Software Industry Evolution in a Developing Country: An In Depth Study
Syed Zahoor Hassan e-mail: [email protected] Lahore University of Management Sciences
Sector U, LCCHS, Lahore, Pakistan.
Abstract
This paper presents data on the evolution of representative software companies in Pakistan. Evolution of the business strategy, functional strategies in finance, marketing, technology, and human resource development areas have been studied along with the changes in the organizational processes and systems at these organizations. Changes in these dimensions have been analyzed in the light of developments in the external aspects such as target markets, supplier institutions and the overall environmental factors, specifically government policies. Our analysis has shown that government policy plays a key role in development of SW industry. Different factors determine growth of companies at various stages of their evolution. Ability to react to opportunities in a timely manner has been one important determinant of companies’ success in achieving high level of sustained growth.
Introduction and background
Software industry is now regarded as vital for the development of any economy. Developing countries value the importance of this industry due to its capacity to provide much needed export earnings and support in the development of other industries. Moreover, access to quality software based systems is seen as vital for improving governance. The issues related to use and adoption of information technology in a developing country have also been studied [8].
In countries like India and Singapore, software industry has assumed a significant position in the overall economy and many companies have established themselves as key players in the global software business [1], [5]. Several counties like Philippines, Pakistan, and Malaysia have seen significant growth in their SW industry. The ways in which the overall development of the economy influences software industry evolution has also been studied [2]. Not all countries have shown similar growth path in this industry. It is important to understand the factors that influence this evolution process. A framework has been proposed in [3] to understand and analyze this evolution process.
In addition to the significance of SW industry in creating high value jobs, enhancing business efficiency and earning export revenues, it also has a multiplier effect on other facets of a country’s economy. This pivotal role of software industry has led many developing countries to embark on initiatives for rapid development and promotion of this industry. As this industry also offers the potential of very attractive margins and high rates of growth, it has attracted the attention of investors and entrepreneurs. For example, in Pakistan there were hardly a few established software companies in 1990 but in early 1999 the membership of Pakistan Software House Association (PASHA) was approaching 100. As the software industry in Pakistan has only emerged in the last 5-10 years, its study provides an excellent opportunity to capture the dynamics of initiation and evolution of SW industry from the inception stage.
In this paper, the framework proposed in [3] has been utilized to analyze the evolution of Pakistan’s SW industry. The key aspects of the framework and data collection methodology are presented. Data from nine software companies has been analyzed to identify the key factors that determine the evolution and growth of software industry in a developing country.
Pakistan’s software industry
Pakistan is a country of nearly 140 million. The main medium of education at the professional level is English and the country has a large pool of trained engineers and technical workforce. There has been a rapid expansion in the information technology related educational institutions over the last five years [4].
First software company of Pakistan, Systems (Pvt.) Limited, was formed in 1977. Until 1984 only a few software companies were formed that did work primarily for the multinationals operating in Pakistan and large local companies. The easing of restrictions on import of computer hardware in 1984, and the widespread use of personal computers, led to greater use of computer based systems by smaller companies. But most companies only focussed on applications in areas like Payroll, Accounting and Inventory management. Software companies were small. In 1994, the more established software companies formed an industry association called Pakistan Software
Houses Association (PASHA). PASHA lobbied with the government to help the industry launch its export efforts. Consequently, Pakistan Software Export Board (PSEB) was created in 1995 to promote software exports. PSEB coordinated and subsidized the participation of software companies in international exhibitions. Government has also announced incentives for the software industry.
A major breakthrough for Pakistan’s software industry came in 1994 when one of the companies, CresSoft, obtained a major software development project from Time Warner, USA. This encouraged other companies to think about exports. When Pakistan’s economy went into recession in 1996, opportunities for local projects diminished significantly forcing software companies to look for work in Europe and US. Around the same time, some companies started focussing on the Y2K problem related opportunities. Since 1996, major thrust of the established SW companies has been towards export work.
Special challenges for SW companies
A number of special factors distinguish software industry from other industries, especially in the context of a developing country like Pakistan [3].
