I had an interesting discussion with a CEO of a software development firm on running costs. Will try to encapsulate the conversation and shed some light on it.
Few years back, starting a Software Business was easy, gather a few clients (or find references through your teachers and seniors), setup an office space (preferably a residential house at less than half the rate of a commercial office), hire few developers and start charging x amount of $ Per-hour.
Calculations were even simpler, no duty on Computer imports, no tax on IT business, dollars charged per hours minus the salary and fixed operational costs and you were guaranteed reasonable profits.
However things have changed drastically over last few years completely changing the way these calculations are done.
Salaries have skyrocketed in IT industry . One of the reason being inflation, the ever increasing inflation rate means salaries have to be adjusted all the time.
Second factor effecting these salaries is the lack of adequate resources. It was in part caused by boom in Telecom Industry, which seriously decreased number of student taking Computer Sciences courses. As it is with us as a nation that we have to follow the trend, for a good part of last 10 years telecom sector was the most lucrative area, so each university opened a telecom engineering faculty, stuffing in as much students as they could. During these years of telecom boom, computer science took a hit, there were some universities who had to drop CS batches due to low registrations. It resulted in drastically lower number of CS graduates coming out of universities even when the local IT industry was showing a 20~30 percent annual growth, and out of these CS students about 60% usually moved out of country within 2 years of their graduation. This created a huge disparity between required CS professionals and actual graduates resulting in higher cost to get these graduates on board and retain them.
Besides salaries, operating costs have also increased many folds. You have to have a power back up (and maybe two including a UPS and a Generator) to ensure that no time is lost due to load-shedding, Operating and maintaining these power backups is another continuous expense.
Secondly in current times, having a good office in commercial area is one of the basic requirements, which requires investment in infrastructure and aesthetics and increased rents. You can not put people in a 400 Rs Chair and 1000 Rs computer desk with a 14 Inch Second hand monitor and expect them to work as was case few years back. A good office is now a prerequisite for good candidates to join, if you don’t have good looking office you might not as well try to get the best talent on board.
Besides the increase in running costs, the environment has become extremely competitive, surge of sites like Elance, Rentacoder etc means that people can offer their services without working from an office, for an individual this means extreme flexibility in rates he can offer (he does not need to have a peon, or an office in commercial space) with protections like Escrow etc it also guarantees the buyers that these cheap services they get are protected. Rates buyers get on these freelancing sites are much lower than dealing with a company across globe. A freelancer only needs is a PC and an Internet connection (which has become way cheap) to get going.
Similarly rise of other countries in this field means you are competing with companies operating in Brazil, Vietnam, Eastern Europe who are able to offer very low rates and have other commonalities with buyers (Like Brazil having same time zone, or Eastern Europe having same cultural background to the rest of Europe) . So if any one has apprehensions with working with a Pakistani firm now they have plenty of options and similar prices to choose from.
So based on these new realities how do we compete? We can only do that by offering quality services, since we can not compete on price we should compete on quality of what we deliver and build confidence of our clients in our services to a level that even if they find cheap alternative they pay you the extra premium. Don’t try to win projects on price only.
Secondly focus on products, products have high initial investment but good returns in longer term, plus they don’t get effected a lot by these price factors once they are rolled out. In coming years, having at-least a few products as your income source would really be important for survival for any type of lean patch or bubble burst coming in future.