Rarely has a new industry traced the trajectory from concept to prime economic driver as quickly as business process outsourcing (BPO) has in the Philippines. In a very short time span, BPO has grown from a handful of contact centres to a global back-office resource hub and call-centre capital of the world, drawing jobs and investment from all corners of the globe along the way. In fact, if the BPO sector sustains its annual average growth of 15-18%, it could soon surpass the annual $25bn in revenue contribution made by remittances from overseas Filipino workers (OFWs).
History
The Philippine BPO success story trades on many of the country’s key advantages, but two are of prime importance. First, it is unlikely the BPO industry would be the powerhouse it is today without a human resource (HR) base made up of a youthful, 95% literate population, armed with good communication skills – crucially, proficiency in American-accented English. Second, without the 1995 establishment of a special economic zone (SEZ) offering tax incentives and low rates on leases to call-centre operators, the industry might have faltered or failed to take root.
The importance of the latter factor is clear from its early history. Just two years after the SEZ was established, it attracted its first multinational, Sykes Asia. The industry began to gain traction swiftly after this, attracting both the forerunners to and the current who’s-who of the BPO industry in the Philippines. The country’s first outsourcing facility began operations in 1999, when the HSBC-owned Cyber City opened at Clark Air Base, a former US air force base, now an international airport and free zone. That same year, eTelecare, the country’s first call centre, was established. Two years later, US firm PeopleSupport moved its operations – and 8400 jobs – to the Philippines, and ePLDT Ventus, a subsidiary of the Philippine Long Distance Telephone Company (PLDT), was founded. ePLDT Ventus would go on to launch the country’s first data centre, spurring development of the thriving data-driven IT-BPO industry that leads its economy today. In 2000, Sitel opened its Philippine operations, eventually expanding to nine offices in the country. Finally, in 2003, the Ohio-based Convergys Corporation joined up with two call centres; it now operates out of 35 offices in the Philippines. By 2011, BPO had become one of the Philippines’ leading private-sector employers, generating some $11bn in revenue and employing 638,000 Filipinos.
Economic Impact
The BPO sector’s contribution to GDP has risen in tandem with the number of companies setting up operations in the country. The industry accounted for just 0.075% of GDP in 2000, rising swiftly to reach 2.4% in 2005, 4.9% in 2011, and 5.4% in 2012. Its estimated GDP contribution was 6% in 2015, with expectations that it could contribute up to 9% of GDP in 2016, according to the IT and Business Process Management (IT-BPM) Roadmap for 2012-16 published by the industry group IT and BPO Association of the Philippines (IBPAP).
A steady upward trend has continued in the industry’s record for revenue generation. According to industry analysts, revenue from the country’s BPO industry grew 10-fold from $1.55bn in 2004 to 15.5bn in 2013, reaching an estimated $18bn in 2014. In its IT-BPM Roadmap for 2012-16, the IBPAP forecasted that annual revenue from the IT-BPM industry could more than double from $9bn in 2010 to $25bn in 2016, a 10% share of the global market. Meanwhile, property consultancy CB Richard Ellis (CBRE) projects BPO revenue could double to $50bn by 2021.
Going from strength to strength, the BPO industry’s record for job creation has experienced a similar rise, from 101,000 employees in 2004 to 900,000 in 2013. Indeed, IBPAP projects that 372,000 new jobs will have been created in the BPO industry between 2014 and 2016 and has targeted an employment figure of 1.3m Filipinos by 2016. Furthermore, IBPAP estimates that the number of BPO employees could reach 3.3m in 15 years, while CBRE projects the BPO industry will add 105,000 employees every year.
“The Philippine BPO sector will continue to thrive in the coming years,” Rick Santos, the chairman of CBRE Philippines, told the local press in October 2015. “The country provides a conducive environment for foreign investors – an excellent pool and low cost of skilled labour, outstanding customer service, a quality destination and one of the cheapest rental rates and highest yields in Asia.”
In terms of total revenue, employment and export sales, voice-centric services such as call centres still dominate the BPO industry in the Philippines. But there are indications that the industry is already expanding into the next level of outsourcing: knowledge process outsourcing (KPO). KPO comprises back-office services such as health care processing and coding, legal transcription, IT outsourcing, and animation and game development. Additional services such as data analytics, business and financial research, mortgage servicing, software development, legal process and patent research, and engineering comprise many rich seams of potential KPO employment opportunities that are already attracting the attention of multinationals and OFWs. Indeed, the future of the industry may have already arrived in the form of KPO, which is already employing about 200,000 Filipinos (see analysis).
