The Philippines’ business process outsourcing (BPO) sector is an economic powerhouse and one of the largest white-collar employers in the country. It benefits from over a decade of pro-investment government policies, a young and well-educated workforce, and rising foreign investment in both third-party contact centres and global in-house call centres (GICs). The industry will soon surpass foreign remittances as the single largest contributor to GDP, driven by growth in the emerging segments of health care, analytics and financial services outsourcing. Although rising levels of automation and advancements in robotics and artificial intelligence pose a threat to low-level BPO jobs, strengthening development ties between industry and academia should see growth in high-value-added BPO positions over the medium term.
Investor Incentives
The Philippine BPO industry offers a number of competitive advantages to potential investors, including strong government support in the form of investor incentives and tax holidays. The Philippine government recognised the importance of developing its BPO sector as early as 2002, when Mar Roxas, then-secretary of trade and industry, lobbied Congress to amend Republic Act 7916 in order to allow office buildings to be registered as an “ecozone”, providing BPO investors an exemption from paying national and local taxes in favour of a 5% gross income tax.
Generous investor incentives remain in place today. The IT and Business Process Association of the Philippines (IBPAP), which represents 330 companies from the industry, reports that BPO investors benefit from a tax holiday or a four-year exemption of corporate income tax that can be extended to six to eight years, and the 5% tax on gross income in lieu of national and local taxes can be elected following the expiration of the original tax holiday. Other benefits include streamlined Customs procedures, simplified import and export procedures, and duty-free importation of capital equipment.
In addition, vocational training schools receive training grants, and companies may be granted exceptions on local taxes and permits, and pay no value-added tax on inputs. Foreign investors and immediate family members are also granted permanent resident status in the country.
Recent Performance
Although India remains the world’s most popular outsourcing destination, the Philippines has been the global leader in voice and call centre services since 2010, according to IBM’s “Global Location Trends 2010” report. That year, data from the Contact Centre Association of the Philippines (CCAP) showed employment in the industry reached 350,000 against 330,000 in India, while segment revenues stood at $5.7bn that same year versus $5.5bn in India.
Figures have since increased to 686,000 Filipinos employed and $11.7bn in revenue in 2014. The industry, which also includes customer support, software development and financial services, has risen to become one of the fastest-growing sectors in the country in recent years.
In 2015 US ource, a small group that provides clients with outsourcing needs, reported that the IT-Business Process Management (IT-BPM) sector – which includes IT, BPO and engineering services – saw industry revenues soar by 18.7% year-on-year to hit $18.4bn in 2014. Growth was even stronger in 2015, with IBPAP reporting that annual industry revenues reached $22bn that year, a 19.6% increase over 2014 and exceeding a target of $21bn.
IBPAP estimated there were 1.1m people employed in the industry at the end of 2015, with new jobs primarily generated in knowledge-intensive business services including computer and IT services, and research and development. The voice segment accounted for 69% of the IT-BPM industry in 2015, according to the Department of Labour and Employment (DOLE), employing two-thirds of the total.
Growth Forecast
IT-BPM revenue for 2016 came in at $22.9bn and employed approximately 1.15m Filipinos, driven by the expansion of GICs. While employment in the industry is forecast to reach 1.3m in 2017, US ource expects BPO revenue to reach $55bn by 2020. The central bank, Bangko Sentral ng Pilipinas, reports that the industry will soon overtake the value of remittances from overseas Filipino workers, which currently account for an estimated 10% of annual GDP. This view is supported by industry stakeholders. “We expect the industry will surpass remittances this year in terms of revenues, which is significant. We forecast a 10-15% growth rate for 2016,” Jojo Uligan, corporate secretary of CCAP, told OBG in late 2016.
The mid-term outlook is equally positive. IBPAP partnered with a host of sector players to draft a new industry roadmap spanning 2017 to 2022, which is the third in a series of five-year plans outlining the industry’s ongoing development strategy. The plan was completed in August 2016 and presented to newly elected President Rodrigo Duterte in October 2016. Roadmap 2022 envisions the Philippines increasing its share of the global IT-BPM market to 15.5% by 2022, up from the 12.6% it currently holds. Compared to US ource, the revenue forecast is more modest and projects a total of $38.9bn by 2022.
