The Growth of the Philippine Outsourcing Industry

Posted on April 30, 2011 by eli

The Philippine outsourcing industry is currently holding 15% of the global market share. The country is the most preferred offshoring destination in Southeast Asia, employing more than 700,000 workers, most of whom are in the call center market. The Philippine outsourcing industry is made up of independent companies and contractors operating on shared services offices. Many multinational companies have outsourced their contact center operations to the Philippines owing to the country’s high English literacy.

The Business Processing Association of the Philippines (BPAP) estimates that the Philippine outsourcing industry has the following workforce profile: call center agents – 62% , back-office – 18.5% and KPO – 9.5%. 5.4% of the outsourced IT workforce are software engineers, 3.2% are transcriptionists, and 2.2% are animators. As more companies outsource their operations to the Philippines, the figures are expected to increase in few years’ time.

The Philippine BPO sector is growing at an annual rate of 46% since 2006. Data from the BPAP, the BPO Services Association and Board of Investments showed that the BPO sector employed approximately 435,000 as of 2008. The industry earned more than $6 billion that year, making the country the 3rd largest BPO provider in the world. The annual revenue of the Philippine BPO industry is estimated to grow to $11 billion – $13 billion in 2010.

Call center offshoring is the major force behind the strong growth rate of the Philippine outsourcing industry. As of 2010, there are 350,000 call center agents in the Philippines, compared to 330,000 in India. Seven years ago, the sector merely employed 2,400 people, with annual revenue of only $24 million.

The country’s strategic location and highly skilled workforce are attracting even India-based outsourcing providers. Indian BPO giants like OmniGlobe, TCS and Compvue have set up their subsidiaries in the Philippines. Bangalore-based Wipro Technologies is now operating a local branch in the Philippines with more than 2,000 workers.

The KPO sector has been growing strongly as well over the past years. Legal services, business analysis, accounting, web development and design, software development, animation and medical transcription have registered considerable growth rates during the recent years. Back office or non-voice services earned $1.1 billion in 2009. The KPO industry’s computer games sector registered a 50% revenue growth in the same year. The legal and accounting sectors are poised to grow continuously given the large number of law and accounting students across the country.

The Philippine outsourcing market is improving its competitive edge as it becomes more diversified. The country’s KPO providers are increasingly catching up with its Indian competitors. As the local market gets more high-value jobs like software development and animation, the country is poised to grow its overall global market share.

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Philippine Outsourcing Industry Gets Bullish Outlook from KPO Firms

Posted on April 28, 2011 by eli

As the Philippine outsourcing industry gets more diversified, more global companies are recognizing the country’s potential to become a major KPO player. The local knowledge process outsourcing industry of the Philippines is rapidly growing, though it is not as developed as the call center industry which constitutes a large percentage of the local BPO market.

Seeing the large supply of specialist workforce of the Philippines, Hewlett-Packard has grown its outsourcing operations in the country. Since its service contract with Procter and Gamble, HP has increased its Filipino knowledge workforce. To date, the local delivery center is serving around 80 companies, said Noel Mendoza, director of the global delivery center of HP  Philippines, which now employs 1,500 people. That is a huge leap from 1,000 workers the company had in 2005 when it won a $3 billion IT service contract with P&G. The local BPO unit of HP specializes in infrastructure and applications management services, mainly in the field of SAP. It also provides business intelligence solutions.

HP cites the availability of talented IT workers as the main reason for expanding its KPO business unit  in the Philippines. Differentiating KPO from BPO, Mendoza cites the specialist nature of KPO work versus the more general aspect of business processes outsourced to typical providers. In the case of HP,  technical expertise is crucial in meeting business goals, which explains its strategic location in countries with high number of IT workers and specialists.

Its highly talented IT workforce allows HP to provide critical, high value services to its clients. For HP and other IT service giants like IBM and Accenture, the availability of knowledge workers determines the sustainability of business. KPO involves more than vendor-client relationship as it requires customization of complex processes and technology solutions which requires expertise and specialized skills.

