As Pakistan’s IT sector booms, software companies and startups lock horns over tech talent

Pakistan is having a startup boom, and most of these startups are based on  and using technology to try and bring about their respective disruption. Other than innovation and ideas, what is the one thing that drives this growth and these startups? It is talent. Talented people capable of not just handling but excelling at the technical aspects that these startups are built upon. For any country to have a vibrant startup ecosystem, there needs to be a culture in which talent is nurtured, retained, and developed. 

In Pakistan, we have a strange relationship with our tech talent. On the one hand, we have a phenomenon of exporting IT services to the Western world primarily. Prominent software companies in Pakistan like Systems Limited, Netsol and Confiz, all provide IT-based services to clients abroad, primarily to the companies in the US and Europe. We have IT engineers working in companies for clients located in other countries which choose Pakistani tech companies because of the low labour cost. 

Average entry-level salary for an IT graduate in the US is $61,812 yearly, according to data obtained from Glassdoor. Average entry level salary in Pakistan on the other hand for the IT sector falls within the range of Rs40,000 to Rs50,000 for majority of the roles according to P@SHA Salary Survey 2021, translating into an average Rs540,000 on a yearly basis. This low cost of labour is what Pakistan’s IT sector thrives on for exports. Pakistan’s IT exports crossed the $2 billion mark for the first time in fiscal year 2020-21 that ended on June 30 this year.

On the other hand we have technology startups in Pakistan, growing exponentially in numbers, trying to solve problems within the Pakistani society using tech-based solutions and scaling up on the back of serious funding. These startups are what you could call product companies – they do not provide IT services to any other consumer or company, they have their own product that they are scaling. Now, these startups actually pay pretty well. And not only this, but they give you opportunities for professional growth and the work is such that it is not mind numbingly boring. 

Somewhere in between are tech engineers that are part of the gig economy, providing services to clients abroad, some of them hustling to grow to become an IT services company. And with so many avenues for earnings, a dearth has hit the market in terms of recruiting tech talent in Pakistan and the war for talent between startups and software houses has distorted pay parities, with engineers now with greater negotiating power than ever before. 

What talent are we talking about?

Tech talent has historically been employed by software houses and agencies to provide project-based work opportunities to software engineers. When it comes to software houses, they are primarily engaged towards providing services to various clients. The engineers they hire work on projects, one after the other, for the company’s clients. The experience these engineers get is across the breadth of various projects.

Gig workers provide services like software houses to clients abroad but in individual capacities.While startups on the other hand are product companies.  While there is a requirement for generalist engineers who can handle almost every project, startups require engineers who have had experience working on a technology product before, and therefore the criteria for hiring steers a little bit away from fresh graduates. The pool is automatically less because such startups are always looking for candidates who have seen scale in solving such problems. For instance, Bykea or Careem or Uber will be more inclined towards hiring engineers who have worked on scaling similar platforms before. According to startups, such engineers are harder to find in Pakistan to begin with because historically, software engineers and developers have worked at software companies earlier where most of their experience had been in development-related work where they would be developing applications for companies in Europe and US because of labour arbitrage. 

The nature of work at software companies is fundamentally different from product companies like startups Bykea, Uber and others that have now sprawled up. 

What exactly is happening?

But regardless of what sort of engineers are needed, what’s constant is that IT-related talent is needed by both sorts of tech companies. Because they were historically concentrated in the software houses, the emergence of startups is making software houses bleed the talent they housed for years and nourished it, only to see them lose this talent to the young startup companies. And the way startups are snatching this talent is old school, i.e. throwing VC money, which has the big software companies in plight, disrupting an order that has been in play for years. 

Startups have raised a lot of money recently. The startup funding during the first six months of 2021 was $125 million, with most startups’ securing average ticket size of over a million dollars. So when you have that kind of money, you are ready to throw more at your employees. Startups are highly risky and it would be a while before they establish themselves as sustainable businesses. Because startups are highly risky, engineers working at established software houses will not be willing to take the risk unless they are paid more. Which is why startups have no other option but to offer extra if they want to recruit top talent.

And as new startups sprawl and more funds come in for existing ones, it simply means extra pressure on the industry. They have to get engineers to scale their products which is why software companies believe that the startup phenomenon has flared the dearth of talent in Pakistan. That they attract talent through fancy designations and money.

“Startup funding is a major factor because of which the entire IT industry is facing the demand and supply gap when it comes to recruiting new employees. Startups are offering flexible work hours and high salaries as they have minimum infrastructure cost with high returns. Software houses are competing by developing succession layers and creating in-house talent pools to cover the shortage,” says Toima Asghar, chief HR officer at Systems Limited.

Now why in the world would that be a problem? Can’t the software houses pay more? Yes they can. They do actually to retain their employees. The problem, however, has snowballed as salaries for various software and IT engineers have gradually increased from a lower base level and further disruption is not healthy for software companies.

The recruiters at top software companies are grumbling about the fact that higher salaries offered by startups has disrupted internal and external pay parities and software houses now have to pay more for the same kind of engineers to pull them from a startup, than what they would be paying engineering at same roles with similar kinds of experience already working with them.

“From a hiring manager’s perspective, they have to manage parities; both internal – what is being paid within the company, and external – what is being paid in the market,” says Saqib.

Money trumps everything. A higher salary in Pakistan is likely going to prompt any engineer to switch jobs and software houses believe that startups are breaking existing parities for no good reasons.

