The global BPO industry is forecast by consultancy Tholons to be worth $250bn by 2020 and the Philippines is seeking to cement its position as a preferred global service offshoring hub and expand on and diversify its share in this lucrative, yet highly competitive field. Having grown at a compound annual growth rate of around 10% over the past decade, the BPO sector has become the country’s largest source of private employment and the second-largest contributor of foreign exchange earnings after remittances. It has also fuelled the growth of other sectors, as the salaries paid out have augmented household consumption and anchored the expansion of the property and retail sectors.

VALUED SEGMENT: “In contrast to overseas foreign workers, because BPO workers spend all of their earnings onshore, each new outsourcing job created is estimated to generate 2.5 additional jobs in retail, public transportation and other support services,” Gillian Joyce Virata, a former executive director at the IT and Business Process Association of the Philippines (IBPAP), told OBG. IBPAP estimates revenue from the sector expanded by 15% over the course of 2014 to reach $15.3bn. By 2016, sector revenue could reach $25bn and match the economic contribution of remittances, while industry employment, which in 2014 surpassed the 1m mark for the first time, will expand an additional 30% to account for 1.3m jobs.

In recognition of its economic contribution and multiplier effect, the government and IBPAP are backing a roadmap aimed at ensuring that foreign exchange earnings and employment keep growing. In addition to growing the size of the pie, industry stakeholders are looking to rearrange the slices into more sustainable BPO sub-segments by diversifying up the value chain away from a dependence on contact centre and low value transactional BPO services into the higher earning, more specialised and more complex non-voice BPO and knowledge process outsourcing (KPO) segments.

KEY CONTRIBUTION: The Philippines has emerged as the world’s largest market for voice-service BPO and the second-most-popular destination after India for ITBPO and global in-house centres (GICs).

“This is the one industry where we are global leaders and we intend to keep it that way by responding to industry requirements in terms of policy, infrastructure and educational support,” Monchito Ibrahim, the deputy executive director at the Department of Science and Technology’s (DOST) – Information and Communication Technology Office (ICTO), told OBG.

Central bank data reveals the sector to have generated export earnings of $13.3bn in 2013, a 15% increase on the previous year’s performance and a near 10-fold increase from a decade earlier in 2004 when it registered $1.4bn. Employment, likewise, has also multiplied by double digits over the past decade, rising from 101,000 in 2004 to over 1m by 2014.

With IBPAP expecting the BPO sector’s revenue for 2014 to be valued at $18.4bn, this would comprise 6.2% of GDP, trailing only remittances, with $22.5bn worth of foreign receipts, but well ahead of third-placed tourism with $4.8bn worth of foreign earnings. Since 2004, the Philippines has tripled its global market share from 4% to 12.3%, a figure that Tholons expects could rise to 19% by 2020. For its part, the country has set out to earn $25bn by 2016, with the sector responsible for 1.3m jobs, 7.3% of GDP and a 13.5% global market share. Tholons said that if the country plays its cards right, it would reach $48bn in revenue by 2020.

Additional accolades for the industry can be found in IBPAP data. The sector was responsible for a 27% share of total exports and it has proven itself to be one of the more equitable employment vehicles, with women accounting for 43-45% of those employed. Recognising the industry’s unparalleled and rapidly expanding contribution to employment generation, investments and foreign exchange earnings, both the government and industry have drawn up roadmaps aimed at retaining and securing the Philippines’ competitive position. The former articulated its vision in the Philippine Development Plan (PDP) 2005-10 and its successor, PDP 2011-16, while the later identified five priority areas within the Philippine ITBPO Road Map 2011-16 LOCATOR DRAW: As a prime driver of the trend towards outsourcing offshore is a need for firms to seek cost arbitrage opportunities in the face of global competition, a country’s wage structure and labour pool are significant selection determinants. With a population of 100m, half of whom are below the age of 25, and widely spoken English, the Philippines holds a demographic trump card. In comparison, the median age in Thailand is 36.2 and in Japan it is 46.1.

While less tangible to measure, the country’s labour pool has garnered a reputation for displaying loyalty, adaptability, empathy and delivering strong customer service in an authentic and relatable way. For historical reasons, there is also a strong affinity for Western culture, and as some of the heaviest social media consumers in the world, a significant exposure to Western fashions and trends. The Philippines, relative to other top offshoring destinations, is rated well in terms of political stability, and under the Benigno Aquino III administration the government is perceived as pro-business and is implementing sound economic policies. This has been evidenced in upward movements in the major investment ratings indices (Standard & Poor’s, Moody’s and Fitch), and an improvement of 33 places on World Bank’s ease of doing business rankings since 2010, the largest leap of any of the countries surveyed.

SURMOUNTABLE CONCERNS: Compared to competing offshoring markets in Africa (South Africa) and Europe (Poland), the country is at a time zone disadvantage when it comes to servicing European and North American clients. This is not usually a deterring factor, however, as the youthful workforce is quite willing and able to work night shifts, and most BPO locales of size and scope that cater to multiple destinations are required to run 24/7, regardless.

