Philippine Outsourcing Industry

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The IT outsourcing and business process outsourcing markets

The outsourcing market has traditionally been divided into two major categories: IT outsourcing and business process outsourcing.

IT outsourcing focuses on farming out functions specific to an organization’s Information Technology group. This is an area that took off, especially during the dot-com boom and the 2001 economic slowdown, as multinationals found it an easy way to reduce costs. Activities range from Application Development and Support to Data Center and Infrastructure Management. Business process outsourcing focuses on farming out non-core, somewhat commodity functions common to most organizations (Call centers, Payroll, Payables and Receivables, etc.) and is sub-categorized into Voice-based and non Voice-based BPO.

By 2008, the offshore IT outsourcing market is set to grow at a CAGR of 43% according to financial services firm WR Hambrecht. Virtually all mid- and large-sized US and UK corporations already outsource a part of their IT operations, and 74% of them plan to increase their level of IT consulting in the coming year. India is the dominant outsourcing provider in the market, but the next few years will see a surge in market presence from China and Eastern European countries.

According to the same report, India dominates the offshore BPO market, capturing $5.2B of that market in 2004 (see figure below). The offshore Business Process outsourcing market is set to grow at a CAGR of 79%, reaching $24.2B by 2008 as other business functions beyond call centers gain acceptance among companies in the first world.

In the IT outsourcing space, Application Development has traditionally been the IT function most organizations outsource, but over the last 12 months, outsourcing Application Maintenance & Support has overtaken it. For the BP outsourcing space, the most prevalent service offerings are call centers, but buyers are increasingly considering outsourcing other enterprise functions, such as finance, HR, legal and procurement.

How does the Philippines fare?

Increasingly, the Philippines is being viewed as a compelling alternative to India within the BPO Market.

It is ranked second to India in NeoIT’s country survey of BPO attractiveness, and fourth in A.T. Kearney’s Global Services Location Index. These surveys consider cost structure, service maturity, availability and quality of the labor pool, infrastructure and risk to the business environment. These are reflected in the economic figures: the Philippines brought in over $1 billion through offshore BPO contracts in 2005, up from $800 million in 2004.

The Philippines strengths that have made it attractive to potential BPO clients (specifically American companies) continue to be our strong English-speaking ability and familiarity with Western business culture. It has been supported by our competitive labor rates, a sizable labor pool of college graduates, and relatively strong telecommunications infrastructure. This has made it an attractive destination for many Fortune 500 firms who have decided to outsource Call Center functions such as direct marketing and customer support.

Within the Philippines, Metro Manila is still the most attractive location for BPO providers. It has over 80 voice-based BPO providers, mostly concentrated in Makati and Quezon City.

However, because of their lower real estate value, access to local talent pool channels, and new interest by the local government, Cebu, Davao and Clark are fast emerging as substitute destinations for outsourcing providers. University towns such as Cagayan de Oro and Dumaguete are also gaining more widespread attention, and may become significant players in the market as well — if the local universities can successfully grow the talent pool for candidates qualified to work on the global stage.

From a cost perspective, an entry level IT Professional in India would still cost less than in the Philippines ($5,400 vs $7,000 annually).

However, due to increasing demand for workers who meet the demands of global businesses, and an insufficient pipeline of high-quality graduates, India is suffering attrition rates of 15%-25%, as workers move to the companies that are willing to provide higher-wages. Attrition goes as high as 45%-50% for voice-based BPO workers. India’s wage inflation is at 12%-15%.

Average global attrition rates, on the other hand, are 9%-12%, with the Philippines on the lower end of the scale. The Philippines also experiences little wage inflation.

On the other hand, a 2006 Diamond Management and Technology Consultants’ survey of IT outsourcing buyers reports that companies plan to slow their outsourcing presence in the Philippines. As already mentioned, though the Philippines ranks second in NeoIT’s BPO Offshoring Attractiveness Index, it ranks 11th in it’s IT Offshoring Attractiveness Index. The two factors that limit the Philippines’ participation in the dynamic, fast-growing industry are the lack of an attractive IT labor pool and the perceived instability of the business environment. We will address both topics in the next two sections.

Enhancing the talent pool

Within the ITO market, the Philippines is only moderately positioned. Besides graduating more high-quality IT Professionals, Philippine companies could leverage their existing relationships with BPO buyers and provide them with ITO services as well. Service offering expansion is the most straightforward way for the country to secure a larger share of the ITO market, especially if the country improves its ability and reputation to deliver high-quality IT projects on-time and on-budget.

Currently, the country is perceived weak in terms of Service Maturity. Global standards such as the Capability Maturity Model Integration (CMMI) and the British government’s IT Infrastructure Library (ITIL) exist to capture best practice in the areas of IT program and project management, and application development and support. These standards are similar to a Six-Sigma program for the activities of the IT organization. Currently, there are only six companies that have attained the highest CMMI Level (Level V); three of these companies are in India. Filipino companies that take these respected global standards seriously are on the path to improved operations, association with a well-recognized standard, and building world-class credibility.

On a slightly negative note, the Philippine BPO market has started to show signs of worker shortage due to a shortening pipeline and the graduates’ English skills. There is evidence that the English skills of new graduates are deteriorating, and this should be quickly remedied by education policies that encourage English aptitude. In the AT Kearney survey, several non-native English speaking countries such as Chile, Russia, the Czech Republic and Hungary now boast comparable language skills to the Philippines. This is an advantage we cannot afford to lose.

