other areas not covered in the World Bank report but of major concern to investors are related to Intellectual Property Rights and the availability of infrastructure. In terms of enforcement of IPR, Pakistan has filed broadly TRIPS-compliant IPR legislation,1 and new legislation is on the way to consolidate Patents, Copyrights, and Trademarks protection under a single institution, the Pakistan Intellectual Property Rights Organization (PIPRO) and PIPRO should to be made operational as soon as possible. In terms of improving the business infrastructure, the GoP has taken a number of steps in this area. By setting up STPs, which are fully equipped with telecom and power infrastructure, the infrastructure issue has been addressed to a certain degree. In general, the deregulation of the telecom industry has improved the telecom infrastructure with significant cost reductions but still telecom costs remain significantly higher than other countries. GoP has embarked on improving the power infrastructure by allowing private power generating companies and recent effort at privatizing the KESC the power distributing company in Karachi. These steps will bring about improvement in the power infrastructure in the long term, while immediate needs will have to be fulfilled through generation of power through privately owned generators.

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6. HIGH LEVEL ANALYSIS OF EXISTING OUTSOURCING MARKET IN PAKISTAN


6.1. Introduction

Pakistans IT services sector has gained some maturity and has acquired sizeable exportable skills over the last 7 8 years but the BPO sector is still at a nascent stage and most of the BPO Service provider companies are less than 2 years old and still going through the learning process. The total size of the IT industry is estimated to be US $ 700 million, with the estimated IT and BPO services export being US $ 100.1 Funds and finances are not problems in todays Pakistan. The countrys banks and financial markets are virtually awash with money and saturated with loanable funds. Any bonafide investor can easily obtain a business loan. There is also a plethora of government support, concession and facilitation. IT hardware is also readily available. Although not many, but there are quite a few success stories of Pakistans ITPS companies. ITIM Associates from the IT sector, TRG and Arwentach from the Call Center sector, to name a few. Some of the key common factors are the availability of funds, a clear business model and sustained efforts. The list of the Pakistani ITPS vendors is attached as an annexure. Although the situation has much improved over the last 12 months as regards the availability of data and information about the local ITPS industry, but hard data and the specific advantages of Pakistani BPO companies are still not readily available. The availability of such information is very important, to enable the individuals and/or companies looking for a local ITPS vendor find enough information on their own (on PASHA and PSEB websites) to progress the matter further. There are divergent views about the available HR strength of Pakistan. Some industry analysts lend to the view that Pakistan has a large surplus pool of quality human resources who can be utilized, after short and focused training, in the ITPS sector. On the other hand, people responsible for the delivery complain that most of the available resources are not of good quality and it is hard to find people with exportable skills. As per our study and analysis, the HR shortage is more pronounced in the area of voice segment of BPO sector, i.e., in the call center segment because people with good quality verbal communication skill in English language are rather in short supply. The problem is further accentuated by the fact that call center agents position is not very popular amongst young people with good educational background who are, generally, not interested in this career partly because of the nature of the job and partly because of the lack of career growth prospects. Another inhibiting factor is that there are not many domestic call centers that could be the breeding ground for experienced call center agents, which is exemplified by the fact that the number of call center agents per 10,000 population is only 0.1 in Pakistan, as against 2 in India and 6 in Philippines. The situation is not so critical in the IT services sector and the non-voice segments of the BPO sector. The number of experienced IT professionals is sizeable (about 15 times more than what are currently employed in the IT services export sector) and is constantly growing by about 5,000 IT graduates per year, so is the number of professionals in other fields/disciplines like Finance and Accounts, Engineering, Medicine, etc, who can be well utilized in non-voice segments of BPO sector, with very little training.
1

PSEB Website
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The real shortage, ofcourse, is of resources for the middle management and supervisory positions in both the IT services and the BPO sectors, which is agreed by all. However, taking everything into account, it can be safely said that the fundamentals for achieving progress in the ITPS industry do exist. The HR can be trained through GoP backed and funded / subsidized training programmes for both the trainees as well as the trainers. The other major missing links would then be the redundant Internet connectivity and the lack of quality office buildings for 500 + employees and none of these issues are not unsolvable. That leaves the image perception of the country as the major hindrance and it would require aggressive PR campaign to circumvent / mitigate the problem. If the above conditions are met then Pakistan can aim at becoming one of the major ITPS destinations as it can offer at least 15 25 % lesser cost (labor and occupancy) than regional competitors.1
6.2. Human Resources (HR)

Pakistan has a population of 150 million; most of who are young and energetic, with a total labor force approaching 44 million. It also has a large supply of qualified labor, approximately 445,000 college graduates per year, which has English proficiency comparable to the Philippines, with a much less pronounced accent than most other destinations including India. English is compulsory at the Secondary and High School level, all science subjects are taught in English, and so are all subjects at the university level. English is also the official language for GoP correspondence, hence the vast majority of the people working in offices can communicate in English with variable degree of proficiency. Pakistan has, however, a low literacy rate as compared to other countries in the region but has invested heavily in education during the last 5 years. About 5.5 million people are studying at primary and secondary school levels but this number drops sharply at higher secondary, degree levels and above. Computer careers are in great demand with almost 28% of undergraduates and 22% of postgraduates choosing computer subjects. Vocational Training enrollments exceed 134,000 with computer subjects taking an overwhelming 58% of the share of enrollments and Technical career enrollments for undergraduates and postgraduates are approximately 70,000.2 The number of IT graduates produced per year is 5,500 and there are 45 Universities offering IT/Computer Science programs. The population of people who can understand and communicate in English with varying levels of skills is about 6.5 million3. However, a large number of them would require extensive training, grooming and experience before they can be expected to serve in an International Call Center and the availability of trainers is another limiting factor. The main strength is the availability of a large pool of Accountants, Engineers, Bankers and Doctors who can be employed in the BPO sector with relatively little training. The GoP provides land for setting up educational institution at very low rates. There are many private universities setup across the country after the Government encouraged such activities during the last 10 15 years.

1 BE Study 2 PASHA Website 3 PSEB Website

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PUBLIC SERVICES Strategy for Pakistans BPO Industry September 20, 2005 STRATEGY FOR INCREASING EXPORTS OF BPO

The ITPS industry generates direct employment for over 120,000 persons1. The total number of IT professionals, Call center agents and the employees working in other BPO segments in the country is estimated at 75,000, 3,500 and 2,000 respectively1. However, the corresponding numbers working for international clients are approximately 4,000, 2,500 and 1,500 respectively, which implies that out of the total ITPS sector HR strength of 80,500, only about 10 % are contributing to ITPS exports revenue. The main human resources issue being faced by Pakistani BPO companies is the lack of qualified supervisors and managers. Raw talent at the entry level is available, as are Senior Managers/General Managers, but what is lacking is the middle level supervisors to serve as team leads, mentors and managers. It takes about 18 months to train local managers in American workplace culture, to empower them to think and act independently and proactively. Major challenges are also being faced due to the limited work/management experience and weak professionalism of Pakistans labor force. Also, women, as in the other South Asian societies, usually do According to a senior ECommerce Times columnist specializing in offshore process migration, the talent pool in Pakistan is very smart, with a strong desire and motivation to learn and they have a staggering capability for conceptual learning, especially if exposed to ideas.

not have the same training to become managers as men, so special training programs for women are needed to become managers at BPO companies. Moreover, there is often reluctance in families to have women work at night. Another area of concern is training and certification, which is now receiving attention from PSEB and the leading companies. The challenge is that there is no broad-based certification that would cover the diversity of call center and BPO sectors already active. However, because of limited local competition, the rate of BPO attrition is as low as 8% and because of a large supply of skilled labor; wage rates are much lower than other major BPO destinations. The following tables show the number of yearly college, university and vocational training enrolments and also the comparison with some major ITPS destination countries and it can be seen that Pakistan compares favorably, at least in numbers.
Table 21: Pakistan College and University enrolments
1

Pakistan College and university students 2004

Universities Professional Colleges Arts/Science Colleges

Total Enrollment 117,863 161,349 750,583

Yearly Graduates 29,466 40,337 375,292

1 PSEB Website and GOP

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Table 22: Sr. No. 1 2 3 4 5 6 7 8 9 Level Industrial Arts Para-medical Management Computer Agriculture Education Home Sciences Education Others Total

Vocational Training Enrollments Numbers 10,045 1,451 1,202 77,390 1,191 6,051 3,464 6,051 795 134,468

% 7.47% 1.08% 0.89% 57.55% 0.89% 4.50% 2.58% 4.50% 1.61% 100.00%

Table 23: Countries India China Pakistan Philippines Mexico Ireland Malaysia Singapore

Comparison of the number of annual college graduates

Number of Annual Colleges Graduates (Thousands) 2,100 950 445 380 138 43 30 13

6.3.

Infrastructure

The three major components of the infrastructure, which affect the BPO sector, are Internet bandwidth, phone and electricity. Electricity problem can be addressed through company owned power generators but the Internet and telecom that are of crucial significance are beyond the control of the BPO companies. Currently, the reliability of the Internet connection is a major issue as, at present, redundancy is not available. Pakistan has a single link to the outside world through a fiber link to Sharjah, UAE. A failsafe Internet connection is the lifeline for IT Professional Services. Companies providing live service to customers
1 PSEB Website and GOP

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abroad require 99.999% reliability and uptime. The most urgent need for Pakistan, in terms of infrastructure, therefore, is to have redundant fiber optic connectivity, without which major North American companies would not agree to outsource their operations to Pakistan. This has been brought to sharp focus by the problems encountered in the last week of June 2005 and the beginning of July 2005 due to the damage to the undersea cable. Based on the current strength of 2,500 agents in International Call centers, a utilization of 8 hours per agent per day and an average revenue of US $ 5 per agent per hour, the estimated revenue loss due to the severance of the link is approximately US $ 100,000 per day to US $ 50,000 per day for 100 % and 50 % utilization of the agents respectively from the time the problem started and the intangible losses are far more (on loss of goodwill, reputation, etc).1 Although, PTCL is planning to add two more links for redundancy one through undersea cable SEMEWE-4, expected to be available by October this year and the other through underground fibre optic link with an Indian company VSNL, but till that happens, major foreign companies would not agree to outsource to Pakistan. The availability / reliability of phones does not constitute any significant problem in the outsourcing of BPO business to Pakistan as, over a period of time, the land and mobile phone infrastructure has become reasonably developed, at least in the cities. Over 85% of telecommunications infrastructure is on fiber2 optics and the positive impact of de-regulation of telecomm sector is beginning to be felt.

6.3.1. Telecom Sector 6.3.1.1. Historical perspective of the telecom sector of Pakistan

Telecom: Historically within Pakistan, basic telecom services have been provided by the Telephone and Telegraph department (T&T). The Government, playing the multiple roles of regulator, policy maker and operator, has run the department. With technological advancements, more and more telecom services have become available but there has been a lack of funding to provide for the installation of new telecom systems, thereby restricting the provision of modern services. As a result, there has been a digital divide prevalent in Pakistan, with the country lagging behind its neighbors and other comparable countries in terms of telecom access. Cellular Mobile: Cellular phone services in Pakistan commenced in 1990s with the award of two cellular mobile telephone licenses to Paktel and Pak Com (Instaphone). Currently there are four cellular players in the market, two with GSM and two with DAMPS technology. The number of cellular subscribers has been growing over the years; however, due to partial competition cellular companies have been unable to match growing demand. Deregulation: Keeping in view the above factors, during 2003-2004 the Government of Pakistan decided to move away from a monopoly situation in basic telephone and introduce more competition within the cellular market. Such actions are considered historical for telecommunications in Pakistan; telecom deregulation has revolutionized the whole industry with the local telecom scenario being completely changed. Today all telecom services in Pakistan are open to competition, with incumbent monopolies now
1 BE Study 2 PSEB Website

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competing against the worldwide telecom giants active in-country. Telecom services consumers are forecasted to increase by many-fold due to price reductions caused by competition and price regulations of SMP operators by the Pakistan Telecommunication Authority (PTA). Broad Band/Internet: PTA has allowed all the ISPs to offer broadband services, a decision determined to be for the greater interest of both users and the telecom industry as a whole for fostering broadband services. Currently over 1900 cities have access to the Internet. From only 19 Internet service providers in 1997-98, by 2004 this number rose to 126. To encourage the growth of the Internet in the country, PTA has decided that in future only the following two types of licenses will be issued: 1. Region-wide license for PKR 100,000 license fee 2. Nationwide license for PKR 300,000 license fee
6.3.1.2. Telecom Infrastructure of Pakistan

Pakistans domestic telecom infrastructure is quite modern and Pakistan has had a fiber optic based national trunk backbone since 1990. The demand for fiber optic cables is so high that fiber optic manufacturing plants have been setup in the country. The salient features are provided below: PTCL has a strong fiber optic back haul across the country. With tributaries covering around 75% of the towns. PTCL has taken massive network expansion to combat competition after deregulation PTCL has installed two self healing DWDM rings PTCL has laid a Fiber optic access network in Karachi, Lahore, and Islamabad. WorldCall is also laying its HFC network in Karachi and Lahore. TeleCard has already implemented a CDMA 1x WLL network of 150k phones in an O&M agreement with PTCL.
6.3.1.3. Foreign Direct Investment

It is expected that US $5 - 8 billion in Foreign Direct Investment will come to the cellular mobile and fixed line telephony sector within the next 3 to 5 years.
6.3.1.4. Projected Growth of Telecom Sector in Pakistan

A brief account of the current and the projected growth in the telecom sector is as follows: Telecom sector grew by 21 % in FY 2004 Telecom sector is likely to show higher growth in 2005 as compared with previous years as new companies are marketing their products and deregulation takes full effect The mobile sector is also expected to grow considerably with the entry of two new cellular operators and expansion of networks by existing operators. It is expected that the base of cellular subscribers will reach 12 million by 2007 and cellular penetration will reach 21% in the same year.
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Pakistan has the potential of 30 million cell phone subscribers by 2010, as shown in the following figure:
Figure 9: Subscribers Growth Forecast for Pakistans Telecom Sector
1

Number of Subscribers (million)

16 14 12 10 8 6 4 2 0 2004 2005 2006 Year 2007 2008 5.9 3.75 6.1 5 9 7.75 11.25 10 13 12.1

15 14

Fixed line Cellular

2009

The following table provides comparison with other countries regarding the telecomm and Internet connections, which shows that Pakistan is at par in these areas with India, keeping in view the population ratio of the two countries. However, it is far behind China in all the areas.
Table 24: Sr. No. 1 2 3 4 6 Population, Labor force and Communication - Comparison and Year 2004 2004 2004 2003 2004 Pakistan 150 44 4.5 5 (2004) 6 (2003) India 1,100 472 49 26 18.4 China 1,300 778 263 269 94
2

Transport Communication Population (Million) Labor Force (Million) Telephone (Million)

Philippines 86 35 3 23 3.5 (2002)

Connections

Cellular Mobile Subscriber (Million) Internet Users (Million)

1 2

Source: Pakistan Telecommunication Authority & BearingPoints Study Sources: Pakistan software export board, Pakistan Telecommunication Authority, http://indiabudget.nic.in and World Fact Book. 1 http://www.pta.gov.pk/
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6.4.

ITPS industry of Pakistan

6.4.1. Market size

The size of the IT industry of Pakistan is about US $ 700 million, with annual Software industry turnover of about US $ 70-80 million1. During the fiscal year 2003-04, more than US $ 200 million was invested by the financial services sector into IT products and services and the total value of some of the ongoing large IT projects of the public and private sector organizations exceeds US $ 100 million2. Software industry is experiencing an annual growth of 40% to 50%.2 Pakistans IT industry is still well below potential, as ideally, it should be 1/5th of the Indian size, as Pakistans economy is generally 1/5th of the Indian economy. The size of the Indian IT-ITES industry is US $ 26 billion, with domestic market contributing US $ 8.2 billion and international IT-ITES revenue US $ 17.9 billion3, which implies that Pakistans IT industry has not kept pace with the other sectors of the economy and its size should at least have been about US $ 4-5 billion. It is also interesting to note from the following table that the ratio of Pakistans export revenue to the domestic revenue is only 17 %, whereas the same ratio of the Indian IT industry is 218 %, which is another indication that huge potential exists for growth of the ITPS export revenue of Pakistan.
Table 25: Country Comparison of IT-BPO industry sizes of Pakistan and India Exports revenue IT-BPO (including Hardware) US $
4

The projected high growth in the fixed and mobile phone density augurs well for the domestic IT and BPO segments. The proliferation will usher in an explosive demand in computer hardware, IT skills, BPO outsourcing and call centers, which would not only generate employment in the country but would also help the local ITPS vendors to gain valuable experience and maturity

Domestic revenue IT-BPO (including Hardware) US $

Export revenue as a percentage of domestic revenue

Pakistan

600 million

100 million

17 %

India

8.2 billion

17.9 billion

218 %

6.4.2. ITPS exports revenue The share of Pakistan in the vast global ITPS market is insignificant. There are less than one hundred companies generating the bulk of the IT and BPO export revenue of Pakistan. As against the total
1 PSEB Website and PASHA Website

2 PASHA Website 3 NASCOM Report 4

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Offshoring revenue of US$ 39.6 billion, the export earnings of Pakistani IT and BPO companies, transacted through the State bank of Pakistan, is about US$ 50 million. There are no sources of information available to determine the value of the unreported export revenues. However, it is estimated that the unreported revenue would be about the same as the reported revenue, which puts Pakistans total ITPS export revenue approximately at US $ 100 million. The percent growth in Exports in 2003-04 over the year 2002-03 was 45 %, which is attributable to the low exports in 2002-03 and the increased level of interest in the IT-BPO sector by local entrepreneurs. There is no record available about the share of the IT services and BPO services in the above export revenue of US $ 50 100 million. However, as the number of IT Professionals engaged in export oriented software development (about 6,000-8,000) is significantly greater than the number of employees of Call Center and other BPO related companies working for international clients (about 5,000)1 and also because the chargeable rates of the software developer is at least 50% higher, the estimated ratio of the earnings of the IT services and BPO sectors is 3:2
6.4.3. BPO sector projected domestic revenue

Like its international counterpart, the domestic BPO industry is also at an infancy stage and the concept, merit and advantages of outsourcing of non-core functions to specialist ITPS vendors has not been given due consideration by public sector and large private sector organizations such as utility companies, banks, multinationals, etc. The two major priority areas for domestic outsourcing are call center and utility bill processing, followed by Admin, HR, Payroll and Accounting Services. However, it would take some cultural shift for Admin, HR and Accounting services to be outsourced, but the first two can be started immediately. Currently, there are only a handful of companies such as PIA, a few banks, telecomm companies and fast food franchises who are operating their call centers through outsourcing. The number of call center agents servicing domestic clients through these call centers is about 2,0001, including those working in the company owned call centers as well as independent call centers. The need for call centers for the domestic sector is estimated to be 10 times more than the present capacity. This assessment is based on the international trend among the public sector organizations and large public dealing private sector companies to have their call center for enhancing the productivity of the organization and facilitating the public and servicing the clients. Another fit candidate for domestic outsourcing is the bill processing of utility and telecomm companies. The projected annual revenue from the enhanced capacity of the domestic call centers and the utility bills processing is US $ 200 million and US $ 30-50 million respectively. The revenue from the other BPO segments is estimated to be US $ 50-100 million, which implies that a domestic outsourcing market of over US $ 300 million already exists2, which can be effectively utilized to nurture the local BPO industry. The following tables show the projected domestic BPO revenue of Call Center and Bill Processing segments.
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2 NASSCOM Report

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Table 26:

Projected Domestic Outsourcing Revenue- Domestic Call Centers

Potential End Users


Airlines Banks Fast Food Chains Government. Offices EPB KESC SSGC Cell phone Companies Courier Companies Telemarketing Companies Educational Institutions ISPSs Traveling Agencies Security Companies

Potential Revenue
Total projected call center seats Total projected call center agents Per seat cost per hour (US $) Per agent cost per hour (US$) Total hours per year Total hours per agent per year Total Revenue per seat per year Total Revenue per agent per year Total Revenue for 12,000 seats per year Total Revenue for 25,000 agents per year Total Revenue ( agents plus seats) Table 27: 12,000 25,000 1 2 8,760 2,000 8,760 4,000 105,120,000 100,000,000 205,120,000
2

Table: Projected Domestic Outsourcing Revenue-Utility Bills

Number of bills generated per month PTCL Cellular phones Electricity Gas Total bills per month Total processing cost per bill (Rs) Total bill processing cost per year (Rs) Total bill processing cost per year (US $) 8,000,000 3,500,000 15,000,000 10,000,000 36,500,000 5.5 2,409,000,000 40,150,000

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6.4.4. IT-BPO Companies of Pakistan As per the PSEB figures, the total number of software houses with valid registration is about 300. There are a total of 154 call centers registered with PSEB, out of which 116 are operational. Out of the 116 active call centers; the number of international and domestic call centers is 70 and 37 respectively. The number of companies providing other BPO services like Medical and legal transcription, engineering services, etc, is about 20.1 Some leading call centers of Pakistani have presence both in Pakistan as well as in North America / Europe and are being run based on international standards. Further, these companies are keen to buy running call centers in North America in order to farm out the business to their call centers in Pakistan. The GoP has initiated many software quality projects in the recent past, which include bringing 20 local companies to CMMI level 2, which is a Software Quality Assurance Certification, and 5 local companies to CMMI level 5 by year-end 2005. At present, the number of ISO 9000 certified IT-BPO companies is 70 and 30 other companies are in the process of certification. There are only seven companies with Capability Maturity Model (CMM) certification. One company is at CMM Level 5, one at Level 4 and another five are at CMM Level 31. The relevant certification for the call centers is COPC and record is not available about the COPC and certification status of the call centers of Pakistan. Similarly, International certification record of the Medical Transcription companies of Pakistan is also not available. The following tables show the distribution of the software houses and the domain expertise and it can be seen from the same that the major concentration of the local software houses is in the three major cities of Karachi, Lahore and Islamabad and the expertise exists in all the modern development technologies/platform. The list of the leading BPO companies active in Pakistan is attached as an Annexure to this report.
Table 28: Sr. No. 1 2 3 4 5 6 Major Cities Islamabad Lahore Rawalpindi Karachi Peshawar Other cities Total Distribution of Software Houses by Major Cities and Database No Of Companies 227 257 48 267 15 44 860 Oracle 69 83 16 90 6 22 286 DB2 22 30 2 18 0 5 77 SQL Server 140 186 31 202 9 39 607 Terra Data 4 0 0 3 0 2 9
1

Access 220 250 44 258 15 42 829

1 PASHA Website

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Table 29: Sr. No. 1 2 3 4 5 6 Major Cities Islamabad Lahore Rawalpindi Karachi Peshawar Other cities Total

Distribution of Software Houses by Major Cities and Languages No Of Companies 227 257 48 267 15 44 860 SQL 140 186 31 202 9 39 607 VB 150 206 39 232 13 40 680 VC++ 146 122 30 160 7 24 489 Java 80 98 16 72 5 21 292 HTML 203 220 38 216 11 38 726 CF 25 35 11 52 3 9 135

XML 26 31 6 38 2 6 109

C 110 132 16 160 7 21 446

6.4.4.1. Matured BPO Services of Pakistani companies

Pakistani agents in the call center are known to have differentiating qualities such as being more assertive thus doing well in conflict communications (e.g. collections.) Also, having more of a neutral English accent allows them to gain a better understanding of their client's expectations. Based on the talent pool in Pakistan and the types of work already in progress, some of the matured BPO services, in addition to Software development, on which Pakistan can build on are given below: Network Security (Monitoring and Management) Telecommunications Call Centre Banking and Investment Insurance eCommerce/Online Retail Finance and Accounting Healthcare o Medical Transcription o Billing o Claims Processing Mortgage Other Financial Services Hospitality and Travel Engineering Design and Petroleum

1 PASHA Website

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6.4.4.2. Local Call Center Segment

The international call center industry in Pakistan started in 1998. However, after the meltdown of 2001, the oldest in the current wave of companies started in 2002. The HR strength of these companies ranges from 5 to 500+ and the company age from 6 months to 25 years1. Although there are no confirmed figures, but it is estimated that the total number of agents working in the international and domestic call centers is 2,500 and 1,000 respectively2. The call center operators of Pakistan are marketing Pakistan, as an alternative to India and Philippines, especially after India imposed a 36 % income tax on internationally owned call centers. Estimates suggest that there are more than 100,000 call centers, 1.2 million seats and 2 million agent positions across the globe and the demand for agent positions is growing at the rate of approximately 23% to 25%3. The Call Centers of Pakistan have to compete in this market place to get their share. Also, call center is a risky business due to claims arising on account of data theft/misuse, improper conduct of agents, violation of local laws, contract violation, etc. A number of Pakistani call centers are maintaining presence in North America / Europe through own offices or business alliances. Pakistani companies are also keen to buy running call centers in North America in order to farm out the business to their call centers in Pakistan, which is a good strategy. The top 25 international call centers in Pakistan collectively add up to about 1,500 seats4, a majority of these are outbound, i.e. providing sales and telemarketing services, while a smaller fraction is inbound. The remaining international call centers, each with 10 seats or less, are either very specialized and integrated into other software or BPO businesses or have yet to establish their long-term viability. Only a few large call centers have long-term contracts and relationships with their customers. Most of these call centers are engaged in outbound services, such as telemarketing, and this tends to be a project-oriented low margin business and can be an easy victim of price-cutting by competitors elsewhere. An investment of PKR 200 300 million (US $ 5-10 million), depending on the hardware and software requirements, is required for setting up a good-sized call center with capacity to hold 500 seats. To put the call center and BPO business on a sound footing for sustainable growth, much focus is needed on efforts to move up the value chain. For instance, call centers can upgrade themselves into better-priced customer and technical support and other knowledge-based inbound services with long-term client relationships and contracts. Similarly, BPO services need to be aimed at knowledge -based value added services way beyond data entry and simple operations. The following table shows that the Call Center segment is extremely underdeveloped in Pakistan and has high potential for growth.

