Appearances can be deceiving

Michael Alan Hamlin

Posted on July 3, 2007

The peril of irrational enthusiasm

Last week, I wrote that Cebu is emerging as a strong, tier-two center for business process outsourcing (BPO) services after Manila. Hardly a day goes by without an investor announcing an agreement or plans to build a facility that will employ thousands in Manila, Cebu, and other emerging BPO centers such as Baguio, Dumaguete, and Davao.

Looking inward, our impression of the fast-growing BPO industry is that things couldn’t be better. But two recent studies of the global industry indicate that the Philippines should not be complacent. The two studies are A.T. Kearney’s semi-annual Global Services Location Index and The Black Book of Outsourcing survey, conducted annually by the Brown-Wilson Group.

In the A.T. Kearney 2007 index, the Philippines was once again a top-ten location. However, it is the only location in the top-ten that declined in ranking from 2005. That year, the Philippines was ranked number four after India, China, and Malaysia. For 2007, the Philippines dropped to number eight. India, China, and Malaysia retained their positions, and Thailand, Brazil, Indonesia, and Chile moved ahead of the Philippines. Bulgaria and Mexico rounded out the top-ten locations, in that order.

The Index evaluates locations by three criteria: financial, people, and environment. The Philippines continues to do well in the financial category, tying with Indonesia and a notch ahead of Bulgaria, India, and Thailand. China, Malaysia, Brazil, Chile, and Mexico trail the other top-ten locations when it comes to overall cost of operating in those countries.

In the people category, which is typically the first thing investors praise about the Philippines, the Philippines in fact does poorly compared to other top-ten locations, only tying Chile and Thailand. Only Bulgaria rates lower. India and China are ranked significantly higher at 2.3 compared to the Philippines’ 1.2 score. Brazil ranks reasonably high at 1.8. Indonesia, Mexico, and Malaysia also beat out the Philippines.

And the Philippines is number nine among the top-ten locations in the environment category. Only Indonesia scored lower. The Philippines did do reasonably well at 1.2 compared to India and China at 1.4. But Malaysia came out on top at 2.0, followed by Chile (1.9), Brazil (1.5), and Bulgaria, Mexico, and Thailand (1.6).

When compared to the 2005 Index, the Philippines financial score declined from 3.6 to 3.3, people remained steady, and the environmental score improved from 1.0 to 1.3. The results appear to suggest that the Philippines financial attractiveness is eroding, while people issues such as availability and language capability aren’t improving. A higher environment score may indicate a somewhat enhanced investment climate.

The Black Book of Outsourcing survey appears to validate the Global Services Location Index. In that survey, the Philippines, when lumped with Southeast Asia, was ranked a distant fourth as the most desirable outsourcing location after India (73.5%), Canada (70.7%), and UK & Ireland (65.2%). Germany, Central and South America, Russia and Eastern Europe, and Israel and the Middle East followed closely.

When respondents to The Black Book of Outsourcing survey were asked what locations they would most likely or definitely consider for an outsourcing project, the Philippines came in as in the A.T. Kearney Index at number eight (20.2%). South Africa was number one with 87.3% followed by Malaysia (83.4%), Argentina (78.3%), and Costa Rica (77.5%). China (42.3%), Brazil (31.1%), and UAW (20.3%) also did better than the Philippines. Only Jamaica and the Caribbean and Mexico did worse.

The relatively low ranking for China may be due to low levels of satisfaction among outsourcers. That’s good news for China’s competitors, but there are other countries to worry about, especially Chile and Brazil. Those countries both grew fast and saw a parallel increase in client satisfaction scores, according to Douglas Brown and Scott Wilson of Brown-Wilson, as reported in The Wall Street Journal.

If there is a lesson in these results, it is that the Philippines has very strong competitors, and their number is increasing. Although already urgent, the results strongly suggest that government must accelerate overhaul of the educational system to better prepare young Filipinos for the knowledge jobs that await them. The Black Book results also indicated trending towards higher value-added outsourcing.

They also suggest that government must continue to improve the environment for investors, but also that developers who build the BPO facilities that investors lease should not allow irrational enthusiasm to crank up lease rates to the point investors look elsewhere. It is important to carefully balance supply against demand to assure that jobs continue to be created and buildings keep going up.

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