Improving the business environment

When ATK recalibrates its weights to put more emphasis on minimizing risk (a 50% weighting instead of the original 30%), the previously fourth ranked Philippines falls off the top-20 list. International press treats the country harshly every time there is a coup attempt, street demonstration, “people power” or presidential impeachment attempt. Although many of these events do not cause interruption to infrastructure service or daily business, management of outsourcing companies constantly have to reassure their clients. Worse, these reassurances may never even reach the ears of a sourcing agent trying to narrow their consideration set of outsourcing locations.

Multinationals reduce their business risk in a number of ways. One way is a phenomenon called “nearshoring” which means a company will look to outsource in nearby countries, which are perceived to be less cost-effective but more stable (Canada, South. America and Central America for the US, Eastern Europe for Western Europe). The size of markets like Canada, Mexico, Ireland and the Czech Republic in the figure above lend credence to nearshoring’s popularity among US and European firms; the outsourcing provider is kept close to the client’s home country in order to reap cost savings, reduce the cultural gap and reduce risk.

Another way to minimize risk is to spread out the locations of their BPO providers. For instance, should service be disrupted in one call center, service can be re-routed to another location. Perhaps because of these tactical options, business environment risk is more “acceptable” to a BPO customer than an ITO customer.

An IT outsourcing provider often deals with critical systems and applications that keep a company’s operations running. Its maintenance is more difficult to geographically spread out because of reasons of coordination and technical complexity. A disruption in an IT provider’s business could mean major slippages to critical IT projects’ deadlines or outages because of delays in issue resolution. These types of incidents can have a significant impact to the daily business. A potential ITO customer, therefore, would often be more risk averse than a potential BPO customer.

In order to improve the situation, the Philippine government should enhance security in locations it has designated as strong outsourcing business clusters and keep insurgency out of these areas. Special consideration should be given to ensure that basic services to these locations are minimally impacted by natural or manmade disruptions.

Finally, and most importantly, the country has to learn to manage the global press better. According to AT Kearney’s survey, the Philippines has the second lowest ranking for country risk, along with Indonesia and Russia.

Yet, the Philippines has not suffered a terrorist tragedy in the scale of the Bali nightclub explosion, the Beslan school attack or the Moscow theater hostage fiasco. Yet, the country is branded to be a dangerous country along side Afghanistan, Lebanon and Liberia. As of June 16th, it has received another travel warning from the US State Department warning Americans against non-essential travel to the country.

Note that despite the tragic bombings in Mumbai and Madrid, no travel advisories exist for India or Spain. These comparisons stress that the Philippines’ standing among foreign governments, analysts and media channels can be improved — the country should make this re-branding effort a priority.

“We must build credibility as a ‘location of choice’ to mitigate geographical risk associated with India,” says Ernest Cu, President & CEO of SPi, a BPO vendor. “This can be done by developing a unified, concerted and focused marketing program similar to NASSCOM. Today, marketing Philippines as a BPO destination is a fragmented effort led by multiple lobby groups and associations.”

Future opportunities

Analysts believe that there will be a consolidation of the BPO market, now that BPO providers are bundling their services and providing their clients with end-to-end services. If BPO companies in the Philippines start expanding their service offerings to include other non-critical business processes, they will be able to take part in several BPO markets that are set to grow in the following years.

HR outsourcing, for instance, is expected to take off and grow at 25%-30% over the next five years, according to NeoIT. Most HR outsourcing begins with payroll processing, but moves to more sophisticated service offerings such as benefits management/administration, training and time-and-labor management.

Finance and accounting outsourcing was new in 2004 and is starting to pick up pace. NeoIT also predicted this to grow at a rate of 25%-30% for the next five years, because many processes, such as accounts payable and accounts receivable management, are prime candidates for outsourcing.

In order to expand into these services, of course, the outsourcing provider will have to already have a strong relationship with their current clients and a reputation of solid delivery in their existing services.

These expected growth rates should be very attractive to existing voice-BPO vendors. “There are other factors which make non-voice BPO an attractive ‘new opportunity’,” Mr. Cu urges, “These are the lower attrition rates, high seat usability or shift loading factor because most non-voice services are time zone insensitive, a higher price margin because the call center industry is becoming commoditized with predictable profitability, and lower capex per seat.”


The Philippines is well poised to benefit from the rising offshore BPO tide in the upcoming years.

However, several actions must be taken to maintain its current momentum: reinforce and restore the population’s strong English skills and maintain its affinity to Western business practices and culture, continue expanding the labor pool of qualified candidates and promoting geographic diversity to spread the fruits of the upcoming offshore outsourcing wave.

Training hubs such as the one set up by the European Chamber of Commerce of the Philippines to provide additional training and guidance to ‘near-hires’ will enhance throughput of those successfully transitioning from the graduate pool to industry.

If there is one area that the Philippine government should focus on, it is the re-branding of the country’s image to a secure, reliable and stable economy that can support the demands of the global business environment. A survey conducted by echoes this sentiment: fully 85% of the respondents state that the country’s image needs to be improved (though 80% also mentioned political stability was needed). This will surely improve the country’s position on both the BPO and ITO industries.

New and existing outsourcing providers need to focus on expanding their presence with their existing clients, by offering to take on additional parts of their client’s operations. Participants in the industry know that this is a highly reputation and relationship-based business, and in order to grow their customer base, it is also critical to preserve solid relationships with business partners, especially in the present-day US’ and UK’s constantly mobile executive workforce.

Leveraging their existing relationships with the BPO clients will not be enough to effect a successful expansion into the IT outsourcing space, however. The Philippines will also need to expand its graduate pool of IT specialists and enhance its reputation as a partner that delivers high quality service inexpensively, while still meeting or exceeding their client’s expectation.

The Philippines prospects are promising. Though there are several external threats on the horizon (i.e. China’s growth as an outsourcing destination), there are many more opportunities for the country to leverage in the near future.