1 BE Study 2 PASHA Website 3 http://www.outsource2india.com/why_outsource/articles/call_centers.asp

4 PSEB Website

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Table 30:

Call Center agents per 10,000 population Employees per 10, 000 Population

Country

USA UK France Australia New Zealand Philippines India Pakistan

125 50 20 74 51 6 2 0.1

6.4.5. Global IT companies with presence in Pakistan Pakistan has provided free market access to foreign companies since its inception. This has been unlike India where the import curtain started to be lifted only about 10 years ago. It is for this reason that established world class IT companies like NCR, IBM, ICL and DEC set up offices in Pakistan more than 40 50 years ago. Latest NCR, IBM, ICL and DEC mainframes/ minis were installed in all the major cities of Pakistan when they were current and there was healthy competition between all these multinational vendors. Latest IT technologies were therefore introduced in Pakistan much earlier than in other countries of the region such as Iran or India. Therefore, there is a pre-disposition to use latest products and technologies that goes back many decades. Today IBM Pakistan business consultancy services provides SAP certified consultants for the Middle East; NCR Pakistan holds the support responsibility for Terradata Warehouse Solutions for Europe; and Oracle Pakistan is serving as a regional hub for other regional countries excluding India. As such, Pakistan has established itself as a Leader in the region in acquiring and using new technologies. There is no reason why it cannot come at par with the countries of the region in technology. Many global IT companies are present in Pakistan and they view the local IT market as a promising market for themselves and their revenues are growing by 30-40% annually2. Multinational IT companies such as Oracle, IBM, Cisco, People Soft reportedly have annual total revenues in the range of US $ 200300 million in Pakistan and their percent increase during the financial year 2003-05 was from 25% to as high as 70%.1

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6.4.6. Major issues and concerns of companies looking to outsource to Pakistan

Apart from political stability, HR availability and Internet link redundancy issues, the other major concerns, in a cold objective evaluation process is IPR, Copyright, Data Security and legal and regulatory environment. Software piracy is a key cause of revenue loss for the ITPS segment. Based on the findings of a survey conducted by IDC, it is estimated that over 35% of the software in use is pirated - translating to a revenue loss of over US $ 30 billion per year. However, the revenue loss is less dependant on the extent of the piracy and more on the installed base. In China, 92% of all software in use is pirated but the estimated loss of revenue is just US $ 3.8 billion, whereas, the incidence of piracy in the US is significantly lower at 22%, yet on account of a larger installed base, the loss of revenue in the US market is estimated at US $ 6.5 billion.1 Data security, confidentiality and integrity are another prime concern and compromises are not accepted. Clients consider network security, personnel security, physical security, and customer privacy and information protection to be critical while deciding about offshore outsourcing. Companies demand implementation of various network security technologies from offshore vendors and in some cases physical security arrangements, like body search and complete ban on bringing in of copying media to the work place. Pakistan is no worse than the major players like India, China, Philippines, etc, but these issues become greater hurdles for new comers than for established members of the club. Another major concern is the lack of information about Pakistans IT and BPO industry. Very little authenticated information is available in this regard, like the HR skills available, software exports, capabilities of leading software development companies, etc
6.4.6.1. Risk Mitigation by Asian Development Bank (ADB)

The Asian Development Bank plans to provide a security risk guarantee against sabotage or terrorism to foreign firms that are willing to invest in Pakistan2 ADB has submitted the proposals to the Pakistan government, and the scheme will be launched after their approval and under the scheme, the bank will provide a risk guarantee to foreign investors against possible terrorist attacks or sabotage and it will work as an insurance scheme. A foreign investor would have to pay 0.5 % - 0.6% of its total investment to the bank to avail of the guarantee. The planned scheme would be limited to foreign firms as the idea is to attract foreign investment to Pakistan. Investors have been wary of parking their cash in Pakistan due to attacks on foreign business interests and these attacks have increased in frequency following the Sept. 11, 2001, event. Though foreign direct investment has risen 55.3% to $597.6 million in the first eight months of the fiscal year that began July 1, foreign investment inflows have been below international levels because of risk perception. The insurance sector was facing problems in obtaining reinsurance from the overseas companies to provide cover to the local business to meet losses incurred in the backdrop of terrorism activities. ADBs

1 NASSCOM Report 2 ADB official

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guarantee will be used for obtaining reinsurance facility from multinational insurance companies and it will help the local insurance sector to cover up losses especially those relating to terrorism. The domestic investors wouldnt be eligible for the scheme on their own; they would be eligible only if they are investing in a joint collaboration with foreign partners. The proposed scheme will run parallel to the banks political risk guarantee scheme, under which domestic investors can seek risk guarantees against changes in governments policies.
6.5. Comparative Analysis with other countries

As compared to other countries, Pakistan has a reasonable size low cost IT work force. Industry experts have provided the following comparisons regarding several IT parameters:
Table 31: IT capability of selected countries
1

Upcoming and Potential Destination for Offshoring IT Services (Until March 2003) Parameter
Active export focused IT professionals IT employee cost (US$, per year) Number of CMM level 5 certified companies IT Labor Force Infrastructure

Pakistan
3,500

India
195,000 5,00012,000

China
26,000

Malaysia
NA

Brazil
NA

Argentina
3,000

Russia
5,500

Czech Republic
NA

Singapore
NA

4000-6000

9,600

7,200

9,500

10,550

7,000

7,500

27,000

0 Low cost, Moderate quality Poor Focus on software quality and processes

60

NA Low cost Moderate quality Good High government support, investments, of $10 billion in high-tech parks Political instability

0 Moderate Cost, Low quality Poor IT centers, Of large MNCs, Government support

0 High cost Moderate quality Average

3 Low cost, High quality Poor

NA

Low Cost, High quality Average High government support, Large no. of IT professionals

Low Cost Low quality Average

Low cost, High quality Good

High cost, High quality Good Business friendly governance offers high tax incentives for IT exports Limited availability of skilled labor

Main Positives

Large no. Of IT professionals

Large Educated population

High quality engineers

Solid infrastructure

Main Negatives

Geopolitical risk

Rising cost

Lack of project management

Language

High salaries, political instability

Unstable economy

Talent retention issues

6.6.

HR Training for IT- BPO Sectors

The IT sector is essentially a knowledge-based industry, with human resources development the most pivotal requirement. Pakistans quality of education needs improvement, with particular focus required on the marketability of skills being learned.
1

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This is particularly the case in the IT industry, which is essentially knowledge-based requiring skillful and educated personnel. Despite good governance policies, concessions and facilitation, the desired result cannot be achieved if the prime mover, human resources, is not developed to its full capacity. Like many countries, Pakistan has to also develop its IT industry, not only because it is among the worlds fastest developing industries but also because it complements the growth of all other sectors in a cumulative way. To achieve this, human resources, particularly within the IT sector, have to be aggressively developed. In this regard, initiative must come from the government on a massive scale, since human resources (particularly as relating to IT), could have one of the highest multiplier effects and prove most pivotal for overall economic development. Human resources development could also prove the key to cost effectiveness, quality development and innovation. Further, it is also an essential prerequisite for application of high tech methods in production. The government should, therefore, assign highest priority to and take all possible steps to develop high quality human resources, particularly those required by the IT and BPO industry. The suggested modules for producing BPO-specific skill sets of exportable quality are indicated below. Experts of the respective BPO segments, to bridge the skills gap, can add additional modules after the training need analysis (TNA): English (ESL or English as a Second Language), written and spoken Accent reduction Business communication, written and spoken Western cultural issues relevant to business Work ethics, professionalism, and general social values Project management and team building Computer technologies, including basic Word processing, Spreadsheets, and Internet browser applications Customer service basics Customer care call handling, including irate customer care Introduction to BPO services Presentation Skills Specialized training in specific BPO services, including Call Center, Legal and Medical Transcription, any compliance, etc. Special training programs for women are needed to become managers at BPO companies. As regards the training needs for the IT professionals, it is a very specialized subject with fast changing training and re-training needs. However, the following training areas can be broadly identified: Software Quality Assurance Project Management and Risk Analysis
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Business and Systems Analysis and Data modelling Software Development Life Cycle (SDLC) Processes Software Development Methodology and Standards Technical and User Documentation skills Configuration and Release Management Network Management and Security Data Security System Analysis and Design Tools Development tools and platforms (Operating System, Front-end, Back-end and Programming Languages)

6.7.

Future outlook

Fulfillment of the maximum level of potentially outsourceable business worldwide remains to be reached, leaving market opportunities for additional countries with Outsourcing/Offshoring capability. As nothing succeeds With improvement in Pakistans like success, after an initial critical mass of companies begin image, security, availability of the to work in the country, more companies will likely follow redundant fiber optic Internet suit, thereby enabling Pakistan to become a desired location connectivity and implementation for Outsourcing / Offshoring. mechanism of governments Notwithstanding the lack of marked achievement in the BPO policies/incentives tough but sector by Pakistani companies, future success seems to be realizable goals, there is every achievable in the near future provided that barriers are reason to believe that outsourcing addressed sincerely and the appropriate enabling companies would find it attractive environment is provided to the private sector to be able to to come to Pakistan, to benefit from play its role effectively. Save for the redundant Internet link, low costs, large HR pool and Pakistan now has a good communications infrastructure, an attractive incentives available here. educated workforce skilled in English - which can be upgraded through short and focused training to meet international requirements, as well as competitive rates for IP, IPLC and subsidized satellite connectivity. It also has a strong base of professionals Doctors, Engineers, IT professionals, Accountants, MBAs, HR experts, Bankers, etc. Further, the cost of Operations (labor, office space and operating expenses) in Pakistan are the lowest among the list of the leading 36 countries with IT capability, as per the study conducted by BearingPoint for one of its clients. Hence, the outlook appears to be quite promising and Pakistan seems to be on the threshold of becoming an important player in the Outsourcing / Offshoring market in the next couple of years, through sound and imaginative planning and sustained efforts by the GoP as well as the industry.

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6.8.

Results of the survey of some Call Centers of Pakistan

A study of selected 16 selected Call Centers in Pakistan was carried out in March April 2005, within the context of the Strategy for Increasing the Exports of BPO Services project awarded by PSEB to BearingPoint. The report so prepared is being produced below, with minor editing to align with the overall context of the main report: Process and Methodology PSEB identified several companies to visit, and facilitated the setting up of meetings. The initial target was to visit 3-4 companies each in Karachi, Lahore and Islamabad. A PSEB project manager was designated in Karachi to set up the meetings, and he was present at each meeting. Similarly, one of two project managers facilitated and participated in each meeting in Lahore. Due to scheduling conflicts, no project manager was able to join the meetings in Islamabad. Following is a summary of company visits arranged by PSEB: Karachi: 7 companies Lahore: 7 companies Islamabad: 3 companies This report is based on: Visits to 17 locations of 16 different companies in the 3 major cities of Pakistan Completed questionnaires returned by 7 of these companies Conversations during meetings at all the companies Summary: For the purpose of this study, BPO (Business Process Outsourcing) is meant to cover call centers as well as companies providing BPO services in the more traditional manner. This especially makes sense due to the size and infancy of this overall market in Pakistan. All companies visited were very generous with their time and in being open in describing their business and challenges. Most of the senior management at these companies appears very seasoned, and possesses good business perspective and communication skills. Many such individuals have prior experience abroad or at other Pakistani businesses. The industry is indeed in its early stages in Pakistan. Thus, the problems and issues highlighted during the visits reflect the current state of affairs. Another snapshot at a different time in the growth cycle will likely yield different results. As stated earlier, there does not appear to be a problem finding qualified senior management. However, almost everyone raised the issue of lack of appropriate human resources required for service delivery, variously at the middle management and individual contributor levels. This is especially true in the context of building scalable businesses moving forward. The other most significant issues that were highlighted related to availability of quality building space for near-term or future expansion and a small assortment of issues with network bandwidth. Most notable in this regard is the need for a second Internet link outside of the country. These are clearly the areas where the companies are
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looking for help from the government and the PSEB. The good news is that generally there seems to be no issue with capital or demand for their services. If the human resource bottleneck is addressed immediately and other critical issues are resolved, significant business growth in this sector can be attained, to the benefit of the companies and the country. PSEB can help by facilitating matchmaking events and other opportunities with global businesses seeking service delivery. One point of note is that most of the call centers are engaged in outbound services, such as telemarketing, and this tends to be a project-oriented low margin business. This segment can be an easy victim of price-cutting by competitors elsewhere. Thus, to put the call center and BPO business on a sound footing for sustainable growth, much focus is needed on efforts to move up the value chain. For instance, call centers can upgrade themselves into better-priced customer and technical support and other knowledge-based inbound services with long-term client relationships and contracts. Similarly, BPO services need to be aimed at knowledge -based value added services way beyond data entry and simple operations. In the end, this was a worthwhile exercise although the period of study was brief and the scope of the study was limited. This subject, i.e. the study of the Pakistani BPO industry, may warrant a more thorough and rigorous survey, census and analysis on its own. General State of the Industry: Some of the companies interviewed described major downturn in their businesses in the 2000/2001 timeframe due to the Technology Bust in the West and the events of 9/11. The most severe impact included a complete shutdown before reincarnation in one case, and major downsizing in other cases. Generally, the industry seems to be healthy and on a steady growth path enjoying its share of the current global economic recovery. Company Sizes The companies visited had as many as 500+ and as few as 5 permanent employees. Company Ages The companies have been in operation ranging from 4 months to 27 years, although BPO service delivery is no older than 10 years. BPO Business Sectors Several BPO sectors can be identified for service delivery in Pakistan based on: The employment environment, with the prevalent dominance of the financial, manufacturing, and trading sectors in the large cities of Pakistan An assessment of the skills and capabilities of the educated labor market in Pakistan Some BPO service delivery companies are working in very narrow segments of specific business sectors. A few companies were also found to be providing highly sophisticated or specialized services, such as content management for eCommerce or outsourced network monitoring, and this bodes well for
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expanding the potential of the BPO services. In summary, the companies visited provide BPO services in the following broad or specialized sectors: Banking and Investment ECommerce/Online Retail Finance and Accounting Healthcare (incl. Medical Transcription, Billing and Claims Processing) Hospitality and Travel Mortgage and Other Financial Services Network Security (Monitoring and Management) Petroleum Telecommunications Some companies that were not visited are said to be actively providing services in the following sectors, and it is likely that other companies are servicing additional sectors: Engineering Design Insurance

Call Centers: There are several pure play international call centers, i.e. where the primary service being provided is dependent upon live voice interaction over the telephone. In many other cases, there are small call center operations embedded within the overall software support or back-office service delivery environments. The international call center industry in Pakistan started in 1998. However, after the meltdown of 2001, the oldest in the current wave of companies started in 2002. According to PSEBs document titled Setting Up Call Centers in Pakistan dated Jan 3, 2005, the top 25 international call centers in Pakistan collectively add up to just under 1500 seats1. It is estimated that a majority of these are outbound, i.e. providing sales and telemarketing services, while a smaller fraction is inbound. The remaining international call centers, each with 10 seats or less, are either very specialized and integrated into other software or BPO businesses or have yet to establish their long-term viability. Except for some of the largest call centers, most dont appear to have long-term contracts and relationships with their customers. Their modus operandi is to seek projects as they become available, and to run campaigns for specified periods of time. Those in business for a while do appear to be developing their expertise in certain business sectors. This industry is projected to be a growth sector and the rationale is justified based on the business that is available. Judging also from the size of the global call center industry estimated at 12 million seats, there is no question that significant growth can be achieved with a plan based on the right ingredients. This is addressed further in this report under the section titled Growth Potential and Issues.

BE Study
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BPO Service Delivery Companies: Out of the BPO companies visited that are not primarily call centers, only a few were found to be in pure play BPO, i.e. set up purely as BPO organizations that provide outsourced services to their customers. Many started out originally in the software space. Having developed and installed solutions for specific business problems, such as medical billing or mortgage processing, such companies were actually asked by their customers to take on some of the associated service delivery tasks. In many cases, the software solutions still constitute an essential basis for their BPO work. As an extension, some of the companies started out in the field of software development in the US or acquired software companies there, and such software business led them into lower cost service delivery from Pakistan. While some may misunderstand BPO to mean simple data entry jobs, the possibilities are really endless once such constraints are removed. Very often these are back office tasks that do not require constant live interaction. Due to time zone differences, spoken English and cultural considerations, and the potential for sustainable high margin work based on specialized skills, greater focus can be targeted to pure BPO or back office work requiring little or no real-time voice interaction.

Certification and Internal Training: Topics related to these subjects were included in the questionnaire. However, the types of services offered by the different BPO companies are so varied, each requiring its own standards and possible certification, that this topic is too complex to be afforded justice in this report. Suffice it to say that most call centers have some levels of internal training for call center agents. New agents are typically trained for 2-4 weeks. In some cases, the training period extends to 3 months. While quality processes need constant attention, monitoring and updating, in the local industry there is a general awareness of the need for internal training and external certification in order to stay competitive in business. PSEB, industry bodies, and companies themselves seem active in this area. For instance, there is a focused effort towards COPC training and certification for call centers, actively supported by the PSEB. In summary, the attention to this aspect of business and the investment varies between companies. The general assessment is that some companies are pro-actively seeking certification, and are focusing attention on training their employees. Others seem prepared to obtain the training and certification necessary for them to attain and retain business.

Extracts of Key Findings and Feedback: The bulleted text below show the two questions from the Questionnaire assorted extracts from completed questionnaires and meeting notes. Q: Company managements description of 3-5 challenges for sustainability or expansion of business, e.g. capital, human resources, bandwidth, availability of customers and projects etc. HR is the only problem, NOTHING ELSE!! Answer: a. Human Resources b. Human Resources c. Infrastructure (Space/Power/Internet)
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The two key challenges for us are capital to fund the expansion that we will need to respond to the business opportunities that are now coming our way, and to find adequate office space and equip it with the necessary infrastructure so that the office facilities upgraded to offer a modern and pleasing environment both for employees and for visiting potential and existing clients. Last few years have seen rapid growth of manpower of the company. This required ever expanding Office Facility. Currently planning to expand our presence in multiple cities within Pakistan to tap the local talent in different cities and retain them locally. Answer: a. Availability of senior staff with the required skills b. Reliability of software systems c. Number, speed and effectiveness of imitators Ranking from the biggest to smallest obstacles we have faced so far: a. Acquiring quality, skilled and talented human resource b. Inadequate support and attitude from the various government departments c. Unstable Internet bandwidth, and higher rates of data access Management feels a challenge in finding qualified human resources; especially in the field of software development with 8-10+ years of experience. Challenges lie in maintaining its leading edge services through the hiring, development and retention of best-in-class human resources and expansion of service provisioning to other departments. Biggest issue is capacity. Infrastructure and bandwidth issues can be resolved in one way or another. HR capacity is much more of a constraint right now. Capacity problem is at mid level. Low level and high-level capacity is not a problem in this country. Getting business is not a problem. Issue is suitable expertise to handle the work. Problems mainly in business communications. Software culture in US is different than here. So, software developers here dont understand how it is used there. Answer (from a call center): #1: HR. Retention averages 6 months, and no more than 1 year. We keep recruiting constantly to cater for attrition. No other major problem. Running out of space here. No more expansion room in this building.

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Q: Any specific areas where the company management could use help for business expansion? We need another bandwidth pipe (other than SEMEWE-3) to support the country so blue chips can look at our country seriously. At the same time we need consultants (renowned and reputable) to take us through the full cycle of gearing up for the new client, process migration, audit and assurance of business continuity. Answer: Operational Research and Scale Models Management and Leadership pipeline recruitment and development Technology Talent retention Supplementing our marketing efforts in the USA and also opening avenues for the provision of our services in the UK and Europe. International Sales Channel may be one area where we are currently focusing on creating a pipeline of opportunities. We may use help in this areas joining with potential partners who can lead to such opportunities. Government support in terms of introducing call center and operations management related academics. Training facilities locally and training support abroad. Government can also introduce call center projects for all public utility concerns. PTCL could not provide 256 kbits clear pipe from their office to the Defence Exchange in Lahore, i.e. they could not provide stable bandwidth. We lost business due to delays, since our contracts had penalty clauses (this is when company was located outside of STP in the past) PSEB has been very helpful and supportive. Bandwidth prices have been coming down. Need good quality call center training institute for accent reduction etc.