People are the key asset. Unlike manufacturing and some
service industries, software does not require very large investment in equipment and/or real estate. The capacity of a SW company to generate revenues is primarily determined by the number and quality of its technical staff. In the words of one entrepreneur, ‘ in this business all of your assets (the people) leave the physical company premises at the end of every day and then return the next day. You have no concrete immovable assets to hold on to.’ Long setup and gestation times. Unlike other businesses,
in case of software companies the evolution path is more tedious and usually takes years before a company attains significant revenue levels. There is need for design and development of processes that fit the firms specific business and technology focus.
Rapid changes in technology and market dynamics. The
target markets and their needs for various software based solutions may not change very rapidly, but the technology options keep changing at fast pace. For example, the growth of Internet and the associated developments in various E-Commerce technologies has transformed the ways in which a company has to develop and provide software solutions.
Importance of product quality and customer trust.
Most businesses rely very heavily on computer based systems for managing their operations and any software related problems could have serious adverse effects. Hence the client organizations need to be assured of the product quality and reliability. The extent of trust between the SW company and its clients, significantly influences the success of software projects [7].
The above mentioned characteristics of software development provide a unique set of challenges for the senior managers and entrepreneurs. SW companies operating in developing countries, and catering to clients in the developed world, face several new challenges:
• Relative focus on the local and export markets. Local projects are needed for development of skills and processes, for establishing credibility, and sustaining the organization in a crisis. But these projects have low margins and are technologically less challenging.
• Marketing to clients that are thousands of miles away. Gaining and retaining trust of clients.
• Staying current with latest technology trends.
• Retaining staff that has international marketability, especially as they gain more experience.
• Operating in an environment that does not provide all the needed support mechanisms.
Framework and methodology
As discussed above, the software companies confront a series of daunting challenges. The issues faced by software companies range from marketing, project management, human resource development, and operations to formulation and execution of strategies that are in line with the overall mission and vision of the company’s founders and senior management. Hence, in order to understand how software industry develops and evolves in a specific country, one would need to study the specific approaches adopted by companies in these areas.
Conceptual framework
In order to understand how specific companies evolve, one can study their evolution in a number of areas. We can analyze an organization’s evolution at three levels: 1. Vision, objectives, business strategy.
2.Strategies in various functional areas – Finance, Technology, Marketing and Human Resource.
3.Organizational processes and systems for
implementation of 1 and 2 above.
The external factors that play a critical role in influencing how an organization evolves are:
1.The target markets and their dynamics. As the markets of a SW company’s clients change, these client companies have to adapt themselves. Market dynamics could be a major catalyst – new products may be needed, specific needs of customers may change. For example, if a public sector organization is privatized, its SW suppliers will have to cater to different issues. 2.Support Institutions and their capabilities. For SW
companies the key input is trained workforce. The level, quality and quantity of workforce that is available
to a company influence its strategies and processes. If qualified people become available in a certain area then the company can target value-added work in that area.
3.Environmental Factors. In developing countries
government policies and economic conditions play a critical role in shaping the development of a software organization. Tax laws, foreign currency regulations, and legal system (especially intellectual property protection laws) are examples of some of these factors.
Figure 1 depicts how the above factors interact to influence a SW company’s evolution. For this study, we decided to capture information through case studies of software companies to determine how they have evolved in the indicated dimensions. A questionnaire was developed to collect the needed data. In all the areas, we asked questions on how changes occurred and the reasons for each change.
Figure 1. Conceptual Framework for Understanding Software Industry [2]
We decided to collect detailed information in all the relevant areas to be in a position to understand the process through which each company has evolved. This required us to use a relatively small sample size of nine companies to represent the overall industry in terms of market focus, technology emphasis and organizational maturity sample includes the oldest SW company in Pakistan and two relatively young companies. We included companies from the two major cities of Pakistan where nearly 80% of the country’s software industry is located (See Table 1). In order to maintain confidentiality, we have named the companies A through I but the specific details have not been disguised. Data was collected through interviews with the chief executives of the firms.
