BUSINESS BANGLADESH:
EXPLORING THE SOFTWARE INDUSTRY adiba islam
Bangladesh Studies (K202)
Business Bangladesh: Exploring the software industry
Prepared for Sheikh Morshed Jahan Associate Professor
Prepared by Group 4 Aaqib Chowdhury (ZR-07) Muhammad Saiyedul Muttaqin (ZR-11) Sohan Al Akbar (ZR-18) Adiba Islam (RH-20) Afsara Zaheen Ahmed (RH -24) Arif Faisal (ZR-34) Shadman Sakib Anik (ZR-35) Avirup Sarkar (ZR-38) Saad Ashraf (ZR-40) Shafinaz Hossain (RH-54) Noushin Wadud Khan (RH – 58) Imtiaz Farhan Bin Habib (ZR-61) BBA- 20th, Section-A
Institute of Business Administration
University of Dhaka April 27, 2014
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Executive Summary The purpose of this report is to better grasp the role of SME’s and the challenges they face, specifically the IT sector, which is clustered in the Karwan B azar Area of Dhaka. The IT sector has been increasingly prominent, starting its journey in the 1960 ’s, to its current state, wher e it employs over 25,000 people in over 800 firms. The sector is surely on the rise, and has large potential for growth, something that is explored in greater detail in the report. As the companies are small in nature, their strengths are the small size and simple set up, while the low labor intensiveness and generally adept workforce favors the firms as well. However, the sector does have some issues with poor quality training provided by the courses at institutions, as well as endemic corruption regarding contracts, a s well as a general failure to properly implement marketing tools and underinvestment in self-promotion. Even thou gh the identification of Bangladesh as a potential star of the future in this sector, as well as the quick digitization of the region are big opportunities to e xploit, there remain issues, like a fading interest from students to study the relevant subjects as well as an imperfect infrastructure. There is little formal regulation; the primary union for these firms is BASIS, which w orks more as a developmental body than a regulatory one. Apart from scheduling the companies that operate in the market, it has done appreciable work in institutionalizing training programs via its institute, BTM, and successful lobbying for government policies like tax rebates. However, actions in terms of networking, knowledge sharing and business development are still in preliminary stage, with a number of options mooted for progress in these regards, like creating a platform of communication between customers and firms and better management of the institute. The triple triangle framework is used to analyze the industry. The primary analysis reveals that the industry has a healthy vibrant and creative work culture, fueled by young and dedicated entrepreneurs and employees. Most of them are capable, however, there is significant room for improvement of the fresh graduates, as the courses currently are deemed insufficient and firms have to offer their own, sometimes lengthy, training. Overall, the majority is small sized firms, so capital is usually self- provided, and when that’s not the case, it is not overly difficult to acquire it from banks. 2|Page
Competition is often unhealthy in the industry, with multiple allegations of cou nterfeit or hacked software, as well as unethical behavior on p art of state actors when dealing with government contracts. Overall though, the competition is not intense as the market is relatively large, especially with international avenues. Collaboration is not significant, as there is very little room. Most firms self-distribute, and provide only services, thus having no requirement for suppliers or distributors. The customer base is steadily growing, as the need to keep pace with international trends of automation and having electronic alternatives is recognized. Globalization has provided a crucial platform for proliferation, with not on ly providing an alternate market for the firms, but also a source of new technology and methods, which the local firms integrate with little hesitance. State action has been minimal, with calls for greater involvement than present frequent in the people surveyed. In terms of perceived importance of business aspects, the entrepreneurs unsurprisingly rate profit as being most important, followed by customer satisfaction, employee satisfaction, value ch ain actors, and social benefits. This tends to follow the narrative of customers being the major source of advertisement, and value chain actors and social benefits not being pertinent to the business. Overall, this group felt that there was need for some change if the growth is to be maintained in the future, with the need for a stronger, more authoritative governing body, better state policies, better legal framework for protection against forgery and other copyright issues, more exposure for IT tournaments for young people, and better extraction of utility from the marketing departments strongly recognized. The preparation of this report, and the requisite research allowed this group to learn and grow as students and pseudo professionals, with better understanding of the interviewing process as well as learning about the significance of SME’s, espec ially in light of the IT sector, and the potential that it holds in the context for Bangladesh.