Growth Potential and Issues: The BPO and call center business in Pakistan offers significant growth potential that is realistically achievable with proper planning and, thereafter, execution of the plan. After extensive discussions with the senior executives of the companies identified for the survey by PSEB, a few themes emerged rather quickly. None of the three major issues described below is a showstopper in any way. Once identified in its proper perspective, each can be solved by diligently executing a robust action plan. The primary problem is the severe shortage of trained personnel and this may impede significant growth. Thus, the human resource issue requires the most immediate focus. This problem can be remedied with concerted efforts by the government, education and training organizations, the local industry, and potential global clients. As pointed out by more than one executive, many of the secondary issues can be resolved one way or another by expenditures that can be justified as a cost of doing business.

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1. Qualified and Trained Human Resources The biggest hindrance to the rapid growth of call centers and BPO services business is not a lack of demand or business from the US and Europe, but the shortage of a large number of suitably educated, qualified and trained professionals required for service delivery. While there is supposedly a pool of unemployed educated young men and women yearning for jobs, there is a visible gap between their knowledge, skills and experience and what is required for reliable and high quality service delivery to global customers. Some respondents blamed the current educational system in the country, stating that less than 1% of students are getting proper education. The shortage of qualified individual contributors will severely impact the potentially explosive growth of the call center and BPO industries. Given moderate attrition in the call center industry, for instance, and the need to staff up quickly for business at hand it is understandable that existing call center companies tend to recruit those who can be put to work after 2-4 weeks of training. While there is a pool of people who meet the requirements, many are not interested in such jobs, for instance due to their aversion to the night shift, while others are not suited due to their lack of commitment to staying in the industry. The net effect is that some of those hired from the latter category exit the industry after a few months due to better job opportunities, pursuit of higher education, or burnout after working in the night shift. This has been causing pressure on the remaining workforce in the industry, which tends to be enticed by competitors for relatively small incremental pay or benefit enhancements. Depending on the business sector, and the companies interviewed, the shortage is felt at different levels of the organization. In many cases, the shortage of seasoned middle management is most acute. Since the number of such managers in any company is small, creating attractive compensation packages for them would not negatively impact the business models. In turn, they could then be expected to help lessen the human resource issues at the lower levels by proper supervision and coaching. Anecdotally, some such middle or project managers for call centers are available for recruitment among the expatriate Pakistani communities abroad. However, no attempt was made to verify this broadly. A plan can be constituted based on targeting specific niche areas in the BPO market, meticulously identifying the right candidates, rigorously training them to fill the skill gaps, setting up the right infrastructure and work environment, creating attractive retention programs, and deploying the trained professionals to their fullest potential. While all training should include a quantum improvement in English communication skills, both written and spoken, the recommendation is not just to focus on pure call centers that require heavy dependence on voice communications. In the long run, it is the knowledge workers delivering higher order BPO services that offer the best opportunity for sustainable business growth as well as satisfying careers for the individuals. 2. Suitable Office Space With the healthy growth of the call center and BPO industry over the past two years, it is anticipated that the emerging shortage of appropriate space to house such companies is going to be an issue in the not too distant future. Ideally, companies are looking for good quality office space with availability of bandwidth, telecommunication lines, and reliable power. The Software Technology Parks (STPs) in each of the 3 major cities seem to be approaching capacity. The positive aspect of this situation is that facilities in Karachi and Lahore were looking for tenants just about a year ago. While this is a good problem to have, i.e. shows a healthy growth in the industry, creative solutions are needed right away given the length of time it takes to plan and construct new buildings. It is understood that PSEB has offered special incentives to private building owners to convert their premises into STPs. However, detailed data is not at hand regarding the extent and availability of such additional space in the 3 cities over the next 1-2 years.
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Given the apprehension expressed by some respondents in this regard, PSEB should communicate the progress in this area to the local industry on a regular basis. 3. Internet Connectivity and Bandwidth The other major issue that was highlighted is Internet connectivity and bandwidth, with variations in its manifestations. Those operating out of the STPs appear generally satisfied with the reliability, consistency and uptime of the Internet connections. However, Pakistan has a single link to the outside world through a fiber link to Sharjah, UAE. A failsafe Internet connection is the lifeline for IT Enabled Services. Companies providing live service to customers abroad require 99.999% reliability and uptime1. Instances were quoted when the Internet connection to the outside world was cut off for about 20 hours at a stretch in the past year. With increasing use of VoIP for call centers, there is absolute dependence on the Internet connection for voice traffic in addition to data. While PTCL provides free backup via satellite to qualified call centers, some companies complained of latency issues with voice calls over such a link. Some of the companies that are located outside of the established PSEB STPs complained about the reliability of the Internet connections to the backbone within the country. Due to its expansion, one such company is interested in moving to an STP and hoping to solve its bandwidth problem at the same time. But, it is constrained from doing so due to the space shortage at the STPs. Some companies already operating in the STPs are faced with the reverse dilemma. As they are expanding and running out of room at the current locations, they are forced to look for space elsewhere. However, they are concerned about the reliability of the bandwidth at available alternative locations. It appears that the well-capitalized companies have arranged for fiber connections at their locations outside of the STPs, but this remains an issue for smaller businesses.

Recommendations: Based on the data gathered during the study of the sample BPO companies, and judging from the state of the art requirements of Western customers, it is possible to make specific recommendations to enhance the sustainability of BPO services in Pakistan. 1. Focus It is remarkable that individual entrepreneurs have been able to start and establish BPO and call center businesses serving many different niches. By itself, there is no need to disturb this trend, and risk-taking entrepreneurs should be allowed to continue exploring new territories. However, in light of the overarching human resources issue, PSEB should focus its efforts on promoting a smaller subset of the BPO sectors. This focus will allow, for instance, the limited training resources to be deployed to the targeted sectors. This will help increase the pool of trained personnel available to the industry. Eventually, a larger pool of people with specialized skills in a few BPO sectors will aid in growing the industry on a solid base. Any attrition will likely continue to feed other companies in the sector. Once several BPO companies in those sectors have established their experience and references, Pakistan can market itself as the destination of choice in those sectors based on bona fide credentials.

1 BearingPoint Study

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Similarly, efforts should be directed at cultivating high margin services. Even if the market entry is to be made at some low margin services, the goal should be to graduate up the value chain as soon as the labor market has attained the requisite domain experience. With a smaller qualified labor pool, high margin specialized services afford better total revenues. In the long run, this is the only sustainable mode of operation. As specific services become commoditized and margins start to shrink, the smart companies need to continuously move up the value chain leveraging their previous experience and harvesting the benefits of new higher margin services. Based on the talent pool in Pakistan, and judging from the types of work already in progress, suggested sectors from which the choices can be further narrowed are: Finance and Accounting Banking and Other Financial Services Healthcare Hospitality and Travel Insurance Telecomm Note that the global telecomm market is still expanding and is being continuously disrupted due to new technologies and convergence, affording a stream of interesting opportunities. Moreover, the biggest growth in the wireless phone market over the next 5 years is projected to happen within Asia, doubling from 600 million subscribers in 2004 to 1.2 billion in 2009. Thus, development of competency and centers of excellence in this area can be used to tap the regional markets for billing and customer care etc. 2. Training The purpose of the training being recommended for entry-level jobs is to fill the gaps between the product of the existing educational system in Pakistan and what is needed to initiate the delivery of world-class customer services. The goal of this speed up training is to increase the pool of entry-level people available to be employed by the BPO and call center companies. Those qualifying from this training by achieving a set standard would be guaranteed jobs via a 3-way commitment between PSEB, employers, and training institutions. Specialized training for target service sectors or for specific customer projects will be supplementary to this basic training. Such product or service training can either be incorporated into the suggested curriculum by specific institutions, or can be made part of the in-house training after recruitment by the call centers and BPO companies. In addition, training is also needed for senior and middle management to keep them abreast of the business practices and changing landscape in their target markets. Such training is not addressed in this document. It is estimated that a rigorous training program lasting approximately 4-6 months will be needed to increase the pool of available entry-level employees for BPO companies. The training must be tightly regulated and monitored for quality. Otherwise, the training may not lead to better results than those of existing educational institutions. To begin with, appropriate screening and aptitude tests are needed to qualify people for training. The goal is to look for those with above average IQ, who are flexible and adaptable, are predisposed to providing pleasant customer service, and are really looking to build careers in the industry. Assuming that all those in this category may not be able to afford the full training costs, partial financial aid in the form of grants or
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loans may be made available by the government. These individuals can be expected to repay the loans fairly quickly from their healthy salaries when employed. Here are suggested modules for such training, where most sessions will be highly interactive and include role-playing. Additional modules can be added as deemed necessary to bridge the skills gap: English (ESL or English as a Second Language), written and spoken Accent reduction Business communication, written and spoken Western cultural issues relevant to business Work ethics, professionalism, and general social values Computer technologies, including basic Word processing, Spreadsheets, and Internet browser applications Customer service basics Customer care call handling, including irate customer care Introduction to BPO services Optional specialized training in specific BPO services, including any compliance 3. Internships The training described earlier will not alleviate the problem of middle management. Seasoned middle managers are produced by on the job training. An internship program can be put into place involving professional Pakistani expatriates abroad, such as those in decision-making positions in North America and Europe. Such a program will arrange for middle managers to spend 3 months abroad for on the job training. Some funding may be available through USAID or other international organizations. J1 visas, surety bonds, and other mechanisms can be put into place to ensure that the managers will return to the original companies for specified periods of time upon completion of the internship. 4. Marketing It is well understood that call centers and BPO service delivery companies need sales and marketing presence close to the target customers. It is impractical for small companies in Pakistan to fund and maintain their own sales and marketing teams in the US or Europe. This is an area where PSEB or industry associations can help by facilitating sales and marketing cooperatives, or by funding such teams that obtain and channel the business to member companies in an equitable manner. 5. Security and Privacy As progress is made towards expanding the call center and BPO business, one issue that demands strong attention is that of the confidentiality of client business practices and data, and respect for the privacy of personal customer data. While this is good business practice anyhow, there may be stringent legal requirements in this regard depending on the business sector. This is addressed under Certification and Compliance. Appropriate technology and practices exist in this regard from physical security of premises
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and systems to the controlled access to data. The management team must be prepared to invest in those, and then to uniformly enforce the policies and procedures. 6. Certification and Compliance This is an area that appears to be getting reasonable attention by PSEB and the leading companies. The challenge is that there is no broad-based certification that would cover the diversity of call center and BPO sectors already active. It is in the nature of business that excellence in any sector can be achieved by focusing specifically on the needs of that sector, and the same can be said of training and certification. This area, too, can be helped by narrowing the focus to a few BPO sectors, and then ensuring that expertise is made available for certification training, auditing, monitoring and remedial activities. Depending on the BPO sector, there may also be a need for conformance to and compliance with appropriate regulations. Again, this requires awareness, training, and then enforcement of the appropriate regulations within the team in order to ensure that service delivery conforms to the regulatory requirements. Examples include Sarbanes- Oxley for corporate governance and financial reporting, HIPAA for the protection of personal health information, Do Not Call Registry for call centers etc. By focusing on a few BPO sectors, the industry as a whole can invest in the appropriate training and auditing services, and collectively develop the expertise and knowledge to be a sustainable and viable service delivery location. 7. Domestic BPO This recommendation will require a little time to implement and to be fruitful, and is not perceived to be an instant panacea. PSEB, the Ministry of IT, and the GoP in general, should encourage the expansion of domestic BPO. This will be based on the same value proposition as in the global markets, i.e. organizations can outsource tasks and service not considered a part of their core competency. Depending on the size of such organizations, there may be significant cost savings due to the efficiencies of the process. In turn, the BPO service delivery organizations specialize in particular types of service delivery as their core competency and can attain economies of scale. The flourishing of the domestic BPO market will help foster processes and skills that can then be leveraged in the global BPO services delivery marketplace. Summary of Companies Visited/ Questionnaire Completed Companys name, address and primary Focus 1 Alt Source Communications, Karachi 9-Feb-05 Yes Outbound call center; target market: financial industry 70 Feb-03 2 etilize, Inc., Karachi 9-Feb-05 Yes Product information centric solutions to online sellers. Target markets include: IT, CE, Hardlines, Softlines and other consumer product retailers and distributors 180 2000 3 Hanover Outsourcing (Pvt) Ltd., Karachi 9-Feb-05 Yes Provide accounts prep and other services of a comparable or higher quality at a fraction of local costs to small/medium accountancy firms in the UK 5 (full-time); others on secondment Oct-04
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4 The Resource Group, Lahore 10-Feb-05 No Call center 200 CSRs Oct-02 5 Accountancy Outsourcing Services, Lahore 10-Feb-05 No Variety of global and domestic outsourced services. Started out with accounting/bookkeeping outsourced from UK in 1998, but now this is negligible part of business. 130 1998 6 Sequel Systems, Lahore 10-Feb-05 No Develops Medical Practice Management Software, and provides outsourced billing services for software clients 30 2003 7 AdamSoft International, Lahore 10-Feb-05 No Develops Medical Practice Management Software, and provides outsourced billing services for software clients 120 2000 8 MPS Call Center, Lahore 10-Feb-05 No Call center providing customer care for prepaid phone cards 80 Apr-04 9 i2c inc., Innovative Pvt Ltd. Software Division., Lahore 11-Feb-05 No Develops financial services and transaction processing system software. Have ASP solution for prepaid cards, credit cards, debit cards, gift cards etc. Have POS activation system. Provides related services, such as billing/accounting and network support. Ca 200 1985 10 Systems (Private) Ltd., Lahore 11-Feb-05 Yes Company has two major divisions: BPO and software products and services. In BPO, current domestic focus is on retail and cash management services, and in USA on the mortgage-banking sector. 400 Dec-77 11 LMK Resources, Islamabad 14-Feb-05 Yes Petroleum IT Company specializing in E&P Data Management, E&P Consultancy and IT solutions and services to a large number of global clients including MNCs, NOCs, Governments, Public Sector Orgs in several market sectors. 500+ As Mathtech in 1994 12 Voxel Communications, Islamabad 14-Feb-05 No Call center 155 Sep-03 13 Call Central, Islamabad 14-Feb-05 No Call center 100 Jun-03 14 THK Solutions Private Ltd., Karachi1 15-Feb-05 Yes Developing apps for Financial and Government sectors. Target market is banks and financial institutions, and Government Departments with a large to very large branch network spread throughout the country. Customer list consists of: Habib Bank, United Bank, 140+ May-00 15 The Resource Group, Karachi 16-Feb-05 No Call center 150 CSRs Sep-04 16 Sidat Hyder Morshed, Karachi 16-Feb-05 No Outsourced software development 17 InfiniLogic (Private) Ltd., Karachi 17-Feb-05 Yes To form the largest and most sophisticated IT
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services, in the form of well structured and quality processed business solutions for our clients. Current clients in UK. Also operate as international call center for clients 90 Oct-03 18 Arwen Tech (Pvt.) Ltd., Karachi 17-Feb-05 Yes Call center, consulting, technology, outsourcing 170 5-Sep-01 19 PIA Contact Center (NCR Corps BPO for PIA), Karachi1 17-Feb-05 Yes Customer care (call center) 150 2002

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7. HIGH LEVEL ANALYSIS OF PROSPECTIVE OUTSOURCING AND OFFSHORING VENDORS A successful offshore outsourcing relationship facilitates harnessing the vendors strengths to deliver results in line with the outsourcing companys business needs. Vendor Analysis, as such, is the most important stage for successful outsourcing initiatives. Most of the large organizations have gone past this stage and have established outsourcing relationships with some of the large global vendors and have now have inveterate outsourcing processes in place. The following global vendors of IT services and Software occupy the majority of outsourcing revenue over 43 % or US$ 102 billion1: o IBM o EDS o CSC o Accenture o ACS o Unisys As regards the BPO sector, the top 10 global BPO vendors, including the following, have 28 % share of the market size, i.e., US$ 54 billion: o ADP o Convergys o Ryder o Ceridian These companies generally provide facilities management services to major corporations. Second-tier vendors specialize in handling niche markets, either vertically within an industry or horizontally across a range of services. In telecom call center outsourcing, the major players are the legacy telecoms, although there are a number of important niche players. The next level of vendors are those that focus specifically on enterprise network services, starting from outside the corporate firewall. AT&T was the earliest provider in this sector. Other telecoms, including Sprint, WorldCom and Qwest, participate in this niche. Concurrently with telecoms moving into the outsourced networked management market, IT outsourcers such as CDC, ACS, and EDS are also beginning to offer telecommunication services and call center support as part of their call center offerings. Whether to target the end user companies or the global vendors were the two competing choices in the development of our strategy for generating outsourcing revenues. Upon detailed analysis, however, there proved to be overwhelming reasons for targeting global vendors. As mentioned earlier, a small number of global vendors have about 43 % of IT Services and 28 % of BPO Services revenue. Targeting global vendors, therefore, instead of end-user companies who would require door-to-door selling - offers a
1

NASSCOM Report
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more feasible and direct probability of outsourcing success. This is analogous to establishing sales relationships with dealers instead of end consumers, who would require far more resources and lesser probability of success per contact, translating to increased per dollar expenses.

7.1.

IT Services Vendors

7.1.1. Employment base

The employment base of the ITPS global vendors is no less impressive. Accenture, IBM Global Services, EDS and CSC collectively employ approximately half million people between themselves, out of which about 12 % are working at their at offshore locations, with Accenture having the highest 18 %, closely followed by EDS with 15 %. IBM and CSC have about 9 % and CSC 4 % employees at offshore offices, respectively1. Also, their offshore locations are spread all over the globe from Far East, South Asia, China, Europe, Canada and South America. In relatively saturated offshore locations like Ireland and the Netherlands, it has taken nearly 10 years for wages to increase from 50-75 % of those in the US. However this will take 25-30 years in locations such as Pakistan because of lower initial wages and a constantly growing educated work force2. The following table shows the number of employees of the top global vendors, along with the percent of offshore based employees:
Table 32: DETAILS Table : Offshore Presence of Leading Global IT Services Vendors ACCENTURE IBMGS EDS
1

CSC

Total employees 102,310 (nos), Offshore 18,200 employees (nos), Offshore 17.8% employees % Span of delivery global Czech Republic, China, India, manila, Philippines, Poland, Slovakia, Spain

170,000 15,000 8.8%

130,000 20,000 15.4%

92,000 3,300 3.6%

Argentina, Peru, Australia, India, Belarus, Brazil, Canada, Ireland, Colombia

Argentina, Canada, Republic, Hungary, Mexico, Malaysia, Africa

Brazil, Czech Egypt, India, Ireland, South

India, Ireland, Malaysia, Mexico, south Africa and Singapore

7.1.2. Revenue base

The following table contains some useful information about the leading global vendors who provide services onshore/onsite as well as offshore and accordingly have two different rates, higher for onshore/onsite and lower for offshore. The average rate is called blended rate. It will be seen from the
1 NASSCOM Report 2 http://www.outsource2india.com/why_outsource/articles/call_centers.asp

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same that onshore rates are as high as US 121 per hour and the offshore rates are as low as US $ 11 per hour and that that the average rate in India is about US $ 25 per hour1.
Sr # Vendor HQ Rates (US $) Projected Revenue in year Offshore 11 20 25 28 25 29 27 28 48 27 43 35 33 55 58 89 NA 2005 (US $ m) 1 395 438 562 30,922 1,009 22 221 19 264 732 20 30 53,469 1,404 5,856 7,408 Number of Developers

Blended 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 Aragon NIIT Satyaram Wipro EDS Tata Systech Cognizant Delphi Perot Infosys Planetasia Trigent IBM Keane Accenture CSC Bel Ind Ind Ind US Ind Pak US UK US Ind Ind Ind US US US US 23 32 35 38 38 39 44 46 48 51 55 55 59 61 68 94 NA

Onshore/Onsite 50 59 59 63 67 64 68 88 48 107 82 100 121 76 93 106 NA

10 4,000 10,600 10,000 45,000 16,000 115 3,900 140 3,000 10,000 380 175 31,000 8,000 15,000 18,000

7.2.

Market Leaders

Further details on the leading ITPS global vendors are provided below and their client list is attached as an Annexure to this report. The worldwide ITPS market is fragmented, with the top ten vendors accounting for 43% of the Market. The Big Three (IBM, EDS, CSC) together control nearly one third of the global market.

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7.2.1. IBM Global Services

IBM is considered the overall leader in the ITPS sector, due to scope and sales volume. IBMs Global Services provides business innovation services, integrated technology services and strategic outsourcing services. IBM focuses on managing processes that complement a companys mission- critical activities. IBM Offerings o Transformational Outsourcing (outsourcing as an aid to restructuring for e-business) o Application Management Outsourcing o E-business Hosting Services o Data Center Outsourcing o Network Outsourcing o Managed Storage Services

7.2.2. Electronic Data Systems (EDS)

EDS is primarily known for IT facilities management services for global clientele. Service provided may be broadly categorized into IT solutions, business process management and consulting. IT solutions include network and system operations, data management, field services, application development, Internet hosting and web site development and management. EDS serves more than 9,000 accounts around the world. EDS Offerings o Application Service Outsourcing o Enterprise Application Hosting o Extended Enterprise Integration o Application In-Sourcing o Business Process Outsourcing (including HR, Finance, CRM) o E-Business Outsourcing

7.2.3. Computer Sciences Corporation (CSC)

CSC is a leading IT provider of IT services to commercial and government entities worldwide. It offers a broad range of services, including consulting, outsourcing, and system integration. CSC Offerings o Business Process Outsourcing, which focuses on energy industry offerings, financial services, health services, and HR services o IT infrastructure outsourcing
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o Network Management Outsourcing o Application Outsourcing


7.2.4. Accenture

Accenture is a major provider of outsourcing services, with an approach based on transformation of business processes. The company has 350 clients in 21 industries on six continents around the world. Outsourcing ranges from single customized solutions to netsourcing or providing standardized solutions to multiple users over the Internet. Accenture Offerings o Business Transformation Outsourcing o Business Process Outsourcing o Application Outsourcing o Technology Infrastructure Outsourcing

7.2.5. Unisys

Unisys focuses on delivery of e-business solutions to customers in 100 countries around the world. More than 70% of the companys sales come from consulting and integration services, mostly for niche customers in the United States. Unisys Offerings o Business Process Outsourcing o IT Outsourcing o Managed Application Services o Network Services Outsourcing (including security infrastructure)

7.2.6. Affiliated Computer Services (ACS)

ACS is a Fortune 1000 information technology provider with operations in North America, Central and South America, Europe, and Middle East. The company provides a full range of services, including technology outsourcing, business process outsourcing and professional services to more than 10,000 clients worldwide. ACS Offerings o Business Process Outsourcing (including accounting, billing call centers and transaction processing) o System and Integration Outsourcing o E-Solutions Outsourcing
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7.3.

