Visionaries Wanted for Opportunities in
Knowledge Process Outsourcing
By Paul Catiang

This article is based on a presentation given by Tully Moss, President of the Magellan Alliance, on April 25, 2007, at the Mandarin Oriental. His topic was the future of outsourcing in the Philippines.

If men cease to believe that they will one day become gods then they will surely become worms.
- Henry Miller, The Colossus of Massouri

Most people know Tully Moss to be the President of consulting firm the Magellan Alliance, with an MBA from the Wharton School in Pennsylvania. What most people don’t know is that he majored in English Literature for his undergraduate degree, and can, with the same ease with which he designs marketing strategies and brand designs, wax enthusiastic about the Cantos of Ezra Pound or the musical syntax of e.e. cummings. More to the point, it is this literary background that gives Tully Moss an appreciation for what slips beyond the numbers and trends associated with business; this sensibility has made him one of the Philippines’ biggest advocates where the country’s development is concerned.

“The Philippines has a lot going for it,” he says one Sunday afternoon in the lobby of the Manila Peninsula Hotel. “You have that affinity for Western culture that’s bred in the bone. Many other countries are trying to catch up to you, but it’s nothing you can teach, it’s part of your culture, part of your DNA. In addition to that, Filipinos are empathic by nature and have a natural tendency to put themselves in others’ shoes; it’s a perfect match for the customer-service aspect of outsourcing.”

Of course, Filipinos aren’t perfect. “Part of what makes the Philippines a success where outsourcing is concerned is luck. You’ll need to work on developing your native talents to take advantage of this wonderful opportunity. But what a lot of Filipinos lack, at least in my opinion, is this greatness of spirit, a sense of entrepreneurial adventure, that willingness to invest in something promising without the guarantee of immediate returns.”

Greatness of spirit indeed; visions drive change, and Tully believes in this firmly. Several days later, at the Mandarin Oriental’s Acacia Room, at a John Clements-sponsored event attended by government and business leaders,  Tully lets the facts speak for themselves.

Knowledge Process Outsourcing Defined
Knowledge Process Outsourcing (KPO) is a subset of Business Process Outsourcing, in that it also takes on outsourced processes but requires more highly-skilled, analytically adept workers. Because it is a step up in the value chain, KPO billing rates are two-and-a-half to four times more than regular BPO rates.

This subset of BPO grew for three reasons, beginning with a desire in buyers to lower the costs of high-salaried services, as labor cost arbitrage is much higher for KPO work than for BPO work—as much as 6:1 to 7:1 for KPO work against 3:1 for BPO work. The cost differential is also more substantial for KPO than for BPO. PhDs and engineers in India have a US$ 60,000 to 80,000 cost differential from their US counterparts, for example, generating greater savings for similar work at similar competency levels.

Offering Greater Value
The second reason for the growth of KPO is India moving up the value chain, as it is expected to become too expensive a destination for low-end services. Indian BPO salaries have been increasing at a rate of 14 percent per year—doubling every six years.

Lastly, there is greater potential revenue per worker with KPO, with average billing rates of US$ 35 to 40 per hour for KPO vs. US$10 to 14 per hour for BPO work.

Demanding Expert Talents
Naturally, KPO requirements are more demanding than those in traditional BPO operations. Traditional BPO is transaction-focused, information-oriented, structured, and rules-based. BPO mostly needs the general skills of recent baccalaureate graduates. It does place a high degree of importance on information security and high quality standards.

KPO, on the other hand, focuses more on analysis, is knowledge intensive, unscripted, and depends largely on interpretation, judgment, and creativity. Specialization and domain expertise are KPO cornerstones, with its workers a mix of experienced professionals, graduates with advanced degrees—MDs, JDs, MBAs, and PhDs—as well as recent baccalaureate graduates. Information security and intellectual property protection are of extremely high importance, given the confidential nature of the work involved. Lastly, quality standards must meet or exceed Western standards.

Bringing in More Revenue
The tradeoff is that KPO affords significant revenue opportunities. KPO is projected to grow to US$ 17 billion globally by 2010, and India anticipates snagging 70 percent of this revenue. The Philippines—if it pursues KPO business in a coordinated fashion with resolve and intelligence—could achieve a 5 to 10 percent share. This translates into US$ 850 million to US$ 1.7 billion in revenues—equivalent to 1 to 2 percent of GDP.

The Philippines in the KPO Picture
But where exactly does the Philippines fit into the big picture of KPO? The Philippines now is clearly on the global BPO map: Metro Manila has the highest number of BPO workers of any city in the world.  After years of being a BPO afterthought, the Philippines now is routinely mentioned in the same breath as India and China when providers discuss top BPO destinations. The country’s BPO presence is still predominantly voice-based customer care, for which it is increasingly viewed as being best-in-class.

It is this contact center work and the credibility it gives the Philippines that will provide a base for entering the next phase of offshoring, Knowledge Process Outsourcing. To develop a position of strength in KPO, the Philippines will need to undertake the following measures:

• Continue to perform well as a location for customer care work, which helps to build Brand Philippines and helps to build investor confidence in the country;
• Develop a marketing program that targets the key providers of KPO services;
• Create incentives for there to be more graduates with advanced degrees in KPO-related disciplines where the Philippines has gaps (such as mathematics);
• Capitalize on BPO location opportunities in several cities in the provinces.  The provinces afford opportunities for BPO participants to redress the manpower supply issue in Metro Manila and expand their operations.

Currently, the Philippines generates US$ 3.6 billion in revenues from Business Process Outsourcing; this accounts for 3 percent of GDP. The industry is experiencing fast growth, growing by 50 percent in 2006 alone, and has achieved a global market share of 4 percent. Within this industry, KPO accounts for a modest portion of the total, estimated to be US$ 200 million and about 5 percent of the country’s total BPO revenues. Animation and engineering design account for most of the KPO work currently being done in the Philippines.