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1. Background In Bangladesh, micro and small and medium enterprises (SME) play a significant role in the development of the economy, primarily by creating employment opportunities and producing important alternative mechanisms for accumulating foreign currency through e xports. For the growth and development of a country like Bangladesh with a huge population development of the manufacturing sector is of utmost importance. Due to low capital investment requirements and higher employment generation this is a major driving force for national growth. The IT sector in Bangladesh started its journey with the nuclear program in the 1960’s. After years’ of stagnation the industry picked up p ace in the 1990’s. In recent times the It sector has been one of major interest in Bangladesh. Owing to the improvement in education and widespread use of English as the second language along with rapid development in communication technology the software industry has taken a huge leap in the last 10 years. The industry has a total valuation of approximately 1500 Cr taka and contributes to about 350 million dollars in annual revenues. In the last 5 years alone the growth has been about 40%. The national body for IT development Basis was established by the government in 1997, and since then they have contributed largely to the development of this industry. Although it is in the tertiary sector the industry workforce is of medium density. Currently there are over 800 IT firms in Bangladesh emplo ying approximately 25000 IT professionals. They cater to a wide array of clients ranging from local government companies, local private companies; NGO’s to even large corporations abroad. Due to the low wage rate that is common to Bangladesh the IT sector has an advantage over our competitors like India and China. In a survey done in 2007-08 by JICA Bangladesh was ranked first among the Asian countries in competitiveness in the software industry. Furthermore in 2011 Bangladesh was declared one of the top 30 off-shore destinations for IT solutions. The IT industry has huge untapped potential for which it is of utmost importance to condu ct a strategic analysis on this sector so that the competitiveness of this industry remains to produce the desired development outcomes.
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2. SWOT Analysis Strengths: »
Small capital investment is needed to start a software business.
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Return on investment (ROI) is high.
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Lower labor costs in comparison to India, China a nd Pakistan.
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Very skilled labor can developed in this country.
Weaknesses: Ø
Mismatch in education provided in institutes and skillset required b y employers.
Ø
Dependency on employee is high hence employee turnover can have devastating impact.
Ø Ø
No standardized pricing strategy. Poor business environment in terms of corruption, time to set up business and recent security challenge.
Opportunities:
Very promising industry with Bangladesh being speculated to be in the next top 30 IT destinations.
Global financial crisis means companies are looking for places to cut additional costs creating a possible opportunity for Bangladesh where labor costs are relatively cheaper.
Growing digital media and need for automation.
Recent propaganda of digitalizing Bangladesh.
Threats:
Declining number of students for IT courses due to a perceived lack of employment opportunities.
Too many competitors and new entrants in the market.
Lack of proper infrastructure such as power shortages and so on.
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3. Grid of Institutional Mandate (GIM) Bangladesh association of software and information services (BASIS) is the primary trade bod y of IT firms in Bangladesh. The importance or the significance of any regulatory body or trade body is how effective they are in policy advocacy, knowledge sharing, business development and network collaboration. The following table will use these c riteria to see how BASIS is performing:
: a) They are performing quite well. Recently lobbied to the government for tax break till 2017 which was accepted. b) However there are also scopes for improvement as they should undertake policies or strategies to inform financial institutions regarding the asset valuation of ICT firms. The lack of such initiatives has hindered the accessibility of loans for firms. This has been a major obstacle for growth.
a) BASIS undertakes various workshops to keep their members up to date regarding improvements in recent technology. b) BASIS should undertake large scale research that will not be economical for individual firm. This research work will be necessary to help the Bangladesh market compete in international arena.
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a) Intellectual property preservation. BASIS should take initiatives that will enable its members to have easy patented rights to softwares developed by them. b) BASIS Institute of Training Management (BITM). Recently BASIS launched training institute which is there to address the dearth of skilled human resource which is very much needed in this sector..
a) Association between members. Sometimes to compete in international bidding firms in Bangladesh needs to show experience which a single firm itself might lack hence they collaborate to undertake such projects. BASIS helps them to collaborate. b) No liaison with customers. BASIS doesn’t provide a platform where software companies and users of such softwares can interact with one another .
4. Triple Triangle Framework Analysis This analysis is used to get a better understanding of the industry, by first looking at the grassroots, i.e Firm level factors, then zooming out to industry analysis, and then zooming out further to have a look at macroeconomic factors that might affect the industry.
