Ranking consistently among the top global providers of business process outsourcing (BPO), the Philippines is now undertaking a significant widening and deepening of its portfolio of third-party services. The sector has begun its transition to higher-skilled and more value-added operations, while also adapting to the challenge of new technologies such as artificial intelligence and robotic process automation. Meanwhile, the industry continues to be a major employer and significant source of revenue for the country. It has also become a key facet of regional development, as companies move away from traditional centres like Manila to lower-cost provinces and second-tier cities.
In the medium term, BPO will remain a highly competitive arena for the Philippines, despite the country holding a leading global position. Efforts to maintain its international standing are watched closely by rival India, while domestically, training programmes and attractive wages will keep citizens vying for the coveted jobs.
Facts & Figures
BPO is a relatively young industry, with the first contact centre in the Philippines opening in 1992 and the first multinational BPO firm, Sykes Asia, setting up in the country in 1997. The industry was supported by the 1993 deregulation of the telecommunications sector, which led to the rollout of a globally competitive fibre-optic ICT network. BPO developed further in the early 2000s when Manuel Roxas II, the secretary of trade and industry at the time, oversaw measures widely credited with laying the foundation that enabled the industry to grow. These included his amendment to Republic Act 7916, which allowed individual floors within office buildings to register as “ecozones” exempt from certain national and local taxes, helping to give BPO companies a strong start.
In the 2017 Tholons’ Services Globalisation Index, an international ranking of IT-BPO cities and countries, the Philippines ranked third among the world’s Digital Nations, with India first and China second. In terms of cities, Manila came in fourth that year, behind Bangalore, Mumbai and Delhi. Tholons places several other Filipino cities in its top-100 list: Cebu (12th), Davao (85th), Bacolod (97th) and Santa Rosa (100th).
According to the IT and Business Process Association of the Philippines (IBPAP), the sector comprised 0.075% of GDP in 2000, 2.4% in 2005, 4.9% in 2011 and 6% in 2015. The 2017 figure was 8-9%, with BPO revenues of $24.5bn that year. BPO thus represented the second-most important income stream for the economy, behind remittances from overseas workers at $28bn.
The sector has supplied citizens with a significant number of job opportunities in recent years. Employment figures from the Philippine Statistics Authority show that in 2006, 141,630 people worked for 1445 companies in the BPO industry. By 2016 the industry employed 1.15m-1.2m people, according to IBPAP. That figure is estimated to have risen to approximately 1.3m in 2017, with IBPAP forecasting a workforce of 1.8m by 2022, or an additional 100,000 jobs per year for five years. This employment growth is illustrated by data from the government-sponsored site PhilJobNet, where 17% of the 6120 active job vacancies on the website in The success of BPO has translated into considerable gains for the wider economy and its size has had a major impact on a range of associated industries. Demand for office space from sector players is a significant force in many commercial real estate markets, for example, with Colliers reporting that in 2017 some 25% of all transactions in the Metro Manila office market were with BPO tenants. For the first quarter of 2017, Colliers reported that the BPO and knowledge process outsourcing sectors combined also accounted for some 45% of office up-take in the provinces – an increase The Philippines has a number of competitive advantages that will drive further growth in the industry, including a large proportion of young English speakers. A 2015 report by global real estate firm Cushman & Wakefield stated that Philippine universities graduate some 470,000 English-proficient students every year, with a national English proficiency ranking of 92.5%. The country’s colonial history and ongoing links with the US have also equipped its English speakers with an American accent and familiarity with US culture. These are significant factors when the main market for BPO services continues to be US-based companies. Filipinos are also widely known for their friendliness and politeness – important qualities for a successful contact centre call.
Wages in the Philippine BPO sector are also very competitive internationally, even though they are high compared to other occupations locally. A December 2016 report by the International Labour Organisation (ILO) stated that annual average pay in the sector in the Philippines was $9297 in 2013, while the average was $2580 for the workforce as a whole. More recent reports suggest that an annual salary in the BPO sector is still more than double the national average. Yet, this amount is approximately 75% less than what the same job would pay in the US. Other operating costs are often substantially lower as well, such as for office space, utilities and taxes, with all of these likely to be even less outside of Metro Manila.
However, while the sector’s performance indicators are still strong, it has experienced the pattern of declining growth rates that is normal to maturing industries. In the six years to 2017, the industry saw a compound annual growth rate of around 17%. This dropped to about 9% expansion in 2017, with IBPAP attributing the fall to less favourable global economic conditions, violence in Mindanao and the large scale of the industry.
While the growth figure may be lower than in previous years, it is still higher than global BPO expansion, which was roughly 6% in 2017, according to the Contact Centre Association of the Philippines (CCAP). However, even with growth set to continue in 2018, some uncertainties exist due to the impact of artificial intelligence and robotic process automation (see analysis), as well as changes to the tax regime.
