best practices study

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PPAAKKIISSTTAANNSSSSOOFFTTWWAARREEIINNDDUUSSTTRRYY

BBEESSTTPPRRAACCTTIICCEESS&&SSTTRRAATTEEGGIICCCCHHAALLLLEENNGGEESS

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IISSLLAAMMAABBAADD

FEBRUARY2005


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PakistansSoftwareIndustry:BestPractices&StrategicChallenges2005 2

Copyrights2005

PakistanSoftwareExportBoard(G)Ltd.

MinistryofInformationTechnology

GovernmentofPakistan

Printing

March2005

Publishedby

PakistanSoftwareExportBoard

TheFundingAgency

TheBestPractices inPakistaniSoftwareSector Project is fundedby the PakistanSoftwareExportBoard (PSEB).

PSEBistheentitywithinGovernmentchargedwiththetaskofenhancingexportsofsoftwareandITenabledservices

(ITES) from Pakistan. PSEB is a guarantee limited company totally owned and fundedby the Government of

Pakistan.AnyquestionsorcommentsaboutthisreportmaybedirectedtoPSEBIslamabadat9251111333666orthroughemailat [email protected].

Disclaimer

ThereportispublishedbyPSEBfortheuseofitsmembers&theITindustry.Thisreportisaresultofa3monthlongindependent

researchstudyconductedbytheprincipalconsultantwithsupportfromPSEB. ThestudyalsoincorporatesfeedbackfromPSEB,

MinistryofITandTelecom(MOITT)andstakeholdersofthePakistaniITindustry. Itfaithfullyreportswhattheconsultantfound

theonthegroundrealityofthePakistanisoftwareindustrytobeandaccuratelyreflects(andwhereverpossibleattributestoothers)

theopinionshewasabletoformonthebasisofhisdiscussionsandonsitevisitstoabout50Pakistanisoftwarecompanies.Tothat

effect, the reportsolely reflects theviewsof the consultantandmayormaynotreflect thoseofPakistanSoftwareExportBoard

(PSEB),theMinistryofITandTelecom(MOITT),ortheGovernmentofPakistan(GOP). Thestudyadvisorsorthecontributorsare

notresponsible,inanywaypossible,fortheerrors/omissionsofthisreport.

ThisreportisabestintentionedefforttodisseminateinformationaboutthePakistansSoftwareIndustryandshouldnotbeusedas

asolemeansofadviceformakinginvestmentdecisions.PSEBdoesnotacceptanyliabilityforanydirectandconsequentialuseof

thisreportoritscontents.ThecontentsofthisreportmaybereproducedonlyafterpriorpermissionfromPSEB.


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CONTENTS

1.EXECUTIVESUMMARY ......................................................................................................................................4

2.BACKGROUND&INTRODUCTION ..............................................................................................................11

2.1BACKGROUNDANDMOTIVATIONFORTHESTUDY......................................................................................12

2.2INTRODUCTORYREVIEWOFTHERELEVANTLITERATURE...........................................................................13

3.THEOBJECTIVES,AUDIENCE,ANDFORMATOFTHESTUDY..............................................................16

3.1THEANALYTICAGENDA: .............................................................................................................................16

3.2THEBENEFITSANDINTENDEDAUDIENCE: ..................................................................................................18

3.3THEFORMATOFTHESTUDY: ........................................................................................................................18

4.ABRIEFNOTEONPROJECTMETHODOLOGY...........................................................................................19

5.ASTATISTICALSNAPSHOTOFPAKISTANSSOFTWAREINDUSTRY.................................................22

5.1ESTABLISHINGAPOINTOFREFERENCEFORPAKISTANSSOFTWAREINDUSTRY ................22

5.2SOFTWAREDEVELOPMENTINPAKISTAN:STATISTICSONMANAGERIALANDTECHNICALPATTERNS.....24

5.3SEARCHFORTHEHOLYGRAIL:DOSTATISTICSREVEALAPATTERNOFBESTPRACTICES?...................49

6.UNDERSTANDINGPROMINENTBUSINESSMODELS&COMPETITIVEDRIVERS...........................53

6.1ATAXONOMYOFGENERICSOFTWAREBUSINESSMODELS.........................................................................54

6.2THEEXPORTFOCUSEDLOCALFIRM(THESYSTEMSORNETSOLMODEL) ..........................................59

6.3THEDOMESTICFOCUSEDLOCALFIRM(THETPSORLMKRMODEL)...............................................68

6.4THEEXPORTFOCUSEDFOREIGNFIRM(THETECHLOGIXORETILIZEMODEL)..................................80

6.5THEDEDICATEDDEVELOPMENTCENTER(THEITIMASSOC.ORCLICKMARKSMODEL) .................90

7. ENVIRONMENTAL,INFRASTRUCTURE &PUBLICPOLICYCHALLENGES....................................101

7.1TELECOMINFRASTRUCTURECOST&AVAILABILITY .................................................................................1057.2AVAILABILITYOFVENTUREANDRISKCAPITAL........................................................................................106

7.3UNDERDEVELOPEDDOMESTICMARKET...................................................................................................107

7.4AVAILABILITYOFPHYSICALINFRASTRUCTURE .........................................................................................108

7.5INTELLECTUALPROPERTYRIGHTS .............................................................................................................110

8.CONCLUSIONS&RECOMMENDATIONS..................................................................................................111

8.1SUMMARYOFRESEARCHRESULTSANDFUTUREDIRECTIONS ..................................................................112

8.2THEWAYOFTHEFUTURE:SOMETENTATIVECONCLUSIONS...................................................................114

9.APPENDIXA:LISTOFORGANIZATIONSSURVEYED/INTERVIEWED ..............................................117

10.LISTOFBIBLIOGRAPHICREFERENCES ...................................................................................................119

11.ABOUTTHEAUTHOR/CONSULTANT....................................................................................................123


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PAKISTANSSOFTWAREINDUSTRY

BESTPRACTICES&STRATEGICCHALLENGES

AN

EXPLORATORY

ANALYSIS

1.EXECUTIVESUMMARY

The software industrywidely seen as the great enablerprovides an opportunity to the

developingcountriestoplayagreatereconomicroleinthefastglobalizingworld.Theexample

of neighboring Indiawhose ambition and progress towards becoming a mini (software)

superpowerisnomysteryfromtheworldisoftencitedinthedevelopmentliteratureasan

evidenceofthefact.Pakistanssoftwareindustrywidelyperceivedtobesharinganumberof

keyfactorswithIndiahasembarkeduponanambitiouseffortofitsowntoclaimitssharein

therichesoftheworldssoftwaremarkets.Pakistaniscurrentlyviewedasatier3countryinawidely quoted taxonomy of software exporting nations (Carmel, 2003). It is widelybelieved

that,withthewealthoftalentandstrengthsavailable,thecountrydeservesabetterplaceinthis

global pecking order of software exporting nationsatleast a tier2 status like Russia and

China,orevenatier1statusalongsidearchrivalIndia1.

Pakistanssoftwareindustryhasbeenasubjectofthecuriosityofinterestedbystandersboth

localandexpatriateentrepreneursindustryanalysts,andpotentialinvestorsalike.Yet,lackof

credible dataon thecurrent stateandcompetitive dynamicsof the industry has oftenbeena

hindrance in engaging these individuals and materializing many prospective ventures. We

wererecentlyinvolved,ontherequestofanexpatriateinvestor,inanefforttoincubateanIT

focused venture capital in Pakistan. As we spoke with industry leaders and the financial

community,werepeatedlyencounteredaseriesoftoughquestions,forexample:

Why hasnt the Pakistani software industrybeen able to produce a single worldclasssoftwarefirm(e.g.Wipro,InfosysorTCSofIndia)inthelast1015years?

Why havent webeen able to grow Pakistani software exportsbeyond a certain level($3060millionperannum)forthelast5years?

DoesPakistanisoftware industrymerelyrepresenta lower levelofdevelopmentoranaltogetherdifferentdevelopmenttrajectoryascomparedtoknownpeernations?

What constitutes a generalized set ofbest practices in the local software industry (i.e.whatdifferentiatesbetterperformersfromthosethatdontperformthatwell)?

This study attempts to answer some of these questions. While several factors are widely

believedtobeahindranceinthecountrysaspirationtobecomeasignificantsoftwareexporter,

1 A widely quoted GOP target of $1B in software exports by Y2000 would have propelled Pakistan into theexclusive tier-1 club.


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nottheleastimportantofwhicharemacro andgeopoliticalinnature(e.g.lawandorderand

securitysituation,imageofthecountryetc.),weadoptaninsideoutapproachthatasks:What

can the various players, essentially software companies, in the industry learn from each

other? There is a growing realization that we must truly understand the structure of the

PakistanisoftwareindustryandthenatureofPakistanscompetitiveadvantageinthesoftware

arena in order to devise better industrial and organizational strategies and public policy

interventions.TheBestPracticesinPakistaniSoftwareSectorProjectbeingthefirstofitskind

andscopeinPakistanisanexploratorystudyofthePakistanisoftwareindustrythatattempts

todojustthat.

