Call Center Industry

5/26/2018 Call Center Industry

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INDUSTRY REPORT: THE PROBLEM OF SUSTAINABLECOMPETITIVE ADVANTAGE IN PHILIPPINE CALL CENTERS

Aileen S. Alava*

Facing high expectations as the newest sunshine industry, the call center industry

in the Philippines appears to have dimmer prospects in the coming years. Having

experienced rapid growth from 2000 to 2003, the industry experienced a slowdown in

growth from 2004 to 2006, raising the question of how sustainable the countrys

competitive advantage is against neighboring competitors such as India and China. This

paper uses Porters Diamond Model to analyze the factors resulting in competitive

advantage between nations, and provides industry player and market information on the

Philippine call center industry, as well as updates on how the industrys participants are

seeking to address the industrys challenges.

I. INTRODUCTIONThe call center industry is heralded as the

newest sunshine industry in the country, earningaround US$1.8 billion in 2005 alone, withrevenues forecasted to reach US$5.3 billion byyear 2010. Employment for this sector has morethan doubled every year, from 2,400 agents in2000 to 150,000 in 2006, and is expected toreach 300,000 full-time employed agents in

2010. The Philippines is among the top locationsin the world for outsourced call centers. An SGVindustry report states that in 2005, thePhilippines share of the global call centermarket is 3% and 31% for the Asia Pacificmarket. By 2010, industry leaders target 6%global market share and 51% Asia Pacificmarket share.

II. FRAMEWORK AND METHODOLOGY

What will give Philippine call centers anadvantage over call centers in other countries,such as those in India, China, Malaysia,Singapore? Michael Porters Diamond Modeldefines competitive advantage between nationsas the outcome of four interlinked factors: 1)firm strategy, structure and rivalry; 2) demandconditions; 3) related supporting industries; and4) conditions affecting the key factors ofproduction within the nations. This paper aimsto discuss the competitiveness of the Philippinesusing this framework. Desk research wasconducted to obtain secondary industry data onlocal and global call centers, while interviews

with call center managers provided insight onopportunities and challenges within the industry.

The role of government will also bediscussed in this paper. Industry developmentsshow government policies such as tax incentivesand relaxation of property laws contributed tothe industrys growth. Strengthening ofgovernment support for primary education iscrucial to the sustainability of the Philippinescompetitive position. Insufficiency in primaryeducation is threatening the Philippineadvantage as local players face difficultymeeting global demand with local supply ofqualified call center agents.

_________________________________

* Assistant Professor of Information Systems Management, College of Business Administration, University of the

Philippine-Diliman.

Philippine Management Review2006, Vol. 13, pp. 1-20.


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INDUSTRY REPORT:THE PROBLEM OF SUSTAINABLE COMPETITIVEADVANTAGE IN PHILIPPINE CALL CENTERS2

III. CALL CENTER OUTSOURCING

A call center is a business operationhandling multiple types of customer-orientedfunctions such as marketing, selling andservicing, through multiple channels of customerinteraction such as electronic mail, the WorldWide Web, electronic messaging, voicemessaging, fax messaging, and traditional mail.Call centers serve various stakeholders of anorganization: from prospects to customers,suppliers to competitors, as well as distributors,partners, and employees. The term call centeris used as a collective term to refer to theseoperations for the reason that the primary meansof contact facilitated by these businesses aretelephone calls.

Call centers are categorized as BusinessProcess Outsourcing companies or BPOs. BPOsalso include medical transcription, IT support,animation, software development, financialaccounting and payroll processing companies.Outsourcing in the Philippines arrived at theheels of successful deregulation in thetelecommunications industry. Intensecompetition spurred massive investment intechnology and skill among Philippinetelecommunications companies, leading toinnovation, quality improvement, and pricecompetitiveness in services.

The Philippines is no stranger to foreignarrangements of this kind. The semiconductorindustry, one of the leading export sectors in thecountry, started in much the same way. From theearly 1970s to mid 1980s this sectorexperienced dramatic expansion, growing at anannual average rate of 53%. Internationalfactors also impelled growth in the form oftransnational companies from the developedeconomies (e.g., US, Europe, Japan) locatingoffshore plants in developing countries (e.g.,Philippines, Vietnam, Singapore) for the mostlabor-intensive phases of semiconductormanufacturing. As with the call center sector,the Philippines main advantage insemiconductors is cheap and literate labor.Government response to further incite exportactivity in semiconductors is similar to

regulatory mechanisms implemented in the callcenter industry today, such as the establishmentof freeport zones, the relaxation of tariffs andduties on imported technologies, and thepermission to employ foreign nationals.

