Analysis of the philippines as a call centre destination

[Rob OMalley]

Analysis of the Philippines as an Offshore Services Location TJ Singh, Frances Karamouzis, Helen Huntley, Ian Marriott This report analyzes the Philippines' suitability for offshore outsourcing, based on 10 criteria: language, government support, labor pool, infrastructure, educational system, cost, political and economic environment, cultural compatibility, global and legal maturity, and data and intellectual property security and privacy. Sourcing managers can use this report to judge whether the Philippines might be a good location for their organization's captive or outsourced offshore IT and business process services. Key Findings • English is the predominant language in the Philippines. In addition, the level of accent neutralization required is relatively low and significantly lower than in India and China. • The Philippines has a history of serving U.S. and Asian markets. Some IT services have been exported for more than 15 years. The country is now emerging as a target destination for call centers and finance and accounting outsourcing. • The Philippines has a good labor pool that is scalable at low cost. Its overall cost structure is currently lower than India's, and wage inflation and attrition ratios are lower. • Attrition rates in key locations, such as Manila and Cebu, are gradually increasing for specific skills and middle managers. However, these rates are still significantly lower than those experienced in India and China. Recommendations • The Philippines has become a destination for call center and back-office finance and accounting operations, but you should perform appropriate due diligence to ensure you are comfortable with specific technology and industry knowledge before signing a deal. ANALYSIS Table 1 provides a summary of Gartner's rating of the Philippines, based on our 10 criteria. Figure 1 shows the Philippines' location and time-zone difference compared with selected cities. Table 1. Philippines: Outsourcing Rating Criterion Rating Language Very good Government support Good Labor pool Good Infrastructure Good Educational system Good Cost Very good Political and economic environment Fair Cultural compatibility Very good Global and legal maturity Good Data and intellectual property security and privacy Fair Source: Gartner (November 2007) Figure 1. Philippines: Location and Time-Zone Differences Los Angeles -16 hours New York -13 hours London -8 hours Paris -7 hours Delhi -2.5 hours Beijing +0 hours Tokyo +1 hour Philippines Language The Philippines is the third-largest English-speaking nation in the world, and an overwhelming majority of IT services workers are proficient in English. English is the medium of communication in business, schools and government. Analysis: The Philippines was under Spanish colonial rule for 300 years, and the U.S. ruled the country for nearly half a century after that. This has left an imprint on the country, fostering its ability to work well with Western countries for trade and expand into new sectors of growth. Filipinos are generally very comfortable speaking and writing English, because most of their elementary and secondary education is in English. The dominant English accent in the Philippines leans toward an American pronunciation with a foreign undertone. Professional and business employees are comfortable using the language, because almost half of the working population is employed in export or knowledge-based industries, such as services. The country's familiarity and comfort with the U.S. accent and culture means a major part of its business process outsourcing (BPO) industry is made up of voice process or contact centers. Even though English is widely used, some training may be needed to achieve a depth and breadth of technical terms. Gartner rating: Very good Government Support The government is looking to introduce new reforms and attract investment in various areas of the economy, including IT and BPO. Foreign direct investment in 2006 was about $2 billion. Remittances from more than 8 million Filipinos staying abroad was about $12 billion in 2006, which is around 10% of GDP. The Board of Investments assists foreign and local companies with the regulatory framework, incentives and market guidance. It grants top-tier incentives to BPO and IT-related activities. Major investments in the country come from the U.S. and Japan. To remain relevant to industry developments, the government and the Business Process Association of the Philippines are developing a five-year road map for the country's BPO industry. The World Bank rates the Philippines 133rd out of 178 countries for ease of doing business. Analysis: The government, under the leadership of its current president, is looking to bring new reforms and attract investment in various areas of the economy. Although foreign investment is very low compared with neighboring countries such as China and India, the government has demonstrated a keen interest in attracting targeted investments through initiatives such as the National Telecommunications Development Plan and the Board of Investments. The Board of Investments is refining incentives for the IT and BPO industry, so as to attract higher-value business process and IT service opportunities to the Philippines. The government is taking a proactive stance by keeping up-to-date on developments in the BPO industry with the help of industry bodies and third-party consultants. Gartner rating: Good Labor Pool The labor pool in the Philippines has several attractive characteristics: relatively lower labor rates, a large percentage of workers who are English-speaking, and an extremely low need to neutralize accents. In addition, wages have remained very stable and consistent, in contrast to India. The BPO and IT-enabled service industry in the Philippines employed almost 250,000 people in 2006 and generated revenue of about $3.6 billion. This was up from 138,000 people in 2005. Contact centers employ the majority of people in the industry. Analysis: With a population of 91 million and a high participation rate in education, the Philippines presents outsourcing providers and shared-service centers with opportunities for scalability. The country's unemployment rate increased by an average of 11.4% between 2000 and 2005, more than twice the rate of many of its neighbors. Although employment growth in the Philippines has been higher than in many other Asian countries, it has not been able to reduce its unemployment rate. This is the result of a young population, high population growth and a rise in labor force participation. The Philippines, because of its low wages, English-speaking workforce and relatively high skill levels, has developed a growing reputation as a favorable destination for call center work for U.S. and other foreign companies. Nevertheless, attrition rates and (to a lesser extent) wage inflation for specific process and voice-based skills and middle management are starting to experience price pressures. This is happening in key cities such as Manila and Cebu, but rates are still much lower than those in India and China. Gartner rating: Good Infrastructure Roads, telecommunications, utilities and real estate in the core areas of Manila, Cebu, Clark, Subic, Baguio and Iloilo are good. Manila and Cebu are the centers of more than 85% of IT services business. Outside these centers, infrastructure