Table 1. Brief Overview of the Organizations
Co. Year of Formation
# Staff
Locations of operation
A Jan 1998 79 US, 2 cities in Pakistan
B Oct 1992 38 US and Pakistan
C 1977 70 US, (3 cities in Pakistan)
D 1991 62 US, Pakistan, UAE and
Saudi Arabia
E March 1998 29 Pakistan
F 1988 40 Pakistan and Hong Kong
G 1992 197 3 cities in Pakistan and 2
locations in US
H 1985 70 Pakistan
I 1987 183 3 cities in Pakistan and
Saudi Arabia
Analysis of data
The nine companies were analyzed using the dimensions of our framework. Each dimension is analyzed separately, and interactions across these dimensions are also discussed.
Vision, Business Strategy and its evolution. Key
aspects of SW companies’ vision and business strategy, as stated by the senior management, are presented in Table 2. Each bullet reflects a specific focus.
Table 2. Evolution in Business Vision
Co. Business Vision – Key Aspects A Better at doing more with less
Specific technology and market focus
B Diversify customer base to reduce risk of high dependence on few customers
Inclination towards product development
C Partnerships, equity interests or equity swaps for acquiring skills
Proactive software development
D Develop expertise in specific area of focus
Partnerships or equity interest in companies to acquire skills and new ideas
Consulting services to startup companies E Fill the vacuum in IT industry in Pakistan
Build a base in the local market and then move into export market
F Focus on multimedia products
Partnership for growth in export market Expertise development in their area of focus G Customized software development
Develop leading edge technical skills
H Use experience gained in the local market and joint marketing with other local companies to enter into the export market
I Leverage capabilities and expertise of parent company Moving into areas with that require a high skill level and technical expertise Target Markets & their Dynamics Environmental Factors Financial Strategy Marketing Strategy Technology Strategy Human Resource Strategy
Organizational Processes and Systems Vision Supplier Institutions Availability of Trained Work Force Telecommuni cation infrastructure
Shifts in vision are also captured in this table. For example company B initially started by focussing on offering customized services to a few customers but later also started product development for a broad client-base. Most companies started with a broad set of objectives and goals. With greater exposure to markets and realization of constraints, companies gradually focussed on a few specific areas. Also, in general there are two categories of companies: conservative and aggressive. The conservative companies have focussed on steady growth, primarily in their initial areas of focus. These companies have also not pursued new technology options aggressively. The aggressive companies allocated resources for acquiring skills in new technology areas and used these skills to acquire more high-end and greater value-added projects. The evolution to a more international market orientation has occurred in most firms, primarily due to attraction of higher profit margins.
Financial Strategy. The key aspects of financial strategy
followed by the companies are presented in Table 3.
Table 3. Evolution of Financial Strategy
Co. Initial Finances Subsequent Finances A Investment of US $1.7
million by Pakistani nationals
Venture Capital investment
B Initially personal investment then inclusion of partners
Future financing through company profits and additional partners
C Initially partnership Company profits and new partners. Due to IFC loan facility able to secure loan from banks D Personal funds
investment, later added a partner
Company profits but not enough
E Equity provided by two companies
Loan from the equity holder companies
F Initial funds put in by two partners
Company profits and loan from family and friends
G Initial investment by the parent company
Loan from the group and company profits H Personal funds &
family loan
Profits and loan from the family I By the parent
company
Profits and investment by the parent company
Information has been collected on how the start of the company was financed and also on how the subsequent financing was obtained. Companies that started before the recent surge in the interest in software business, primarily relied on founder’s own resources at the time of start up. The first major institutional investment came when one of the leading business groups in Pakistan decided to invest in a software company. The success of this venture has encouraged other business groups to invest in SW companies. Entrepreneurs that started companies with their
own resources have relied on company profits or equity financing by additional partners. In some cases these partners have also contributed technical skills and expertise to the company, helping in the growth process. Lack of a well-developed stock market, where companies could offer their shares for the general public, has been a serious impediment in enhancing the financial resource base of SW companies. Most recently, some companies have floated their subsidiaries in US to tap the US stock market for harvesting their gains, at a later stage.
Marketing Strategy. Marketing strategy followed by the
companies has been analyzed by considering the market focus, product, and distribution dimensions (Table 4).
