Publication: Economist Intelligence
Ready for the Deluge: Outsourcing in Philippines
Richard Mills, Chairman
Philippine outsourcing sector has been steadily picking up momentum over the
past few years. As of this time, it seems to have reached a tipping point.
Direct employment seems to have surpassed 100,000 people and hiring growth
is maintaining very high levels. Most estimates put growth rates for
Business Process Outsourcing (BPO) at 40% to 50% annually, while many of the
contact center organizations are blistering ahead at rates approaching 100%.
While this is clearly not sustainable in the long term, it is thrilling
while it lasts and this should be over the next 1.5 to 2 years. When one
considers the dramatically slowing growth in India and other more mature
offshore outsource destinations, the situation in Philippines is positive to
Given that the BPO sector is
easily the most significant economic opportunity for Philippines at the
current time, it is important that all business leaders keep up-to-date with
progress. In this chapter, I will describe what real decision makers in the
BPO sector are doing and saying about Philippines. Since India is still what
most people think of when the topic of outsourcing is discussed, the
information will often be discussed in relation to that country.
Sykes is a large U.S.-based
contact center and IT support organization with operations in both India and
Philippines. The company said earlier in the year that it would shift much
of its Indian capacity to the Philippines, where it already has more than
The official company
announcement from Dan Hernandez, Sykes' vice president for global strategies
was, "We moved calls to other facilities in Asia to get a higher rate
of return.” However, knowledgeable observers in the region said that the
rate of return differential must have been substantial for a company of
Sykes' size and prominence to forgo India after already spending millions to
put capacity in place. While there has been no formal company announcement,
it seems that future growth in Asia for Sykes, will be in Philippines.
(formerly known as GE Information Systems) is a large IT organization with
locations throughout the world. The company has had a presence in India for
years but made the decision to direct all functions with a strong customer
component to Philippines because of “better economics and results.”
Company analysis also indicated that costs were increasing
disproportionately in India. Victor Lee, who oversees professional and
customer service operation in the region for GXS, is also quoted as saying
that “having product development in India and professional and customer
services in Philippines reduces risks.”
Many in the Business Processing Outsourcing (BPO) sector will remember when
Dell made a significant announcement in 2004 that they were withdrawing 1000
jobs from India back to the US because of quality problems. What is less
well known is that during that same period, Dell increased the number of
jobs in Philippines by over 1000.
In 2005, the company announced that it was expanding its commitment to
Philippines by setting up a number of captive centers and will also keep
most of its current third-party relationships as well. Dell selected
Philippines for its new customer contact centers because of the “strong
language and communication skills of its high-quality workforce.” On the
Dell website, they also stated the following: “English-savvy population,
about 100 similar facilities in place and 650,000 students, the Philippines
is fast becoming the contact center location of choice in Southeast Asia.”
More outspoken than most, Rick McGonegal is clear that India won't be part
of his company's plans for the foreseeable future. He is the Managing
Director of RCG Information Technology, another good-size IT provider. The
company already has a strong offshore presence in the Philippines and has
assessed the Asia-Pacific region for future expansion. India, he feels, is
already too crowded, with numerous companies all scrambling to hire from
each other. The result is destructively high staff turnover rates,
mounting salary costs and poorer English communications skills compared with
that available in the Philippines. He also cited overstretched
infrastructure in India as a further reason RCG wouldn't consider this
destination at present. According to McGonegal, his company has its
"radar set on Vietnam and China" should its current best option of
the Philippines give way.
ICT Group Inc., another large contact center organization says it “has
bypassed India altogether.” The company opened its second call center in
Manila and is about to open its third. John Brennan, chairman and chief
executive of ICT, is quoted as saying in the Wall Street Journal
"Philippines has several advantages over India.” According to him,
wages are higher in Manila than in New Delhi, Bombay or Bangalore but there
is less staff turnover in the Philippines because of a relative shortage of
higher-paying software development and other business processing jobs.
"Callcenter work is something people naturally want to migrate out of,
and there are more opportunities to do that in India," he says.
ClientLogic is a similar story. The company, among the top 5 in its
industry, is quoted by CNN as saying that "Philippine call centers have
higher average staff tenure and better customer satisfaction ratings than
India.” Within the BPO industry, it is known that the company is
experiencing stronger growth in Philippines.
Industry estimates for Convergys, another large BPO organization, are that
it will employ 8000 people in Philippines by the second quarter of 2006.
This is up from roughly 6000 as we approach the end of 2005. This surprising
if one considers that Convergys announced recently that it is undergoing a
global restructuring plan affecting most areas of the company – although
apparently not the Philippine operation.