It makes sense from the perspective of software companies. For instance, they have an employee working in a software engineering role at the company that pays, let’s say Rs100,000 per month. Now if that company gets a new project from a client and the recruitment department of the IT company goes on a hiring spree, they would find less experienced engineers for the same role working at startups at Rs150,000, whereas their own more experienced engineers would be working at Rs100,000. Now if the urgency of the project requires hiring to be completed in a matter of days, the recruiting managers would be left with no choice but to try to recruit that engineer at a salary even higher than Rs150,000.

This is the dilemma here. You cannot have new hires with less experience working at salaries higher than more experienced employees at the company. If you do, you run the risk of losing these employees to startups and then you would have to recruit them at an even higher salary. The only choice one can be left to have is to increase the salaries of these engineers as well, disrupting the internal pay parity for one new hire in the company, which eventually pushes up the salary base for any new hires.

You see, software companies believe that the parities that they had set for years are actually what the technology engineers are worth in the Pakistani market. And that the VC-money backed startups coming in and throwing in extra money are giving strong negotiating powers to engineers’ means that the established order is distorting and going strongly against software houses.

“Software houses lose their tech talent to freelancing as well, with new graduates preferring to work as freelancers with their own flexible work schedule, and experienced engineers leaving to do the same, thereby creating the problem of employee retention,” says Saqib Tiwana, head of human resources department at Lahore-based Confiz Solutions.

Employee retention problem is faced by startups as well because, and it will come later down, that startups are also in a lurch because they also lose talent to new startups who have even more money to throw to recruit top talent.

But at least in the case of the gig economy, freelancers are not switching for higher salaries and therefore do not distort salary levels.

The reason why big software companies feel threatened by the new order in which they are not able to control salaries is because, and as earlier mentioned, these companies are primarily software exporters, making money because of the clients that are mostly foreign companies that are doing business with companies in Pakistan because of low cost labor. So when the labor costs go up, the margins for these companies shrink. They make less money, but importantly, if this continues to happen, sometime in the future, Pakistani software companies will lose the competitive advantage because of low cost labor and then it would mean serious trouble. 

The problems for startups

Both startups and software companies are bleeding each other, trying to get hands on each other’s talent. It is more of a problem for software companies because that eventually increases their costs.  

As mentioned above, startups are mostly building their own product that they want to scale in the Pakistani market. This creates a pull for engineers, new entrants as well as experienced ones working at software houses, to join startups to get in-depth experience of building a product and scaling it up. At software houses, these engineers are working on projects from. They will start on something, develop it and move on to the next one. The engineers would be across the breadth of projects which would involve building products for others and then moving on to the next when the product is built. Nowhere in this experience is deep learning for the engineer. His or her core KPI is to keep the company’s client satisfied, even if the client is satisfied with a bad product. While for some engineers, this could be triggering – having to leave a project with bad product, wanting to improve it but not being able to do anything about it because the client likes it that way.

For some engineers, the experience would not be fulfilling, with the desire of deep learning about the product unsatisfied. There is also no ownership of the product, because as soon as the client’s requirement is fulfilled, an engineer is done working on the project.

This is another pull that startups have. Because they are product companies, engineers get a chance to deeply learn about the product they build, keep an eye out on analytics, scale the product and troubleshoot problems, which gives them a sense of ownership.

This is where the problem arises for startups. That the market does not have experienced engineers who know how to scale products to begin with. Most engineers in Pakistan would be generalists, whereas scaling technology products would require specialists. While this is a pull for anyone to work in a startup, for a startup, it means that engineers looking for such roles would be limited because not every engineer would have the urge to become specialists. The trends are still favourably skewed towards software houses with candidates de-facto preferring to join established software houses that have built their reputation over the years.

Startups are small right now, with their products being used by tens or hundreds of thousands of users. The complexity that comes with it is that the kind of problems a software engineer faces when the transaction level with a product is small is very different, very different from problems that come when the transactions are huge. So even though there are engineers that can handle product scaling, they perhaps do not have the experience to handle the product when it scales further to millions of transactions a day. The number of experienced engineers who could handle this at massive levels is considerably less in Pakistan and the problem is further compounded when other startups, equally or more well-funded, are also competing for the same talent and that further inflates the pay scale for such engineers.

“Historically, the skill-set that experienced engineers have of scaling products has been very small in Pakistan,” says Abbas Shahid, vice-president of growth at Bykea.

“You will only find some engineers who would have some level of exposure or academic background from a different place who can manage product scaling and they are generally interested in it as a passion not as a career. Through self-learning, these engineers have been able to teach themselves. We are utilising those people to give that sort of exposure to the Pakistani market as well,” he adds.

Another problem that startups recognise is that the startup ethos encourages participation in decision making whereas Pakistani tech engineers are by default a shy lot that feel uncomfortable having conversations besides strictly what to build in. They can develop the what of the product but will remain hesitant to ask the why of it. They would not go back and contest that if something is being developed, what’s the logic behind it and what would be a better way to do it.   

Most of this attitude has to do with restricting engineers to engineering only at universities, without feeding them the knack of looking at all things engineering from a business perspective.

The problem at the end of the day for everyone in the IT industry is the dearth of IT engineers. Some of it in numbers: while there is no official repository of data on how many IT graduates are in the market, news reports online say that the number is roughly 300,000 graduates, with 20,000 graduates entering the market annually. While this looks like a healthy number, the demand is very high with as many as 2,000 software companies working in Pakistan that employ these graduates.

But top universities are few and far between and the number of top notch graduates is in reality restricted to a handful of universities like GIKI, FAST, LUMS and NUST and it is this talent perhaps that is most attractive and worth fighting for. Perhaps what Pakistan needs is more tech universities that can produce more quality graduates as the IT sector is further set to boom with software companies recording record exports and startups bagging record funding.