Workforce
The country’s higher education institutions produce 500,000 English-speaking college graduates per year, providing a steady supply of potential BPO employees with skills matched to industry needs. This equips the BPO industry with a key advantage over its main competitor, India. Indeed, a 2015 study by the Philippine Institute for Development studies found that the Philippines produces one suitable graduate for every two produced in India.
To ensure the sustainable growth of this supply of skilled workers for the industry, IBPAP, in concert with the Commission on Higher Education (CHE), created the Service Management Programme (SMP). A specialised course for students studying for careers in business administration, management or IT, SMP is designed to assist students in acquiring the skill sets required to gain an entry-level position in the IT-BPM industry. Included in the SMP is the “train the teachers” programme, which ensures the development of a critical mass of teachers trained for proficiency in teaching IT-BPO subjects to meet the IT-BPO industry’s standards. Since 2013, SMP has been rolled out across 17 state universities and colleges, and it has been expanded to private universities as well.
Looking beyond the BPO industry’s labour requirements to those of KPO, it is clear that students desiring a career in KPO will have to develop a different and enhanced set of skills for the KPO industry to have the steady source of human capital that BPO already has. Key here is having an informed student populace, because the choices students make about what to study will determine whether they can provide the additional skills demanded by KPO.
The good news is that many students already base their decision of what to study on the type of career they hope to enter when they graduate, as well as the number of employment opportunities available in each sector. Studies show that currently, more than half of Filipino graduates have earned medical degrees in areas such as nursing, while engineering, IT, business, accounting, and related fields make up another 40% together. These are all skill sets that will be very much in demand as KPO gets under way.
Services Expanding
Multinationals have shown strong interest in setting up shared services offices in the country. Shared services are a system under which the operation and administration of an organisation’s specific operational tasks – such as accounting, payroll, HR, legal and IT – are rolled into one entity, and in this case it is off-shored to save on costs. CBRE has named banking firms such as HSBC, Standard Chartered, Capital One, Citibank, and JP Morgan, as well as enterprise solutions and software firms like Accenture, Oracle, Microsoft and Dell as among those interested in expanding their BPO operations in the Philippines to include shared services. Non-voice BPO operations are also coming in for more demand. While the US has been the major export market for Philippine BPO firms as well as the major country of foreign investment in the Philippine IT-BPO sector, most of its demand has been for call centre (voice) BPO. However, demand from Japan and the EU has been increasing, mostly in relation to animation and software development services.
Top Of The Charts
Although India remains the overall leader in many global BPO rankings, according to consultancy Tholons’s “Top 100 Outsourcing Destinations” report, Manila was the number-two outsourcing destination for call centres (after Bangalore but ahead of Mumbai, Delhi and Chennai) in 2014, and Cebu was number eight. The 2014 A T Kearney Global Services Location Index ranked the Philippines seventh place, up from ninth the previous year, calling its industry a “powerhouse” and “one of the most sophisticated in the world,” and its qualified labour force “one of the deepest.” It sees the Philippines’ BPO industry “expanding into higher value-added voice services as well as into IT and BPO offerings”.
Meanwhile, Cushman Wakefield’s BPO and Shared Service Location Index placed the Philippines second (after Vietnam) in its 2015 index. The index is weighted to evaluate and measure each country’s relative cost, risk and quality. Because cost is a prime determinant for many companies’ decisions about where to locate their BPO offices, countries that scored well on costs appear in the top half of the index, making the Philippines the second most price-conscious choice.
Manila & The Next Wave Cities
Office rental prices are on the rise in some of the most attractive business areas of Metro Manila, such as Makati and Cebu, where almost 70% of BPO service providers are located. Real estate services firm KMC MAG Group has projected growth of 5-7% for rents and capital values in Metro Manila in the year to September 2016. According to KMC MAG, Metro Manila’s financial district, Bonifacio Global City (BGC) will supply half of the 2m sq metres of new office space in the market until 2018, with a 3-5% increase in BGC’s rents and capital values occurring over the year to September 2016.
Because the outsourcing industry is so price-sensitive, any increase in rental prices has the potential to adversely affect the industry’s critical need to provide a prime location for outsourcing based on a positive ratio of cost (such as office rents) to quality (availability of a skilled labour pool). In addition, the various natural disasters regularly experienced by the country make it strategically wise to distribute operations across the country: if a flood cuts the power in Manila, for instance, it will likely still be on in Cebu.