Another industry story that got out recently was about developments at IBM.
The company is said to have a large deal with Sprint. After more than a year
of frustration in Bangalore, they pulled all voice operations out of India
sending a loud message to the world that India is not a preferred
destination these days.
Perhaps the most significant acquisition in the BPO sector this year was the
purchase of Ambergris Solutions, arguably the leading home-grown contact
center organization in Philippines. The purchaser was Telus International,
the IT division of Telus Corporation, the second largest telco company in
Canada. In a presentation to the Canadian Chamber, company CEO Eng Boon Lau
described the exhaustive Asia-wide research his people undertook. The
Philippine option was deemed as overwhelmingly superior to those of other
countries, including India. An aggressive growth strategy is now in place
that should make Ambergris one of the key players in the Asia Pacific
Even the Consulting Firms Are Catching On
Many of the large research consulting firms are reporting this shift.
Gartner Group, perhaps the most respected of the IT industry, recently
released a report that predicted India would lose “significant market
share” to countries like Philippines because it “does not have a
long-term plan for improving infrastructure and increasing the supply of
quality employees for the BPO industry.”
XMG Global, another consulting firm, predicted that “Philippines will
surpass India by 2008 in contact centers.” This is a remarkable statement
consider India is roughly 10 times the size of Philippines in total
It is a similar story for the major business journals. Many are reportly on
the growing problems in India and viability of next step destinations
countries like Philippines. Forbes (India: Good Help is Hard to Find),
BusinessWeek (India’s IT Challenge), Rediff (India: Desperately Seeking
Talent) are a few examples. A simple internet search will uncover dozens
more similar headlines
Long Live the King
Despite all of the negative statements about India, we should also
understand that no one is predicting the demise of India as an outsourcing
destination. That country became the “King of Outsourcing” because it
was the one that proved to the world that the offshore outsourcing model
works. India will continue driving the industry forward because of its huge
size and remarkable competence of its senior managers.
India does experience slower growth in the near term, it is only because of
its tremendous success over the past few years. Current alleged constraints
are not indicative of weakness but of India’s great success. Rising salary
costs may be a big deal to business bigwigs who have to somehow budget for
them but it is reasonable to assume that for individual workers, who see
their paychecks rise by 30% from a well timed job change, “rising costs”
probably don’t warrant the same degree of concern.
If Philippines is a better option today, it is only because it has been less
successful at developing and attracting quality outsourcing employers in the
past. The pioneering accomplishments made by India have now opened the door
for Philippines to receive its share of the blessings. And as for India, we
can be sure they will soon be back stronger than ever.
Philippines Is This Year’s Fashion
That said, the prevailing sentiment among business leaders is that
Philippines is a superior choice overall for the following reasons. First
and most importantly, quality people are more available in Philippines.
Filipinos are said to speak better English, have a better customer service
mind-set and are more culturally attuned with the west. While India’s
first-rate educational institutions are said to produce better technical
people, Philippines’ more well-rounded liberal arts education programs are
more appropriate for the larger opportunities in back-office processes
Infrastructure requirements for BPO organizations are relatively
straightforward. The most important of these are reliable and cost effective
telecommunications, office space and electricity. These are mainly available
in Philippines with some growing constraints in office space.
Business leaders report infrastructure deficiencies in telecommunications,
office space and electricity in India that are becoming more extreme as the
industry continues to grow. Even simple matters like roads are constraining
growth in some Indian cities because workers have difficulty getting to
Expatriates also report a much improved lifestyle in Philippines as compared
to India. Lastly, issues like security, government support and general
business environment are said to be somewhat better in Philippines although
these differences do not seem to be significant.
If Philippines Is So Great, Why has It Lagged?
It is certainly true that Philippines has been slow to attract awareness of
itself as an accepted, let alone preferred, destination for offshore
outsourcing. The country had the same opportunity India had during the Year
2000 craze years ago but sat around the sidelines and watched as India
created dozens of world-class outsourcing organizations. During the same
period Philippines created almost none. Even today, the penetration of the
outsourcing sector in Philippines is said to be 2 to 3 years behind India.
It is hard to understand why this is. According to most business leaders,
Filipinos speak better English, have a better customer service mind-set and
the cultural gap is less. India is reported to have better technical
universities but Philippines is said to be better in liberal arts (more
appropriate for back-office processing). Philippines is also broadly
reported to have better infrastructure and expatriate life-style.
So why has India outpaced Philippines to such a degree?
