Despite a late start, Pakistan's information technology entrepreneurs and the government are hoping to make it big in the global marketplace for outsourcing of IT-enabled services. How have other countries succeeded and where does Pakistan stand?

Naween A. Mangi spoke from New York to Ron Hira, professor of public policy at the Rochester Institute of Technology, and Rafiq Dossani, senior research scholar at the Walter H. Shorenstein Asia-Pacific Research Center at Stanford University.

Software exports, call centres and medical transcription firms have become all the rage over the last three years. Young entrepreneurs are returning after years spent working at major tech firms in the US to start up their own ventures and the government is forecasting that IT will be the next big thing in Pakistan's economy.

So far, the numbers tell a less-than-compelling story. In 2004, although the software and IT enabled services business was worth $300 million, (including hardware the figure is $600 million), exports and outsourcing made up for just $33 million of that. By comparison, India logged $12.8 billion in software and services exports in 2004.

Still, the Pakistan Software Export Board, a federal body set up to promote outsourcing, forecasts that the business will grow by at least 45 per cent annually for the next five years. A lot of that growth will come from call centres and business process outsourcing which last year made up one-fourth of total exports. In the next ten years, the PSEB aims to be at the top of the class of tier two global IT companies.

But as experts and practitioners agree, Pakistan will need more than ambitious aims to meet that goal. Prof Ron Hira, whose new book Outsourcing America assesses the impact on the US job market, says the outsourcing industry is set for rapid growth in the next few years and if done right, developing countries like Pakistan could benefit from the boom.

Hira is an expert who has testified before the US Congress on the implications of outsourcing. "Pakistan isn't on the map yet," he says. "India dominates what most people think about [when it comes to outsourcing]."

Rafiq Dossani, an expert on outsourcing and a senior research scholar at Stanford University says there are several reasons for that. First, is the poor quality of infrastructure.

"When the Internet tanked recently, that created a really bad perception that the country has not thought through even the most rudimentary aspects," Dossani says. "Deregulation in this area is too limited." He says that while voice services have benefited from the deregulation, data services are still uncompetitive.

He says there are too many stumbling blocks since bandwidth is more expensive than in other countries. "The costs are outrageous at four or five times what they should be," he says.

Dossani identifies the thin segment of English speakers as a second hurdle in the way of a flourishing outsourcing industry in Pakistan. "Of the 30 per cent of the population that lives in urban Pakistan, one tenth speak English that's good enough to work at a call centre," he says. "And of those five million or so, only about one million are available to come into this field as the rest are working elsewhere."

Then, he says poor marketing also holds the industry back. "You just don't see the trade body [in Pakistan] working like India's Nasscom to project a positive image," he says. "The Pakistani diaspora has done well and there is a great need to better use that network."

He forecasts that the outsourcing business in Pakistan can be at least $1 billion in size but says this is only possible if alliances are formed with countries like India and China.

"The Philippines has done well by understanding that it cannot reach critical mass on its own and therefore forming alliances and pitching themselves as a second location to offset country risk," he says. Dossani also says Pakistan has the advantage of a highly skilled group of entrepreneurs which "is the reason why the tiny industry does exist."

Hira adds that since Pakistan entered into the industry late, playing catch up is an inevitable need. However, the sector can take advantage of the circumstances in other countries. "India has done a lot of things right," he says. "They have been successful at not just attracting foreign investment but also building their own companies and leveraging the large Indian diaspora," Hira says.

"India is also so talked about that people are comfortable doing business there. But since wages are rising, Pakistan can use that as an entry point." He says that while countries like India have accumulated critical mass and scale, others are distinguishing themselves in different ways.

Eastern European wages are slightly higher than Pakistan and companies in that region have specialized in near-shoring by targeting the European market. Russia, meantime, is aiming at the U.S. market in both services and manufacturing while the Philippines and Malaysia are targeting services.

"The question really is how you separate yourself from the pack," Hira says. "You can compete on price to a certain extent but you have to offer something more to distinguish yourself."

He says U.S. companies are now moving from pilot stage outsourcing to full deployment which indicates both the success of the pilot projects and the rapid growth that is likely to come in the outsourcing market for the next few years. "There will continue to be a backlash from U.S. workers, but by and large there has not been any real policy movement to restrict outsourcing so there is still a large opportunity," he says.

Hira admits that the extent to which a growing outsourcing industry ties into the broader economy in terms of job creation remains unclear but he says, other advantages emerge. "In India, for example, it remains unclear that they've been able to link the benefits [from outsourcing] back in, but the big benefit is that they have created world class management which can then move into other sectors."

Therefore, Hira recommends that Pakistan take a long-term vision not for the next three or five years but for the next two decades. "Right now you can try to pick up the low hanging fruit and absorb the excess demand but don't just think about attracting the individual company to come [to Pakistan]," he says. "Think about how this will fit into the larger set of skills for your country so that you can differentiate yourself much later down the road."

Chris Farrell: Remember the dot-com boom of the 1990s? It seemed as if every entrepreneur with a good idea and a PC could challenge established companies for customers. Brick-and-mortar companies jumped on the e-commerce bandwagon. The demand for digital workers soared. Long-time computer professionals hopped from job to job, pulling down more money with every employer. Newly minted college graduates juggled multiple job offers. But when the Y2K problem emerged in the latter part of the '90s business and government quickly realized there still weren't enough IT workers on hand to find and repair the computer glitch. The quick fix? Hire computer professionals overseas. And that temporary solution permanently changed the global economy.

Paul Saffo: Y2K was huge in getting the ball rolling on offshoring.

Farrell: Paul Saffo is director of the Institute for the Future, a high-tech think tank in Silicon Valley.

