An Analysis of the Information Technology Industry in Pakistan

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GE Capital shows India`s IT-enabled service might

Tue 06:21 AM

By Robin Elsham

BOMBAY, Dec 4 (Reuters) - To appreciate India`s ``enormous potential`` in IT-enabled services, look at GE Capital.

With 10,000 employees, GE Capital Services India, a unit of the financial services arm of U.S.-based dynamo General Electric Co GE.N, has grown rapidly to become the largest IT-enabled services provider in India.

Last year alone the Indian unit hired 6,000 employees, prompting the company to post signs around its premises warning Trespassers Will Be Recruited.

``I can`t tell you how much we depend on India in GE,`` Pramod Bhasin, president of GE Capital India, said on Tuesday, in a keynote address at the start of a two-day seminar in Bombay on ``Indian Private Equity Investing in the New Environment``.

Private equity refers to investing money to buy an ownership stake in an unlisted company, with the aim of later taking it public or selling it to a strategic investor at a big profit.

According to data compiled by seminar organiser Asian Venture Capital Journal, India ranked second in Asia in the amount of private equity it attracted over the past 11 months.

It pulled in $1.1 billion, trailing only the $1.86 billion pumped into Japan in the January-November period. And India topped the table for number of deals financed at 91.

MOST PROMISING FIELD

Bhasin told the seminar, attended by representatives of many of Asia`s biggest and most active venture capital funds, that the best investment in India is IT-enabled services.

``I think there is no better or more promising area for India. It plays to India`s sweet spot.``

IT-enabled services involve using telecommunications to provide virtually any sort of service, from call centres handling customer account queries to product development and design services.

``At GE we`re at the stage where we believe all back-office operations should be carried out in low-cost countries,`` Bhasin said.

GE Capital India is already performing accounting, claims processing, credit evaluation and a host of other functions for 80 GE branches around the world.

``We don`t see why in India we shouldn`t go from 10,000 (employees) to 15,000 to 20,000,`` Bhasin said.

Many multinational companies have already set up service centres in India, enabling the Indian IT industry to continue growing strongly the past year even as growth worldwide slowed to a crawl.

In an earlier address, Daniel Schwartz, publisher of the Asian Venture Capital Journal, neatly summed up the evolution of India`s global economic significance over the past decade, concluding India is becoming ``the world`s back office``.

``In the early 1990`s India was a low-cost manufacturer, then it became the world`s software services developer and now we are seeing a transition to India as the world`s back office or provider of IT-enabled services.``

India is ideally placed to dominate the IT-enabled service field, Bhasin said, if it continually works to improve efficiency in the ``commoditised`` end of the industry, and to move up the value-added ladder by offering more sophisticated services.

``We (India) are so far ahead of the rest of the world in terms of English and costs. The market is ours to keep.``

A subsequent seminar speaker, W Bowman Cutter, a top economic policy advisor to former U.S. President Bill Clinton, referred to ``a world where China becomes the world`s manufacturing entrepot and India becomes the world`s IT-enabled services entrepot``.

CHINA THREAT

But in IT-enabled services, Bhasin said India faced a threat, especially at the lower end of the service spectrum, from China. It is pushing to develop an IT service industry my introducing English-language instruction and stressing computer education in schools.

``Will they catch up? Yes, within four to five years. I have never seen any country develop so fast.``

So India must keep ``going from simple stuff like call centres, to more complex operations.`` Such services would employ highly trained professionals to provide cut-rate services in areas like engineering, medical transcription, medical and legal consulting, and accounting.

``It`s about using the best brains in India to deliver services,`` Bhasin said, referring to the potential provided by population of one billion and a highly developed network of universities, technical colleges and research institutes.

Simultaneously he said Indian IT-enabled service providers need to continually work to reduce costs to safeguard their leadership position against market entrants from places like China and the Philippines.

``Our objective (at GE Capital India) is to take costs down 15 percent a year,`` Bhasin said.

He added the Indian government must also improve the nation`s industrial infrastructure to ensure the IT service industry continues to prosper.

``Tomorrow when pressure on margins is greater, we won`t be able to afford double backups on power and phones,`` Bhasin said, referring to the redundant system almost all top Indian companies employ to cope with power blackouts or phone service disruptions.

Bhasin said Indian service providers needed to offer cost savings of 30 to 40 percent to get American and European companies to outsource operations to them.

http://reuters.activebuddy.com/s?id=DSDVOBOM20O6

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Can Russia’s techies mimic India?

http://www.msnbc.com/news/502330.asp



Fledgling “offshore programming” firms pop up and prosper



By Rebecca Santana

MSNBC CONTRIBUTOR



MOSCOW — Barely anyone came to work on a bright autumn day at one of Russia’s biggest software development companies, but that was perfectly fine with management. Business is doing so well, the company moved into new office space and many employees stayed home while the move took place.