Sector Coordination
IBPAP divides the industry into five main subgroups: contact centres and BPO; IT and software development; animation and game development; health information management; and global in-house centres (GICs). The agency thus acts as an umbrella organisation for a number of industry segments and their professional societies, such as the CCAP, the Philippine Software Industry Association, the Animation Council of the Philippines, the Healthcare Information Management Association of the Philippines and the GIC Council of the Philippines.
This approach of bringing all segments under one roof highlights the view that as it matures, the industry is experiencing increasing and potentially beneficial overlaps among its various components. One example of this is the growth of GICs. However, these are sometimes viewed as competitors by traditional outsourcing organisations. “There are two ways of looking at this,” Jeffrey Williams, co-founder of industry consultancy Genfinity, told OBG. “Some BPO firms see them as a threat, but the industry as a whole does not. When companies opt for a GIC, they usually maintain BPO-related operations. GICs are more of an evolutionary move.”
Another example of cross-collaboration is that of the CCAP working closely with state bodies to promote growth and the evolution of the contact centre segment. These are principally the recently created Department of Information and Communications Technology (DICT) and the Department of Trade and Industry (DTI).
Development Plans
The government is active in sector planning and structuring. Beginning operations in 2016, the DICT took over many of the mandates previously held by the Department of Science and Technology’s ICT Office (DOST-ICTO) and combined various units operating in the ICT field that were previously within other departments. The result allows for a comprehensive, coordinated and specialised government focus on the ICT sector. The DICT has worked on a range of issues since its inception – from speeding up internet connections to enhancing cybersecurity – and manges three agencies: the National Telecommunications Commission, the National Privacy Commission, and the Cybercrime Investigation and Coordinating Centre.
Medium- and long-term development plans for the economy as a whole are also being pushed by the state – with BPO to continue to play a major role in shaping the country’s future. The long-term vision is encompassed in the National Economic Development Agency’s AmBisyon Natin 2040 scheme, which sets three main goals: comfort, security, and a “strongly rooted” society with a good work/life balance and family orientation.
With these overarching principles in mind, the medium-term Philippines Development Plan 2017-22 is currently being rolled out, seeking to establish the foundation for the 2040 targets. In this, building a globally competitive knowledge economy is seen as key, with an emphasis on more widespread adoption of modern technology, support for innovation, and a strengthening of research and development. All this will be vital if the BPO sector is to successfully meet the upcoming challenges of automation.
More specifically to BPO industry growth, the IBPAP produced a master plan, Roadmap 2022, which sets a number of targets to be achieved by that year. The association not only sees a BPO workforce of 1.8m people as an attainable target by 2022, but also $40bn in annual revenue and a global IT-business process management (IT-BPM) market share of 15%. It also envisages 7.6m direct and indirect jobs in IT-BPM by 2022, 500,000 of which will be outside the capital region and 73% in mid- to high-value categories.
Taxing Subject
One major contributor to sector growth has been the support the government gives to BPO in terms of tax and other incentives. The Republic Act 7916 was a key example of this, but companies have also benefitted from a range of additional measures.
The Philippines Economic Zone Authority (PEZA), which runs some 300 special economic zones nationwide, offers incentives such as income tax holidays allowing corporate income tax exemptions for four to eight years, simplified visa and import-export processes, and a range of exemptions on imported capital equipment. A second agency, the Board of Investments under the DTI, also offers income tax holidays and exemptions, tax credits and simplified procedures for companies in key sectors or geographical areas wishing to establish operations in the Philippines. Regional development authorities, such as the Regional Board of Investment for the Autonomous Region of Muslim Mindanao, offer further incentives packages.
However, under new and upcoming legislation, special tax rates currently enjoyed by BPO companies may become a thing of the past. The administration of President Rodrigo Duterte is pushing ahead on a major nationwide infrastructure drive, with an increase in tax revenues comprising one component of funding. Thus, a major reform of the tax system is now under way. In December 2017 the first phase of the Tax Reform for Acceleration and Inclusion (TRAIN) cut personal income taxes while hiking taxes on coal and other fuels.
As of May 2018 the next phase of the reform, TRAIN 2, was still under discussion in Congress. According to Sonny Dominguez, the secretary of finance, this stage seeks to lower the corporate tax rate from 30% to 25% while curtailing other incentives, including those provided by PEZA. Under TRAIN 2, extension of the tax holiday from four to eight years may depend on company performance, while the current practice of imposing a 5% tax following such holidays may be replaced with a 15% levy on net taxable income.
The new regime has thus been of some concern to industry players, as well as to PEZA. While the Department of Finance argues that the incentive schemes cost the country P600bn ($11.9bn) per year, PEZA officials have pointed to a worrying decline in BPO investments. They say this fall is in part triggered by fears of TRAIN making the Philippines a less friendly business environment. Approved foreign direct investment pledges for the economy as a whole fell by 51.8% in 2017 to P105.6bn ($2.1bn), the lowest in 12 years , while BPO-related investments declined by 32% to P4bn ($79m).