Given these considerations, the industry is proactively laying the groundwork to expand into alternative locations, dubbed the Next Wave Cities. These include Baguio, Bacolod, Clark, Cavite, Cagayan de Oro, Davao, Iloilo and Laguna. Outside of Manila, a wealth of talent exists, in addition to the benefit of lower rental prices. This includes but is not limited to engineers in Pampanga, finance and accounting agents in Laguna, and medical professionals and practitioners across the provinces of Visayas and Negros, all of whom have the potential to help diversify and develop the industry from BPO to higher-paying, value-added, knowledge-intensive services. Alfredo Marañon Jr, governor of Negros Occidental, told OBG, “Increasingly, the services sector has been a major driver for economic growth, diminishing the dependence of a province like Negros Occidental on agriculture. The strong conversational English capability and lower price point has generated a lot of interest for BPO players willing to move away from the saturated Metro Manila and enjoy lower attrition rates in key provinces and cities, provided – as we are doing in Negros Occidental – that the adequate infrastructure, human resources and local government support are put in place.”
New Rules
Two key legal acts have underpinned the positive legal and regulatory atmosphere in which the IT-BPO industry operates, reinforcing the Philippines’ reputation as a secure and reliable offshoring destination and boosting investor confidence. One of these, the Data Privacy Act of 2012, penalised the unlawful use and disclosure of personal information collected by the government and the private sector. The act aligned privacy standards with those of the Asia-Pacific Economic Cooperation Information Privacy Framework and European Parliament.
The other, the Cybercrime Prevention Act of 2012, provided the legal framework and resources to identify, prevent and impose punishment for internet-based crimes, adding another level of protection against online theft and fraud. This is particularly relevant to the IT-BPO industry because, as a rule, these companies use the internet and computer technology to carry out their operations. The BPO industry benefits from the law’s provisions on protection for data, devices and systems as well as the penalties incurred by cyber-criminals for computer-related offenses.
ASEAN Integration
Integration into ASEAN presents the country’s IT-BPO sector with a unique opportunity. With some help from the government and the education system, the sector could find itself at the forefront of the country’s contribution to economic integration and growth in ASEAN through cross-border trade of IT-BPO services. Although proficiency in the English language has been a key component of the country’s success in BPO, it could present an obstacle as the Philippines prepares to integrate into and enter ASEAN markets. In few other ASEAN nations is English so widely spoken, and none speak it so widely or so well as Filipinos. So when it comes to providing BPO and other outsourcing services to ASEAN nations such as Cambodia, Thailand or Vietnam – or providing BPO services to multinationals operating in many countries and wishing to consolidate their operations in one place – Philippine BPOs could lose their competitive edge. However, there is a potential upside to this as well. “We are already known as a call centre capital of the world, we already have the expertise, so a lot of companies are saying, ‘We’re doing this in my North American operations; why don’t we do it in our Asian operations and consolidate in one location? … Logically we can do it in the Philippines,” Jose Mari Mercado, the president of IBPAP, told local press in June 2015. “With the ASEAN integration, it will be easier for us to attract Thai-speaking agents to come to the Philippines and be part of the workforce here.”
In October 2015, Mercado took the regional shared service facilities concept further, telling reporters there could be an opportunity in offering a multi-language BPO platform and suggesting that the CHE could help the industry by deciding which ASEAN language the Philippines’ schools should concentrate on teaching in order to provide the best BPO service. “The opportunity is there from an attractiveness perspective in terms of location, but the challenge is we don’t have the language capabilities,” Mercado said.
Sector insiders think that integration can only spell better times for the Philippine IT-BPO sector. “With ASEAN expected to grow by $2.78trn in 2017, the integration will only ramp up activity and interest in BPOs. There is a wealth of opportunity for the Philippines to establish its seat with the top economies given the growing middle class, robust domestic consumption, rising retail activity, and sustained growth in manufacturing,” Santos told local press.
Slow To Load
One issue on which everyone in the industry agrees is that the country’s internet access speeds are not fast enough to sustain the industry’s growth. The country’s connectivity speed ranked 21st among 22 Asian countries and 176th out of 202 total countries as of May 2015, according to the Net Index report, an index of web connectivity published by internet metrics company Ookla. The average download speed was 3.64 Mbps, far below the world average of 23.3 Mbps. Recognising that poor internet connectivity could act as a drag on investor confidence in the sector, lawmakers have filed a bill requiring telecoms firms and internet service providers to provide a minimum connection of 10 Mbps for mobile broadband and 20 Mbps for fixed wireless broadband access. Companies failing to provide these speeds would incur fines of up to P2m ($44,400).
Outlook
BPO shows no signs of dimming in the near future. As long as the government continues to provide a supportive business and regulatory climate, the education system continues to educate appropriately skilled workers, and the industry invests in building for the future, there is no reason why IT-BPO should not meet or exceed its targets.
Fixing the one major problem – the country’s slow and expensive internet infrastructure – should not amount to an insurmountable obstacle, Greater connectivity will lead more and more businesses to consider relocating to the Philippines. Updating this network will provide benefits and value not just to the BPO sector but to the economy and society at large.
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