‘There is a need to further liberalise the foreign exchange regime for IT firms’
Asif Peer is the Chief Executive Officer, Managing Director and Member of the Board at Systems Limited (PSX: SYS). Systems is Pakistan’s pioneering and leading software house, which scores bulk of its topline from IT exports. Asif received his Bachelor in Computer Science from NUCES and his MBA from the IBA, Karachi. He started his career with Systems Limited as a software developer in 1996. BR Research recently sat down with the Systems CEO for an in-depth discussion on factors behind the software firm’s ascent and the opportunities and challenges facing the broader IT industry. Edited excerpts are produced below:
BR Research: Systems has grown its balance sheet tremendously over the last ten years, and its market capitalization has also risen a lot in recent years. What is the recipe behind the successful journey so far?
Asif Peer: Systems Limited believes in having a solid foundation for growth and having employee ownership, which are the things that have been mentored to us by the founders of this company. We are always thinking about how to design the organisation for perpetuity. It is about doing the right things when building leadership structures for the organisation in a sustainable manner. We have never taken shortcuts. We are always focused on revenue and profit growth and believe that stock price is an outcome of that.
About a decade ago, 90 percent of our business was coming from North America, mainly the United States. At that time, we asked ourselves what was stopping us as a ‘system integrator’ to become global? And we realized that nobody was stopping us, and that whatever we had learned in North America, we could replicate it in other markets. Also at that time, we had limited business, about 3-4 percent, coming from the domestic market. We soon realized that if we neglected the domestic market, we would not be able to attract or create client-facing talent. People resonate more with local success stories, and when we work here in the local market, we also give visibility to our staff into customer-facing role. And it’s a good learning experience as Pakistani customers are tougher – you have to deliver more for less price.
We have tackled both these issues over the past ten years. On the markets question, we started with the easiest one to expand: the UAE, where doing business is easier. The first two to three years there were very tough business-wise, as we were losing money and margins were less. But in a services business, you must be patient. Unfortunately, at that time, like other Pakistani companies that faced regulatory restrictions on sending foreign exchange overseas, we couldn’t send the dollars back for investment in our business, which affected prospects. As we couldn’t invest as much as we would have liked, we relied on organic growth in that market. It was a difficult time, but we persevered and were able to create a name.
Our experience in the UAE gave us the confidence to establish our business later in Qatar, and now in Saudi Arabia. We have gained immense experience, both operational and leadership, while working in overseas market and growing regionally.
BRR: What is the current composition of revenues?
AP: About 50 percent of our sales are coming from North America and Europe, 30 percent from the Middle East and about 20 percent from Pakistan. The Pakistani market, for instance, has grown a lot in recent years. References are very important in a service business, and Pakistani market is great for us in that respect. And margins here are not too bad currently – 80 percent of our business in Pakistan now comes from private enterprises. As a system integrator, we have brought a lot of depth in our technology offerings, and it is becoming easier to cross-sell in the local market as well.
BRR: How do you see things in the next five years?
AP: I think we will have to remain focused on growth, as every market we operate in has a lot of potential. Now that we are a trulyglobal service provider, we will rely on both organic and inorganic growth. We will keep growing in innovation, as you may have seen us do throughout last year in the startup space. We need to have the courage to do all of this in parallel. For growth, you cannot afford to do sequential stuff, because time is not on your side. We will strive in all possible ways to remain committed to growth and to deliver results. Our growth is critically dependent on our talent pool. Some 6-7 years ago, we had less than a thousand employees – today, we have over 5,000 employees.
BRR: Systems Limited has greatly expanded its topline during the pandemic. How would you contextualize this growth occurring in turbulent times?
AP: The pandemic created circumstances that provided us with the flexibility to stretch our resources faster and deliver results at a time of global turmoil. Since we were well-diversified in terms of geographies, product portfolio and partners, it helped us to cope with the client-related and operational challenges that the pandemic brought up. The government’s decision to keep open the IT and IT-enabled-services (ITES) companies during early pandemic had helped, too. While IT firms in the neighboring countries were closed, we were open for business, followed an aggressive strategy, and came out a winner.
To meet higher overseas demand for our work during the pandemic, we achieved a net hiring/addition of 1,800 employees during the last year alone. And we did that without having to build on the physical infrastructure to house the increased workforce.
BRR: Pivoting to the overall industry, Pakistan’s ICT exports have grown immensely in recent years, especially during the pandemic. Can this momentum be sustained?