Saffo: But once they went overseas, they discovered it's not just a matter of cost. These programmers overseas are often better than the best you can get in the United States.

Farrell: Ireland, the Philippines, and Israel were among the more popular destinations for offshoring Y2K programming fixes. But India became the offshore capital. It had plenty of high-tech companies staffed with well-educated English speaking digital workers. Thanks to India's steep import barriers in the 1980s, no one could afford new computer systems. So Indian tech workers were the world's leading experts in the older software languages that needed upgrading. Suhas Patil is chairman emeritus of semiconductor maker Cirrus Logic.

Suhas Patil: And they were listening to their customers and what their needs were, and as the recognition came that systems had to be upgraded to not have the problem based on the Y2K issues, that's how they got their break.

Farrell: And made the most of the opportunity. AnnaLee Saxenian is Dean of the School of Information Management and Systems at the University of California, Berkeley.

AnnaLee Saxenian: I think the importance of Y2K was overwhelmingly about establishing Indian companies' reputation among US customers and helping begin a set of customer supplier relationships that have simply taken off in the last four years.

Farrell: Of course, Y2K contracts ended in 2000. Yet many Indian companies took advantage of their now sterling programming reputations to negotiate for more sophisticated work. Research. Software development. Accounting services. Long-distance medical advice. Rafiq Dossani is a senior research scholar at Stanford University.

Rafiq Dossani: India is now growing at 70-80 per cent a year in offshored services ... services which are maintaining an accounting system, maintaining an HR system, doing claims processing, that's growing easily at 70 per cent, maybe even higher.

Farrell: Offshore also came onshore during Y2K. The town of Mountain View lies at the heart of California's Silicon Valley. Housed in one of the many nondescript low-rise office buildings that crowd the region's business avenues is the Indus Entrepreneur, or TIE. It is a networking base for the Indian high-tech Diaspora.

Shankar Muniyappa: Y2K was a big opening as early as 98.

Farrell: Shankar Muniyappa is director of information systems for TIE. He came to America for Y2K-and stayed.

Muniyappa: Myself and many of us believe still believe this is the place where you need to be if you want to be middle of innovation.

Farrell: Some 30,000 Indian IT professionals now live and work in the Valley. Rafiq Dossani of Stanford University:

Dossani: At least 25 per cent of the start ups have Indian employees at fairly senior levels working for them. And ... there's a whole infrastructure therefore being built around them because it's a substantial number now, so you see shopping malls you see business services and so on catering to this particular immigrant community.

Farrell: That community is adding vitality to the American economy. Still, many American high-tech workers are threatened by the offshoring of white collar jobs. The numbers are murky, but according to Mark Zandi of Economy.com 370,000 non-manufacturing jobs moved overseas over the past fours years-with most of the information technology jobs going to India. Salaries are down too. Still, the big factor behind the loss of 1.5 million jobs lost since Y2K is improved business efficiency or productivity - not offshoring. And Y2K also played an important role in boosting business efficiency.

Economists initially looked at Y2K as a productivity killer.

Imagine a town threatened by a rising river. Every able-bodied person in town is put to work stacking sandbags. It's necessary work to save the town - but it's unproductive work. Nothing gets built. No food gets grown.

With the Y2K bug, programmers, chief information officers, project managers, and other digital workers were getting paid to do unproductive work - stacking sandbags of silicon. No innovative investments. No new productivity enhancing software.

But economists were wrong. Y2K wasn't a flood. Instead, think of it as clearing a path choked with underbrush. Once the trail is open, it is much easier to zip from point A to point B. Y2K gave companies an excuse to clean up their software and hardware underbrush - a critical factor in today's improved business productivity. Paul Saffo:

Saffo: A lot of companies said well, gosh, if we're going to have to spend all this money to fix our software let's also see what else we can do at the same time, so it was an invitation to replace a whole bunch of stuff. ... So it forced people to ask hard questions about how they were using things and in the best instances people really did become more efficient.

Farrell: The result? Companies used the new systems they installed to cut costs and work smarter - and hire fewer workers.

[Voice of Leonard Nimoy: "Do you have hard copies of all your important documents ... such as bank statements."]

That's Leonard Nimoy, Mr. Spock from Star Trek. He's narrating the Y2K Family Survival Guide video - one of thousands of products peddled by prophets of doom. Y2K did bring home how reliant we all are on computers. Many of us still don't back up critical data at home. The same isn't true for business and government. Many learned from Y2K just how vulnerable information systems are to a malicious attack or unforeseen disaster. Case in point: Y2K actually helped some businesses survive 9/11.

[News broadcast of President George W. Bush: "I've directed the full resources of intelligence and law enforcement communities to find those responsible and bring them to justice."]

The attack on the World Trade Center stopped trading on the New York Stock Exchange. Against the odds, that citadel of capitalism opened six days later.

John Koskinen: The reason the markets, securities markets, were able to open the Monday after the Tuesday of 9-11 was they still had the test scripts that had been developed in 1998 and 99.

Farrell: John Koskinen credits preparations for Y2K. He was President Clinton's Y2K czar.

Koskinen: ... they were able to in effect take all of those Y2K scripts and make sure that all the transactions with all of the major players would close. Without that they never would have been able to do it in the time frame with the confidence they had.

Farrell: A record 2.4 billion shares traded on the New York Stock Exchange the day it reopened.

Y2K was a unique economic event. Earlier jolts to the economy, like the 1973 oil price hike and the 2001 attack of 9/11, were shocks. But the Year 2000 arrived right on schedule. The surprise was how little immediate impact the much-feared transition had on the economy. Yet we're still living and working with the economic impact of Y2K five years later.

For Marketplace and American RadioWorks, I'm Chris Farrell.