Firm Level Factors Culture: There were mostly positive views of work culture in the industry, with most respondents pointing towards an informal, and close knit group of employees. This was mostly attributed to the average age of the employees being quite low, as well as the management being relatively young as well, as most of the companies started after the turn of the century. Moreover, the size of the firms are relatively small, with most e mploying under 20 people, and the low employee turnover means a long time for the group to gel as a unit. The employees were said to be generally committed, with good adherence towards deadlines, albeit working hours are often said to be more flexible than other industries. Capability: In this segment, most of the respondents said they w ere satisfied with the number of potential employees to select from, i.e enough fresh graduates with bachelors in CSE are being churned out by Universities. However, some dissatisfaction with the university courses and internal training programs was expressed, with the claims being, that more practical courses and style of education at the universities would far negate o r reduce the need for intensive on-the-job training programs, with a few firms reporting training times as high as 6 mo nths. Capital: IT and internet services being a tertiary industry, the n eed for capital investment was relatively low, and most of the firms are small units with low capital investment. The only major investment required was to acquire the trade license, which was reported to be as high as 20lac, but apart from that, not a lot of expenditure was noted. Procurement of capital and finance was said to be relatively easy, with banks reported to be interested in investing in these businesses, and in a lot of the cases, the businesses were entirely self-financed, eliminating the need for external borrowing.
Industry level factors Competitors: There are a large number of firms, mostly concentrated in the Basis building in the Kawran Bazar area. However, as the firms offer a wide variety of services to an even wider variety of clients, extending from local small firms to government bodies to major international operators, the level of direct competition was reported to be low. However, there was some 7|Page
dissatisfaction at ‘unhealthy’ competition, especially with regards to government contracts, with claims of corruption and less than transparent tender allocation processes. There were some isolated claims of software copying and other competitive u nethical behavior as well. Customers: As pointed out earlier, the customers belong to a wide variety of groups, and with increased globalization, the group is getting wider. Greater awareness of automation and keeping up with international standards of online bookkeeping and other electronic services is contributing to the direct growth of the number and needs of the customers. Collaborators: Most of the firms do not sell any actual products, and are limited to only providing services, thus, are not involved with any vertical collaborators. This need is further diluted as the firms tend to sell their own software through their o wn networking channels, so neither distributors or suppliers are external collaborators, the processes are conducted internally when applicable. Whatever hardware is required, like computers and other machinery, is usually taken from any number of places, and often companies had no preference for the sourcing, as these were needed once in every 5 years or so.
Macroeconomic Factors Globalization & International Influence : The nature of the industry is such that globalization plays a critical role in the proliferation of this market. Most of the respondents attributed this to two primary factors:
a) The global trends of automation and provision of electronic services are being spilled over to the local market, thus creating demand from local consumers for services not previously asked for, like data categorization software, accounting and management software etc. b) The foreign countries also provide a much needed market for these services, as local consumption remains low, most of the respondents claimed at least part of their income to be supplemented by foreign customers. This was further augmented b y the fact that the software can be easily transferred cross-border without need for taxes or having lengthy travel times, hence, globalization is a valuable plus point for this industry. Technological Advancements: The state of technology has improved markedly, mostly due to the global development of IT, as well as the local development and investment in the sector in Bangladesh, starting from courses at universities to the sharp rise in the nu mber of firms in the industry. Moreover, firms quickly adapt to international advancements, processes like cloud share computing and incorporation of other similar techniques are do ne quickly and efficiently. Even though the computers used are not always top of the line ones, the software and methods very much are, according to the entrepreneurs surveyed.
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State & society: Most of the respondents were non-committal about state contribution towards the business, with the view that state neither substantially helped n or hindered the business. The high licensing fee was oft-criticized, with some respondents claiming it was too high. The influence of the union, which some respondents were not even aware existed, was also claimed to be minimal, with the organization seen as one which merely kept a schedule of the firms, as opposed to a regulatory body.
The vast majority of the respondents did not see a significant social angle on their business, and apart from their business ‘trying to do the right thing’, couldn’t really point out their contribution to society.
5. Sustainable Market Enterprise
The graph above depicts the importance and concern software firms have towards each of the levels or elements of their business sphere. We have used arbitrary scores to quantify them in the explanation of each dimension in the following page:
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1. Making profit. Score=5 Making profit is the most important factor in most software firms. This is mainly due to hi gh developing costs and a commercial mindset of most of the managers.
2. Customers Score=4.5 Customers are the second most important sector in the mod el due to them bringing all the profits in the business. The customer base is expand ed mostly by word of mouth since small software companies have almost no advertising. The companies therefore rely on building good relations with their customers.
3. Employees Score=3.5 There have been extremities on the focus on employees among the factors. A high score was given by some companies who preferred service-based operations and focused on holding their employees to avoid excess training cost and loss if experienced workers due to replacing of an employee. The companies with a low score mainly outsourced their employees or already had a large available pool, which made their current employees dispensable.
4. Suppliers Score=2.5 Software companies have a low dependency on fixed suppliers for hardware and software. Hence, they do not have a strong supplier base. Most of their hardware come from many different places, based on their availability and the ir software are either downloaded as opensource programs such as LINUX or licensed from abroad such as Java. Their low score on suppliers deduces their low dependency on a strong supply chain.