AP: The pandemic also really helped in the sense that as nearly all countries in the world were affected by Covid-19 in a similar manner and businesses had to find ways to survive by going digital, it somehow made Pakistani IT companies and free-lancers more acceptable to new foreign clients. A lot of clients, facing delivery issues, shifted their work to IT companies across the world that were open for business and capable enough to produce the work. Clients also preferred to have a diversified geographic mix for their IT suppliers so that their work was not disrupted by Covid-19 in any single, major country.
Going forward, Pakistan’s IT exports look geared to maintain 30 percent to 40 percent annual growth. This fiscal, in FY22, the country might touch IT exports between $2.8 billion to $3 billion. Sustained growth requires a lot of hard work by IT companies, significant policy shift by the government, and a more liberalized foreign exchange regime where IT firms can easily invest in their target markets. We also need to project our country collectively as having a positive persona, which will help all companies in this industry with their demand generation.
BRR: Can you elaborate what kind of a policy shift you are referring to?
AP: I think it concerns mainly one area: foreign exchange regulatory framework. Before going into what needs to be done, let me state that there have been some favorable policy shifts recently. For instance, last year, the SBP allowed IT firms to send money overseas, without SBP approval and through authorized dealers or banks, up to an amount equivalent to 10 percent of previous three-years’ average export remittances. It helped in the sense that IT firms could now make some investments abroad, such as acquiring equity stakes in other IT firms, spending on marketing, etc. Also, the ‘mirroring’ measures helped convince a lot of Venture-Capital investors, who were previously skeptical, to invest in Pakistan’s startup space.
While those two measures have really helped the local market, there is a need to further liberalize the foreign exchange regime for IT firms. The valuations of IT firms abroad are really high, so we cannot acquire anything of value in, say, four or five million dollars. In that context, it was music to our ears when the (former) PM announced couple of months ago that IT firms could take out 100 percent of the value of the remittances they brought to Pakistan in the previous year. Since 60 to 70 percent of export proceeds are basically spent covering for local costs and expenses, IT firms can realistically take out only 30 to 40 percent of what they receive as export remittances. But giving the industry that sort of a signal would have really opened up the space for IT firms like Systems.
In India, companies are allowed to take out a maximum of a billion-dollar or four-time enterprise value without their central bank approval. And this has helped their exports grow dramatically. More importantly if listed IT companies, like Systems,are allowed cross-border equity-swap to acquire companies in their target markets, the export revenue could grow dramatically.We hope that the current government would allow a desirable percentage, let’s say 35 percent, of export proceeds to be invested outside.
Other than that, the IT sector requires consistency in policies, stability in economic issues, investments in reliable ICT infrastructure such as fiber-optic networks, and brand-building of Pakistan by converting impressive demographics and raw talent into success stories. We have to study and market Pakistan’s IT-sector fundamentals from the lens of the likes of Forbes, IDC, etc. For instance, the World Economic Forum has already noted that Pakistan is the most cost-effective destination for IT services. There is a need for our foreign office and overseas missions to work on those kinds of B2B connections. If you want to double or triple IT exports, then efforts need to be doubled and tripled as well. Demand generation is the key here, and the above measures will help a great deal.
BRR: Talent supply and retention are said to be big challenges facing local IT industry. How are you dealing with this issue?
AP: The IT firms will have to themselves invest in converting raw talent into a qualified resource. If Pakistan wants to increase its annual IT exports by $1 billion per annum, it would need 20,000 to 25,000 more qualified engineers. As per the government statistics, 35,000 new engineers are graduating every year, a number which I feel is overstated. But even if Pakistan is producing 25,000 new engineers in reality, just about 5,000 of them are found to be employable and high quality. There is a gap of 20,000 qualified individuals in this market.
We are investing as much as we can on our human resource. We are recruiting aggressively and training our HR properly. We are hiring a lot of fresh graduates from all the universities as well as middle-level professionals. We are investing a lot on upskilling or re-skilling our talent resource. We are running multiple training and mentoring programs. We won’t be able to survive if we do not make these kinds of investments. That is why we, at Systems, are not complaining about HR at all.
Having said that, it is difficult for smaller IT companies in Pakistan to make those kinds of investments and to have the patience over several years for those investments to bear fruit. That is why, despite all the potential that Pakistan has to offer, there are challenges faced by the industry to grow on an overall basis. The good thing is that everybody, including people at [email protected] and PSEB, recognize this challenge and are focused on finding solutions on a mass scale.