Pakistan the hot new offshore information technology (IT) destination

Why is Pakistan the hot new offshore information technology (IT) destination? This is because of a combination of favorable economic circumstances. Just when many Western managers are finally becoming comfortable with the idea of working closely with Indian IT firms, along comes Pakistan.

Pakistan is shaking off decades of “also ran” status. Funds invested into building educational institutions in Pakistan (when there were not enough jobs to absorb all the graduates from those institutions) are paying off as Pakistan begins to field a modern, highly productive labor force that is the envy of more prosperous but less tech savvy nations elsewhere in the region.

Why Care?

Why should the average Western IT professional, businessperson or IT consumer care? Because we are all going to be buying and using more IT outputs from Pakistan. To be a smarter buyer and user of IT products calls for a familiarity with Pakistan, even for those who do not initially intend to do business with Pakistani firms. We are all part of a global economy and Pakistan is an increasingly important part of that global economy.

The issues that Pakistan faces as it gears up for the global high-tech marketplace are many of the same issues that both advanced and developing economies face elsewhere in the world, as both service providers and service consumers. Pakistan is making no effort to gloss over its challenges, which makes those challenges easier to address.

With a population of 160 million and a land area almost twice the size of California, Pakistan is a smaller and more unified country than most of its neighbors, which increases that nation’s chances of solving its own problems and avoiding the mistakes that have plagued neighboring economies.

India Helps Pakistan

The biggest boost to Pakistan’s efforts to break into the global IT marketplace came on September 28, when India’s finance ministry announced an income tax of more than 36 percent on foreign firms with software, R&D and customer service operations in India. This tax proposal had been in the works since the beginning of the year and is expected to prompt U.S. firms to follow GE’s lead in selling off assets in India.

Any Western business manager who initiated or approved the establishment of an IT production or R&D subsidiary in India in 2004 could find that decision to be a career-ending move unless they have built in financial reserves to accommodate both the tax scheme of September 28 and upcoming taxes still on the drawing board.

A proposal is under consideration in New Delhi to tax activities conducted over international private leased connections (IPLCs) that carry most of India’s voice and data traffic to and from the outside world. There is also a proposal to replace state-to-state customs duties (octroi) with a national value added tax. Both those tax proposals could be combined into a single scheme.

U.S. IT brokerage firms, their U.S. clients and domestic Indian IT operations will be largely untouched by the September 28 tax scheme. But the traditional offshore migration path of outsourcing to an offshore location first — before setting up captive operations there — has been disrupted in India until economic reforms reduce the role of the Indian government in the economy and consequently reduce that nation’s revenue requirements.

For Westerners with long-standing personal ties to India, that country’s September 28 tax scheme could have both personal and financial consequences. For new Indian workers who hoped for a position with a Western firm based in India, that country’s revenue policy will alter careers, lifestyles and futures. Westerners can pack up and look for other another country to set up operations. However, what country?

Pakistan’s Advantages

Pakistan is the primary beneficiary of India’s decision to tax foreign firms with captive IT operations in India. No other economy can match Pakistan’s labor pool of educated English-speaking workers. No other economy can match Pakistan’s scalability, reliability and low-cost environment.

Pakistan offers five advantages over India:

1. Western experience: Executives at IT firms in Pakistan often have worked and gone to school in the U.S., which is Pakistan’s largest export market. Indian IT firms whose managers have worked in the West are generally more expensive than similarly positioned Indian firms, without always providing noticeable differences in program implementation capabilities. The willingness of Pakistanis to return home from the West stands in marked contrast to most Indians who arrive for school or work in the West and never look back.

2. Professionalism and integrity: The personal integrity of Pakistani managers is easy to identify and appreciate, especially by Westerners with business experience elsewhere in the region. However, the relatively open and trusting nature of Pakistanis has made them easy prey for Indian business brokers who have managed to cheat several Pakistani IT firms by offering to provide them with outsourcing contracts in exchange for up-front fees. The Pakistanis assumed that these Indians were open minded and charitable for coming to help less experienced firms in Pakistan gain access to international contracts, until the Indians took their money and disappeared.

3. Higher labor availability: Fewer holidays in Pakistan means less slippage in staff availability compared to India. IT firms in India are advised to hire a diverse workforce so that members of one community can enjoy important festivals while members of other communities cover the phones and keep production going.

4. Good accents: Pakistan’s official language is English. Only Kolkata (formerly Calcutta) and the Punjabi areas of India can come close to competing with accents in Pakistan, where many families speak English at home and where accent neutralization for non-native speakers of English is substantially easier than in India. Language skills and accents provide Pakistan with a major advantage over all other Asian outsourcing destinations.

5. Low cost talent pool: India’s top-tier labor force for IT work has been stretched thin in many areas, especially Bangalore, where escalating wage rates, turnover and higher outsourcing prices are reaching critical mass at the same time that the urban infrastructure has exceeded its carrying capacity. Annual turnover rates reported to for most merchant call center facilities in India at the beginning of November are approaching 100 percent. High turnover rates are causing a shift to second tier Indian cities and to Kolkata. Escalating turnover rates are one of the Indian outsourcing industry’s dirty secrets. In comparison, Pakistan’s top-tier talent pool is largely untapped and turnover rates are less than 20 percent.

Shared Roles

Pakistan and the U.S. have similar roles when it comes to human rights. Both countries are a beacon of safety and a haven for refugees. The government of Pakistan has not been advertising this fact. The people who have fled to Pakistan from surrounding countries in the region have, on a one-to-one personal basis. They are Pakistan’s best ambassadors.

Before making up your mind about Pakistan, talk to people who have left there or have passed through there. Their origins might be different but their stories are often tragically similar. Too often, it seems as if they are all reading from the same script: family members (or themselves) in neighboring countries who have been victimized, jailed, possibly tortured, relatives killed, and all survivors traumatized and dispossessed. Pakistan welcomes them and serves as a place of safety and security.

From Iran, Afghanistan, India and elsewhere they come, seeking the same things that immigrants to the U.S. have always sought: opportunity, liberty, freedom of religion and respect for personal beliefs.

Americans naturally identify with the underdogs, the runners up, the people who are trying harder than anyone else to succeed. This is why many Americans find it easy to identify with Pakistanis.

It is not necessary for Americans to take sides in disputes between India and Pakistan. Taking sides is not required. Long-term peaceful solutions are required.

Increased trade and joint projects between Pakistan and India will pull those two countries together and create incentives for peace. American firms doing business in one or both countries can contribute to peace through responsible business practices and the moderating effects that employment and prosperity provide. This can and should be accomplished when American firms are allowed to operate on an equal footing with local firms, which for now only appears possible in Pakistan.