The Philippines: Is it the next KPO hotspot?

March 20, 2010

1. Overview
While the Philippines has clearly emerged as a maturing alternative to India for both call center and BPO work, the country is also increasingly attempting to position itself as the next major knowledge process outsourcing (KPO) hub. However, the United Nations Conference on Trade and Development’s (UNCTAD) 2009 Information Economy Report cited increasing geographic diversification as a threat to the Philippines’ share of the global outsourcing market while the country itself continues to score low in various competitive reports for its poor business and investment climate. Hence, does the Philippines, a country that also has a much smaller population than India, really have the potential to maintain its position as the number one alternative to India and move up the value chain to become a major global KPO player?

In this research report, we will examine this potential by addressing the following questions about the Philippine outsourcing market:

• What are the key characteristics and drivers for the Philippine BPO/call center and outsourcing industries?
• What is the government doing and not doing to encourage the growth of these sectors?
• What are the key operating factors, costs and risks to be aware of when outsourcing to the Philippines?

2. Key Facts and Trends
The Philippines has a population of at least 92 million with another 11 million living abroad and most Filipinos are both literate and able to speak and understand English. In addition, some 400 years of Spanish and American rule has greatly influenced the culture of the country, making it both the most Westernized and Americanized country in East Asia – and hence a natural outsourcing destination.

And although the Philippines has felt the pinch from the global economic crisis and continues to suffer an image problem due to negative perceptions about its business and investment climate, the country’s maturing outsourcing industry remains largely a bright spot for the country. In fact:

• The Philippine Commission on Information and Communications Technology (CICT) expects the BPO and information and communications technology sectors to have 26% growth for 2010. CICT has also noted that last year’s revenue hit US$7.3 billion and they expect this amount to reach US$9 billion this year with employment rising from about 550,000 to 600,000.[1]

• In addition, other CICT figures show that over the last five years, employment

in the BPO sector has grown by almost five-folds. In fact and in 2004, total employment in the sector stood at around 100,000 and by the end 2009, the estimated number of full-time employees had reached 446,000.[2]

• Meanwhile and according to the Business Processing Association of the Philippines (BPA/P), voice related work or regular contact center operations contributed US$5 billion in revenue for 2009, a 22% increase over 2008 figures; while back-office or non-voice related BPO work contributed more than US$1.1 billion in revenue, a 35% increase over 2008 figures.[3]

• In an October-November 2009 survey conducted by the BPA/P and Outsource2Philippines, 52% of the 160 respondents said doing business in the Philippines was less risky than doing business in India, while 38% said the risks were equal. However, government corruption was cited by 21% of respondents as a risk factor, up from just 11% last August, while the tight labor market was identified by 23% of respondents as the most significant risk factor. Nevertheless, the bulk of respondents also indicated that they plan to increase their local work force by 6% to as much as half over the next 12 months.[4] [5]

• In addition, 81% of respondents said that the prospects for the growth of KPO were “good” to “very good” but 54% also said that the tight labor market for qualified workers was the most significant risk factor faced when expanding a KPO operation. Other obstacles cited included retaining knowledge workers (46%), complex employee training requirements (34%), higher wages required to attract knowledge workers (30%) and the country’s inadequate education system (29%).[6] [7]

• Nevertheless and despite optimism by local industry players, the United Nations Conference on Trade and Development’s (UNCTAD) 2009 Information Economy Report cited increasing geographic diversification as a threat to the Philippines’ share of the global outsourcing market. The report noted that the Philippines accounted for 9% of the global BPO market in 2004, 12% in 2005, 14% in 2006 but since then market share has remained steady at 15%. Moreover, the report noted that back in 2004, five countries (Canada, China, India, Ireland and the Philippines) accounted for as much as 95% of the total global BPO market but by 2008, this market share had shrunk to 80% as new locations emerged.[8]

• Meanwhile, the Wall Street Journal noted in May 2009 that the Philippines has about 15% of the global call center market for the number 2 spot while India’s share of the market has fallen from 80% in 2004 to about 40% in 2009. In addition, it was noted that India-based call centers, many of whom have expanded into the Philippines, earn about US$11 billion in revenue compared with the US$6.8 billion earned by Philippines-based providers.[9]