Agreements in the semiconductor industryduring its period of rapid growth were coveredby subcontracting arrangements. Todays globaltrend for off-shoring, or offshore outsourcing,has very little difference with subcontracting.Offshoring is the arrangement by which onecompany contracts with service providerslocated outside the country for services thatcould also be or usually have been provided in-house. Outsourcing business processes to remotelocations is made possible by advancements inthe telecommunications sector in the outsourcercountries. Low labor cost and improvedconnectivity resulting from technologicaladvancement and deregulation in thetelecommunications sector in the servicingcountries (e.g., India, China, Malaysia, thePhilippines) have made offshore outsourcingattractive from an economical standpoint. Thecosts of operating a call center in thePhilippines, for example, is reportedly 40%lower than in the United States (55% costsavings from labor less 15% incremental costfrom travel and telecommunicationsrequirements). Offshore outsourcing in generalbrings in around 25% to 50% in cost savings.

Globalization and its societal effects havemade manageable the challenges of cross-cultural communication: many offshoredestinations have a Western heritage and almostall are exposed to Western culture popculture,even through the internet, cable television, andother entertainment media, e.g., movies, books.The difference in time zones between theservicing and the served countries (e.g., theUnited States, the United Kingdom) areaddressed through alternate six- to eight-hourshifts in the day, enabling call centers tomaintain 24-hour service agent availability.While incremental costs are incurred forperfunctory risk management expenses, e.g.,


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hazard pay, etc., the total cost of operating a callcenter out of India or the Philippines are still

lower compared to the cost of operating out ofthe US or the UK.

IV. THE PHILIPPINE CALL CENTER INDUSTRY

An IT-Enabled Services briefer from theBoard of Investments in 2007 states that thereare an estimated 146 call center companies inthe Philippines. Call center companies should bedistinguished from call center sites. A site is afacility housing a call center operation and a callcenter company may operate multiple sites.Sykes Asia, for example operates five sites inthe Philippines while People Support operatesfour. There are three categories of call centercompanies:

Foreign-owned call centers withPhilippine subsidiaries. These are callcenters owned by foreign companies,usually from the United States, that havebranched out to offshore outsourcing.

Insourced call centers of largemultinational corporations. These areoperations that are dedicated to theparent companies and whose objective is

to bring competitive advantage bytransforming an erstwhile internal back-office function into one that is revenue-generating.

Filipino-owned call centers. These callcenters are wholly owned by Filipinoentrepreneurs or corporations (e.g.Smart, PLDT, Globe, etc.) that seekcustomers from the United States,Europe and Asia, particularly fromJapan and Singapore.

Estimates from the Board of Investments(BOI), the Commission on Information andCommunications Technology (CICT) and theBusiness Process Association of the Philippines(BPAP) report the demand for call centers toreach anywhere from between 30,000-50,000new agents hired in the Philippines per yearfrom 2007-2010.

Figure 1Employment in Contact Centers

64,000

112,000

168,000

218,000

262,000

301,000

331,000

0

50000

100000

150000

200000

250000

300000

350000

2004 2005 2006 2007 2008 2009 2010

*2006-2010 from BOI/CICT/BPAP Forecast

Source: Board of Investments, BPAP


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The success of call centers worldwide isattributable to the growth of outsourcing as aprofitable business model. The BOI estimatesthat 2006 revenues in business processoutsourcing (which includes other IT enabledservices such as medical transcriptions,animation, and back office transactionsprocessing) amounted to US$3.67 billion, and

projects revenues to jump upwards 40% to reachUS$4.79 billion this year. Joint forecasts fromthe BOI, BPAP and CICT predict that there willbe 343,000 new outsourcing jobs this year (ofwhich 64% or 218,000 will be in call centers), a40% increase from the number of newoutsourcing jobs in 2006 of about 244,000 (ofwhich 69% or 168,000 were in call centers).

Figure 2Annual Employment (2004-2010)

99,30064,000

162,250

112,000

244,675

168,000

343,013

218,000

479,519

262,000

668,126

301,000

920,764

331,000

0

100000

200000

300000

400000

500000

600000

700000

800000

900000

1000000

2004 2005 2006 2007 2008 2009 2010

BPO Industry Contact Centers


The Philippine call center industry isestimated to have earned US$2.7 billion inrevenues in 2006, a growth of 50% from 2005searnings of US$1.7 billion. The Department of

Trade and Industry expects actual 2007 returnsto be close to US$3.5 billion, a further growth of30%.


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Figure 3Annual Revenues of Contact Centers

(in US$M)


It is interesting to note that service incomeof ten of the top call centers1 in the country

(Ambergris, Convergys, Cyber CityTeleservices, Sitel, E-Telecare, iContacts

Corporation, InfoNXX, Parlance,PeopleSupport, and Sykes Asia) together

account for more than 20% of the total revenuesof the entire sector.