Business Process Outsourcing Market

The following table shows the Sector-wise revenue of the leading BPO vendors. It will be seen from the same that the Logistics and Supply Chain Management occupies the highest share i.e., US $ 18.42 billion, followed by Document management and Finance and Accounting at US 12.20 and 9.21 billion respectively. It is also of interest to know that the Logistics and Supply Chain Management essentially require higher degree of onshore presence and as such less percentage of this sector would be potentially offshoreable than the other sectors like Finance and Account and HR, which do not have such limitations.
Table 33: Vendor Name ADP Head Quarter U.S Leading BPO Vendors
4

Revenue Sector Billion US $ 5.20


Finance and Accounting

Expertise and Related Revenue


The company is one of the largest payroll and tax filing processors in the world Provides payroll and tax processing, benefits administration, human resources information systems, and related services to customers Provides services such as billing, human resources administration, and customer care The company provides a variety of HR related services including payroll, organizational change management, talent and reward consulting, and the largest portion of the company's business -benefits outsourcing.

Ceridian

U.S

0.85

Finance and Accounting

Convergys

U.S

1.63

Finance and Accounting

Hewitt

U.S

1.50

Finance and Accounting

OPI

U.S

0.04

OPI's finance and accounting services include accounts payable and receivable; Finance and Accounting bank reconciliation; billing; collections; financial reporting; inventory accounting; and payroll.

SECTOR TOTAL ADP U.S

$9.21 2.80
Human Resources The company is one of the largest payroll and tax filing processors in the world Provides payroll and tax processing, benefits administration, human resources information systems, and related services to customers Provides services such as billing, human resources administration, and customer care

Ceridian

U.S

0.46

Human Resources

Convergys

U.S

0.88

Human Resources

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Vendor Name

Head Quarter

Revenue Sector Billion US $

Expertise and Related Revenue


The company provides a variety of HR related services including payroll, organizational change management, talent and reward consulting, and the largest portion of the company's business -benefits outsourcing.

Hewitt

U.S

0.81

Human Resources

SECTOR TOTAL

$4.94
The company's Fleet Management Solutions (FMS) segment acquires, manages, maintains, and disposes of vehicles for commercial customers. *Logistics and Supply Similarly, the Supply Chain Solutions (SCS) segment provides logistics and supply chain Chain Management services from industrial start (raw material supply) to finish (product distribution). Ryder also offers Dedicated Contract Carriage (DCC) services The world's largest package-delivery company, UPS transports more than 13 *Logistics and Supply million packages and documents per Chain Management business day. The company also offers supply chain management services. BAX Global arranges the transportation of *Logistics and Supply freight by ocean and chartered aircraft and acts as a broker to clear items through Chain Management customs. Arranges domestic and international freight transportation through a network of more *Logistics and Supply than 8,000 providers. In addition, Schneider Chain Management Logistics offers logistics software (SUMIT) and freight bill payment services World leader in cross-border express *Logistics and Supply deliveries, and a major provider of logistics Chain Management and freight forwarding services Freight management, supported by services, information *Logistics and Supply consultancy management and focused specialist Chain Management services. *Logistics and Supply Transportation, e-commerce, business Chain Management solutions and supply chain management

Ryder

U.S

2.60

UPS

U.S

1.60

Bax Global

U.S

1.00

Schneider Logistics U.S

0.05

DHL

Germany

3.50

Exel

U.K

6.00

Fedex SECTOR TOTAL

U.S

3.67 $18.42

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Vendor Name

Head Quarter

Revenue Sector Billion US $

Expertise and Related Revenue


Offers inbound call handling for customer service requests, technical support, and order taking. SITEL also offers outbound telemarketing, database and list-building services, and direct response marketing. Offers a variety of outsourced call handling and customer management services, including support, customer acquisition and retention, and service provisioning for telecommunications providers. Its also offers call handling, direct marketing, and data management services for automakers and auto dealerships through its Direct Marketing and Consulting business segment.

Sitel

U.S

0.96

Customer Care

Tele Tech

U.S

1.00

Customer Care

SECTOR TOTAL

$1.96
E-Commerce/Retail Building Materials/Business Process Outsourcing/Business Process Consulting The company provides Internet-based procurement application services that make the purchasing process less timeconsuming.

Prosero

U.S

0.12

Procurement

ICG Commerce

U.S

0.51

Procurement

SECTOR TOTAL

$0.63
IKON Office Solutions sells and leases copiers, printers, fax machines, and additional office equipment. The company Document management also provides services such as document management outsourcing, electronic file conversions, facilities management, and training. Xerox is best known for its color and blackand-white copiers, but it also makes printers, scanners, and fax machines. The Document management company sells document management software and copier supplies, offers such services as consulting and document outsourcing

Ikon

U.S

4.70

Xerox

U.S

7.50

SECTOR TOTAL

$12.20

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Vendor Name

Head Quarter

Revenue Sector Billion US $

Expertise and Related Revenue


One of the largest records storage and information management companies in the world. The company stores paper documents, computer disks and tapes, microfilm and microfiche, audio and videotapes, film, X-rays, and blueprints. A leading processor of financial data, Fiserv provides check processing, software development, business support, insurance claims processing, health plan management services, transaction processing, and other data processing and related services.

Iron Mountain

U.S

1.90

Data Management

Fiserv

U.S

3.80

Data Management

SECTOR TOTAL

$5.70
It offers both inbound and outbound call handling for such things as customer support and technical assistance, as well as sales and marketing and order processing.

West Corp

U.S

1.20

Tele Marketing

Lason

U.S

0.29

Facility Management

The firm helps document- and dataintensive companies streamline such business processes as accounts receivable, claims processing, electronic medical records management, and loan processing

OTHER SECTORS REVENUE $1.49 TOTAL BPO REVENUE $54.54

* This is 50% of the total revenue earned by Logistics and Supply Chain Management providers as outsourcing constituted 50% of the total revenue.

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Figure 10: Leading vendor BPO Sector Revenue


Values in U.S. Billion Dollars

5.70

Other 1.49

4.94

12.20

Procurement 0.63

Human Resource 18.42 Logistics & SCM Finance and Accouting Customer Care

Customer Care 1.96

9.21

Procurement Document Management Data Management Other

7.4.

Future Prospects

Network services outsourcing represents an increasingly popular option as networked systems become more commonplace, skill shortages continue and infrastructure requirements become even more complex. The market is moving away from the total outsourced facilities management model toward selective outsourcing and BPO, which provide more flexibility and are more attractive to smaller organizations. Network services outsourcing clearly represents a strong trend for the future, despite some recent setbacks, as the market seeks to define itself. The current economy has tended to sharpen the focus on selective outsourcing, rather than complete facilities management, and it has impacted some of the major players as companies seek to renegotiate long-term contracts and redefine services to reduce expenditures. This sector, as such, needs to be targeted, especially because indigenous skills can be made available in a relatively shorter frame of time, through the training of the IT resources.

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7.5.

Global ITPS Vendor Survey Report

7.5.1. Introduction 7.5.1.1. Rationale for Survey

In April 2005, the Pakistan Software Export Board (PSEB) engaged BearingPoint to conduct a survey of Business Process Outsourcing (BPO) vendors in order to further understand the views of vendors active within this industry. The survey was designed to gauge both opinions of outsourcing to Pakistan in particular, as well as thoughts on outsourcing in a more general context. The ultimate aim of the survey is to develop a more thorough understanding of those factors that would make Pakistan an attractive location for offshore outsourcing.

7.5.1.2. Survey Methodology

BearingPoint developed the survey as a result of conversations held with PSEB in Islamabad during the week of April 18, 2005. The blank survey form is attached to this report as Appendix A. In agreement with PSEB, BearingPoint initially aimed to target approximately 20 BPO vendors for completion of the survey. However, given the anticipated challenge of facilitating responses from the appropriate representatives at the various organizations, BearingPoint broadened the initial target list of companies to over 65 (a complete list/contact log of vendors is provided as Appendix B). In including vendors on the target survey list, BearingPoint considered several factors. First, the team included those companies considered among the best managed in 2005, as announced by the Black Book of Outsourcing in April 20051. Second, we drew from a listing published by Managing Offshore (a monthly newsletter for global-sourcing managers) of the "top 100 global companies that demonstrate leadership, innovation and outstanding performance in information-technology and business process outsourcing.2 " From the first list, we omitted companies based in India. From the second, we included only those based in the US/Europe. To further round out the target list, we included other companies identified through various sources, such as through BearingPoint industry contacts, as significant players in the BPO industry. Among the target list included those companies considered to be the main players in this market space, including, for example, Accenture, ACS, CSC, EDS, HP, and IBM.3 Conduct of the survey took place from April 25, 2005 through May 20, 2005, with BearingPoint reaching out to the over 65 targeted vendors. In total, the BearingPoint survey team engaged in a combination of more than 250 telephone calls/emails. From this extensive outreach, 17 vendors in total completed the
1 2

12 Indian firms among 50 best BPO vendors. April 13, 2005. <http://www.rediff.com/money/2005/apr/13bpo2.htm>. Meet the Offshore 100. Managing Offshore/neoIT 2005 Offshore 100 Study. <http://www.managingoffshore.com/0105_winners.html>. Note that while we focused on companies based in the US and Europe, in several instances we were subsequently forwarded to their operations in India. For this reason, there are several cases where the survey was actually completed by an India-based contact.
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survey with BearingPoint. An additional 9 companies declined to take the survey, for various reasons. The team was unable to obtain any response from the remaining companies despite repeated efforts to do so.
7.5.1.3. Results and analysis

Results from the survey and associated analysis are provided below, according to the questions as posed in the survey and based on the responses received from the 17 companies surveyed. Please note that in order to preserve the anonymity of vendors responding, specific company names have not been provided herein.
7.5.1.4. Outsourcing Locations

Question 1 of the survey asked respondents to provide details on where they outsource the majority of their clients work. As shown in Figure 1 below, the majority of respondents (65%) indicated that the bulk of their work is being outsourced to India, with any other outsourcing locations only secondary. Of these 65%, several companies did indicate they are using multiple locations in addition to India. For example, one company indicated it also outsources work to many other locations worldwide, including China, Poland Costa Rica, Mexico, Tunisia and Malaysia. 35% of respondents indicated that they outsource the majority of their work to Other locations. In particular, locations cited within this category included the United States, Europe, Canada and the Philippines. Indeed, several vendors specified the Philippines and expressed high levels of satisfaction with the outsourcing they are doing there. None of the survey respondents indicated that they outsource the majority of their work to China.
7.5.1.5. Activities Outsourced

Question 2 asked respondents to detail which outsourcing activities they currently assist in outsourcing. Respondents could choose from the following: Software Development/Support Business Processes (BPO) Data Conversion Digital Content Creation Contact Centers Other All 17 vendors responding indicated that they outsource more than one category of activity. As shown in Table 1, below, the largest categories for outsourced activities included software development/support and business processes. Many of the vendors also maintained contact center outsourcing activities. Within the category of Other companies mentioned the following activities: IT infrastructure; customer service; billing and collections; order entry; applications management; infrastructure applications development and maintenance; as well as human resources, payroll and financial accounting.
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Table 34: Software Development/ Support Total Responses/ Category

Table 1. Activities Outsourced, by Category Data Conversion Digital Content Creation

Business Processes (BPO)

Contact Centers

Other

14

15

7.5.1.6. Types of Outsourcers

Question 3 queried the types of outsourcers utilized by vendors. As represented in Table 2, the majority of companies indicated that they utilize captive facilities, or a combination of captive facilities and other resources. One vendor specified in particular that they use captive facilities together with other offshore subcontractors, who handle overflow and/or work requiring skill sets they do not possess in-house. For each of the 3 responses within the Other category, it was indicated that companies do the outsourcing themselves, thus in reality reflecting further the prevailing use of captive facilities.
Table 35: Captive Facilities Outsourcers Utilized, by Category Offshore contractors subOnshore contractors Other

Total Responses Category

11

7.5.1.7. Criteria in Evaluating a Potential Offshore Location for Outsourcing

Question 4 asked respondents to rank a series of criteria in evaluating a potential offshore location for outsourcing work. As shown in Table 3, below, respondents ranked the availability of labor with the required skills of highest importance in considering an offshore location. Second and third most important included English language capabilities and political stability, respectively. Ranked as least important included time zone advantages and incentives. Several survey participants did offer additional criteria they consider to be very important in considering a potential offshore location. These included the perception of their clients regarding the location and intellectual property rights. A further comment was provided that language skills in general, beyond English, are important for a potential outsourcing destination.

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Table 36:
Ranking (Total Companies Giving Factor This Rank) 5

Criteria in Evaluating an Offshore Location for Outsourcing


4 Important 3 Somewhat Important 2 Not Very Important 1 Not Important

Very Important

Total Companies Responding

Average Ranking

Availability of Labor with Required Skills English Language Capabilities Political Stability Low Labor Costs Legal Regulatory Framework Size of Pool/Annual Graduates Qualified Contractors Incentives Criteria Time Advantages Zone and

13 10 10 9 9

2 5 5 4 4

1 1 0 3 3

0 0 1 0 0

0 0 0 0 0

16 16 16 16 16

4.75 4.56 4.50 4.38 4.38

Labor 6 Local 8 2 0 0 16 4.25

3 0 0

6 8 3

4 6 7

1 1 3

2 1 3

16 16 16

3.44 3.31 2.63

Pakistan as an Outsourcing Location


7.5.1.8. Consideration of Pakistan Generally

Question 5 inquired if respondents have ever considered Pakistan as an outsourcing location. Of the 17 vendors completing the survey, only 2 responded in the affirmative. Of these, one company declined to provide any further input to the question, and the other offered a comment that political instability and the threat of terrorism kept them out. Excerpted below are comments (provided anonymously) explaining reasons for not considering Pakistan. Prime Rationale: Just didnt ever look at Pakistan Vendor Comment: Most likely they havent considered Pakistan because there has been no customer demand. As well, they havent seen value in going there. Vendor Comment: Just didnt ever look at Pakistan.

For this study conducted by BearingPoint, of the total 17 total companies responding to the survey, only 16 responded to this particular question.
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Vendor Comment: The outsourcing locations are driven by our worldwide global sourcing strategy. Having said that there are quite a few outsourcing destinations that (we have) considered as proven outsourcing locations based on various factors such as competition, rankings of locations by industry analysts, availability of talent pool in line with our strategy, maturity of these outsourcing locations, outsourcing maturity of service providers (ability to deliver services and handle large size contracts based on historical trends), infrastructure availability and costs, political and economic conditions, etc. Vendor Comment: There is no real reason they are NOT considering Pakistan. Would be willing to consider Pakistan. Prime Rationale: Already in India Vendor Comment: Just got into India - July 2004 Vendor Comment: Havent considered Pakistan because we are already in Bangalore and therefore have no need. Vendor Comment: "We were not familiar with the capabilities of Pakistan in this area. India is catering to the present demands." Vendor Comment: "We have already invested in India and have sufficient growth capacity there for the mid-term future." Prime Rationale: Perception of political/regional instability Vendor Comment: Dont think the political situation in the country is conducive to setting up operations.would be hesitant to make a trip there. Vendor Comment: Political instability Pakistan brings up image of CNN. Vendor Comment: Regional instability and the need to reduce terrorism. Vendor Comment: High political instability. Low awareness on resource pool, skills sets, potential locations, quality of physical and telecom infrastructure in the country. Vendor Comment: Lack of knowledge (about the country). Perception of political situation. As indicated by the above, three primary reasons were indicated for not considering Pakistan. In the first case Just didnt ever look at Pakistan, companies did not express any strong reasoning for not going into Pakistan, primarily just a lack of knowledge and consideration of the opportunities there. The next reason, Already in India, is fairly straightforward companies already have operations set up in India and are content with those arrangements. Finally, several companies expressed reservations in looking at Pakistan given the perception of political/regional instability.
7.5.1.9. Pakistan Rankings as a Location for Offshore Outsourcing

Question 6 requested respondents to rate Pakistan as a location for offshore outsourcing work, based on a series of criteria. As shown in Table 4, below, ratings were generally low, with many respondents ranking several factors as unknown. This included, for example, two criteria - investment incentives and company taxation and fees - where 14 companies out of 17 expressed a lack of any knowledge at all.
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The most positive factor, still only receiving a combined ranking of average (due to several companies lack of knowledge) was labor costs. Notably, 11 companies ranked Pakistans general business reputation as Poor.
Table 37:
Ranking (Total Companies Giving Factor This Rank) 5 Very Good

Pakistans Ratings as a Location for Offshore Outsourcing


4 Good 3 Average 2 Poor 1 Very Poor 0 Unknown

Total Companies Responding

Average Ranking

Labor Costs General Business Reputation Telecommunications/Other Infrastructure Bureaucracy/Red Tape Availability of Required Skills Political Stability Awareness of Industry/Trends Marketplace Legal and Regulatory Framework for ICT Intellectual Property Protection Contractors with CMM/ISO Certification Investment Incentives Criteria Company Taxation and Fees

5 0

6 1

1 3

1 11

0 1

4 1

17 17

3.18 2.12 2.00

17

0 0 0 0

1 2 1 3

5 5 2 2

4 2 5 3

2 2 7 1

5 6 2 8

17 17 17 17

1.71 1.71 1.59 1.47

17

1.12

17

0.74

12

17

0.53

14

17

0.41

14

17

0.35

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Judging from these rankings, and especially the number of unknown responses, Pakistan has much work remaining to increase awareness of Pakistan as an outsourcing location and to improve its image in many areas ranging from general business reputation to political stability to legal and regulatory framework for ICT. Further, while not on the list of criteria in the survey, two respondents also indicated that language capabilities are important when considering an outsourcing location. This includes capabilities beyond just the English language.
7.5.1.9.1. Criteria in Considering Pakistan for Offshore Outsourcing Needs

Question 7 asked respondents to evaluate a series of criteria according to importance in considering Pakistan for their clients' offshore outsourcing requirements. As indicated in Table 5, vendors ranked improvement of the legal and regulatory framework for ICT as the most important criteria for seriously considering Pakistan for clients offshore outsourcing requirements. Following this were the development of educational capabilities/skills and a reduction of bureaucracy/red tape, respectively. Among the least important criteria were ranked the establishment of alliances with IT/software corporate schools, as well as the development of software/technology parks. In general, however, on average all factors were ranked as at least important, indicating that Pakistan should focus at least some level of effort on improvement within each of these areas.
Table 38:
Ranking (Total Companies Giving Factor This Rank) 5 Most Important

Criteria in Considering Pakistan for Offshore Outsourcing


4 Pretty Important 3 Important 2 Somewhat Important 1 Least Important

Total Companies 2 Responding

Average Ranking

Improve Legal and Regulatory Framework for ICT Develop Educational Capabilities/Skills Reduce Bureaucracy/Red Tape Criteria Improve Telecom Facilities and Reduce Costs

15

4.40

14

4.36

14

4.29

13

4.23

1 2

BearingPoint Study Not all vendors responded to every question. In some cases, vendors chose to provide comments on what steps they believe Pakistan needs to take independent of the questions. These comments are noted separately.
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Provide Incentives for ICT Activities Increase Awareness ICT Location as

14

4.04

16

3.94

Enhance Qualifications of Local Companies Develop Software/Technol ogy Parks Establish Alliances with IT /Software Corporate Schools

13

3.85

14

3.61

13

3.38

An additional concern expressed by multiple vendors was the need to improve political stability (this was ranked as a 5 by one company) and stabilize the region. A specific comment was that there is a need to improve Pakistans Transparency International Corruption Perceptions Index (CPI), which is essential for financial services clients. Another vendor indicated that they do not know much about Pakistan, and that, in their position, they have had hundreds of conversations about outsourcing destinations and Pakistan has come up not once. This vendor indicated that they would even consider outsourcing to West Africa1 over Pakistan because West Africa does pretty good marketing in the U.S. Companies also expressed their opinion of the importance of multi-language capabilities and availability of recruiting companies. Further, a particular recommendation of one vendor is that Pakistan needs to develop testimonials with compelling project examples of U.S.-based companies that have been able to successfully operate in Pakistan. The country should use such stories to create mileage and that will attract companies.
7.5.1.9.2. Learning more about Pakistan

The final question was designed to gauge if respondents would be interested in learning more about Pakistan's value proposition as a location for outsourcing. If so, respondents were asked where they might be interested in attending a workshop. Of the 17 companies surveyed, 7 expressed interest in learning more about Pakistans value proposition as a location for outsourcing. Of these, 3 were interested in attending a US-based workshop, while a further 3 were open to a workshop located in either the US or Pakistan. 1 indicated that electronic media would suffice. See Table 6 for full contact details for each of these companies.

Ghana and Nigeria in particular were mentioned as appearing to market themselves heavily at industry events as destinations for outsourcing.
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Table 39:

Companies Interested in Learning More about Pakistan

Name of Contact Company/Website Name/Title


Aon Human Resources Outsourcing www.aon.com Convergys www.convergys.com Joy Kay Hatfield, Sr. Director, Offshore Business Development Pramod Murari, Vice President Efunds International India Pvt.Ltd. www.efunds.com Vipul Khanna, Vice President Larry Kurzner, Senior Vice President

Contact Information
Tel: +1 212 441-1280 (office); +1 917 860-1429 (mobile) Email: Larry_Kurzner@aon.com

Date Interviewed
May 18, 2005

Workshop Location
USA or Pakistan if trip is sponsored

Tel: +1 513-784-6585 Email:Joy.Kay.Hatfield@convergys. com

May 11, 2005

Pakistan or USA (Location doesnt matter, though cost would be a factor.) Pakistan or USA

Covansys www.covansys.com

Tel: +91 80 25268694 Email: RPMurari@covansys.com

May 10, 2005

Tel: +1 414 341 6620 Email: Vipul.khanna@in.efunds.com

May 16, 2005

Pakistan or USA

Secova eServices, Inc. www.secova.com

Rob Berger, Vice President, Global Operations Dan Morley, Vice President, Global OnDemand Services Jayakishore Satla, Manager Marketing

Tel: +1 732-836-3800 Email: rob.berger@secova.com

May 5, 2005

USA

Teletech Holdings, Inc. www.teletech.com

Tel: +1 303-397-8228 Email: danmorley@teletech.com

May 10, 2005

USA

Unisys Global Services India www.unisys.com

Tel: +91 80 51594267 Email: jayakishore.satla@unisys.com

May 16, 2005

Neither Pakistan nor US. Prefer electronic media.

BearingPoint Study
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7.5.2. Conclusions

Throughout the conduct of the survey, vendors expressed repeated similar views on Pakistan, based upon which further strategy can be developed. Overall, the following points can be gleaned from the survey: In general, vendors consider the availability of labor with required skills as the most important in selecting an outsourcing destination. Other important factors are English language capabilities and political stability. Less important are time zone advantages and incentives. Companies have a lack of information about Pakistan, and in general have not considered Pakistan as an outsourcing location. In some instances where there are views of Pakistan, they tend to be influenced by negative views of political and regional instability. For many factors Pakistan was rated between very poor to average, with its labor costs being ranked as its most favorable criteria. Based on the survey, among the most important criteria companies cited in considering outsourcing destinations are legal and regulatory framework for ICT, the development of educational capabilities/skills, and the reduction of bureaucracy/red tape. Beyond this, each of the criteria considered by vendors did receive generally high rankings in this area, leading to the conclusion that Pakistan should seriously consider improvement in each of these factors.