Mendoza has a positive outlook on the prospects of the knowledge process outsourcing industry of the Philippines. He said that the presence of HP’s rivals in the Philippines affirms its KPO capabilities. He is optimistic that the Philippine outsourcing industry can replicate the success of India, the IT outsourcing capital of the world. Bill Pfluger , former general manager at Chevron Shared Services, cited the country’s BPO incentive scheme and skilled workforce as the reasons why the company chose to operate there. Gregory Kittelson, consultant at Kittelson and Carpo Consulting, said that low cost, great talents and hospitality make the Philippines one of the most preferred BPO destinations in the world.

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Philippine Outsourcing Analysts Eye Growth in Publishing Market

Posted on April 26, 2011 by eli

The Philippine outsourcing industry hasn’t fully tapped the lucrative publishing market. The current outsourcing market is mainly comprised of call centers and low-value BPO service providers. The operations of KPO firms providing specialized services like legal process outsourcing and publishing haven’t grown as much as the leading global KPO providers. There is so much area for market expansion for the Philippine outsourcing industry if KPO sector gets the same support and financing as call centers do.  KPO is considered as a high-value service because it requires employment of specialists and professionals or the so-called knowledge workers .

ValueNotes projected outsourced publishing revenues in the Philippines at $100 million in 2008. There are about 30 vendors, including SPI, Innodata and Asiatype. Several publishing service providers already have a long presence in the market, with some operating as long as two decades. In comparison, India has more than 100 outsource publishing providers, giving the country a substantial share of the global publishing service market, especially in the scientific, medical (STM) and publishing segments.

The publishing outsourcing market of the Philippines has good exposure to STM materials. Recently, educational and corporate publishing are gaining momentum. Majority of large and mid-sized BPO firms are growing at a rate of 20%-30% annually for more than ten years. These trends suggest that foreign publishers are recognizing the competitiveness of world-class Philippine KPO providers.

It is estimated that the workforce of the Philippine publishing outsourcing sector is only one-fifth of its Indian counterpart. However, some of the largest KPO providers in the world have operations in the Philippines, including SPI and Xlibris.

The Philippine publishing outsourcing industry has so much room for new entrants. Around 80% of all industry revenues come from the top 2 KPO providers, compared to India where 80% of the industry revenues come from 10-12 vendors.

A large population with strong English communication skills remains the competitive edge of the Philippine outsourcing industry. With 15,000 technology graduates every year and favorable cost structure, the Philippines can provide long-term cost savings to foreign publishing firms by providing copy-editing, graphic design,  art rendering and other publishing related services at a fraction of what they would cost in the US.

Despite the rising cost of operations, many publishers are still unwilling to offshore all of their publishing jobs due to quality concerns.  However, the Philippine experience showed that the local workers can meet the standards of international publishers. Providing value-added service is a new area of competition that the Philippine outsourcing firms can exploit to grow their business.

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Philippines Expands Legal Process Outsourcing Service

Posted on April 24, 2011 by eli

The Philippines is one of the emerging players in the legal process outsourcing industry. Legal process outsourcing services range from clerical to high-skill tasks. LPO pioneers originally offered legal transcription, document review, and writing of pleadings and briefs. Now, many legal process outsourcing providers are capable of performing high-end tasks such as legal research, document analysis, contract drafting, financial reporting, and patent process outsourcing.

LPO clients experience the same benefits enjoyed by other types of businesses that outsource their operations – lower costs, higher productivity and scalable operations. Attorney fees in the US range from $150-$350 dollars per hour for routine service, whereas LPO providers in the Philippines charge only a fraction. Law firms can reduce their overhead expenses related to administration, accounting, information technology and clerical salaries by tapping on Philippine outsourcing providers. This will significantly impact their bottom line considering that 17% of average firms’ total expenditures are overhead expenses.

According to a study conducted by Trestle Group, legal firms are faced with growing calls to decrease their service fees. Legal departments of financially troubled corporations are the likely targets of cost-cutting since they are not revenue-generating business units. This is another factor that fuels demand for legal process outsourcing.

Law firms will enjoy higher productivity rate by outsourcing legal paperwork. Due to economy of scale, better technological skills and trained staff, LPO firms can process paperwork faster and more effectively than a law firm, says Amanda Carpo of consulting firmKittelson & Carpo Consulting.

