Understanding Pakistan’s IT services value chain and how to move up the ladder?

Analysis of Pakistan's exports by category and suggest recommendations on growing them.

Technology is often thought to have the potential to be the greatest equalizer for developing countries that can leapfrog development without necessarily going through the trial and error of previous versions of technology. Pakistan is currently at the cusp of that opportunity if we leverage newer technologies like artificial intelligence, machine learning, and data.?

Pakistan has the pivotal opportunity to position itself as a hub for IT Services and become the destination for the massive amounts of global spend on outsourcing. But there are a few roadblocks in the way. For that, let’s first examine Pakistan’s IT services value chain to contextualize where we currently stand.?

Currently, information and communication technologies account for more than 38% of Pakistan’s total services exports. This is a significant contribution as the same number, barely five years back, used to be under 20%. This is a welcome development for our economy, which has long been ailing due to the weak export base.?

In the export of IT Services, a lot has changed in the past ten years. Software services are driving the growth, increasing by 530% from $254M in 2013 to $1.36B in 2022. During this period, software’s percentage share of ICT exports has risen from 31.7% to 52%, and this doesn’t even account for the other computer services, of which experts say the majority is software-related.?

The State Bank sees the change to software-centric growth as the result of a set of factors shared by developing countries globally. The declining costs of broadband internet and telecom services, a burgeoning young population, and the resulting hyper connectivity allowing for the widespread dispersal of knowledge means that Pakistan can benefit from an export revenue stream that has an extremely low cost of capital.

What has also driven the IT Service export growth has been call centers, which have grown by 5.7 times in the past ten years, growing from $37M in 2013 to $215M in 2022. 10 years ago, call center services had a share of 4.7% in overall ICT exports, but this has now grown to 8.2% in 2022. While any inflows of forex is invaluable for the country, it is ultimately the result of our financial attractiveness and not our technical skills. Because the nature of this work means that its requirement from the labor force is not very high skill, in comparison to software engineering, call centers will be the first to be automated in the coming age of AI.?

This is precisely what global management consulting firm, Kearney, says in its 2023 Global Services Location Index. In the report, Kearney talks of the key disruptors making the talent supply chain more complex, changing the landscape of the global services industry as a whole. It speaks of the potential impact that generative AI will have on talent supply, as “this new wave of AI has the potential to replace or reduce up to 300 million jobs around the world over the next decade while enabling innovation, efficiency, personalization, and creativity.”

To elaborate, this means that labor outsourcing will be going towards countries with digital resonance, which is the term Kearney uses to measure the digital skills of the labor force and the digital outputs of business activity. Kearney expects labor cost to become less of a consideration in outsourcing in the automation-intense Industry 4.0 environment of the future. For Kearney, the key considerations will be the readiness of a location to address digital disruption, its connectivity, and the resilience of its labor pools.?

Unfortunately, the Index shows us that Pakistan is unprepared to exploit the digital disruption. It lags behind its comparable and ranks 29th, even though its Financial Attractiveness and ‘People Skills and Availability’ scores are up there with the best, which show that cost competitiveness and workforce availability aren’t a problem. It is Pakistan’s ‘Business Environment’ and ‘Digital Resonance’ that let it down.

So, how can we fix the business environment strengthen our digital resonance, and move up the value chain in IT services? Firstly, I endorse P@SHA’s recommendation to launch a National Single Window Corridor for trade facilitation. This Corridor will make it easier for international clients to do business with Pakistan by easing local and international business in registrations, exports, licenses, approvals, and payments. While different single-window initiatives exist in Pakistan, there is a lack of integration of government departments.?

Second, I think there is merit to SBP’s recommendation for the government itself to become the biggest client of Pakistan’s IT industry by digitizing governance and public sector operations. This will create a market for local tech firms to innovate and expand their capabilities and enable the diversification of the client base for IT firms beyond overseas export markets. Overall, it will structurally digitize the local market and increase our digital resonance. Moreover, having that domestic market will not only de-risk the sector a little but also encourage investments in research and development.?

Third, encouraging IT adoption by SMEs through the use of subsidies and technical assistance will digitize the largest segment of the company. Like the e-government policy, this would boost demand for local IT firms and increase digital resonance in the country.?

Now is the time to act, especially if we want to leapfrog development and get Pakistan out of its perennial economic crises. Whether we can develop a competitive advantage in outsourcing beyond cost and population, especially when the world changes due to AI, will make all the difference in Pakistan’s journey.?