3. Market Characteristics and Factors to Consider
While the above facts and trends shed some light about the overall potential for the Philippine IT services and outsourcing industries, the following market characteristics and other factors need to be considered by any firm considering setting up a presence in or planning to outsource work to the Philippines:

• Industry Structure
• Government Support
• Regulatory and Legal Structure
• Intellectual Property (IP) Protection
• Infrastructure
• Human Capital
• Operational Costs
• Quality Track Record
• Risk

3.1. Industry Structure
Most large or medium sized multinational third-party call centers or BPO firms have some type of presence in the Philippines and these firms would include Accenture, AEGIS PeopleSupport, Convergys, eTelecare, Genpact, Sitel, Sykes and Teletech while MNCs with substantial shared services type of operations in the Philippines include AIG, Citigroup, Dell, Deutsche Bank, Genpact, Hewlett Packard, HSBC, IBM, Manulife, Safeway and Thomson Reuters. It should be noted that some of these firms may employ 10,000 or more people in multiple locations spread across the country.

Meanwhile, there are a growing number of established homegrown or Philippine owned call center or BPO firms or conglomerates that are competing globally. Major locally controlled groups would include the following:

• ePLDT Ventus: Owned by Philippine Long Distance Telephone Company (PLDT), the largest telecommunications company in the Philippines, ePLDT Ventus controls or has major investment stakes in a number of IT or outsourcing related firms including Vocativ Systems, Parlance Systems, SPi Global Solutions, Infocom Technologies, Digital Paradise Thailand, netGames, Digital Paradise and Level Up! In fact, SPi Global Solutions has 29 locations across North America, Europe and Asia and over 14,000 employees worldwide.

• IPVG: A publicly listed company on the Philippine Stock Exchange, IPVG controls or has major investment stakes in IP services, internet security, on-line gaming, mobile solutions and BPO companies such as IP-Converge, IP E-Game Ventures, IPCCO, Prolexic, Influent, Megamobile and i-Pay Commerce Ventures. In fact, IPVG attempted to purchase PeopleSupport in 2008 but lost out to India based Aegis BPO.

• LiveIT Solutions: As the BPO investment holding company of the Ayala Corporation, the oldest and one of the leading conglomerates in the Philippines, LiveIT Solutions in turn controls or has major investment stakes in Integreon, eTelecare Global Solutions, Stream Global Services, Affinity Express and HRMall. In fact, Integreon is now a leading provider of outsourced research, legal and business Knowledge Process Outsourcing (KPO) type services with nearly 2,000 employees in the US, UK, India, China, South Africa and the Philippines.

• Paxys: As an investment holding company controlled by Malaysian tycoon, Ananda Krishnan, Paxys in turn controls or has major investment stakes in Advanced Contact Solutions (ACS), ScopeWorks Asia, Global Idealogy Corp., SmartSalary Stellar Global Solutions Philippines and WNS Philippines. Paxys is actively seeking to add new investments to its growing BPO portfolio.

Hence and compared with other outsourcing markets, the Philippines has a fairly active mergers and acquisitions market for outsourcing related firms.

Table 1. Selected Mergers & Acquisitions Involving Philippines Based IT or Outsourcing Vendors

Date

Buyer

Acquisition or Merger Target

Amount

November 2009 Integreon Grail Research Undisclosed
October 2009 eTelecare Global Solutions, Inc. Stream Global Services, Inc. Stock swap
August 2009 PCCW Teleservices IP BPO Holdings Pte. Ltd. Up to US $22 million
August 2008 Aegis BPO PeopleSupport Inc. US250 million
March 2008 Paxys, Inc. Ubaldo Reidenbach Solutions Inc. (URSI) Php6.5 million (Php3.5 million by year end)
February 2008 IA Global, Inc. Shift Resources Inc. US$225,000
January 2008 Allsec Technologies Inc. Kingdom Builders Inc. (KBI) Undisclosed
April 2007 SPi Springfield Service Corp US$44 million
May 2006 ePLDT Inc. SPi
May 2006 Paxys Inc. Smart Salary $A36.7 million

3.2. Government Support
The outsourcing sector falls under the Philippine government’s Investment Priorities Plan, a list of promoted areas for investment issued annually by the Board of Investments (BOI) under the Department of Trade and Industry (DTI). Generally speaking, investment incentives are given by either the Philippine Economic Zone Authority (PEZA) or the BOI.

