Philippines Sourcing Industry Reshapes Communities

By: JoDeen Urban, Editor In Chief, The Source

Sourcing is an important pillar of the Philippines’ economy and recently several sector developments are shape-shifting the economy, infrastructure investment, education and community living models. Impressive growth has been achieved in IT-BPO (contact service centers, back offices, medical, legal and other data transcription, animation, software development, engineering design and digital content) and the Global-in-House Center segment. For example, ten times growth in the BPO sector from US$1.5 Bn in revenues in 2004 to an estimated US$16 Bn in 2014 has been achieved.

In April, the Manila Standard Today newspaper reported that IT-BPO revenues for 2016 could reach as much as US$27 Bn. Within the last year the contact center market grew by 19% which is evolving to meet the desire of customers who prefer to email, chat online or use social media, and is expanding beyond its traditional USA client-base and more actively engaging UK and Australian clients. Call center related industries now account for roughly 5% of the national GDP. According to the IT and Business Processing Association of the Philippines, this industry sector alone is expected to add 372,000 new jobs from 2014-2016.

Providing an enduring supply of high quality labor and service innovation should be
Possible given positive economic conditions and inwards investment indications.

The government’s challenge is to ensure that an enduring supply of high quality labor and service innovation is created to support these industries. This should be possible as positive economic conditions exist providing a solid financial foundation to create favorable education and training environments, and business investment opportunities.

Overall growth rates in 2013 were 7.2%, second only to China’s 7.7% among Asian countries, and the country enjoys investment grade ratings from all three major rating agencies. This means not only lower borrowing costs but also makes the Philippines and attractive proposition for investment. These factors lend themselves to jobs creation and economic growth. Moreover, for the period between 2004 and end-2013 the Philippine Stock Exchange Index has grown fourfold. The country enviably boasts reserves of US$83 Bn and debt levels of US$59 Bn. Earnings forecasts for the next year are anticipated to grow 16-18%.

The Philippines has also garnered several outsourcing rating honors which enhance its appeal. The 2014 Tholon’s Top 100 Outsourcing Destinations Report ranked Metro Manila (2) and Cebu (8) in the Top 10 beating other high profile locations. Of note, a large supply of college-educated, fluent English speaking professionals is a key growth driver of its BPO sector. Employee accents are an important tipping point. D.S. Rawat, India’s General Secretary of the Associated Chambers of Commerce, recently stated that “neutral sounding accents” are largely to blame for India losing 70% of its call center industry to the Philippines and $30 Bn in lost foreign exchange earnings this decade.

The government is also taking steps to diversify the nation’s service offerings and develop deeper bench-strengths as illustrated by the founding of Analitika, a public-private consortium designed to build the Philippines as a global analytics center. Formed in April 2014, Analitika is spearheaded by IBM with participation by the government, academia and another eight of the country’s biggest companies. Expected to account for 10% (US$ 212 million) of the US$ 2.12 Bn global analytics industry, Analitika believes it can create 200,000 jobs in the next five years and could expand by another 200,000 jobs beyond that.

Transformations

The boon is transforming the way some Filipinos live. In a 24/7 work cycle environment travelling call center executives can find hotels that will not vacuum hallways and rooms during certain daytime hours to enable sleep and will serve breakfast in the late afternoon. Call center agents can easily find 7 a.m. “happy hour” cocktails at the end of their shift.

Community planning has also been reshaped. To cement its reputation as a world class outsourcing location civil infrastructure planners green-lighted the building of the Mactan-Newtown information-technology park to complement Cebu’s other 25 fully functional IT parks.

The new P20 Bn 28.8 hectare economic zone is being developed by Megaworld Corporation (headquartered in Makati City, Philippines) as a “live-work-play” planned community in Cebu’s Lapu-Lapu City. It is in fact a mini-city complete with offices, shops, hotels, entertainment and leisure venues, homes, a school supervised by LASSO, and its own beach. It is expected to engage 45,000 knowledge workers in addition to the 100,000 full-time workers already employed in Central Visayas (mostly in Cebu and partly in Negros Oriental). The first tower of Mactan-Newton has been fully leased to Diamond Bar, California-based Enfrasoft Inc. and Florida-based The Results Companies.

Megaworld, who is investing US$ 5 Bn in 10 planned communities in the Philippines, is following a model established in Eastwood, a 40 acre site eight miles from the center of Manila which draws 100,000 people every day. Eastwood is the country’s first-ever integrated township project covering 17 hectrares. Also known as Philippines’ first cyberpark, Eastwood City has 19 completed luxury condominium towers, 10 first-class corporate office buildings, seven ongoing residential projects, 500 commercial and retail shops, three malls, and a modern IT Park. The community is also home to more than 22,000 residents and 55,000 workers to date.