5. Society Score=3 Some software companies contribute to public service such as application softwares for government elections or census. They also promote recyclable “green technology” which benefits the environment. Some companies go as far as to even donate all their award money to charity services. 10 | P a g e
6. Insights and Recommendations 1. Establishment of an association Although software companies are already connected with BASIS which mostly conducts training sessions among the software developers, there is no particular association that looks after an individual company’s interests. Neither is BASIS in a very strong position for bargaining with the government for benefits, so a stronger association with some leverage might benefit the industry.
2. State Policies Although there is government budget allocation for the IT sector, the amount to be invested in software industry is not large or specific. Moreover, there is avenue for the government to tailor specifically to the needs of the industry, as b oth India (in Bangalore) and China ( in the Silicon Valley) have successfully done, via setting up o f universities and training centers in the geographical proximity of the IT hubs.
3. Proper laws should be made and implemented The software industry faces a huge challenge regarding security, as the products are always vulnerable to copyright and piracy issues. Some of the respondents drew light on software theft via obtaining the source code of other company’s software through unethical means. Legal framework for protection against these activities needs to be much stronger to provide significant deterrent and penalties, as this industry is particularly susceptible, and it takes a long time for companies to develop their products.
4. Organize more software related IT competitions Apart from the people involved with the industry, few others have more than a rudimentary grasp of the industry, its scale of employment, or the vast opportunities of growth. Greater number of competitions related to the IT sectors, with greater media coverage, would likely draw light to these opportunities and encourage more people to take this line of work seriously, leading to further expansion.
5. Extracting utility from marketing tools. Most of the companies in the market were formed by and are run by entrepreneurs who got their degrees in CSE. Moreover, most of the companies were observed to have little to no investment
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in marketing department, and most of the contracts were acquired via word of mouth customer feedback. Greater focus on marketing activities on a large sc ale, similar to India, where Bangalore is marketed as the IT hub of south east asia, would likely benefit the entire industry. On a micro level, individual firms can benefit by increasing their scope o f business by attracting broader range of customers, and availing benefits from better pricing and placement strategies overall.
7. SO WHAT? 1. Exploration & Observation:
While visiting the software offices, we have sharpened quite a few of our observational and field work skills. Listed below are a few: * Interview Skills: we have learnt how to a sk questions and gain information from individuals in the best and most efficient way possible. We hav e also learnt how to kindly request for their cooperation and to value their time. * Observational Skills: We learned to observe small yet important details, such as the office environment, work ethics etc of all the firms we vi sited. We also observed how some individuals had very different opinions about the software industry as a whole, compared to others 2. Knowledge gained:
The field survey has allowed us to track down and visit a number of software companies which we did not know about previously. We got to familiarize ourselves with their work environment and business practices. We also learnt more about BASIS (Bangladesh Association of Software and Information Services), which is the primary trade bod y of IT firms in Bangladesh. We learnt how BASIS contributes to the improvement of the business environment for the software firms, and its importance as a trade body. 3. Capitalizing on gained information:
We have discovered that the IT sector in Bangladesh is rapidly growing and generating profit. For this reason, we believe investing here would be a good decision. With the government taking an initiative to ‘digitalize’ Bangladesh, more and more peo ple are growing inter ested in social media and smartphone applications, etc. With this rapidly growing market, there is a rapidly growing demand for new and innovative software for both mobile phone and computers. Currently as there are not many firms competing in this sector, the market is easily penetrable and profitable too. 12 | P a g e
Extension: Software Industry in practice Key partners: Most of the software and IT companies have apparently no direct suppliers or service providers. Because of their business nature, software firms do not need to entitle them with others for supplies, supports or services. Mainly, a software firm’s goal is to satisfy and meet its clients’ requirements that are done by the intellectual workforce o f the company. However, many firms can consult with renowned individuals and firms to serve their clients properly. From this perspective, other IT specialists or firms can be the key partners.
Activities: The central resource for this industry is the intellectual and skilled emplo yees. The human resources of this industry are used to satisfy the needs of the clients that involve IT solutions, developing new software, services or consulting related to software developmen t etc. In addition to that many firms develop new software and smartphone applications for the open market, give IT solutions to the customers, design web pages and thus utilize its valued human resources.
Resources of the Software Industry:
Human Resources- The software industry’s primary resource is its workforce. Potential developers must be proficient in programming languages, such as Java and C++ for Android development and Cocoa for iOS/OS-X development, and they must have the desire to develop. However, some of our interviewed entrepreneurs pointed out that it is often difficult to find people with specific skills.
