The Philippines: BPO update

Michael Alan Hamlin

Posted on October 27, 2006

Five trends suggest continued strong growth

Despite the high-pitched rhetoric generated by detractors of Senate and Department of Finance moves to eliminate, rather than rationalize, investor incentives, according to Business Processing Association of the Philippines (BPA/P) executive director Mitch Locsin the business process outsourcing (BPO) industry remains confident that it will grow rapidly through 2010.

Locsin said earlier this week that five trends auger well for the Philippines and the BPO industry, notwithstanding certain inevitable challenges. Although his remarks were made in an off-the-record briefing, Locsin agreed to allow me to report on his comments.

The first trend driving BPO investment is the increasing propensity for Indian tier-one BPO players to acquire and expand contact center capacity in the Philippines, especially in the voice segment. According to Locsin, increasing labor costs, high turnover, and client preference for outsourcing voice support to the Philippines account for Indian interest in the Philippines. Risk mitigation also plays an important role.

Locsin believes “coopetition” – cooperating while competing – with India offers attractive benefits for both India and the Philippines and their respective BPO investors. For Indian service providers, expansion to the Philippines offers the opportunity to grow revenues while strengthening customer relationships. For the Philippines, aside from the generation of more jobs, Locsin said the industry will benefit from association with India, the world’s number one BPO services provider. The industry also has much to learn from the National Association of Software and Service Companies (NASSCOM), he said. NASSCOM has been instrumental in branding and promoting India, and BPA/P hopes to emulate that successful track record.

Two of the trends Locsin identified, training of near hires and improving hire rates, are critical factors in assuring that the Philippines has the human resources to meet investor demand. Training of near hires, which the Philippine government is subsidizing, has increased the pool of workers available to the industry. According to Locsin, 60 to 80 percent of near hires are actually hired following 100 hours of basic English-language training. “This gives them the practice they need to be confident speaking English,” Locsin said.

Higher hire rates of 10 to 15 percent, up from three to five percent just a year ago, reflect private-sector efforts to provide training outside the traditional education system. Unfortunately, Locsin says that support from government institutions – such as the Department of Education and the Commission on Higher Education – that have the mandate to strengthen curricula to prepare students for available jobs has so far been disappointing. “We’re not getting much movement,” he said.

The fourth trend is the increasing interest in value-added BPO. This is “the next big thing” according to Locsin. Value-added BPO refers to back-office processes such as accounting and financial services, inventory management, and human resources management. An exciting, new growth area is knowledge process outsourcing (KPO). KPO includes processes such as market research and analysis and intellectual property management, and provides higher returns to service providers.

Finally, outsourcing demand is expected to increase as a result of the fifth trend Locsin identified: U.S. demographics. Like many other developed economies, the U.S. population is shrinking, reducing the number of citizens and residents who work. In the meantime, population growth in the Philippines makes it one of the youngest populations anywhere, increasing the urgency with which the Philippines must create new jobs.

If Locsin’s forecast is correct – it’s based on work done by the Commission on Information and Communications Technology – the Philippine BPO industry will directly employ almost 1.1 million people by 2010 and generate US$12.2 billion in annual revenues, up from an estimate of 266,000 jobs and $3.6 billion in revenue for 2006. Coupled with growth prospects in other emerging sectors like tourism and medical services, these trends are extremely encouraging.

Of course, no matter how rosy projections are, growth isn’t guaranteed. Two key factors affecting growth of the BPO and other industries – including semiconductors and electronics which account for almost 70 percent of exports – are the investment climate and perceptions of the Philippines in general. Domestic and foreign investors believe that current efforts to “rationalize” incentives are actually intended to emasculate them. Real and meaningful rationalization is fine; undoing incentives is woefully misguided.

Second, the Philippines must do more to improve perceptions of the Philippines in the wake of a new stream of warnings that travel to and living in the Philippines is dangerous. While governments are obligated to warn their citizens of potential dangers, the other side of the Philippines’ message is not being communicated systematically, frequently, or as well as it should be. No matter how attractive the Philippines is to investors who know this country, unless potential investors are convinced of those merits, the Philippines won’t achieve its potential.

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