The Philippines’ KPO Strengths: The Big Four
KPO conceivably could occur in any analytical, creative, knowledge-based service, but thus far has been concentrated in nine functional areas. The Philippines is strongest in four KPO areas: Finance & Accounting Outsourcing, Human Resources Outsourcing, Creative Development, and Engineering.

Finance & accounting outsourcing, or FAO, involves processes like accounting, budgeting, forecasting, treasury, risk management, and management reporting and analysis. There is a large pool of accountants to draw from for this type of KPO work, as the Philippines currently has 103,000 accountants. This is nearly equal to the number of accountants in India, a country which has twelve and a half times the population of the Philippines.

Human resources outsourcing—HRO—includes benefits management and high-end training and development. Filipinos’ language skills, cultural affinity for the west, and empathic nature make them a natural for this kind of work.

Creative development, one of the stronger offerings the Philippines has as far as KPO work is concerned, ranges from animation and content development to e-learning development. Entertainment and publishing companies are the main clientele for such outfits. Filipino creativity has resulted in the country’s strong position in this field of KPO work.

Engineering—mechanical, electrical, civil, and chemical—are all outsourced to the Philippines, given the large number of engineers it produces each year—over 280,000 in 2006—and the high regard for Filipino engineers worldwide. The country has a market in automotive, aerospace, and oil & gas engineering.

The Philippines’ KPO Presence: Those Next in Line
There is also a Filipino presence in three other KPO fields: Business Research and Analytics, Logistics, and Legal Services.

Business research and analytics deals with processes like financial research, financial modeling, data mining, market research, competitive intelligence and patent search. Industries served by this kind of outsourcing are in financial services, legal consulting, and in general industry. There is a modest number of MBAs in the Philippines, with almost 5,000 produced in Academic Year 2005-2006. The country may be spotty in analytics, but the presence of this many MBAs, not to mention the fact that one-third of all yearly graduates have business degrees, suggests potential for more growth.

The Philippines’ KPO Deficiencies: Those that Need Strengthening
There is a distinct lack of Filipino presence in the areas of scientific research and medical services. This is also reflected in the number of people in science and math courses in the local universities. For the academic year 2005-2006, there have only been only 128 masters and 18 doctorates in the Natural Sciences, and Mathematics has a minuscule 85 masters and eight doctorates.

Higher mathematics and advanced natural sciences—not just engineering and accounting—are necessary to take advantage of the Research & Development opportunities in KPO; the dearth of specialists in these areas will make it difficult for the Philippines to capture a large share of advanced analytical and R&D work

BPO entrepreneurship is also weak in the Philippines, with the notable exception being animation.

The Labor Pool Challenge: Issues and Questions
There are about 1.1 million registered Filipino professionals, according to the Professional Regulation Commission.

There are over 280,000 engineers in their registry, as well as nearly 600,000 health care professionals. Despite this, growing the talent pool is the primary issue for the Philippines to grow in KPO. Among various issues the BPO industry in the Philippines needs to address, talent takes the longest to develop and requires the highest degree of coordination among disparate sectors: business, academe, government. This is particularly true when talent needs to be upgraded to meet more exacting standards of KPO providers, as the recent near-hire training program sponsored by Philippine President Gloria Macapagal-Arroyo and executed by the Technical Skills Education and Development Authority (TESDA) and various BPOs attests. It is also an issue given that competitor countries are also looking to raise the education bar.

The Philippines’ advantages remain, however: English language skills, an empathic nature, a happiness that is grounded in its culture, and an affinity with Western culture. These, however, will not by themselves be enough to stake out a superior position in KPO.

A more immediate issue, the limited availability of “A” commercial space in Metro Manila and the provinces, will get resolved in the intermediate-term.

When it comes to training, developing, and retaining talent, however, there are more questions than answers:

What can be done to retain talent within the Philippines—rather than simply watching the brain drain to other countries?

What educational initiatives are necessary for the Philippines to sustain its growth in customer care and to position the country for growth in KPO?

What combination of standards, teachers, and money will have the greatest impact?

How can there be a substantial increase in people with high proficiency in the English language?  How can we ensure that students not only learn written and spoken English but also have superior listening and comprehension skills?

What needs to be done to ensure that English language teachers have appropriate levels of English language proficiency and are employing teaching methods that clearly advance students’ ability to converse in English?

Are there new degree or certification levels in areas such as accounting that will help ensure an adequate supply of qualified KPO workers?

What can be done to develop a more robust entrepreneurial spirit in the Philippines so that more BPO and KPO companies are owned and operated by native Filipinos?

Among the various types of KPO, are there ones the Philippines should tag for support and development?

Are there KPO activities that play to Filipino strengths, that will enable the Philippines to stake out a position of distinct competitive advantage, and that have high growth and profitability potential?

What kind of support should these areas have from government and academia?

In the final analysis, it will take more than momentum to develop the Philippines’ KPO capabilities and take full advantage of this next stage in global outsourcing. What’s required is vision and the endurance and resolve to pursue that vision. Once more, the entrepreneurial spirit Tully Moss mentioned becomes more necessary than ever, because this spirit of expansion will open doors and will keep them open. The past few years have seen the Philippines put a foot in the door with Business Process Outsourcing. Now the challenge lies in taking the next step to move up the value chain towards Knowledge Process Outsourcing, and in taking that next step raise the bar for Filipino graduates, professionals, and even the Philippines itself. All that remains is to see if anyone will answer the challenge.