BPO in the Philippines Could Jumpstart Economic Growth

By Edward Barbour-Lacey

Posted: 15th October 2014 09:04

The month of August saw an all-time high for employment in the Business Process Outsourcing (BPO) sector in the Philippines, hitting over one million employees.  Growth in employment is being primarily driven by the expansion plans of a number of companies, such as Accenture and Convergys.
 
Over the past decade, the Philippines’ BPO industry has seen tremendous growth – revenues and employment have expanded tenfold since 2004. The industry sees an average yearly growth rate of 20 percent. 
 
The country’s success has had a profound impact on other BPO centers, such as India, who have seen their share of the industry decline. In 2013, it was reported by the Associated Chambers of Commerce and Industry of India (Assocham) that India had lost over 50 percent of its BPO industry to foreign competitors.
 
The Philippine government has strongly supported the BPO industry. The government led Philippine Development Plan, a program lasting from 2011 to 2016, has singled out BPO as a high-potential and priority development area for investment.  Additionally, the government is running a number of training programs, such as the Training for Work Scholarship Program, in order to create a competitive workforce.
 
Additionally, investors into the BPO industry are eligible for a number of incentives, such as tax holidays, simplified import and export procedures, tax exemptions on imported capital equipment, and the freedom to employ foreign nationals.
 
Filipino employees are particularly attractive to BPO employers – they tend to be very fluent in Western-accented English. While the BPO industry employees just two percent of the country’s workforce, the industry has had a positive effect on a number of other business areas, such as the retail, real estate, and telecom industries.
 
However, this growth cannot go on forever – key among present challenges is the trend of BPO moving away from pure voice services towards a multi-channel delivery model. This has combined with more traditional challenges faced throughout the BPO industry such as a lack of well-trained employees and high turnover rate (often as high as 50 percent in the Philippines).
 
Key statistics of the Philippine BPO industry include:
 
 - Export revenues grew from US$1.3 billion in 2004 to US$13.3 billion in 2013
 - 2013 US$15 billion in total revenue
 - 2014 forecast of US$18 billion in total revenue
 - 2016 forecast of US$25 billion in total revenue
 
RELATED: Philippines Destined to be Asia’s Next Tech Tiger?
 
BPO growth not shared by the wider economy
 
However, growth in the country’s BPO industry must be balanced against the wider economy. The World Bank recently downgraded its economic growth forecast for the Philippines: from 6.6 percent to 6.4 percent for 2014, and from 6.9 percent to 6.7 percent for 2015. The World Bank noted that any future growth in the country would largely depend on public spending, disaster reconstruction, and government-led structural reforms.
 
The Philippines was not alone in receiving a downgrade; predictions for economic growth in emerging East Asia slowed down to 6.9 percent, from 7.2 percent in 2013. However, World Bank East Asia and Pacific regional vice-president Axel Vann Trotsenburg explained that he believes the region has “the potential to continue to grow at a higher rate and faster than other developing regions if policy makers implement an ambitious domestic reform agenda.”
 
Noteworthy for foreign investors, the World Bank has highlighted a number of external and domestic risks that are worth paying attention to as the Philippines’ economy moves into the future.
 
Key external risks include:
 
 - Disorderly policy normalization in high-income countries
 - A disorderly adjustment in China’s property market
 - Political tensions in the Middle East and Eastern Europe
 - Territorial disputes with China
 
Domestic risks include:
 
 - Low government consumption
 - Slow reconstruction spending
 - Lags in domestic reform (particularly) reforms to raise tax revenues needed to raise infrastructure and social services spending
 
In its analysis of the Philippine economy, the World Bank concludes that, in order to maintain economic growth, the country should pursue further structural reforms and increase investment in human and physical capital. Meanwhile, necessary structural reforms include protecting property rights, promoting more competition, and simplifying regulations.
 
Not just BPO – the rise of KPO
 
Changes are happening quickly in the BPO world. In order to not be left behind it is crucial that the Philippines pay close attention to trends that have the potential to alter the industry. If the country fails to keep pace with the changing landscape, it could well find its economic growth stagnating further.
 
As the demand for non-voice services continues to rise, there is a growing need for what has been described as Knowledge Process Outsourcing (KPO). KPO is defined as the outsourcing of core data-based business activities to another company, which plays an important role in a company’s value chain by providing highly specific expertise.
 
While obviously aimed at cutting costs, KPO is also a value adding activity. Core processes served by the KPO sector are wide ranging and include:
 
 - Market research
 - Fraud analytics
 - Equity research and investment banking
 - Insurance and actuarial
 - Engineering services
 - Web development
 - Data integration
 - Project management
 - Research and development
 - Medical transcript preparation and legal processes
 
The KPO industry is already seeing strong growth in India and Europe, where it has been easier to find the highly qualified employees needed to work in this new industry. Globally, from 2013-2018, the KPO market is expected to grow at a CAGR of 23.12 percent.
 
Currently in the Philippines, call center and voice operations make up about two-thirds of the BPO sector, however the government has recognized the trend moving towards KPO. As such, it is attempting to create an attractive investment environment, and is working with companies in order to identify key areas of specialization and training needed to create a competitive workforce. As a result, KPO’s share of the market is steadily gaining ground in the country and some of the world’s largest KPO service providers, such as J.P. Morgan and AIG, are already operating in the country.
 
If government reforms continue, the future of KPO and BPO in the country looks bright.  This feeling has been reiterated in the highest levels of Philippine government – at a recent meeting, President Aquino stated, “We are determined to prove to the world an important truth about our country: In the Philippines you will find a place where the government is focused on investing on its greatest resource, its people; a nation where entrepreneurs are viewed as partners, and where everyone works to prove that, for tourists and businesses alike: Es más divertido en las Filipinas [It’s more fun in the Philippines].”
 
This article was first published on ASEAN Briefing.
 
Dezan Shira & Associates is a specialist foreign direct investment practice, providing corporate establishment, business advisory, tax advisory and compliance, accounting, payroll, due diligence and financial review services to multinationals investing in emerging Asia. Since its establishment in 1992, the firm has grown into one of Asia’s most versatile full-service consultancies with operational offices across China, Hong Kong, India, Singapore and Vietnam as well as liaison offices in Italy and the United States.
 
For further details or to contact the firm, please email info@dezshira.com or visit www.dezshira.com.

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