Exhibiting nominal growth rates of approximately 20% every year, business process outsourcing (BPO) is the Philippines’ most successful major sector. While accounting for only about 2% of national employment in 2012, the sector still makes an oversized contribution to the country’s GDP and especially to growth, both directly and indirectly as it creates demand for office space, telecoms services and the consumerist lifestyles of its young employees.
Both globally and locally, the BPO industry remains in an early stage of development, rapidly changing and brimming with optimism and ideas for the future. The Philippines has established itself as a top player, successfully leveraging strong English-language skills and close cultural ties to the US to build the largest concentration of call centres in the world and the second-largest BPO industry globally. But there are serious challenges that will have to be overcome to sustain the sector’s rapid growth, including containing costs and keeping up with the sector’s increasing need for qualified college graduates.
GROWTH SPURT: BPO began to develop in the Philippines in the 1990s, when several international call centre operators set up shop and a number of large multinationals began to develop in-house service centres. The country emerged as one of the world’s major BPO players during the global financial boom of 2004 to 2007, when the Philippines BPO sector tripled in size within three years, going from 100,000 employees and some $1.5bn of revenues in 2004 to 300,000 employees and $4.8bn of revenues in 2007, according to the IT & Business Process Association of the Philippines (IBPAP).
The sector continued to expand rapidly through the global crisis years of 2008-09 and remains in a boom phase. While annual growth rates have fallen, from more than 60% in 2005 to 20% in 2012, the sector continues to break records in terms of numbers of jobs created each year. Employment reached about 777,000 by the end of 2012, an addition of 137,000 jobs since 2011. The sector added 114,000 jobs in 2011. Revenues in 2012 reached $13.2bn, up from $11bn in 2011 and $9bn in 2010.
IBPAP is a voluntary association formed by BPO firms with government support in 2004 to coordinate the development of the sector and speak for the industry to the public and governing authorities. The group has about 300 member firms, while about another 300 companies are members of five affiliate associations representing segments of the BPO sector, according to Gillian Joyce Virata, senior executive director at IBPAP. Virata estimated there are about 1000 firms doing BPO work in the Philippines.
VOICE ADVANTAGE: The sector’s rapid growth can be accounted for by two sources. While aggressively capturing an increasing share of the work that firms in high-cost countries are off-shoring to lower-cost countries, the Philippines has also pulled away the voice work that was previously outsourced to India or elsewhere. Indeed, the country nearly doubled its share of the global BPO industry from 5% in 2006 to 9.5% in 2011, according to Everest Group, a consultancy. The domestic call centre industry surpassed India’s in 2010 and has continued to pull ahead, reaching a workforce of 497,000 and revenues of $8.7bn in 2012, according to the Contact Centre Association of the Philippines (CCAP), the largest of IBPAP’s affiliate associations.
The Philippines has strong competitive advantages over other outsourcing destinations in the voice-based, customer-facing call centre segment, which accounts for nearly two-thirds of the country’s BPO sector. Foremost is the high level of fluency in contemporary American English, rooted in the country’s history as a US colony and maintained in the independence era. English has co-official language status and is the main language of business, government, education and print media.
ACCENTED TOUCH: US television and films are widely watched without dubbing or subtitles, and many Filipinos have lived in the US or are in close contact with family or friends living there. Thus, many Filipinos speak contemporary, idiomatic American English, in sharp contrast to the highly localised, British-derived variant of English that is spoken in India. Filipino accents are also relatively clear and easier on the ears for an American audience, and Filipinos are often able to adapt their accents to the people they serve. Jojo Uligan, executive director at CCAP, told OBG that Philippines call centres today work in 17 languages, with US Spanish speakers the largest non-English market. Still, more than 90% of the BPO employees in the country work in English, and 75% work with US English-speaking clients.
“We do not just speak American English, we understand American culture,” Uligan said.
INTERNATIONAL STANDARD: Most of the world’s larger providers of BPO services have call centres in the Philippines. Accenture and Convergys have the biggest local presence, each with more than 30,000 total BPO employees. Other international firms with a large presence in the Philippines BPO segment include Teleperformance, Teletech, Stream, Sykes, Sitel, Aegis, Transcom, Telus, West, 24/7, SPi, EXL, EGS, Cognizant and Sutherland. The larger firms typically provide call centre services as part of broader outsourcing contracts that cover a range of customer services and often include back-office functions, with work spread across multiple countries.
