Why we need to channel freelancing talent to companies for IT sector growth!

Not too long in the past, the only option for middle-class white collar people was to work for someone else. Serving a company for years, doing the usual 9-5 hours and being frugal enough to save money for the future. There was no way to be in control of your own craft. But that no longer applies: freelancing, particularly for foreign clients, has opened up opportunities like never before, allowing you to generate a good income, that too in dollars.

On an individual level, freelancing has proved to be a great social mobility ladder, allowing households to become upper middle class and improve their living standards. We have all witnessed the stories of young kids buying cars, taking their parents to Umrah or moving to a better locality. It's a dream come true for many, including millions of Pakistanis.

In fact, it is one of the most lucrative work arrangements for millions of Pakistanis — we are the fourth largest market globally by number of freelancers, according to Payoneer. The Ministry of Information Technology and Telecom's Ignite estimates that there are 2.37 million active freelancers in the country, of which 0.55 million are doing it full-time. For context, this includes professionals of various industries, such as marketing or writing, and is almost the size of the overall IT workforce.

By any measure, this is a big number, as are their economic contributions. According to the State Bank of Pakistan, the remittances received by Pakistanis from overseas IT firms and online platforms on account of freelance services stood at $397.3 million in FY22. At the same time, there must be some meaningful activity happening entirely locally, which is not included here. In a matter of little over a decade, freelancing has become an important driver of economic activity.

However, for all its good, freelancing at a nationwide scale can hurt us more than it helps. Hear me out. Talent, like everything else, is scarce and Pakistan’s service export industries primarily rely on that. If human resources leave the local workforce to become self-employed, it puts additional constraints on an already tight pipeline. 

Just to be clear, I am not talking about a designer or a developer doing side projects on the weekend for some client. This specifically applies to people pulling out of the domestic labor force while still working full-time as freelancers. Again, the point here is not to target individuals who make this choice — for their personal circumstances or preferences, it may be a perfectly sensible decision. 

But freelancing on a macro level can have big opportunity costs. To begin with, there’s a significant difference between what a company can bring in versus an individual. For instance, large IT services organizations in Pakistan have average revenue per employee of around $25,000 — a number that’s only going to increase as they get bigger and approach India’s level of $48,000. 

Unfortunately, that’s nowhere close to what a typical freelancer earns in a year. Only the top ones do. Plus, unlike companies, their ability to substantially increase that number with time is rather constrained — after all, there are only so many hours in a day. Moreover, individuals have a lower ceiling in the global services industry and can often be at a natural disadvantage. For instance, they usually can’t qualify for the big projects as organizations prefer institutional arrangements in such cases.  

It actually goes far beyond revenue. Companies contribute to the economies in many other ways: from developing metropolitan clusters to investing in research. I mean Silicon Valley was famous for its orchards until technology companies changed its landscape forever. That’s what building institutions is about and their legacy transcends generations. Even in direct monetary terms, organizations can unlock values in ways that individuals can’t: by raising investments and making exits. 

Isn’t this what Pakistan desperately needs? Some big brands who can employ hundreds of thousands of people, invest millions of dollars into the ecosystem, unlock value for investors? Remember, the whole is so much bigger than the sum of parts. But how exactly will we get to that scale when a sizable population prefers to work independently and in silos? 

The only way out is to streamline the incentives so that individuals can extract more —  both in monetary and non-monetary terms — by association with companies than on their own. One possible, and simple, solution is to fix the regulatory structure: currently techie freelancers get tax exemption on their foreign earnings while employees of export-oriented foreign companies don’t. So for the income levels, a freelancer takes home more than his counterpart working for someone else. 

Just bringing the two on par could help a great deal and to compensate for the lost state revenues, the government can instead tax companies on their turnover. Even if it will cost a little, the long-term savings in the form of talent acquisition and retention would be easily worth it.