Part Two: The global perspective and Philipine competitiveness

The Global IT-BPM Industry: the Immense Opportunities and Tremendous Challenges

It has been 16 years since the first call centers set up shop in the Philippines, and what was once hailed as the sunshine industry has matured into an established business sector that has evolved beyond the initial voice services to become a diversified range of other capabilities, all of which have combined to transform into an economic pillar that is outpacing revenues provided by the Overseas Filipino Workers (OFWS) for the national economy.

The overseas global outsourcing industry itself has undergone many changes, and a revolution brought about by technology and the shrinking of international economic borders still lies in store. The opportunities that exist for outsourcing destinations like the Philippines still abound—but with them, are tremendous challenges that must be confronted and addressed head-on if the nation’s position in the grand scheme of things is to continue.

dagupan-city-ictbpm-roadmap-creating-the-next-wave-of-progress-final-for-printing_img_18First, the growth of the global outsourcing industry has been continuing unabated the past decade, and projections have forecasted that this growth will double by the end of 2016. Ten years ago, the value of the global outsourcing market was $74 billion. By December of 2016, its value is projected to rest at anywhere from $256 to $268 billion. Of this amount, $136 to $144 billion will come from the IT and engineering services outsourcing (ESO) market; the rest, which will reach an estimated $120 to $124 billion, will come from the overall business process outsourcing (BPO) market.

In another game-changing development, mid-size companies from the U.S. and Europe are also getting into outsourcing to reduce their operational costs. Unlike multinational conglomerates, these smaller firms were initially hesitant to try outsourcing and, up to now, are still hedging their investments on outcome-based arrangements. Still, they could not deny the attraction of labor arbitrage that allows them to create higher profit margins. According to the Duke Fuqua School of Business Offshoring Research Network, two-thirds of middle-sized companies have aggressive business expansion plans, and 25 percent of them are seriously considering offshoring. As the Fuqua School confirms it, “Midcap companies are poised to take the plunge. IT-BPM companies all over the world would do well to anticipate this trend and prepare themselves to be agile and flexible enough to cater to that emerging market once the opportunity arises.

IT-BPM companies must also constantly prove that they can innovate and address the changing requirements of their clients. Another thing that has changed in the global BPO sector is that cost-reduction and labor arbitrage, while still motivators for companies as evinced by the nascent mid-sized company market, are no longer the sole reasons that drive the engine of the global outsourcing market. Innovation and talent are another. The continuous transformation of technology is compelling companies everywhere to adapt or die; the more courageous ones with foresight want to race ahead of the trend and have a hand in directing the change. While the mid-company market value IT-BPM companies for their cost-efficiency, the larger companies and multi-nationals are propelled by innovation and knowledge-building. They no longer turn to outsourcing in order to get certain tasks accomplished, but also to receive information, guidance, and insight on how to succeed in their business. They also look to the talents within these third-party providers for radical out-of-the-box thinking, new concepts, and groundbreaking techniques that can help them continue their leadership foothold.

dagupan-city-ictbpm-roadmap-creating-the-next-wave-of-progress-final-for-printing_img_20These new concerns have also made potential IT-BPM clients more cautious when it comes to their investments. Aside from the vaunted cost-reduction, they look at other important variables such as locations of the IT-BPM companies and their vulnerability to risk. They check the strength of the support coming in from both the outsourcing country’s government and the private sectors. They make a determination if the climate in the offshoring countries makes it safe and secure enough for them to build and continue their business – legally, politically, economically, and environmentally.

Another factor that IT-BPM companies would do well to consider is that, while not abandoning outsourcing, their foreign clients are becoming more inclined to doing it onshore or near shore. This means contracting the contractual back-office work to companies actually located on American shores or territories only a few

thousand miles away. These are the challenges that face IT-BPM companies today, regardless of their countries of origin. They must give these challenges all due consideration, and respond to them effectively, if they are to take advantage of the opportunities that lie ahead—and which are still actually growing.

The Road Ahead. While cost reduction and labor arbitrage remain attractive incentives for clients to continue outsourcing to countries outside their immediate hemisphere, what is becoming increasingly paramount are the adaptability and technical flexibility of the talent in these countries to keep up with the frenetic pace ofinnovation. Others equally important are political stability and government support for the foreign clients, environmental conditions that can withstand the disruptions triggered by climate change, and longstanding security for the workforce who is composed of foreign nationals and local talent alike. The absence of several of these factors may cause the client country to pull out from an outsourcing destination and instead invest in more proximate locations.

The need to innovate. Back-office services that cater to a wide range of industries – like healthcare, engineering, finance and accounting, architecture, IT, and design – have taken center stage in the international outsourcing industry. They have emerged as the core sector of the industry, complementing, if not actually relegating, the voice sector to a secondary position.