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8. STRATEGY FOR INCREASING EXPORTS OF ITPS


8.1. Introduction

One of the major factors inhibiting growth is the absence of a comprehensive and workable strategy to promote ITPS sector growth. Pakistan requires a strategic direction for removing barriers, creating enabling environment, improving delivery capability and generating demand. There must be an equal emphasis on all fronts. This section covers the proposed strategy, as well as some additional background information relevant to the strategy developed by us, e.g., key security concerns of clients, overview of the ITPS industry of China, Analysis of some major ITPS destinations, Technology zones of other countries, Strategy adopted by other countries for ITPS industry promotion, SWOT analysis of the local ITPS industry, etc. The strategy covered in this section for the promotion of the local ITPS industry can be categorized into the following: 1. Recommendations for the local ITPS industry. 2. Recommendations to the GoP to remove barriers and create enabling environment and a fully global delivery model. 3. Marketing strategy for targeting the ITPS business. Also, there are three components of the strategy, namely, WHAT, WHY and HOW. WHAT strategies, that should be adopted, are mentioned in this section. The answer to the WHY question emerges from the analysis of the data and the information in the preceding sections 2 through 7 as well as the additional background information available in this section. As regards the HOW The HOW part of the strategy is also premeditated in this section. However, it will be covered more exhaustively in the phase 2 of this project, which is for the implementation of this plan. Before describing the proposed strategies, it is necessary to provide some more background information and analysis, which have also contributed to the development of these strategies.

8.2.

Key security concerns and demands of IT- BPO services clients

As per the search carried out by industry experts, key security concerns and expectations / demands of companies outsourcing IT-BPO services fall under the following two main heads: 1. Policies 2. Processes. The main policy concerns of a client include the legal frameworks of the destination country, and the policy and standards adhered to by the IT-BPO service provider. Some key areas include:

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Foreign companies require the host nation to have a stringent legal framework to deal with data protection and intellectual property rights issues, as in the absence of the same, companies are unable to take legal action against the vendor in case of violations. International security standards such as ISO 17799 and BS 7799, etc., are demanded by companies to ensure information security. A robust verification and auditing process to track processes such as inter alia, the development of a software code and authenticity of a telephone call. In research, customers accord a lot of emphasis on ethical practices followed by vendors in terms of client confidentiality, data sharing etc. There are several security processes that customers expect their vendors to have in place, including the following: Companies demand firewall protection and data encryption capabilities for reliable communication and network security. To avoid theft of data, hardware network access at the floppy disk or CD-ROM level has to be monitored, ensuring that documents do not get copied through electronic or physical means. Controlled access to all production sites through electronic ID-card Vigilance over employee dissemination of critical information via emails, discussion groups, etc. As companies want to stay updated, they prefer remote access to the vendor networks in order to monitor processes and regulate the use of their data There are also some specific concerns regarding BPO vendors: Voice-based vendors are expected to address problems concerning the misuse of client confidential information including addresses, phone numbers, credit card information etc. Client confidentiality is a major concern while outsourcing high-end functions such as equity research, pharmaceutical research, market research, etc. Clients consider network security, personnel security, physical security, and customer privacy and information protection to be critical while outsourcing/Offshoring work. Companies demand various technologies such as intrusion detection systems, firewalls, anti virus software, etc., from offshore vendors.
8.3. Overview of ITPS industry of China

China is both a provider and receiver of IT Professional Services. Its current IT services exports revenue is US $ 1.9 billion per year but it is also the largest market for IT in the Asia Pacific region and one of the fastest growing ITPS markets in the world. This strong growth is driven by rapid economic development, privatization, foreign investment, and large-scale government investment. The Chinese ITPS market is predicted to grow from $2 billion in 2003 to $4.2 billion in 2007, at a CAGR of 20%. This is a direct result of the extremely strong growth of Chinas economy. In addition, Chinas entrance into the WTO has opened the market to foreign competition, spurring investment in IT firms to allow them to better compete in the global arena. Foreign investments are also rapidly increasing, with multinational corporations shifting their production to China.
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This growth is materializing because of various factors: Strongest systems integration growth in the world, fueled largely by massive investment in infrastructure; Consulting services for foreign enterprises attempting to gain access to the Chinese market and strong manufacturing demand for ERP and related business process reengineering given the predominance of small and medium sized businesses in China; mid-market is a focus for all vendors. However, BPO services market is still nascent and faces considerable cultural resistance. Most spending in this sector today is by multinational corporations, with very minimal spending by the domestic forces.

China's IT Professional Services Market Growth (USD Million Dollar)


$5,000

$4,000

356 646 311

$3,000

$2,000

206 296 1,245 297


2003

229 337 1,430 346


2004 Systems Integration

269 412

516

2,543 2,081 1,714

$1,000

$0

422
2005

536
2006

684
2007 Process Management

Consulting

IT Managed Services

The following figure shows the Market Sizing and Segmentation of the IT professional services of China Another important factor is that the Chinese IT Professional Services industry is strongly hardware oriented. China has established itself as a leader of the computer hardware. Computer Hardware is a significant part of the worldwide IT spending and the projected hardware global revenue for the current year is expected to be about US$ 387 billion. The numbers of PCs in use worldwide are expected to increase from 575 million at this time to almost 1.3 billion by the end of the decade. The share of the mature PC markets in Europe, the US, and Asia in this phenomenal increase of about 725 million PCs is projected to be only about 150 million PCs, the rest will be provided by the emerging markets with China leading the way.

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8.3.1. Brief analysis of some major ITPS destinations

CHINA: China is a favorable candidate for offshore outsourcing, enjoying cost and labor pool advantages. It is perceived to be behind India in terms of IT , management training, international certification of its IT and contact center operations. It ranks particularly poorly in the areas of general proficiency in the English language, IP piracy and bureaucratic red tape. The Chinese government is undertaking several measures such as helping local firms in acquiring CMM certifications by covering the cost, facilitating training in partnership with Indian firms, placing emphasis on software development in the academic curriculum and building proficiency in English. INDIA: India is considered to be a favorable location for offshore outsourcing because of its sustained cost competitiveness, rich experience and a large labor force second only to China. However, India ranks below the top ten in terms of the business environment. Infrastructure weaknesses and concerns over economic stability have pulled India down on this parameter. Further, while India is becoming increasingly integrated with the global economy, it is still not as culturally compatible with the western geographies as some of the near-shore options. Indian vendors are addressing these issues by investing in training and by expanding operations to other low-cost (often near-shore) destinations such as Canada (for the US), China and Singapore (for the Asian economies). MALAYSIA: Malaysia is an oft-overlooked contender. The country enjoys low costs, a very conducive business environment, active government support and strong global exposure. However, being a small country it lacks the scale advantage offered by India and China. SINGAPORE: Singapore offers world-class education and infrastructure, high ratings for economic and political stability, IP security and aggressive political promotion of the ICT industry - making it a preferred location for regional service functions. PHILIPPINES: The dominance of emerging Asian nations in the offshore equation is further underscored by the performance of It has designated special Philippines. The country enjoys a favorable cost structure, promising economic zones, five of human resource capabilities, which, while much smaller than India which are suitable for IT, and China, has more students enrolled in universities than most call-center and ITES-BPO European countries. Further, the significant American presence over businesses. Participating the last century has resulted in a generally high level of English companies receive income proficiency in the country - which is a key factor driving the tax holidays, duty free countrys emphasis on voice-based services. The Philippine imports and other government acknowledges the need to improve the countrys image advantages and overall business environment for BPO and related services. Further, the country facilitates IT-ITES related investments by providing tax benefits and forging smoother dealings with the government.

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CANADA: Canada provides excellent business environment, high quality workers, robust infrastructure, and linguistic and cultural similarities with the US market - making it an attractive destination for conservative client firms who would prefer a near-shore solution. Canada has also emerged as an attractive location for Indian companies to expand their operations in order to balance offshore and nearshore service delivery capabilities. Other emerging hotspots for offshore outsourcing include South Africa, Vietnam, Argentina, Romania and South Africa .
8.4. Overview of Technology zones of other countries

8.4.1. Dubai Internet city (UAE)

Dubai Internet City (DIC), which opened in October 2000, provides a Knowledge Economy Ecosystem that is designed to support the business development of Information and Communications Technology (ICT) companies. It is the Middle East's biggest IT infrastructure, built inside a free trade zone, and has the largest commercial Internet Protocol Telephony system in the world. There are now 16 office buildings in Dubai Internet Citywith an 80% occupancy rate. Dubai Internet City is home for about 1,200 companies having more than 10,000 knowledge workers. Construction is soon set to begin on 14 new high-rise towers. The total investment to date by the Dubai Technology and Media Free Zone Authority in the project stands at US$700 milliona figure that does not include land-acquisition costs. A new phase in the expansion of this project will see an additional investment of US$800 million. Internet connectivity is provided at a universal rate of 2Mbit/s. The network core is spread across two separate, fully redundant locations. Separate gateways to Public Switched Telephone Network (PSTN) service providers ensure full redundancy and availability of telephony services, and a dual connection to two separate ISPs helps to ensure the same level of availability for Internet services In line with Dubai's liberal economic policies and regulations, Dubai Internet City offers foreign companies 100% tax-free ownership, 100% repatriation of capital and profits, no currency restrictions, easy registration and licensing, stringent cyber regulations as well as protection of intellectual property. The global ICT giants Microsoft, Oracle, HP, IBM, Compaq, Dell, Siemens, Canon, Logica, Sony Ericsson and Cisco have presence here and these companies represent a community of over 5,500 knowledge workers. The cluster of ICT companies in Dubai Internet City comprise of Software Development, Business Services, Web Based and e-Commerce, Consultancy, Education and Training, Sales and Marketing and Back Office Operations. DIC provides a scalable state-of-the-art technology platform which allows companies looking to provide cost effective business process outsourcing (BPO) services such as call center operations.

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The benefits to the company moving into DIC include: Investment-free infrastructure Reduced operations costs by outsourcing network components Easy and automatic network deployment Flexibility in physical and logical reconfiguration The ability to focus on core business
8.4.2. Special Economic Zones / IT Parks 8.4.2.1. India

The purpose of setting up Special Economic Zones, generally known as SEZs, is to provide a conducive and duty-free environment for manufacturing, services and trading activities related to exports. These special zones were set up in India in April 2000 by the Government and are quite similar in concept to the STP, except that it is not restricted to technology companies only and manufacturing and trading activities are also allowed in the SEZs, albeit for export purpose only. At present, there are 27 SEZs in India, including the erstwhile Export Processing Zones (EPZs), which were converted into SEZs. The units located in SEZs are entitled to import all goods, including capital goods, required for their activities, exempt from customs duties. Following other sops (concessions) are also allowed: Exemption from Central Sales Tax (CST) to units in the SEZ for procurements from the DTA. (The position in relation to excise duty free local procurement is not clear) Local sales tax benefits (in some states such as Karnataka) Services provided to a developer or SEZs for the purposes of development, operation and maintenance of SEZs, setting up of SEZs or for manufacture of goods by SEZs have been exempted from service tax. Transactions from DTA to SEZ to be treated as exports under the Income Tax Act and Customs Act Supplies can be made from SEZs to the Domestic Trade Area (DTA) on payment of applicable duties and subject to prescribed conditions. Private sector is allowed to build and operate an SEZ but there are certain Terms and Conditions that need to be satisfied by the Developer and the Enterprise- the occupant of the SEZ. Tables below list the Terms and Conditions for both the parties.

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Table 40:

Terms and Conditions

SEZ Developer

Only units approved under SEZ scheme would be permitted to be located in SEZ. The SEZ units shall abide by local laws, rules, regulations or bye-laws in regard to area planning, sewerage disposal, pollution control and the like. They shall also comply with industrial and labour laws as locally applicable. The SEZ should have an area preferably of 1000 hectares. Such SEZ shall make security arrangement to fulfill all the requirements of the laws, rules and procedure applicable to such SEZ. Wherever the SEZs are landlocked, an Inland Container Depot (ICD) will be an integral part of SEZs.
Table 41: Terms and Conditions
1

SEZ Enterprise SEZ units have to be a positive Net Foreign Exchange Earner. Performance of the unit will be monitored by a Committee consisting of Development Commissioner of the Zone and Customs. Units shall maintain proper accounts and furnish details regarding value of import, export etc. to Development Commissioner on a quarterly basis.

Apart from these Term and Conditions, the developer also needs to satisfy some other formalities.
8.4.2.2. Philippines

Philippines has designated special economic zones, five of which are suitable for IT, call-center and ITES-BPO businesses. Participating companies receive income tax holidays, duty free imports and other advantages
8.4.2.3. Brazil 2

The government of Brasilia has started to construct a "Digital Capital Project" in a 303-acre area with the objective of having all IT companies from the Brasilia region located in a common area. The main goal is to attract companies from other regions to Brasilia. The Brasilia IT Industries Syndicate (SINFOR) is supporting this project. The Digital Capital Project, as the IT Park is being called, will have 300 to 7,000 m lots to be displayed on company joint-ownership units and company individual units. There will be a designated area for the
1 2

Nasscom Report and BearingPoint Study Source: http://strategis.ic.gc.ca/epic/internet/inimr-ri.nsf/en/gr122939e.html


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establishment of banks, fairs, and events. SINFOR estimates that total costs, including the implementation of infrastructure and buildings construction, will be approximately US$ 87.8 Million.

8.5.

SWOT Analysis of Pakistan as an Alternative ITPS Hub

A review of the internal and external environment is an important part of the strategic planning process. SWOT Analysis has been used to identify the Strengths and Weaknesses and examine the Opportunities and Threats currently faced by the ITPS sector in Pakistan. The strategy would focus on areas where Pakistans ITPS sector is strong and where the greatest opportunities lie. Also, it would enable us to build on strengths, exploit opportunities, remove weaknesses, and develop a strategy for dealing with threats. STRENGTHS Pakistan has lowest cost base (labor and occupancy for a bench mark of 200 full time employees) in the top 36 countries with IT capabilities. Trained and experienced people are available for supporting and maintaining the IT infrastructure. Starting and closing a business in Pakistan is faster than all other countries in comparison. Pakistan is internationally known as a country with IT capability of moderate quality (and quantity) o Pakistani companies have over 7 years of experience of developing Software for the international market o Pakistani companies have more then 2 years of experience of providing BPO services to international clients. Most of the senior management of local BPO companies are seasoned professionals, and possesses good business perspective and communication skills. Many such individuals have prior experience abroad or at other Pakistani businesses. Pakistani companies have gained considerable expertise in certain niche sectors like Banking, Insurance, Finance and Telecom. Major urban cities- Karachi, Lahore, and Islamabad have: o Literacy Rate of about 50 % o Large pool of professionally qualified and experienced people, e.g., MBAs, Accountants, Lawyers, Engineers, Doctors, etc o Availability of Software Technology Parks (STP) and reliable Telecom infrastructure o Concentration of the best educational institutions of the country. o Availability of large number of people who have lived and worked abroad and can partially fill middle management positions (10-20% of the requirement)
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o Average years of education in middle class households (and above) are comparable to any other city in the world. It has large pool of English speaking human capital (approximately 6.5 million). Admittedly, most of these people do not possess the proficiency in the English language to serve foreign clients, but it is estimated that the English language skills of at least 5-10 % of them can be upgraded to that level over a 3- 6 month period through training. It has extremely low Bandwidth Rate, US $ 2,000 per 2 MB Government has taken initiatives to develop and support the ITPS industry in addition to removing barriers to investment. Asian Development Banks initiatives to mitigate security risk by providing guarantee against terrorism and political risks. Continued economic recovery, with projected 7.5% GDP growth, needed to support capital investment and business confidence. Foreign investors allowed 100% ownership of equity in "Software Houses/Software Companies" Tax exemptions for IT companies until 2016 100% repatriation of profits allowed for IT companies 7 years tax holiday for Venture Capital funds The State Bank of Pakistan (SBP) has permitted banks to open Internet Merchant Accounts. Several cellular companies using digital transmission (GSM and TDMA) Pakistan is the first country in this region to establish DWDM telecom infrastructure. WEAKNESSES Perception of Pakistan (acts of terrorism, political issues, etc) reduces business confidence and technology spending Plans. Lack of internal stability and law enforcement Inconsistency in governmental regulations and policies Government of Pakistans change in priority and straying focus from ITPS Unavailability of redundant fibre optic Internet connectivity Unavailability of human capital to fill middle management positions Shortage of trainers and the training facilities for upgrading the English language communication skills of available HR resources. Lack of quality certification of Pakistani ITPS companies from the international professional certification bodies (CMMI, COPC, etc)
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Absence of quality consciousness and culture, which results in poor to moderate quality output. Domestic and international call centres are prohibited to operate under one roof, which is one of the major inhibitor in the growth and maturity of the call centres of the country. If allowed, the call centres can start their life as a domestic call centre and once they gain maturity and experience, can attract international business and can also economize on costs. At present they have to maintain two separate establishments. Furthermore the international call centre start up gets trapped in a vicious cycle because they are unable to get the international business as result of lack of call centre experience. The electricity is charged at commercial rate for the ITPS companies and not at the industrial rate, in-spite of the fact that ITPS has been declared as an Industry. Unavailability of corporate buildings that can house over 1,000 employees, which creates scalability issues and concerns for both the domestic and the international investors. Non-existence of regulatory framework for creation of Virtual Special Economic Zones, which would enable the private buildings to be treated as virtual technology parks, subject to compliance with the regulatory laws. The absence of such a facility would cause huge public sector investment for creation of more technology parks to meet the demand and even then the companies may find it less conducive to their business than their own office premise. Lack of one window operation to set-up business Lack of Intellectual Property Rights enforcement, which is given considerable importance in the vendor location assessment by the outsourcing companies. Small and undeveloped ITPS market. Cultural challenges in convincing corporations to relinquish control of applications, which is an impediment in the growth of the domestic outsourcing capability/maturity. The lack of banking sector capacity to evaluate some long-term credit risk exposures, especially the new investors without credit histories The non-availability of credit history of small companies and consequential problems faced by them in accessing financing Lack of business know-how of IT industry players Lack of venture capital availability in the country Lack of access to the international capital market Lack of understanding of legality and processes involved in ITPS and software products marketing Continued low literacy levels and degradation of education standards which further restrains the availability of IT professionals Poor communication and networking with non-resident Pakistanis and their low support of the local IT industry
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The constant stream of Statutory Regulatory Orders1 (SROs) introduces a high degree of business uncertainty. As a result, the policy environment is felt to be at risk from political, geopolitical, and economic shocks. Further infrastructure investments required to be a successful offshore alternative OPPORTUNITIES Thriving global ITPS market with projected growth of 7 % overall and 11 % in the BPO sector Strong growth predicted in back office services for BPO (HR, accounting, general affairs) and procurement Only 14 % of offshore outsourceable business has been actually offshored. Hence, a large portion of the market remains untapped. Concentration of outsourcing business in the hands of a few global ITPS vendors, which narrows down the area of focus for marketing efforts. Commitment terms of BPO contracts have short durations, which present an opportunity to get the expired contract work shifted to Pakistan. Early Entrants will benefit from minimal competition and available human capital Geographically well positioned to become part of the global IT hub Leverage off of proven track record of sub-continent in providing outsourcing services to North American and Western European countries Strong demand for Finance and Telecom services from Western European and Japanese ITPS markets where Pakistan has indigenous skills. Increased focus of matured industries in USA and Western Europe to increase margins, which yearns for cost reduction Requirement of Software and English language skills by China to complement and support its computer hardware and manufactured goods export industry Existence of large group of companies in Pakistan who have international presence Rising costs in India, about 15-20 % higher than Pakistan Indian strategy to build a truly global delivery model: As of 2004, all Indian vendors have an overwhelmingly large proportion of their workforce in India; the strategy put forward by NASSCOM implores the need to focus on building delivery capabilities in other low-cost geographies as well. High voluntary turnover rates in India. Vendors struggling to balance profitability, turnover, and increases in cost
1

Subordinate legislation or implementing regulations. Hereinafter SROs.


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Recent changes in Indian tax policies require multinational companies to be taxed in India if they are outsourcing any part of their core function to India Regulatory requirements (Patriot Act, Sarbanes-Oxley, Basel II) leading to integration requirements Prospects exist for liaison between local and international ITPS vendors - JV or Facility Deals Focus of developing industries on new technologies and growth requirements Unexplored Mid-market opportunities THREATS Competition from Established Industry Leaders and Emerging BPO service provider countries Brain drain Lack of proven track record on a large scale and lack of proliferation of ITPS sector Might not be able to provide breadth of ITPS required for becoming part of global ITPS Hub Inability to move up the value chain can discourage vendors to bring in high-end projects BPO industry is migratory, low margin, high penalties for non-compliance of SLA, especially in the case of call centers Few dedicated local BPO players Language, political and cultural differences

8.6.

Action points for Government of Pakistan for ITPS growth

Based on our analysis and study, the following are the proposed action points for the GoP for the promotion of the ITPS industry, which includes steps for removing barriers, creating enabling environment and generating demand.

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Subject

Proposed Action Plan for Government of Pakistan

Priority1

Marketing Strategy Implementation

GoP to implement the following marketing strategies High 1. Strategy for Global Vendors - Target Approach 2. Strategy for Niche Markets 3. Strategy for Alliance with China 4. Strategy for Global Vendors - Deal Approach 5. Strategy for Partnering with Indian ITPS Companies 6. Strategy for Joint Collaboration with Dubai Internet City 7. Strategy for Pakistan's Existing ITPS Market 8. Strategy for Multi-National Companies Operating in Pakistan There is a dire need to rectify Pakistans image of a terrorist nation that has High an unstable government and hence, inconsistent economic and political policies. Instead, it should be perceived as a Trusted and Secured Sourcing destination. The issue of unhealthy perception of Pakistan may be better addressed through effective PR campaign in the US market than by any other means because of its apparent impartiality. The soft image campaign for Pakistan should be integrated with FDI call in the BPO industry and the particular emphasis should be on placements of soft image advertisements in the trade journals for the priority end user industries identified in this study, i.e., 1. Telecom sector 2. Utilities sector 3. Financial services sector The fact that Pakistan is already a major outsourcing destination for manufactured items in the textile sector can be highlighted. Worlds leading companies and brands like Walmart, Levis, etc, are outsourcing the manufacturing of textile garments to Pakistan. Customers are visiting their manufacturing facilities in Pakistan frequently and the delivery schedules and the international quality standards are being met. Further, oil exploration companies are involved in drilling operations in the interior of the country, without any major problem. The above pitch should also be used in Pakistans approach to the global vendors.

o Image Perception Issue

From ITPS growth perspective


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Marketing Campaign

An aggressive marketing campaign should be carried out, which should High include the following: 1. Marketing presence in the U.S should be created through a leading firm to improve image of Pakistan and market ITPS outsourcing to Pakistan. 2. Government of Pakistan should promote Pakistan as a Global ITPS Hub through PSEB, BOI, EPB, Embassy, Trade Counsels, and Missions. 3. Conferences and road shows would be held abroad to attract ITPS Vendors. 4. Marketing should be undertaken through targeted international IT exhibitions and conferences. 5. Existing Pakistani ITPS Vendors and their services should be promoted at International seminars/conferences as an effort to form liaison with international ITPS vendors. 6. International conferences/seminar should be held in Pakistan for international vendors as well as local investors and also at Dubai for those global ITPS vendors who are hesitant to visit Pakistan. 7. Visits should be arranged for International ITPS Vendors to meet around a Deal Concept. 8. Industry delegations should be sent to targeted sectors exhibitions. 9. Pakistan should be marketed as the leading destination for global ITPS, based on lowest cost base and its human resources capabilities and the GoP all out support for the risk mitigation. 10. Media campaigns should be launched within Pakistan to boost local investors confidence in investing in the local ITPS Sector. It is well understood that call centers and BPO service delivery companies High need sales and marketing presence close to the target customers. It is impractical for small companies in Pakistan to fund and maintain their own sales and marketing teams in the US or Europe. This is an area where PSEB or industry associations can help by facilitating sales and marketing cooperatives, or by funding such teams that obtain and channel the business to member companies in an equitable manner. GoP should also facilitate matchmaking events and other opportunities with global businesses seeking service delivery. Pakistani labor costs are low, while education is relatively high. In contrast, Medium Indias labor costs are rising along with its tax burden and regulations. This increment in costs can cast serious trouble to firm doing basic call center business. Pakistani firms can discretely target industries and call centers in India to bring over to Pakistan - this is what U.S. and European firms do. Once GoP identifies say 10 call centers (presumption is that these call centers do business for international operations), go upstream to those international operations and offer them a turnkey solution with strong local Pakistani private support.