PEZA is a government corporation that was set up to oversee the promotion of the country’s economic zones and to establish ready-to-occupy locations for foreign investments. The agency also offers incentives for IT investors, developers and operators that include:

• Income-tax holidays.
• Incentives under the Philippine Build-Operate-Transfer Law (BOT Law).
• Essential off-site infrastructure facilities.
• Option to pay a special 5% gross income tax instead of all national and local taxes.
• Permanent resident status for foreign investors and their immediate family members.
• Employment of foreign nationals.
• Assistance in the promotion of economic zones.

In addition, PEZA offers ecozone and IT locators the following incentives:

• Income-tax holidays or a four-year exemption from corporate income taxes. This is extendable up to eight years and there is an option to pay a special 5% tax on gross income instead of all national and local taxes after the holiday expires.
• Exemption from duties on imported capital equipment, parts and raw materials.
• Domestic sales allowance that equals 30% of total sales.
• Exemption from wharfage dues and export taxes or fees.
• Permanent resident status for foreign investors and their immediate family members.
• Employment of foreign nationals.
• Simplified import and export procedures.
• Other special incentives as determined by the PEZA Board.

Meanwhile, the BOI offers a separate range of incentives to which includes the following:
• Income-tax holidays.
• Exemption from duties on imported spare parts.
• Exemption from wharfage dues and export duties.
• Tax credits.
• Additional deductions from taxable income.

However, investors should be aware of two bills currently stalled in Congress, one involving the rationalization of fiscal incentives and a second bill known as the Simplified Net Income Taxation Scheme (SNITS). Both bills are expected to bring in at least Php10 billion and Php5.24 billion in annual revenues respectively but the Senate version of the bill to rationalize fiscal incentives is being opposed by both PEZA and BOI.[10] Meanwhile, another bill to create a Department of Information and Communications Technology (DICT) which is strongly supported by various business groups and foreign chambers of commerce also remains stalled and it is unlikely that any action will be taken until well after the upcoming May elections.[11]

3.3. Regulatory and Legal Structures

Philippines Flag

3.3.1. Legal Systems of the World
The legal system of the Philippines is based on Spanish law that was then influenced by US common law after 1898. Indigenous legal practices along with religion has also influenced the Philippine legal system while in Muslim areas of the country, Islamic (Shari’a) law is followed.

In addition, the Philippine constitution follows a strongly nationalistic policy that favors Filipino labor, raw materials and finished products. Hence, this constitution restricts or severely limits foreign investment in a wide range of key economic sectors while non-Filipinos are not allowed to own land. Such policies have long attracted ere from would-be foreign investors. In fact, one Chinese official late last year even bluntly stated that the Philippines needs to first improve its investment environment in order to attract more foreign investment.[12]

However and for employers in general, the Philippine Labor Code is a particular bone of contention for as it contains a number of provisions that are considered extremely beneficial to labor. This labor code prohibits the termination of employees except for just or authorized causes as prescribed in the code while the right to organize a union or for a union to insist on a closed shop are protected. In addition, the right to strike (so long as the strike is authorized and comply with the requirements of the code) are expressly recognized while Philippine jurisprudence applies the rule that any doubt in the interpretation of the law or the Labor Code must be decided in favor of labor rather than management.

For the outsourcing industry, Article 130 of the Labor Code which outlines a nightwork prohibition on women employees has been a particular concern. And while the Secretary of the Department of Labor and Employment (DoLE) has said in a recent ruling that the outsourcing industry is exempted from this outdated provision and an exception is almost always easy to obtain from the department, there are concerns that corruption could seep into the exemption process under a future administration.[13]

In addition, the outsourcing industry has strongly opposed a 2009 bill before Congress (House Bill No. 6532, or An Act Strengthening the Security of Tenure of Workers in the Private Sector) which would cap the number of casual and/or contractual employees that employers could hire to just 20% of the workforce. Under the proposal, only the hotel and restaurant industry would be able to hire temporary employees on a project basis.