Table 4. Marketing Strategy Evolution
Co. Location & Industry
Product Distribution
A Communication
industry in the US (Sales & marketing and front end customer care solutions
Product Development
Initially direct selling but intend to use multiple intermediaries
B Initially local banks then
other sectors in the local industry, now only export market (US)
Customized SW development and product development
Initially direct selling but now working through sub-contractors and setting up distribution channel
C Initially local market
now catering to both local and international market
Products for local market, Y2K projects, Off-shore reengineering projects, internet applications
Personal selling and equity based partnerships for export marketing
D Initially local market
then only export market (US), now catering to both local and international market. Aim at retaining a mix.
Customized SW development for export and products for local market
Personal selling in local market and equity based partnership for export marketing
E Telecommunication
sector in the US market, got no orders, started work in the local market. Now working to get export orders
Customized SW development and product development Contacts in the international market and commission agents for getting projects
F Initially local market
and now both local and int’l market (US, Middle East and Far East)
Customized products and product development Partnerships, commission agents, now working on developing proper distribution channel for their products
G Telecommunication,
airline, health care and financial sectors in the US, no projects, same sectors in the local market. Now same sectors in US, UK, Middle East and Japan
Customized SW development
Operating through commission agents (Consultants)
H Local market, now both
local and int’l market (US, Europe, Middle East and Far East)
Customized SW development and data entry
Direct selling and commission agents
I Local market now
operating in local & int’l market (Europe, Middle East and Far East)
Customized SW Development
Personal selling and contacts in the international markets.
Most companies focussed initially on the local market, trained engineers, and developed processes. As the opportunities for undertaking large and more lucrative assignments in the local market diminished, due to the downturn in economy, companies shifted attention almost exclusively to foreign markets. A few new companies, that focussed on the exports, soon realized the need to undertake projects in the local market to establish their credibility with the foreign clients.
All companies that started before 1998, focussed initially on customized software development. Only in the last couple of years companies have started to develop standard products. The understanding that companies gained by working on customized SW development projects in a given domain enabled them to undertake product development projects. Increased financial resources and access to a more diversified customer base also encouraged the companies to undertake the more risky product development route. Companies initially took whatever work they could get but gradually focussed on a few technology and application domains, leading to development of general-purpose products.
During the initial export phase, most companies relied on third party intermediaries for securing projects, and worked primarily as subcontractors. Companies that had the financial resources to set up a front office in US were able to obtain work directly, but the investment required for maintaining a marketing office in US was beyond the financial means of most companies. Joint ventures and partnerships with established companies in US, has also been pursued. Marketing has been primarily the responsibility of the top management, with almost no company investing in an independent marketing function.
Technology Strategy. Most companies started by
focussing on known technologies and then shifted to newer areas (See Table 5). Increasingly companies have relied on latest tools and technologies to stay competitive. For some the key advantage has been their ability to allocate resources to do R&D and skills development in new areas. Some of the more established companies now allocate in access of 20% of their people to acquisition of new skills. Companies are also beginning to invest in implementing quality initiatives (ISO and CMM certification projects have been initiated by several companies). Increasing number of companies is now relying on their technology strengths as source of competitive advantage. Access to a larger pool of quality professionals, at more competitive salary levels, could give greater boost to this strategy.
Human Resource Strategy. Human resource management
area has posed the greatest challenge to software companies. On one hand, the lower cost of highly qualified professional is a key advantage as compared to companies in the developed countries. But at the same time, as the market for SW skills has become global, the companies
have to worry about retaining their more highly skilled and experienced professionals. Companies have taken a number of steps to address this situation:
• Set up stock option schemes for employees along the lines of the US model.
• Provided the option to work in US on company
projects.
• Accelerated the promotion rates, gave higher ranks.
• Introduced productivity based financial rewards.
• Provided support for continuing education.
• Hired and trained non-computing graduates.
Table 5. Technology Strategy Evolution
Co. Key Aspects
A Whatever is needed to make products satisfy customer needs
Technology choices are taken into consideration while deciding systems requirements
B Consistent upgrading of technology Client server applications, web and intranet technologies and windows based applications C Acquire latest technology in specific areas of focus
Get into latest technologies (Internet based products) D Acquire skills of technologies to improve quality of
SW.