Challenges
Despite the optimistic medium-term outlook, the industry will grapple with some challenges over the coming decade. In the near-term, limited infrastructure development outside of Manila is weighing on growth beyond the capital (see analysis). Perhaps most significant, however, is the pressure that rising levels of automation are putting on a significant number of low-skilled BPO jobs, mandating new investment in skills training and infrastructure to support expansion beyond voice and call centre services. “The BPO industry has a major impact on the Philippine economy, which is why it is so important to plan for the potential risks and what the global trends will be,” Cyril Rocke, CEO of enterprise technology firm DataOne Asia, told OBG. “Regarding this business, the government must think five to 10 years ahead, because it affects every sector including real estate, retail and public transportation,” he added.
Labour Force
The Philippine labour market is one of the country’s most significant competitive advantages. A US colony from 1898 to 1946, the Philippines still has an education system that is closely aligned with that of the US, and students are taught in English. The country’s accounting, legal and regulatory processes are also based on US law, leaving graduates well positioned to complete work for US-based firms. The Board of Investments reported in July 2015 that 94% of the population is literate and 70% is fluent in English.
“The biggest asset of the Philippines is its talented workforce, not only for BPO, but for many other sectors as well,” David Rizzo, Asia-Pacific president of French outsourcing firm Teleperformance, told OBG. “Given its positive demographics and current population size, the country is well positioned to reap benefits should it provide the right knowledge workers to meet demand for services,” he added.
The worker pool in the country is expanding rapidly and labour costs are competitive. Roughly 550,000 people graduate from tertiary education in the Philippines annually, while labour costs in China are 1.9-2.2 times higher than in the Philippines, according to the “Global 50 Remuneration Planning Report 2015/16” from Towers Watson Data Services. PayScale, an online company that gathers salary, benefit and compensation information, reports that the average annual salary of an entry-level customer support representative is $4488 in the Philippines – less than in Malaysia or Mexico. Total employment in the BPO sector has grown from 525,000 in 2010 to over 1m as of late 2016, with the sector rising to become the most significant generator of white-collar jobs in the country. The trend is expected to continue, according to IBPAP’s Roadmap 2022, which forecasts that mid- to high-level skilled jobs will account for 73% of IT-BPM jobs by 2022, up from 54% in 2016. An additional 654,000 IT-BPM jobs are expected to be created in the country by 2022, and IBPAP’s roadmap forecasts that one in seven new positions will be generated by the industry.
Employment Shifts
Attrition rates, which have long weighed on recruitment costs, are also improving, although high levels of churn continue to consume a large amount of BPO company time and resources. “People are not leaving the industry, they’re moving from one company to another. We count these people as attrition per company, but in the industry overall attrition is quite low,” Uligan told OBG. “Average attrition, at least for the contact centre industry, used to be 59% or 60%, but that’s now down to 48%,” he added.
However, employment trends are forecast to undergo two major shifts. First, cities outside of Manila will steadily grow to comprise a much more significant proportion of total employment than they currently hold. The second trend, with more serious economic ramifications, is rising automation and artificial intelligence (AI), which is expected to eliminate a significant number of existing jobs, at least those less-specialised.
Automation Threat
Although the country’s well-educated, English-speaking workforce allowed it to surpass India in voice services, the Philippines is increasingly faced with rising automation and a widening array of service demands. IBPAP has forecast that non-voice services will comprise 52% of the industry by 2022, up from 45% in 2016. In August 2016 George Yang, CEO of start-up company AI Pros, told media that BPO’s “lower-value” segment – which comprises 72% of the total BPO workforce – could be replaced by robots and automation in the coming years. “The potential disruption caused by AI, automation and analytics is a serious concern. It will displace a lot of low-level work,” Jun Abo, vice-president of support shared services at outsourcing firm Transcom, told OBG. “We’re already seeing customers asking for omni-channel services, which means it’s happening now.”
Development Opportunities
At the same time, rising automation presents new opportunities for highly skilled IT-BPM work, which should promote development of a better-educated workforce. “What’s going to happen eventually, and has already been happening in some areas, is that AI will replace people. Not all things can be done by humans, and not all things can be done by robots. Robots can’t think. There are some processes that can be automated, but there will always be a more complex type of service that only humans can do,” Uligan told OBG. “I’m not worried about AI because I know innovation will create new employment opportunities.”
