Recently, I had the opportunity to participate at SODEC 2009 (the largest IT Expo) in Japan. Many Japanese companies stopped by our booth and were surprised to learn that Bangladesh offers IT outsourcing services. It sure does point out very low awareness about Bangladesh as an IT outsourcing destination among buyers. Our suspicion is validated by a recent report from A.T. Kearney’s Global Services Location Index (GSLI), a ranking of the most attractive offshoring destinations. Bangladesh did not make the top 50 list, when Egypt is ranked 6th and Vietnam is ranked 10th.

In this article, I would look at the issues from all angles and propose a few initiatives that I believe are important for getting us over the hump and establish Bangladesh as a legitimate destination for IT outsourcing. The proposal is based on insights that I gained over last 3 years in building an IT outsourcing business (Code71). During this period, I had the opportunity to listen to clients and many prospective buyers talking about what they are looking for in outsourcing service providers. At the same time, I also learned a lot about the IT industry in Bangladesh through setting up and operating an offshore development center in Dhaka. Additionally, I also had the opportunity to work with Indian outsourcing companies and observe them as they rose to prominence in IT outsourcing during my long IT career in the USA before I turned entrepreneur in 2006.

Present situation

Not a whole lot of statistics are published by the government or related organizations like BASIS/BCS/EPB about the IT industry. Based on what I can gather from different sources, last year Bangladeshi companies have exported IT services for a total of $27MM. I would venture to say that a significant part of this revenue come from freelancing sites like RentACoder, Elance and the like. Many of the companies involved in outsourcing are building their businesses based on these sites. While kudos to the young entrepreneurs for making the best of the opportunities available on these sites, we cannot build a sustainable and significant industry based on these sites.

Challenges

We all know about the infrastructure issues facing the IT companies. Among them the most critical are the unreliable power and internet connection, and high cost of suitable commercial office space. Although many people cite these issues as reasons behind our lack of success, these are easy problems to fix. There are other challenges that we do not hear about but are actually holding us back from achieving success.

Company size

Average size of an IT company in Bangladesh is about 8-10 (anecdotal) people. There are only a few companies that have 50+ software engineers. Let’s contrast that with Indian companies. A small Indian company has a few hundred developers with an average annual revenue of $10MM (source: http://www.nasscom.in/upload/ Annual_Report07-08.pdf). 74% of the Indian companies fall in this category. The issue with companies with 10-20 people is that it creates doubt in the minds of the serious clients about our ability to sustain as a business. Given a choice between a company with 100+ developers and another with 20, most likely buyers will go with the larger company.

Lack of onshore presence

Most companies in Bangladesh do not have any offices in the buyers’ country (i.e., USA, Europe). It is expensive to setup and run an office in the USA or Europe. Also it is difficult for many Bangladeshi entrepreneurs to obtain visa to travel to these countries. IT services is in many ways relationship-based business. Without a regular in person interaction, it is very difficult to build a sustainable long-term business. The greatest challenge in managing clients is to reduce the project delivery anxiety in their minds due to the time zone differences and distance. It is imperative to have a bridge team onshore to address this very issue.

Transient nature of the Industry

Most IT companies are setup to operate in an Ad-hoc fashion. Let me explain what I mean by Ad-hoc. The founders, investors, and management seem to run their businesses based on availability of projects. The mantra is hire when there is a project, and fire when there is none. No long-term vision for investment in the people.

Lack of IT savvy investors and leadership

Our business culture is based on trading and manufacturing. We do not have much experience in knowledge-based industry, specifically high tech businesses. At the one end of the spectrum, we see many successful business people from other industries invest in the IT industry as a way to diversify their portfolio. However, many of them struggle to manage and grow their cool IT business. The reason is that they try to structure and operate the business in the same way they operate manufacturing businesses. To a hammer everything looks like a nail. On the other end of the spectrum, we see many young IT professionals turning entrepreneurs themselves. This is all good if they are working on some new product ideas. It does not work so well when the business is IT services (that is building software for clients). You would need experience to learn and build enough credentials before starting an IT services business.

Role of BASIS, EPB, and BCS

Instead of trying to understand and speculate about how BASIS and BCS came about, it is fair to say that BCS and BASIS in many ways have overlapping goals. Now add EPB in the mix. It has recently added IT services to its list of products and services to promote. It is like having too many cooks in the kitchen. We need to clearly delineate responsibilities among these three organizations so that we can create a consistent brand to the outside world by deploying optimum resources. BASIS has done a good job of working with Government to create policies required to help grow an IT industry. However, it has not been successful in promoting Bangladesh to the buyers of IT services. It is evident in the low awareness among the buyers. It is partly due to its limited budget and partly because how it is structured.

Proposal

Let’s look at the market opportunity that is available to us. Worldwide IT services spend was $967B and global sourcing was $76B with a year over year growth of 30% in 2008(Source: NASSCOM). While India had lion share of that ($40B), Vietnam (it has seen 35%-45% yearly growth in last few years with export reaching $300MM) provides a good picture for what Bangladesh could achieve. So, what we can do to address the issues I mentioned above and capture the opportunity that is luring us for so long. It can be tricky. Here are some of the things that we should implement soon before the opportunity passes us by.