Initially low level languages and now C++, Java and application development tools
E Identify new areas and acquire latest technology and skills in that area.
Client Server applications and 3 tier paradigms F Acquire technology to improve the quality of the
products
Technology for more realistic testing to ensure quality Multimedia SW, scanners, audio video digitizing and recording equipment
G Always work with cutting edge technology. 20% staff training in latest technologies
H Cope with the developments in technology that are taking place over time (Reactive)
I Keep pace with the advancements in technology
The key approach has been to make employees feel important and to provide them opportunity for professional advancement financial reward (see Table 6).
Organizational Structure and Processes. Most
companies initially followed an ad-hoc processes and procedures and utilized an informal organizational structure. As the companies grew and focussed on export markets, they had to set up more formal processes and procedures, and introduce various functional areas in their organizations. Some of the newer entrants have started with a relatively more formal set of processes, and organizational structure. In early 1999, most of the
Table 6. Human Resource Strategy Evolution
Co. Company Policy Employee Retention and
Training
A Looking for the best people
with opportunity to move to US upon reaching a certain level in the company.
Stock options for employees based on the US model. In-house training (On-the-job).
B Promote a sharing culture
because employee’s decision to stay with the company is based on the long term growth of the company.
Main criteria for selection is the period of time the prospective employee will stay with the company. Average yearly increase in salary 25%. 2-3% of the earnings invested in training
C To cope with the turnover
problem, devised an employee retention program - company offers various monetary rewards based on certain criteria and rotation between Pakistan and US office.
A policy of offering employees partnership based on performance.
From the very start the company had a separate HR development and training department. Most of the training is conducted in-house.
D Hire fresh people, give
them salaries higher than the market, provide a flexible environment for self-expression and delegate responsibility.
Promotions every two years In-house training through lectures and videos, also sponsors training from professional training institutes. Offered full educational sponsorships to employees.
E Fresh graduates demand
extremely high salaries.
Equity options only to senior people.
Formal training system in which every fresh individual gets 6 weeks training.
F No turnover problems
because no alternative available.
Difficulty in finding people experienced in multi-media systems, so setup training section. Trainers sent abroad for collecting information about leading markets and new technologies.
G Working environment and
type of projects has helped the company in attracting quality people from within the country and abroad.
Formal committees represent employee interests on various issues. No profit sharing plan but intend to have one soon. Spend around 5% of the revenue on training. Training by foreign trainers on project management and presentation skills.
H Formal training program in the
standard operating procedures of the company. Concurrently they are provided with books and assigned to a project, under a senior person.
I To counter the turnover problem
and lack of adherence to company operating procedures, the company currently maintains a ratio of 1 CS graduate. Offer partnership option based on performance.
Retention issue is pivotal in hiring decisions.
Formal program for training of employees, conducted in-house.
Table 7. Evolution in Organizational Structure and Processes Co. Organizational Structure Processes & SW Development Methodology A US office functional structure and Pakistan office process oriented structure
Central human resource planning and management, policy definition, accounting process and monitoring. Processes evolved over time. For SW development using short development cycles, variation of the spiral and within each cycle a variation of waterfall. B Initially no clear
organizational structure but evolved over time, currently have separate accounting and administrative departments and plan to create a marketing department
Initially ad-hoc processes. Now formal project estimation, project design, documentation, and standards for project tracking. Developed a separate bulletin board on the web where team members discuss problems, also used for developing manuals and documentation. C Started with a loose
structure and as the company grew in size formal structures developed. Project managers with complete responsibility for project planning and execution
Initially conventional processes now use SW for costing and project management.
No specific SW methodology used but the company is experimenting with available methodologies to find which one is best for the company.
D Initially no formal-structure but as the company grew developed formal reporting structure.
Initially ad-hoc processes but cost overruns and time overruns forced the company to develop standard processes. Each step is documented. Spiral SW development.
methodology is currently in use. E The company has
matrix structure from the very start.
Company has developed standard procedures for documentation, user manuals and quality assurance. F Initially informal
structure but now departmental structure. Main reason was increase in size.
Standard processes have evolved overtime. Now the company uses SW for project management.
G Started with a formal organizational structure.