Other industry stakeholders echoed these sentiments. In August 2016 CCAP told media that the industry is well positioned to remain resilient through the global shift towards automation. The association reported that while 28% of current BPO activities are expected to be automated by 2022, mid- and high-skilled tasks requiring abstract human thinking will expand by 7% and 48%, respectively. Benedict Hernandez, president of CCAP, said basic data entry tasks are not the norm in the Philippine BPO industry, and noted that the association is conducting an inventory to determine the skill levels of BPO workers in the country.
In October 2016 Colliers International, a global real estate consultancy, released a report titled “Nots and Bots: Unboxing the Truth About Robotics’ Impact”, which stated that automation and robotics will not reduce employment or limit industry expansion – arguing that human services in both voice and product development is indispensable. Instead, automation and robotics could improve efficiency and enable companies to expand both their client and service base, with growth in high-value services offsetting automation of low-level tasks.
Real Estate Dilemma
The real estate consultancy instead argued that hard infrastructure poses the most significant challenge to future expansion in the country, noting that although rental rates for prime office space in Manila averaged $21.80 per sq foot in the second quarter of 2014, relatively inexpensive compared to other major urban markets in the Asia Pacific region, average rents jumped to $31 per sq foot in the second quarter of 2016, surpassing average office rental rates in Mumbai, the commercial capital of India. Although the new administration has targeted timely implementation of major transportation infrastructure projects, congestion and transportation bottlenecks are also driving up the cost of doing business, particularly in Metro Manila. New infrastructure spending could support development of alternative business districts, while mass transit upgrades are expected to spur development in Vertis North, a business district in Quezon City, and Altaraza, a township in San Jose del Monte, as well as Bulacan, according to Colliers International, which cited outsourcing companies as a major potential beneficiary of new road projects which could support growth in the emerging business districts of Manila Bay and Arca South.
The newly created Department of ICT’s planned national broadband network should serve to further support improvements to service quality and overall IT infrastructure, however, paving the way for new investment outside of Manila. Investors will also benefit from lower rental rates. Although office space in Metro Manila is still relatively cheap, prices soared from $21.80 per sq foot in quarter two of 2014 to over $31 per sq foot in the same period of 2016, according to Colliers International.
Training Initiatives
In a bid to bolster targeted labour market development, BPO stakeholders are increasingly working with academia to ensure the next generation of graduates is adequately prepared to provide new, high-level BPO services.
“Future access to a capable talent pool is one of the biggest risks that the industry faces as it moves towards the future,” Doug Almond, country manager for the Philippines at Sutherland Global Services, a New York-based BPO firm, told OBG. “Technology will not necessarily replace the total number of jobs, but will definitely require higher-trained employees that can perform in areas such as data analytics, information technology and health care.” While the Technical Education Skills Development Authority provides accreditation and training grants for BPO training centres, the private sector also plays a significant role in workforce development. In May 2013 IBPAP partnered with the Commission on Higher Education (CHED) to launch a new Service Management Programme designed to develop a large pool of educators able to train a market-ready BPO workforce. The programme was rolled out at the Polytechnic University of the Philippines, Cavite State University and Laguna State Polytechnic University which should help support further BPO investment outside of metro Manila.
The programme includes instruction in business communication, BPO fundamentals, computer literacy, service culture and systems thinking, as well as language proficiency training. It began after CHED issued a memorandum allocating P125m ($2.6m) to support expansion of a pilot programme launched in 2012. The initiative is notable because it was also undertaken in partnership with the private sector. The initial pilot programme, implemented at the University of Makati, Jose Rizal University and the Lyceum of the Philippines University, was supported by volunteers from companies including Dell, GE and HSBC Electronic Data Processing.
“We’ve talked about linkages for decades but now we’re actually doing it. In addition to the Service Management Programme, we’ve also launched on-the-job training internships, accreditation and certification initiatives, and new assessment programmes to ensure we’re attracting the right people. Right now between seven and 10 applicants out of every 100 are hired,” Penny Bongato, executive director for talent development at IBPAP, told OBG. “We would like to increase the number of those who get hired to double or triple the current hiring rate, supported by the various industry-academia interventions that we have in place and will be putting in place in the next six years, especially with the recently launched IT-BPM Roadmap 2022.”
