Economic Update

Published 12 Feb 2013

Although India has long dominated information technology outsourcing (ITO), the Philippines is fast making up ground by carving itself a place as an alternative destination for offshore IT service providers.

Data issued by the Industry Development of the Information and Communications Technology Office of the Department of Science and Technology shows that the Philippines has the third-largest pool for IT work in the Asia-Pacific region, while its ITO costs rank among the lowest in the world.

However, while the Philippines is well placed to tap into growing global demand for ITO, analysts say the government will need to increase its support for the sector by improving infrastructure and shifting more focus on to education, if momentum is to be maintained.

Under the government’s IT-Business Process Outsourcing (BPO) roadmap 2011–16 issued in November 2011, the combined sector is forecast to earn up to $25bn in 2016, providing jobs for around 1.3m Filipinos. While BPO will remain the largest contributor in terms of revenue and job creation, ITO is expected to increase its role, with some estimates suggesting it could double its current earnings of around $2bn by 2016.

The progress that the Philippines has made in strengthening its position as a leading ITO destination was evident in a report issued by IT and outsourcing consultancy Tholons, which lists the world’s top 100 ITO hubs each year.

Manila moved up to third place behind Bangalore and Mumbai on the list, replacing Delhi and thus breaking India’s monopoly on the top three spots. The Philippine hub of Cebu City also rose one place to eighth in the rankings, while five of the country’s other centres made it into the top 100.

Joel Mari Yu, managing director of the Cebu Investment Promotions Centre, said on January 16, he believed the city’s strong performance was due in part to its large pool of skilled workers. “Labour availability, especially quality, are among the criteria in selecting these top destinations,” he added. “Tholons believes that one of the best value propositions of an outsourcing destination is its people. Since Cebu is an IT and academic hub in the southern Philippines, Cebuano workers are appealing because many of them can perform complex business tasks.”

While Tholons’ findings suggest that the Philippines is edging towards the targets laid out for the industry in the government’s roadmap, Gregg Victor Gabison, president of the Cebu Educational Development Foundation for IT, said more needs to be done if the country is to continue moving upwards in the ITO global rankings.

He said more graduates were required. “We also need an open-minded industry extending its resources to academia and third, we need a government that is facilitative and investment friendly,” Gabison told local media in late January.

Analysts have called for the government to increase spending on infrastructure such as power supplies and communications links, which they say will facilitate and attract further investment in ITO. They have also highlighted the importance of offering more incentives to companies operating in the sector, such as lower income tax rates.

One of the advantages the Philippines ITO sector enjoys over its rivals is its easy access to the US market, bolstered by shared languages and historical and cultural ties. The Philippines’ ITO sector also offers a strong financial incentive for US trade, with costs estimated to be up to 70% lower than those incurred by American firms not outsourcing, according to Salil Dani, practice director at outsourcing advisory and research firm Everest Group.

Dani also highlighted the growth potential that ITO held. “The Philippines’ current IT/IT-enabled service market is $14bn, of which IT is only $2bn. But remember, a few years ago the total market was barely $7bn. Look at the way it’s catching up,” he told the Times of India on January 22.

With continued support, Manila and Cebu are well placed to keep up the pressure on the Philippines’ ITO rivals in the medium term. Their rising status also indicates that while business processing and other outsourcing segments have dominated the sector to date, ITO is fast becoming a major contributor to the economy.