The global LPO industry is growing at rate of 20% a year and is estimated to be worth $1 billion. KPO industry revenues are projected to grow to $17 billion  by 2013-14. In 2010, there were 5,200 professionals in the LPO industry in India and the Philippines, with revenues reaching  $300 million. LPO is projected to grow to 18,000 workforce and $960-million market by December 2015. The global recession had positive net impact on the LPO industry. Although real estate paperwork dropped significantly due to poor market condition, demand for document review, litigation and services pertaining to compliance increased.

Why law firms prefer to outsource their paperwork and professional jobs to the Philippines? The Philippines has a large college-educated population. Around 400,000 students graduate from college every year.  In 2010, 4,847 law graduates took the bar exam, 20.26% of whom passed. In the preceding year, there were 5,903 graduates who took the bar exam, with a passing rate of 24.58%. Aside from the highly educated workforce, the Philippines has a large network of BPO operators that run KPO accounts alongside other BPO services.

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Philippine Outsourcing Industry to Grow European Clientele

Posted on April 22, 2011 by eli

Team Europe, a group of industry associations in the field of BPO, is leading an industrywide effort to promote the Philippine outsourcing industry to Europe. The Philippines has a potential to get US$40 billion share of European outsourcing market, but it is yet to diversify its clientele which is mainly comprised of US firms. Europe only constitutes a small percentage of the Philippine BPO revenues. More than 65% of the local BPO market services US-based firms.

Europe is now beginning to recognize the benefits of offshoring to the Philippines. Team Europe is eying the United Kingdom, the Netherlands, Scandinavia and German speaking countries as the potential market of local BPO firms. These countries have a plethora of outsourcing needs that can be met by Philippine offshoring companies, said Stephanie Weber, business development manager of Team Europe. Weber said that several European companies are looking to expand their offshore business in the Philippines.There are already a good number of corporate giants in Europe that are outsourcing their operations to the Philippines, including Atkins, Siemens, Ericsson, Deutsche Bank, HSBC, Henkel, Shell and Nestlé.

Outsourcing contracts from the UK is expected to reach $160 billion by 2011, while Germany, France and Italy are expected to spend $125 billion, $92 billion and $50 billion respectively. Nordik countries are projected to spend $63 billion.
Data security regulation poses a big obstacle to Philippine offshoring providers wishing to conquer Europe. There are 36 EU regulators that oversee the security and privacy aspects of business operations. Offshore service providers need to be familiar with the requirements of Data Privacy Authorities in every EU country to ensure compliance and to catch up with their European competitors.
Nevertheless, there is a strong demand in Europe for skilled IT developers. A study conducted by IT Outsourcing Europe Ltd., entitled European IT Outsourcing Intelligence Report 2010, showed that the majority of Dutch companies that did not have offshore contractors felt that they were not getting the highest possible level of service for their software/website development needs. Businesses in the Netherlands cited long time frame, high cost and bugs as the leading obstacles to in-house IT development. Many Dutch companies did not consider outsourcing due to fear of losing managerial control, although they cited lack of skills as the major factor that would prompt them to turn to BPO firms.

Weber said that promoting the Philippine offshoring industry to the European market will take several years to yield significant results. So far, the country earned the United Kingdom’s National Outsourcing Association (NOA) Award for Best Offshoring Destination. The advocacy group is planning to get more media coverage and conduct outbound promotions for the Philippine BPO industry, especially for the IT sector. Recently, it launched its official website in which BPO firms can share case studies and success stories. Team Europe also vows to bring more awareness on the Philippine BPO industry by getting BPO firms to participate in exhibits and trade shows in Europe.

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Which Philippine Outsourcing Providers Can Deliver in the Long Run?

Posted on April 20, 2011 by eli

Foreign companies in search for Philippine outsourcing providers have to check the short-term and long-term stability of their prospective BPO contractor. The ability to fulfill the terms of service agreement does not solely depend on the skills of the workforce, experience of the BPO provider and the quality of facilities and information technology.Financial stability is also a major determinant of the success of an offshore provider. Market uncertainties affect even the largest company, so clients must get some assurance that their chosen BPO provider has the ability to withstand common risks faced by the industry, notably contract cancellation.