There are also several large locally based call centre providers, a number of which have sold out in recent years to international firms. There are also hundreds of smaller firms, most with 50 agents or fewer. Smaller players typically subcontract to larger BPO providers or lease agents through brokers. Despite the booming market for BPO services there is a high failure rate among smaller firms due to intense price competition in the market.
“A lot of the micro, small and medium-sized enterprise (MSME) call centres open with a bang and in less than a year they go bankrupt,” Jun Abo, CEO of Bright Mango Solutions, a management consultancy for BPO firms, told OBG. “MSMEs are vulnerable to brokers who sometimes order work and then do not pay. The challenge for these firms is thus to get and retain their own clients.”
In March 2013 Abo helped launch a new association specifically designed for these smaller, locally owned call centre firms. Known as Philcall, the company aims to circumvent brokers by pooling resources and building a collective reputation for quality and reliability. The group only admits BPO firms that are majority locally owned with 200 agents or less. It had eight members as of September 2013.
OTHER SEGMENTS: Corporate services, the second-largest BPO market segment, reached a workforce of 154,000 and revenues of $2.5bn in 2012, according to IBPAP. The sector is dominated by accounting and other repetitive back-office work, but also includes some of the more elite fields of outsourcing such as financial research that are collectively known as knowledge process outsourcing (KPO). The segment includes many in-house service centres of multinational firms, referred to as global in-house centres (GICs) or captives, which are not technically outsourcers but are nevertheless counted as part of the BPO sector. Operators of large GICs in the Philippines include Chevron, Shell, Maersk, Bechtel, Procter & Gamble, Henkel and Thomson Reuters. Some GICs also include call centres.
CAREFUL GROWTH: Some companies have expanded their GICs into outsourcers for third parties, notably the banking groups JP Morgan, Deutsche Bank and Bank of America, which mainly serve the financial industry, and the insurer AIG, whose Philippines unit, Integra BPS, provides specialist outsourcing services to insurers. Among the other specialist corporate service outsourcers that are operating in the Philippines are ADP, the payrolls processor, and First Advantage, a company specialised in background checks and other verifications.
IT and software development outsourcing reached a workforce of 57,000 and revenues of $1.16bn in 2012, according to the Philippine Software Industry Association, another affiliate of IBPAP. IBM, Dell, HP and Xerox (through its Affiliated Computer Services unit) all have operations in the Philippines, and some have branched out into other BPO segments.
The fastest-growing major BPO segment is health care information, which reached a workforce of 45,000 and revenues of $460m in 2012, up by 80% and 66% over 2011, respectively, according to the Health Care Information Management Outsourcing Association of the Philippines, another IBPAP affiliate. Major players include UnitedHealth Group, M*Modal, Cognizant, EGS, EXL, SPi and Accenture. The health care information segment is expected to continue growing very rapidly, driven especially by health care reforms that were ongoing in the US in late 2013, and the impetus they have given to efforts to contain health care costs (see analysis).
The local sector also includes three niche technology-related BPO segments. Engineering services employed 10,800 people and earned $206m in revenues in 2012, animation employed 9000 and earned $132m, and game developers, counted separately from other software, employed 3500 and earned roughly $50m, according to IBPAP, the Game Developers Association of the Philippines and the Animation Council of the Philippines.
SUPPORTIVE GOVERNMENT: The administration of President Benigno Aquino III and recent legislatures dominated by his Liberal Party have been strongly supportive of the BPO sector. In a 2012 speech to the International Outsourcing Summit, IBPAP’s annual conference, Aquino promised to support the sector’s growth “in any way possible”, particularly through investment in education.
Three legal reforms important to the industry were adopted in 2011-12: the Data Privacy Act and provisions of the Cybercrime Prevention Act, which tightened the protections afforded to outsourcing clients’ proprietary data, and an amendment to the Labour Code that liberalised night employment for women, which previously required a special permit. Efforts by parties on the left to push legislation to more tightly regulate the sector and promote unionisation of employees have repeatedly failed.