Sales and marketing Cooperatives

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Target international ITPS companies operating in India.

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o Risk Mitigation

An important risk factor is reversal of Government polices in case of High change of present set-up. Options may be explored for insurance against such reversals. The suggested insurance policies should cover specific amount of loss against the reversal of specific government policy. The HR training should be of the highest priority, as it is a people intensive High business. Training courses should be arranged for meeting the major segments of the ITPS sector, e.g., the US GAAP accounting skills in ITESBPO. The HR training needs in general have been identified in Section 6 for both IT and BPO sectors. However, for vertical segments, Training Need Analysis should be carried out through the respective domain experts. The HR training should be subsidized/funded by the GoP for employees and the companies. IPR enforcement issue needs to be addressed seriously and the following High recommendations are being proposed in this regard: 1. The enforcement of data protection and privacy laws in Pakistan should be strengthened. 2. Awareness on the subject should be spread among the following (through print media, seminars, workshops, etc): a. Enforcement authorities b. Judiciary c. Local ITPS vendors 3. Workshops should be arranged for local IT and BPO vendors about the implementation of network and physical security of the electronic property/data and it should be conducted by the experts Enforce New York Arbitration convention

o HR Training

IPR Enforcement

Regulatory Framework

Low

o Labor Laws

Update Pakistans labor laws as a large number of labor registrations, Low record keeping, and notification requirements are required under a series of labor laws The following issues concerning the banking sector should be addressed through the help of State Bank of Pakistan and the public and private banks: 1. The non-availability of Banking sectors capacity to evaluate some long-term credit risk exposures, especially for the new investors without credit histories 2. The lack of risk analysis capabilities and familiarity with equity/scorecard financing 3. The non-availability of credit history of small companies and consequential problems faced by them in accessing financing.

o Banking Sector

1. Medium 2. Low 3. Medium

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o Internet link

Redundant Internet link should be made available

High

Broadband Facility

Measures should be taken to provide good quality and reliable broadband High connectivity to the ITPS companies with redundancy and at affordable cost and in quick time and to continuously upgrade the infrastructure. PTCL response time for the requests for new connection and expansion in High the existing bandwidth should be drastically reduced. At present, the new connection takes about 2 months and the increase in the existing bandwidth (e.g. from 128 kbps to 256 kbps) 3-5 weeks. It should be possible to get the new connection in 1-2 weeks and the bandwidth increase in 1-2 days. One-window operation to set-up ITPS business should be created and free High consultancy should be provided to the foreign companies desiring to start operations in Pakistan. One window facility should also be provided in the operational phase for High regulatory procedures, taxation, utility bills payments, etc. Domestic and International call centers should be allowed to operate under High one roof. It may result in the misuse of the concession in certain cases, but the advantages are far more. Interconnectivity of call centers across multiple locations should be allowed High in all cases i.e., between international call centers, between domestic call centers and between international and domestic call centers. This is essential for load balancing (to achieve optimized utilization of the agents) and also for disaster recovery. Remote agents should be allowed both for domestic and international call centers, which is currently restricted by PTCL. This would enable the High utilization of Pakistans female workforce from home and reduce the cost of operations of the call centers. This is particularly important because the females are generally not in a position to work after daytime. Tariff free imports of all equipment used directly for providing IT High Outsourcing services should also be allowed (for instance currently duty is charged on call center equipment, which is categorized as a PABX). The bandwidth rate, of both domestic and international call centers, should Medium be equal and at the current international rate so as to enable call centers to develop expertise and skills through local work

Onewindow operation

o o

o Call Centers

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Electricity Rates for ITPS companies

Special Economic Zones (SEZs)

Electricity should be charged at industrial and not at commercial rate for the ITPS companies. This will redress an existing anomaly, as GoP has declared the ITPS sector an industry and there is no basis for not allowing this sector the benefits available to the other industries. The fear of misuse should not be allowed to work against the interest ITPS industry in general and of the of bonafide companies in particular. This will make appreciable difference in the operating expenses of these companies as the electricity cost is about 15- 20 % of the total occupancy costs. 1. To overcome the space shortages at STPs and also to avoid heavy government investments in the development of such facilities, private sector should be invited/allowed to develop, build and operate SEZs as a public-private partnership or as purely privately owned venture, on the same pattern as is being done in other countries like India and Philippines. These SEZs should enjoy the same status, concessions and benefits as the goverment owned STPs. 2. Further, to meet the immediate shortages of technology parks, Virtual SEZ status scheme should be introduced which would allow a privately owned building, outside the STP or SEZ, to be accorded the same status as an SEZ by being considered as a virtual SEZ. This would not pose any problem because of the nature of IT Services Outsourcing and BPO work, where inputs and outputs for work being performed are received and sent electronically making customs or tariff control practically impossible, irrespective of whether such a company is located in or outside a custom bonded area. The salient features of the virtual SEZ are as follows: a. Extend the incentives offered to companies operating in Software Technology Parks to all companies exclusively involved in IT Services Outsourcing and BPO sectors irrespective of their location, thereby creating SPECIAL ECONOMIC ZONES, which are VIRTUAL. b. Certain benchmarks should be defined against which the virtual SEZ applicant is to be judged. c. There should be a one-window operation for regulating the virtual SEZs. d. Virtual SEZ status could be revoked in case the virtual SEZ violates the regulatory requirements, which would be a sufficient deterrent. e. Compliance to requirements and regulations for being an exclusive IT Outsourcing Company should be done through post audit inspections of contracts and revenue collections. 3. The sale of products and services by the local suppliers to the companies located in the STPS and SEZs should be treated as exports. This would help reduce operating costs of the ITPS export companies such a facility has been implemented in India.

High

1. High

2.Medium

3. Low

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IT City

Synergy will be built if a number of ITPS companies are located in one Medium place such as an IT City. Also, a good-sized call centre requires the operating facility to accommodate at least 1000 employees for which buildings do not exist in major cities. Hence to meet these requirements it is recommended for the government to build IT Cities, initially of about 100 acres and then of bigger sizes e.g. of 300 acres of land. 1. This is estimated to be a two-year project, taking a minimum of one year to become operational. 2. In Karachi, the optimal IT City location would be either in the Defense Housing Society or on National Highway for proximity with the airport. A similar scenario would apply to building IT Cities in other cities. 3. The cost of building a 300 acre IT city would be around US $ 100 million, which could be raised through public private partnership Private Sector should be indoctrinated about the ITPS industry. The local High big business houses and investors should be approached for considering and investing in BPO industry. This should be achieved through Seminars, Information booklets and Facilitation efforts, such as, Feasibility/ consulting support by Expert Advisory Cell. Their interest should be created by informing them about the huge potential of this industry and also by giving them the examples of the big Indian business houses like Tata who saw the opportunity early and have created profitable businesses. They should be encouraged and guided to diversify from the conventional manufacturing and trading sectors to ITPS sectors, in their own business interests. The investor mobilization programs should be held for providing them detailed information on: 1. Appraisal of opportunity 2. Pakistans strengths in this area 3. Facilities available GoP should take actions to counter cultural challenges in convincing High corporations to relinquish control of applications that is an impediment in the growth of the domestic outsourcing capability/maturity.

Motivating Local Investors

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Domestic Outsourcing

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Seeding Strategy

A seeding strategy for marketing the BPO industry should be undertaken Medium that includes: 1. Public service announcements 2. Pamphlets / brochures 3. Videos 4. Web based information 5. Forums 6. Conferences a. Regional forums b. Local forums c. Electronic or web based The target audience would include: 1. Government functionaries (concerned departments) 2. CEOs/ senior managers of local end user companies 3. CEOs/ senior managers of IT companies 4. Potential investors 5. Other stake holders The GoP should subsidize the costs of Professional and quality Certification High of companies in IT, Call Center and other BPO sectors, such as, CMMI, CISA, CIA, CPP,CISM, SCAMPI, SAP, Oracle, Great Plains, etc through reimbursement of certification fees and subsidizing certification trainings.

Certification companies

of

Creation Pool

of

Talent

Guidelines to educational institutions and institutes should be provided to Medium create talent pool. In this regard, a dynamic interaction with the industry should be maintained so as to provide to the educational institutions the list of the skills required for the BPO industry as well as career prospects. In addition, industry pitches should be arranged for: 1. Students 2. IT educational institutions 3. Commerce education institutions 4. Language training institutes Following should be done to improve standards in local IT education Medium 1. Spoken English courses should be introduced at all graduate colleges across the country and UGC should be approached for the same. 2. A Center of Excellence may be set-up as an IT University with public-private partnership arrangements to establish standards in local IT education 3. International certifications may be sought through affiliations with international institutes of repute. 4. Recognition of IT institutes by appropriate Government bodies using strict criteria

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Skills Programs

Up-gradation

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8.7.

Strategy adopted by other countries

8.7.1. Strategy of other countries

The more successful offshore outsourcing destinations in this region are India, China, Philippines, Malaysia and Singapore. Although the formal strategy adopted by these countries for achieving high growth in ITPS exports is not available, except for some indication of the same in respect of India vide the strategic review 2005 of the IT Industry in India, carried out by NASSCOM, our research identifies the following common policies pursued by the above countries: 1. The government played the role of facilitator and enabler, creating modern infrastructure and removing the barriers, both proactively as well as in response to the requirements brought to its attention by the professional bodies. 2. Top priority was given to high quality education from school to the university 3. Extraordinary incentives were provided to the ITPS sector investors and companies. 4. Regularity framework was created and maintenance of law and order was accorded utmost priority. 5. In India, states competed with each other to foster the growth of the ITPS exports industry in their own state. 6. Contacts were made with the top decision makers at the highest government levels (ministers, chief ministers, ambassadors) both for technology and skill transfer as well as for attracting the business. 7. Above all, there has been constant effort and planning, based on the analysis of the previous performances and the future trend of the industry.
8.7.2. Strategy adopted by India

India did not start on this route through a well thought of strategy. The outsourcing flood was triggered by Non-resident Indians, NRIs, as they are commonly known. It started as a mutually expedient arrangement when the Indian expats holding senior positions in the US IT industry, got created captive facility in India for transfer of low end jobs like data entry to the offshore facility. (GE was one of the first companies who opened its own facility in India. It now employs 18,000 workers in India and has seen a total savings of 350 million dollars a year.)1 Thereafter, it caught the imagination of the Indian government who got into the act, saw the huge opportunity and developed the strategy to exploit the opportunity, in close coordination and in conjunction with the private sector in general and with the IT industry in particular. The phases of the IT-BPO evolution of India can be categorized into 3 phases, Pioneers 1996-2000; Early adopters 200-2003 and Cautious followers (2003-08). The detailed attributes of each phase, as provided in the above referred NASSCOM report, are included in the Annexure to this report.

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The above NASSCOM report suggests strategy for both the ITPS industry as well for the Government, which are also placed in the Annexure to this report. For the ITPS industry, it proposes four point plan as next steps, namely, building a truly global delivery model to focus on building delivery capabilities in other low-cost geographies, building consultative selling capabilities by creating vertically aligned sales force, offering solutions capabilities by building partnerships with hardware and software providers and building a sales force with domain skills and building multi-cultural organizations with unifying values but a global workforce and global career tracks. The recommended next steps for the Government. include supplementing the efforts of the industry, opening new opportunities through country specific initiatives, investing in enhancing the supply of knowledge workers and developing the domestic market. Some of the major specific issues identified for being addressed include, increasing awareness among customers of the countrys capabilities in higher value added activities, proactively addressing questions/misconceptions about Offshoring in the worldwide media through inter-government interactions and trade negotiations, strengthening the data protection and privacy laws, ensuring availability of skills e.g., English speaking workforce, US GAAP accounting skills in ITES-BPO and trained IT personnel, Introducing spoken English courses at all graduate colleges across the country by lobbying with the state governments and relevant education boards like UGC, AICTE etc. Some of the other specific issues suggested to be addressed are opening new opportunities through country-specific initiatives, enhancing the supply of the world class knowledge workers, emphasizing on establishing a vibrant domestic market by removing regulatory bottlenecks, issuance of comprehensive guidelines for IT solutions, products and hardware buying after due consultation with all concerned.

8.8.

Strategic Go forward Approach Menu:

8.8.1. Recommendations for the local ITPS industry

There is a large pool of funds available within the Private Sector, which can be invested in ITPS development. As an effort to attract such investment, the Government of Pakistan should actively engage with the local investors and big business houses to excite their interest on this non-conventional but very profitable business opportunity. GoP should encourage big businesses to perceive the ITPS opportunity like Indian counterparts, such as, Tata. Private Sector should be indoctrinated about the ITPS industry. Private Sector should acquire call centers in North America and outsource certain services to Pakistan for cost reduction. Eventually the Private Sector would be able to branch out its North American call canters to Pakistan. The use of closed factories in the industrial area for large BPO projects should be explored and GoP and the sites associations should be approached for help/assistance in this regard. These buildings which are lying unused have huge capacity and are ideally suited for a low cost back office processing and may provide some answer to the shortage of large capacity buildings.

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Instead of organic industry growth targeting all end user companies abroad (who may be apprehensive about offshoring / outsourcing to Pakistan), a forward integration approach by local IT Companies already having clientele in the US/ Europe may be more useful. A strategy may be adapted to approach such companies to consider diversification into BPO and sell this to their existing clientele (The Resource Group Model) Some BPO companies should be set-up to serve the domestic market and create demand for business process outsourcing through elaborate marketing programs. There are lots of small companies who do not keep adequate accounting staff, for example, and as such do not get enough information for better financial management. They might be willing to outsource their accounting/ payroll process for data that could help them professionally manage their finances. This would help create a culture of BPO in Pakistan. To overcome the perception-related challenges in the North American market, Pakistani IT Outsourcing providers should look to leverage emerging opportunities in the Asia-Pacific region as well. This includes alliances, acquisitions, or setting up operations in India as well as other emerging BPO markets of China and Dubai. Should look for opportunities in the Network Security Management segment and should invest on the training of their HR accordingly Should acquire skills and information about data security, to address the apprehensions of the client

8.8.2. Marketing strategy

If Pakistan is committed to becoming the Leading ITPS Destination Target the leading ITPS vendors, as they are the major players in the ITPS global outsourcing market. Top ten vendors control over 43% of the market share. These vendors provide full breadth of IT professional services to most of the fortune 500 companies. In addition, outsourcing to global vendors mitigates companys direct risk. Pakistan needs to position itself as a major ITPS Player. Promoting Pakistan as a BPO Hub alone is not sufficient as vendors and their clients are interested in countries providing a full range of services. The SWOT analysis of the vendor approach strategy is given below:

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Table 42:

SWOT Analysis of Vendor Strategy Approach

Vendor Strengths Weaknesses Strategy I Vendors have customers captured clientele I Vendors might not respond I Some of the largest ITPS vendors have I It may take long to build investment presence in Pakistan confidence I ITPS market is fragmented because large I Unavailability of required human resources vendors hold most of the market share and IT I Through vendors Pakistan would be able to I Low/minimum return on investment provide full breadth of ITPS I Broad range of non-related action I Unavailability of corporate buildings

Opportunities I Escalating labor cost in India I Unfavorable Indian Tax policies for MNC I Increasing labor turnover rate in India I Good IT to provide necessary infrastructure I Large pool of English speakers I Niche Markets

Threats I GoP straying away from focus on ITPS I Inconsistent GoP policies I Reversal of Incentives I Making continuous sustained investment

STRATEGY FOR GLOBAL VENDORS - TARGET APPROACH Our analysis of the ITPS global market and the major global vendors has lead us to the conclusion that for starters like Pakistan where ITPS industry has not taken inveterate roots, it is prudent to target the major global vendors of ITPS who occupy an overwhelming share of the market size - the top 10 vendors have about 43% of the global ITPS market share. The alternative option of approaching the end user large companies is not a competing choice as the end user companies would find it hard to change an arrangement which is working right for them at present. Majority of the large companies in the U.S. and Western Europe have gone through the evaluation and trial and error process and have now settled for one or the other large ITPS vendors. It would be highly improbable to convince the large companies of US and Western Europe to change their ITPS vendor and try out a new vendor in Pakistan. Moreover, it would take enormous efforts to establish contact with such a large number of prospective clients and that too with little or no hope of success. On the other hand, it is far more manageable and practicable to make a pointed and focused effort to motivate a few of the top ITPS vendors to divert some of their outsourcing work to Pakistan and it would be necessary for GoP to facilitate this process. Once Pakistan has achieved a critical mass, it is reasonable to expect that success will breed success, with more and more vendors and eventually end user companies tempted and encouraged to take advantage of Pakistans low costs coupled with its proven and demonstrated ability to handle outsourced work. Based on the above, the following Global Vendors - Target Approach strategy has been developed: 1. Target the leading 25-30 global managed service providers (vendors of ITPS). a. Immediately target Vendors with Pakistan presence to commence ITPS locally
1

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b. Approach all other vendors to invest in Pakistans ITPS sector c. Facilitate global vendors investors to Partner/JV with local ITPS vendors 2. The top decision makers should be contacted at the highest Government levels (ambassadors, ministers and above) to address their concerns about investing in Pakistan. A face to face deliberation would have much more chances of success for Pakistan than a cold objective assessment during an outsourcing decision making process as no one from Pakistan is then present to argue its case. As against this, when the case of the country is argued in person by someone in authority then the vendor concerns can be addressed promptly and assurances can be given which are likely to be more acceptable to them (vendors) than those coming from someone not in a position to do anything about the concerns. 3. They (vendors) should be provided details about the advantages of outsourcing to Pakistan, informing them about the incentives available to the ITPS industry and also that Pakistan has a large pool of human resources who can be converted into a skilled labour force through training. The GoP should also offer to provide / facilitate the HR training free of cost to the intending vendors. It should also try the matchmaking of the local BPO vendors with the global vendors by short listing, through a separate process, the local BPO vendors who have international delivery capability. Although there are a very few BPO companies in Pakistan, but to protect its own credibility and avoid failed projects which are a bad publicity for future prospects, it is important for the GoP to satisfy itself that the recommended BPO companies have the delivery capability of international quality. Certain benchmarks like the companys age, financial health, processes, its professional certification status, the education and the experience of its entry level employees, middle management and senior management, etc. should be used to assess the companys delivery capability. It is also important for the GoP to undertake the matchmaking, as the majority local BPO companies do not have the time, capability and resources to find the potential clients in an international country. This is one of the areas where GoPs resources would be genuinely needed.

STRATEGY FOR GLOBAL VENDORS - DEAL APPROACH The third strategy in our strategy approach menu is to adopt a package Global Vendors - Deal Approach and make an extraordinary offer to some of the top global vendors, which would be hard to match or refuse. This offer would be dictated by long term national objectives rather than narrow considerations and would include making an extremely generous offer, such as free occupancy and other facilities for an extended period of time against some agreed benchmarks, such as guaranteed revenues, technology / know how transfers, level of local employment, etc. Such a strategy would help to put Pakistan on the global outsourcing map, thereby helping to kick start the ITPS industry, generating a ripple effect and accelerating the flow of outsourcing jobs to Pakistan in a geometrical progression, at least in the beginning. The recommended strategy in this respect would involve targeting the leading International ITPS vendors with Deal Approach. As part of the deal, vendors would be provided an identified opportunity with available Ready to Move-in Facilities and they would have an opportunity to:
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a. Transfer outsourcing projects from their other locations to the local office b. Obtain outsourcing projects from the local public and private sector for which they would have an edge owing to their proven delivery capability at international level. The costs involved for implementing such deals would be about US $ 75,000 per year on free office space for 100 full time employees and a further US $ 25,000 per year on free electricity. On the benefit side, it would generate about US $ 1 million of export revenue. The transparency issues and the objections from the local players can be addressed by limiting the offer to the first 5 or 10 companies who sign up and also requiring them to meet certain benchmarks of the number of full time employees and/or export revenues per year. The suggested benchmarks are minimum 200 full time employees and minimum export revenue of US $ 5 million. This way it would immediately double the existing ITPS export revenue transacted through the State Bank. Such a deal approach is all the more needed since the existing incentives already available in Pakistan to the ITPS vendors are not proving to be enough motivating factor, as determined during the survey of the US based global ITPS vendors. Hence, it is imperative to find an inventive and out of the box solution. The deal approach aims to make a one time Hard To Refuse offer, which would make a substantial difference to the bottom line of the ITPS vendor being offered this deal. The whole idea is to generate a critical mass, delivery capability and an image of a feasible outsourcing location for Pakistan, so as to encourage the other major international vendors to shed their apprehensions and reservations about establishing their offshore outsourcing center in Pakistan. STRATEGY FOR NICHE MARKET As the growth of ITPS industry and the attendant revenues are of such paramount and crucial importance to Pakistan one single strategy alone cannot be relied upon to deliver the results in a reasonably short period of time. Accordingly, the above strategy of targeting the global vendors has to be augmented with other strategies, and implemented in parallel. One such strategy is to set eyes on the Niche market and to create the enabling environment and develop and fine tune the skills and resources required for meeting the outsourcing needs of the selected Niche sectors, particularly in those sectors where there is fierce competition and the room for enhancing revenue is limited and the only way left to improve the bottom line is to reduce costs. Utilities companies, Financial services sector and Telecom industries of USA and Western Europe fit in very well in the above profile, as at the moment they appear to have reached a plateau, are facing immense competition and their margins are diminishing. To remain competitive they require cost reduction. On top of this, new opportunities have been created for the financial services segment of the BPO sector as a result of the international regulatory requirement. The above opportunities are very well complemented and supported by the fact that Pakistan has thriving local Telecom, Financial services and Oil and Gas sectors and outsourcing can be done from these sectors to the local ITPS vendors, which would not only develop their capability to handle similar assignments from international companies but would also lend credibility to their proposal and build their confidence. This would help create Market segmentation of ITPS, in which Pakistan can have a competitive edge and differentiation.
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The strategy for targeting niche markets is provided below. 1. Develop expertise in the above NICHE market by approaching the decision makers in the corresponding domestic sectors and offering them certain concessions / benefits for outsourcing the work to the local ITPS. This could come from the budget for the promotion of the ITPS exports and if no such budget exists, then financial allocations should be made by the GoP to trigger and facilitate this outsourcing in the ultimate interest of this industry 2. Approach International companies within the Utilities, Financial Services and Telecom Sector firstly by identifying them and then encouraging the local ITPS vendors to approach them. The GoP should then address on priority basis the issues confronting the local BPO companies in getting the outsourcing work from the identified companies. These issues could be of a general nature like the availability of the infrastructure, company registration, other logistic issues, etc, or of vendor specific nature like the visa requirements, etc. 3. Leverage the NICHE sector ITPS services from Pakistan to various developing regions Local/International partner companies can provide BPO services to financial institutions and telecomm sectors in Asian and African countries. Embassies should do the exploratory work to identify the prospects and arrange the matchmaking event with the short listed BPO companies. The embassies not having the required skills for such an assignment should be provided the necessary assistance and guidance through GoP initiatives to meet the objective. A temporary cell can be created within the IT ministry for a specific period of 3 to 6 months with the mandate to work with the embassies either onsite or remotely to identify such companies and help in match making. STRATEGY FOR ALLIANCE WITH CHINA China has established itself as a leader of the computer hardware in the same way as India has taking a lead in the IT services and Software. Computer Hardware is a significant part of the worldwide IT spending and the projected hardware global revenue for the current year is expected to be about US$ 387 billion. The numbers of PCs in use worldwide are expected to increase from 575 million at this time to almost 1.3 billion by the end of the decade. The share of the mature PC markets in Europe, the US, and Asia in this phenomenal increase of about 725 million PCs is projected to be only about 150 million PCs, the rest will be provided by the emerging markets with China leading the way. The IT industry in China is heavily dependent on its hardware segment with hardware revenues, including exports, accounting for about 85% of the Chinese IT industry1. However, it does not have the same strength in Software development, which, the Indian software companies have by virtue of extensive experience in Software projects. Owing to this reason, Indian software development companies are rushing to partner with the hardware manufacturing companies of China to provide the embedded software for their computer hardware. The value of the Indian IT Services and Software exports to China
1

