The Philippines as a KPO Destination
By Mylene Isip, Joie Llanillo, Iris Mendiola, and Paul Catiang

Since the turn of the century, the buzzword associated with the Philippines’ economic growth has been Business Process Outsourcing, or BPO. Now, there’s a new arrival in the arena: Knowledge Process Outsourcing. What is KPO? How viable is KPO in the Philippines? What challenges does this new industry present? These are the questions which will hopefully be answered here.

BPO services vs. KPO services

Defined as the continuous process of creation and dissemination of information, which is achieved by bringing information industry leaders together to create knowledge and see meaning in information and its context, Knowledge Process Outsourcing is now emerging as a new sector that promises to provide long-term jobs for intellectual, analytical and knowledgeable people with pay scales much higher than the BPO sector’s.

The processes involved in KPO are of a higher order of complexity and require the level of expertise possessed by professionals, specialists, and scholars. These processes include Animation and Simulation; Content Development; Automotive and Aerospace Design and Development; Financial Consulting and Services; Intellectual Property (IP) and Patent Research; Financial Modeling; Learning Solutions; and Writing and Content Development, to name a few.

With this greater skill requirement comes more benefits, of course. KPO offers the usual benefits associated with outsourcing. Companies can take advantage in the difference in the costs of living across countries to generate savings and reduce costs. Like its predecessor, BPO, KPO offers uninterrupted services with the standard operational efficiency. Moreover, KPO also allows companies to recruit a larger workforce without raising their costs. The high level of specialization required by KPO, however, means that KPO professionals work on more than non-core processes—a key difference between KPO and BPO.

On the other hand, Business Process Outsourcing involves giving a third party the responsibility of what would normally be an internal system or service, and is usually reserved for non-critical and non-core aspects and functions of any given business. Companies outsource some of their processes mostly because of the cost savings involved; the difference between labor costs and costs of living across countries contribute largely to these cost savings. Outsourcing companies also offer uninterrupted services, yielding more value for money.

BPO companies take on processes as relatively simple as Accounting and Bookkeeping, Accounts Payable Administration, Customer Management, Payroll Processing, Business Intelligence, Medical and Legal Transcription and Litigation Support. Despite the relative complexity of the processes being outsourced, however, the base requirements of Business Process Outsourcing are easily filled by college graduates or professionals with at least a college degree.

One of the benefits of outsourcing is that BPO firms can execute their processes on a large scale, thereby enabling themselves to offer uninterrupted services to their clients. Combined with the lower operation costs in a developing country like the Philippines, this proves to be an attractive prospect to companies looking to send their non-core processes offshore. As of the end of 2006, there are over 250,000 BPO professionals in the Philippines, a number that is projected to grow to over one million in 2010.

Opportunities in Knowledge Process Outsourcing

A majority of U.S. Consumer products companies are outsourcing heavily today, due to rising energy costs, lower marginal profits, and sluggish demand. According to PricewaterhouseCoopers, more than two-thirds of U.S. consumer product companies are outsourcing to fast-developing nations to cut the costs that result from rising manufacturing costs and other overheads, as well as an anticipated sluggish growth in demand in the coming months. 

Likewise, rising energy and fuel costs are forcing consumer products industries to outsource jobs to other fast developing countries such as India, Philippines, Pakistan and other Asian countries that are improving their infrastructure and where labor costs are low. U.S. companies will benefit from such outsourcing, not only by reducing the costs, but also by bringing quality products at lower costs to their consumers. 

Destinations for Knowledge Process Outsourcing

As a global phenomenon, outsourcing has found several countries to call home, with each country having varying capacities and markets served. India continues to lead the pack, with its more than 75,000 IT graduates and 20,000 English-speaking graduates annually. Outsourcing is so interwoven into the fabric in the country that the Indian government has a national minister specifically for IT. The government favors IT foreign ownership and imposes no export taxes. Redundant telecom and utility infrastructures ensure very good reliability within India's special IT parks. The National Association of Software and Service Companies also serves as an association for IT and ITES companies in India and aggressively markets India as an outsourcing destination globally.

China is also another well-known outsourcing destination, especially Dalian, a city that blends technology, infrastructure and lifestyle to create an environment suited for the IT and ITES industries. The city is home to several BPOs and KPOs which service companies in the China-Japan-Korea region.