The study draws upon an onthespot survey of 40 of the most prominent and largest

software companies in Pakistan, as identified by PSEB and PASHA. We conducted

organizationalinterviewswithseniorexecutives(CEOs/CTOsorLocalofHeadsofOperations)

of 47 of these companies to supplement the statistical data with qualitative insights. These

interviewsfocused

on

understanding

these

organizations,

their

business

and

revenue

models,

competitivedrivers,strategicchallenges,andpolicybottlenecks.Wealsoconductedinterviews

ofopinionleaders,policymakers,andseniorexecutivesofotherorganizationalentities(e.g.IT

MNCs,financialinstitutions,andacademia)thathadasignificantbearingonthelocalsoftware

industry.Inallweconductedover65interviewsbetweenOct.Dec.timeframe(seeAppendix)

The substantive findings of the study canbebroadly divided into two components. The first

part attempts at creating abrief statistical snapshot of the Pakistani software industry, as

gleaned from the data on organizational, managerial, and technical practices of our

respondents.Thesecondpartofthestudyusestaxonomyofgenericsoftwarebusinessmodels

todevelopaqualitativesenseofsoftwaredevelopmentactivityinPakistan.Italsoidentifieskeystrategic challenges (13 in all) typically faced by companies within each of these generic

business models and managerialbest practices (20 in all) adoptedby various players in the

industrytomeeteachofthesestrategicchallenges.Thereportconcludeswithadiscussionon

environmentalandpolicybottlenecksandsometentativeconclusions

The results of the statistical analysis are quite illuminating. On the whole, the 60 software

houses included in our statistical sample employ over 4000 technical and professional

employeesforanaverageof62employeesperorganization.Roughlyone third (32%)of the

software companies reported annual revenues of more than a million dollars with some

reportingmorethan$5M,anotherthird(36%)between$200Kand$1M,andtherest(32%)lessthan$200K.6ofthecompanieshadmorethan250employeesandanother8hadbetween100

and250employees.Onthewholethese60companieshadexperiencedanemploymentgrowth

ofabout27.5%andarevenuegrowthof37.4%overthelastyearpointingatbetterutilization

of excesscapacityor valueadditionperemployee,orboth.Around 40%of thecompanies in

our sample were subsidiaries of foreign companieswith majority of them having a parent

companyintheUnitedStates.55%ofthecompanieshadoneormorefrontofficesabroad(50%


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in the US, 11% each in UK and Middle East, and 3% in the Asia Pacific region). 45% of the

respondents had quality certification (mostly ISO9000 with only 3% having CMM). 73.7% of

thecompanieshaddedicatedqualityassuranceteams.

Broadlyspeaking,ourrespondentsderivetheirrevenuesfromexportanddomesticmarketsina

ratioof60:40.Ontheexportsside,theyderive22.5%and38.5%oftherevenuesfromproductsand services respectively. Although we did not ask directly, our conversations with the top

leadersoftheindustrysuggestthatamajorityoftheproductexportsarecustomizedrather

than shrinkwrapped products. On the domestic side, however, the ratios are somewhat

reversedwithproductsandservicescontributing23%and16.5%respectively.Ourrespondents

predominantly serve the private sector markets with around 85% of the total sales going to

privatesector(localandforeigncombined)andtherestgoingtopublicsector,equallydivided

betweendomesticandforeign.

We tried to parse the data into various classifications in an attempt to understand the

organization and dynamics of software industry. For example, we looked at the differences

betweenexportfocused,domesticfocused,andhybridsoftwareoperations;betweenproduct

focused, servicesfocused, and hybrid operations;between large and small operations; and

between operations formed prior to and after the DotCom Bubbleburst in the United States.

Ourresultsaresuggestiveofseveralinterestingtrends.

Forexample,on themanagerialpracticesside, there issomesuggestiveevidence thatexport

focusedsoftwareoperationsaremorelikelytodistributestocks/ownershipamongemployees,

hold employee bonding activities, and benefit from employeedriven innovation while

domesticfocusedsoftwareoperationsaremorelikelytoshareprofitswithemployees,provide

additionalbenefitstofemaleemployees,havegreaterfinancialdiscipline,andprovidetimeto

employeestoworkontheirowninterests.Despitethelatter,however,theyseemtobenefitless

from employeedriven innovation and suffer more from a perception of lower delegation

quality.Hybridsfallinbetweenthetwocategoriesonalmostallthesemeasures.

Exportfocusedoperationstendtospendmore,onaverage,onqualityassurancewhilehybrids

tend tohaveagreaterpropensityforseekingaqualitycertification.Allcompanies,across the

board,prefertouseandexpressgreatersatisfactionwithhighcontactapproachesofmarketing

(e.g.wordtomouth,oneononecontacts,andpreestablishednetworks).Wedonotfindalot

of

differences

between

the

cost

structures

of

export

focused,

domestic

focused,

or

hybrid

operations, except that hybrids seemed to underinvest in productdevelopment to pay for

expensive marketing and advertising, and training and certification. CEOs of exportfocused

softwareoperationstendtospendmuchmoretimeintacticalratherthanstrategicmode(doing

daytodaymanagementratherthanmarketingandbusinessdevelopment).

Our analysis of other classifications provides few interesting insights. The dedicated

development centers tend to be smaller, more rigorous (from a technical and process


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standpoint)thantherestoftheindustry.They,however,seemtoexperienceseriousconstraints

torevenueandemploymentgrowthafactthatweinterpretasamanifestationoftheirmid

life crisis. Although we see a trend towards productization in the industry, we found few

significant differencesbetween productfocused and servicesfocused operations. This lack of

differentiation (e.g. in the cost structures of services and productfocused operations) is

problematic, to say the least. There were also few significant differencesbetween large and

smallsoftwareoperationsandbetweenthosecreatedbeforeandaftertheDotComBubbleburst.

Onthewholethesefindingsalsopaintapictureoflackoffocusandspecializationwithinthe

Pakistanisoftware industry. Thoseproductfocused operationsaresimilar to servicesfocused

operations and preDotCom operations are not qualitatively different from postDotCom

operations does not speak well for the maturity of the industry as a whole. A related

substantivefindingisthetrendtowardsthehybridizationofsoftwaredevelopmentactivity.

Thehybrid firmhasemergedasan importantorganizationalclasson itsownrather than the

averageof

the

two

extremes.

While

the

hybrid

firm

tends

to

do

better

than

the

two

extremes

on

somemeasuresandhencemightbeseenasamanifestationoftheindustryssurvivalinstinct,it

isnotquiteclearifitistheoptimalmodeloforganizationofsoftwaredevelopmentactivityin

thelongrun.

In line with the study objectives, we also asked the question: Do aggregate statistics reveal a

patternofbestpracticeswithin thesoftware Industry?Weusemultiplecomparisongroups

(e.g. 40 most prominent companies, top10 companies, 14 fastest growing companies, 14

companiesthatdescribethemselvesasgloballycompetitiveagainsttherestoftheindustry)and

find mixed results on thataccount.For example, we find robust evidence to support the fact

that betterperforming companies tend to adopt a set of employeefriendly managementpractices (e.g. flexibility, stockownership,profitsharingetc.) and haveaccess tohigh quality

managerial talent (e.g. mix of technical andbusinessbackgrounds, prior venture experience,

financial disciplineetc.) than therestof the industry.All companies,across theboard, prefer

highcontact marketing approaches over lowcontact onesbutbetterperforming companies

reporthighersatisfactionwiththeformerthantherestoftheindustry.Ourresultsonvarious

measuresoftechnicalandprocessqualityare,however,inconclusive,atbest.Here,wedonot

find any clear patterns that differentiatebetterperforming companies from the rest of the

industry.Webelievethatbestpracticeswithintechnicalandprocessrealmsaredependenton

thetypeofworkperformedandanumberofprojectspecificvariables.Asreportedelsewhere,

therefore,projectleveldatamightbebettersuitedtoidentifythesedifferences.

Next,basedonourstatisticalfindingsandqualitativeinsights,wedevisea4parttaxonomyof

generic business models. The four subclassifications, named after their most prominent

examples, include: Exportfocused Local Firm (Systems or Netsol Model), Domestic

Focused Local Firm (TPS or LMKR Model), Export Focused Foreign (Expatriate) Firm

(TechlogixorEtilizeModel),andDedicatedDevelopmentCenter(ITIMorClickmarks


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Model).Wepresentasnapshotofeachofthesegenericsoftwarebusinessmodelsandidentify

key strategic challenges for each13 in all for the entire industry. As we discuss the ways

relativelymoresuccessful firms in the industryhavecountered thesestrategicchallenges,we

alsoarriveattwenty(20)managerialbestpracticesthatcouldbereplicatedbyotherplayersin

theindustry.

The Exportfocused Local Firm is one founded by a predominantly Pakistanbased

entrepreneurial team (that may or may not have been aided/encouraged by a group of

expatriates),butwithanexplicitpurposeofexportingsoftwareproductsorservices.Majorityof

thefirmsestablishedinpreDotComBubblebursterawithanexpressedpurposeofexporting

services to North America and

WesternEuropeancountriesfallin

this category. Although there are

somethathavetakentheproducts

route,their

numbers

are

relatively

smaller than those focusing on

export of services. The most

defining feature of this class of

companies, namely, the local

presenceoftheirfoundersandthe

exportorientation of their

products/ services, brings a

number of unique and important

challenges to this type of a firm.

We discuss three of these in great

detailandalludetoseveralothers.

The ones we discuss in depth include: customer acquisition in a foreign market, setting up a

foreignmarketingpresence,andunderstandingthedomainandcontextofaforeigncustomer.

Some salient examples of this type ofbusiness model in action are: ThreesixtyDegreez, Post

Amazers,AdvancedCommunications,Makabu,Netsol,andAutosoftDynamicsetc.

TheDomesticfocusedLocalFirm,withanexceptionofafewcompanies,isreallyonebecause

ofcircumstancesratherthanchoice.Moreoftenthannot,andlogicallyso,thedomesticfocused

local firm plans to export its products or services abroad and is merely using the domestic

market as a vehicle to gain a track record with real life customers. Whether a firm is in this

categorybychoice(Illdodomesticfirst,exportlater)orbycircumstances(Sincetheexport

market doesnt seem very good right now, Ill survive by selling at home) the strategic

challengesarequitesimilar.Wediscussthreeoftheseinsomedetail.Theseinclude:operating

inanunderdevelopedlocalmarket,gettingaccesstocapital,andhavingabusinessplananda

strategic/domainfocus.Otherchallengesalludedtoinclude:migratingfromthedomestictothe

export market, developing relationships, delivering quality products/services, and even

ZRG

TPS

Lumensoft

Yevolve

2B Technologies

SI3

Softech Systems

Genesis Solutions

Alchemy Technologies

AppXS

Oratech

Askari Info Systems

Acrologix

Comcept

LMKR

CARE

ThreeSixtyDegreez

Post Amazers

Advanced Comm.

