Ranking consistently among the top global providers of business process outsourcing (BPO), the Philippines is working to widen and deepen its portfolio of thirdparty digital services. Foreign companies delegating operations to providers in the Philippines generate roughly one-10th of the country’s GDP, indicating the degree to which BPO is fundamental to the stability of the economy. The industry is the primary avenue of employment and training for the middle class; the second-largest source of foreign currency earnings after remittances; and the driving force behind a network of ancillary transport and retail businesses. Thus, the BPO industry often acts as a bellwether for the country’s overall economic health.
The broader BPO sector comprises contact centres, led by voice services; global in-house centre operations; health information management; IT and software development; and animation and game development. Its GDP contribution rose from 4% in 2008 to around 7% in 2018, and it employs approximately 3% of the total labour force.
The year 2018, however, saw progress slow somewhat. According to the 2019 Tholons Services Globalisation Index, an international ranking of IT-BPO cities and countries, the Philippines ranked fifth among the world’s top-50 “digital nations”, behind India, Brazil, Canada and the US. While this represents a decline from second place in 2018, Metro Manila, home to 80% of the BPO workforce, maintained its second-place position out of 100 “super cities”, behind only Bangalore, India. Cebu City and Davao City, however, fell from 11th and 75th to 12th and 95th, respectively.
BPO activities registered roughly 5% growth in terms of revenue and headcount in 2018, according to the latest data from the IT and Business Process Association of the Philippines (IBPAP), the industry’s primary information and advocacy body. Revenue rose from $23.4bn in 2017 to $24.7bn in 2018, while sector headcount grew from 1.17m to 1.23m over the period.
These figures fell short of the 9.2% compound annual growth rate (CAGR) for revenue which was targeted in the six years from 2016 under the Philippine IT-BPM Roadmap 2022. Goals established in the roadmap include raising the number of people directly employed in BPO from 1.2m in 2016 to 1.8m by 2022, equivalent to a CAGR of 7.8% and representing 4.1% of total employment; increasing turnover to $40bn, or approximately 15% of the global total; doubling the number of people employed outside of Metro Manila to 500,000; and raising the proportion of the workforce employed in mid- to high-value jobs to 73%. Achieving these strategic aims will require the industry to expand by 7% per year through to 2022.
According to Rey Untal, the president and CEO of IBPAP, the employment and revenue growth targets set out under the roadmap were not achieved due to several factors, including geopolitical developments like the implementation of protectionist policy in the US, which accounts for more than two-thirds of foreign investment in the Philippines’ BPO sector. According to some industry stakeholders, while pressure on US companies to relocate their operations to the US has not yet significantly affected the Philippines, local BPO firms have reported difficulty obtaining visas and other necessary permissions for Filipino staff to work in US-based outsourcing coordination centres.
There are still a number of challenges that may hinder the objectives set out in the roadmap, the most immediate of which is a series of tax and regulatory changes in 2019. President Rodrigo Duterte’s Comprehensive Tax Reform Programme aims to reform the tax system to generate the revenue required to fund the government’s P9trn ($167.4bn) Build, Build, Build infrastructure initiative. The first tranche, signed into law in December 2017, reduced income tax for low- and middle-income workers while expanding the value-added tax base, and raising or introducing new charges on some consumer goods. However, the next major package in the pipeline, known as the Tax Reform for Attracting Better and High-Quality Opportunities (TRABAHO) bill, threatens to replace long-standing incentives on offer to companies investing in special economic zones (SEZs) with a more stringent review mechanism linked to performance and a number of additional criteria (see Economy chapter). With BPO firms among the largest investors in SEZs, the industry is fearful that proposed measures will see investors relocate their operations away from the Philippines in order to take advantage of subsidies on offer elsewhere (see analysis).
Longer-term challenges for the sector include automation and the development of digital alternatives, such as artificial intelligence (AI) and machine learning. This puts the Philippines particularly at risk because contact centres and global in-house centres comprise around four-fifths of the country’s BPO industry, making it the largest destination in the world for voice-based services, having surpassed India in 2012. “In order to further generate added value, automation needs to be combined with upskilling of the labour force and the creation of incubators to promote national talent,” Junar Amador, managing director at Ingram Micro Philippines, told OBG. “The industry has the potential to spread economic opportunities beyond the major cities and to capitalise on existing pools of talent across the country,” he said.