Consider these 2016 revenue projections from the research of IT-BPAP, Everest Global and Outsource2 Philippines: IT and Engineering Services Outsourcing (ESO), $136 – $144 billion; non-voice, $70 to $73 billion; and voice, $50 to $51 billion. The same research shows that this trend started as early as 2010, when IT and ESO accelerated to the top of the industry with $65 to $80 billion in revenues; voice, then, still held the secondary position with $25 to $27 billion, while non-voice, then a fledgling market, was only third with $15 to $18 billion in revenues.

The pre-eminence of IT, engineering, and other back-office services heralded the influence of technological development which continues to accelerate rapidly today. Emerging trends like the cloud technology and the Internet of Things (IoT) continue to challenge companies to push their own envelope and expand theirboundaries in order to change with the times, and survive.

dagupan-city-ictbpm-roadmap-creating-the-next-wave-of-progress-final-for-printing_img_21According to AT Global Kearney Services Index 2016, robotic process automation and software solutions that can replace easy-to-do human skills will make the outsourcing landscape even more competitive. For example, robotic software tasked to do accounting work costs only a fifth of onshore services and a third of offshore services, but does the job three times faster. Automation can also result in a savings of 25 to 50 percent. As a result, outsourcing destinations that rely merely on English fluency and administrative tasks that can easily be given to programmed software are at risk of losing their accounts. In this tough new world, Kearney says that the advantage lies with outsourcing destinations that have the traditional BPO framework and yet have an abundance of talent with “the requisite soft skills that machines cannot replace.

dagupan-city-ictbpm-roadmap-creating-the-next-wave-of-progress-final-for-printing_img_22Other outsourcing countries that will remain competitive are those that can host or provide services that can work with cloud technology or the creation of mobile apps. This new “app revolution will shatter existing structures because it will go beyond responding to the needs of the consumer market. Companies will soon develop apps not for their customers but for themselves and their own internal processes; employees will collaborate with each other, meet online, and transact their businesses in a workflow process that is run through several apps. Research from Datamark Incorporated says that companies will be creating apps that can facilitate and make more efficient “supply chain management, logistics, purchasing, sales support and other processes.

The emergence of apps as an internal corporate tool is both a threat and an opportunity to outsourcing countries. Obviously, IT-BPM’s which have as their core competencies these business process services that can be replaced by these apps risk losing chunks of their business. On the other hand, IT-BPM’s with a highly skilled workforce who can conceptualize, create, design, implement, and continue to improve on these apps will have a secure foothold in the market.

A more sophisticated workforce. The challenges of technology are also increasing the standards for the global outsourcing talent pool. The days wherein premiere foreign clients are willing to pay an arm and a leg to outsource tasks for “glorified administrative personnel will soon go the way of the simple text-and-talk cellphone. The triumphant global outsourcing worker must be a designer and an innovator. He can think on his feet and anticipate what his client needs, and not just respond to them. He must be familiar not just with one foreign culture, but with several. He is constantly upgrading his skills and knowledge, and can boast of several core competencies, and not just one.

As an example, Datamark illustrates the challenges – and the opportunities – that will face the new global customer service representative today – “The world will recognize the evolution of ‘human-powered’ customer service. Once a customer has exhausted self-service options (FAQs; intelligent, web-based CSR robots; interactive voice response (IVR); etc.) and needs a ‘real person.’ the customer will likely speak to a highly skilled agent trained to handle complex problems in more than one language and through multiple communication channels. These customer service representatives will respond to consumers over the phone, through web chat windows, by email and through social media such as Twitter, Facebook, LinkedIn and Google+.

Safety and security on all levels. Business continuity, political stability and support, and environmental safety are other factors that foreign clients weigh in considering their outsourcing destinations. Safety and security on the business, political, economic, and ecological front are non-negotiable for these companies that are fighting their own recession, government upheavals, and currency fluctuation at home. In a sense, the outsourcing destinations become their haven for permanence – a structural safety net, if you will – while they are wrestling with issues back home.

Obviously, they will favorably look on an outsourcing destination that has a political and government leadership that recognizes the value of what they offer, and are willing to provide incentives and other forms of private-and-public-sector partnership as a means of support. Institutions that remain strong for decades and impervious to any kind of economic tumult are an asset. On the other hand, a considered outsourcing destination that is perpetually subject to a change in government leadership, coup d’ etats, and mass

demonstrations tends to spook off potential investors. The prevalence of corruption and its impact on the growth of the economy is another factor that can give potential investors pause.

Tied to political stability is economic predictability and reliability. While cost reduction and labor arbitrage will always weigh in on the side of outsourcing destinations, foreign clients increasingly check on the other costs involved in outsourcing, and study if their overall investments will continue to give them significant (or huge) profit margins. Salaries of the workforce, expenses incurred in training them, the rise of property and building costs, inflation and taxes, housing for foreign nationals, telecommunication and other infrastructural investments – all these are being monitored to see that profit margins increase, and not decrease. Should the increase in costs cut into their profit margins, the foreign companies will consider relocating to a cheaper outsourcing country.