While there are some apprehensions over intellectual property (IP), the legal regime and its enforcement are considered sufficient for the BPO sector’s needs and judged to be continually improving. “Because of the strong trade relationship with US, the country is taking IP very seriously,” Donald Felbaum, the managing director of the IT consulting firm Optel, told OBG. In April 2014 the US removed the Philippines from its watch list of countries that do not properly protect IP rights for the first time in 20 years. Following a strong run in 2012-13, the Philippine peso has settled into a comfortable exchange rate band to the US dollar. However, rising administered prices (fuel and electricity) could place pressures on wages in the coming year.

The one area where there is perhaps the most concern and calls for intervention is the labour gap, as the solid reputation garnered by its workforce is negated if the volumes of employees needed by investors are not met. China and India annually churn out 7.5m and 5.5m graduates, respectively, far exceeding the 550,000 of the Philippines. The Commission on Higher Education estimated that BPO jobs created in 2012 – around 137,000 – represented more than 25% of graduating college students, an absorption rate that will make it difficult to fill all available jobs. Compounding matters is the challenging and stressful nature of the job and shift hours, resulting in a churn rate estimated at 50%.

“For the industry to grow at the targeted 15%, 150,000 new entrants are needed each year, not accounting for attrition. This would entail 60% of all new graduates to enter the field, which is not realistic. The government realises this and is looking to introduce new certification schemes and encourage high school graduates to work in the industry part time,” Feldbaum said.

In addition to a shortfall in quantity, while Filipinos demonstrate a number of enviable attributes that make them ideally suited to contact centre work, other markets’ labour pools are deemed to possess traits that make them better suited to the higher value, non-voice contracts that the Philippines hopes to capture.

TELECOMS & UTILITIES: As a rapidly rising Asian economy, demand for office space and rental rates have been increasing at about 3% year-on-year, but Metro Manila’s office districts still offer some of the most affordable leases in the region. According to the real estate firm Colliers, the central business district of Makati City has the highest lease rates in greater Manila, with an average charge per sq foot per annum of $29 as of the second quarter of 2014. Fort Bonifacio, the country’s second-most-desired location, charges $17.89, while Ortigas, the third main business district offers rates at $12.87. In India, the country’s biggest BPO competitor, charges range from $31 to $118 depending on the city. Although the pace of new supply hitting the market might not keep up with rising demand, analysts are expecting rates to remain competitive, especially for those willing to locate outside of the more sought after commercial locales (see analysis).

A unique trait associated with the Philippines’ BPO sector is that many BPO tenants are co-located in office towers in central business districts rather than in large office parks outside of the main city centres. “Following the real estate boom that preceded the Asian financial crisis, the country was left with empty buildings to fill and the BPO sector stepped in” said IBPAP’s Virata. “An offshoot of labour being located in smaller plots is better network connectivity.” At a national level, Philippine broadband capacity, due to geographic challenges associated with being an archipelago and unresolved regulatory issues, is considered poor. However, in Metro Manila and some other urban centres, last-mile connectivity is in place for commercial internet speeds.

One infrastructural shortcoming affecting the country and the sector is power costs and reliability, a concern for an industry that often relies on running 24/7 and can ill afford going offline. The government, under an initiative titled “next-wave cities” is looking to create more IT hubs outside of metro Manila.

While relocating firms to second-tier cities will afford firms more incentives and lower rents, and allow employers to bypass the fierce demand and high turnover for talent in the capital, there is a strong impetus for the local authorities to ensure that robust power and broadband infrastructure is available (see analysis).

RAISING ITS VOICE: IBPAP estimates that of the $18.4bn in revenue expected for 2014, 62% is to be derived from voice-based BPO. The Philippines is the undisputed leader when it comes to the provision of call centre work, overtaking India in 2010 and expanding its lead ever since. While there are other competing offshore destinations where English, although not the first language, is commonly used in business, government, education and print media, the distinct linguistic advantage enjoyed by the Philippines is accent neutrality and an unmatched proficiency in terms of daily vocabulary, grammar and idiom. This, in addition to the historic ties to the West and a strong culture of customer service generates confidence among firms in the US, the UK, and Australia and New Zealand to contract out even their most sensitive customer relations work.

Although English contact centre work is the mainstay in the Philippines and makes market sense, when considering that the US alone accounts for 60% of global voice outsourcing demand, having been colonised by the Spanish and Japanese at various stages prior to independence, there is further linguistic diversity in the country to leverage. Realistically, however, winning non-US-originating Spanish language work could prove challenging as Central and South America have already cornered the market. At the moment, the US accounts for around 77% of all voice work, and to geographically diversify the country is looking to increase the contribution from Australia, New Zealand and also the UK, which has traditionally relied on India.