Given the above laws and proposed laws, the Philippines has long performed poorly when rated on various competitive criteria. In fact and in the World Economic Forum’s Networked Readiness Index for 2008-2009, the Philippines ranked #109 (between Suriname and Ecuador) for having a score of 2.70 (1 being burdensome and 7 being not burdensome) for the burden of government regulations; ranked #109 (between Bangladesh and the Dominican Republic) for having a score of 2.06 (1 being ineffective and 7 being very effective) for the effectiveness of its national lawmaking bodies; ranked 60nd (between Sri Lanka and Thailand) for having a score of 3.94 (1 being nonexistent and 7 being well developed and enforced) for its laws related to ICT; ranked #83 (between Zambia and Azerbaijan) for having a score of 3.47 (1 being heavily influenced and 7 being entirely independent) for judicial independence; and ranked 111th (between Burundi and Mali) for taking 842 days to enforce a contract.

Table 2. Key Indicators of the Business Environment (2009)

Indicator

2009

Business start-up
Cost (% of GNI per capita) 28.2%
Duration (days) 52
Dealing with construction permits
Time (days) 203
Cost (% of GNI per capita) 81.7%
Employing workers
Rigidity of employment (index) 29
Ratio of minimum wage to average value added per worker 0.64
Redundancy costs (weeks of salary) 91
Tax rate
Total tax rate (% profit) 49.4%
Corporate tax rate (statutory rate) 35%
Labour tax and contributions (% of commercial profits) 10.3%
Exporting
Documents for export (no.) 8
Time to export (days) 16
Cost to export (US$ per container) US$816
Importing
Documents for import (no.) 8
Time for import (days) 16
Cost to import (US$ per container) US$819
Protecting investors
Investor protection index 4
Closing a Business
Time (years) 5.7
Cost (% of estate) 38%

Source: Euromonitor International based on the World Bank (The Philippines: A Country Profile. November 6, 2009)

3.4. Intellectual Property (IP) Protection
At the end of 2009, the Philippines remained on the US Trade Representative’s (USTR) watch list for piracy while Washington-based International Intellectual Property Alliance (IIPA) noted that not much had changed in terms of punishing infringers or passing needed IP protection laws while the Philippines based IP Coalition noted that the country still hadn’t provided adequate protection for IP rights.[14] And while special IP courts are planned to be set up in response to the USTR’s placing of the country on its watchlist, such courts are still only in the early planning stages.

Moreover and in the 2009 International Property Rights Index by the Property Rights Alliance, the Philippines ranked 74th (together with Tanzania and the Dominican Republic) overall out of 115 countries surveyed and ranked by their general property rights regimes (China ranked 68th while India ranked #46) and ranked 60th (together with Mali, Benin, Brazil and Argentina) in the specific category for intellectual property rights (China ranked 70th while India ranked 49th). In addition, the Philippines ranked 75th for IP rights protection, 25th for the strength of its patent rights and 66th for copyright policy.


Table 3. The International Property Rights Index 2009

The Property Rights Alliance’s International Property Rights Index 2009 is based upon.

Category

Score

World Rank

Regional Rank

Overall

4.5

74 of 115

13 of 18

Legal and Political Environment

3.3

95 of 115

14 of 18

Judicial Independence

3.8

73 of 115

16 of 18

Rule of Law

3.8

83 of 115

14 of 18

Corruption

3.4

98 of 115

16 of 18

Political Stability

2.2

106 of 115

14 of 18

Physical Property Rights

5.5

69 of 115

15 of 18

Property Rights Protection

5.5

67 of 115

12 of 18

Registering Property

7.7

58 of 115

14 of 18

Ease of Loan Access

3.2

73 of 115

14 of 18

Intellectual Property Rights

4.8

60 of 115

10 of 18

IP Rights Protection

3.5

75 of 115

14 of 18

Strength of Patent Rights

8.4

25 of 115

3 of 18

Copyright Piracy

2.6

66 of 115

11 of 18

Gender Equality

10.0

1 of 90

1 of 15

Access to Land

10.0

1 of 90

1 of 15

Access to Property Other than Land

10.0

1 of 90

1 of 15

Access to Bank Loans

10.0

1 of 90

1 of 15

Inheritance

10.0

1 of 90

1 of 15

Social Rights

9.8

46 of 90

4 of 15

Source: http://www.internationalpropertyrightsindex.org/philippines-c85

In addition and in the World Economic Forum’s Networked Readiness Index for 2008-2009, the Philippines ranked #89 (between Libya and Malawi) for having a score of 3.12 (1 being weak and not enforced and 7 being strong and enforced) for intellectual property rights protection.

