Political risks affects Pakistan's offshoring potential

In the competitive world of offshore outsourcing, Pakistan doesn't get much attention.


The main reasons can be found in any quick scan of news headlines about that country: terrorism and political instability, including two unsuccessful efforts to assassinate President Pervez Musharraf.

Nonetheless, Pakistan has a developing offshore IT services industry. And in many areas of the country, it's business as usual.

Indeed, in March, Chicago-based consulting firm AT Kearney for the first time added Pakistan to a list of 50 countries that it evaluates for their offshore services market potential.

Kearney's Global Services Location Index weighs more than 40 metrics, such as a country's labour pool, infrastructure and legal system.

Johan Gott, an analyst at Kearney, said Pakistan was added to the list of evaluated countries in order to stay ahead of interest from the consulting firm's clients. Although it's doubtful that large companies will build offshore development centres in Pakistan, Gott said the country does have potential - particularly with smaller companies seeking outsourced IT services.

"In many respects, it's similar to India in terms of education and people skills," he added.

Kearney isn't the only market watcher that thinks offshore development may pick up in Pakistan. In a report last year, Lehman Brothers said Pakistan's IT industry was growing at a high rate, with more than 330 companies having registered with the country's software export board.

According to Lehman, Pakistan's advantages include relatively low wages - amounting to as little as half the level of salaries in India - as well as reasonable real estate costs, plentiful government incentives and a readily available supply of workers.

One of the largest IT services firms with operations in Pakistan is NetSol Technologies NetSol is based in California, is listed on the Nasdaq exchange and has offices in countries such as the UK, China and Australia. But the company was founded in Pakistan in the mid-1990s, and it has about 600 engineers in that country working on projects for global clients in industries such as automotive and financial services.

NetSol is still tiny compared to the behemoths of the offshore industry in India. However, CEO Najeeb Ghauri said he started NetSol with the hope of leveraging India's offshore success in Pakistan. He added that the Pakistani government has been trying to encourage development of an offshore services market through incentives such as a tax holiday on all IT imports and exports.

The US is Pakistan's largest trading partner, and Ghauri said the country's economy is doing well. "Anytime anybody goes to Pakistan, they always come back bullish," he said.

Not so bullish is Todd Furniss, chief operating officer at the Everest Research Institute, an independent arm of the Everest Group, a consulting in Dallas. Furniss said Pakistan is reasonably stable economically and has a legal system based on English law. "That infrastructure should make it a logical destination for services," he added.

But that isn't the case, said Furniss, who cited a number of issues facing Pakistan, including the lack of an IT industry group similar to India's National Association of Software and Services Companies, which is known as NASSCOM. He also questioned whether Pakistan's educational system is adequately preparing students for the IT services labour market.

But the biggest problem that is holding back Pakistan's IT services industry is the geopolitical situation there, according to Furniss. "That is really is a central issue," he said.

Companies seeking offshore services have a wide range of choices, said Cliff Justice, head of globalisation at consulting firm EquaTerra. There are many other countries that offer similar outsourcing options and "don't come with the issues that Pakistan comes with right now," Justice said.

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