After lagging behind India in foreign investment and global appeal, the Philippines has recently overtaken that country to become the world’s largest provider of business process outsourcing (BPO), as measured by revenue and headcount. And Manila has replaced Mumbai as a BPO hub.
The Philippine BPO sector’s revenues are currently $18 billion; the sector employs more than 1 million people and has grown by more than 20% annually since 2004. Similar growth rates are forecast for the next two years at least. Accenture, Convergys, JPMorgan Chase, HSBC, and Royal Dutch Shell are among the companies that have BPO operations in the country.
Motivated mainly by cost-cutting, many multinationals have opted for BPO, making it one of the fastest-growing sectors worldwide. BPO involves contracting out back-office functions such as accounting, call centers, and IT support. Developing countries are obviously attractive because of the lower costs; having a well-educated, English-speaking workforce is another key advantage.
A number of factors have contributed to the Philippines’ success. Lower office rents compared to regional competitors are a plus. The country also has a high number of fluent English speakers with relatively neutral Filipino accents, making it easier for American customers to communicate clearly with call center employees.
An estimated 30% of Filipino university graduates are employed in the sector, as opposed to 10% in India. The Filipino government has supported the sector with targeted training programs. Also, the Philippines offers a number of incentives that BPO investors benefit from, such as tax holidays, simplified import and export procedures, tax exemptions on imported capital equipment, and the freedom to employ foreign nationals.
The government has also pushed through legislation assisting the BPO sector that is targeted at making local data-privacy standards internationally competitive. In terms of attracting skilled labor, jobs in the sector are much better paid than in the economy as a whole. Far from being a depressing prospect, a job in a call center, particularly in Manila, is considered prestigious. Vis-a-vis rival employers, BPO companies have a competitive edge.
Another positive factor is the country’s demographics. The Philippines has a structural labor force surplus that is expected to last for another few years at least. In the last few decades, this excess labor has fueled an exodus of Filipino workers to the US and the Middle East, turning the country into one of the largest recipients of workers’ remittances worldwide.
But the ready supply of labor is also the reason why wages in the Philippines have not gone up by nearly as much as those of other fast-growing Southeast Asian countries. For the local BPO sector, this means that the sector is likely to stay cost-competitive for the foreseeable future.
Moreover, the BPO sector already represents 6% of the country’s GDP and is expected to overtake remittances in importance to the economy by as early as 2017. As the sector’s contribution to the economy grows, it is likely to receive even more favorable treatment from the government (in terms of investment incentives, targeted educational programs, tax breaks, etc).
Challenges for the local industry are related to the expansion from voice services into more sophisticated services (which can be anything from market research to web development to medical transcript preparation). The experience of companies to date suggests that the level of education and training of the workforce is still too low for this type of service. Employee turnover rates as high as 50% are reported. It remains to be seen whether the Filipino BPO sector can successfully manage the transformation. Either way, there are at least a few years left of solid growth in the voice-services sector.
Oana Aristide is a Senior Economist on D&B’s Global Data, Insight and Analytics team. Based in the UK, she covers three Scandinavian countries as well as Romania, Japan, Malaysia, and the Philippines as a contributor to D&B’s Macro Market/Country Insight Products. She has a background in central banking.