“IT USED to be a factory producing some big construction materials, and it is still a factory but producing software,” said Dmitri Loschinin, managing director of Luxoft, which employs 220 people in its production staff.

Luxoft is one of a growing number of companies developing software for mainly foreign clients, an industry often referred to as offshore programming. India leads the field in offshore programming, but Russia possesses the fundamentals to compete for market share if the country overcomes certain obstacles.

Although there are no official statistics, insiders estimate that Russia will generate somewhere between $70 million and $100 million in revenues from its “offshore programming” operations this year and employ around 3,500 full-time programmers. Many others, especially university students, will work as freelance programmers.

“There’s no downside to bringing this offshore development to Russia. It doesn’t pollute the air. There are no health risks. Maybe your eyes will get bad sitting in front of the computer too much, but it’s such a major jobs creation,”

— MATTHEW IGEL

Kelly Services in Moscow These numbers are tiny compared to India, which generated $6 billion in revenue in 1999, but Russia’s offshore programming industry is growing at 50 to 60 percent a year, according to a McKinsey Global Institute report.

One of the main reasons Russian companies are attracting business is their low costs, which make it cheaper to outsource business to Russia than simply hiring programmers and moving them to the United States. The main centers are located in Moscow, St. Petersburg, and the Siberian city of Novosibirsk where there is a wealth of educational institutes as well as good communications infrastructure.

Alexander Egorov, CEO of St. Petersburg based Reksoft, one of the oldest offshore programming companies in Russia, says Russian companies charge about $40 for an hour’s work compared to $90 to $120 in Europe and the United States. Russian programmers make $300 to $1,500 a month depending on experience and skills.

The low wages almost make one forget this is a country that put the first person in space and still has an education system emphasizing mathematics and science that made such a feat possible. Last spring, a team from the prestigious St. Petersburg State University beat out teams from Cal Tech, MIT, and Harvard to win the International Collegiate Programming Contest World Finals.

“The traditionally limited computer resources in Russia make Russian programmers more creative in their solutions,” said Dan Dougan from St. Petersburg based Jensen Technologies. To put it more bluntly, Russian programmers can’t afford to buy their own computer so they put it together by hand.

But Russia is lacking many of the incentives that made India such a powerhouse, including special government sponsored schools to teach programming languages, tax incentives and subsidies.

“Don’t even speak about it or I’ll cry!” said Egorov. “That’s why India will sell software near to $6 billion this year and the whole Russia industry will sell near $120 million. That’s the difference.”

``The president plays tennis? Everyone plays tennis. The president started to talk about offshore programming, said it three times, everyone became terribly interested,`` says Anatoly Karachinsky, who is sometimes referred to as Russia`s ``internet oligarch.

Many companies, though wary of too much government involvement, are optimistic that the Russian government may be moving in the right direction. Anatoly Karachinsky, president and CEO of IBS, which spun-off Luxoft, said Russian President Vladimir Putin is supportive of the idea and other government leaders, are falling in line.

“The president plays tennis? Everyone plays tennis. The president started to talk about offshore programming, said it three times, everyone became terribly interested!” said Karachinsky.



But-deservedly or not-the country has an image problem. Russia’s international reputation as a snow-covered Wild West where legal protection for intellectual property rights-as well as just about all other rights-are flimsy and easily violated, rattles many foreign companies. Surprisingly, says Jim Hitch from the St. Petersburg branch of the Baker & MacKenzie law firm, Russia has all of the right laws in place.

“The difference between Russia and the U.S. and other countries is really not what’s written in the laws but how they’re enforced,” says Hitch. He added that foreign companies can minimize their risk when doing business with Russia.

Getting foreign companies to overcome their hesitations of doing business with Russia is one of the main obstacles to offshore programming, says Pavel Cherkashin, president of Moscow-based Actis Systems.

Getting foreign companies to overcome their hesitations of doing business with Russia is one of the main obstacles to offshore programming, says Pavel Cherkashin, president of Moscow-based Actis Systems.

“We have to prove a lot that a Russian company in theory can be a good partner,” said Cherkashin. “If we can sell the concept of Russia, it’s 2/3 of our own sale.”

Quality control and proper management are other factors that make Russia a hard sell. Russia trails far behind India in the number of companies certified to assure consistent quality. Only one Russian company has an ISO 9000 certification — one of the globally recognized measures of quality, according to the McKinsey Global Institute report. India, on the other hand, has 109 certified companies.