Netsol

Makabu

Autosoft Dynamics

Sidaat Hyder Morshed

Avanza Solutions

GoNet

Kalsoft

Jinn Technologies

Secure3 Networks

Systems Ltd

Progressive Systems

Millennium Software

Cressoft

Etilize

Prosol

Adamsoft

Ultimus

MixIT

Techlogix

Xavor

Elixir Technologies

ITIM Associates

MetaApps

Clickmarks

Enabling Tech. (Quartics)

Trivor Systems

Strategic Systems Intl

ESP Global Systems

DOMESTICFOCUSED

LOCALFIRM

EXPORTFOCUSED

LOCALFIRM

EXPORTFOCUSED

FOREIGNFIRM

DEDICATED

DEVELOPMENTCENTER

FIGUREGENERICBUSINESSMODELS&THEIRTRANSITIONSSCENARIOS

DIVERSIFICATION

M&A

W/

FOREIGN

FIRM

BUYOUTBYLOCALMGMT.MATURITY,VALUEADD ELEVATIONOFPAKOPS.SHIFTING

PRIORITIES

TRANSITIONSKEY


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marketing abroad. Some salient examples of this type ofbusiness model in action are: 2B

Technologies, ZRG, TPS, Lumensoft, Yevolve, SI3, Softech Systems, AppXS, and Genesis

Solutionsetc.

The Exportfocused Foreign Firm is one founded abroad (or jointly, in Pakistan), by a

predominantlyforeign(usually,anexpatriate)entrepreneurialteam,withanexplicitpurposeofusing the Pakistanbased offshore development facility to deliver a product or service

demandedbytheforeignmarket.Thistypeofbusinessmodelhasbeenadoptedbyservicesand

productfocusedcompaniesalike.Whilethisclassofcompaniesenjoysseveraladvantagesover

thoseinearlierdiscussedcategories,namely,qualityofduediligenceonthebasicidea,foreign

contacts/networksoffounders,andbetteraccesstocapitaletc.,therearesignificantchallenges

aswell.Wediscussfourofthesechallengesinsomedetailandidentifyanumberofmanagerial

bestpracticesfollowedbysomeoftheinterviewees.Thesechallengesinclude:dealingwiththe

imageproblem,counteringthegeographicallyshiftinglaborarbitrageargument,scalingup

the

Pakistanbased

operation,

and

getting

to

know

the

land

and

managing

expectations

etc.

Some salient examples of this type ofbusiness model in action are: Elixir, Etilize, Ultimus,

MixIT,TechLogix,Prosol,andXavoretc.

TheDedicatedOffshoreDevelopmentCenter,asthenamesuggests,isafairlylimitedoffshore

operation of a foreign company. It is different from the ExportFocused Foreign (Expatriate)

Firm inthesense that it isoftenanaddontoanalreadyexistingcompanywhosestrategic

andmanagerialprocessesandcontrolsarequitewellestablished.Duetoitsuniquenature(i.e.

limited scope) it faces a number of challenges that are distinct from the earlierdiscussed

category. We discuss three key challenges facedby organizations in thisbusiness model and

identify innovative best practices to counter these. These include: managing the parentsubsidiary relationship, setting up an offshore facility in Pakistan, and building a quality

softwaredevelopmentoperation.Somesalientexamplesofthistypeofbusinessmodelinaction

are: MetaApps, ITIM Associates, Clickmarks, Trivor Systems, and Strategic Systems

Internationaletc.

The taxonomyofgenericsoftwarebusinessmodelsmaybehelpful inseveralways.Firstly, it

gives us a relatively easy and comprehensive way to classify a particular software operation

into a broad enough category of organizations and a hence a reference point to compare

ourselves against. Secondly, it highlights the importance of understanding the strengths,

weaknesses,prerequisites,andstructural limitationsofeachof thegenericsoftwarebusinessmodels. It is also important here to understand that while transitionsbetween these generic

softwarebusiness models are possible, they are not necessary or automatic. None of these

business models is essentially good orbad, they arejust different and one must pick the

particularmodelthatbestsuitshis/herideaofferingdestinationmix.

Weconcludethestudywithabriefreviewonenvironmentalandpolicybottlenecksthathave

hindered the growth and development of the software industry. This is,by no means, an


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exhaustivestudyorevenacomprehensive listofpolicy issuesbutratheradescriptionofour

statisticalandqualitativefindings.Thecountrysimage,overandabovethecompanysbrand,

topsthelistastheproblemidentifiedbyasmanyas68%ofallrespondents.Thisisfollowedby

qualityofmanpower(56%),thecostofIT/Telecominfrastructure(50%)andlawandorderand

security situation (48%) as the most important problems from the perspective of alltypes of

firmscombined.Whiletherearevariationsbetweenhoweachofthesemaydisproportionately

affectvarioussubcategoriesoforganizations,image,IT/Telecominfrastructure,andHRappear

to rate consistently as among the top5 problems in all categories. We also faithfully narrate

severalproposals,putforthbyourinterviewees,toaddresssomeoftheseissues.

Onthewhole,thereareafewgeneralizedconclusionsthatonecandraw.Thefirstandforemost

contributionofthisstudyistobringforththeveryvibrantfaceofPakistanssoftwareindustry.

Pakistantoday,unlikeyesteryears,isfastturningintoahappeningplaceforIT. Althoughthe

industryhascomealongwaysinceitsfirstcompanyopenedshopin1976,ithasonlybeenin

thelimelightforinvestorsandpolicymakersalikesincetheearly1990s.TenyearsisaveryshorttimeforthedevelopmentofanentireindustryandtherearesignsthatPakistanssoftware

industry, having laid the foundations for a tomorrow, maybe in forbetter times ahead. Last

yearalone, the industryhasgrownataround37% inrevenuesand27% in termsof technical

and professional employment. Many of the CEOs we spoke to expect abetterthanlastyear

performance in 2005. Another encouraging sign is the increasing number of Pakistaniowned

foreign firmsbeing located to Pakistan as well as the reversebrain drainbeing causedby

returningPakistanientrepreneurswhoseetherelativelylesscompetitiveandvirginmarketat

home as a tremendous opportunity for setting up a Pakistanbased company. Systems

Integration, Innovation and Intelligence (SI3) and The Resource Group (TRG) are the posterchildrenofthisundeniabletrend.Noneofthesewouldhavebeenpossibleadecadeago.

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

modernization of traditionally conservative segments of the economy. If deregulation in the

financialsector isanycrediblesignofthingstocome,weare likelytoseemassivechanges in

the shape of the local manufacturing and service industries by virtue of telecom sector

deregulation and the enhanced competition under the noweffective WTO trade regime. The

former has already begun to show tremendous promise with around a billion dollars of

promised

investment

in

last

year

alone.

An

investor

whom

we

spoke

to

sees

the

situation

as

the

fading away of the Old Pakistan and the Emergence of the New Pakistan that is effectively

linked toand a significantplayer of the global economic system.The New Pakistan presents

considerablepromiseandopportunitytothosewillingtobiteat it.Thereareliveexamplesof

companiesTRG, SI3, LMKR, Netsol, Techlogix, Etilize, TPS and many morethat have

capitalizedonthisnewsetofopportunitiesandpositionedthemselvestoreaptherewards.


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There are, however, considerable, although not insurmountable, challenges too. The industry

suffers from a serious professionalization and institutionalization deficit. The 200people

barrier,althoughpsychological, isrealtill it isactuallybrokenandbrokenconvincinglyand

forever. Inaddition to the200peoplebarrier,wealso facea20peopleanda2peoplebarrier

thatrequires

as

much

attention

as

the

former.

Many

of

our

very

innovative

firms

continue

to

resistprofessionalizationandthusfailtogrowbeyondaparticularsize.Theindustryishungry

for capable investors/acquirers to come forth andbring about paradigm shifting structural

changes to thesecompaniesandenable themtomoveto thenexthigher levelofgrowth.The

fastmaturingmarketofoutsourcingandoffshoringservicesnecessitatethatourentrepreneurs

and business leaders think about new ways of doing things. It is unlikely, given the

consolidation in theoutsourcing industry, thatwewouldseeanewplayerreplacingWipros,

Infosys, or TCS of this world. Rather than blindly copying the already wellestablished

countries and players, we must think creatively to devise a model thatbest suits our own

strengths

and

weaknesses.

Our

ability

to

lead

in

the

business

model

innovation

would

determine,toalargeextent,ourplaceinthefuturepeckingorderofsoftwareexportingnations.

Playingthevolumesgame(ITES/BPO),withouttherequisitescalabilityandHR,isunlikelyto

succeedonanindustrywidescale.Untilwecanresolvethescalabilityissue,wemustlearnto

playintheequallylucrativeideasgame.

InadynamicandfastchangingindustrylikeIT/Software,tomorrowcanandwillberadically

different,andnotmerelyanextensionoftoday.Itwouldrequireinvestorsforesight,business

managers insight, and entrepreneurs courage to capture the moment and build the next

generationofnicheplayersand industry leadersandbuild it in theNewPakistan.Profitsare

certainly to be earned by those who break the rules and try the unthinkable. There is,

however, a dire need to think deep and hard about the problems, patterns, and strategic

challenges identified in this report, find explanations for these, and devise strategies to get

aroundthem.

2.BACKGROUND&INTRODUCTION

Pakistanssoftware/IT industryhasshownanunevenpatternofgrowth through itsrelatively

short history. While Information technology and software industries were not a government

prioritybefore early nineties, software houses have existed in the country since 1970s. From

earlytomid 1990s, however, promoting the software/IT industry hasbeen a stated, if not

alwaysadheredto,governmentpriorityafactmotivatedpartlybyIndiasrisetoprominence

asamini(software)superpower.Severalpolicyactionsandinfrastructuredevelopmentand

upgradationprojectshavebeenundertakenbyGovernmentofPakistan(GOP)topromotenot

onlyadomesticsoftware/ITindustrybutalsoexportsofsoftwarefromPakistan.Manyofthese


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aredocumentedintheNationalITPolicyanditsaccompanyingActionPlan(MOST,2000).The

progressontheseactionsandinitiativeshas,however,beensketchy(UNCTAD,2004).Thelocal

softwarescenedoesnotyetshowthekindofvitalityandgrowththatisacharacteristicofmajor

tier1oreventier2softwareexportingnationasdescribedinCarmel(2003).