NASSCOM Report
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were about US$ 15 million in the year 2003-04. This is also an opportunity for Pakistan, since it has comparable skills in matured IT sectors. Pakistan does have skills in embedded software coding, although not in large numbers, but once there is a demand, sufficient resources can be trained in 6-12 months from a large pool of experienced software engineers/programmers. Moreover, the alliance in IT services should not be restricted to embedded coding alone, but other services should also be offered like customized software development, IT consulting, ERP selection and implementation, system integration, Network management, etc., in which expertise is available in Pakistan. Siemens Pakistan has a number of successful SAP implementations to its credit and local expertise is also available in other ERP major international applications like Oracle Financials, Peoplesoft, etc. Furthermore, proficiency in the English language is not commonly available in China, which is a major concern to them since their major customers happen to be the English speaking countries. This situation creates another opportunity for countries like Pakistan who has a large number of work force with proficiency in both spoken and written English. Such countries can fill the gap and provide the much needed customer support / services to the English speaking customers of Chinese products and services. GoP should leverage its longstanding and fraternal relations with China for creating a strategic alliance with Chinese export oriented manufacturing and service sectors. It should be targeted towards making Pakistan the Hub for providing customer services support to the Chinese companies clients in English speaking countries. GoP should also work towards creating alliances between Pakistani software development companies and Chinese hardware manufacturing companies. To accomplish this, a two-way exchange of delegations will be required; the major computer hardware companies of China should be invited to Pakistan for meeting with the IT companies of Pakistan and the experts and managers of top local IT companies should also be sent to their locations in China. However, preparatory work should begin much earlier, and the Chinese companies should be approached to find out the kind of expertise in software they would be requiring from Pakistan, which should be provided to the local IT companies. However, the payment rates from the Chinese companies for the above services could be an issue, as Chinas business model is based on low cost. Some other limiting factors could be the availability of significant number of IT experts to write the system level codes as well as the copyright issue. These issues are challenges but do not constitute a no go hurdle. The payment will not be as high as from US or Western Europe, but will still be much higher than the domestic rates and that too in foreign exchange. Moreover, rates will become more relevant when there is a high demand in which event, opportunity costs will become a factor, but till that happens, rate issue will not be decisive. The recommended strategy for creating alliance with China is as follows: 1. GoP should pursue with the Chinese Government, at a high level, to form a strategic business alliance for providing customer centric services in English through Pakistan for the Chinese Governments state owned entities exporting to North American and European countries.

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2. Help set-up call centers/customer contact centers to support Chinese manufacturing and service sector companies in English speaking countries. GoP can play a part in this by alerting the local call centers to this untapped opportunity and in also identifying through the embassy the decision makers of the existing English language call centers of China, to enable the local BPOs to approach them for diverting the work overflow. The embassy should also help to identify the end user companies of China who are using their own managed or a 3rd party call center and their contacts should be made available to the local BPO companies. To enlighten, educate and guide the local ITPS companies in this regard, an opportunity awareness seminar should also be conducted by the GoP for them, which should include information about the processes involved in obtaining an outsourcing contract from a Chinese company and other helpful information. 3. Foster collaboration of Software Development companies of Pakistan with the Hardware Manufacturing companies of China (for developing hardware embedded software) 4. Promote setting up of the Chinese language teaching institutes for improving interface between Chinese and local companies and enhancing their preference for Pakistan, so as to mitigate the limiting factor. If the local BPOs are able to deliver successfully the first 30 to 40 projects, then the work will start flowing, requiring about 50 to 100 people who can interact with the Chinese clients in Chinese language and the training can be provided in batches of 10. STRATEGY FOR PARTNERING WITH INDIAN ITPS COMPANIES India is moving up the value chain and its costs are also rising. Their new strategy is to build a truly global delivery model. As of 2004, all Indian vendors have an overwhelmingly large proportion of their workforce in India; now they are realizing the need to focus on building delivery capabilities in other lowcost geographies. This presents a bright opportunity for Pakistani BPOs, who should be encouraged and facilitated to target the outsourcing of the work from the Indian vendors looking for low cost options. This would be beneficial to Pakistan in multiple ways. Firstly, it will lead to the transfer of delivery management skills and secondly, it will prove a big marketing advantage for a company to say that it has handled the same work that was originally outsourced to the Indian company. The strategy for partnering with the Indian ITPS countries is as follows: 1. Invite the decision makers of top 5-10 ITPS companies from India for matchmaking with the local BPOS. 2. Hold workshops for the Pakistani ITPS companies to understand the processes followed by the Indian ITPS companies, so as to create the right impressions about the capability of the local companies and to facilitate understanding. 3. Provide incentives for partnering/JV and help fast track the process of starting the JV. 4. Facilitate the visit of the senior management of Pakistani companies to India to explore the business.

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STRATEGY FOR JOINT COLLABORATION WITH DUBAI INTERNET CITY As can be seen from the details provided above regarding Dubai Internet City (DIC), it has the perfect environment for IT-BPO work. In addition to this, Dubai is a business friendly and welcome place for investors. As opposed to this, investors are shy of coming to Pakistan due to image perception and it also lacks quality office building for 500+ employees. However, Pakistan has a pool of trainable human resources for the ITPS work, which Dubai does not have. As such, it makes a good business case for the joint collaboration between Pakistani IT-BPO companies and DIC. The use of the infrastructure of Dubai Internet City by Pakistani IT-BPO companies should, therefore, be seriously explored. It would serve to address the two major problems that the local IT-BPO companies are facing, that is, of investors reluctance to come to Pakistan and the lack of quality office building for large projects at least in the short to medium terms. The strategy for joint collaboration with the Dubai Internet City is as follows 1. Facilitate the visit of the senior management of Pakistani companies to the DIC to explore the business. GoP can make these visits more productive by making contacts with the quarters that matter in DIC to enable the local BPO s to raise the level of contact, which is likely to yield better results. The access to the DIC decision makers would be far easier for the GoP than for private sector business executives. 2. GoP should have top level contacts with UAE Government to explore the possibility of collaboration between local IT-BPO companies and DIC. Our proposal to them should be based on the argument that that it would be a win-win situation for both. DIC has ambitious expansion plan and Pakistan can help get it filled up with IT-BPO companies, who will have fewer reservations about coming to DIC. The infrastructure will be theirs and Pakistani IT-BPO companies will provide the HR, in this way both the entities will be playing to their respective strength and complementing each others capabilities. 3. GoP should support start up of a pilot project in DIC as a base for future growth, which will be more like a proof of concept. It could be a public-private partnership and two to three ITPS companies of Pakistan interested in starting operation at DIC, should be selected against some laid down benchmarks, like the export earnings, age of the company, number of technical employees, maturity of the business processes of the company, range of its services, etc, and each of these parameters should have a weightage. Such an step is needed to make a beginning and should be a one time incentive from the GoP. Once the strategy works, other Pakistani IT-BPO companies will follow suit, especially because of the proximity of Dubai with Pakistan. The growth of ITPS export revenue cannot be achieved without the required financial investments.

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STRATEGY FOR PAKISTANS EXISTING ITPS MARKET The fourth strategy we recommend is to enlist GoP support and commitment for enabling Pakistani ITPS companies to acquire running ITPS centers in the U.S. and Western Europe, team up with international vendors and develop their skills to international standards. It also aims to leverage the resources and the networking of the Pakistani expatriates and mitigate the apprehensions about Pakistan by enhancing the image of Pakistan through aggressive marketing campaigns. This strategy mentioned below is based upon the assumption that the Government of Pakistan recognizes that a huge market exists, which would be accessible once Pakistan develops its delivery capabilities. With GoP support and commitment Pakistan has the potential and is well positioned to become a major global market player. The strategy to foster the growth of the existing local ITPS market is as follows: 1. Match up local ITPS vendors with Small and Medium Sized ITPS vendors from North America and Western Europe providing similar range of services (as the corresponding Pakistani ITPS vendor) to form alliances/Joint Ventures and acquire and branch out certain services to Pakistan for cost reduction. This should be done by a match making exercise at the strategy implementation stage. The information about the above mentioned ITPS vendors is accessible and the capabilities of the local ITPS vendors can also be known. Seminars and workshops should be held for the local ITPS companies to guide them in this regard and to equip them with the detailed information about the global vendors most suitable for being approached by them. GoP should also extend full support and assistance that may be needed by the local ITPS companies in this regard. 2. Extend GoP incentives and support / remove barriers for various ITPS sectors to enable the existing ITPS companies to transform themselves into global companies. 3. Conduct aggressive international marketing campaigns to position Pakistan as the Global ITPS Hub through relevant worldwide media, country specific initiatives, inter-government interactions and trade negotiations. Roadshows and conferences should be held in USA, UK as well as in Pakistan and for those who are reluctant to come to Pakistan, the conferences can be held in Dubai. In these marketing campaigns, the humane face of Pakistan, its history, culture and heritage, in addition to the IT capability should be projected. Similar presentations of the leading ITPS destinations like India, Malaysia, Philippines, etc. should be studied in this respect. One of the corner stones of our sales pitch should be the statistics, for instance, the number of incidences of theft, robbery, mugging, murder and other acts of lawlessness in major cities of the world versus the major cities of Pakistan. The point to be driven home is that the ground realities are not as bad as the perception. The example of the oil exploring foreign companies operating in the interiors of the country (Sind and Baluchistan) should also be cited. It would require allocation of financial resources by the GoP, but it would be a worthwhile expense to boost the ITPS exports revenue and to take it to the next quantum levels of US $ 500 million and then to US $ 1 billion. The specifics of the campaign should b developed in the strategy implementation phase.

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4. Encourage non-resident Pakistanis in USA and Europe to invest/form JV or market ITPS. The list of who is who of Pakistani experts settled in USA and Western Europe and occupying the position of influence should be prepared and they should be feted by the local ambassadors and offered incentives for bringing in ITPS business to Pakistan. They should also be encouraged and supported for creating their own captive facility by assisting with the start up of the set up, including hiring of the resources and other free consultancy services. Appeal should also be made to their sense of identity and patriotism for the country and also how important role they can play in the uplifting of the peoples economic condition. Analysis should be carried out as to why such efforts did not bear fruits in the past and the right lessons should be drawn. The contacts with the Pakistani experts should be focused by identifying those experts who are working in influential positions in US and Western Europe and those who seem to be interested should be provided all the needed assistance. Most importantly, they should be safeguarded against harassment and other inconveniences by anyone and such occurrences should be dealt with promptly and strongly. There should be a an efficient and empowered one window reporting and facilitating centre/mechanism for them so that they do not get bogged down, frustrated and discouraged, like what has been happening to such initiatives in the past. Further, to create healthy competition, the top 5 should be accorded the privilege to be invited to state dinners/functions at state expense. Award should also be instituted for rendering meritorious service in this field, as is being done for outstanding achievements in sports, culture and other fields. There is no denying the fact that the experts who have been very successful abroad, crave for recognition in the home country and such acts of recognition will motivate them more than anything else. It would create a new opportunity for them to win recognition at home without having to move here physically, by leveraging their what they have achieved abroad. 5. GoP should set up one stop shop for companies desiring to establish outsourcing centers in Pakistan. This is important because setting up a business is still a cumbersome process involving numerous visits to different Government agencies and also the information in this regard is not easily available. GoP should open consultancy services, which would help complete all the paper work, freeing the investor to focus on the core business. STRATEGY FOR MULTINATIONAL COMPANIES OPERATING IN PAKISTAN The multinational companies (MNCs) usually have a unified business process and common application software operational in all their branches worldwide. The backoffice processing is either done by the individual unit itself or by some other unit of its region. This strategy aims to target multinational companies located in Pakistan to provide their international units with certain backend processing services through the Pakistani Multinational Company (MNC) itself or through a local ITPS vendors or through alliances with local ITPS vendors. The most relevant example is of ABN Amro bank who had created a software development center in Pakistan to develop the software for the entire company. Although, unfortunately, it did not last long, but there is a silver lining in terms of the lessons to be learnt from an a real life example, even though a failed one. The main reasons being cited in this unsuccessful undertaking are shift of focus of the top management, the then high attrition rate and poor management of the software development center.
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However, the business model has not been faulted. This example can be replicated and there would be an added advantage of a practical example of what should be avoided. The top management and the decision makers of the local MNCs should be approached by the GoP at a high level (provincial minister or above) and encouraged / motivated for the execution of the back office processing in Pakistan of their counterparts from other countries. In return, they should be facilitated with any other issues they might be facing in their operations. Other packaged benefits can also be provided to them, e.g., free HR training, preferred business status, etc. Admittedly, not all the MNCs would take fancy to this idea and would like to maintain their own priorities. However, it is quite possible that some of the companies may seriously consider this option, especially after they are approached by the GoP at very senior level, to get some mileage out of their agreeing to oblige and to gain proximity to the decision making quarters of the GoP and also because there is going to be, after all, financial benefit to them. Their corporate office must be concerned about the rising costs in the back office processing and call center operation and if they receive a proposal from their Pakistan based MNC to help them out in this regard, then it is likely to be given serious thought. This especially holds true for the current time, as the big companies are feeling the heat due to the increased competition and need for cost cutting is of high priority to them, which can be easily achieved by outsourcing of BPO work to a low cost location. They will not be taking any undue risk or jeopardizing their business by doing the outsourcing because it is no more a black box and, on the other hand, is a demonstrated success worldwide. STRATEGY FOR INDIGENOUS CAPABILITY BUILDING The strategy for enhancing revenues from the exports of IT Professional Services must be complemented by an equally sound strategy for in-house capacity and capability building. The evidence of demonstrated ability to manage outsourced services would provide impetus to the efforts for attracting foreign ITPS vendors to the country. This strategy is built around the outsourcing of the public sector functions to local BPOs and leveraging ITPS services from Pakistan to developing regions, and is further elaborated below: 1. Outsourcing by GoP of some of its existing functions to local ITPS vendors to help them develop capability and credentials, to foster growth of the ITPS industry and to build international confidence for staking claim to outsourcing work from abroad. It is estimated that the domestic market exists for the outsourcing revenue of approximately US $ 300 million dollars from the public sector and large companies in the private sector in Call centre, bill processing and other BPO segments, as detailed in section 6. 2. Local banks which are providing BPO / backend services internally for their international and local branches (some numbering over 1000 branches), and are currently upgrading and making substantial investments into IT, can team up with global vendors to offer their existing infrastructure for similar banking backend services globally or regionally, as a non core but high income banking business.

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3. GoP should approach the decision makers in the local banks to create an outsourcing division to explore, plan, obtain and deliver outsourcing contracts. It should be seen more like contribution to the national cause for putting Pakistan on the global offshore outsourcing map, than a purely commercial venture. The embassies and GoP should extend full support in identifying the potential sources as well as for providing the necessary information.

8.9.

Financial Feasibility

It is essential for the Government of Pakistan to invest and create an enabling environment for the ITPS industry. A feasibility analysis has been done to illustrate the potential revenue, which individual sectors can generate if all necessary requirements are met. The assumptions used in carrying out the analysis are described in the Appendix to this report.
Table 43: Sector Revenue and Requirements Other BPO
1

To Attain Sector Revenue of US $ 1 Billion Call Center REQUIREMENTS:


Human Resources Office space (million sq. feet)

IT and Software

81,333 5.7

64,619 4.5

35,000 2.5

COST (million US$):


Building Costs Marketing Campaign Training and Certification: Company Employee Up-front set-up cost2

68 14 54 1.7 52 86

81 8 13 13 97
1

88 32 32 8 24 30

Table 44:

Bandwidth Requirement

Annual Revenue (Million US $) Bandwidth Requirement (Gbps)


IT Services and software BPO Internet Voice Corporate

1,000 0.24 1.40 0.60 0.02 0.10 2.36

Total

1 2

BearingPoint Study Up front se-up cost includes cost of hardware, software, office furniture etc.
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8.10.

Granular plan with time frame

Following is the granular plan with time frame for the proposed strategies. This represents the sequence of process involved in the business development cycle and will continue in all quarters in the same sequence.
Timeline Tasks Deliverables
2005 Qtr 4 Qtr 1 2006 Qtr 2 Qtr 3 2007 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4

Strategy for global vendors Target Approach a) Vendors having presence in Pakistan
Contact decision makers of identified global vendors in Pakistan & at their corporate office Arrange their visit to Pakistan for presentation, seminars & meetings Sales pitch

Presentation about local capability

Evaluate local vendors for recommending Assessment criteria, to global vendors for partnering/JV Assessment process & list of selected local vendors Arrange meetings of visitors with local vendors Arrange meeting of visitors with senior govt officials Memorandum of Understanding Investment package

Facilitate negotiations between local and Draft contract global vendors for partnering/JV Negotiate set up of their outsourcing center in Pakistan with or without Partnering/JV with local vendors. Signing of contract with global vendors for outsourcing to Pakistan Setup of outsourcing center in Pakistan by global vendors Start of outsourcing work in Pakistan Memorandum of Understanding Signed contract

Outsourcing process

Strategy for global vendors Target Approach b) Vendors Not having presence in Pakistan
Contact decision makers of identified global vendors at their corporate office Sales pitch

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Timeline Tasks
Arrange their visit to Pakistan for presentation, seminars & meetings Arrange meetings of visitors with local vendors Arrange meeting of visitors with senior govt officials

Deliverables
Presentation about local capability Memorandum of Understanding Investment package

2005 Qtr 4 Qtr 1

2006 Qtr 2 Qtr 3

2007 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4

Facilitate negotiations between local and Draft contract global vendors for partnering/JV Signing of contract with global vendors for outsourcing to Pakistan Setup of outsourcing center in Pakistan by global vendors Start of outsourcing work in Pakistan Contract

Outsourcing process

Strategy for Global vendors Deal approach a) Vendors having presence in Pakistan
Prepare a deal package for the first 5 global vendors availing of the deal incentive Identify the office spaces that would be made available to the 5 global vendors free of charge for one year Contact decision makers of identified global vendors in Pakistan & at their corporate office Arrange their visit to Pakistan for presentation, seminars & meetings Deal package with incentives, benchmarks and other regulatory procedures Earmarked Ready to move in office spaces details Sales pitch

Presentation about local capability

Arrange meetings of visitors with local Memorandum of major public and private sector understanding with some companies for assessing the possibility of organizations local outsourcing business Arrange meeting of visitors with senior Investment package govt officials Negotiate set up of their outsourcing center in Pakistan Memorandum of Understanding/draft contract

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Timeline Tasks
Signing of contract with global vendors for outsourcing to Pakistan Setup of outsourcing center in Pakistan by global vendors Identification of HR and company certification needs by the Vendors HR training fully paid up by GoP

Deliverables
Signed contract

2005 Qtr 4 Qtr 1

2006 Qtr 2 Qtr 3

2007 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4

Outsourcing process

Detailed specifications for HR training and company certification needs

Company certification funded by GoP

Start of outsourcing work in Pakistan

Strategy for Global vendors Deal approach b) Vendors Not having presence in Pakistan
Prepare a deal package for the first 5 global vendors availing of the deal incentive Identify the office spaces that would be made available to the 5 global vendors free of charge for one year Contact decision makers of identified global vendors at their corporate office Arrange their visit to Pakistan for presentation, seminars & meetings Arrange meeting of visitors with senior govt officials Negotiate set up of their outsourcing center in Pakistan Signing of contract with global vendors for outsourcing to Pakistan Setup of outsourcing center in Pakistan by global vendors Deal package with incentives, benchmarks and other regulatory procedures Earmarked Ready to move in office spaces details Sales pitch

Presentation about local capability Investment package

Memorandum of Understanding / draft contract Signed contract

Outsourcing process

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Timeline Tasks
Identification of HR and company certification needs by the Vendors HR training fully paid up by GoP

Deliverables
Detailed specifications for HR training and company certification needs

2005 Qtr 4 Qtr 1

2006 Qtr 2 Qtr 3

2007 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4

Company certification funded by GoP

Start of outsourcing work in Pakistan

Strategy for Niche Markets a) Vendors having presence in Pakistan


Telecom, Financial Services, Oil and Gas sectors Contact decision makers of public and List of identified companies private sector organizations from and their decision makers Telecom, Financial services and Oil and Gas sectors for outsourcing to local ITPS vendors to develop indigenous capability Outsourcing from above organizations to Contract document local ITPS vendors Identify / short list the utilities, financial services and Telecom companies of USA and Western Europe and their decision makers Contact decision makers of identified companies in Pakistan & at their corporate office Arrange their visit to Pakistan for presentation, seminars & meetings Arrange meetings of visitors with local vendors Arrange meeting of visitors with senior government officials List of identified companies and their decision makers

Sales pitch, investment package Presentation about local capability Memorandum of Understanding Memorandum of Understanding

Facilitate negotiations between the above Memorandum of companies and local vendors for Understanding outsourcing to them Signing of contract with local vendors for Signed contract outsourcing to them
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Timeline Tasks Deliverables


2005 Qtr 4 Qtr 1 2006 Qtr 2 Qtr 3 2007 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4

Creation of outsourcing process / Outsourcing process infrastructure upgrade and HR training of local vendor Start of outsourcing work in Pakistan

