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    Southeast Asia
     Mar 9, 2011


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.

(Copyright 2011 Asia Times Online (Holdings) Ltd. All rights reserved. Please contact us about sales, syndication and republishing.)


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