Figure 4Comparative Annual Revenues of

148 Call Centers vs. Ten Top Call Centers (2004-2005)


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Activity in the industry is apparentlydependent for the most part on a small numberof big players. The BOI in its IT-Enabledservices briefer (2007 release) states that itexpects upward momentum to continue until2010. Sources of growth have been identified asfollows:

a) Expansion from established call centerssuch as PeopleSupport, Sykes,eTelecare, PLDT, ClientLogic,InfoNXX, Citibank, Ambergris,Accenture, IBM, Caltex and HP

b) Entry and consequent expansion, i.e.addition of new sites, etc. of globalplayers such as Dell, HSBC, JP Morgan,AIG, Convergys, TeleTech, Sutherland,Deutsche Bank, and NetSuite.

c) Next wave of entrants such as AccorReservation, MiSYS, Siemens, Ericson,Alsbridge, Virgin Atlantic, Philips,Emerson, Capital IQ, DDC and Kanbar.

Growth in the sector follows expansion theoperations of big players. In the last two years,both Sykes Asia and People Support haveestablished new call center sites while stillothers have added new projects and accounts.These activities and the influx of new playershave resulted in revenues steadily growing until2006 and expectations for further expansionuntil 2010. While growth is continuous,however, a slowdown in the rate of growth isexpected starting 2005.

Figure 5Annual Revenue Growth Rate of Contact Centers

133.3%

114.3%

166.7%

220.0%

75.0%

50.0%

29.8%20.2%

14.9% 10.0%

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

*2006-2010 forecasted by BOI/CICT/BPAP


Slowing growth in the last two years afterthe steep increases of 2003 to 2004 indicates thatthe call center industry in the Philippines is nowapproaching maturity. Sales and earningsexpansions of the past years resulted from the

Philippines cost advantage over other countries.The passage of time, however, may erode thisadvantage as China and other Southeast Asiancountries threaten to eat into the Philippinesmarket share with better cost or quality


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offerings. The challenge for the industry is toextend growth by improving the competitivedimensions where the Philippines is weak or byadjusting industry targets to create newcompetitive advantages.

The Global Arena

The Asia Pacific region outperforms otherregions such as Eastern Europe, South America

and Africa. Japan and South Korea are seen toincrease nearshore outsourcing investments inlow-cost, labor-rich neighboring China whileSoutheast Asian countries benefit from close-to-Western cultures, open economies, andadvanced technologies for a similar costadvantage. In 2005, Frost and Sullivanforecasted that call centers in Asia will growfrom 21,360 in 2004 to 39,248 call centers in2011, at a compound annual growth rate of 9.1%

Figure 6Forecast Growth of Call Centers in Asia Pacific

*at a Compound Annual Growth Rate of 9.1%, as forecasted by Frost and Sullivan.

More recent studies predict faster growthrates. A 2006 Asian Contact Center IndustryBenchmarking Report assessed the industry tobe in a period of strong growth. The studyconducted on 747 contact centers in thePhilippines, India, Singapore, China, Malaysia

and Thailand estimates that by 2007, the total576,000 seats in the countries studied wouldincrease to 704,500, a growth rate of 23%.Among the countries in the study, thePhilippines has the highest forecasted growthrate. By 2007, it is expected to grow by 33%,Singapore and Malaysia by 32%, China at 22%and India by 16%.

Of the Asian destinations, India is the topchoice, with other nations such as the

Philippines, Malaysia, Singapore, and Chinafollowing closely. The Philippines, having anAmerican-influenced culture, a proficiency inEnglish comparable to India without the heavyaccent, and a skilled labor force, was consideredthe greatest threat to Indian domination in this

sector. However, recent years developments inother competitor countries such as China,Malaysia, Thailand and Indonesia coupled witha strong peso and deficiencies in the local supplyof qualified call center agents have weakenedthe Philippines advantage.

The A.T. Kearney Global Services LocationIndex in 2007, a survey conducted to measurethe relative attractiveness of offshore locationswith regard to financial structure (40%), people


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skills and availability (30%), and businessenvironment (30%), has ranked the Philippinesthe 8thmost attractive country for offshoring in

2007. The top twenty-five countries are asfollows:

Figure 7

Source: AT Kearney 2007 Global Services Location Index


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The 2007 study saw the Philippines declinefrom its 4th rank from AT Kearneys last GLSI

survey which was conducted in 2005. The toptwenty five locations then were as follows:

Figure 8

Source: AT Kearney 2005Global Services Location Index

The Philippines drop in the AT Kearneyrankings is attributed to the appreciation of thepeso and growth in the call center industrywhich has driven up labor costs in terms of theUS dollar, by as much as 30%, according to ATKearneys GSLI 2007 highlights. In other areasof performance, the country improved slightly,

particularly in infrastructure, industry size andlanguage skills. In contrast, Malaysia, Thailand,and Indonesia have either retained their rankingsor moved up the index. Slower industry growthrates in these countries have tempered the effectsof inflation on labor costs.


