In this BPO Corner:
In Our Outsourcing Image: The Philippines
By Tully Moss, president, The Magellan Alliance

India is the country nearly everyone associates with outsourcing, but what’s the second country that comes to mind? Ask that question to a roomful of business or technology executives, and the answer is less predictable. There are more than 30 countries vying for a share of the outsourcing pie, and in terms of corporate mind-share, there doesn’t appear to be a clear second choice.

But if you look at market share—measured in terms of numbers of people employed in IT-enabled services such as call centers, back-office processing, and finance and accounting, the Philippines is clearly No. 2. India has approximately 350,000 people working in IT-enabled services. The Philippines—with one-twelfth the population of India—has more than one-third of that number: Nearly 135,000 Filipinos work in IT-enabled services. No other country comes close. Ireland is No. 3, but it has fewer than half the number of people working in IT-enabled services than does the Philippines.

What’s happening in the Philippines? For one thing, every one of the largest U.S.-based call-center providers has discovered the Philippines and established a presence there: Convergys, ICT, Sitel, Sykes, and West are all there. Call centers in total employ nearly half of the Filipinos working in IT-enabled services. This number more than doubled over the past year. Other IT-enabled services—animation, medical transcription, litigation support, captive accounting services, insurance claims processing, and other outsourced services—are also being positioned in the Philippines.

The attractions of the Philippines include population, a large number of English speakers, and personality. If you look at the world outsourcing map, among those that currently are serious contenders for customer-care outsourcing such as call centers, the nation with the second-largest population where English is widely spoken is the Philippines. With more than 80 million people, the Philippines is, after India, the largest nation that is a significant player on the world outsourcing stage.

There are other nations with larger populations. China has the largest population of any country, but the English language capabilities of its citizens are, for now, limited. There are nations within the Commonwealth of Nations, former colonies of Great Britain where English is still widely spoken, that are larger. Pakistan, for example, has in excess of 100 million people, as does Nigeria. But, there are issues that, for the moment, limit the attractiveness of these nations as outsourcing destinations. If you want low-cost, educated, English-speaking workers, the Philippines currently is your next best source after India.

Visitors to the Philippines are taken with the warmth, friendliness, and courtesy of the Filipino people. This personality carries over to Filipinos’ work as call-center agents and in other customer-service functions. Filipinos have developed a reputation in the call-center industry as being highly caring, quick to master an American accent, and speaking empathetically when answering a customer complaint.

Risk and Reward

In our discussions with nearly 20 outsourcing operations in the Philippines, we were struck by how many of them indicated that the Philippines, in the context of all nations that the outsourcing party operates in, stands out as best-in-class for customer care. There are reasons that Accenture, AIG, AOL, BellSouth, Citibank, Dell, Earthlink, HSBC, and others rely on Filipinos for a significant portion of their customer care. Those operating in the country give Filipinos high marks not only for their warmth and courtesy, but also for having a good work ethic, for being educated and receptive to training, and for displaying a cultural affinity with the U.S. (the Philippines was a U.S. colony for nearly 50 years and evidence of U.S. culture is widespread in the Philippines).

For all of its benefits, the Philippines present some significant challenges, as do most developing nations. There are reasons these nations are relatively inexpensive places to do business: There are dangers and inconveniences in all of them. In the case of the Philippines, the issues are ones of political stability and personal safety. In terms of personal safety, the Philippines is like many places (including some of the larger cities in the U.S.): There are areas where you’re safe and there are places you’re better off avoiding. The U.S. State Department provides clear guidelines about places to avoid in the Philippines.

When people think of political instability in the Philippines, many think of terrorism. But, this is unlikely to be a source of radical instability. Filipino terrorists are fringe elements who, unlike terrorists in the Middle East, do not have broad sympathy in the larger Filipino population.

A more important barometer to watch may be financial stability. The sovereign credit rating of the Philippines has been pegged at three levels below investment grade by Standard & Poors, and four levels below investment grade by Moody’s. The government is well aware of what needs to be done to address this situation, beginning with a more vigorous approach to collecting taxes. Whether the government has the backbone to successfully execute programs designed to strengthen the nation’s financial position will be determined over the next couple of years. If it does, the Philippines have reasonable prospects for gradually returning to a stronger financial position. If it does not, the issue of political stability is likely to become more significant.