2.1BackgroundandMotivationfortheStudy

WhilethecausesofPakistansbelowparperformanceinthesoftwaresectormaybemany,the

importanceofwithinindustrylearningandanorganicgrowthcannotbeoverlooked.Pakistans

softwareindustry(anditsancillaryandrelatedindustriese.g.banking,venturecapitaletc.)isin

direneedofsharingofbestpractices,ofitsownindustryiconsandheroes,andofalotofhope,

optimismandthefocustosucceed.Itneedsanindepthunderstandingofthecurrentstateofits

affairs,beyond thegeneralrhetoric,andavisionof the future tomotivate it toupgrade itself

and capture its due share in the world software/IT market. A formal research study ofbestpracticesandstrategicandcompetitivedriversofthePakistanisoftwaresectorhaslongbeenin

order. The proposed study would develop a shared understanding of the problems and the

promise of the Pakistani software sector andbuild a coalition of support around this shared

reality.Itwouldalsoserveasanauthenticsourceofdataandinformationtoquicklyupgrade

theunderstandingofpotentialinvestorsintendingtoinvestinthelocalsoftwarescene.Finally,

andmostimportantly,itwouldhelptheindustryitselfinlearningfromeachotherssuccesses

andfailures.

Several factors are widelybelieved tobea hindrance in the countrys aspiration tobecome a

significant software exporter,not the least important of which are macro and geopolitical in

nature (e.g. law and order and security situation, image of the country etc.). While resolving

these issues is critical to developing a strong and robust industry, this study adopts a

differentinsideoutapproach that asks the question: What can the various players,

essentially software companies, in the industry learn from eachother? In essence, we are

attemptingtolearnfromthevariationsinperformanceofcompaniesoperatingunderthesame

set of geopolitical and policy environment. Secondly, there is a growing realization that we

must truly understand the structure of the Pakistani software industry and the nature ofPakistanscompetitiveadvantageinthesoftwarearenainordertodevisebetterindustrialand

organizationalstrategiesandpublicpolicyinterventions.Afirmlevelanalysishasthepotential

tounearththefactorsbehindwithinindustryperformancedifferentials(e.g.Netsolvs.Cressoft

vs. Enabling Technologies) and identify best practices that can be adopted industrywide.

Regardlessofwhatthefinalconclusionmaybe,theonethingthatiscertainaboutthePakistani


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software industry is that it is not a very well understood and researched one. For example,

questionslike:

Why hasnt the Pakistani software industrybeen able to produce a single worldclasssoftwarefirm(e.g.Wipro,InfosysorTCSofIndia)inthelast1015years?

Why havent webeen able to grow Pakistani software exportsbeyond a certain level($3060millionperannum)forthelast5years?

DoesPakistanisoftware industrymerelyrepresenta lower levelofdevelopmentoranaltogetherdifferentdevelopmenttrajectoryascomparedtoknownpeernations?

What constitutes a generalized set ofbest practices in the local software industry (i.e.whatdifferentiatesbetterperformersfromthosethatdontperformthatwell)?

Answeringthese(andother)questionswouldrequireconsiderableindustryresearch,sharingof

bestpractices,anddiscussion/debate.Theultimateanswertothesequestionsismostsurelynotgoingtobeasilverbulleteitherbutaformalinquiryhasthepotentialtosetinmotionaprocess

thatmightgiveussomehints towardsapossibleanswerorenableus toaskmore intelligent

questionsandthusleadusnearertothetruth.

2.2IntroductoryReviewoftheRelevantLiterature

There hasbeen considerable increase in the interest in software industries within developing

country contexts in the recent years. Proponents of the school of thought that sees IT and

softwareasagreatenablerhavearguedthatinformationtechnologyingeneral,andsoftware

industryinparticular,providesanopportunitytothedevelopingcountriestoinextricablylink

themselves with the developed economies of the west. This globalization of work (or

production), somebelieve, is a harbinger of subsequent phases of globalization that would

reduce the disparities across the world and provide an equal opportunity for everybody to

participateintheglobalproductionandcreativeprocesses.Inmanyinstances,thesepredictions

havealsobeenvalidatedby initialexperiences insomedevelopingcountries.Mostnotableof

theseareIndia,IrelandandIsrael,famouslyknownas thethreeIsoftheglobalITrevolution

andthenewentrantsinthetier1ofsoftwareexportingnationsthatalreadyincludesrelativelymoredeveloped,mostly,OECDcountriesand,andtoalesserdegree,ChinaandRussia(tier2

countries).Followingtheexamplesofthesetier1and2nations,areahostofotherdeveloping

countries,namely, Brazil, Mexico, Malaysia, SriLanka,Pakistan, Ukraine,Bulgaria, Hungary,

Poland and the Philippines (tier3 countries) and Cuba, Iran,Jordan, Egypt, Indonesia and

Bangladesh(tier4countries)andmanyothers(Carmel,2003).


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Whiletheboundariesbetweenthecountriesinthis4tieredtaxonomyarequitefuzzy,primarily

bydesignbutalsoduetolackofcredibledataoneach,Carmel(2003)attemptstodifferentiate

tier1 countries as having hundreds of companies, more than a billiondollars of export

revenues,andtheindustrymaturityofmorethan15years;tier2countriesashavingatleasta

hundredcompanies,exportsrevenuesofmorethan$200million,andgreaterthan10yearsof

industrymaturity;andtier3countriesashaving tensofcompanies,morethan$25million in

exportrevenues,andover5yearsofindustrymaturity.Allotheraspirantsthatdonotmake

thecutfallinthetier4ofthetaxonomy.

Manyresearchersandanalystshave tried tounderstand thedynamicsof the Indiansoftware

industry (NASSCOM,2001,2002,2003,2004;Heeksetal,1996,1998,2002;BajpaiandShastri,

1998;Desai,undated;Aroraetal.,2000).Software industriesofothercountriessuchasChina

(Tschang and Xue, 2003), Japan (Rapp, 1996), Iran (Nicholson and Sahay, 2003), Romania

(GrundeyandHeeks,1998),SriLanka(BarrandTessler,2002),Korea(BarrandTessler,2002)

and Malaysia (Mohan et al., 2004), among others, have alsobeen documented in literature.

Severalresearchershaveattemptedtotakethisknowledgeandapplyittothecontextofother

countries(UNCTAD,2002,Tessleretal.,2003).Othershavetriedtodeveloppolicyframeworks

and draw policy conclusions (Carmel, 2003b, Heeks and Nicholson, 2002) or develop generic

analyticframeworksforanalyzingthecompetitivenessofsoftwareindustries(Heeks,1999;and

Bhatnagar,1997).Heeks(1999)describesa2x2theoreticalframework(describedinsection5.2)

thatclassifiessoftwarecompaniesonthebasisoftheirdestination(domesticorexport)andtype

ofoffering(productorservice).Bhatnagar(1997),takingadifferentapproach,describesnations

asgoing through fourstagesofmaturity transitioning frombuildingskillsandreputation, to

buildingservices,tobuildingproducts.

Heeks(1999)analyticframeworkisinterestingandusefulandroughlyformsthebasisofthis

reports analytic framework. The four resultant categories of companies from Heeks 2x2

frameworksaredifferentintermsoftheirorganizationalcharacteristics,competitivestrategies,

and enabling conditions and requirements. While it is clear where most companies from

developing countries would like tobe (i.e. exporting products and services), Heeks (1999)

arguesthatgettingthereisnotallthateasy.Veryfewcompanieshavebeenabletosuccessfully

executeonstrategiesdictatedbytheneedsofeachofthesefourquadrantsandHeeks(1999)

claims that majority of what we see is a constrained kind of an optimizationhe calls them

survivalstrategiesratherthanafreeplaywithinthesecategories.Drawinguponanearlier

paper (Heeks, 1998) it also presents secondary and anecdotal evidence to support his

conclusions.


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Thatthemuchtoutedsuccessofthesoftwareminisuperpowersmaynotbeasconvincingas

it is portrayed canbegleaned from the following facts.Firstly, developingcountry packaged

softwareexportsthe24caratgoldofthesoftwareexportsbusinessareminimalinthe5

10% range fromeven thebest of thesoftwareexporters like India, with the soleexception of

Ireland

and

perhaps

to

a

lesser

degree,

Israel.

Secondly,

majority

of

the

work

doneby

the

developing countries consist of lowskilled programming or coding services and while some

countries,notablyIndia,mighthavedonewellinthistypeofactivity,itseriouslysuffersfrom

issues of valueaddition and scalability. Thirdly, majority of the workbeing performedby

developingcountriesislocatedinrelativelyfewconcentratedenclavesofsoftwaredevelopment

activity worldwide (e.g. IndiasBangalore),beingperformedby foreigntrainedprogrammers

workinginsubsidiariesofforeigncompanieswhospendamajorportionoftherevenuesonsite

(in thecountry of their clients) to pay for the travel and living expensesof their consultants,

leavingmuchtodesiredintermsofvaluegainedbythedevelopingcountryitself.Heeks(1999)

describes

major

challenges

(orbottlenecks)

that

a

firm

may

encounter

in

each

of

these

four

productmarketcategoriesanddescribesthereasonsofthetypeofperformanceweseeineach

ofthesecategories.

