'IT exports must move up the value chain' an interview with the CEO, Systems Limited

Asif Peer is serving as the CEO, MD and Member of the Board of Directors at Systems Limited. After receiving his Bachelor in Computer Science from NUCES and an MBA from IBA Karachi, Asif started his career with Systems Limited as software developer in 1996. He later moved to the US; where he worked for 13 years and went on to serve as COO of Visionet Systems (2008-12). Asif came back to Pakistan in 2012 and returned as CEO at the same firm where he started his career. BR Research recently spoke to Asif about the group performance and broader trends in local IT industry. Selected excerpts follow:
BRR: Let's start from the group performance. Systems Limited (consolidated) revenues have almost quadrupled in the last five years. The top-line stood at Rs 3.8 billion in CY17. Is there any revenue target for the next five years?
Asif Peer: We believe in reinventing ourselves every few years, which is why we have grown over the past four decades. CY17 was an exceptional year for Systems Limited - we experienced positive momentum across key areas of our business. As a company, we pushed forward with an accelerated growth strategy and accomplished several major milestones.
Our continued growth is not only reliant on what we sell, but also on the innovation and superior value that we create for our customers to stay ahead of the curve. We double our growth every 3 to 5 years with historical growth of 20 to 30 percent, and we expect that this positive momentum will continue for many years to come.
BRR: Bulk of revenues at the holding company (Systems Limited) is derived from overseas sales. Can you please tell us about major geographic and product markets? And how is the current growth trend like in those markets?
AP: We laid the foundations of a multi-pronged growth strategy a few years ago, and while we continue to grow our revenues from the US and the Middle East, we have also strengthened our presence in Pakistan and will continue to expand to new international geographies in the future.
We are committed to timely delivery of projects and services, while ensuring utmost customer satisfaction. We will continue to strengthen our existing service offerings like business applications that create superior customer value, and regularly launch new product offerings. Our Centers of Excellence include business intelligence, ERP, CRM, eCommerce, mobility, managed services, and BPO offerings. Our wide range of BPO services includes digital marketing, contact center, and eCommerce back-office operations.
Our concept of global strategy is based on leveraging strategic alliances with Microsoft, IBM, and other major global principals for domain-specific solutions, bring these solutions to Pakistan as an implementation partner and system integrator, and to work with them as a team and replicate our successes in one region across others. We leverage several core IBM technologies for API management, platform integration, and business process management, and make extensive use of the Microsoft technology stack, including Azure, Dynamics 365, and Power BI.
We have also invested in solution development to solve complex business problems, which is one of our key strengths - to be an industry problem solver through dynamic business solutions. We expect that our investment and focus on product development and innovation will pave the way for future business growth. We have created a culture that allows us to foster innovation in its broader sense, focus on idea generation, and recognize and encourage the best. We aspire to position ourselves as a global technology brand that delivers exceptional customer service and provides sustainable value.
BRR: Last year, the holding company saw its net profits decline. What caused this occurrence? Would CY18 be different, after 1QCY18 delivered robust bottom-line growth?
AP: Distribution expenses for the company increased considerably over 2016 because the company invested in marketing and business development, both in international and local markets. This investment is expected to yield accelerated growth in future revenues. Furthermore, in line with company policy for receivables outstanding for more than 365 days, the company has provided for doubtful debts due to delayed projects and delayed payments in our new markets.
CY18 would be better, because the company will see a significant decline in these marketing costs. Currency devaluation and the export rebate would also positively impact revenue growth.
BRR: Let's turn to group subsidiaries, whose share in the consolidated top-line has been growing rapidly. We understand that bulk of the improvement is coming from TechVista, the fully-owned Dubai-based firm selling software solutions in the Middle-East and Africa markets. What are the factors that have delivered profitable growth for this firm? And what lies ahead for it this year?
AP: Since we started our operations in 2014, our key focus has been to align partnerships with key principals to deliver solutions and acquire customers. Delivering value to our customers has translated into repeat business and helped us win new customers through word of mouth and references.
We are proud to be serving the most prestigious customers in the Middle East, and have also successfully delivered upon innovative public sector projects in Abu Dhabi. What's more important is our relationship and revenue growth per customer - and our business is expected to grow further because of alignment with principals like IBM and Microsoft. We have recently setup TechVista Manpower, which allows us to have unlimited visas issued for our workforce, and also opened an office in Abu Dhabi to help us work on public sector projects.
BRR: The 70%-owned E-Processing Systems (EP Systems), which develops airtime solutions through its OneLoad product, is at a startup stage. When do you expect EP Systems to reach a critical mass and become commercially viable for the group?
AP: EP Systems is a financial platform that is already doing several million transactions per month. The metric of success for such products is their reach and usage. OneLoad has served over 60 million people through its retailers in the last 12 months. We expect mass adoption of the product at the consumer level in the next two years.
