Three decades of software industry of Bangladesh

Building a modern, smart, prosperous nation writes Rokon Zaman The writer is an Activist on Technology, Innovation and related Public Policy. He is Professor, Electrical and Computer Engineering, North South University, Dhaka. He completed his higher studies in Memorial University of Newfoundland, Canada.

Despite small size, the software and Information Technology Enabled Services (ITES) industry of Bangladesh has a long history. Software development and export of software development services started in early 80’s. Against the backdrop of the target of the Bangladesh Association of Software and Information Services (BASIS) of generating US$1.0 billion dollar in 2018, from its current level of less than US$200 million, here is a brief account of the growth history of export capability of software, software development service and ITES.

ORGANICALLY GROWING INDIGENOUS SERVICE SEGMENTS: From the early 80’s, individual Bangladeshis started leveraging their overseas contacts to begin the export of software development services to the western countries. In course of time, export of ITES added to this initial software service export trend. Using this strategy, almost 200 indigenous software companies have organically grown with export track records-although sporadic in most of the cases. These companies are also active in the local market.

Over the years, these companies suffered from a number of limitations including discontinuous flow of export work-orders, high cost of business development, and rapid employee turnover. Extremely small size of work-orders – between US$5,000 and US$10,000 – offered by overseas companies which are also small, made it very difficult for these companies to generate revenue growth — with acceptable rates of profit-to-revenue ratio – to meet financial obligations. Moreover, poor response of financial institutions to address cash flow discontinuity, originating from irregular order flow, often forced these companies to pursue the practice of project-based hiring.

This human resource (HR) management approach significantly eroded employee-loyalty, in a society where job security is very much valued. Such a recruitment practice, coupled with weak financial situation, contributed to loss of experienced people, resulting in loss of precious tacit knowledge. As a result, these companies have still been struggling to generate high volume work-orders from high-paying mid to large customers to support consistent growth of revenue and profit-to-revenue ratio.

The long battle of developing export service business has built certain capabilities within these companies, which could be leveraged to develop scalable export business with the strategic engagement of foreign partners. These partners are expected to bring the much-needed consistent flow of high-volume work and also moderate amount of capital to strengthen the delivery capacity to meet international requirements.

ORGANICALLY GROWING INDIGENOUS SOFTWARE APPLICATION SEGMENTS: As early as 1986, a UK-trained Bangladeshi software professional set up a firm, Machine Dialogue, to develop business applications for export market. Machine Dialogue succeeded in exporting ERP (enterprise resource planning) software application to a globally reputed multinational, Volvo Motor Company. Sudden departure of its core development team for the US led to the folding-up of the company.

Following this footstep, several companies embarked on developing applications for export market. Notable examples are Tiger IT and Rev System. Rev system has established itself as market leader in VoIP (Voice over Internet Protocol) dialer segment for supporting voice calls over IP (Internet Protocol) network. Tiger IT is another example of global success story. Biometrics solution of this company has been highly rated by American’s National Institute of Standard and Testing. Despite limited research and development (R&D) facility, weak-risk capital financing capacity, and virtually non-existence of lead users in Bangladesh, the success stories of these and other indigenous software application companies are testimonies of creative capability of Bangladeshi IT (Information Technology) professionals.

CAPTIVE OFFSHORE DEVELOPMENT CENTRES: The struggle of organically growing local companies started to draw the attention of foreign firms and individuals to exploit the latent potential of Bangladeshi youths. Initially to support the software development, investments were made to develop captive facilities, either as joint ventures or under full ownership, primarily to export coding and testing services to support the software development work of overseas parent companies. Matatitude, captive facility of a Dutch company, was the first European facility in Bangladesh. Another example is 20-20 technologies.

Sponsors of such captive facilities were mostly small companies, and none of them experienced sustained exponential growth over last 20 years. As a result, these captive facilities did not grow beyond the size of 30 to 40 people. Upon being impressed the resilience and perseverance of Bangladeshi youths in acquiring software development competence, Samsung opened a software research and development centre in Dhaka. Over a span of less than three years, Samsung’s Dhaka R&D centre has grown as a strong team of 600 professionals in its global network of R&D facilities. M&H is another well-respected captive facility, active in BPO (Business process outsourcing).

JOINT VENTURE BPO SEGMENT: The landing of SEA-ME-WE-4 in 2006 at the coast of Cox’s Bazer offered low latency, high capacity international connectivity to Bangladesh. Such high calibre international connectivity, latent potential of graduates and escalating salary advantage encouraged the establishment of large-scale business process outsourcing facilities in Bangladesh. Foreign companies started exploring opportunities to benefit from such an advantage of Bangladesh. As a result, joint venture initiatives started to pop up.