As the language of commerce, law and education, English has helped the Philippines attract investment from US financial services companies like Citibank and JPM organ, and telecoms firms like Verizon Wireless. However, in February 2018 global research and advisory firm Gartner forecast that up to 25% of global customer service and support operations will integrate virtual customer assistants (VCAs) or chatbot technology across engagement channels by 2020, up from less than 2% in 2017. After implementing VCAs, organisations reported a 70% reduction in call, chat and/or email inquiries, and an increase of approximately 33% in customer satisfaction. Voice-based contact centres in the Philippines will most likely embrace VCAs as US companies – including Genpact and Concentrix, the latter of which absorbed leading BPO player Covergys via a merger in 2018 – double down on digital expertise in the coming years.
IBPAP’s roadmap forecasts that the digital transition will create an additional 388,000 mid-skilled jobs and 309,000 highskilled positions by 2022. As such, the programme identifies areas where retraining and retooling will be necessary, and assigns technical working groups to address needs in each of the BPO industry’s core areas. A primary aim of each group is to ensure that each subsector is sufficiently staffed with individuals skilled in science, technology, engineering and mathematics.
At the government level, the Commission on Higher Education is tasked with ensuring that graduate programmes are appropriately tailored to meet the demands of the private sector, while the Technical Education and Skills Development Authority is charged with teaching current employees new skills. “When it comes to upskilling, the focus is on bringing in new people to handle work that requires new skills while retraining existing staff,” Maria Cristina Coronel, president of local BPO firm Pointwest Technologies, told OBG. “There is an adequate pool of talent emerging from universities, which are producing around 70,000 engineering graduates a year. The greater challenge is finding a sufficient supply of talent for the two years in which there are no undergraduates exiting university, due to the transition to a K-12 educational system.”
However, the so-called automation cliff is expected to bring about a sudden change in the demand for and distribution of low- versus mid- to high-end skill sets across BPO. “Today, 80% of the workforce in the BPO industry performs front-end services, with the other 20% in operations support and planning,” Mike Lytle, COO of Teleperformance Philippines, told OBG. “These proportions will change considerably in the coming years as the need for more complex processing and creative thinking continues to increase.”
Recognising the potential for start-ups to fill gaps in technical and technological know-how, IBPAP held three Takeoff events in 2018, where entrepreneurs were given a platform to pitch services to BPO firms.
There are already a number of developments under way, but how far they can push the local BPO industry remains to be seen. The private sector has worked to improve its readiness and taken the first steps to adopt robotic process automation (RPA), which involves high-volume and repetitive tasks. The inaugural RPA Conference was held in Manila in August 2018 and included automation heads from insurer AXA Philippines, the manager of US automaker Chevron’s RPA Centre of Excellence and the digital transformation lead of building materials supplier LafargeHolcim, indicating the array of industries that are embracing these changes. “Automation is increasing productivity by 40-60% in back-office operations and between 20% and 30% in chat services,” Lytle told OBG. “While cognitive automation has delivered results in very niche operations, it is not enough to disrupt the whole BPO industry just yet.”
Investment in data analytics is also gaining momentum. “Companies here understand the value of data analysis; however, they are still at the data-gathering stage,” Ryan Guadalquiver, country head at US-based analytics firm SAS, told OBG, adding that investment has thus far been largely focused on upgrading tools to collect information. Substantial new opportunities are emerging for those with the appropriate training, but it is unclear whether the country is moving quickly enough to address the skills gap. This is especially true as the incentives offered under the previous fiscal regime come under consideration, and VCAs, AI and other disruptive technology make language skills redundant for frontline services.
Nonetheless, the Philippines has a number of competitive advantages could that drive growth, especially as it cements itself as a leader in creative industries, which include those related to culture, economics, technology, animation, visual arts, music, fashion, entertainment and architecture.
According to the Department of Trade and Industry (DTI), in 2017 creative industries contributed over P600bn ($11.2bn) to the economy and employed 14.4% of the labour force. Global freelancing platform Upwork hosts more than 1.3m profiles from the Philippines on its platform, second only to the US, with graphic and web design among the most commonly offered services. The development of creative industries is being facilitated in part by the Creative Economy Council of the Philippines (CECP), an independent think tank that has advocated for the creation of a government body dedicated to formulating official policy. “A successful creative economy is built on creative industries, clusters, cities, education and tourism,” Paolo Mercado, senior vice-president of marketing, communication and innovation at Nestlé Philippines, and founder and president of the CECP, told OBG. “Official creative policy entails the founding of a high-level agency that reports directly to the president. This agency would be responsible for defining the industry, measuring outcomes, and setting growth targets for revenue and job creation, as well as for intellectual property development.”