Other countries include Russia, which has the third-largest population of engineers and scientists per capita, even though not many of them speak English. While the country hasn't developed back-office competencies to date, but Russia certainly has the potential to do so. Canada is, unsurprisingly, among these countries, but as a near-shore alternative to the U.S., the IT salaries are much higher in Canada than in most offshore countries. There is, however, little or no political risk operating in Canada. The country has a solid telecommunications infrastructure, ideal for software development and maintenance, as well as tech support.

The Advantages of Outsourcing to the Philippines

The Philippines, on the other hand, is a destination that ripe with potential in the realm of global outsourcing and in Knowledge Process Outsourcing in particular. The country’s affinity for Western culture and the English language certainly provides an excellent foundation and makes Filipinos suited to take on processes outsourced from North American companies. As far as KPO is concerned, the Philippines is a viable destination for processes like engineering design, animation, IT, learning solutions, medical services planning, financial consultancy and several others.

The Philippine government exempts companies from export taxes, fees, dues and licenses if they open in one of the country’s IT parks. These IT parks have sprung up over the past 13 years fuel the export industry significantly; abandoned U.S. military bases left behind a dependable telecom infrastructure. There is also a government task force charged with the development of IT and KPO services.

The country’s greatest challenge is in providing the qualified workforce needed to take on such processes. According to the Commission on Higher Education (CHEd), the Philippines has a total of almost 2.5 million students and approximately 450,000 graduates each year. The regions that produce the most graduates are, in descending order, the National Capital Region, the CALABARZON area, Central and Western Visayas, Central Luzon, the Ilocos Region, the Bicol Region and Mindanao. These same regions are home to several outsourcing companies that have begun operating in the country.

Engineering, already a popular course in the Philippines, finds another niche in the highly technical sub-sectors of KPO; in 2006, the Philippines produced almost 56,000 engineering and technology-related graduates. IT is likewise a favored field, with over 42,000 graduates produced in 2006. Both sets of graduates are expected to grow by around 20 percent by the year 2012.

Since Knowledge Process Outsourcing is an industry for professionals and not fresh graduates, the Philippines’ existing labor pool must be looked at. According to the Professional Regulation Commission, the Philippines has over two million licensed professionals in 2006. Of this number, more than 100,000 are Certified Public Accountants; over 120,000 are midwives; there are over 26,000 electrical engineers; electrical and communications engineers, as well as chemical engineers number up to more than 22,000 each; there are over 16,000 architects; medical technologists number up to over 40,000, while there are more than 95,000 licensed physicians and over 40,000 dentists.

It is this thriving pool of professionals that can be tapped for Knowledge Process Outsourcing in the Philippines as it continues to grow; the country serves as fertile ground for KPO firms that deal in Engineering Design, Financial Consulting, and Medical Content and Services. Projections for industry growth for BPOs is estimated to reach up to US$ 20 billion by 2010, compared to US$ 12 billion for KPO.

The challenge the Philippines faces comes in the form of high attrition rates, the high cost of training, and security and confidentiality of information. Having been an issue since Day One, attrition in outsourcing is a real and tangible concern, causing training costs to rise as new hires are taken in to replace those who have resigned. Today, various companies in the BPO industry are employing several retention strategies with some success. Training costs for BPOs alone are high; the expertise needed by Knowledge Process Outsourcing will likewise require a higher order of training programs which include training in the processes being outsourced as well as leadership training, as the industry sorely needs leaders in this early stage of its development.

The Business Process Outsourcing industry in the Philippines can be likened to an enfant terrible: it brings with it booming growth in contact centers and back-office processing, and yet possesses a child’s capriciousness, throwing tantrums in the form of attrition and training difficulties, showing a lack of responsibility through its lack of leaders. But these are all growing pains; the Philippines now stands at the next stage of its growth.

Knowledge Process Outsourcing, is, after all, taking BPO to a higher, more complex, and more mature level—at least as far as industries are concerned. Where BPOs would be content in hiring fresh college graduates, KPOs will settle for nothing but the most qualified and experienced professionals. While the Philippines will continue to service non-core processes from other countries, the country is beginning to develop the capability to handle processes of increasingly greater complexity.

KPO is what BPO wants to be when it grows up.