Nevertheless, outsourcers themselves have little to worry about in terms of actually theft of intellectual property or data by their employees. In fact, there has yet to be a major publicized incident involving the lost of intellectual property in the country’s outsourcing industry.

Moreover, the House of Representatives has recently passed the Cybercrime Prevention Act of 2009 which addresses issues such as the illegal hacking of government Web sites, phishing and data fraud and also creates a Cybercrime Investigation and Coordinating Center under the Office of the President. If signed into law, the Act imposes six years and one day to 12 year prison terms or a fine of not more than Php200,000 for computer hacking, data forgery and system interference.[15]

3.5. Infrastructure
By and large, the infrastructure in the Philippines, especially the transportation infrastructure, is relatively poor due to the archipelago nature of the country, the lack of government investment and widespread corruption. Nevertheless, the Philippines has a relatively sophisticated mobile phone industry and a high concentration of mobile phone users.

However, the Philippines still ranked 85th (between Serbia and Morocco) in the World Economic Forum’s Networked Readiness Index for 2008-2009, a decrease of four places from its 2007-2008 ranking of 81 and a decrease of 16 places from its 2006-2007 ranking of 69. The Philippines also ranked #107 (between Tajikistan and India) for having 4.30 telephone lines per 100 people; ranked #85 (between Moldova and Bolivia) for having 3.98 Internet servers per million population; ranked #85 (between Canada and the Dominican Republic) for having 58.88 mobile telephone subscribers per 100 people; ranked #68 (between Paraguay and Oman) for having 7.46 personal computers per 100 people; and ranked #80 (between Tunisia and Georgia) for having 1.10 total broadband Internet subscribers per 100 people.

In addition, the World Economic Forum’s Global Competitiveness Report found that the Philippines fell 16 places to 87th place among the 133 countries surveyed in terms of the capability of institutions, policies and other factors that boost productivity.[16] In fact, the Philippines remained second to last among the eight economies in the region and only bested Cambodia.[17]

On the other hand, the Philippines ranked 54th (between Peru and Venezuela) in the Economist Intelligence Unit’s (EIU) E-readiness Rankings 2009. This was an improvement of one ranking over the previous year but it was still noted that Philippines performed lowest in research and development (61st place) while the local legal environment (especially for the protection of intellectual property) also scored low at 47th.[18]

Table 4. The Networked Readiness Index 2008–2009 Ranking
The World Economic Forum’s Networked Readiness Index takes into account the presence of an ICT-conducive environment and the degree of preparation needed to use ICT along with its actual use by individuals, the business sector and the government. While the Philippine’s ranking (#85) was better than that of Argentina (#87), it was behind the rankings for Malaysia (#28), China (#46), India (#54), Brazil (#59), Mexico (#67), Vietnam (#70) and some Central and Eastern European countries.

2008–2009 Rank

Country/Economy

Score

75 Dominican Republic

3.76

76 Egypt

3.76

77 Botswana

3.72

78 El Salvador

3.69

79 Macedonia, FYR

3.67

80 Senegal

3.67

81 Trinidad and Tobago

3.67

82 Guatemala

3.64

83 Indonesia

3.62

84 Serbia

3.62

85 Philippines

3.60

86 Morocco

3.59

87 Argentina

3.58

88 Georgia

3.48

89 Peru

3.47

90 Nigeria

3.45

91 Gambia, The

3.44

92 Namibia

3.44

93 Mongolia

3.43

94 Syria

3.41

95 Honduras

3.41

Table 5: The Economist Intelligence Unit’s (EIU) E-readiness Rankings and Scores (2009)
The Economist Intelligence Unit (EIU) assesses the world’s largest economies on their ability to absorb information and communications technology (ICT) and use it for economic and social benefit. The Philippines ranking (#54) was ahead of that of China (#56), India (#58) and Vietnam’s ranking (#64) but behind that of Argentina (#45), Brazil (#42), Mexico (#40), Malaysia (#38) and nearly all Central and Eastern European countries.