Another concern is the level of management skill in Russia. While computer programmers are abundant, managers to guide them are not. Only a handful of Russian offshore programming companies employ more than 80 programmers, partly because there aren’t managers with the skills to coordinate that many people.

But none of these problems seem insurmountable. Most of these companies are growing at a very quick pace, which means more jobs and more money for Russia.

“There’s no downside to bringing this offshore development to Russia,” said Matthew Igel, general manager of Kelly Services in Moscow, who recruits IT personnel for offshore programming companies. “It doesn’t pollute the air. There are no health risks. Maybe your eyes will get bad sitting in front of the computer too much, but it’s such a major jobs creation.”

FORTUNE magazine has published a series of articles on DESIS of Silicon Valley. Very good reading, makes us feel proud.

http://www.fortune.com/fortune/2000/05/15/ind2.html

http://www.it.fairfax.com.au/software/20000509/A44685-2000May5.html



http://www.ecompany.com/articles/mag/1,1640,6607,00.html

Los Angeles Times

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India, for instance, has 4.1 million technical and scientific workers and is churning out an additional 70,000 computer programmers and developers a year, said Navtej Sarna, spokesman at the Indian Embassy in Washington.

India, like Malaysia, Israel and other nations, is beefing up its high-tech sector ``with an eye toward attracting high-paying jobs from the U.S. and other developed nations,`` said Harris Miller, president of the Information Technology Assn. of America.

Mahboob Akhter, a Pakistani native who lives in Orange County, knows the hidden talent overseas. He first made extensive contacts in India and Pakistan in the mid-1990s while working at another U.S. firm.

As president of Focus Software International in Tustin, Akhter has sent much of his company`s software development work to India and Pakistan over the last three years.

Focus Software employs 15 Indian programmers, who are subcontracted through an Indian firm. Akhter said outsourcing saves him at least 30% on labor costs, part of which he passes on to customers.

``I`ve been happy with the results,`` he said. ``Programmers have been able to deliver the projects on time and [with] good quality.``

Faraz,

That was an insightful article and scoped correctly, but I did not see the corelation between your analysis and your optimistic projection for the future. The key element in the equation is the entrepreneur who weds the supply of low cost technical manpower in Pakistan to the demand internationally. You have rightly mentioned that many technical person led software companies in the USA fail owing to poor financial planning. On the other hand enough succeed, (the names run like a who`s who specially in the Internet space,) to create a dynamic software industry in the USA. Engineers learn the marketing and finance mindset and sales people get a sense for technology. I think that is the trend in Pakistan too and that is therefore the key ingredient enabling high IT growth n addition to factors you noted - quality training institutes, more PCs, increasing int`l demand.

Regards

Yusuf

My name is Kashif Zafar and I am working as a Network Engineer in Saudi Arabia .I am really convinced with WHAT kHAWAJA sAHIB HAS WRITTEN regarding the mushroom sof instititutes in Pakistan (not producing quality men ).Take for example MCSE Course .In Karachi where I belong to hundreds of institutes are offering these courses and those peoples who have not taken any IT related degree like B.Com they are also doing it and expect to get a job in a foreign country which is nearly impossiblebecause for a course of just six exam no one specially outside Pakistan will offer you for a job as a Network Engineer unless you have a related IT degree like Computer Science,Electrical/Electronics/Physics or sometimes a bachelors degree in any Engineering discipline.Through this channel I want to inform my Pakistani brothers that never look for a short cut .First go for a degree.

The Institute of Business Administration (IBA) in Karachi has published a book on the IT industry. You may find it useful.

You may find some other information on www.pesanet.org/Forum

Good luck.

Very informative and interesting article. I am however, in complete disagreement about your statement regarding `corrupt and incompetent financial institutions`. I work in one of the pioneer financial institutions in Pakistan. Whereas I grant that our management definitely could have more vision, I do NOT agree that FI`s are corrupt and incompetent. Are u speaking of DFIs? Yes we have had trouble with DFI`s but reasons for those are very complex and it is completely incorrect to call them either incompetent or corrupt. You must be reading how much the SBP, these institutions plus new legislation is doing to clean up stuck-up loans. A lot of stuck-up recoveries is due to poor feasibilities and inconsistent Govt. policies. As for the rate of mark-up, reasons for that have to do with general uncertainty present in our markets as well as Pakistan being a net debtor nation. Many other types of businesses other than IT do utilize long-term funding and pay us back. In fact Leasing (one form of long-term capital) is fairly easily available. Mark-ups range from 21-23%. Of-course, lease expense is tax-deductible so the effective rate is cheaper. This is assuming that the entrepreneur is willing to pay taxes. There are always two sides to the story.