Global Economics

The Philippines' Awesome Outsourcing Opportunity


India's dramatic economic rise this decade, powered by its role as the back office of the world, has developing countries from Argentina to Vietnam scrambling for a piece of the action. With good reason: Researcher Gartner estimates offshore infotech and business-process outsourcing amounted to $34 billion globally in 2005 and could double by 2007.

And the race is on in Eastern Europe, Latin America, China, and Southeast Asia to land jobs and economic growth by answering customer phone calls, managing far-flung computer networks, processing invoices, and writing custom software for multinationals from all over the world.

Though India continues to have a lock on most of this global business, that is starting to change. Even Indian outsourcing powerhouse Infosys (INFY) has started increasing staff in China and the Czech Republic this year, is exploring Latin America, and likely will eventually set up a base in Southeast Asia.

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.

Could all of this be a golden opportunity for the Philippines, long regarded as the economic laggard in Asia? This 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 (see BusinessWeek.com, 9/18/06, "Let's Offshore The Lawyers").

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 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 merely $24 million.

LANGUAGE ADVANTAGE. The outsourcing sector currently employs over 200,000 people. That is still way behind India's 750,000, but Manila is catching up fast. The Business Processing Association of Philippines estimates the industry will chalk up 57% growth this year with total revenues of $3.3 billion and is on track to deliver nearly 48% 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 President Gloria Macapagal Arroyo's strategy to put strong growth drivers in place," says Philippine Cabinet Secretary L. Ricardo Saludo.

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, though it lags some of the other locations in infrastructure.

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 U.S. 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."

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 U.S. 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 U.S. 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 U.S. 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 U.S. 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 U.S. Supreme Court." Most Filipino lawyers sit for U.S. bar exams and that gives Manila a leg-up over India, China, or Malaysia.

Design work is another place where Filipinos have and 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.

OfficeTiger's clients include large insurance companies, retailers, and publishers of books and directories. OfficeTiger is looking at Philippines operations to provide 40% to 50% of its total annual revenue growth over the next three to five years.

TALENT POACHING. Another factor working in the Philippines' favor is cost. In India, wage costs in outsourcing have risen 15% per annum over the past two years. This rise has outsourcing firms and clients looking for alternatives. With that in mind, the risk for the Philippines is that its relatively low office-rental and labor costs could also start to rise dramatically.

Already, heavy demand for office space, despite a boom in construction of new buildings, is causing upward pressure on rents. Companies that are expanding say costs are starting to escalate fairly rapidly. There are signs of a tight labor market, too. Excessive poaching of talent that was the norm in India a few years ago is becoming common in Manila as well.

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. Cabinet Secretary Saludo says 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 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 escalation gets out of hand or other infrastructure bottlenecks appear, the Business Process Association of 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. "Five years from now, there could be a lot of countries doing as much as India is doing today," says Infosys CEO Nilekani. "We are just scratching the surface in outsourcing and off-shoring."


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