High-Level Job Growth
These efforts were already showing signs of success when DOLE reported in March 2016 that the IT-BPM sector would create approximately 225,000 new jobs by the end of the year. One potential growth driver, which should also support expansion of highly skilled BPO employment, is health care outsourcing services. According to DOLE, it is the fastest-growing segment of the BPO industry. The department forecast that health care outsourcing activities would generate some 100,000 new jobs in the Philippines in 2016 and it expected this growth to maintain momentum over the course of 2017. The segment received a boost in late 2015 when the US adopted the 10th revision of the International Classification of Diseases, which has been driving new demand for coders and offering the Philippines a lucrative niche market. “The segment has gone from $100m in annual revenue in 2010 to almost $2bn in 2015, while employment has grown from 14,000 in 2010 to over 118,000 today. We are the fastest-growing segment in BPO,” Jeff Williams, chairman of the Healthcare Information Management Association of the Philippines (HIMAP), told OBG. This growth is particularly notable given that 70% of health care outsourcing employment is held by registered nurses providing high-level services, according to HIMAP. The industry is also critical to future growth as it is focused on attracting new GIC investments.
Captives
Captive shared services, or GIC services, where organisation uses a wholly owned subsidiary instead of a third-party vendor for its BPO activities, will be another important growth driver. In July 2016 the Shared Services and Outsourcing Network (SSON) reported that significant investment in a broad array of business services had spurred a doubling in the number of shared service centres (SSCs) and BPO offices since 2000. Although third-party BPO offices have traditionally been the growth driver – and continue to account for two-thirds of all in-country operations – shared services now lead industry expansion. Approximately one-third of SSCs in the Philippines provide global service support, compared to 17% in the US and 25% in Asia-Pacific, and it is already home to BPO for major multinationals such as Accenture, Xerox, Wells Fargo, Canon, Chevron and Coca-Cola. In March 2016 American Express opened its first GIC in the country, creating 400 jobs, and is expected to augment its workforce to 1300 over the next few years. The SSON reports that the banking, financial services and insurance industries are the most commonly represented among GICs. Indeed, just under one-third of captive shared services activity is finance-based, and a number of non-voice emerging segments are forecast to continue driving high-level employment growth.
Emerging Segments
In August 2016 CCAP announced that roughly 100 foreign firms were in discussions with Philippine BPO stakeholders and were considering outsourcing business to the country. Although the association did not specify the proportion of companies that were looking to establish GICs against those looking to partner with third-party BPO centres, CCAP’s Hernandez told media that many of the companies are looking for high-value-added service provision. He cited interest from Silicon Valley technology companies as well as financial services providers. CCAP reports that out of $1trn in potential global outsourcing work, just $166bn is being outsourced at present, leaving the Philippines well positioned to capture a larger share of the global market across a broad range of high-level services. This trend is particularly pronounced among GICs, with the SSON estimating that 80% of SSCs focus on higher-value-added processes, compared to just over 50% for third-party BPO centres. The SSON also identified analytics and marketing as holding particularly high potential for expansion.
Outlook
The BPO industry in the Philippines is expected to record another year of double-digit growth in 2017, supported by a diverse and ever-expanding service base, as well as rising foreign investment in GICs. Workforce development should support the gradual elimination and automation of low-end processes and services, creating new opportunities for value-added outsourcing that extends well beyond traditional voice services.
“In the beginning, locators came to the country for simpler labour arbitrage and the capability of Filipinos to speak English. However, the industry has evolved significantly and has expanded to many higher-value-added services. The work being serviced in the country requires the Filipino knowledge worker to continue to scale up to more complex functions, such as engineering, finance and accounting, health care and nursing, financial advisory, insurance underwriting, research and legal,” Miguel Garcia, CEO of advisory, consulting, build-out and enablement firm DTSI Group, told OBG. As such, 2017 is expected to be another year that bolsters the type of increasingly skilled employment that leads to more robust macroeconomic expansion.
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