Merger and acquisition to form a few large companies

We all need to be open to forming larger companies through merger and acquisition. In the past, I have seen an effort to form consortium as an alternative to merger. However, given the nature of the business, it is very difficult to make it work, if not impossible. In order for us to compete with companies from Vietnam (our real competition), we need to have larger companies. This may be difficult not because of the mechanics involved, but because of our traditional business culture. We need to overcome that mental barrier and make a real effort in this regard. To help with this process, we could engage professional consultation. If we could select the presence of onshore office as one of the criteria when selecting candidate companies for merger, we could also solve for “lack of onshore presence,” one of the critical issues in the way for the Bangladeshi companies having long-term success. If we can form 5 to 10 100+ companies by 2010, it is a reasonable expectation that some of these companies will be able to grow to 1000+ company by 2020 and can earn a revenue of $20MM-$30MM. To put this number in perspective for people familiar with Garments industry, $20MM is equivalent of $67MM revenue in the Garments industry. The reason is that 70% of the revenue in the Garments industry goes into paying for raw materials and only 30% is value added, whereas in the IT outsourcing industry (software) 100% is value-added.

Establish an IT park

Most IT companies in Bangladesh operate from a limited residential space because as we all know that commercial spaces are very expensive. Although the first IT incubator in BSRS Bhaban has proved to be successful in helping companies get started, it was not built with IT companies in mind and hence lacked the some of the much needed features. Now is the time to build a more comprehensive IT park with all modern facilities to provide excellent environment for IT programmers. Among the usual infrastructure elements (24 by 7 power, high speed internet, reliable telecommunication), this park should also have a SAS 70 compliant data center, IT library, state of the art IT training classes, space for organizing seminars, as well as cafeteria/food court run by food service providers, gym, and hotel for accommodating buyers and delegates. The whole park should be secured from external intruders. This will help eliminate infrastructure concern that many clients/buyers have about Bangladesh.

Restructure BASIS and BCS into one organization

IT industry will be better severed when the efforts of BCS and BASIS can be combined into a concerted one. NASSCOM is the poster child for what such an organization could do. Having a single organization has many advantages including pulling funds and resources together to utilize more efficiently and also help create one view of Bangladesh in the minds of the buyers. We also need to take a look at how these organizations structured and operate. We need to have a dedicated team of highly experienced professionals (in marketing, business, strategy, and brand development in addition to IT experts). We cannot staff this team with volunteers including the position of the president. This team needs to be recruited from the industry for a competitive compensation to attract the right talents. This team will report to a board of directors formed from the volunteers elected from the member companies. The board of directors will provide the guidance and feedback. A part of the EEF fund could be utilized to fund this operation.

Local market development for software service

We all know that the current government has laid out a vision for digital Bangladesh (although the details are yet to be seen) by 2021. This is great because a viable IT outsourcing industry requires a healthy local demand. If we take a look at India, its local market demand was $12B in 2008. However, what is important is to make sure that we (private companies and government agencies) prefer Bangladeshi companies when awarding local projects at a price that we would be willing to award an Indian company. It would allow Bangladeshi companies involved in the IT outsourcing also offer the same service to the local companies and government agencies.

Niche market focus

Global IT outsourcing industry is a matured industry. It is difficult to have success for us as a new comer with plain vanilla service offerings (everything for everybody). We need to stand out (differentiate) and not blend in. We need to build expertise in niche areas (emerging trends) and not follow where Indian companies have found their success. We need to have a very clear message to the buyers as to why they should consider Bangladesh over other established IT outsourcing destinations. Low price cannot be the strategy. There is nothing stopping Indian or Vietnamese or Chinese companies to match our price. In fact, they already are doing so. The niche area can be along technology, industry, and market segment. These will be different from one Bangladeshi company to another. We also need a brand for Bangladesh as an overall destination for IT outsourcing. In this regard, I would like to propose that the Bangladesh brand be “A home of Agile IT outsourcing.”

For readers who are not familiar with the term Agile in the context of IT, here is a brief overview. Agile is a set of philosophies about how to manage IT projects. Scrum and XP are the two most popular Agile software project management processes. In light of high failure rate associated with traditional project management (also known as Waterfall), many companies in the USA and Europe are adopting Agile practices. Indian companies built their initial success in outsourcing by becoming experts in implementing Waterfall using CMMi framework (a process framework created by SEI- software engineering institute of the famous university Carnegie Mellon). Now the tide has turned in the direction of Agile. More and more buyers will be looking for outsourcing companies with Agile development practices. Now is a great time for Bangladeshi companies to invest in building expertise in Agile practices. BASIS could take the initiative of promoting Bangladesh as the “Home for Agile IT Outsourcing.” Some companies in Bangladesh are already practicing Agile software development.

CJ WEB