The BPO sector is completely non-unionised, and calls to unionise by national trade union associations and the small, pro-union BPO Workers Association have largely fallen on deaf ears. A 2013 study by pro-union German professor Niklas Reese concluded that hopes of unionising Philippines call centres were “dim but not impossible”, partly because employees see themselves as professionals rather than labourers and tend to change employers often. However, Philippine labour laws are relatively rigid, particularly complicating termination of employees.
BPO firms can access several investment incentive regimes. The most important are the Omnibus Investments Code, which offers full income tax holidays to priority investments approved by the Board of Investments for up to six years, and the Special Economic Zone Act, which offers the same holiday plus discounted tax rates thereafter to priority investments approved by the Philippine Economic Zone Authority (PEZA) in priority locations known as ecozones. Such ecozones were becoming increasingly ubiquitous until a June 2012 PEZA decision that restricted the programme’s incentives for building developers to projects outside the country’s two main metropolitan areas of Manila and Cebu.
BPO LOCALES: BPO firms were initially concentrated in Manila’s central business district in Quezon City and Makati City. However, as the sector has grown it has spread out across Metro Manila and to many provincial cities. Local governments increasingly compete for BPO investments by securing PEZA ecozones and simplifying bureaucratic procedures.
The BPO sector is the main driver of demand for office space in the Philippines, according to real estate company Colliers International, and the country’s developers are increasingly sophisticated in catering to its needs. Major developers such as SM Investments and Ayala Land plan entire BPO-based communities with office, retail and residential spaces.
Metro Manila’s Taguig City, south-east of Makati, has emerged as the top BPO destination, assisted by a particularly BPO-friendly local government and a centrally backed project to convert the former Fort Bonifacio, which now hosts a concentration of BPO firms. Another prominent destination is Quezon City, in north-east Metro Manila, where, for example, Ayala Land has partnered with the University of the Philippines Diliman in two PEZA-registered technology parks that draw mainly BPO tenants.
Cebu, the second-most-populous metropolitan area after Manila, also has a large BPO industry, with $484m in BPO revenues in 2012 and about 95,000 employees, according to IBPAP. The city was ranked 8th worldwide in 2013 among BPO destinations by the consultancy Tholons, which placed Manila 3rd behind Bangalore and Mumbai. Unusually, just over half of Cebu BPO employees work in non-voice segments, according to the regional office of the National Economic Development Authority.
RELOCATION EFFORTS: In an effort to slow the pace of migration to Manila and Cebu of college graduates seeking BPO work, the central government and IBPAP have sought to encourage BPO firms to locate in other, less congested cities. As part of its promotion and to encourage local authorities to compete for these BPO businesses, IBPAP regularly publishes a top-10 list of the most-attractive BPO destinations outside Manila and Cebu.
Two of these original “Next Wave Cities”, the northern city of Angeles and Bacolod in the Visayas region, have since been elevated by IBPAP to developed BPO centres. Both have BPO workforces of more than 15,000. IBPAP’s 2012 Next Wave top 10 included the Manila suburbs of Bulacan, Rizal, Cavite and Laguna, the northern city of Baguio, Lipa in southern Luzon, Dumaguete and Iloilo in the Visayas region, Naga in the eastern Bicol region, and Davao in the southern Mindanao region. The push to provincial cities has resulted in some reduction of the BPO sector’s concentration in Manila, from 83% in 2006 down to 76% in 2012, according to IBPAP.
TELECOMS HUB: Another advantage of the Philippines BPO sector is the support of the excellent telecommunications links, which are largely the result of the country’s position as a crossroads for submarine telecommunications cables. The Philippines is a natural landing point for submarine cables leading between South-east Asia and Japan. The number and capacity of these links continues to grow, with two state-of-the-art cable networks, the Asia Submarine Cable Express and the South-east Asian Japan Cable, commissioned in 2013.
Additionally, two major trans-Pacific cable networks land in the Philippines: the Tata Global Network and Asia-America Gateway, which lead to the US west coast via Guam and Hawaii. Both the trans-Pacific networks and some of those on the Southeast Asia to Japan route include links to Hong Kong, a major Asian data hub. These multiple undersea links and routes provide a level of redundancy and security to the BPO industry, which depends on stable international connectivity.
