Risk factors

Michael Alan Hamlin

Posted on August 26, 2009

Negative perception of the Philippines, including the tight labor market for knowledge workers, is increasingly viewed as a significant risk factor by the business process outsourcing (BPO) industry. Preliminary results of the latest industry survey conducted by the Business Processing Association of the Philippines (BPA/P) and Outsource2Philippines (O2P) suggest that negative publicity and media reports internationally are taking a toll on the Philippines’ already “not-quite-glowing” brand.

The complete results of the survey will be announced in the next regular CEO breakfast briefing conducted by BPA/P and O2P, which is scheduled September 30. That briefing will focus on the state of the knowledge process outsourcing (KPO) industry-which is bright if things go well-and the business continuity issues and risk factors that are at the core of investment decisions in an industry in which country competition has become fierce. (Disclosure: BPA/P is a client of my firm, which conducted the online survey. I am a director of O2P.)

In the latest survey-again, results are preliminary-51% of respondents indicated that “negative perception” of the Philippines is a level one, two, or three risk factor associated with doing business in the Philippines, and 20% said it is a level one factor. A slightly lower percentage, 49%, said the “tight labor market” is a level one, two, or three risk factor in their view, but 23% of respondents said it was a level one risk factor.

The tight labor market for knowledge workers-an even more obvious and important factor for KPO than BPO-is probably responsible in part for the negative perception of the Philippines. But it’s not the only factor responsible. Fifty-five percent of respondents said that government corruption is a level one, two, or three risk factor associated with doing business in the Philippines, although only 11% said it is a level one factor.

Since the survey took place during the period in which former president Corazon C. Aquino passed away and local and international coverage of the U.S. visit of president Gloria Macapagal-Arroyo was at its highest, it is not surprising that 45% of respondents view “political instability” as a level one, two, or three risk factor. Fifteen percent of respondents indicated that it is a level one risk factor.

The sad passing of Mrs. Aquino was said by a number of commentators to provide a harsh foil against which to evaluate the current administration, especially in terms of its respect for freedom and constitutional democracy. Mrs. Arroyo’s critics have alleged that the administration and its supporters are attempting to prolong its hold on power by revising the constitution and shifting government to a parliamentary system. Mrs. Aquino’s legacy is restoring and preserving democracy and overseeing a peaceful transition of power, in contrast.

Actually, the visit of the Philippine president went largely unnoticed by U.S. media with the exception of the Washington Times, which twice criticized the visit and Mrs. Arroyo on its opinion page and urged U.S. president Barack Obama not to meet with her. The New York Post and the Washington Post both ran short blurbs on large and expensive private dinners administration supporters are said to have underwritten for Mrs. Arroyo and her entourage to the tune of $20,000 and $15,000, respectively. The Post followed up on its blurb when a maelstrom of criticism resulted when the stories were re-reported here.

Respondents are based in the Philippines, and the local coverage of these stories-including the administration’s dismissal of the Times editorials-may have affected their perspectives nevertheless. Regular international coverage of terrorist and insurgent activity in the southern Philippines casts a wider net, however, especially when it is associated with the presence of U.S. troops. Risk consultancies and other analysts regularly advise BPO and KPO investors on the veracity of these stories, as well as other factors such as corruption and local political sentiment. This is the more likely source of international negative perception of the Philippines among investors, and may have had some effect on respondents’ views as well.

What is the impact of these views on the perceived competitiveness of the Philippines? About 45% of respondents said that compared to India-the Philippines’ largest BPO and KPO competitor-doing business in the Philippines involves about the same risk (33%), more risk (10%), or much more risk (2%). A slight majority of respondents indicated that doing business in the Philippines is less risky (43%) or much less risky (13%) than doing business in India.

In recent years, the Philippines has been seen to be a much less risky place to do business than in India. Does the survey suggest that is changing? Perhaps. The CEO briefing next month with provide top industry representatives the chance to weigh in.

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