ADDING VALUE: The DOST road map calls for the proportion of contact centre work to reduce to 40% over time as higher value segments are promoted. “Voice work is becoming commoditised and there are replacement options for speaking to customers via machines. Long term, the industry needs to move into KPO,” Felbaum told OBG. Corporate services are the second-largest BPO segment after voice, accounting for 20% of the industry’s headcount in 2013, according to IBPAP. The segment is dominated by accounting and other repetitive back-office work, but also includes some of the more expert fields of outsourcing such as financial and market research, analytics and auditing that are collectively known as KPO.

The KPO segment includes many GICs, which are not technically outsourcers, but are counted as part of the BPO sector. GICs are estimated to provide a 10% contribution to IT BPM exports. According to IBPAP, there are over 130 GICs in the Philippines, of which 65 conFortune 1000 firms. The other non-voice categories in the Philippines’ BPO mix include IT services and health care information management (HIM), each of which was responsible for around 8% of the industry’s headcount, followed by engineering (1%), animation (1%) and game development (0.4%).

“People incorrectly think that we only handle transactional voice work, but this is far from the case. Voice work, like other types of work, can be viewed as a pyramid of complexity with more complex work being done by fewer, more specialised professionals. In the Philippines, we work in all levels of the pyramid in the voice and non-voice sectors. A pyramid has a larger base. We now need to widen the upper levels,” said Virata.

COMMON KNOWLEDGE: Expanding into more knowledge-intensive BPO segments requires an upgrading of the talent pool, as an addition to good communication skills, specialised qualifications in fields such as IT, engineering, finance and design are needed. China and India are said to have a larger and more technical skill base, with a longer track record in the more complex business processes. “Filipinos are famous for their sense of empathy, which bodes well for all service industries like customer care and tourism, but they are for the time being less math and science inclined,” Cyril Rocke, the CEO of cloud provider DataOne Asia, told OBG.

Compounding the challenge is that Filipino knowledge workers in fields like engineering and IT are heavily demanded throughout the Gulf as well as in nearby Singapore and Malaysia, leading to a “brain drain” of the country’s technical talent. According to IBPAP, only around 10% of applicants for call centre positions qualify for hiring. As such, diversifying into more back office functions provides an employment outlet for those who may lack communication skills but compensate with a proficiency in more technical areas, such as accounting, finance and design.

CAPTIVE MARKET: Multinationals are increasingly setting up GICs to handle in-house work, like finance and accounting, and those with operations in the country include Chevron, Shell, Maersk, Bechtel, Procter & Gamble, Henkel and Thomson Reuters. Some of the longer-established BPO consultancies have expanded their Philippines-based GICs to service third parties, particularly in financial services field, where JPM organ Chase, Deutsche Bank, Bank of America and AIG provide specialist outsourcing functions to firms in their vertical.

GETTING TECHNICAL: The Philippine Software Industry Association (PSIA) calculates that revenues from IT and software development nearly doubled between 2008 and 2012, expanding from $600m to $1.16bn. IBM, Dell, HP and Xerox are amongst the global tech giants with operations in the country.

Along with the PSIA, two other tech related affiliate associations under the IBPAP umbrella are the Game Developers Association of the Philippines and the Animation Council of the Philippines. The global market for the outsourcing of animation and gaming is estimated to be worth $1.5bn, and in 2012 animation and gaming revenues for the Philippines came in at $132m and $50m respectively. By 2016, IBPAP is aiming to increase the country’s share in gaming and animation to 10%. Important media and gaming content producers, including Walt Disney, Warner Brothers, HBO, Marvel Comics, Hanna-Barbera, Nintendo, Sega, Game Gear, Game Boy and Sony Playstation have outsourced work to Filipino animation professionals and studios.

IN GOOD HEALTH: HIM is easily the fastest-growing KPO segment for the Philippines, with revenues having expanded some 66% over 2011, a further 80% over the course of 2012, and finally 117% over 2013 to reach $998m. IBPAP is anticipating the rapid expansion will continue, targeting $2.4bn worth of revenues and employment of 120,000 by 2016. Health care reforms in the US are creating an impetus to reduce the system’s administration costs by outsourcing tasks like medical transcription, billing, coding and outpatient care services. The Philippines, with a demonstrated track record of serving a diverse range of US clients’ BPO needs, as well as a strong familiarity with the US health care system stemming from its history supplying nurses to the US, is in a strong position to pick up the bulk of the the country’s offshored work.

OUTLOOK: As the size and scope of the global BPO industry expands, so too does the competition amongst countries looking to win their share of the lucrative pie. The Philippines possesses a demographic edge and some innate cultural traits that would be difficult for others to emulate in overtaking it as the global leader in voice-based BPO. While ongoing efforts to revamp the education system and better match the industry’s technical requirements should bolster its prospects at capturing additional share from top-placed India in the ITBPO and GICs spaces. The country can also use its assets in niche segments. A propensity for creative positions is good for design and digital work in fashion, animation, gaming and architecture, and the country is expected to become a new leader in offshore HIM.