2009 Rank (of 70)

2008 Rank

Country

2009 Score (of 10)

2008 Score

44 49 Jamaica

5.33

5.17

45 44 Argentina

5.25

5.56

46 50 Trinidad & Tobago

5.14

5.07

47 48 Bulgaria

5.11

5.19

48 45 Romania

5.07

5.46

49 47 Thailand

5.00

5.22

50 53 Jordan

4.92

5.03

51 46 Saudi Arabia

4.88

5.23

52 58 Colombia

4.84

4.71

53 51 Peru

4.75

5.07

54 55 Philippines

4.58

4.90

55 52 Venezuela

4.40

5.06

56 56 China

4.33

4.85

57 57 Egypt

4.33

4.81

58 54 India

4.17

4.96

59 59 Russia

3.98

4.42

60 63 Ecuador

3.97

4.17

61 62 Nigeria

3.89

4.25

62 61 Ukraine

3.85

4.31

63 60 Sri Lanka

3.85

4.35

64 65 Vietnam

3.80

4.03

Source: http://graphics.eiu.com/pdf/E-readiness%20rankings.pdf

3.6. Human Capital
The Philippines has long claimed to have the third largest English speaking population in the world but English proficiency has declined over the past few decades due to the lack of education funding (The Philippines only spends about 3% of its GNP on education, below the 6% international standard) and the introduction of Tagalog as the medium of instruction.[19] In fact, Malaysia and not the Philippines had topped 10 countries in East Asia in the latest International English Language Testing System’s (IELTS) scores for English with Malaysians scoring broadly better at reading and listening while Filipinos scored better at writing and speaking English.[20] Meanwhile, the Economist recently noted that Filipino teachers have been flunking English for years with only one in five teachers passing the English-proficiency test in 2004 and they further noted that call centers now reject at least nine-tenths of their applicants, who are other wise qualified and largely college educated, due to their poor proficiency in English.[21]

Hence and according to a mid-2010 survey by BPA/P, 45% of respondents indicated that they hire 6 or less applicants out of 100 before training while the remaining respondents indicated that they hire 7 or more out of 100.[22] Attrition was also cited as an issue with 53% of respondents indicating that their attrition rates were below 10%, another 29% indicating that their attrition rates were between 11%-20% and 17% indicating that their attrition rates were above 21%.[23]

In addition to English language problems and high attrition rates, poverty and high population growth has turned the Philippines into the second largest labor-exporting country in the world after Mexico. And while many of those who go abroad to work are un-skilled, increasing numbers of well educated and skilled professionals are also leaving and this brain drain is being felt throughout the economy. Hence, outsourcers will likely find it difficult to hire experienced IT and other technical talent and this is a major reason why the Philippines, unlike India, is unlikely to become a major player in the IT market.

Meanwhile and in the World Economic Forum’s Networked Readiness Index for 2008-2009, the Philippines ranked #92 (between Panama and Bulgaria) for having a score of 3.75 (1 being rare and 7 being widely available) for the availability of scientists and engineers; ranked #100 (between Algeria and Mauritania) for having a score of 3.34 (1 being a laggard and 7 being among the best in the world) for the quality of math and science education; ranked #46 (between Israel and Mauritius) for having a score of 4.02 (1 does not meet the needs of a competitive economy and 7 meets the needs of a competitive economy) for the quality of its education system; ranked #30 (between Hong Kong and Indonesia) for having a score of 4.65 (1 means they invest little and 7 means heavy investment) for the extent of staff training; and ranked #32 (between Korea and Estonia) for having a score of 4.84 (1 is limited and 7 is among the best in the world) for the quality of its management schools.

3.7. Operational Costs
The Philippines has long been criticized for having artificially high minimum wages which have discouraged foreign investment in the country along with the development of a strong manufacturing base. In fact, data from the Philippine National Wages and Productivity Commission showed that the Philippines is ranked seventh out of 13 economies in the region in terms of having the lowest minimum wage with workers in the National Capital Region (NCR) of Manila earning a daily minimum wage of Php382 or US$8.09.[24] This is in comparison to Vietnam’s daily minimum wage of US$1.26-$1.55, Cambodia’s US$1.49-$1.66, Indonesia’s US$1.95-$3.63, China’s US$3.66-4.14, Thailand’s US$4.44- $6.09 and Malaysia’s US$7.19 -$15.40.[25]

However, wages in the outsourcing industry are relatively competitive compared to wages in the countries where the work is being outsourced from and the Philippine Bureau of Labor and Employment Statistics (BLES) has estimated that the average monthly wage wages for certain outsourcing sectors to be the following[26]:

• Php15,901 (US$346) for customer service representatives.
• Php16,222 (US$353) for accounting and bookkeeping clerks.
• Php14,816 (US$322) for computer assistants.
• Php23,474 (US$510) for computer engineers.
• Php28,599 (US$622) for computer programmers.