Another segment worthy of mention are Marketing Firms and professionals, who help highlight product features, uses and deliver it to the right market audience.
Equipment- First of all, computers with the required specifications are need ed. Some may need developer oriented graphics chips to facilitate development of visually intensive applications, and most need decent levels of RAM and processing power to keep up with the multitasking and large workload. For the accumulating data, a minimum of 500 GB of data storage is needed for each computer.
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A high speed internet connection is also necessary with LAN to keep the developers of the same organization connected and updated while sharing relevant data among themselves. To achieve this, modems, routers, servers and hubs are used.
Applications- For day-to-day operations and serving as a solid platform for other OS developments, a Windows operating system is used. Windows 7 is the most popular version. To test out the applications, devices with the required OS are needed (Android, Windows or iOS).
For development purposes, programming interfaces and SDKs( Software development kits) , which are a set of development tools, are used to develop and test out application software.
Value Proposition: Most of the IT farms in Bangladesh provide the following services:
Web Designing and Hosting: Almost all the IT farms in our country provide web designing and hosting services. They design and develop websites and web applications according to the requirements of their customers and provide w eb hosting. This is a highly customized service because the requirements of ever y customer are different and they have to satisfy those requirements. Developing Smartphone Applications: Many IT firms in Bangladesh are specialized in developing application software for smartphones on different platforms such as Java, IOS, Android, Windows etc. These applications are mostly developed when a customer places an order. But, sometimes the firms develop applications and then release those in app stores. Developing Business Management software: Some of the IT firms in Bangladesh specialize in developing software for efficient business management; for example : ERP, MIS, Accounting software, Inventory management software etc. Sometimes they develop a software on demand but sometimes they develop a software and then communicate the features and benefits to potential customers. Marketing Solutions: Some of the IT firms in our country provide Internet based marketing solutions. They use the web as their me dium of communication and enable their clients to take advantage of the vast reach of the web in order to ensure maximum visibility.
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Customer Segments: The IT farms in Bangladesh mostly tread in the 3 customer segments that are given below: »
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Organizations: Most of the products and services of the IT farms are highly customized. The tailor their products and services according to the requirements of their customers who are mostly organizations. Most of the products and services of an IT firm are developed when they are asked by an organization. Other than smartphone applications almost all of their products and services are developed for organizational users. These firms provide their services to almost every type of organization ranging from NGOs to large Multinationals. Smartphone users: The other segment of customers they target are smartphone users. This is a segment whose contribution is relatively low now b ut is growing rapidly. The IT farms develop the smartphone applications targeting this particular segment of people and the main source of revenue from this segment is paid subscriptions and advertisements shown during the runtime of these applications. International clients: Initially the software development in Bangladesh started with freelancers that made customized softwares for firms abroad. Slowly over the years the freelancers came together to build this into the small formal sector that it is now. Despite the growth of the domestic market the international market is still the largest client base for the software industry.
Channels: The most important thing for a business is to reach the target customers and provide them with a proper channel to communicate their needs. The IT firms in Bangladesh use the following tools to ensure proper channels of communication with their customers. * Above the Line Communication: They usually advertise their organizations, products and
services on TV, Newspapers, Social-Networking sites, Billboards, posters etc. Sometimes they even distribute leaflets and brochures to potential customers. * Below the Line Communication: In most cases the IT firms send their employees to potential
customers with proposals. These employees personally communicate the b enefits of the product or service to the customers and try to convince them to become actual customers. Apart from that almost all the IT firms in Bangladesh have their o wn websites through which any person can find information about the firms products and services and co ntact the. Most of the IT firms have employees specializing on customer relations whose job is to entertain calls and answer the queries of current and potential clients.
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Building Relationships: * Suppliers - Although software companies do not need raw materials, they need hardware
suppliers (very infrequently), office supplies( frequently) and have to buy software sometimes. Interviewed companies often show an inclination to buying these simple and/or infrequent goods from previously acquainted suppliers with whom they maintain good relationships due to the years of business. * Employees- Although the employees are satisfied with on-time salary and reasonable behavior,
some companies such as Kaz software and Zanala Bangladesh take it leaps ahead, by cooking barbecues, playing cricket and teaching children together( in case of Kaz), and implementing a very motivational reward and award system in case of Zanala. Needless to say, employees in such organizations stand heads and shoulders above in motivation compared to those employeefocused only on a medium level. * Clients- Software companies strive to test their products and retest with beta testers to make
sure the end-product works as reliably as possible. Th ey also try to be their best to respond promptly to client inquiries and maintain updates and checks on their products. This builds relationships with clients over months and this can result in end orsements from big clients.
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