Creative Economy Agency
In tandem with the DTI, the CECP in April 2019 submitted an ambitious roadmap designed to promote the Philippines as a leader in creative industries in the ASEAN region by 2030. The first phase of the plan involves marshalling a number of government agencies into a Creative Economy Agency (CEA) to be led by the DTI and operate directly under the president. Chief among the CEA’s goals would be to formulate action plans for the five major creative industries: advertising, film, animation, game development, and graphic and digital design. Of these, advertising production stands out in terms of its growth potential, in part due to the size of the domestic market. “At Nestlé Philippines, we produce more television ads than other markets in South-east Asia because of the number of brands we support, so it makes sense to base a regional advertising production hub here,” Mercado told OBG. “The demand and skills are there, but the question will be whether the incentives for setting up an advertising centre with a major foreign conglomerate as an investor are better in the Philippines than in other countries.”
Filipino advertising agencies already win numerous awards, with multiple winners taking home accolades at the APAC Effie Awards, the Cannes Lions International Festival of Creativity, and the New York Festivals Advertising Awards. The advertising industry in the Philippines does not attend these events as a national delegation, and there is no platform to showcase the country’s collective talents. Creating such a platform and leveraging it to market the local creative economy as a whole would therefore be prioritised by the CEA.
The CECP also advocates for declaring creative industries a national priority, which would open the door for the launch of SEZs dedicated to the export of creative capital. As of early 2019 there were roughly 300 operational SEZs offering incentives; however, the vast majority were focused closely on IT-BPO, with others devoted to manufacturing, agriculture, tourism, and medical and wellness, but none to creative industries.
Local governments are driving the creation of clusters focused on incubating domestic creative industries in various cities across the Philippines. In 2017 the city of Baguio was recognised by UNESCO as the Philippines’ first Creative City for Craft and Folk Arts in 2017, and the Department of Tourism is working to drive an ambitious series of programmes centred around a new international arts festival. Meanwhile, Intramuros – the historic walled area of Manila that houses the San Agustin Church, a UNESCO World Heritage site – is earmarked to open as the country’s first creative hub to provide space for training and workshops. Other developments currently in the works include an advertising production centre in Legaspi Village in Metro Manila’s Makati City, and a centre for film production and television broadcasting in Quezon City. In Cebu City, there are plans to launch a furniture manufacturing hub in the Crossroad district.
On a global level, the British Council has long recognised the potential in the Philippine creative economy, and in December 2018 the organisation formalised a three-year, multi-sector partnership with the National Commission for Culture and the Arts, the CECP and the DTI to promote creative industries. Meanwhile, in January 2019 the UN Conference on Trade and Development indicated the scope for development of creative trade by recognising the Philippines as one of the top-10 exporters of creative goods among developing countries. These efforts are all in their early stages, but the potential to incubate a micro-economy of significant value is clear.
However, restrictions on foreign ownership in the creative industries, as well as the Filipino First policy, which prioritises the promotion of Philippine businesses and locally made products over those of foreign counterparts, present obstacles to international investment and creative talent. With the exception of internet businesses, global firms are prevented from owning any equity in local media, and foreign ownership of advertising companies is capped at 30%. A successful creative policy must also address the shortfall in licensing or royalties paid to the Philippines as a result of underdeveloped intellectual property rights. Such challenges are surmountable, but doubts remain as to whether President Duterte will sign up to the CECP’s vision and clear a path for greater foreign involvement in the sector.
The BPO industry is on course to maintain its role as a primary driver of employment and revenue in the near term, even though the future could prove to be challenging. While rapid uptake of new technology is likely to replace many lower-skilled personnel, human contact remains a major component of the call centre business, presenting an opportunity to retrain staff for more critical processes.
The industry is unanimous in calling for the government to modify some provisions of the TRABAHO bill, including a proposal to stagger the withdrawal of incentives for the SEZs in which many BPO centres operate. This would likely result in some significant setbacks and place a heavy burden on replacement industries, including the creative economy, to successfully drive economic transformation.
The IT-BPO industry’s position on the bill also highlights the Philippines’ potential to maintain its competitive edge in the region, given low labour costs, widespread English proficiency, and a young and growing working-age population that is prepared for service operations. As the sector matures and continues to expand to a number of other cities, development should continue, though potentially at a more moderate pace than previously witnessed.