In addition, the Wall Street Journal has recently noted that the average entry level BPO salary in the Philippines is US$3,858 while the average annual salary for IT professionals is US$10,730.[27]

Nevertheless, outsourcers need to be aware of the additional costs that will be incurred when Filipino employees work during various types of local holidays. Under Philippine labor laws, employers are required to pay employees who work during holidays the equivalent of 130% to 200% of their regular pay depending on the type of holiday.[28] And although pay rules for certain types of holidays have since been relaxed, the current presidential administration’s penchant for declaring holidays at the last minute, sometimes for political reasons, and/or then undeclaring them has long irked employers and has added additional and unforeseen costs to doing business in the country.[29]

On the other hand, the Philippine Peso has largely remained stable during 2009 after weakening in 2008 and is foreseen to largely remain stable in the near future – barring any major or unexpected economic or political shocks. However and during much of 2007, the peso was one of the strongest-performing Asian currencies against the US dollar and this strength had impacted a number of weaker players in the industry. Nevertheless, most outsourcers were able to cope with this rise and had contractual provisions with their clients that protected them from major exchange rate fluctuations.


Table 6. Exchange Rates (PHP:US$)

Philippine exchange rate

Source: World Development Indicators Online

3.7.4. Quality Track Record
The Philippines has become the call center destination of choice for voice work from the USA market given the close cultural affinity between the two countries and the familiarity of Filipinos with American English and pop culture. In fact, Filipino customer service agents are particularly adept as sales and debt collection related work and have lower attrition rates than their Indian counterparts and hence, the quality of the work they provide is relatively high.

3.8. Risk
At the moment, the risk of operating in the Philippines should be considered moderately high as the country faces both internal and external pressures plus 2010 is an election year. Risk factors stem from rampant and rising levels of poverty associated with high birth rates, severe income inequality (the country’s 2008 Gini Index of 48.1 stands among the highest in the region) rampant corruption, poor infrastructure, high crime and both high unemployment and double-digit underemployment (7.6% and 19.8% respectively at the end of 2009). These problems have also contributed to a four decade long Communist insurgency in many parts of the country while many parts of Mindanao remain lawless with various bandit, clan, Communist and militant Islamic groups in conflict with both the government and each other.

However and in large part, these problems do not directly impact the country’s outsourcing industry. Instead, the serious mismatch between skills-to-jobs available, deteriorating English abilities, a poor education system and a braindrain of skilled workers should be considered the most serious risks or problems faced by the outsourcing industry.

Moreover, elections will be held on May 10, 2010 to determine who will succeed an unpopular President Gloria Macapagal-Arroyo who will be term limited out of office. And while the country’s notoriously violent and corrupt elections do not impact the country’s outsourcing industry directly, many existing or new investors are reportedly taking a wait and see approach before committing to major new investments or expansions of existing operations.

In addition, the Philippines’ location on the ring of fire makes the country particularly susceptible to earthquakes, typhoons, volcanic eruptions and floods which have also helped to hinder economic growth. In fact, Typhoon Ondoy, which struck Metro Manila in September 2009, dumped more than a month’s worth of rain during a 24 hour period and flooded 80% of the city. Nevertheless, the disaster’s impact upon the country’s outsourcing industry was negligible with 45% of respondents to a BPA/P survey indicating that operations remained normal during the typhoon with another 45% indicating they resumed normal operations within hours or in three days or less.[30]

Table 7. The Philippines Risks and Vulnerabilities Summary

Indicator

2009

External Shocks

High

Real Estate

Medium

Government Finances

Medium

Energy

High

Socio-Political

High

Environmental Shocks

Mediu

Source: Euromonitor International (September 10, 2009)

4. Conclusion
Despite many negatives concerning both the business and investment climate, the Philippines has clearly managed to turn itself into the number one destination for providing high quality and cost effective voice-based customer service work. Moreover, the Philippines has also gained a significant foothold in the BPO market by positioning itself as an alternative to India and increasingly has a toehold in the more lucrative KPO market.

