BPO success and future prospects

In a bit of good news towards the turn of the year, our newspapers have been highlighting the fact that the Philippines has overtaken India as the world leader in business process outsourcing (BPO). IBM’s Global Locations Trend 2010 declared the Philippines as the world’s number one location for shared services and BPO. This year, according to Everest Group, an outsourcing advisory group, the Philippines will earn “$5.7 billion for call center work from the US, Europe, and Australia, compared to the $5.5 billion that India’s call centers will take in”. In terms of employment, there are now 500,000 Filipinos working in call centers (versus 350,000 Indians). Even better news is the extremely optimistic forecast given by President Aquino that the industry’s revenues would hit the $12-13 billion next year and up to $100 billion – a fifth of global market share – by 2020.

Along with others, I must express my delight about the above news (I’ve been a vocal advocate of ICT/ BPO since the Ramos administration). But I want to highlight the fact that our success clearly has to do with government policy. Businessweek concisely sums it up: “government streamlined the approval process for companies setting up call centers and changed its rules to allow individual buildings to be designated special economic zones. Such zones offer tax breaks, quick clearances for building permits, and an exemption from import duties on computers and telecom gear. And some 40,000 students have benefitted from government- sponsored training to improve their English and communication skills.” Former President Arroyo demonstrated personal support by attending BPO inaugurations. President Aquino maintains that practice.

Indian BPOs in the Philippines

 India’s total outsourcing revenue (which includes call center revenue) is pegged at $70 billion while Philippines is currently at $9 billion. A roadmap from the BPAP expects this number to hit $25 billion by 2016. The India-Philippines comparison is interesting and instructive. But it is also important to note that a number of BPOs operating in the Philippines are Indian firms.

When I visited India last month, Ambassador Ronald Allarey and Bobby Ferrer of the Philippine Embassy briefed me on the mushrooming interest of Indian companies to do BPO in the Philippines. They pointed out that there are already more than 20 Indian companies operating in Manila and the provinces in the BPO space. I found this surprising considering the fact that there was reluctance on the part of the Indian organizations such as NASSCOM (in the early 2000’s) to meet with Filipinos to discuss outsourcing, let alone invest in the Philippines. Back then, we were already seen as competition.  

Even as I express the hope that more Indian companies come to the Philippines, I am constrained to point out the following: 

1. The Indian BPO migration to the Philippines is a natural evolution of their supply chain similar to manufacturing industry’s outsourcing of lesser value-add activities to lower cost centers. In the context of BPO, Indian companies are ramping up to more complex, higher value-add activities in non-voice and Knowledge Processing Outsourcing. They are shifting to outsource the voice component, which has lesser value, to the Philippines and other countries like Sri Lanka and Bangladesh. The Indian company then concentrates on developing its capability on higher value components within India which allows them to better retain their employees.

2. As a general rule, the top management of these BPO firms will always be Indian. That is understandable because they have the expertise that Filipinos may not yet have. But it is also true that these Indian managers tend to hire more Indians for their top echelon. To truly strengthen the Philippines’ management, it would make sense for the government (specifically the Board of Investments and the Bureau of Immigration) to incentivize firms that provide a clear strategic plan of technology transfer and skills training that would place Filipinos in management positions over a period of time.

3. Cooperating and competing in India will be a fact of life in the global BPO industry. As we forge on in the IT-enabled service industry, we constantly have to look at what India is doing. For instance, a real risk to the Philippine BPO sector is currency appreciation. The more the Philippine peso strengthens, the greater the danger that some of the BPO workload is transferred back to India. I understand that India has intervened in the currency markets more than us. There is also a risk coming from India’s neighbors as well. I don’t have the statistics for Sri Lanka and Bangladesh – but as these two countries stabilize their currencies and become more competitive because of it, there will be more talk of India near-shoring BPO jobs to these countries. It should also be noted that China and Vietnam have joined the BPO arena. 

Knowledge Process Outsourcing – the next stage

Today we are number 1 in the voice component of BPO. But the voice segment is low value and switching costs in this area are low, and more importantly, contracts allow for early termination for convenience. Such operations can easily be transferred from one country to another. Thus, we must build our own capabilities in the higher value, higher switching cost segments of the global IT enabled services.

Since the organization of Outsource Philippines - the forerunner to the Business Processing Association of the Philippines – I have always argued that we shouldn’t stop at BPO. Knowledge Process Outsourcing (KPO) should be the next logical step for the Philippines. According to experts “The defining difference between the two.... is that KPO is usually focused on knowledge-intensive business processes that require significant domain expertise”.

Knowledge Processing Outsourcing (KPO) is merely a continuation of BPO, though with rather more business complexity. It is not easy to hire/replace KPO workers as they will be highly educated and trained -– analytical expertise and decision-making skills that cannot be transferred by script or playbook. Thus it is harder to transplant one KPO operation to another country.

But playing in the KPO space requires more from government, particularly in education. Excellent communications skill is necessary but not enough to land a place in a KPO team. KPO workers are engineers, MBAs, doctors, nurses, lawyers, investment analysts, and other skilled professionals. India has an abundance of such professionals. That is our challenge

At this point, we are just one cog in the global supply chain which currently presents itself as a low cost provider for a low value step in the process chain. We must aggressively pursue US and European organizations and other non-Indian BPO companies to relocate here. There are American companies like IBM, HP, Proctor & Gamble, and Accenture that already have a large footprint here, primarily because there is no major Filipino competitor in this industry (unlike in India, there are BPO behemoths like Infosys, Wipro and Tata Computer Systems). Multinational experience in India shows that Indian companies constantly pirate their talent from them.

While it lasts, let us take full advantage of all the opportunities provided by voice BPO. At the same time, we should be preparing NOW for KPO. But these preparations will take more than a change in mindset and a group of entrepreneurial and visionary players from the industry to make this happen. There should be sustained consultation and collaboration between industry players and government resulting in a single-minded strategy to capture BPO for the Philippines

To echo President Aquino’s mantra for public-private partnerships, we need one today to draw out a concrete plan of action with components in enhanced education, innovative investment incentives, focused economic policy and serious infrastructure development – to be seen as a serious global competitor for KPO.

As we enter the New Year, this is an initiative that both government and the private sector would do well to take to heart. The opportunities and rewards in this area are huge.