Working on ISO compliance and CMM level 4. Adopted methodology fine-tuned for offshore development. Variation of spiral with short delivery targets.
H Formal organizational structure.
Self developed methodology currently being followed. I Initially informal
structure but as the size increased developed formal reporting procedures and Matrix organizational chart.
Planning on ISO 9000 compliance with the help of parent company Formulated a quality manual based on past experience, also developed standard library routines. Using Arthur Anderson consulting methodology for IT consulting.
companies had launched initiatives to formalize their development processes and develop more formal marketing mechanisms (See Table 7).
We now discuss the external dimensions that influence the software industry – Target markets, supplier institutions, and environmental factors.
Target markets and their dynamics. Most companies
identified their specific target markets during the first two to three years of existence. Those that got export opportunities have left their local markets totally but some are again tak
ing
interest in the local market, primarily in the e-commerce and Internet based product areas(see Table 8).Table 8. Target Markets
Co. Market Characteristics A Communication industry in the US
High level of customer sophistication requires in-depth knowledge of the business processes
B Shift from local market to export market, resulted in increased customer sophistication
Diversify customer base to reduce risk of high dependence on few clients.
C Initially local private and public companies now both local and international buyers
D Initially local markets only products, then customized SW for different industrial sectors, then only export to the US and now both in local market (products) and international market
International exposure resulted in improving the overall system specially project estimation
E Telecommunication industry in the US. Because of low orders shifted to local market with no specific industry focus.
Local market exposure to strengthen systems to get entry into export market
F Initially local corporate sector, now both local and international market
Bigger projects have put stress on the company to improve systems and procedures.
G Initial focus on telecommunication, airline, health care and financial sectors in the US, but because of getting no projects same sectors in the local market. Same sectors in US, UK, Middle East and Japan, with the addition of engineering related projects. Due to export orders the company acquired specific skills to get the job done H Initially local market, now operating in both local and
international markets. Employees in client organizations resist computerization due to the fear of job loss
Have to improve systems to cater to the international market
I Financial system for local market, now mainly local customized SW development and platform conversion. Only handle small and medium size projects in international market due to lack of project managers
The shortage of high-end technology work, lower profit margins, and the drying-up of large government projects due to funding shortages, have led the firms to concentrate more on the export markets.
Telecommunication and E-commerce sectors in US have been major areas of focus. Most are willing to take many smaller projects from several clients rather than one or two large projects from a single client to diversify their risk. Due to lack of extensive project management skills, companies have relied primarily on smaller projects. As firms acquired more sophisticated project management skills, they took progressively larger projects.
A number of factors led the companies to focus on export markets (See Table 9). Most companies got an opportunity to undertake export work based on past experiences in the local market. In some cases local client contacts provided access to their foreign counterparts.
Table 9. Factors Leading to Export Focus
Co. Kay Factors
A Previous work with other another local company in the same area
(Telecommunication sector)
B Start of telephone banking in Pakistan provided the company the entry
in the local market.
Shift in the International automotive market towards the use of SW for designing and pricing the electrical and electronic systems of cars. A friend in the US studying at CALTEC had done his thesis in the same area.
Idea given at an exhibition by a camera manufacturer who wanted a SW in which databases and images could be linked.
C Realization of the Y2K tools problem, expertise in this area and
subsequent work provided the entry into the international market. (Focus on AS 400 system)
Y2K problem time related so realizing the importance of internet in future started work on internet based products
D Identification of need for word processor in local language provided
the entry but piracy problems resulted in failure
A friend in the US entered into partnership and thus gave access to the US market for Lotus notes applications
By gaining experience and resources, bought a local company working on Urdu word processor.
E Equity holder companies offered the company to develop their systems
till export projects materialize.
Internal process development resulted in developing a project that the company intends to market to other SW houses
F Distribution of Apple computers resulted in the idea of developing
multi-media products.
Initially develop presentations for different companies Pioneering work was development of CD on 50 years of IBM in Pakistan and the quality of work brought in the project for developing a CD on 90 years of IBM world over
G A US based company venturing into the field of communication
wanted to develop systems at low cost.
Good reference from that company brought in new business
H Need of local companies to computerize financial systems gave the
opportunity.