For all its problems, the Philippines remain an attractive destination for those who outsource. During a month-long stay in the Philippines, we interviewed the heads of most of the leading BPO providers, captive services, and call centers operating in the Philippines. Not only were they committed to staying in the country, all of them were planning to expand their presence in the country. Why? All of them are pleased with the performance of their Filipino workers and reaping substantial cost savings from their Filipino operations.

The Filipino government has taken several steps to help companies achieve desired cost savings and to help make the Philippines a hospitable place for foreign direct investment. Government incentives—in areas such as income tax holidays, foreign ownership of Philippines-based companies, deductions for training expenses, and duty exemptions on capital equipment—are on a par with those of other Association of Southeast Asian Nations (ASEAN) countries. In other free market initiatives, the country’s telecommunications, banking, shipping, and insurance industries have been deregulated.

This has reaped benefits for outsourcers. The Philippines telecommunications system, for example, has become one of the most robust in Southeast Asia. A deregulated, highly competitive telecommunications industry in the Philippines has yielded lower international transmission costs than India’s. There are digital fiber-optic backbones running the length and the breadth of the country (although last-mile issues exist outside of the largest cities), and the nation has multiple international links. In virtually every city, there are two major and several secondary providers of digital telecommunications, and redundancy is widely available—not only within a given provider’s system but also by having two suppliers providing separate systems.

In terms of other basics, the Philippines is similar to the leading outsourcing destination—India. Labor costs tend to be on a par or somewhat higher than those in India, depending on the type of position. But telecommunications and real-estate costs usually are lower in the Philippines. The Philippines tends to be ranked similar to India in terms of intellectual property protections (but much higher than China). And it takes about as long to fly from New York to Manila as it does to Bangalore—20 hours give or take, depending on the airline and route taken.

The greatest untapped outsourcing opportunity in the Philippines may lie in its large pool of accountants. There are as many accountants in the Philippines as there are in all of India, and, again, the Philippines has only one-twelfth the population of India. Some savvy captive operations are tapping into this talent pool. Caltex has had an accounting back-office operation in the Philippines for several years. Within the past year, Shell also has opened a back-office accounting operation in Manila. SPI, the largest Philippines-headquartered BPO operation, has recently established an finance and accounting (F&A) operation.

The biggest challenge currently being faced by those with outsourcing operations in the Philippines is a tightening labor pool. The explosive growth in call centers has generated a large demand for recent college graduates with high proficiency in spoken English. Filipino colleges graduate 405,000 people annually, virtually all of whom speak at least some English. But those who meet the exacting standards of the better-run call centers and who also are willing to work nights (the Philippines is 13 hours ahead of Eastern Standard Time) constitute a more limited pool of applicants.

The challenge to find qualified applicants is driving call-center operators to three things: training, tie-ups with local colleges, and recruiting in the outer provinces. Some call centers are engaged in near-hire training—taking candidates whose English language proficiency is close to acceptable and providing them with the training that will quickly bring their English language proficiency up to an acceptable level. Call centers are also forging ties with local colleges by helping them develop elective courses that teach skills needed in the call-center industry.

Recruitment in the outer provinces—areas outside of metro Manila—is being pursued by a handful of the larger call centers. The outsourcing industry in the Philippines is concentrated in metro Manila, which has a population of more than13 million and is one of the largest cities in the world. But savvy participants in the Filipino outsourcing scene are identifying cities and provinces in outlying areas as either sources of talent or as places to locate their next facility. John Clements Consultants, the Philippines’ largest recruitment and human-resources consulting firm, is finding far higher percentages of applicants in the outer provinces who meet the oral proficiency requirements of call centers than in metro Manila.

As the Philippines moves forward, it has significant potential for growing its outsourcing employment. This is particularly true in areas involving moderately sophisticated customer contact, accounting skills, and transaction processing. It will need to enhance training and education to ensure that the issue of having enough individuals with a high proficiency in English is addressed. And it will need to expand its position in transaction processing and other forms of business-process outsourcing. Other modest changes, such as extending tax holidays, will further enhance the attractiveness of the Philippines as an outsourcing destination. With these initiatives and with reasonable political stability, the future is bright for this up-and-coming outsourcing destination.

For further information about the services of The Magellan Alliance, please contact:

MR. TULLY MOSS
President
The Magellan Alliance
203-261-7731
tully@magellanalliance.com