Stillotherresearchershavetakenamulticountryviewofsoftwareindustries.Rubin(2000)isan

interesting, thoughdated,overviewofglobalsoftwareeconomics (Pakistan isnot includedas

one of the countries surveyed). It presents data on several interesting variables (e.g. labor

productivity,sizeofsoftwarestaff,sizeofportfolio,costperdeliveredanddocumentedlineof

code,costpersupportedlineofcode,averagesalariesofdevelopersandmaintenancestaff,and

defects per 1000 lines of code etc.) for a large number of countries. Coward (2003) takes an

outsourcers view of the software industry looking at the 14 factors that influence the

decisions of American SMEs to outsource software development activity to developing

countries. Cusumanoet.al.(2003)isareviewofglobalsoftwaredevelopmentpractices.Based

onastudysampleof104projects,itcomparesthesoftwaredevelopmentpracticesofAmerican,

European,Japanese,andIndiancompanies.

Thisstudyfindsthatconventionalsoftwareengineeringpractices(e.g.functionalspecs,design

reviews,codereviewsetc.)arepopular in India,Japan,andEuropebutnot theUnitedStates

wheretheyareusedless,acrosstheboard.ItidentifiesIndiancompaniesasespeciallyadeptin

mixing theseconventionalapproacheswith therelativelynewerapproaches likedailybuilds,testerdeveloperpairs,andpairedprogrammingtechniques.Overall,thereportfindsJapanese

andEuropeansoftwareoperationstobemostproductive(intermsoflinesofcodeperaverage

staff*calendar) followedby US and Indian operations.Japanese projects also produced the

lowest number of defects, followed closelyby Indian and US projects, and the Europeans

finishinglastonthismetric.


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Thisstudyconfirmssimilarfindingsbyotherresearchersthatdescribethetechnicalqualityof

software developmentprocesses employedby Indian software companies (Duttaand Sekhar,

2004) and the adoption of standardized quality practices like Six Sigma methodologies

(Radhakrishnan, 2004) and CMM certifications. These geographical differences in software

development

practices,

however,

maybe

attributed

toboth

cultural

and

type

of

work

related

factors.Forexample,Cusumanoetal.(2003)observethatIndiaandJapansignificantlylagthe

AmericanandEuropeansoftwareoperations intermsofthe innovativequalityof theirwork.

Dutta et al. (1997) finds similar acrosscountry differences within 16 different European

countries.

Collectively, thisconstitutesawealthof informationabout thedevelopmentandevolutionof

softwaredevelopmentactivityindevelopingcountrycontextsfrommultipleperspectives.They

point towardsanumberof factors,environmental,policyanalytic (e.g.CarmelsOvalModel,

Heeks National Export Success Model) and organizational (e.g. Cusumano et al., 2003, and

Cusumano,2004)andidentifymajorbottlenecksthatmightaffecttheexecutionofaparticular

strategy (e.g. Heeks, 1999). While development planners seek to extract prescriptions, this

collectivebody of literature falls short of doing so hinting instead at the idiosyncratic factors

andearlymoveradvantagesthatmightdistinguishsomecountriesprogressfromtherest.

The overall picture that emerges from various models and frameworks is a complex one. It

underscores the importance of understanding a large number of policy, environmental, and

organizational factors, and how they interact with each other, as well as the individualistic

featuresofeachof thecountriesand their targetmarketsbeforeapolicyoran industrywide

prescriptioncan

be

made.

Every

country

that

we

looked

at

(e.g.

India,

China,

Japan,

Ireland,

Israel etc.) is different from every other country and understanding these unique features is

importantbeforeany lessonscanbedrawnandapplied fromothercontexts.We takeup this

challengeinthisreportonPakistanssoftwareindustry.

3.THEOBJECTIVES,AUDIENCE,ANDFORMATOFTHESTUDY

TheBestPracticesinPakistaniSoftwareSectorProjectbeingthefirstofitskindandscopein

Pakistanis an exploratory study of the Pakistani Software Industry. Not only is the whole

subjectoftheformationanddynamicsofsoftwareindustryaroundtheworld,andespeciallyin

developingcountries,relativelynewandhenceunderstudied,thePakistanisoftwareindustry

isa totallyuncharted territoryas faras thestructure,managementpractices, technicalability,

andtheindustrydynamicsareconcerned.

3.1TheAnalyticAgenda:

Thisstudyhasbeenundertakenwithatwoprongedanalyticagenda,namely:


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Atthemostbasic level, thestudyattempts tocollectqualitative (butalso,wheneverpossible

within thepurviewof theresearch,quantitative) informationon thecurrentstateofsoftware

industryinPakistanwithanemphasisonfirmlevelcharacteristicsandcompetitivedynamics.

This would help in identifying the various organizational success factors, develop a shared

understanding

around

those,

and

enable

stakeholders

to

derive

strategic

and

policy

prescriptions from these. It explores the importance and prevalence of the various structural

constructs in the Pakistani software industry and documents perceptions ofbusiness leaders,

entrepreneurs,andinfluentialindividualsintheindustrytowardseachoftheseconstructs.The

studyattemptstodoaoneleveldeeperanalysisofwhyindividualsholdacertainperceptionto

move the level of debate within the industry to the next higher level (i.e. from identifying

problemstoidentifyingsolutions).Forexample,ifwehearalternativeexplanationsoflackofa

culture of entrepreneurship, we would like to explore why and on what factors are those

perceptionsbaseduponand,totheextentpossible,corroboratethatwithgroundreality.

Atthemoreadvancedlevel,thestudyattemptstoestablishbestpracticeswithinthePakistani

softwaresector.Thisisaproblemriddledwithcontroversies,nottheleastimportantofwhichis

the identification of highperformers in the absence of credible performance data. Additional

issueshavetodealwithdefinitional(i.e.whatisabestpractice?)andmaturity(i.e.when

doesapracticebecomeabestpractice)problems2.Thestudytriestotacklethiscontroversial

subject in a number of ways. Firstly, we try to identify the relatively more successful and

prominent software companies in Pakistan and compare their various organizational,

structural, and process features against several others that have not been as successful.

Although it is likely that the differencesbetween thebest and the notsogood performers

may not turn out tobe substantive enough (or worse yet, they may turn out tobe quite

obvious), the results of the study would, nonetheless, form a documentedbaseline against

which changing trends in the Pakistani software industry maybe compared in the future or

againstthatofothercountries(e.g.India).

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

qualitative/anecdotalapproachmaystillbeoftremendousvalueinidentifyinganddeveloping

a shared understanding of best and unique practices (and whats possible) within the

software sector in Pakistan. Similarly, a valid criticism of our approach maybe that in a

relativelynascentandimmatureindustrylikeours,asinglecompanymaynotrepresentallthedesirablebestpracticefeatures.Weuseaqualitativeapproachtoidentifyandcherrypick

specific innovative and successful features of the software development and marketing

2Accordingtoonelongtimeindustryobserver,itmightbedifficulttoidentifybestpracticesinthe

relativelynascentPakistanisoftwareindustry,whatonemightgetinreturnforthequestfortheformerwouldbea

lotofworstpractices.


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processes (e.g. partnering and alliance building, customer acquisition, and product

developmentstrategyetc.)todevelopalaundrylistofbestpracticesthattherestoftheindustry

canemulate.Whileourprimaryfocusismanagerialbestpractices,wedobrieflytouchuponthe

issueoftechnicalpracticesinthepassing.Thisisdonefortheprimaryreasonthatthereexists

an

interplay

and

dependence

between

the

latter

and

the

former.

We

do

not,

however,

attempt

an

exhaustiveanalysisofthetechnicalpracticesoforganizationsbeingstudied.

3.2TheBenefitsandIntendedAudience:

The primary purpose of undertaking this study is that ofwithinindustry learning with the

secondarypurposebeinginvestmentpromotionandfacilitation.Thebenefitsof(andintended

audiencefor)theaboveanalysiswould,therefore,bethreefold:

Firstly, the findings of the study would be of considerable value for the existingsoftware entrepreneurs, executives,andmanagers seeking to learnfrom the collective

experience of their compatriots. This learning could take the form of: What are the

criticalsuccessfactors,theDosandDonts,sotospeak,ofrunningasoftwarebusiness

in Pakistan? The industry managers wouldbe able to gauge the performance of their

companies against the bestinclass companies and derive recommendations for

correctingcourse,ifnecessary.

Secondly, the study would also inform the interested (yet skeptic, at times) bystanderspotential entrepreneurs, interested businessmen and managers, and

investorscontemplatingstartingasoftwareventureand looking foragoodsenseof

what we can learn from the experiences of tens of successful and notsosuccessfulentrepreneurs.Itwouldalsohelpinspireandilluminatethedecisionsofavastnumber

of stakeholders, namely, business leaders, industrialists, managers, financiers and

investors, regulators, policymakers etc, whose decisions to engage or disengage with

thisnascentsectoroftheeconomycanmeanthedifferenceforthesoftwareindustry.

Thirdly,thestudybeingthefirstofitskindinPakistancouldbeofpotentialvalueforforeign investors,clients,andpolicymakerswhoseappetiteformeaningfulquality

informationon thesubjectgoesunsatisfiedforwantof credibleanalysisdoneon the

subject.Tothateffect,thisstudymayprovideacredibledatabenchmark(orreference

point)forputtingPakistanssoftware industry in largerglobalperspectiveandgetting

themessageacrosstopotentialinvestors,clients,andpolicymakers.

3.3TheFormatoftheStudy:

Thestudycanbebroadlydividedintotwoparts.Thefirstpartcoversastatisticalsnapshotof

the industry as gleanedby data on ourrespondents. The second part combines this with the

morequalitativeinformationtodiscussstrategicchallengesandgoodpracticesintheindustry.


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The study is formatted as follows: Section3 provides some background that builds the

motivationforthestudy.Section4dealswiththeobjectives,audience,andformatofthestudy.

Section5briefly describes the project methodology in a narrative and a graphical fashion.

Section6startswith theresultsof thesurveyandattempts tobuildastatisticalprofileof the

Pakistanisoftwareindustryasgleanedfromanonthespotsurveyof60ofitsmajorplayers.