According to Gartner, 25 percent of the top BPO companies in 2009 will cease operating under current ownership by 2012 due to drastic changes in the market landscape. The Philippine offshoring industry has seen a number of mergers and acquisitions in the past years. Foreign clients should be aware of these changes in the competitive landscape to leverage their business contracts and avoid business disruptions. Here are some of the things buyers should look at when assessing the business stability of BPO vendors.

Long-term profitability of existing contracts

Many BPO providers lose sight of long-term profitability as they aggressively seek for whatever projects that can bring cash instantly. Philippine outsourcing firms that can turn their businesses into a standardized revenue-generating activity are less prone to financial downturn. Prospective clients should assess the deals currently handled by their preferred offshore vendors to get an idea about their profitability. This will also test the willingness of the BPO provider to build an honest business relationship.

Although some firms will not disclose information about their contracts with prospective clients, others would be willing to do so for the sake of building trust. There is a growing awareness on the importance of mutual dependency in the BPO sector, so disclosing such information is becoming an acceptable practice.

Subcontracting

Philippine outsourcing providers are constantly seeking for more clients to ensure long-term profit. However, multiple contracts can lead to backlog, prompting some BPO providers to subcontract to a competitor. Thus, knowing the current capacity of a BPO provider is important in determining if it is under-utilizing or overusing its resources.

Availability of Capital for Critical Investments

Outsourcing companies that lack capital funds are likely to fail to win deals that are important in their future success. More BPO providers are now investing in platform intensive approaches in which buyers can adopt a standard platform rather than the more expensive ‘lift-and-shift strategy’. The latter approach may require millions of dollars of investments to win a contract.

Contingencies for Contract Termination

As the Philippine outsourcing industry faces more mergers, acquisitions and tougher competition, clients must know how the ever-changing market condition will affect their BPO contract. Contract termination is on the rise and likely to be the trend in the years ahead. Prospective clients need to develop a contingency plan in anticipation for unsuccessful BPO contract. Conditions like right to terminate the deal in the event of change in business ownership and extending relationship with outsourcing provider beyond tactical operational issues will make it easier for clients to switch to a different BPO provider. Grounds for contract termination should also be stipulated in the agreement. Switching to another offshore provider is costly but necessary sometimes.

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Philippine Outsourcing Boom Backed by Data Security Bills

Posted on April 16, 2011 by eli

The rapid growth of the Philippine outsourcing industry prompted calls for more structural reforms to attract more BPO investors. In a bid to improve the competitiveness of the Philippine outsourcing industry, Rep. Roman T. Romulo sponsored the Data Privacy Act or  HB 1554.  The law explicitly forbids the processing of personal data without the consent of owners, except when processing is needed to protect the health or life of data subjects. Another lawmaker, Rep. Susan Yap, introduced a similar bill that seeks to penalize unauthorized use and collection of personal data.

HB 1554 will create a  National Privacy Commission that will hear complaints on data security infringement and enforce the law.  Under the law, business process outsourcing firms and all businesses will be required to have reasonable data protection measures. When data security breach takes place, companies must notify the affected parties. The Commission can impose civil fines amounting to  P5,000,000 ($114,679)  and file relevant case to the Justice Department to start investigation.

Companies that are involved in the  collection of personal data have to secure an  absolute consent for owners allowing the company to use it. Use of personal data for medical and statistical research purposes is not covered by the bill.

Another bill, sponsored by Rep. Susan Yap, seeks to regulate the collection, recording, distribution and use of confidential data. Under the Data Protection Act (HB 890), offenders can face 6-12 years of imprisonment and fines ranging from 1 to 3 million pesos. For breaches resulting into public leakage of confidential data, the penalty is 2-6 years of imprisonment and fines ranging from 200,000 to 500,000 pesos.