BRR: Let's pivot to the broader IT sector. How large is it in terms of annual sales?
AP: Growth rate of export remittances for IT and IT-enabled services (ITeS) during the first two quarters of the current fiscal year (July to December 2017) compared to the same period last year is 25.95 percent. The credit for this impressive growth goes to the hard work and dedication of the industry's member companies. At this rate, total export remittances are estimated to be around $900 million and total estimated market is expected to over $3.3 billion (July 2017 to June 2018).
BRR: Actual quantum of IT exports doesn't get recorded for some reason. What do your estimates suggest about the size of Pakistani IT exports?
AP: Several companies are still using non-IT/expense codes, which negatively impacts efforts to obtain more incentives for the government. It is important to understand that services being provided by your company's Pakistan office have value and the monthly payment received from the principal office abroad is to be reported as export revenue in codes assigned to the IT sector (and not in codes for expenses).
Out of the approximate $2.5 billion IT exports, approximately $900 million comes from the State Bank channel, around $800-$900 million comes from the SME market that is remitted to the personal accounts versus company accounts, and an estimated $500 million is attributed to freelance accounts for IT and IT-enabled services.
BRR: Why are some companies still using the wrong reporting codes?
AP: In case of SMEs, there is a tendency to avoid taking the time to carry out the Form-R/PRC exercise with the bank at the time of receiving inward remittances, so banks end up misreporting IT export remittances in non-IT sector codes.
Then there are SMEs that receive inward remittances in their personal foreign exchange accounts rather than company accounts. This does not help the IT & ITeS industry either, because such transactions are reported against personal remittances. The gap between dollar rates is also a key contributor to misreporting.
BRR: Compared to the region, how competitive do you think Pakistan's IT-BPO scene is? What human, financial and technological factors impede its competitiveness globally?
AP: Pakistan has a great potential for software development, BPO, and export to other countries. That's because of the quality of skilled resources and the cost arbitrage compared to neighboring countries. In order to remain competitive, Pakistan needs to move up the value chain and counter the lack of talent.
In our industry, rapidly-changing customer requirements and technology makes it essential for us to reinvent and extend our services, our technologies, and ourselves so that we are in a position to respond to these changes with agility. That is why investing in our people is of critical importance as we move forward.
IT is a human-intensive industry that requires strengthening of human capital. With an influx of quality talent, the IT industry can continue to grow at a faster pace and achieve maturity. We need to have vocational training programs that give people exposure to technological changes in the global market and generate foreign exchange for Pakistan. Due to the ever-evolving global technological landscape, curriculum in Pakistan needs to evolve accordingly. What was relevant in the past isn't relevant any more.
BRR: Why do you think that even leading local software houses have been unable to cross the threshold of $50 million export sales, despite being in this business for decades? Why have they not been able to build scale?
AP: The growth of technology exports from Pakistan is limited because of our country's risk profile, unfavorable travel advisories, and the issue of negative media perception. Most Pakistani companies don't have an onsite presence abroad, and the visa-issuance process for western countries remains a challenge.
Furthermore, most of these IT companies are more focused on project-based work, for which one needs to focus on strategic outsourcing and managed services to build scale and get recurring business from abroad. Right now, companies have not innovated remarkably into Pakistan-based product offerings that have been exported abroad.
It is our social responsibility to act as a conduit of opportunity, create more employment in Pakistan, and give back to society. The IT industry needs government support to strengthen Pakistan's national image and contribute towards a bright future for our future generations.
BRR: Through the FY19 budget, the Prime Minister has recently announced an "IT package" for the sector. It includes extension on income tax exemption on export sales until June 2025, a cash award on IT exports, and reduction in sales tax to 5 percent on local IT sales. How effective do you think such measures can be to boost the sector?
AP: The incentive package will definitely help the industry gain momentum in IT exports, tackle issues related to taxation, encourage technology companies to bring direct foreign investment into Pakistan through official channels, and eventually boost the industry as a whole. We are expecting that in the next couple of years, our export channel revenue will double.
BRR: Some market sources suggest that many Pakistani corporates would rather buy software licenses and IT services from Western and Chinese multinationals than source the same products and services from the local market. How correct is that perception? And if it is true even to some extent, what can be done to encourage more local sourcing?
AP: Some multinationals that have corporate agreements with principals may take this route to purchase software licenses and IT services from abroad rather than in Pakistan. However, some public and private sector organizations in Pakistan prefer to engage foreign companies for technology-related work that can otherwise be delivered by local companies in Pakistan.
To produce talent and drive local product innovation, it would be ideal to establish public-private partnerships to launch incubators, internships, and management trainee programs. We must encourage local concerns with prior experience to continue to engage in R&D, innovate, and protect their intellectual property. This strategic investment in our human and social capital will help us save our foreign exchange, improve Pakistan's global standing as a reference, and grow our exports.