Do we have a future in offshoring?

When Sen. Mar Roxas was still DTI Secretary, I asked him what he was doing to prepare us to meet the challenges of globalization. Why wasn’t he, I asked him, choosing the industries where we have competitive advantage and give them full support to be world class players. He told me he didn’t want to "play God" in the sense of deciding which industries lived and which ones died. He said he wanted the market to determine that.

I thought that was a cop out. Many other countries are choosing their "champion" industries and lavishing them with support to make them competitive in the globalized world market. I thought he was just afraid to offend the vested interests behind the 50-year old "infant industries" that should have faded away a long time ago. So I asked Mar again what industries he thought have enough promise… one where we have or could easily have competitive advantage?

Mar quickly answered that outsourcing is it. From IT, to call centers, to business process outsourcing and medical transcription… Mar thought we have a future in these businesses. He thought we have competitive advantage in providing these services even as he acknowledged that we have to work double time to improve needed skills in English proficiency and in higher level IT skills as well. He was concerned about the 3 percent hiring rate of call centers as well as the low rate of passing of our IT graduates in international certification tests.

Today, perhaps thanks to the initial efforts of Mar and his successor, Cesar Purisima, we have accomplished much in developing outsourcing as a potent domestic job creator. We have done well enough to attract a lot of international attention. But the question is, have we done enough to be competitive in the long term? What more can we do?

A recent article in the quarterly journal of McKinsey Consultants gives us some answers. The Philippines, the McKinsey study concedes, is emerging as an important supplier of labor to the global offshoring market. But its research shows that even as "the country has marked advantages, it must overcome significant obstacles to compete with nations such as India."

The stakes are high. The McKinsey Global Institute (MGI) estimates from 2003 to 2008 alone, an additional 2.6 million offshore services jobs will be created around the world, offering a valuable source of employment and exports for the low-wage countries that capture them.

Offshoring has already made its mark in the Philippines. In areas where there are a number of call centers, businesses that cater to the workers, like fast food outlets and 24/7 convenience stores, are doing well. It also revived our down and out property market almost by itself. There are even entertainment places (like night clubs) that operate at 6 in the morning when the call center workers are just calling it a day. McKinsey estimates that in 2003 we supplied $1.7 billion worth of offshore services to the world economy and around 100,000 people are today employed in call centers.

Available skills and low costs are reasons often cited for the country’s emergence as an offshoring location. Among the 10 countries examined by McKinsey, "the Philippines has the second-lowest hourly wage for offshoring professionals, at 13 percent of the US level; the salaries of Indian workers were the lowest, at 12 percent; wages in Malaysia are around twice that level."

McKinsey also observed that "the Philippines has a larger pool of workers suitable for multinational companies than its relatively small population of 88 million would suggest. For every 100 college graduates with finance and economics degrees from countries in our sample, executives of multinationals said they would hire 30 in the Philippines, compared with just 15 in India; the corresponding figures for generalists and life science researchers, respectively, were 25 versus 10 and 20 versus 15.3."

The Philippines even compares favorably on the suitability of its engineering graduates for employment with multinationals – a particular strength for India. Moreover, a higher percentage of the Philippines’ population than of India’s has earned a college degree.

The advantage of India is that given its billion or so population, they graduate hundreds of thousands of college degree holders each year. The sheer number gives it the muscle to take on in coming business from the West. We, on the other hand, quickly hit the ceiling of potential qualified workers that could be hired.

McKinsey also notes that "the Philippines lags behind other potential destinations on five additional criteria that companies consider when choosing an offshore location…Of the countries we studied, it has the poorest risk profile – a legacy of natural disasters, security threats, and data theft – and very few third-party vendors. As a potential domestic market for services, the Philippines attracts only a fraction of the enthusiasm China and India generate."

Also among our negatives noted by McKinsey for which Ate Glue should take responsibility are, "the country’s subpar business environment suffers from strict labor laws, high levels of corruption, and a surfeit of bureaucracy. Obtaining approval to open a call center in the Philippines, for instance, takes twice as much time as it does in India or Malaysia. Another drawback is a paucity of direct flights from the Philippines to distant markets such as the United States."

I didn’t think availability of managerial talent is a problem but from what McKinsey found out, it apparently is. "Management talent is also scarce in the Philippines, partly because its offshoring industry is still in the early stages of development and has yet to develop many managers. Furthermore, the country’s economy is dominated by small and midsize companies that are often family owned and don’t produce much management talent. The Philippines has a large diaspora that could be a potential source of managers, but these emigrants tend to take non-managerial jobs (as contract workers and nurses, for example) so they return home without suitable experience."

McKinsey recommends a number of things that government must do to attract more offshoring business. "Improving the infrastructure would be one place to start. Of the countries we examined, the Philippines has the highest electricity prices and one of the most expensive telecommunications systems. Although the country has enjoyed some success developing ‘cyber parks’ (special zones with concentrated world-class infrastructure), it should expand this effort and pay more attention to enhancing their physical and digital security."

All I can say after reading the McKinsey report is, hey Ate Glue… it’s your move… and I don’t mean more speeches and press releases either.

One stop help desk

Speaking of the outsourcing business, Rep. Joseph Santiago of Catanduanes called for the creation of a top-level, 24-hour one-stop government help desk that would assist all existing as well as prospective investors promptly deal with all their needs. Santiago wants red carpet treatment to prospective investors that would cover all of their government requirements, national and local.

Under Santiago’s proposal, BPO investors would be helped to expedite their importation of computers and other telecommunications equipment, the working papers of foreign consultants, the travel documents of executives and exemptions from the ban on night work for female employees.

Santiago updated the 100,000 workers cited by McKinsey to 132,000 workers now employed by the outsourcing industry. He also said we are now hosting 120 BPO providers, including 70 call centers. Santiago estimates that next year, the industry is expected to rake in almost $2 billion in revenues and engage at least 50,000 new workers.

I wonder who should carry the ball on this one.

Food for thought

Here’s Dr. Ernie E today.

One evening Art’s family was eating dinner when the boy asked, "Dad, are caterpillars good to eat?"

His dad answered, "Haven’t I told you never to talk about gross stuff like that during meals?"

"Why did you say that, Art?" his mother wondered, "Why did you ask the question?"

"It’s because I saw one on dad’s lettuce," Art replied, "but now it’s gone."

Boo Chanco’s e-mail address is [email protected]