Although the Philippine outsourcing industry has earned the trust of multinational companies by meeting international data security standards, the lack of a comprehensive data security bill could still worry new entrants especially if they  are planning to outsource tasks that involve large volume of customer data like credit card numbers and social security number. So far, the only data security regulation available in the  Philippine is Administrative Order 8, otherwise known as   Guidelines for the Protection of Personal Data in Information and Telecommunication System in the Private Sector. The administrative order forbids an entity from disclosing confidential data obtained from information or communication system. It imposes basic data security measures and sets rules for data protection certification.  Under this order, companies have to honor confidentiality obligation and  lawful access. Companies must secure absolute authorization from data subjects before they can access and use their personal information,  although certain exceptions apply.

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Philippine Outsourcing Firms Gear Up For Public Contracts

Posted on April 14, 2011 by eli

The Philippine outsourcing industry is eyeing alternative markets aside from the contact support industry which accounts for more than half of its BPO revenues. Diversifying into other niches such as the public sector will open new contracts and more growth opportunities. Foreign government agencies award high-value contracts every year, which involve services that can be easily outsourced abroad. In the US, government outsourcing is rising faster than commercial outsourcing. Data processing, application development, infrastructure management, and contact support are examples of government contracts that can be offshored.

Data Integration and Processing
Government offices process a large amount of data ranging from personal information to financial transactions. Efficiency is a major issue facing many government agencies that handle massive paperwork on a regular basis. Manual method results into delay, errors and costly maintenance of documents. Government agencies are able to streamline their operations and cut working hours by entering into IT service contract with software vendors. Data integration allows various government offices to exchange data and compare records for faster processing.

Infrastructure Management
This type of IT service contracts includes the maintenance of computer networks, setting up security systems, and managing storage systems and data centers. Infrastructure management can be carried out off-site, even in offshore locations such as the Philippines or India.

System Development
Large government agencies cater to different types of customers. Because of their unique IT needs, they require a custom-built system. System development projects may include a comprehensive medical billing program, online registration form, electronic surveys or online examinations. Due to the demanding nature of the job, government agencies usually outsource this type of work to BPO firms that have technical expertise. Oftentimes, government agencies find in-house alternative to be more expensive. The in-house IT staff may not be skilled enough to handle the job, and the costs associated with training and errors could be too much to handle. Disruptions in service due to system failure, interoperability issues and bugs can have disastrous effects on millions customers, so government agencies often find it more convenient to outsource large scale IT works.

Are Foreign Governments Willing to Offshore Public Contracts?
There are several factors to consider when choosing between offshore and onshore outsourcing providers of public contracts. Data security is a sensitive issue for U.S. and European public authorities. Contracts dealing with highly confidential information are likely to be outsourced onshore. However, system development and infrastructure development can be done offshore. Contact support and other services that involve lower level of data security measures are easy to outsource overseas.

IBM and Hewlett-Packard are some examples of IT service companies that leverage their expertise and global market share by offshoring. The question of offshoring thus becomes irrelevant for some US public contracts since the winning bidder may have its own offshore staff in the Philippines or India.

Data security regulation in the Philippines still needs to address the major concerns of foreign governments that are reluctant to outsource high-security data processing functions. Nevertheless, the present data protection regime provides standard level of security to many outsourcing clients.

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Philippine Outsourcing Firms Serve Most of Australia’s Offshoring Needs

Posted on April 12, 2011 by eli

According to the Australian Contact Centre Outsourcing Market Study 2011, courtesy of Callcentres.net and Aegis, Philippines outsourcing providers won the largest share of the Australian offshoring market. Domestic outsourcing accounted for most of the market share, but the Philippines got the largest share of offshoring market (19%), followed by Malaysia (5%) and India (4%). The report included data from five service categories: contact center, back-office support, finance, information technology and human resources.

The Philippines outranked India in all categories. The Philippine outsourcing industry captured 20% of the Australian customer support market, compared with 13% for India; 33% of back-office outsourcing market, compared with zero for India; 18% of IT services, compared with 9% for India and 25% of financial offshoring market, compared with zero in India.

Insourcing or onshoring still dominated the local outsourcing scene. It captured 73% of all customer interactions, 67% of back-office support services, 91% of IT services, 75% of financial outsourcing and 100% of HR offshoring market. Malaysia and China served 18% and 9% of the IT outsourcing needs of Australian firms.

