The Philippines: The New Outsourcing Hot Spot

Economists and analysts are startled by the Philippines’ runaway growth in the sector. “The pace of development of the BPO sector in the Philippines has been impressive,” says a recent report by the US investment bank Goldman Sachs. “Three years ago there was a question mark whether Philippines could develop some [outsourcing] momentum. Now, it’s a $3 billion industry.”

Golden Opportunity
“Some of the countries like Philippines and Malaysia have done fairly well to leverage their unique skills and carved niches for themselves,” said Infosys Chief Executive Officer Nandan M. Nilekani, in Singapore recently attending an International Monetary Fund and World Bank meeting.

The Philippines’ vast archipelago is starting to gain some traction on the outsourcing front. Chennai, India-based OfficeTiger now has over a hundred people working in Manila on legal outsourcing for clients such as Dupont and expects to have nearly 1,500 by the end of 2007.

The Philippines raked in offshore service generating revenues of $2.1 billion last year, placing third behind India and China and slightly ahead of Malaysia. That’s up to 62% over the $1.3 billion it gained in 2004, and a huge increase from the start of the decade when the outsourcing industry in Manila employed just 2,400 people and the industry had revenues of a mere $24 million.

Language Advantage
The outsourcing sector currently employs over 200,000 people. The Business Processing Association of the Philippines estimates the industry will chalk up 57 percent growth this year with total revenues of $3.3 billion, and is on track to deliver nearly 48 percent growth in 2007 to $4.9 billion. Business process outsourcing (BPO) is one of the fastest growing segments of our economy and a key plank of the government’s strategy to put strong growth drivers in place.

Consultancy A.T. Kearney, in its recent ranking of the most desirable global services locations which are competitive for business process outsourcing, ranked the Philippines fourth in the world behind India, China, and Malaysia – a huge change from being outside the top 10 three years ago. Philippines gets high marks for its large, educated talent pool and English language skills.

Economists and analysts are startled by the Philippines’ runaway growth in the sector. “The pace of development of the BPO sector in the Philippines has been impressive,” says a recent report by US investment bank Goldman Sachs. “Three years ago there was a question mark whether the Philippines could develop some [outsourcing] momentum. Now, it’s a 3 billion industry.”

White Collar Force
Goldman’s report also notes the outsourcing industry has begun to expand beyond the capital Manila into university towns such as Baguio, as well as Clark (the former US military base), Cebu, Dumaguete, and Davao. “It is clear that Philippines is now very much on the global map for outsourcing,” the Goldman report said.

The recent growth spurt in the outsourcing industry in the Philippines has been fueled not by traditional low-value-added call centers, but more higher-end outsourcing such as legal services, web design, medical transcription, software development, animation, and shared services. Though call centers still form the largest part of the sector, the Philippines has begun leveraging its creative design talent pool, its large pool of lawyers and its professionals in accounting and finance.

“Philippines as a country offers us a unique talent pool for outsourcing services in legal as well as design services,” says Joseph Sigelman, co-president of India-based OfficeTiger, which was acquired by US printing services giant R.R. Donnelley in April. The company chose the Philippines as the springboard for its legal services outsourcing and expects to make Manila the main center for “pre-media” outsourcing work, including desktop publishing, composition, typesetting, and graphic design.

Familiar with US
Legal services were a natural extension of the outsourcing work the firm has been doing from its base in Chennai for years. “As an ex-American colony, there is cultural affinity and the legal system is based on US law,” says Sigelman, a native of New York. “In Manila, every lawyer seems to know what Roe vs Wade was about. In Chennai, they may have some of the finest legal brains in the world but not everyone has heard about Roe vs Wade or other key cases in US Supreme Court.” Most Filipino lawyers sit for US bar exams and that gives Manila a leg up over India, China, or Malaysia.

Design work is another place where Filipinos have an edge, according to Sigelman. He says he has found incredible depth of design talent in Manila; the kind of talent that is hard to come by in Bangalore, Hyderabad, or Chennai.

Talent Poaching
Another factor working in the Philippines’ favor is cost. In India, wage costs in outsourcing have risen 15 percent per annum over the past two years. This rise has outsourcing firms and clients looking for alternatives..

Already, heavy demand for office space, despite a boom in construction of new buildings, is causing upward pressure on rents. There are signs of a tight labor market too. New companies are offering “joining bonuses” to the most talented the day they sign up for the job. Many employees are given bonuses for finding new recruits. “It’s inevitable that costs will rise but the Philippines is still a very competitive place for the sort of work we are doing,” says Sigelman.

Money for Training
The government is focused on developing human capital through education and training to keep a steady supply of talent for the outsourcing sector. Manila is also beefing up the telecommunications infrastructure, he says.

Chasing the outsourcing wave is a smart strategy for an economy such as the Philippines. Compared with capital-intensive manufacturing, service businesses are cheap to set up and can generate a hundred times more jobs per dollar invested. President Gloria Macapagal-Arroyo recently earmarked $10 million for new trainees in the outsourcing industry. Students interested in outsourcing jobs are given vouchers that can be used for tuition at vocational institutes.
Unless cost esacalation gets out of hand or other infrastructure bottlenecks appear, the Business Processing Association of the Philippines projects that outsourcing in the Philippines could be an $11 billion industry employing 900,000 people by the end of 2010. That will put it close to where India is today.


Source:
By Assif Shameen
Business Week Online