This section is divided into 4 major parts. The starting part sets the context of this statistical

analysisbydiscussingresultsfromaverylimitednumberofearlierstudies.Thenwediscussa

basicstatisticalsnapshotoftheindustryusingexportfocusedanddomesticfocusedfirmsasa

basis for classification. Next we discuss various other classifications (e.g. productfocused vs.

servicesfocused, small vs. large, preDotCom vs. postDotCom, and developmentcenters vs.

rest of the industry) to assess how these varying organizational factors affect the managerial

and technical processes of software companies in Pakistan. Finally, we assess whether the

industrystatisticsrevealapatternofbestpractices?Inessence,weusethestatisticaldatato

answerthe

question:

How

do

better

performing

firms

differ

from

the

rest

of

the

industry?

Section7supplements thiswith informationgained fromaround65qualitative interviews. It

usestaxonomyofgenericsoftwarebusinessmodelsinPakistantoidentifygenericprofilesand

strategicandcompetitivechallenges facedbysoftwarecompanies inPakistan.We identify13

suchchallenges,dividedacross4genericcategoriesofsoftwarebusinessmodels,anddiscuss

ways in which our respondents have innovatively tried to address each of these. There are

lessonstobelearnthereforthesoftwareentrepreneursandbusinessmen,bothyoungandold

that could be applied and replicated across the industry. Section8 briefly touches upon

environmental,infrastructure,andpolicybottlenecksconfrontingthesoftwareindustry.Finally,

Section9discussessometentativeconclusionsandrecommendations.

Thisreportcanbereadinitsentiretyorselectivelydependinguponwhatareaderisspecifically

lookingfor.Initsentirety,wehavetriedtostructurethereportinamannerthatcouldgivethe

readeracomprehensiveviewofPakistanssoftwareindustry,itscurrentstate,itspeculiarities,

and themajorchallenges facedby thesoftwarecommunity.Onecanalso,however,pickand

choose what specific sections to read. For example, the generic profiles of different types of

softwarebusinessmodelsandthechallengesspecifictoeachcanbereadwithoutreferenceto

the rest of the report. Either way we hope the report would present considerable original

informationandgeneratesomethoughtandreflectionamongitsreaders.

4.ABRIEFNOTEONPROJECTMETHODOLOGY

Inordertomeetbothqualitativeandquantitativerequirementsofthestudy,weadoptedatwo

prongedapproachtotheproject,comprisinganonthespotstatisticalsurveyandqualitative

interviewswithtoporganizationalexecutivesofmajorsoftwarecompaniesinPakistan.Owing

to the relatively short timeline of the project, a convenience sample of software houses (or


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softwaredevelopmentoperations)wasselectedandcontactedtobecomepartofthestudy.An

effort wasmade, however, to includekey largeandprominentplayersof the industry in the

analysis.Foursourcesofinputwereutilizedforthispurpose.PSEBandPASHAofficialswere

contactedtoidentify,fromamongsttheirmembercompanies,thelargest,mostprominent,and

mostsignificant

software

operations.

The

consulting

team

also

utilized

its

own

knowledge

of

the localsoftware industrytoaddto this listofnominations.Finally,severalcompanieswere

addedtothelistonanongoingbasisasnamesofcompaniesdoinginnovativeandinteresting

workcameupduringinterviewswithindustryprofessionals.

In all, 22 companies in Karachi, and 13 each in Islamabad and Lahore (for a total of 47

companies) were personally visited and surveyed. 13 more companies were added to the

statistical sample through the Online Survey of Best Practices in the Pakistani Software

Industry3.Thisincreasedthetotalnumberofsurveyrespondentsto60.40ofthese60companies

(or 2/3rd of the total) were identified and hence categorized as the more prominent and

relativelysuccessfulsoftwareoperationsinPakistan.Thisenabledustodeveloptworeference

groupsandallowedthepossibilityofstatisticalcomparisonsbetweenthesetwogroupswitha

viewtoidentifyingdifferencesbetweentheminvariousmanagerialandtechnicaldimensions.

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


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Perceived Policy

Problem &

Opportunity

Problem

Definition

DataCollectiononContext & Background

Policy &

Research

Questions (RQ)

Preliminary Literature

Review (LitR1)

1.Research

Questions(RQ)

2. Survey

Parameters(sample

4.

Instrument

Testin

3. Surv

Instru

6. Ana

& Res

5. Survey

Administra

-ion

3.

Admin

Interv

2. Identify

Sample /

Participant

1.Thematic

Areas for

Interviews

R&DPERFORMANCEMAILSURVEY

COMPANYINTERVIEWS

ONGOINGLITERATUREREVIEW(LITR2)

Figure-I: The Multi-Pronged Research Methodology


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Severalothercomparisongroupswerealsocreatedtohighlightdifferences inmanagerialand

technical practices. Throughout the following analysis, where appropriate, we invoke the

differences between various categorizations (e.g. exportfocused vs. domesticfocused vs.

developmentcenters,betterperformersvs.rest,productfocusedvs.servicesfocused,andlarge

vs.small

software

houses)

to

make

the

results

more

meaningful

to

the

software

community.

FigureI(below)presentsagraphicalsnapshotoftheprojectmethodology.Nextwelookat

theresultsoftheanalysis.

5.ASTATISTICALSNAPSHOTOFPAKISTANSSOFTWAREINDUSTRY

Adiscussionofthesize,structure,anddynamicsofPakistanssoftwareindustrymustbeginby

setting an appropriate reference for the same. This reference can either come from within

Pakistan(i.e.comparingthecurrentindustrywithitsstateatsomepointinthepast)oroutside

Pakistan(i.e.comparingitwiththestateofsoftwareindustryofacomparablecountry).There

arepotentialproblemswithboththeseapproaches.Fortheformer,barringahandfulofreports,

welackcomprehensiveandcredibledataofanykind,whatsoever,tosayanythingmeaningful

abouttheindustryatdifferentinstancesintime.Whileforthelatter,onefacestheproblemof

finding an appropriate country to make comparisons with. Most often, for reasons of

prominenceandtradition,theexampleofIndiaisinvokedwhenanalyzingPakistanssoftware

industrya practice that, although may have some value, can at times be quite

counterproductiveorleadtowrongpolicyprescriptions4.Wewilldiscusseachofthesepoints

ofreferenceingreaterdetailbelow.

5.1EstablishingaPointofReferenceforPakistansSoftwareIndustry

Looking forpointsofreferencerelevant to thePakistanisoftware industry,wecould identify

onlyahandfulofstudies/documentsofvaryingcredibilityfromthepast.Theseinclude:A1999

2000 CSPSEARCC5 ICT Manpower and Skills Survey; a 2002 PASHALUMS Study of

PakistansSoftware/ITIndustry,a2004UNCTADStudy,anda2004EAC6StudyofPakistans

ITIndustry. Eachofthesestudiesisfairlylimitedintermsofthescopeandcoverageofpolicy

4 This has been a case quite a few times in past, for example, the Government of Pakistans $1 Bn. Software ExportTarget by FY2000 was motivated in part by using the Indian software export figure and appropriately discounting itto a smaller value rather than any credible assessment of the industrys present or future capability.5 This study was conducted by the Computer Society of Pakistan (CSP) in collaboration with South East AsiaRegional Computer Confederation (SEARCC) and used methodology and instruments that were used among 14countries of South-East Asia.6 Experts Advisory Cell (EAC) is housed within Ministry of Industries, Government of Pakistan.


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andorganizational(technicalandmanagerial)issues.Thesestudies,likeanyotherstudyofthis

nature, also have a fair number of methodological issues and problems. For example, CSP

SEARCC&PASHALUMSstudiesarequitedated.Whiletheformerdoesfairlywellasfaras

being representative of the industry and providing a good reference point for crosscountry

comparisons, it isfairlylimited in itsscope(i.e.onlydealswithmanpower issues).The latter,however,whilebeingmuchbroaderinscopedoesfairlypoorlyonrepresentativeness7.

The latter two studies (i.e. UNCTAD, 2004 and EAC, 2004) are focused more on the policy

environmentandlessonorganizationalissues.Theformermakesanattempttoimposepolicy

prescriptions from other countries without adequately demonstrating an understanding the

7 The maximum sample size in PASHA LUMS (2002) is 16 with very strong statistical generalizations made, attimes, with as little as 7 observations, without any mentioning of potential non-response biases.

TEXTBOX#1: SALIENTFINDINGS&METHODOLOGIESOFPRIORSTUDIES

CSPSEARCCStudyofICTManpower(2000):314of441organizationsresponded(71%

responserate)ofwhich40.8%wereITsuppliers,14.5%publicsector,and44.7%privatesectorend

users.2375of5000ITprofessionalsresponded(46%responserate)ofwhich60.3%workedin

developmentand39.7%inservices.Somesalientfindingsare:

51.3%ITprofessionalsworkedinsoftwaredevelopmentwhile6.3%inITMgmt. ITprofessionalsagedbetween2529(33%),2024(23%),and3034(19%) Male:Femaleratiois9:1,withroughlyproportionalrepresentationinjobsincl.ITmgmt. Salarylevels:PKR25M)employeddoubletheQAprofessionalsthansmallerona%basis.

UNCTADStudy(2004):ComprisesreviewofsecondaryliteratureinthePakistaniand

internationalcontexts.Salientfindingsofthestudy,generallycriticaloftheindustry,are:

Discernableactionononly18ofthe162(11%)commitmentsofNationalITPolicy Pakistan76thof102countriesinNetworkReadinessIndex ActualspendingunderITPolicy2000lagsallocations,esp.inExports/eCommerce RevenuesinExport:$12.2M(growthof84%)andDomestic:$5M(growthof49%) Currentestimateofsoftwareexportsatabout$12M


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peculiardynamicsofthe localsoftware industry.Thelatterprovidesa lotofdata,which isat

best,sketchy,andaggregatesa lotofmundanesecondary information inanunimaginative

fashion. These weaknesses notwithstanding, these studies provide a starting point for a

discussionon thecurrentstateofPakistanssoftware industry.TextBox#1 (above)provides

someofthesalientfeaturesandfindingsofthesereports.