However, there are risk factors that could potentially cause the Philippine outsourcing industry to plateau or even to stumble and stumble badly. These factors namely include:

• Education and English: Even low margin call center work requires an educated workforce with strong English language skills but many Filipinos increasingly lack the skills needed even for these jobs.
• Braindrain: Moreover, a braindrain is further depleting the relatively small pool of qualified candidates.
• Natural Disasters: Typhoon Ondoy’s direct impact on the outsourcing industry in Metro-Manila was minimal but a major earthquake and its aftermath could have devastating consequences to the industry and the country as a whole.
• Political Uncertainties: The Philippines will hold elections in May and it remains uncertain who will win these elections or the policies they will implement. Moreover, a further rise in corruption or more unfriendly policies towards employers and foreign investors could further increase the already negative perceptions about the country’s investment and business climate.

Nevertheless and despite the above risks, the Philippine outsourcing industry as a whole should continue to grow but the country’s share in the overall global outsourcing market will likely remain stagnant or could fall in the face of new and emerging alternative offshore, nearshore and even homeshore destinations for both call center and BPO work. In other words, the Philippines needs to take action to address the decline in education and English standards, erratic government policies and a braindrain of increasingly skilled professionals. Otherwise, the Philippines may remain just another call center and BPO destination under increasing pressure from alternative destinations and only capture just a toehold in the more lucrative KPO industry.

References
1. “BPO Sector to Hire 600,000 Workers, Post Revenues of $9B this Year.” Manila Standard. February 9, 2010.
2. “BPOs and their impact on the middle class.” Business World. January 29, 2010.
3. “BPO sector generates US$7.2B in revenues.” Philippine Daily Inquirer. February 9, 2010.
4. “Survey cites hurdles to high-value outsourcing.” Business World. December 3, 2009.
5. “Tight labor market, negative perception top BPO investor concerns – survey.” Philippines News Agency. December 2, 2009.
6. “Survey cites hurdles to high-value outsourcing.” Business World. December 3, 2009.
7. “Tight labor market, negative perception top BPO investor concerns – survey.” Philippines News Agency. December 2, 2009.
8. “Outsourcing share under threat.” BusinessWorld. October 23, 2009.
9. “Philippine Call Centers Ring Up Business.” Wall Street Journal. May 30, 2009.
10. “No revenue laws from Congress (SNITS, incentives rationalization okay unlikely given little time).” Business World. January 18, 2010.
11. “Chambers make last-ditch plea for DICT bill.” Business World. January 12, 2010.
12. “Philippines aiming to join China’s resource boom.” AFP. October 28, 2009.
13. “Labor concerns in the business process outsourcing industry – Part 1 (Clarifications on night work prohibition).” Business World. July 2, 2009.
14. “Groups claim minimal gains made in RP anti-piracy effort.” Business World. November 24, 2009.
15. “Bill on cybercrime penalties approved on final reading.” Business World. January 19, 2010.
16. “RP competitiveness plunges.” Business World. September 9, 2009.
17. Ibid.
18. “RP loses ground in global IT competitiveness survey.” Business World. September 24, 2009.
19. “BPOs’ new requirement, Managerial talent.” Business World. March 11, 2009.
20. “English standards slipping in Philippines; Concerns raised after results show Malaysians beating Filipinos in global language exam.” The Straits Times. November 9, 2009.
21. “E for English; The Philippines and the English language.” The Economist. June 6, 2009.
22. “BPO industry mid-year status: Well-managed, innovative firms are growing.” BPA/P. June 2009.
23. Ibid.
24. “Philippine labor among S.E. Asia’s most expensive.” Business World. December 22, 2009.
25. Ibid.
26. “BPOs and their impact on the middle class.” Business World. January 29, 2010.
27. “Philippine Call Centers Ring Up Business.” Wall Street Journal. May 30, 2009.
28. “Flexible holiday pay rules pushed.” The Philippine Daily Inquirer. January 30, 2009.
29. “Palace releases 2009 holiday calendar.” The Philippine Daily Inquirer. January 9, 2009.
30. “Tight labor market, negative perception top BPO investor concerns.” Philippine News Agency. December 2, 2009.


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