CURRENT CHALLENGES: The greatest obstacle to sustaining the sector’s rapid pace of growth has been the shortage of qualified employees. The 137,000 additional BPO jobs created in 2012 represented more than a quarter of the country’s 517,000 graduating college students that year, according to the Commission on Higher Education. However, while many call centre jobs do not require college degrees, non-college-educated applicants with strong language skills are rare. As a result, the sector is dependent on higher education for qualified staff.
The BPO sector’s demand for fresh hires is exacerbated by high rates of attrition, driven by the strains of night work and by emigration, a national tradition among Filipinos and to some degree among BPO employees. Call centres typically lose about 50% of their employees each year, according to IBPAP, although much of that is to other BPO firms.
David Rizzo, Asia-Pacific regional president at Teleperformance, told OBG: “The greatest and most persistent challenge to the BPO industry is not the shortage of people, but of qualified talent, namely those that have a conversational English language capability.” IBPAP aims to support the sector to overcome this challenge by providing what it calls “bridge training” to applicants who are rejected when they first apply for BPO jobs, usually because they fail to demonstrate a strong command of English.
There are other, external challenges as well. “The BPO industry has grown in the double digits for the past decade, becoming a principal generator for economic activity in the country. As BPO companies in the Philippines continue to mature, they face risks like the appreciation of the peso as it directly affects their price competitiveness,” James M Donovan, group CEO at the ADEC Group, told OBG.
SUPPORT: The programme is run jointly with the governmental Technical Education and Skills Development Authority and focuses on improving candidates’ self-confidence. The initiative trains some 65,000 “near hires” a year of which 46,000 were employed by BPO firms in 2012-13, according to Virata. Funding for the programme comes from a government allocation to support IT and BPO talent development and which may vary each year. The funds also support a BPO trainers’ training programme at the University of Makati, among others.
“The supply of qualified graduates determines the pace of the sector’s growth,” Virata told OBG. “Our problem is that out of every 100 applicants, at most 10 will pass assessments and be hired. However, if we put the next 30 through bridge training, another 20 of those will then pass and be hired.”
TECHNICAL BUSINESS: While English skills in the Philippines top most other BPO locations, the pool of talent with technical and financial skills is relatively small. While the BPO sector’s pace of growth has generally exceeded even optimistic forecasts, there has been relatively little progress in moving into higher-value types of outsourcing. Revenues per BPO employee actually fell slightly in 2012, to about $17,000 from roughly $17,240 in 2011. Revenues per employee were highest in the IT and engineering segments, at about $20,350 and $19,070 respectively, while other segments earned less than the call centre average of $17,500 per employee.
The decline in revenues per employee partly reflects the tough price competition among BPO centres globally. While the Philippines competes well on price with BPO centres in Latin America, Eastern Europe and South-east Asia, costs are about 15%- 20% higher in the Philippines than in India, according to Jeffrey Uthoff, president of Telus Philippines. The Philippines generally gets high marks for sound macroeconomic policy and low inflation, which dropped below a 3% annual rate in the first eight months of 2013 from 3.1% in 2012 and an average of 4.2% in 2009-11. That compares to average annual inflation rates of more than 10% since 2009 in India.
However, the relatively strong Philippine economy has come at the price of an appreciating peso, which strengthened from P50:$1 in November 2008 to P40:$1 January 2013 before weakening alongside other global emerging markets to P44:$1 in September 2013. “Because 75% to 80% of outsourcing business comes from the US, devaluation of the dollar or excessive appreciation of the Philippine peso is problematic,” Uthoff told OBG.
OUTLOOK: The BPO sector’s results in 2012 were on track with an ambitious roadmap adopted by IBPAP in 2010, which targeted a 16.3% compound annual growth rate (CAGR) of sector employment and 18.8% CAGR of revenues through 2016. So far results have been even better: a 21.7% CAGR of employment and 21.8% CAGR of revenues in 2011-12. Thus the roadmap’s 2016 targets of 1.3m employees and $25bn of revenues look realistic. However, the sector’s hopes for gradual growth in revenues per employee are unlikely to be realised soon given the toughening competition as an increasing number of countries enter the industry. Growth in 2013-14 could be especially hurt by the collapse of the Indian rupee in mid-2013 – the peso has gone to some Rp1.4 to P1 as of September 2013 – which will make India’s BPO sector formidably competitive. The Philippines will need to aggressively position itself as a provider of premium quality service to retain and continue to draw cost-sensitive, fleet-footed BPO clients.
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