Extensive experience with databases, working with low level languages, work of existing client in international market in the Y2K area provided entry to the export market.
I Parent company expertise in financial systems and contacts in the local
market gave the entry point at a time when computerization of financial systems in Pakistan had just started
Good reference from clients and contacts with companies brought further business.
Supplier institution related issues. The SW industry in
Pakistan has been constrained by the non-availability of required inputs. The relatively small base of properly qualified computer professionals available from the local educational institutions has been one such constraint. Lack of access to funds from the local banks has been another major issue (See Tables 10 and 11). The primary issues are related to telecommunication facilities and education, the two drivers of software industry.
Table 10. Key Issues in Availability of Needed Inputs
Co. Key issues
A Low availability of technical human resource at the middle level
Electricity shut downs and unreliable telecommunication B Banks don’t have the ability to assess the potential of SW
business
Quality human resource not available
C Retention of quality human resource, influence of socio-economic conditions
Drastic reduction in hardware costs have allowed the use of newer technologies
Unreliable communication system
D Sound sources of funds for financing growth don’t exist. Universities and training institutes have helped in training Unreliable communication system
E Experienced HR for handling large projects not available Tools have become very expensive
F Banks don’t have understanding of SW business Unreliable communication system
G Problems with finding and retaining good project managers
Group support for finances and projects Unreliable communication system
H Institutions are not providing quality CS graduates Sources of funds have always been a problem I Parent company support for finances, processes
improvement Trained project managers not available Unreliable communication system.
Environmental Factors. A number of specific issues
related to the overall operating environment effect the SW companies (see Table 12). These include:
• Cost and quality of communication facilities.
• Government policy in tax, trade and infrastructure.
• Overall socio-economic conditions.
Some of the specific details regarding the socio-economic conditions in Pakistan, and the various developments in the policy area, are listed in Table 13. One can easily relate the down turn in the local economy in 1996-97 timeframe to the shift of software companies towards export markets. The Government initiative to set up a SW export board in 1995 and the related activities to enable Pakistani software companies to explore foreign markets, also led to greater focus on export of software. In 1998, following the nuclear explosions, government imposed restrictions on foreign currency accounts. This decision had adverse affect on the growth of the SW industry.
Table 11. Key Supplier Institution Related Issues
Telecommunication Infrastructure:
Pakistan Telecommunication Company Limited (PTCL) has monopoly over international lines till 2002. Refused to give fiber optic connection to Internet Service Providers (ISPs) and other companies that had established Internet service for their own use. Charges also very high.
PTCL is regulated by Pakistan Telecommunication Authority (PTA). Internet Telephony declared illegal. PTA also grants licenses to companies seeking to operate as ISPs.
Education:
In 1994, only two institutions that were providing quality education in the computer science
As the demand for computer professionals gradually increased, more institutions established, mostly in the private sector
Number of institutions providing quality CS education has risen to 7. Many more institutions that are providing short language or application oriented courses have been set up.
Conclusions
Software industry provides an opportunity to developing countries to improve governance, enhance competitiveness of their industries, create high value jobs, and generate export revenues. Given the predominant role of governments in the education and telecommunication sectors in most developing countries, government policies and initiatives play an important role in shaping the evolution of software industry.
It is important to understand the multidimensional nature of the influences that determine the evolution of individual software companies. It has been observed that different factors determine the growth path at various stages of evolution. As the firms focus on export markets, government encourages individual firms to put more effort into marketing. When firms grow and obtain more export work, access to quality professionals becomes a dominant issue. SW firms in developing countries have access to lower cost technical work force. Sustained development of SW industry requires world-class technical and project management skills. With the current shortage of IT skills in developing countries, IT professionals are moving to developed countries in increasing numbers. This situation is posing serious human resource challenges.
Table 12. Environment Factors Influencing Companies
Co. Key Aspects
A Overall state of the economy and socio-economic situation affects the company in terms of
attracting quality human resources.