According to Callcentres.net director Catriona Wallace, Australia has strong demand for outsourcing and this would fuel economic growth. As the domestic economy remains resolute in fighting cost hike, more and more Australian firms are outsourcing their contact support to the Philippines. The economic advantage of offshore destinations will remain the major determinant of the key players in the offshoring market for Australia. According to Wallace, only 1 out of 5  five Australians and Dutch national say they are happy to deal with foreign call center agents, but this is unlikely to prevent the looming growth of the outsourced call center industry.

According to Denice Pitt, president and country head of the Australian unit of Aegis, the rising cost of running an in-house operation is prompting domestic companies to try outsourcing. Pitt added that offshoring gives market companies more flexibility and better access to technology.

Domestic outsourcing and offshoring will allow Australian companies to maximize the cost benefits of outsourcing.  Australian companies are expected to outsource 10% more call center jobs this year. In 2010, Australia outsourced  41,500 call center jobs. This year, the telecommunications, finance and banking industry are expected to be the largest outsourcers.

The report also showed that 53% of the surveyed Australian companies outsourced more than one function. The most outsourced jobs are as follows:

  • Customer relations  (60%)
  • Back office support and form processing (44%)
  • Information technology (16%)
  • Finance (12%)
  • Human resource (12%)
  • Others (12%)

Around 32% of the respondents said they planned to outsource at least one in-house function. Thirty-five percent planned to outsource their back office function, while 29% percent cited customer interaction activities and human resources as possible jobs to be outsourced. IT was cited by 24%.

Cost savings from outsourcing was estimated at 26%- 50%, with 29% of the respondents reporting that they expected to save as much 30% from outsourcing.

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Outsourcing to the Philippines – Investors’ Guide

Posted on April 12, 2011 by eli

Foreign investment is a risky move, but outsourcing to the Philippines significantly reduces the amount of money and time in setting and running an offshore business unit. Outsourcing to the Philippines saves companies from common risks normally associated with foreign investment. The stable business climate and positive foreign investment policy of the Philippines make it an ideal environment for either short-term or long-term outsourcing contracts.

The Philippines has liberalized its foreign investment policy to spur economic growth and global competitiveness. In most industries like business process outsourcing, foreign investors can own as much as 100% share in business. Pioneer firms are eligible to receive income tax holiday for six years. They are also entitled to duty-free importation of capital equipment. Multinational outsourcing firms are guaranteed of repatriation of investments abroad and right to hire expatriates for their Philippine office. BPO firms located in special economic zones designated by the Philippine Economic Zone Authority can enjoy a preferential tax rate of 5% when their tax exemptions expire. The positive foreign investment regulation in the Philippines has attracted global outsourcing providers like Convergys and Sitel to invest considerable amount of money in the country.

The high popularity rating of the new president is expected to further improve investor confidence. President Ninoy Aquino is looking at the possibility of increasing economic growth rate beyond 5-6% by making structural reforms that would improve the ease of doing business in the country, said Cayetano Paderanga, director general of the National Economic and Development Authority. The proposed structural changes will be implemented in the Department of Finance, Department of Trade and Industry, Department of Public Works and Highways and other agencies.

Aquino is working to cut time for business registration from 4-8 hours to 15 minutes. Instead of filing 36 documents, investors would just file 6 forms, while the 8-page application form will be trimmed to one page. The president also had the local government units assess their business registration procedure to increase efficiency.

Another good development in the business climate is improvement in tax payment. According to the 2011 Ease of Doing Business Report of the International Finance Corp, a private offshoot of the World Bank, the Philippines improved its ranking from 133rd to 124th slot in the tax payment category. The survey showed that the administrative burden associated with tax payment has eased. The percentage of tax payments relative to income has improved as well.

The presence of a large number of foreign-owned outsourcing firms in Manila makes it easier for the industry to attract clients. These outsourcing firms have more experience in running offshore projects than do locally owned counterparts. By attracting more multinational BPO investors, the Philippines can surely maintain its global competitiveness in the BPO field in the long run.

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