Finally, foreign clients are more cognizant now of the environmental challenges that can break out without warning, and their resultant effect on their outsourcing destinations. Earthquakes, flash floods, typhoons, and other major calamities that can literally tear down buildings, injure and kill people, and destroy property can interrupt work flow and hamper business operations. While many of these calamities are well outside anybody’s control – and even the industrialized countries suffer their fair share of them – foreign clients assess which outsourcing destinations are more inclined or adaptable to create fail-safe mechanisms and contingency measures to ensure business continuity.

Cushman and Wakefield’s 2016 study on BPO and Shared Services location elaborates on the questions that foreign clients are asking in looking for outsourcing destinations: “How important is the availability of labor? What are the key costs to consider? Is political and economic stability important? What are the key risks for the business?

The study also notes that, in finding the answer to these questions, more and more foreign clients are looking beyond the traditional BPO locations to discover more hospitable, compatible frontiers.

The Top IT-BPM countries. At this point, we may well ask, “Given all these challenges, where does the Philippines stand? The reply to that question will be answered in the next section. To conclude this chapter, it is best to take an overview of the other countries of choice which make up our competitors.

dagupan-city-ictbpm-roadmap-creating-the-next-wave-of-progress-final-for-printing_img_23Asia-Pacific: India remains the incontestable global leader in outsourcing because of an excessively abundant, highly skilled, and cost-efficient workforce. China has emerged as a contender because of its workforce’s improvement of its English-language skills and cultural adaptability. The liberalization of its market and the lifting of rigorous restrictions are also attracting foreign clients. However, China’s weak protection of intellectual property rights remains a firm deterrent to solid growth and the influx of more investors. Malaysia has grown steadily as an outsourcing player precisely because it protects intellectual property rights; at the same time, it has steadily developed its labor pool while seeing to it that other costs, such as property and infrastructure, remain low.

Latin America. Mexico remains in the radar of most American clients because of its proximity which means faster travel-time, an increasing English-fluent talent pool, and numerous professionals who are skilled in ICT and engineering. Telecommunications infrastructure and services likewise remain solid and stable. Meanwhile Costa Rica’s small labor force makes labor costs relatively expensive, but the talents’ high quality more than make up for the cost. The business environment is highly investor-friendly and the locals easily establish a connection with American culture. Colombia has caught the eye of foreign clients because of its reliable nationwide infrastructure and low labor and other related costs which were brought on by the depreciation of their peso.

Eastern Europe: High regulatory costs in Poland are balanced by a cost-efficient labor market. Romania’s labor force is also attractive to foreign clients, but its business environment needs to be more flexible. Finally, Ukraine’s political unrest is compensated by the low costs of doing business in the country.

Africa: South Africa is the leader in the region because of its highly literate labor force and the security it guarantees to foreign nationals, especially their business entities. Egypt’s highly educated workforce remains an asset, despite foreign concerns about the political and economic turmoil in the country. Turkey’s growth has been steady because of its labor availability and reasonable infrastructure costs. Kenya is making slow but increasing strides because of its infrastructure and time-zone compatibility with foreign clients.

The Philippines in the IT-BPM Industry

The Philippine leadership in the global outsourcing industry. Despite the challenges, the Philippines remains a major player in the international IT-BPM industry, and is still recognized as second only to India when it comes to back-office services. Foreign clients are still drawn by a very literate, hardworking, and young and energetic talent pool who has proven that it can adapt very well to changes. The country has likewise shown that it can create and perform services well beyond the voice sector, which it has led for the past decade. English-fluency and IT skills are among the workforce’s unquestioned core competencies. Government support and stability have proven to be consistent, and many foreign clients have set up shops in other cities outside the National Capital Region. Still, there remains a lot of room for improvement, such as the creation of stronger linkages between the public and private sector, the enhancement of tax incentives, increased training for new graduates and the aforementioned younger workforce, and the empowerment of regions hosting BPO hubs including support of their distinctiveness in order to attract more clients while sustaining the current ones.

Revenues and employment. According to IT-BPAP, Everest Global and Outsource 2 Philippines, the archipelago stands to earn anywhere from $15 to $25 billion by the end of 2016, contributing seven to nine percent to the Gross Domestic Product (GDP). Fulltime employees or direct employment will rise up to 1.2 million while another 3.2 million jobs will be created in ancillary industries that benefit from the IT-BPM sector, such as food, retail, transport, etc. The high-paying IT-BPM jobs play a huge part in creating a strong middle-class with disposable income and who can contribute further to national development. The industry’s overall contribution to the GDP already equates, and might surpass, that of the OFW industry which has long propped up the economy.