Export of ITPS Services to Developing Regions Identify opportunities for export of Niche List of Niche market sectors sector ITPS services from Pakistan to developing regions Arrange training of Pakistan embassies for orientation about ITPS and the available capability in Pakistan Training need analysis of Pakistan embassy staff

Create a cell within IT ministry to work Job description of IT cell with embassies for identify clients and help in match making with ITPS vendors of Pakistan Arrange visit of local ITPS vendors to Visit report / above countries for match making recommendations Assist in negotiations Memorandum of Understanding Signed contract

Signing of contract

Set up of facility

Outsourcing process

Start of work

Strategy for Niche Markets b) Vendors Not having presence in Pakistan


Telecom, Financial Services, Oil and Gas sectors Contact decision makers of public and List of identified companies private sector organizations from and their decision makers Telecom, Financial services and Oil and Gas sectors for outsourcing to local ITPS vendors to develop indigenous capability Outsourcing from above companies to Contract document local ITPS vendors

Pakistan Software Export Board Document Number: PSEB_VOL_9 Doc Version - Disposition: Final 164

PSEB_BPO_Report_February 7,2006.doc 2005 BearingPoint, Inc. and/or its affiliate(s)

PUBLIC SERVICES Strategy for Pakistans BPO Industry September 20, 2005 STRATEGY FOR INCREASING EXPORTS OF BPO

Timeline Tasks
Identify / short list the utilities, financial services and Telecom companies of USA and Western Europe and their decision makers Contact decision makers of identified companies at their corporate office Arrange their visit to Pakistan for presentation, seminars & meetings Arrange meetings of visitors with local vendors Arrange meeting of visitors with senior govt officials

Deliverables
List of identified companies and their decision makers

2005 Qtr 4 Qtr 1

2006 Qtr 2 Qtr 3

2007 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4

Sales pitch, investment package Presentation about local capability Memorandum of Understanding Memorandum of Understanding

Facilitate negotiations between the above Memorandum of companies and local vendors for Understanding outsourcing to them Signing of contract with local vendors for Signed contract outsourcing to them Creation of outsourcing process / Outsourcing process infrastructure upgrade and HR training of local vendor Start of outsourcing work in Pakistan

Export of ITPS Services to Developing Regions Identify opportunities for export of Niche List of Niche market sectors sector ITPS services from Pakistan to developing regions Arrange training of Pakistan embassies for orientation about ITPS and the available capability in Pakistan Training need analysis of Pakistan embassy staff

Create a cell within IT ministry to work Job description of IT cell with embassies for identify clients and help in match making with ITPS vendors of Pakistan Arrange visit of local ITPS vendors to Visit report / above countries for match making recommendations Assist in negotiations Memorandum of Understanding

Pakistan Software Export Board Document Number: PSEB_VOL_9 Doc Version - Disposition: Final 165

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PUBLIC SERVICES Strategy for Pakistans BPO Industry September 20, 2005 STRATEGY FOR INCREASING EXPORTS OF BPO

Timeline Tasks
Signing of contract

Deliverables
Signed contract

2005 Qtr 4 Qtr 1

2006 Qtr 2 Qtr 3

2007 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4

Set up of facility

Outsourcing process

Start of work

Strategy for alliance with China


Contact decision makers in Chinese Govt Sales pitch for creating strategic alliance with Chinese export oriented manufacturing and services sector for setting up their customer contact centers in Pakistan for English speaking countries Contact decision makers in Chinese Govt Sales pitch for creating strategic alliance between Chinese Computer Hardware manufacturing companies and IT companies of Pakistan for providing software development services to them. Contact decision makers in Chinese Govt Sales pitch for creating strategic alliance with the major public and private sector organizations of China and the leading companies of Pakistan for providing system integration, ERP implementation and business and IT consulting services. Identify instructors and courses for List of instructors and course Chinese language teaching institutes details Set up Chinese language teaching institutes Contact decision makers of identified companies in Pakistan and /or at their corporate office Arrange their visit to Pakistan for presentation, seminars & meetings Arrange meetings of visitors with local vendors Arrange meeting of visitors with senior govt officials Chinese language qualified HR Sales pitch

Presentation about the capabilities Memorandum of Understanding Memorandum of Understanding

Pakistan Software Export Board Document Number: PSEB_VOL_9 Doc Version - Disposition: Final 166

PSEB_BPO_Report_February 7,2006.doc 2005 BearingPoint, Inc. and/or its affiliate(s)

PUBLIC SERVICES Strategy for Pakistans BPO Industry September 20, 2005 STRATEGY FOR INCREASING EXPORTS OF BPO

Timeline Tasks Deliverables


2005 Qtr 4 Qtr 1 2006 Qtr 2 Qtr 3 2007 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4

Facilitate negotiations between the above Memorandum of companies and local vendors for Understanding outsourcing to them Arrange visit of local ITPS vendors to Visit reports major public and private sector organizations of China for match making Assist in negotiations

Signing of contract with local vendors for Signed contract outsourcing to them Signing of contract with GoP for setting up captive facility for outsourcing ITPS projects from China Signed contract

Creation of outsourcing process / Outsourcing process infrastructure upgrade and HR training of captive facility Creation of outsourcing process / Outsourcing process infrastructure upgrade and HR training of local vendor Start of outsourcing work in Pakistan

Strategy for Partnering with Indian ITPS companies


Arrange workshop for ITPS vendors of Pakistan to help them understand the processes being followed by Indian ITPS companies Contact decision makers of top 10 ITPS Sales pitch companies of India at their corporate office Arrange their visit to Pakistan for presentation, seminars & meetings Arrange meetings of visitors with local vendors Arrange meeting of visitors with senior govt officials Presentation about the local capabilities Memorandum of Understanding Memorandum of Understanding

Facilitate negotiations between the above Memorandum of companies and local vendors for Understanding outsourcing to them

Pakistan Software Export Board Document Number: PSEB_VOL_9 Doc Version - Disposition: Final 167

PSEB_BPO_Report_February 7,2006.doc 2005 BearingPoint, Inc. and/or its affiliate(s)

PUBLIC SERVICES Strategy for Pakistans BPO Industry September 20, 2005 STRATEGY FOR INCREASING EXPORTS OF BPO

Timeline Tasks Deliverables


2005 Qtr 4 Qtr 1 2006 Qtr 2 Qtr 3 2007 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4

Arrange visit of local ITPS vendors to Visit reports major ITPS companies of India for match making Assist in negotiations

Signing of contract with Indian ITPS Signed contract vendors for outsourcing to ITPS vendors of Pakistan Signing of contract with GoP for setting up captive facility for outsourcing ITPS projects from India Signed contract

Creation of outsourcing process / Outsourcing process infrastructure upgrade and HR training of captive facility Creation of outsourcing process / Outsourcing process infrastructure upgrade and HR training of local vendor Start of outsourcing work in Pakistan

Strategy for Collaboration with the Dubai Internet City


Contact decision makers of Dubai Internet City (DIC) Arrange their visit to Pakistan for presentation, seminars & meetings Sales pitch

Presentation about local capability

Evaluate local vendors for pilot project in Assessment criteria, DIC as a public-private partnership Assessment process & list of selected local vendors Arrange meetings of visitors with local vendors Arrange meeting of visitors with senior govt officials Facilitate negotiations between visitors from DIC and local vendors for partnering/JV Memorandum of Understanding Investment package

Draft contract

Negotiate set up of outsourcing center in Memorandum of DIC by selected ITPS vendors of Understanding Pakistan as pilot project

Pakistan Software Export Board Document Number: PSEB_VOL_9 Doc Version - Disposition: Final 168

PSEB_BPO_Report_February 7,2006.doc 2005 BearingPoint, Inc. and/or its affiliate(s)

PUBLIC SERVICES Strategy for Pakistans BPO Industry September 20, 2005 STRATEGY FOR INCREASING EXPORTS OF BPO

Timeline Tasks
Arrange visit of local ITPS vendors to DIC for match making Assist in negotiations

Deliverables
Visit reports

2005 Qtr 4 Qtr 1

2006 Qtr 2 Qtr 3

2007 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4

Signing of contract with DIC for set up of Signed contract outsourcing center at DIC by ITPS vendors of Pakistan as pilot project Setup of pilot project outsourcing center in DIC by local ITPS vendors Start of pilot project outsourcing work in DIC Outsourcing process

Strategy for Pakistans Existing ITPS market


Create a database of the specific List of local ITPS vendors capabilities of all the major ITPS vendors with specific range of services of Pakistan Identify small and medium sized ITPS List of foreign ITPS vendors vendors of North America and Western with specific range of Europe and create a database of the services specific areas of their work Arrange seminars and workshops for Sales pitch local ITPS vendors to guide them about the vendors most suitable for being approached by them and their decision makers Assist the local vendors in match making, Memorandum of inter alia, through the support of the local Understanding embassies Remove the barriers and create enabling GoP directives environment for local ITPS vendors as detailed in the Proposed Action Plan for GoP Prepare strategy for marketing campaign Presentation and other and presentation marketing documents / brochures Conduct aggressive marketing campaigns through worldwide media, country specific initiatives, intergovernment interactions and trade negotiations Arrange road-shows and conferences in USA, UK, Dubai and Pakistan Presentation and other marketing documents / brochures

Presentation and other marketing documents / brochures

Pakistan Software Export Board Document Number: PSEB_VOL_9 Doc Version - Disposition: Final 169

PSEB_BPO_Report_February 7,2006.doc 2005 BearingPoint, Inc. and/or its affiliate(s)

PUBLIC SERVICES Strategy for Pakistans BPO Industry September 20, 2005 STRATEGY FOR INCREASING EXPORTS OF BPO

Timeline Tasks Deliverables


2005 Qtr 4 Qtr 1 2006 Qtr 2 Qtr 3 2007 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4

Create one-stop shop for companies GoP directives desiring to establish outsourcing centers in Pakistan Create incentives / motivational plan for Pakistani expats who assist in the promotion of ITPS outsourcing to Pakistan Identify Pakistani expats working in influential positions in US and Western Europe Incentives and motivational plans for Pakistani expats

List of influential Pakistani expats

Approach them for setting up their own Memorandum of ITPS center in Pakistan or Partnering/JV Understanding with local ITPS vendors Arrange their visit to Pakistan for presentation, seminars & meetings Arrange meetings of visitors with local vendors Arrange meeting of visitors with senior govt officials Presentation about the capabilities Memorandum of Understanding Memorandum of Understanding

Facilitate negotiations between them and Memorandum of local vendors for outsourcing to them Understanding Signing of contract with local vendors for Signed contract outsourcing to them Signing of contract with GoP for setting up captive facility for outsourcing ITPS projects to Pakistan Signed contract

Creation of outsourcing process / Outsourcing process infrastructure upgrade and HR training of captive facility Creation of outsourcing process / Outsourcing process infrastructure upgrade and HR training of local vendor Start of outsourcing work in Pakistan

Strategy for Multi-National Companies Operating in Pakistan


Identify and contact decision makers of Multi-National companies (MNCs) operating in Pakistan Sales pitch

Pakistan Software Export Board Document Number: PSEB_VOL_9 Doc Version - Disposition: Final 170

PSEB_BPO_Report_February 7,2006.doc 2005 BearingPoint, Inc. and/or its affiliate(s)

PUBLIC SERVICES Strategy for Pakistans BPO Industry September 20, 2005 STRATEGY FOR INCREASING EXPORTS OF BPO

Timeline Tasks
Arrange visit to Pakistan of their decision makers from the corporate offices for presentation, seminars & meetings Arrange meeting of visitors with senior govt officials Investment package

Deliverables

2005 Qtr 4 Qtr 1

2006 Qtr 2 Qtr 3

2007 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4

Negotiate set up of their outsourcing Memorandum of center in Pakistan either trough their own Understanding/draft contract unit in Pakistan or through a local ITPS vendor or through the alliance of their local unit with the local ITPS vendors Signing of contract with local vendors for Signed contract outsourcing to Pakistan Setup of outsourcing center in Pakistan by MNCs Identification of HR and company certification needs by the Vendors HR training fully paid up by GoP Outsourcing process

Detailed specifications for HR training and company certification needs

Company certification funded by GoP

Start of outsourcing work in Pakistan

Strategy for Indigenous Capability Building


Approach decision makers for outsourcing by GoP of some of its existing functions to local ITPS vendors, specially in the areas of bill processing and call center Start of outsourcing to local ITPS vendors from the above organizations Contact decision makers of local banks Sales pitch to offer their banking backend services capability to global vendors / other banks in the region Approach the decision makers of local banks to create an outsourcing division to explore, plan, obtain and deliver outsourcing contracts, more as a national service than a commercial venture
Pakistan Software Export Board Document Number: PSEB_VOL_9 Doc Version - Disposition: Final 171 2005 BearingPoint, Inc. and/or its affiliate(s) PSEB_BPO_Report_February 7,2006.doc

PUBLIC SERVICES Strategy for Pakistans BPO Industry September 20, 2005 STRATEGY FOR INCREASING EXPORTS OF BPO

Timeline Tasks
Arrange match making of local banks with the global ITPS vendors/other banks in the region, as per above Signing of contract with global vendors / Signed contract other banks in the region for outsourcing to Pakistan Setup of outsourcing center in Pakistan by banks Identification of HR and company certification needs by the Vendors HR training fully paid up by GoP Outsourcing process

Deliverables

2005 Qtr 4 Qtr 1

2006 Qtr 2 Qtr 3

2007 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4

Detailed specifications for HR training and company certification needs

Company certification funded by GoP

Start of outsourcing work in Pakistan

Pakistan Software Export Board Document Number: PSEB_VOL_9 Doc Version - Disposition: Final 172

PSEB_BPO_Report_February 7,2006.doc 2005 BearingPoint, Inc. and/or its affiliate(s)

PUBLIC SERVICES Strategy for Pakistans BPO Industry September 20, 2005 STRATEGY FOR INCREASING EXPORTS OF BPO

8.11.

Benefits1

Human Resource
2005
Human Resource

2006 & 2007 37,000 29,000

2008 70,000 33,000

2009 110,000 40,000

8,000

Job Creation

Creation of 100,000 Jobs in 4 Years

Other Benefits
I I I

Foreign Investment of $ 660 million in ITPS sector Increase in ITPS exports revenue from the current $ 100 million to $ 1 billion in 4 years Downstream impact on other products and services

8.12.

Tangible benefits

The tangible benefits of the recommended strategies include increase in the ITPS exports revenue from the current level of US $ 100-150 million to US $ 500 million and US $ 1 billion in 2 years and 4 years respectively. The other quantifiable benefit is the creation of direct and indirect employment opportunities for 65 and 100 persons respectively for each US $ 1 million ITPS export revenue, with attendant revenue generation for the Government in terms of income tax and other taxes. The following table indicates some of the major tangible benefits.
Table 45: Description Tangible benefits
1

2006 & 2007 370 Total Projected Revenue from all ITPS segments and all strategies (US $ million) Creation of employment opportunities due to ITPS exports 25,000 Human Resources Direct 37,000 Human Resources All (Direct + Indirect) Creation of employment opportunities due to domestic BPO 30,000 Human Resources Direct 50,000 Human Resources All (Direct + Indirect)
Creation of office space Direct million sq ft Investments (US $) Creation of office space All (Direct + Indirect) million sq ft Investments (US $)

2008 700 45,000 70,000 30,000 50,000 3.0 99 4.9 163

2009 1,100 70,000 110,000 40,000 70,000 4.6 155 7.7 257

1.6 52 2.6 86

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Pakistan Software Export Board Document Number: PSEB_VOL_9 Doc Version - Disposition: Final

PUBLIC SERVICES Strategy for Pakistans BPO Industry September 20, 2005 STRATEGY FOR INCREASING EXPORTS OF BPO

8.12.1. Intangible benefits

The intangible benefits include downstream impact on other products and services sectors, e.g., computer hardware sales and services, construction industry, emergence of a sizeable population of young people with strong buying capability with its healthy impact on the economy, etc. The other intangible benefits would include improvement in the image perception of Pakistan, improved social order due to the employment of the young educated, etc. It will also help to kick start the downstream industry because of the permeation of IT applications in wider segments of the business.
8.13. Conclusion

It would take about 1-2 years for the above-mentioned strategies to start yielding the desired results. Further, the projected ITPS export revenue is US $ 370, US $ 700 and US $ 1,100 by the year 2007, 2008 and 2009 respectively. The Cost benefit analysis of the above strategies and the other recommendations shows that the approximate investment cost during the above period is US $ 83, US $ 82 and US $ 84 respectively. The tables showing the project time lines and cost versus benefits are given below
8.13.1. Project Time lines

The business development life cycle has been indicated in the following table for each of the above strategy. It is the complete process from the time of identification of the vendors/outsourcing companies and the respective decision makers till the finalization of the contract and start of operations. In the case of global vendors, the business development cycle would be longer for vendors not having presence in Pakistan than those who do have a presence in Pakistan. Furthermore, its not going to be a one time discrete activity as the business development process for each strategy would be a continuous process with more and more vendors / companies being approached for outsourcing business. Likewise, there would be both horizontal and vertical growth with new companies opening up the outsourcing shop in Pakistan and the existing companies bringing more business. It will be seen from the same that it would require about 9-12 months from the time the strategy is launched till the business starts coming. 3, 6 and 3 months have been earmarked for the identification of the clients, negotiations and contract signing/logistics respectively.
Table 46: Description
2005 2006

Project Timelines for each strategy Timeline


2007 2008 2009

Strategy 1: Strategy For Global Vendors Target Approach


Global Vendors Having Presence in Pakistan Global Vendors NOT Having Presence in Pakistan

Strategy 2: Strategy for Global Vendors Deal Approach


Global Vendors Having Presence in Pakistan Global Vendors NOT Having Presence in Pakistan

Strategy 3: Strategy for Niche Markets


Pakistan Software Export Board Document Number: PSEB_VOL_9 Doc Version - Disposition: Final 174 2005 BearingPoint, Inc. and/or its affiliate(s) PSEB_BPO_Report_February 7,2006.doc

PUBLIC SERVICES Strategy for Pakistans BPO Industry September 20, 2005 STRATEGY FOR INCREASING EXPORTS OF BPO

Global Vendors Having Presence in Pakistan Global Vendors NOT Having Presence in Pakistan

Strategy 4: Strategy for Alliance with China


Business Development Cycle

Strategy 5: Strategy for Partnering with Indian ITPS Companies


Business Development Cycle

Strategy 6: Strategy for Joint Collaboration with the Dubai Internet City
Business Development Cycle

Strategy 7: Strategy for Pakistans Existing ITPS Market


Business Development Cycle

Strategy 8: Strategy for Multi-National Companies Operating in Pakistan


Business Development Cycle

Strategy 9: Strategy for Indigenous Capability Building


Business Development Cycle

8.13.2. Cost versus benefits of the recommended strategies and recommendations

As can be seen from the table given below, the major impact of the strategies identified and the recommendations for the GoP would be felt in the year 2007 onwards. This table also shows that the investments are a very small percentage of the revenues and above all most of the investments would be of recurring use. The Human Resource training costs and the building costs are incremental, as the resources once developed will be utilized in the subsequent years. The estimated marketing expenses are in proportion to the export revenue targets, with, understandably, higher proportion in the early years. The chief components of the marketing expense would be the hiring of some reputable marketing firm in USA for projecting Pakistan and its IT capability, expenses on targeted International seminars and trade shows, holding of road shows in Pakistan for the targeted sectors, etc.
Table 47: Description
PROJECTED REVENUE (US $ million) Total Projected Revenue from all ITPS segments and all strategies

Cost benefits

2006 & 2007 370

2008 700

2009 1,100

REQUIREMENTS:
Human Resources Office space (million sq feet)

25,000 1.7

45,000 3.0

70,000 4.7

COST (US $ million):


Building Costs
1

52

46

56

BearingPoint Study
PSEB_BPO_Report_February 7,2006.doc 175 2005 BearingPoint, Inc. and/or its affiliate(s)

Pakistan Software Export Board Document Number: PSEB_VOL_9 Doc Version - Disposition: Final

PUBLIC SERVICES Strategy for Pakistans BPO Industry September 20, 2005 STRATEGY FOR INCREASING EXPORTS OF BPO Training and Certification Marketing Campaign Deal Approach (Payroll & Office Rental) Up-front setup cost Total Cost1 Cumulative Cost

13 20 4 78 170 170

12 30 148 240 320

14 40 232 345 510

8.13.3. Cost versus benefits Assumptions

The aforementioned revenue projections are subject to the implementation of recommended strategies and the assumptions use. The consequential breakdown of the strategy wise revenue is provided in the following table:

Totals may not add up due to rounding off


PSEB_BPO_Report_February 7,2006.doc 176 2005 BearingPoint, Inc. and/or its affiliate(s)

Pakistan Software Export Board Document Number: PSEB_VOL_9 Doc Version - Disposition: Final

PUBLIC SERVICES Strategy for Pakistans BPO Industry September 20, 2005 STRATEGY FOR INCREASING EXPORTS OF BPO

Table 48: STRATEGY


PROJECTED REVENUE (US $ million) Revenues Growth of Existing ITPS Companies Strategy for Global Vendor - Target Approach Strategy for Global Vendor - Deal Approach Strategy for Niche Markets Strategy for Alliance with China

Strategy wise projected revenue 2006 $150 50 50 25 25 25 25 10 10

2008 $210 100 200 50 33 30 30 30 11


1

2009 $294 200 400 60 42 36 36 39 12

Strategy for Partnering with Indian ITPS Companies Strategy for Joint Collaboration with Dubai Internet City Strategy for Pakistan's Existing ITPS Market Strategy for Multi-National Companies Operating in Pakistan

Table 49:

Some Key assumptions/parameters

Average number of employees per company

IT Services & S/W BPO


Call Center: Other BPO segments (employees):

30 60 30 100% 26% 14% 60%

ITPS Exports Revenue share - % Call Center: Other BPO segments IT Services & S/W Space required sq ft Call Center / agent Other BPO Services S/W House / developer Building cost Cost / sq feet (US $)

70 70 70 33.3

Training costs (US $) IT Services & S/W S/W development & IT skills
CMMI

Unit cost (US $)

Percent to GoP share be trained 10% 100%

1,667

BearingPoint Study
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Pakistan Software Export Board Document Number: PSEB_VOL_9 Doc Version - Disposition: Final

PUBLIC SERVICES Strategy for Pakistans BPO Industry September 20, 2005 STRATEGY FOR INCREASING EXPORTS OF BPO

Training costs (US $)


Company cost Level 2 Level 3 ISO 9000 Employee cost Per module cost Total modules Call Centre Company cost Employee cost supervisor Employee cost agent Other BPO segments SAP / module Oracle Financials / module

Unit cost (US $)

Percent to GoP share be trained 15% 5% 15% 100% 100% 100%

20,000 60,000 5,000

5,833 4

5% 1%

100% 100%

5,000 3,800 500

25% 7% 75%

100% 100% 100%

5,833 1,667

2% 5%

100% 100%

Pakistan Software Export Board Document Number: PSEB_VOL_9 Doc Version - Disposition: Final 178

PSEB_BPO_Report_February 7,2006.doc 2005 BearingPoint, Inc. and/or its affiliate(s)