OUTSOURCING GROWTH TO REACH 62%

BY VERONICA C. SILVA-CUSI, BusinessWorld Online Editor
10/29/2007 | 10:32 PM

THE PHILIPPINES is still a "darling" of the worldwide outsourcing industry, but challenges from a new Asia competitor and rising costs lie ahead.

Revenues of the Philippine outsourcing industry, including onshore and offshore services, are expected to grow to $4.1 billion by the end of the year, for a 62% growth rate and a 1.4% global market share, said Canada-based IT research firm XMG, Inc. in a statement released Monday.

Lauro Vives, XMG founding president and chief analyst, said the Philippines is "the best performing country in 2006/07... The size of the Philippine outsourced ICT [information and communication technologies] services is also growing, but at a much faster rate than the global market. The Philippine industry has far exceeded all analyst expectations."

However, other Asian countries are faring much better or close to the Philippines’ performance and XMG is challenging the local outsourcing industry to also look into these other Asian countries.

India undoubtedly corners the biggest global market share for outsourcing among Asian countries at 11.5%. A far second is China, with 4.4% market share and then the Philippines.

Malaysia is the Philippines’ closest competitor with 1.2% market share, and this is surprising news to the local outsourcing industry. XMG data showed that in 2006, the Philippines and Malaysia were neck and neck with a global market share of 1.02% and 1.04%, respectively.

The XMG study covered the worldwide outsourcing market, including onshore and offshore services for information technology, business process outsourcing and call center, which is expected to finish the year at $297 billion and $450 billion by 2010.

But XMG said there are challenges for both India and the Philippines in 2008, namely the increases in wages in order to retain people and real estate prices. XMG pegged the wage increases in the Philippines at 8%.

The challenges are no secret to the Philippine outsourcing industry, according to an official of the local industry association, the Business Processing Association of the Philippines (BPA/P). In a phone interview, BPA/P chief executive Oscar Sañez said they have anticipated these challenges and included them in their industry road map up to 2010.

An 8% wage inflation is "manageable," said Mr. Sañez, compared to other industries which are experiencing from 9%-10% hike.

He noted that demand for manpower in the industry is still higher compared to supply.

Aware of rising real estate costs in central business districts, Mr. Sañez said the Philippine BPO industry is also developing other sites outside Metro Manila by working with real estate developers, local government units and telecommunication companies.

But Mr. Sañez challenged XMG’s data, since according to their own industry data, China is a close competitor but Malaysia is nowhere near the Philippines.

He said that they have already factored in China, but noted that it has no experience in offshoring.

There are, however, no inputs in their road map about Malaysia and Mr. Sañez expressed doubts if Malaysia can build up the number to supply manpower.

With the help of consultancy firm McKinsey and Co., BPA/P drafted Roadmap 2010, a fact-based and industry-oriented analysis persuading stakeholders in BPO, government and education to capitalize on the improving economy and growing market for offshoring and outsourcing.

According to BPA/P data, the local off-shoring and outsourcing industry increased its revenue by 48% to $3.3 billion in 2006 from $1.5 billion in 2004.

By 2010, revenues are expected to increase to $13 billion as the Philippines aims to corner 10% of the global outsourcing market which is expected to reach $130 billion.

Wake-up call

In reply to Mr. Sañez, Mr. Vives said: "That’s because this country has always been focused on India and China. Hope this is a wake-up call for everyone. Malaysia has been doing offshoring even before the Philippines [as early as late 1990s] through several multinational captive centers."

He added that Malaysians have highly educated professionals for non-voice and knowledge process outsourcing (KPO).

Still Malaysia and the Philippines face greater challenges beyond 2010.

"The Philippines will eventually hit the wall for growth due to lack of qualified manpower, similarly to the way the Malaysians have. The Malaysian country strategy is to focus on building a work force capable of providing higher value services in the areas of KPO and IT services."

Saturation

"We expect a slowdown in the growth of the Philippine industry by 2010 due to the highly saturated labor market for IT, call center and BPO services and the increasing cost," Mr. Vives told BusinessWorld

"By 2010, ’deal clinching’ factors must rise above the cost of labor and skills, but for the ability of a country to provide a sustainable pool of highly qualified workers," he added.

Mr. Sañez said the BPA/P study covered only up to 2010 since industry insiders and stakeholders could not see pass 2010, which could make analyses and results inaccurate owing to the dynamism of the industry.

To survive competition, Mr. Vives, a Canadian-Filipino, said the Philippines should "move up the outsourcing value chain and focus on higher value services in the areas of IT, engineering services and KPO to increase revenue per employee ratio.

"Like chasing a speeding train"

He added that it would be useless to run after India.

"Chasing India is like chasing a speeding bullet" said Mr. Vives.

"When the labor market in the Philippines for offshore and outsourcing services is saturated by 2010, the recipe is to ensure revenue and investment influx per employee into the country is higher through the provisioning of higher value services," he stressed.

Comparing outsourcing locations, Mr. Vives said that one of the key advantages of India — aside from the rich pool of manpower resources — is the availability of locations outside major cities Bangalore and Mumbai.

"India has a number of cities such as Hyderabad, Chennai, Kolkata and Pune that can offer the same luster as Bangalore and Mumbai three to four years from now," he noted.

"These cities have the potential to offer the same factor conditions Bangalore presented seven years ago such as sustainable labor pool, infrastructure development, cost advantage and a business environment favorable to attracting further investments," he said.

"XMG research forecasts a negative net supply of manpower by 2008 in key locations within Metro Manila," he warned. — with a report from Marian Grace S. Ramos/BusinessWorld