Moreimportantly,however,thesereportsprovideanimpetusandamotivationtoundertakea

moreextensiveontheground(handson)analysisofthePakistanisoftwaresector.

5.2SoftwareDevelopmentinPakistan:StatisticsonManagerialandTechnicalPatterns

PakistansSoftwareIndustryhascomealongwayfromitsstartin1976whenacompanyby

thenameofSystemsPvt.Ltd.openeditsofficesinLahore.Overthelastthreedecadesorso,the

industryhasgrown from zero toan approximatesizeof wellover a hundred milliondollars

and employs thousands of professionals8. During this time, the industry has seen periods of

nascence, hope, euphoria, disillusionment, renewal, and rebuilding. The last decade has in

particularnotonlybeenatimeofgreatpromise,butalsoatestfortheindustrythathasbeen

throughafullcycleofreversalsfromaninsideout(domesticfirst,exportlater)toanoutside

in(exportfirst,domesticlater)worldviewandbackagain.Intheprocess,itprobablyhasalso

been through considerable maturation, not only in terms of its ability to develop good

innovativesoftwarebutalsobuildsuccessfulbusinesses.Wefindconsiderableevidenceofthe

fact that the countrys financial communitythe business houses, investors, and business

managersare learning how to manage the IT and the IT professionals are learning how to

manage thebusinesspartsof the ITbusiness.The industry,however,hasa longway togo

beforeitcantrulyrealizeitspotential.Thestatisticalpicturethatwepresentbelow,therefore,is

asnapshot,ataparticularpointintime,ofwhatessentiallyisamovingtarget.

Beforewediscussthestatisticalresults,however,adisclaimerisinorder.Thestudyinquestion

onlylooksattherelativelywellknown50oddsoftwarehouses(ordevelopmentoperations)in

Pakistanandhencedoesnotclaimtoberepresentativeoftheentireindustry.Totheextentthat

an

80:20

rule

can

be

demonstrated

to

apply

to

Pakistans

software

industry,

our

survey

sample

8 Although a significant number in its own right, these figures present a picture of an industry that is quiteinsignificant in the bigger scheme of things, namely, its contribution to Pakistans economy both in terms of revenuegeneration as well as employment creation capacity.


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couldeasilyclaimtocoverthelargestandthemostprominentplayersamongitsrespondents9.

Wedonot,however,goanyfartherthanthatintryingtoassessorclaimhowrepresentativeour

findings are for the rest of the industry. For some key statistics, for example, the study can

providesomeveryaccurateandusefullowerandupperbounds.Thismaybethecasewithdata

onindustryrevenues,employment,andqualitycertificationsetc.Forotherstatistics,thestudy

mayonlybeabletoprovideagutfeelestimateofhowthingsareontheground.Thismaybethe

casewithdataonmanagerial,marketing,andtechnicalpractices,andaccesstofundingetc.For

others still (e.g. issues specific to smaller companies), the study may not represent the true

pictureof the industryatall.We leave it to thejudgmentofouraudience todraw theirown

conclusionsonacasebycasebasis.

TableI(below)presentsabriefstatisticalsnapshotofPakistanssoftwareindustryasgleaned

fromoursample60respondents.Althoughthedataisquiteselfexplanatory,someaspectsare

worthnotinghere.Inacumulativesense,the60softwarehousesinourstatisticalsamplehave

combinedrevenuesofover$80million(seefootnoteandTableIIfordetails)andemployover

4000 technical and professional employees. This picture of revenues is, however, merely an

estimate extrapolated through categorical data. TableII presents more accurate categorical

estimatesoftherevenuesofourrespondents.Ofthe52companiesthatreportedtheirrevenues,

slightlymorethanathird(19companiesor36%)hadannualrevenuesbetween$200Kand$1M,

about a third (17 companies, or 32%) had annual revenues greater than $1M (4 of these had

annual revenues in excess of $5M), and another third (16 companies, or 30%) had annual

revenuesoflessthan$200K.Inanaggregatesense,thesesoftwarehouseshaveseenarevenue

andemploymentgrowthofabout37.4and27.4percentrespectivelyoverthelastyearhinting

ateitherimprovedcapacityutilizationintheindustryorvalueadditionperemployedtechnical

andmanagerialemployee,orboth.Theaveragesizeofasoftwarehousecomesouttobeabout

62employeeswiththeperemployeerevenuepotentialbeingaround$21,800perannum.

9UNCTAD (2004) makes a similar claim, attributed to PSEB, in that the top-15 or so software companies in

Pakistan (e.g. the likes of Xavor, Techlogix, Netsol, Systems, Softech etc.) could account for as much as 75% of theoverall industry revenues


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TableI:KeyAggregateStatisticsOnRespondentCompanies*

Revenue&EmploymentinSurveyedCompanies #(%)ofSoftwareHouses

TotalNumberofSoftwareHousesSurveyed 60***

CumulativeRevenues(calculatedthroughmidpointestimation)** $81.15Million*^

Total#ofProfessional/TechnicalEmployees 4070

AveragesizeofCompany(#ofProfessional/TechnicalEmployees) 62

RevenueperTechnicalandProfessionalEmployee $21,814

%GrowthinProfessional/TechnicalEmployment(overlastyear) 27.47%

%GrowthinRevenues(overlastyear) 37.4%

Ownership Structure and Quality Characteristics of Companies

%ofCompaniesthataresubsidiariesofForeignCompanies 40%

%ofCompanieshavingFrontOfficesabroad(US,UK/EU,ME,AP) 55%

%ofCompanieshavingaQualityCertification(ISO,CMM) 45%(3.3%haveaCMM)

%ofCompanieshavingaDedicatedQualityAssuranceTeam 73.7%

Product & Strategic Posture of CompaniesProductProfile****

ProductfocusedorPackagedSoftwareCompany 56.67%

Software/ITServicesCompany 48.34%

Software/ITConsultingCompany 31.67%

StrategicPosture****

Nicheproduct/serviceforaNicheMarket 36.67%

Product/serviceapplicabletoseveralindustries 56.67%

Product/serviceapplicabletoanindustryvertical 33.34%

*Thesearebasedonselfreportedannualrevenues

*^TheStateBankofPakistanestimatesthecountrysexportsfiguresoflastyeartobe$32M.

**Thisestimateneedstobeusedwithgreatcaution.Thecorrespondinglowerandupperlimits

are$39.35and$110.95Million. PleaserefertoTableIIforadetailedcategoricalbreakdown

***46softwarehousesweresurveyedinpersonwhile14submitteddatathroughonlinesurvey

****Thesecategoriesarenotmutuallyexclusivei.e.acompanycanoptforoneormorecategories

In terms of their product/service strategy and strategic posture in the market, 56% of the

companies described themselves as productfocused (packagedsoftware) companies, 48% as

software/ITservices companies, and 31% as software/IT consulting companies. It is worthemphasizingherethatmajorityofthecompaniesthatdescribedthemselvesasproductfocused

dealtwithcustomizedratherthanshirkwrappedproducts.Intermsofindustryfocus,abouta

third of the companies described themselves as niche players, another third focused on an

industry vertical, and about 56% produced a product/service applicable to several industries.

Clearly,noneofthesecategoriesaremutuallyexclusive.Manycompanies(asmanyas42%and


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23%) identified with more than one category in the product profile and strategic posture

respectively.

TABLEII:SIZEOFRESPONDINGCOMPANIESBYREVENUE*&

EMPLOYMENT

AnnualRevenuesinUS$(PKR**) #(%)ofSoftwareHouses

N=52***

Greaterthan$5Million(>PKR300Million) 4 (7.69%)

Between$1and5Million(~PKR60300Million) 13 (25%)

Between$500Kand1Million(~PKR3060Million) 9 (17.31%)

Between$200Kand500K(~PKR1230Million) 10(19.23%)

Between$100Kand200K(~PKR612Million) 6 (11.54%)

Between$50Kand100K(~PKR36Million) 5 (9.62%)

Lessthan$50K(~PKR3Million) 5 (9.62%)

Total 52(100%)

FulltimeEmployment

N=60

Greaterthan250Employees 6(10%)

Between100and250Employees 8(13.33%)

Between25100Employees 23(38.33%)

Between525Employees 22(36.57%)

Lessthan5Employees 1(1.67%)

Total 60(100%)

*Thesearebasedonselfreportedannualrevenues**1US$=60PKR

***Eightcompaniesinoursampledidnotreportfullyearrevenueseitherbecauseitwastheir

firstyearofoperationorbecausetheyweredevelopmentcentersofforeigncompanieswithno

independentrevenueestimatesoftheirown.

TableIIIpresentsastatisticalprofileoftheindustrystargetcustomers.Broadlyspeaking,our

60respondentsderivetheirrevenuesfromexportanddomesticmarketsinaratioof60:40.One

theexportsside,ourrespondentsderive22.5%and38.5%of therevenues fromproductsand

services respectively. Because of the preponderance of customizable products in the product

servicemix,wecontemplatethattheproportionfromexportofproductsmaybeoverestimated

andthusrepresentanupperboundonly10.

10Somelocalsoftwarehousesengagedindevelopmentofsoftware(i.e.programmingandcoding)a

service,fromthestandpointofthelocaloutfitforforeignproductbasedcompaniesmayhaveidentified

theirrevenuesasarisingfromproducts.


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TABLEIII:WHOMDOPAKISTANISOFTWARECOMPANIESSELLTO?

Exportsvs.Domestic&Productsvs.Services %ofTotalRevenues*

N=54

ExportProducts 22.56%

ExportServices 38.52%

DomesticProducts 23.37%

DomesticServices 16.53%

Exportsvs.Domestic&Publicvs.PrivateSectors

N=54

PublicSector(Govt.)Domestic 8.51%

PublicSector(Govt.)Foreign 5.90%

PrivateSectorDomestic 30.79%

PrivateSectorForeign 54.77%

*Thesearebasedonselfreportedpercentagesofannualrevenues

On the domestic side, our respondents derive around 23% and 16.5% of their revenues from

products and services respectively. Again, a major chunk of the products revenue would

comprise customized or customdeveloped products rather than shrinkwrapped products.