It is an issue that no one seems to have a definitive answer. Some of the
reasons I hear are:
1. Better Marketing – India has Nasscom, a one-stop association for
the entire Indian
outsourcing industry that has done a fabulous job of promoting India to the
association represents roughly 95% of India industry and is a global force
in promoting India to the global community and professionalizing the sector
at home. Philippines, despite being a much smaller country, has between 6
and 8 various outsourcing associations (the actual number keeps changing),
all supposedly promoting Philippines. Too many of these associations are
fractious in nature and seem to be constantly battling within themselves and
against others who try to unify them. The result is that none are large
enough or competent enough to effectively market the Philippines to global
organizations. They seem to spend their limited energies promoting
Philippine outsourcing to other Filipinos. Happily, a single industry
association is emerging in Philippines and support for it is growing. More
about this later.
Better Senior Managers and Entrepreneurs – It was reported during
the dot-com boom times that close to 40% of Silicon Valley startups were
founded by Indians. (A joke at the time was that all it took to start a
dot-com was 4 Indian engineers and an American guy to sell.) Indians are
clearly an entrepreneurial people who know what it takes to build
world-class businesses. Filipinos, like most other people in the world,
don’t seem to have that same need for the recognition that building
successful businesses entails
3. Bad Security Perception of Philippines – Until recently, there
was a real threat that India would go to nuclear war with Pakistan over the
Kashmir region. Such a war would be in addition to the 2 previous horrific
wars these countries have already fought in just the past few decades. They
still lob a few missiles at one another even today. But for some reason,
India was better about keeping this sort of information from American BPO
decision makers’ ears. Philippines, by comparison, has a few bungling
bandits located far to the south engaging in various flavours of
hooliganism. Laughably, these bozos have somehow been labeled “Muslim
insurgents” and gained international notoriety for themselves. Despite the
obvious differences in situations, most people in the west have the
impression Philippines is the more dangerous than India. The vagaries of
public relations management seems to be something Filipinos have been poor
am sure there are other reasons but these might be a start. The question for
the future is whether Philippines will succeed as an outsourcing destination
as the worldwide BPO sector continues to undergo tremendous upheaval.
Worldwide Industry Trends Affecting Philippines.
just a year or so ago, Business Process Outsourcing was a simple industry to
understand. The sector consisted, for the most part, of a few large American
companies sending call center \ work and some IT processes offshore.
No longer is that the case. The next phase of this fascinating sector is
much more complicated since so many things are happening all at once.
of all, outsourcing is expanding beyond just call centers and IT into almost
every conceivable business process. The current new batch of outsourcing
locators are involving themselves in a myriad of activities. Some of these
include: accounting, HR, financial analysis, design engineering, animation,
medical services, legal services, insurance processes, banking processes,
map-making, publishing content creation, research, on and on.
Given that answering telephone inquiries and software programming are
microscopic parts of most company’s businesses, this is significant. Some
business leaders I have spoken to have used the phrase "tipping
point" to describe the current life-cycle stage of services
outsourcing. One fellow I spoke to thought the phrase "business process
outsourcing" wasn't descriptive enough to express the vast diversity of
the current environment. He felt a better phrase was something along the
lines of "everything-anyone-can-possibly-imagine-as-being-outsourced
Second, it is no longer just large American companies (and some notable UK
firms) who are aggressively sending work offshore. Now every rich country in
the world is moving rapidly to join the movement. We are already seeing
action from countries as diverse as Japan, France, Australia, Denmark and
As a specific example we could look at little Canada. Until a year or so
ago, there were very few Canadian interests in the Philippines BPO sector.
Today, Canadian companies have taken controlling interest in ClientLogic
(one of the largest BPO’s in the world with a strong Philippine focus),
Telus acquired Ambergris (arguably the most successful homegrown BPO in
Philippines, Nucomm (a quality mid-sized Canadian call center outfit) set up
operations and Thomson Financial (the large global information provider)
continued growing. Announcements of other major investments are imminent
although still confidential at the time of this writing.