Eastwood City                                      Photo Courtesy of Megaworld Corporation

Eastwood City
Photo Courtesy of Megaworld Corporation

The 10 Megaworld communities will represent 16 million new square feet of office space over the next ten years.

In 2013, Teleperformance, the world’s leading provider of outsourced customer experience management services, opened in its 11th site in the country at City Davao, Mindanao.

Photo Courtesy of Teleperformance

Photo Courtesy of Teleperformance

The site, celebrating its first anniversary this month, operates 24/7 and covers an area of 11,200 square meters. Features include over 1,500 employee workstations, a fitness gym, spacious cafeteria, service clinic, sleeping quarters, game and recreation area. Teleperformance Davao employs about 2,000 people.

Segment Sustainability Efforts

One sustainability challenge is manpower retention. Turnover in the BPO sector currently runs at 40-60% in the Philippines. This requires non-stop replenishment of employee ranks, drives human resource training costs skywards and reduces productivity.

With respect to education and professional development, the government is engaged with local and international companies doing business in the Philippines to develop Filipino skills in project management, administrative skills, and knowledge development of healthcare, health and safety, and the legal industries to meet the growing needs of knowledge-based sectors. Attention is also being focused on creating an understanding of cross-cultural differences to improve workers’ adaptability and ability to develop appropriate empathetic approaches to customer service. The acquisition of these differentiated soft-skills will be very important as the region’s 2015 open borders initiative begins to take effect with its knock-on consequences of increased competition.

The Philippines has an extremely high literacy rate of 93.4%. While the country is the 3rd largest English-speaking nation in the world there are continuing efforts to ensure that English remains one of the core languages. House Assistant Majority Leader and Cebu Representative Gerald Gullas Jr. is author of a bill seeking to reinforce the use of English in all school levels in a bid to make and sustain the Philippines as a leader in the global labor markets.

Also, with regard to the country’s push into data analytics, Trade Secretary Gregory Domingo stated in at the launch of Analitika that analytic courses are embedded in the curriculum of some schools. A total of 12 universities in the country have developed curricula for business analytics, and the consortium plans to offer courses beginning in elementary school with a heavier emphasis at Grades 11 and 12.

Governance

The country’s competitive position is also reliant on continued improvement of its governance quotient. The 2014 Bertelsmann Stiftung Transformation Index (BTI) ranked the Philippines in 49th place among 129 world economies, an improvement from 2013’s 68th position. The BTI evaluates the progress in consolidating democracy, economic development and political management for economies that are either developing or in transition. By way of comparison, Taiwan topped the list and Eritrea was at the bottom next to Syria and North Korea.

The report findings noted several areas of challenge for the government to address including the slow reform process, corruption levels, coordination between state, private enterprises and research institutions, ethnic violence (particularly in rural areas and Mindanao) and a widening gap between the rich and poor.

Where Does It Lead?

With a national population of 100 million, 900,000 of whom are full employed in the services exports segment (ITO, KPO and BPO) the government’s continued, concerted development of this sector presents ample opportunities to engage more Filipinos in its quest to distinguish itself as the leading sourcing destination. According to the IT & Business Process Association Philippines (IBPAP) this task should not be viewed lightly. India is the world’s dominant global supplier of ITO & BPM services, employing over 2.8 million people and grossing US$ 75.8 Bn. While some Indian contact center business has been recently lost to the Philippine’s it is facing the Philippine’s challenge head-on to create even more formidable and innovative service delivery platforms.

Better utilization and development of Tier II and III locations is critical.

Currently, industry is principally concentrated around only two hubs: Manila NCR (National Capital Region) and Cebu. It is estimated that 70% of service providers are located in Manila NCR putting saturation levels at the top of minds. Better utilization and development of the country’s Tier II (Davao City, Santa Rosa and Iloilo City) and Tier III locations (Mandaluyong, Matalpa, Pasig) is critical to retain the talent pools in those areas – Finance & Accounting agents in Sta. Rosa, Laguna, engineers in Angeles (Clark), Pampanga, and nurses across the Visayas and Negro provinces who could serve the HIMO segment.

The Philippines’ near and mid-term challenges include widening the geographic spread of service delivery locations, improving the retention ratios of its contact centers employee base, transitioning talent pools into non IT-BPO higher value services, improving education and professional development, continually updating and improving the telecommunications infrastructure, and supporting industry-policy frameworks.

About the Author: JoDeen Urban is an independent management consultant working with established companies as well as start-ups on strategy, organizational capability and business model innovation.

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