Tax incentives compensate for increasing cost of utilities and infrastructure
B Lack of cost effective high quality communication infrastructure
Tax incentive will impede the development of tax culture in the long term and result in lack of information about SW export reporting procedures
C Lower cost of hardware has enabled companies to try out newer possibilities
Lack of cheap communication systems
D Brain drain caused by professionals going abroad. Foreign exchange policy is causing serious loss Tax breaks not helping the industry, government can help by using IT itself
E Most companies focusing on SW export, opportunity in the local market.
Exchange rate policy is hurting the company. Lack of cheap communication systems
F Lack of cheap communication systems
Tax regulations on import of hardware and SW need to be formalized
G Law and order situation has hurt, foreign buyers and trainers hesitate to come to Pakistan Exchange rate policy is hurting the company Lack of cheap communication systems
Lengthy procedures for import of hardware and SW
H Tax incentives don’t address the problems of the SW companies
Exchange rate policy is hurting the company Lack of cheap communication systems I Deteriorating socio-economic conditions
Lack of finances for expansion
Lack of cheap communication systems.
Development of a world-class SW industry in a developing country require sustained efforts over a long period. Pakistan’s software industry has reached its current level due to the efforts over the last decade. Given that a number of internal and external factors collectively influence the manner in which a SW company evolves, it is not judicious to focus on one or two factors for promoting development of software industry. In the long-term, the availability of quality IT professionals (a direct result of the quality of educational institutions) plays the single most important role in the development of SW industry.
Table 13. Some Key factors relating to Pakistan
GNP growth 1993-94 1994-95 1995-96 1996-97 1997-98 Manufacturing Service 3.9 3.69 5.6 4.80 4.43 4.75 0.54 2.10 6.08 (p) 4.77(p) Tax Incentives announced in 1995-96
Exemption from all duties and tariffs on import of export related hardware and SW. Exemption from corporate income tax on export earnings for a seven-year period. Low data communication rates. 100% foreign ownership allowed. Relaxation on setting up joint ventures.
Support organizations Pakistan SW Houses Association (PASHA) Pakistan SW Export Board (PSEB) Information Technology Commission (ITC)
PASHA was established in 1993 by 8 SW companies as an industry association for negotiating with the government on various issues and providing industry a platform for discussing problems and undertaking collaborative work.
PSEB was established in 1995 with objective of formulating a policy framework for increasing SW export. Till now this institution collaborated with academic institutions and SW companies to promote IT education under Action Learning Centers of Excellence Scheme.
ITC was established in 1997 to promote computerization in government organizations, make suggestions for promoting SW export and undertaking research in SW and related area. It never functioned effectively.
Govt Policy for Pricing of Comm Services
Government has subsidized the
communication rates for SW companies. But even after subsidy, this rate is high compared to other countries.
Government Policies in Finance Area
Restriction on foreign currency accounts has hurt SW companies.
Uncertain exchange rate policy and multiple exchange rate regime discouraging exports. Ability to react to the new opportunities is an important determinant of growth. Companies that spotted the opportunities related to Y2K problem, the changing telecom business, Internet, and the emerging e-commerce applications, and then geared themselves to offer services and products to meet these emerging needs, have grown at a very fast pace. By focussing on these areas, some firms were able to establish a foothold in the fortune-500 companies for out-sourced projects. Others that have
stayed in the more traditional application areas have not grown that fast.
Growth of SW industry in developing countries, requires concerted and coordinated efforts of the government policy makers, educational institutions, and industry entrepreneurs. Individual firms may flourish due to the efforts of entrepreneurs, but as an industry, SW can only play a significant role in the development of country if all the relevant players fulfill their roles. Governments have access to the largest resource-base and capacity to influence the environmental factors, supply institutions (telecom companies and educational institutions being the most important), and local markets (state owned or controlled organizations form a major part of the economy) in the developing countries. Hence, governments have the most significant role to perform in development of software industry. Government actions and policies can both help and hinder development. Focus on short-term goals at the expense of developing institutions for long-term sustained development can adversely affect ability of SW industry to grow.
The work presented in this paper provides a framework for analysis of software industry development and evolution in a developing country. The field data presented, and analyzed, in this paper illustrates how the framework can be used to analyze the evolution of a given country’s software industry. This kind of analysis can be of benefit to researchers and policy makers that are interested in understanding how software industries could be fostered in developing countries.
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