BPO firms are expanding into secondary and tertiary cities in the Philippines

As the Philippines is the second-largest BPO destination in the world, holding at least a 12% share of the global market, it is no surprise that Manila, as the country’s commercial epicentre, has become a top destination-city for hosting offshore service providers. A study by research group Tholons ranked the top 100 outsourcing destinations by city, placing Manila in second for 2014, behind only Bangalore. Manila moved up one spot in the rankings from the previous year, overtaking the city of Mumbai in India, which has historically been the stronger BPO services providing nation of the two.

Several other Philippine cities ranked well, too. Cebu, which is home to 20 BPO firms and a BPO workforce of around 200,000, made it to eighth place in the global table. The cities of Davao ( approximately 20,000 workers), Bacolod (around 20,000), Iloilo (2000), Santa Rosa and Baguio also appeared on the list, though all were ranked near the bottom end and are deemed to not yet fully register reputation-wise amongst international decision makers.

SPREADING THE WEALTH: Manila accounts for around 70% of all outsourcing employment, a concentration that the government would like to see reduced in order to contain the pace of urban migration and allow other parts of the country the opportunity to benefit economically from the BPO boom. Under the Next Wave Cities initiative formulated in 2010, 10 locations, four of which constitute suburban extensions of metro Manila, were identified as viable alternatives based on criteria related to worker supply, telecom infrastructure, a conducive business environment and risk management.

In order to raise awareness among companies that are potentially interested in the Next Wave Cities, the Department of Science and Technology - Information and Communications Technology office ( DOSTICTO) has been collaborating with the IT and Business Process Association of the Philippines (IBPAP), running roadshows and coordinating other promotional activities. So far, their efforts are bearing fruit. Manila’s share of Philippine BPO dropped from 83% in 2006 to 70% by the end of 2013. By 2016, the government is targeting a 60:40 split between Manila and the rest of the country, while aiming to put three more cities on Tholons’ top-100 list.

However, the Philippines is not the only player. China is seen as an emerging rival to the Indian-Filipino dominance of the sector, with three cities ranked in the top 20 of Tholon’s list, while Malaysia, a fellow ASEAN member, is raising its BPO profile.

CATCHING THE WAVE: Prospective investors relocating to the provinces are able to tap into location-specific incentives as well as concessions offered by IT parks accredited by the Philippine Economic Zone Authority. Yet the primary motivating force tends to come down to market realities. “All things being equal, incentives can come into play. But incentives cannot sway a decision if the infrastructure and talent is not in place,” Monchito Ibrahim, the deputy executive director at DOST-ICTO, told OBG.

According to IPBAP, offshoring to the Philippines is roughly a 25% more expensive proposition than locating in India, where 80% of ITBPO growth is being experienced in tier-two and -three cities. While the Philippines’ overall value proposition can be swung via offering superior quality and other desired attributes, as offshoring is by its very nature an exercise in creating cost arbitrage, diversifying the sector to more affordable locations outside of metro Manila provides alternatives to the more cost-conscious clientele. At a human resources level, there are cost savings and benefits associated with setting up in a less saturated location. Talent acquisition and retention costs can be reduced, while attrition rates are more manageable as there is less competition for labour and lower turnover, as workers save money by not having to move away from their homes.

Local real estate services firm and Savills affiliate KMC MAG Group, in an article published June 2014, anticipated Manila would face a shortage of 80,000 sq metres of office space by 2015, resulting in rental cost for premium office space increasing by 7%. Cebu is also projected to have its commercial property sector approach saturation in coming years, pointing to the need for BPO firms to consider other locations. For Cyril Rocke, the CEO of cloud provider DataOne Asia, beyond more favourable salary and rental outlays, other advantages that come with diversifying operations outside of the capital include avoiding metro Manila’s infrastructure congestion and expatriate management enjoying more amenable surroundings. “Many emerging cities, such as Cebu and Iloilo, offer more for employees in terms of quality of life and work environment.”

INCLUSIVE GROWTH: The provinces supplied Manila with a significant portion of its labour force needed for the rapid growth the city’s BPO sector over the past decade. As such, the Next Wave Cities initiative is considered a win-win for all stakeholders as it alleviates the socio-economic pressures associated with urban migration while promoting rural development. Employers benefit from a more captive workforce and are able to pay lower salaries, as they do not have to compensate for higher costs of city living, and higher disposable income levels in tertiary cities fuel growth in consumer sectors.

“The beauty of the BPO industry as a vehicle for rural development is that a unit can be set up as a greenfield project virtually anywhere. All you need is a committed local government unit that is willing to put up the infrastructure. Other industries, like tourism and agriculture, are limited in terms of location,” Dondi Mapa, the National Technology Officer at Microsoft Philippines, told OBG.

The Philippines is a natural landing point for submarine cables connecting South-east Asia and Japan, and these undersea links and routes provide a level of redundancy and security to the BPO industry, which is entirely dependent upon stable international connectivity. Although last-mile telephony connections outside of Manila, Cebu and major tourist areas are currently limited, if and when locators show a commitment to set up in emerging BPO centres, the expectation is that the telecom providers will soon begin to follow suit. “The private telecoms companies tend to focus their enterprise efforts on serving BPO firms, as they need good infrastructure and are willing to pay for it,” said IBPAP’s Virada.

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The Report: The Philippines 2015

BPO chapter from The Report: The Philippines 2015

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