Another factor worth considering on the domestic side is a certain number of hybrid

companies that, for reasons having to do with the necessities of theirbusiness and revenue

models, bundle hardware with the software they develop. Examples maybe banking

automation

companies,

callcenter

solutions

companies,

and

mobile/handheld

devices

companiesandotherswhoseofferingsdependonsimultaneoussaleofspecializedhardware.

This,once again,wouldnecessitate that the figureonrevenues fromdomesticproducts isan

upperbound rather than an accurate estimate of sales from purely software development

activity.

Atthesectorallevel,ourrespondentsderiveanoverwhelmingportionoftheirrevenues (>85%)

from theprivatesectorwithonly8.5%of thesalescoming fromgovt.orpublicsectoron the

domestic frontandanother6%on the foreign front.Thisessentiallyconfirms theobservation

about the relatively insignificant role played by public sector and the government as a

sophisticatedbuyerofsoftwareproductsandservices inPakistan.Many intervieweesthatwe

spoke to stressed the need for the government tojumpstart the demand for local software


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developmentby intelligentlyusing itsdemandcreatingability.Wewilldiscuss this theme in

muchgreaterdetailinalaterpartofthisreport.

As we dig deeper into this statistical analysis, it is quite obvious that while these toplevel

(aggregate)statisticshavetheirownvalue,theytendtomaskthevitalityandheterogeneityof

the underlying data. That exportfocused operations maybe different from domesticfocused

operations, larger operations maybe different from smaller operations, and productbased

operations maybe different from servicesbased operations not only in terms of their

organizationalandmanagerialarrangementsbutalsothestrategicandcompetitivedriversisa

foregone conclusion. What we need, therefore, is a much more finegrained analysis that

focusesontheseimportantsubcategoriesinadditiontotheaggregatelevelstatistics.Thiskind

ofanalysisalsohasimportantimplicationsforthebusinessmodelandstrategyissuesthatwe

address,inaqualitativesense,insection6ofthisreport.

Asweattempttoderive importantsubcategoriesofourdata,ourfirstreferencepointmaybe

Dr.RichardHeeksworkonsoftwarestrategiesfordevelopingcountries(Heeks,1999).Figure

II (below) presents a graphical representation of Heeks software strategies framework that

dividesthepotentialuniverseofstrategiesinto4distinctcomponents,namely,exportservices

(StrategyA), exportproducts (StrategyB), domesticproducts (StrategyC), and domestic

services (StrategyD).Forcomparisonpurposes,henames the former (StrategyA&B)as24

CarotorFoolsGold,andthelatter(StrategyC)asThirdWorldMicrosoftand(StrategyD)

as Small Fish in a Small Pond. According to Heeks (1999) each of these four strategies is

distinct in the sense that each has its own set of organizational requirements, competitive

drivers, environmental prerequisites, and riskfactors. Yet, as Heeks (1999) points out with

illustrations from Indias case, companies try to adopt each of these strategies to varying

degreesofsuccess.


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WhileHeeks(1999)discussesrelevantfactorsthatmightmakeeachoftheseapproachesmore

orless

risky

(and

thus

more

or

less

likely

to

succeed)

without

actually

presenting

empirical

data

onhowmanyIndiancompaniesadopteachoftheseapproachesandwhatpercentageofthem

do so successfully, we are able to put data on Heeks framework for the case of Pakistans

softwareindustry.ThesedataarepresentedinfigureII(above).Inall,37%ofourrespondents

seem to followstrategyA,20%seem to followstrategyB,9%seem to followstrategyC,and

another 25% seem to follow strategyD. The overall picture that emerges from overlying our

dataonHeeksframeworkisthatofoverrelianceontherelativelyriskierofthefourstrategies

(StrategiesA&B)thatHeekscalls24CarotorFoolsGoldandunderrelianceontherelatively

less riskier one (Strategy D) that he calls Small Fish in Small Pond. FigureIII presents thisdatainagraphicalformat.Wewilldiscussgenericbusinessstrategiesthataremodificationof

Heeks4partframeworkinsomewhatdetailinthenextsection.

C:(Local-Products > 50%)

Total #: 14

% of Total: 25%

B:(Export-Products > 50%)

Total #: 11% of Total: 20%

D:(Local-Services > 50%)

Total #: 5

% of Total: 9%

A:(Export-Services > 50%)

Total #: 20% of Total: 37%

Software Business

MarketServed

Domesti

Export

Services Packages

FigureII: RichardHeeksTaxonomyofSoftwareBusinesses,asappliedtoPakistan


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100% Exports

Domestic

Export

Fig-III: Product-Market Profile of Pakistani SoftwServices Product

0 25 50 75

0

25

50

75

100


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Another way to look at the data is to classify software companies solely according to their

marketorientationi.e.thosethatarepredominantlyexportfocusedvs.domesticfocusedwitha

lot of hybrids working in between in both export and domestic markets in almost equal

proportions. From the standpoint of being able to identify differences in organizational,

managerial, marketing, and technical processes, this seems tobe a more promising approach

thanHeeks(1999)asitremediesfortheabruptboundarychangesacrossthefoursegmentsin

Heeksclassification11.Weuseanarbitrarylimitof75%(exportsvs.domesticandproductsvs.

services) to define a new typology. Thus, we define an exportfocused company as one that

derivesmore than75%of itsrevenues fromexportsandadomesticfocusedcompanyasone

that derives more than 75% of itsrevenues from the domestic market (products and services

combined). Inbetween these twocategoriesareabunchofcompanies thatarecategorizedas

hybrids(almostequallyactiveinexportanddomesticmarkets).Asimilarscheme,basedona

75%cutoff,canbedevisedforproduct andservicesfocusedcompanies.

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

definingfactorintheconceptualizationofsoftwareventuresinthePakistanienvironment,we

first look at that in greater detail.

FigureVI (above) presents a

breakdown of our respondents

between domestic, export

focused, and hybrid operations.

Applying the above classification

on our sample, we get 18 (37%)

companiesasdomesticfocused,20

(41%) of the companies as export

focused, and 11 (22%) of the

companies as hybrids. We now

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

bothanaggregateandacategoricalperspective.

11 One can speculate that the company doing 51% product-exports is not likely to be very different from doing 49%product-exports, yet the former would be placed in a different category than the latter under Heeks (1999) scheme.

Fig-IV: Market Orientation of

Software Companies in Sample

Hybrids

22%

Domestic

37%

Export

41%

Domestic Export Hybrids


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Before we discuss the results of this analysis, however, it is important recognize that almost

none of the differences between export and domesticfocused operations are statistically

significantatthe5%

significance level

and, therefore, may

atbestbetermedas

suggestive. In the

following

discussion, when

we talk of

significance, we

would mean a

finding of

significance from

practicalratherthan

statistical

standpoint. Also,

what is practically

significantmayvaryfromsituationtosituationandconstructtoconstruct(e.g.a10%difference

maybe of littlevalue inonecontextbutof greatvalue inanother). With thatcaveat in mind,

herearesomeofthestatisticalfindings:

Theformation&fundingstrategiesforexport &domesticoperationsarechanging.Goingback

toourdata,exportfocusedsoftwarehousesaremuchless likelytobefundedwithsavingsof

localfoundersthaneitherthedomesticfocusedorhybridoperations(TableIV).Webelievethis

tobe a representation of an afterthefact conclusion i.e. it is not that there is a dearth of the

desiretoexploretheexportrouteamonglocalfoundersbutratherthanthelatterhavenotbeen

able to successfully do so, eitherbecause of inadequate capital or lack of networks abroad.

Investmentbyaventurecapitalfundoralocalpartner(e.g.abusinesshouse)isalmostequally

likely to result in a domestic, an exportfocused or a hybrid software operation. Domestic

focused software houses are much more likely tobe focused on financial and automation

systems, and sell a mix of hardwaresoftware offerings than exportfocused software

TEXTBOX#2:WHATDOESITMEANFORARESULTTOBE(NOT)

STATISTICALLYSIGNIFICANT?

0

10

20

30

40

qaproll

1 2 3 4

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

significanceleveltohold,onemustbesurethat19outof20times,adraw

fromonesubpopulationwouldcomeouttobedistinctlydifferentfroma

drawfromtheothersubpopulation.Wedonotgetstatisticallysignificant

results when either the subpopulations are not dissimilar in which case

there is littlevariationbetween them or there is too muchvariation,as is

thecaseinthefigureabovewherethestandarddeviationbands(variation)

around the means are so large that none of four subpopulations is

distinctly different from others. Smaller sample sizes can sometimes, not

always,beahindranceingettingstatisticalsignificance.

Two subpopulations

e.g. different types of

software houses, are

considered to be

different,atastatistically

significantlevel, if one

can rule out, with a

measure of confidence

thatindeedtheyarenot


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operations.Theyhave,onaverage,smallerrevenuesizesbutalsolesserdependenceonasingle

client.

Exportfocusedsoftwarehousestendtosufferfromlackofgrowthinprofitability(operations

continue to grow in revenuesbut not in profitability) much more than domesticfocused or

hybridsoftwarehouses.Thismightbeduetoadversetermsoftradearisingfromrecessionin

majorsoftwareexportmarketsintherecentyears,aninabilitytoclimbupthevaluechain,oran

overrepresentationofdevelopmentcentertypeworkdonebycompaniesinthiscategory.

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

practices.>Fromthestandpointofmanagerialpractices(seeTableV,below),thereseemstobe

virtually no statistically identifiable differencebetween domestic, hybrid, and exportfocused

software operations in terms of the technicalbackgrounds of the entrepreneurial team (i.e.

founders).Thereissomesuggestiveevidencethatexportfocusedsoftwareoperationsaremore

best practices study

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