Karachi Rising – The Emerging Offshoring Hub

The Global Outsourcing Industry According to different studies conducted by Gartner, Forrester and NASSCOM, the global outsourcing industry is estimated to be over $1 trillion. Of this $1 trillion dollar opportunity, $597 billion is IT Services and Software and $448 billion is BPO. Out of the above spending, $280 billion is potentially ‘outsourcible’. Only 14% of this ‘outsourcible’ market has been addressed, combined with 7% - 10% annual growth, the opportunity is staggering. Karachi has the highest per capita income in South Asia and its estimated population is 16 million, which is expected to reach 32 million by 2025

Changing the Way the World Does Business There is no question that offshoring has changed the way that companies do business. Multi-national companies globally continue to take strategic advantage of highly skilled but low-cost workers in developing countries to reduce costs. India and China have dominated the market, India in IT/ITES/BPO and China in manufacturing. But other developing countries are emerging as fertile land for offshoring, including Pakistan.

Global Offshoring Jobs Growth and Office Space Requirements Cushman Wakefield forecasts that the US, Europe and Japan will offshore over 5 million jobs between 2005 – 2015 and this will result in outsourcing office space demand of 96.9 million sq meters (1,043,022,919 sq ft) with 35.3 million sq meters (379,966,037 sq ft) going to India. India – Skills Shortage and Cost Increase India is by far the global leading offshoring destination with close to 50% market share. India’s success however has lead to many challenges: the Indian IT/ITES/BPO industry is experiencing a skills shortage, with only 10% of graduates suitable for IT/ITES/BPO industry employment. This strain on skills has lead to 15% wage inflation per annum. The skills shortage combined with wage inflation has lead to Indian companies experiencing retention challenges, with attrition rates reaching 50%. India’s budget in 2008 made no comment on extending the Software Technology Parks of India (STPI) Scheme. The STPI provides tax holidays to India’s IT/ITES/BPO industry and the STPI tax holiday expires on March 31, 2009. Further disappointing the Indian IT/ITES/BPO industry was the decision to increase the excise duty on packaged software from 8% to 12% to bring it on par with customized software that comes with a service tax of 12%. Adding to the aforementioned challenges is the value appreciation of the Indian Rupee, thereby making India products and services even more expensive. Compared to a US dollar the Indian Rupee is now 39.93, its highest rate in 9 years. This has put the squeeze on Indian IT/ITES/BPO margins, cutting margins between 2.5 to 3.0 percentage points since mid-2006. Furthermore, the success of the IT/ITES/BPO industry has lead to higher real estate prices, leading Indian companies and global companies operating in India to seek other markets with IT/ITES/BPO skills and lower costs. Karachi – The Emerging Hub of Offshoring Karachi is the financial, commercial and transport hub of Pakistan and the gateway to the landlocked energy-rich Central Asian economies. It accounts for the lion’s share of GDP and generates 65% of Pakistan’s revenue. Karachi has the highest per capita income in South Asia and its estimated population is 16 million, which is expected to reach 32 million by 2025. Karachi is one of the ten largest cities in the world and has the highest literacy rate and most educational institutions in the country. What the Experts Say on Pakistan as a IT/ITES/BPO Destination What the Experts Say on Pakistan as a IT/ITES/BPO Destination BearingPoint analyzed the top 36 IT capable countries globally in term of lowest cost of labor and lowest occupancy cost. Pakistan ranked 1st at 8% of US cost while India ranked 15th at 30% of US cost (set up of 200 full time IT employees in 30,000 sq. ft of office space). BearingPoint, 2005 Gartner ranks Pakistan in its list of Emerging Countries with attractive costs Jim Longwood, Ian Marriot, Gartner, February 2008 “Pakistan as a rising star offers a surprising new home in South East Asia for Outsourced Customer Management” Stephen Lloyd, Program Manager, IDC, July 2006 “Pakistan has several fundamental advantages over other markets, making it a viable location for the IT/BPO space. The two main drivers of success that Pakistan possesses are its low cost labor cost and sufficient supply of educated workers.” Lehman Brothers Pakistan IT Industry Report, August 2006 “I have been to Pakistan and I see the future and the future is now.” Ken Morse, Senior Lecturer; MD MIT Entrepreneurship Center March 2007 during a visit to Pakistan Pakistan IT/ITES/BPO Strengths Pakistan has the lowest cost base (labor and office space) for a bench mark of 200 full time IT employees in the top 36 countries with IT capabilities Starting and closing a business in Pakistan is faster than all other countries in comparison Pakistani companies have over 10 years experience developing software for international export Pakistani companies have over 5 years experience providing BPO services to international clients Most senior managers in local BPO companies are seasoned, many of whom have overseas experience Pakistani companies have developed considerable expertise in Banking, Insurance, Finance and Telecom The major cities have: A large pool of professionally qualified and experienced professionals, e.g., MBAs, Accountants, Lawyers, Engineers and Doctors Reliable telecom infrastructure Availability of expatriates who can fill middle management positions in the industry Average years of education in the middle class households are comparable to any other city in the world Large pool of English speaking skills, 10% of the 6.5 million can be trained for industry hire within 3 – 6 months Extremely low bandwidth costs Asian Development Bank initiatives to mitigate risk by providing guarantee against instability Foreign investors allowed 100% ownership Tax exemptions for IT companies until 2016 100% repatriation of profits for IT companies 7 year tax holiday for VC funds DWDM telecom infrastructure Pakistan Macroeconomics Pakistan’s economy continues to maintain its strong growth momentum for the fifth year in a row in fiscal 2006 – 2007. With economic growth at 7% in the current fiscal year, Pakistan’s economy has grown at a 7% average over the last five years. This growth has cemented Pakistan’s place as one of the fastest growing Asian economies. Growth in industry, agriculture and services has been supported by robust investment into the country. The economic forecast for 2007 - 2008 calls for continued at a constant rate. Agriculture and Industry produced 2/5th of growth while Services produced 3/5th of GDP growth. Real per capita GDP grew by 5.2% and has maintained 5.5% over four year. Foreign Direct Investment has increased rapidly and has reached $6.5 billion. Investment now represents 23% of GDP. Remittances reached $5.5 billion and Foreign Exchange Reserves reached $15.1 billion Source : http://www.ittowerkarachi.com/outsourcing.html