is still lacking. While it is improving, IT penetration is still relatively low. The Philippines has 87 national airports with paved runways, of which eight are international. Air transport is used to carry passengers on journeys between islands. Analysis: The overall infrastructure of the Philippines is good, with roads, airports and telecommunications able to support a growing IT services industry. The country was ranked 70th in the World Economic Forum's 2005 global Network Readiness Survey. In the same survey, Malaysia was placed 24th, India was 40th, and China was 50th. There are two telecommunications landing sites within 50 km of each other (near the town of Batangas). This could be a single point of failure if a major natural disaster were to strike. The government has planned for a third site, which will be some distance away. Gartner rating: Good Educational System Despite low economic levels, the country has a high standard of education. The literacy rate is more than 92%, one of the highest in Asia. College education is financed mainly by the private sector. The government has established the University of the Philippines, with regional campuses throughout the country. It offers subsidized tuition rates to students. Courses in finance and accounting are extremely similar to those in the U.S., because accounting principles in the Philippines were modeled directly on U.S. generally accepted accounting principles. Analysis: The Philippines has a large young population — more than a third of Filipinos are below 14 years of age. Free education at lower levels has significantly helped the literacy rate. However, the government will have to take reforms further to keep pace with above-average population growth. Participation rates are about 97% for elementary schools and 73.4% for secondary schools. The country's educational system is based on the American system, and most university courses in finance and accounting are taught according to a U.S. syllabus. This makes the country a natural choice for finance and accounting outsourcing from the U.S. Many U.S. banks and financial institutions have established back-office operations in the Philippines. Gartner rating: Good Cost The salaries for IT outsourcing and BPO employees are among the lowest in the world. In 2005, the average entry-level salary for an IT professional was $7,300 a year; for a BPO employee it was $5,500. Analysis: For all three of the largest components of IT services costs (labor, telecommunications and real estate), the Philippines has highly favorable structures. Salaries for IT outsourcing and BPO employees are among the lowest in the world, and the country has talent specifically for voice-based processes. The telecommunications industry was deregulated almost a decade ago, resulting in large price decreases and making it accessible and competitive compared with most Asian locations. Real estate is also relatively inexpensive, making it inviting to set up operations. Growth and expansion, as well as increases in occupancy rates (up to 95%) in commercial buildings, mean there are early signs of some slight increases in rental rates. Gartner rating: Very good Political and Economic Environment Corruption continues to have an adverse effect on the country's growth. The country is ranked 103rd in World Audit's ranking of corruption in 150 nations, where first indicates minimal corruption. Transparency International's 2007 Corruption Perception Index places the Philippines 131st out of 180 countries. The most visible source of political instability stems from long-standing pockets of continuing social unrest and insurgency in parts of the archipelago. Another persistent issue is the continued influence of the military and wealthy Filipino families on the country's political and economic landscape. Crime and terrorism are fears for many Western visitors, even in major centers, and the governments of some countries (for example, Australia) have standing low-level travel advisory warnings for the Philippines. Analysis: The Philippines has conflicting accelerators and inhibitors. On the one hand, the government and the economic landscape create an inviting environment for investment, including expedited processing for captive centers and the legal establishment of IT services companies. On the other, political practices are such that key changes in federal government result in periods of instability, upheaval and disruptions to economic and regulatory policies. Currently, political stability and certainty are gradually returning after the last major shift. Gartner rating: Fair Cultural Compatibility Historic links with Europe and the U.S. mean the country has a high degree of cultural compatibility. The country is perceived to be relatively liberal with its civil and political rights for its citizens. World Audit ranks the Philippines 68th in terms of democracy and 63rd for press freedom out of 150 countries. Analysis: Philippines ranks as one of the best countries for expatriates because of the country's comfort with English and the historical links with Europe and the U.S.. It is within four and a half hours of major Asian capitals. Young Filipinos have a cultural affinity with the U.S. in terms of sports, food, music and so on. Many U.S. companies have a longer history of conducting business in the Philippines than in other Asian countries. Gartner rating: Very good Global and Legal Maturity Philippines has seen rapid growth in its BPO industry over the past few years, with contact centers gaining the largest share of revenue. Foreign investors view the inefficiency and uncertainty of the country's judicial system as a significant disincentive to investment. Some observers also argue that judges lack the required knowledge or experience of market economics or business, and sometimes this lack hinders the interpretation of law into policymaking. Analysis: The country's legal system does not send very positive signals to multinational companies, because many loopholes exist and a large number of legal cases are pending. Gartner rating: Good Data and Intellectual Property Security and Privacy The Philippines is compliant with the World Trade Organization's Trade-Related Intellectual Property Rights (TRIPS) agreement with regard to systems and procedures for registering claims on intellectual property. The country has a backlog of more than 1,400 cases related to intellectual property. The judicial system is not adequate in settling these cases, resulting in weak enforcement of intellectual property laws in the Philippines. The Philippines has been slow in passing new laws relating to computer crime. An e-commerce law (RA8792) is the only law in this area passed since 2000. Analysis: The legal framework for the protection of intellectual property rights in the Philippines needs updating, and while the Senate has ratified key World Intellectual Property Organization treaties, groundwork on them is still pending. The country's lawmakers have been slow to pass new data laws and privacy acts, with only one piece of legislation since 2000. However, lawmakers are planning to enact several pieces of legislation related to computer crime in the next two years. Gartner rating: Fair RECOMMENDED READING "Forecast: Enterprise Network Services, Philippines, 2005-2011" This research is part of a set of related research pieces. See "Gartner's 30 Leading Locations for