Among many success stories, the notable ones are ServiceEngine and Graphic People. In such joint venture companies, foreign partners provide access to global clientele and also provide guidance in developing the delivery capacity. On the other hand, the Bangladeshi counterpart takes the role of operation management to make sure that as per the guidance of foreign partner, quality jobs are delivered in a competitive manner. These joint ventures are turning fresh graduates into globally comparable professionals by giving couple of months of quality hands-on training and on-job guidance.

With their foreign partner companies such as WPP or Y&R, joint ventures such as Graphic People are succeeding in securing jobs to serve Fortune 500 companies such as Microsoft. Almost 40 per cent salary advantage is making such local production facilities as the key competitive tool to their global counterparts to succeed in winning in global competitive biddings. Demonstrated success stories are indications of large latent potential — 30 millions students preparing for jobs over the next 15 years – for global players to benefit from.

ONLINE MARKETPLACE: The transformation of the global job market has given an opportunity to the Bangladeshi youths to demonstrate their strong willingness to learn, undertake challenging assignments, and deliver with hard work. Among more than 400,000 (50 per cent year-on-year or YoY growth) freelancers registered in global onine marketplaces like Elance-oDesk; 30,000 very active professionals have shown their potential. Among these 30,000 active freelancers, most of them are part-timers, a significant number of them are students and some of them have day-time full-time jobs.

Despite low-hourly rate, these Bangladeshis have shown their commitment to learning and delivering from remote places to satisfy their western clients. During 2010 to quarter one (Q1)2014, 435,249 jobs were awarded to the Bangladeshi freelancers from Elance-oDesk marketplace alone. In this marketplace, Bangladeshi freelancers contributed almost 5.0-7.0 per cent working hours to total working hours contributed by more than 8.0 million freelancers from 180 countries. This is a testimony of a large volume workforce what Bangladesh has to offer to the global human resource pool.

FREELANCING TURNING TO COMPANIES: Online marketplace has unlocked opportunities to address five pressing entry barriers faced by aspiring entrepreneurs in Bangladesh. These constraints are: 1) acquiring marketable knowledge and skill; 2) knowledge about global demands for IT products and services; 3) access to seed capital; 4) confidence to deliver; and 5) reference clients. With affordable seed capital for acquiring a computer and broadened connection and basic skills, thousands of aspiring university graduates or students started exploring bidding opportunities for micro jobs in the online marketplace.

After facing surmountable barriers, they started becoming successful in winning bids and delivery track records. Through a series of deliveries, some of them succeeded in developing enough understanding about customers’ requirements, acquiring necessary knowledge-skill, saving the required seed capital from earnings, building CanDo confidence, and developing satisfying relationships with customers having capacity to give repeat work orders.

Capitalising on such achievements, more than 50 high performing freelancers crossed the barrier to develop enterprises to export products and services to the global market. One of them is TechnoBd. Capitalising freelancing success, the entrepreneur has built this company with about 20 professionals without requiring any seed capital from family, friends or anybody else. Despite small size, this success of creating US$10,000 per person value addition for the global market appears to be a replicable growth model to connect millions of Bangladeshi students to the global job market.

DIRECT OFFSHORE EMPLOYMENT: This is a relatively new model of employment. In this model, foreign companies directly recruit individuals in their payroll to work over the net from the home country. Without crossing the national boundary, almost 500 to 1000 Bangladeshis are now on the payroll of foreign companies such as TCS or British Telecom. Quality education and on the job training opportunities in local companies are paving the way for some high calibre professionals to be directly recruited by foreign firms. These professionals remain stationed in Bangladesh and work with their colleagues from other parts of the world in a collaborative manner and they are paid from foreign sources.

The background of the software and ITES industry explained in this write-up provides some insights to draw upon the lessons to help develop scalable growth models. Such scalable growth models are precursors of designing a strategy for sustainable expansion of Bangladesh’s software industry. The objective of this write-up is to invite strategies from readers recommended for stakeholders to stake steps for increasing as well as facilitating competition in private investment — both local and foreign — to turn latent potential into large-scale revenue earning – in both domestic and export markets.