 

THE PHILIPPINE IT-BPM INDUSTRY

dagupan-city-ictbpm-roadmap-creating-the-next-wave-of-progress-final-for-printing_img_24

dagupan-city-ictbpm-roadmap-creating-the-next-wave-of-progress-final-for-printing_img_25The A.T. Kearney study notes that the Philippines is recognized as second only to India when it comes to global leadership. The Philippine workforce’s innate creativity, adaptability, and resilience have marked it as among those that can flow with the evolving business environment. Its people can and are more than able to handle the soft skills that would be forever outside the realm of robotic software at its most mature incarnation. Half a million college graduates enter the job market every year, with a 92.5 proficiency rating in the English language. This English-language proficiency does reduce the need for the kind of immersive training that can be found in countries like India, which in turn leads to savings for foreign clients.

The Philippines remains number one when it comes to the voice sector. Thirty percent of its clientele comes from the U.S, and another 15 to 20 percent are based in the United Kingdom. In the non-voice back-office areas, it has gained inroads in services such as banking, finance, media, and KPO, and is perceived by many foreign clients as a worthy alternative to India. While it still has limited penetration in the IT-ESO market, global perception among clients has it that the Philippine competence in this sector can only grow with time, especially given the Filipino penchant for innovation despite limited resources.

Aside from talent, the country has also gained good marks among foreign clients for its improvement in infrastructure, business environment, and costs in taxes and regulations. In Forbes’ survey for the best countries to do business in, the Philippines landed in the 82nd position out of 146 countries, effectively outpacing India and China.

The Next Wave Cities

In its 2014 assessment of the Philippines, a Citibank report notes that economic growth has been shaping the cities and the regions well outside Metro Manila. Central Luzon, Central Visayas, and Southern and Northern Mindanao are projected to enjoy sustainable momentum, due to continuous building and enhancement of infrastructure and the development of regional economic zones that can give birth and sustainability to corporations, business entities, and technological hubs. These areas also are supported by educational institutions and colleges that nurturetalent and shepherd their entry into the workforce; adequate power and energy supply; and abundant natural resources.

dagupan-city-ictbpm-roadmap-creating-the-next-wave-of-progress-final-for-printing_img_26IT-BPAP has also named the Next-Wave Cities which are being groomed or encouraged to become prime locators for the incoming tide of new locators and foreign clients. The local government as well as the private sector in these areas are being enjoined to develop the necessary structures that can support the advent of new enterprises and emergent IT-BPM companies. Housing has to be available and properly built and managed to accommodate not just the workforce, but the influx of ancillary talent coming from related industries. Schools and other institutions must partner with the LGU’s and the IT-BPM’s to continue the fresh supply of talent every year. Telecommunication and internet services must be constant, strong, and remain beyond disruption. Twenty-four-hour facilities such as transport, restaurants, and even recreational centers must be developed and encouraged to ensure that the 24-hour-run working lifestyle of the IT-BPM ecosystem flourish and be sustained.

The Department of Science and Technology (DOST) has named the following among the Next-Wave cities the past years: Baguio City, Davao City, Dumaguete City, Iloilo City, Lipa City, Metro Bulacan (Baliuag, Calumpit, Malolos City, Marilao, and Meycauayan City), Metro Cavite (Bacoor City, Dasmariñas City, and Imus City), Metro Laguna (Calamba City, Los Baños, and Sta. Rosa City), Metro Naga (Naga City and Pili), and Metro Rizal (Antipolo City, Cainta, and Taytay).

This year, the DOST and IT-BPAP added the following to the list: Cagayan de Oro City, Dagupan City, and Dasmarinas City. Regions and cities are included in the Next-Wave list based on their compliance with the following criteria: talent pool access, quality of infrastructure, and investor-friendly business environment. Next-Wave Cities are named as such because they are assessed as being able to accept, support, and sustain the entry and growth of IT-BPM hubs.

Challenges and response. Despite its considerable gains, the Philippines still faces tremendous challenges if it is to maintain its leadership position in the global picture while expanding its reach to capture new markets. Talent, while abundant and respected, must still be nurtured and grown to scale if it is to continue meeting the demands of the voice sector, while showing itself as a worthy competitor against India and the other outsourcing destinations for the non-voice sector. Scalability must also be boosted in the other business aspects, aside from labor, if the sectors themselves are to continue their growth. Country marketing must increase its visibility to a significant degree, especially among the European market, if the Philippines is to remain at the top of mind of present and potential clients. Continual improvement must be made on cost competitiveness (including wages, infrastructure, telecom, real estate, etc.), the regulatory environment, capital availability, and risk perceptions.

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Compos Mentis Inc.
Created for the Dagupan ICT Council, Dagupan, Pangasinan
All Rights Reserved 2016