“The changes could have quite an impact on business,” Felma Magnata, associate vice-president of operations of SPi Global, told OBG. “We hope the government will give them a second look, or strengthen their policies to further ease doing business here and encourage investors to enter the market.” A resolution on TRAIN 2 is expected in the second half of 2018.
Sector Players
Beginning with Frank Holz establishing the first contact centre in the Philippines under the Accenture Group in 1992, today the industry is home to hundred of outfits – although Accenture remains one of the industry’s top firms, with Global Delivery Network centres in Manila and Cebu.
Other major sector players include Convergys Philippines Service Corporation, JP Morgan Chase Bank NA Philippine Global Service Centre, Sutherland Global Services, Genpact, Teleperformance, 24/7 Customer Philippines and Telephilippines. IBM, HSBC, SPi Global, Sykes, Aegis, TeleTech, ACS of the Philippines, AIG Shared Services Corporation and Hinduja Global Services are other top names. Convergys leads in terms of employee numbers, with the American Chamber of Commerce of the Philippines stating that the US company became the Philippines’ largest employer in 2017, with 57,000 full-time workers on its domestic payroll.
In terms of markets served, sector companies usually aim for a mix of Anglophone clients. Given the range of different time zones this entails, work is usually spread among a day shift serving Australian and New Zealand customers, a middle shift from mid-afternoon until 12am for the UK and Ireland, and then a night shift for According to an April 2018 report by Magellan Solutions, clients from the US account for 64.7% of all customers served by the Philippines’ BPO market. US companies invested some $1.4bn in the local BPO sector in 2015, up from $986m a year earlier, with this figure likely to have remained high since.
The European market has risen in significance in recent times, with non-UK companies taking an increasing interest in the Philippines as they move more back-office processes offshore. Europe is currently responsible for around 10% of local BPO business.
Australia, meanwhile, has also been a growing source of clients, not least because Western Australia and the Philippines share the same time zone. Australian giant Acquire BPO bought into the Philippines market in 2014 with the purchase of SHORE Solutions, while TSA Group, another of the largest BPO companies in Australia, opened a second site in the country in 2016. Other Asia-Pacific markets now include Japan, with companies such as Toshiba, Fujitsu and Epson offshoring to the Philippines, along with around 70 additional firms.
Next Wave
While the BPO industry got its start in Manila, it has since spread to other regional centres. Metro Cebu was one of the first of these, followed by Metro Clark and Bacalod. In 2016 the DOST-ICTO named 10 Next Wave Cities (NWCs) as the upcoming centres for significant industry growth, in collaboration with IBPAP and Leechiu Property Consultants. Indeed, available office space and low rental rates are some of the key factors driving this shift to smaller cities, as BPO companies are one of the Philippines’ top consumers of office property. The 10 NWCs named were Baguio, Cagayan de Oro, Dagupan, Dasmarinas, Dumaguete, Lipa, Malolos, Naga, Santa Rosa and Taytay.
The DICT established an NWC programme that has been conducting ICT roadshows to boost awareness of the up-and-coming cities and what they have to offer companies. The DICT has also been conducting ICT workshops for regional nodes that are still in an early stages of development, along with conducting surveys on rural impact, researching untapped talent pools and working with ICT councils across the country. The councils were established under the auspices of the National ICT Confederation of the Philippines (NICP) to develop the sector in each locale.
In 2017 the NWC initiative was taken a step further with the launch of the digitalcitiesPH programme, supported by the DICT, IBPAP and the NICP. This seeks to help implement IBPAP’s IT-BPM roadmap, while working to place more Filipino cities in the Tholons top-100 cities index. The programme also aims to bring together sector stakeholders to collaborate on securing more opportunity for countryside communities.
HR
Developing NWCs also means strengthening the regional IT infrastructure and training the local talent pool. Fortunately, many cities beyond Metro Manila have established universities – Cagaylan de Oro, for example, has four higher education institutions.
Human resources development is being assisted by government schemes such as the Training for Work Scholarship Programme (TWSP). Operated by the Technical Education and Skills Development Authority, the programme offers a specific IT-BPM training element. A TWSP partnership between the Commission for Higher Education and IBPAP has also led to the creation of the services management programme, a specialist track for BPO professionals.
Despite dedicated training to help ensure success, the sector continues to have a relatively high employee turnover rate. A major factor behind this is the unsociable schedule demanded by call centre work, which infringes on time with family and friends, as well as the sometimes stressful interactions with clients. However, the turnover rate has declined in recent years thanks to the introduction of regular health check-ups, stress and risk management programmes, and higher wages. New career paths are also an incentive for staff to remain in the industry, with the shift to more high-skilled, value-added jobs offering employees a longer-term future.
Outlook
As the sector matures and spreads to additional cities, growth looks set to continue – although likely at a slower rate than previously witnessed. Over the medium term, the largest challenge the industry faces is the widened use of new technologies, with these likely to remove many lower-skilled jobs. However, while human contact remains a major component of the call centre business, this presents the sector with an opportunity to retrain staff for more critical processes.
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