A strong interest shown by different stakeholders in an earlier write-up on the subject has prompted this writer to share further his views about what we should do to enable the software industry of Bangladesh to grow. To begin with, it is to be noted that independent (or third-party) software industry primarily grows along seven business models. These include:

1) Project-based customised application development, implementation and maintenance services: Most of the Bangladeshi software firms are active in this model. As a matter of fact, global software industry grew following this model in the 60’s.

2) Back office of large client, whether corporate or government, to offer software development and maintenance services, usually, long-term, large multi-year contracts: The success of India’s software industry is primarily based on this business model – triggered by Y2K. Despite numerous attempts, Bangladesh did not succeed to replicate this model that was explained in the first part of the article [Page 6, The Financial Express, September 21, 2015].

3) Development and commercialisation of software products, whether as service or for selling the licence of application: Microsoft is the role model. Selected software firms of Bangladesh have made limited progress in this model.

4) Captive research and development (r&d) centres of software-intensive product-based companies: Samsung’s research & development (R&D) centre in Bangladesh is an example of this model. Software industry of Ireland and Israel developed primarily on this model. A large number of American and European firms have set up development centres in these countries to take advantage of technology superiority of Israel and of European trade advantage of a low-cost European Union (EU) nation, Ireland.Building a modern, smart, prosperous nation

5) Invention and commercialisation of software application development technologies: This model has been the starting-point for the success of Israel’s software industry. Many small-scale American and European firms are also working in this model.

6) Back-office of numerous small clients, primarily foreign: Many Bangladeshi software firms have been trying to develop export business following this model. Due to small contract size, high business development cost to contract size ratio, and discontinuity of work-flow are limiting the growth of the industry by pursuing this model.

7) Offering implementation services of best-of-breed business applications: Many Indian firms have embraced this model in the recent past. Large information technology (IT) consulting firms have strong presence in this model. Although foreign firms are doing business following this model in Bangladesh, the Bangladeshi firms are yet to be visibly present in this model.

Historically, our major attempts of software industry development have focused on applying the solution which was needed to succeed in Model 2 — the success model of India. It was perceived that (i) increase of supply of trained human resources (HR), (ii) reduction of duties on hardware (HW) import and (iii) making software free will attract demand for exporting software development services to the local industry, without having adequate focus on local context and global value-chain of software service trade. As a matter of fact, all these three solutions have rather created constraints to the growth models, pursued by the Bangladeshi software industry.

We need to pay attention on the following issues to enable Bangladeshi software industry to grow in order to take advantage of its exploitable potential:

1. How to increase usages of software & information technology enabled services (ITES) to improve wealth creation as well as facilitation capacities of both public and private sectors of Bangladesh;

2. How to improve software firm-level capacity for accelerating growth in both size and profit to revenue ratio;

3. How to increase the entry of high calibre new firms through R&D investment in universities and setting up of pre-commercial innovation laboratories;

4. How to increase the flow of both talent and investment in the sector;

5. How to integrate local firms to public procurement and help them grow globally competitive;

6. How to improve policy and regulatory framework for higher value-added competition in different economic sectors to reduce cost and increase quality by taking the advantage from locally developed software innovations;

7. How to integrate local firms with global value-chain of software product as well as service trade;

8. How to facilitate human resource (HR) quality improvement through collaboration between industry and academia to do research, innovate and commercialise software innovations resulting in creation of high-paying jobs;

9. How to align the national development programme to take better advantage from software innovation and service globalisation;

10. How to detect, adapt and promote scalable growth model to scale up successes of software business demonstrated by individuals, firms, products, and markets;

11. How to monitor training requirements, design curricula and promote them to both institutions, firms, individuals, and governments;

12. How to design standards of skill development and provide assessment services;

13. How to offer software testing and quality assurance certifications to software firms and clients, primarily local;

14. How to provide assistance in intangible asset valuation, intellectual property rights (IPRs) and risk capital financing; and

15. How to offer technology development and product innovation services to home-grown local firms.

Instead of just providing training by hiring foreign consultants by spending foreign currency [borrowed from creditors like the World Bank (WB) or Asian Development Bank (ADB)], to create the impression that software is free by condoning intellectual property rights (IPR) issues and also by awarding public contracts to foreign firms, attention needs to be paid to creating demand for outputs of local firms to ensure that software is perceived as a valuable commodity. Furthermore, R&D capacity has to be developed to support innovations, high-paying career growth paths have to be offered to professionals and risk capital financing has also to be made available.

Otherwise, the software industry will be a lost opportunity to build a prosperous nation — may be, this is the only opportunity for us to turn our 40 million students into builders of modern, smart Bangladesh.

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