A mixed bag

Michael Alan Hamlin

Posted on October 29, 2008

Outsource2Philippines (O2P) and the Business Processing Association of the Philippines (BPA/P) announced the results of a survey of business process outsourcing (BPO) industry executives at the beginning of the week. The survey was conducted to assess the potential impact of the global financial crisis on the industry, one of the few bright spots in the Philippine economy. As expected, a majority of the respondents said the impact of the crisis on their Philippine operations would be neutral or positive.

But unexpectedly, many respondents also expressed caution. Almost 40% said they are decreasing capital spending in response to the crisis, and nearly 30% said they are postponing expansion plans. Less than 10% of the executives polled said they are increasing capital spending. Still, almost a quarter said they are accelerating expansion plans in response to the financial crisis. What accounts for this mixed bag of results? (Disclosure: I am a director of O2P and BPA/P is a client of my firm, TeamAsia, which administered the survey.)

The prognosis for the industry is defined by two dimensions. The first is specific BPO sector, and the second is the size of the firm. Let’s take sector first. Many companies that develop original software IP (intellectual property) have a deep dread of the crisis. Almost 54% expect the global financial crisis to have a negative effect on their operations in the Philippines. It may be that these executives are beginning to see clients defer investing in new or updated technology until the business environment begins to improve.

Nearly 40% of software IP creators expect the impact of the global financial crisis to be neutral. However, less than eight percent expect the global financial crisis to have a positive effect on demand for their products and services. Compare that sentiment to the perspective of respondents representing the engineering and legal transcription services sectors.

None of the respondents from the engineering sector fear that the global financial crisis will have a negative impact on their operations in the Philippines. Instead, a whopping 75% said the crisis would have a positive effect. With cost pressures rising in western markets, engineering services executives expect even more work to be pushed offshore and their way. Apparently, these executives are not worried that a global recession will cause a significant decline in projects that require their expertise. The other 25% of respondents in the engineering services sector expect the impact of the crisis to be neutral, of course.

Legal transcription services executives are also largely optimistic. About 63% of respondents in this sector said they expect the crisis to have a positive effect on their operations here, and 12.5% said the impact would be neutral. Unlike the engineering services sector, however, a significant number of legal transcription services executives fear the consequences of the financial crisis. Twenty-five percent expect it to negatively affect their businesses. That surprises me. Financial collapses present lots of opportunities for litigation, and with everyone watching costs it seems natural to outsource transcription and other legal support services to offshore service providers.

Within the overall software sector, not all is gloom and doom. Some software services providers, which range in size from very small organizations to extremely large firms in the Philippines, are considerably more upbeat than their IP generating colleagues. Almost 35% of software services providers, in fact, expect the global financial crisis to have a positive effect on demand, and about 30% said the impact of the crisis would be neutral. But almost half, close to 40%, said that financial crisis will hurt them.

How about the size of the firm? Most software sector respondents manage companies with less than 500 employees, and many respondents running small companies are worried. In the survey, almost 30% of respondents with 500 or fewer employees believe the financial crisis will have a negative impact on demand for their services. That response rate climbs to about 39% for companies with 100 employees or less.

Being small doesn’t mean that the financial crisis will almost certainly have a negative impact on a company, however. Far from it, in fact. Most engineering services firms employ 100 people or less. Overall, 33% of respondents employing 100 or fewer employees are upbeat about the crisis, and expect to benefit from their clients’ pain. And 44% of companies with between 101 and 500 employees are confident the crisis will produce good news. That confidence level does go up as the size of firms increase. Among the largest firms, none felt that the crisis was going to hurt them.

Are some smaller firms simply less confident that they can thrive while the world around them deals with the financial crisis? Perhaps so. But one thing is certain, if the survey had been conducted among executives in companies with more than 5,000 employees exclusively, it appears that none of the respondents would have been worried about the global financial crisis.

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