Third, the movement is no longer just for the largest global companies. We
are now seeing the early stages of involvement by mid-sized and small
companies – even individual entrepreneurs are getting involved. Here are a
few examples of smaller companies that you may not have heard about yet but
soon will: YellowAsp creates layout designs for printed circuit boards, XMG
Global IT Research and Advisory Inc. prepares high-end IT research, Forssman
Pacific creates construction design drawings, Key-In Data Solutions does
claims processing, Primesoft develops advanced Web applications, VinciWorks
designs online training programs, and Pulse DesignTech
offers electronics design services. The list goes on and on.
and most significantly for Philippines, the sector is becoming vastly more
competitive. Most developing countries throughout the world have seen the
success of India and want to participate. The result has been a frantic
stampede of new destinations to compete for the same BPO jobs as
Philippines. And, most of these 30 or so countries have lower costs than
Philippines. Unless Philippines aggressively begin to improve itself
promotional activities and increase the value of its services, we risk
finding ourselves bypassed.
the early leaders of outsourcing like India are being pushed by extreme
competitive pressure to quickly move up the value chain to more
sophisticated processes. Remarkably sophisticated work is now starting to
appear. As one example, Deutsche Bank has recently set up an operation that
will perform financial analysis work for the company’s CFO’s located
throughout the world. The company is hiring very senior financial
professionals for these functions
The Biggest Opportunity of Our Lives
Current growth rates in the BPO sector seem to be stronger than in other
boom times. During the dot-com boom times, growth rates in employment were
often quoted as 20% to 25% per year. People achieving these impressive rates
were considered successful by industry standards. Today in Philippines,
people with 20% to 25% growth are at risk of being called losers. Most BPO
organizations, even the largest ones, have been growing by 40% to 50% per
year. Many of the call centers are growing at rates approaching 100%.
point to keep in mind is that a lot of dot-com company hiring was based
around dreams and funny ideas, and paid for with venture capital money
rather than being funded from company revenues. In the current environment
in Philippines, hiring is almost exclusively the result of client
instructions that they are ready to pay real money for new employees.
the current worldwide business environment, one would be hard-pressed to
find such hiring growth in any other business sector. As we begin 2006,
there are approximately 100,000 people employed in the BPO industry in
Philippines. Estimates are that the sector will provide work for 500,000
people over the next 4 years.
times like this typically happen only once per decade and they almost always
move on to different sectors. The 1990’s, for instance, was important for
IT and telecommunications. The 1980’s was real estate and high finance (in
The point is this: For those involved in the BPO sector, we are living
through a period that will probably not happen again in our lifetimes. We
need to make sure we harvest as much as we can while the opportunity exists.
This opportunity will pass quickly if we don’t and probably never return.
Philippines: World-Class Destination, Third-Class Marketing
One of the most important initiatives that is underway that will help us to
achieve our great potential is through the association called Business
Process Outsourcing Philippines (BPA/P). Philippines is developing a single
strong voice for promoting and professionalizing the Philippine BPO sector
that is in the model of India’s NASSCOM. The Indian association is always
cited as a strong reason for that country’s great success as the pioneer
and by far the most successful services outsourcing country in the world.
Another example is the Philippine mining sector. Because of the strong and
leadership of the Philippine Chamber of Mines by Philip Romualdez, this
industry is now back on its feet and ready to provide be a major job
provider for this country.
Business Processing Association of Philippines (BPA/P) has recently been put
with place with strong leadership under Mitch Locsin (Executive Director)
and Dan Reyes (President). A strong BPA/A will allow Philippines to promote
itself in a proactive manner, rather than just
reacting to bad publicity after the fact. It will also help along the
process of professionalizing the industry by encouraging world-class
standards of performance.
are the goals but progress is still being hindered by the fractious nature
of various industry associations – some of whom are loath to join efforts
with BPA/P because they fear the loss of personal prestige. This, of course,
is ridiculous and their lack of commitment to joint efforts is shameful and
needs to be rectified.
is one of the major constraints to Philippines developing itself into a
world leader in Business Process Outsourcing. The product is good. We just
need to market it a little better. If this can be done, there is a
possibility the Philippines can rise up and finally take its rightful place
among the tigers of Asia. Let’s see how we do.
Chalré Associates Executive Search
Richard is considered a leading expert on Asia-Pacific outsourcing by
ComputerWorld magazine. His regular column called “View from Offshore”
is a feature of the publication. Richard has been appointed an “Expert
Panelist” on offshore outsourcing by CIO
Magazine and the Offshore Outsourcing Richard has also been called “the
local guru on outsourcing” by Dr. Michael Clancy, President of the
Economist Business Forum and the “Asia-Pacific expert” by Call Center
Magazine. In addition to ComputerWorld, he is a regular opinion editor for a
host of other international publications. Mr. Mills is an active board
member of the Canadian Chamber of Commerce and chairs its high profile ICT
extensive career in executive search includes 4 years working throughout
Asia for a global executive search firm based in New York and 5 years in
Toronto, Canada. His clients have been leading multinational corporations
for both local and international staff positions. Of the many international
projects he worked on in the Asia Pacific region, one was particularly
noteworthy as it became the largest technology recruiting venture in Korean
history and a cover story for ComputerWorld magazine.
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