Philippines ousts India for outsourcing top
spot By Joel D Adriano
MANILA – The Philippines has emerged as
the world leader in business process outsourcing
(BPO), supplanting India in terms of total number
of workers employed. Two studies, one by IBM's
Global Locations Trend report, another by
consulting firm Everest Group, show a shift at the
top of the still strong global cost-cutting trend.
With average annual growth of 46% since
2006, BPO has been one of the few bright spots in
the otherwise moribund Philippine economy. The
sector, almost non-existent a decade ago, has
zipped from US$350 million in revenues in 2001 to
over $9 billion last year. Analysts predict
industry revenues will exceed $10 billion this
year.
BPO has evolved into a $150 billion
global industry, driven largely by Western
banking, insurance and technology companies that
have outsourced parts of
their IT operations to lower cost,
English-speaking developing countries. The boom in
the Philippines has been led by call centers,
where Filipinos handle sales, customer service and
technical support calls.
The Philippine
boom has been led by call centers, which make up
for nearly 70% of the local BPO industry,
according to the Contact Center Association of the
Philippines. Contracts from multinational
companies Convergys, Accenture and IBM lead the
way.
Even Indian BPO companies are
shifting work to the Philippines. India's Tata
Consultancy Services, which opened its first BPO
center in Southeast Asia last December at Taguig
City, projected that Philippine outsourcing will
grow into a $25 billion industry by 2016,
providing work for some 1.3 million people. The
number of call centers in India has fallen by half
over the past three years.
An estimated
120 BPO firms employed over 600,000 Filipinos last
year, according to the Business Processing
Association of the Philippines, a trade group. BPO
company employees now earn on average 53% more
than workers of the same age in other industries,
according to International Labor Organization
statistics.
Key to the Philippines'
success has been its huge pool of English
language-proficient workers. Now, US outsourcing
clients are drawing a distinction between the
Philippines and India, with a preference for
Filipino workers' American accents and grasp of US
culture.
Filipino BPO workers are often
cited for their comparative ability to solve
complex problems.
One industry executive
estimated that it takes on average only one to two
calls to solve a problem in the Philippines that
in comparison would take six or seven in India.
Indian BPO entrepreneur Deepak Patel recently
noted that "Indians have not been able to handle
irate customers" as well as Filipinos can.
The Institute for Development and
Econometric Analysis Inc, a local think-tank,
estimates that the fewer number of calls required
to solve a BPO-related problem has contributed to
the Philippines cost competitiveness vis-a-vis
competitors in India.
While Philippine
average salaries are higher than in India, US
companies are increasingly willing to pay for the
difference. Filipino call center agents earn
around $3,600 annually, still considerably less
than the $30,000 excluding fringe benefits
required to hire an average US worker. Attrition
rates are also much lower in the Philippines than
in India, a crucial measure of quality control.
Generous tax incentives for BPO-related
investments, including income tax holidays of six
to eight years, have also given the Philippines an
edge. The World Bank's latest Philippine Quarterly
Report points out that during the tax holiday
period, industry net margins rate were between
11-21% in the Philippines compared with 13-16% in
India. After the income tax holiday period, the
two countries were roughly on par, the research
found.
Shortages ahead Still,
there are several questions hanging over the
industry's long-term sustainability. Other lower
cost countries, including China, Sri Lanka,
Vietnam and several Eastern European states, are
aggressively trying to lure more BPO investments.
Electricity rates in the Philippines are among the
highest in Asia and are driving up the cost of BPO
operations. A recent rise in office rental rates
is also undermining the Philippines' comparative
cost advantages.
A bigger concern over the
medium term is a projected shortage of qualified
English-speaking workers. Industry leaders have
noted a sharp deterioration of English language
capabilities among new graduates, a result of a
new government emphasis on teaching the local
language in schools and a general decline in the
quality of the country's education system.
The Commission on Information and
Communications Technology (CICT) recently
concluded that only seven out of every 100
graduates have the skills required by BPOs.
Meanwhile, the industry will need an
estimated 160,000 new workers annually by 2016.
The lack of talent is driving up salaries,
especially at the higher-end service segment of
the industry. As a result, companies are
increasingly relying on more English-language
proficient retirees to fill job vacancies,
industry leaders say.
There is an even
bigger danger that if the Philippines fails to
move into higher value-added production services,
such as software development, engineering, medical
record services, accountancy and game development,
growth will start to stagnate. That risk will rise
with rising global competition for the basic
voice-oriented services Philippine BPO companies
now dominate but over the medium term won't be
able to sustain high growth.
Demand for
higher-end BPO services that require more
technical knowledge is expected to grow faster
than voice-based customer services in the years
ahead. It's a segment where India, where entry
level IT professionals earn around $5,400 compared
to $7,000 in the Philippines, has a clear market
lead.
Konstantinos Boukis, owner of
Philippine BPO firm Helicon Technology Corp,
believes the industry will be able to sustain fast
growth over the next five to six years. After that
there is a broad concern that growth will be
restrained by the lack of linkages formed between
BPO companies and local industries that have moved
up the value-added ladder.
A recent
Philippine congressional report noted that the BPO
industry has very little interaction with the rest
of the economy, mainly because 92% of its output
is exported as services to other countries. Call
centers, in particular, were characterized as the
lowest rung on the global outsourcing ladder.
Unless the BPO sector can upgrade itself and
contribute to greater efficiencies and
competitiveness across other industries, the
Philippines leadership position will likely be
short-lived.
Joel D Adriano is
an independent consultant and award-winning
freelance journalist. He was a sub-editor for the
business section of The Manila Times and writes
for ASEAN BizTimes, Safe Democracy and People's
Tonight.
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