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Figure 9Philippines Offshore Attractiveness, 2005 & 2007

A. T. Kearney Findings

2005

3.62007

3.3

2005

1.0

2007

1.2

2005

1.0

2007

1.3

0

1

2

3

4

5

6

Financial Structure Business

Environment

People and Skills

Availability

Ratio of Categories - 40:30:30

Philippines' Score

2007 2005

Financial Structure

Compensation Cost (8) 7.1 7.7

Infrastructure Cost (1) 0.7 0.8

Tax and Regulatory Cost (1) 0.3 0.58.10 9.00

Philippines' Score

2007 2005

Business Environment

Country risk / Economic and Political

Environment (6) 1.9 1.8

Country Infrastructure (2) 1.2 0.7

Cultural Adaptability (1) 0.7 0.8

Security of Intel lectual Property (1) 0.3 0.2

4.1 3.5

Philippines' Score

2007 2005

People Skills and Availability

Relevant experience / IT BPO Industry

size/quality (4) 1.2 0.9

Size and availability of labor force (2) 0.7 0.7

Education (1.5) 0.9 0.9

Language (1.5) 1.2 0.7

Attrition risk (1) 0.2 0.6

4.2 3.8 Source: AT Kearney 2005 and 2007 Global Services Location Index


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India

Among the top contenders for offshorelocations, India is the country with the mostexperience. The emergence of call centers as anopportunity for national growth came uponderegulation in the telecommunications industryin the mid-1990s, much like the Philippineexperience. The outsourcing sector, the firstparticipants of which were medical transcriptionservice companies then followed by datamanagement and customer support providers,began to take root in the late 1990s. As in thePhilippines, the first operations consisted ofsupport subsidiaries of multinational companiesservicing the parent company.

Low-cost and highly-skilled labor,significant improvements in IT infrastructure,and a positive business environment spurred byindustry organizations such as the NationalAssociation of Software and ServicesCompanies (NASSCOM) propelled exponentialgrowth for the industry in the years to follow.The NASSCOM estimates yearly growth of 37%for the outsourcing segment with the call centerindustry leading the sector. Call centerscomprised 46% of the total US$4.6billionrevenue the outsourcing sector earned in 2005.India is the strongest contender in the sector andis often tagged as the worlds first-choice inoffshore outsourcing. In 2005, it has 8% global

market share and 68% market share in Asia-Pacific.

The Philippines greatest advantage overIndia is in language skill. American Englishbeing the dominant lingua franca in sales andsupport transactions coursed through callcenters, the Philippines has a culture that iscloser to the West and an English tongue that isthe easiest to understand in the whole of Asia,partly to exposure to American television andpop culture, as well as English being themedium of instruction in all education levels. Ithas been observed that Indias pool of talent hasthe advantage in technical, specializedoccupational skills while the Philippinescompetence is in liberal arts, which providesmore general knowledge as well as capabilitiesneeded for back-office processing, e.g.,communication skills, and cultural adaptability.

Increased global competition in the callcenter sector has led to efforts to expand theportfolio of services of the Indian IT-enabledservices sector. NASSCOM reports that the lastthree to four years in India have been a period ofdiversification. Indias BPO companies haveexpanded to higher-value processes throughvertical integration towards non-voice-basedservices such as back-office processing andcontent development. In 2005, customer careservices comprised 34% of total BPO revenuesin India, compared to 69% in the Philippines.


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Figure 10.1 Figure 10.2

Sources: DTI (Philippines) , PriceWaterhouseCoopers (India)

China

China is the preferred choice as a call centerlocation for companies targeting South Korea(attracted by ethnic Koreans living in China)with which it has the closest cultural ties. China

is the only other country in the world that posesa threat to India as far as size and cost of laborsupply is concerned. The yearly cost ofoperating a call center seat in China is the lowestin Asia.

Table 1Comparative Annual and Hourly Costs per Call Center Seat in

China, India, Malaysia, the Philippines, Singapore and Thailand

in USD ($)Annual Cost per

SeatHourly Cost

per SeatChina 13,543.00 3.62

India 15,872.00 4.24

Malaysia 34,779.00 9.29

The Philippines 18,086.00 4.83

Singapore 66,998.00 18.46Thailand 18,527.00 4.95

Source: callcentres.net

Chinas cost advantage, however, isdampened by its deficiencies in English-speaking manpower. In this regard, Chinacannot as of yet compete head-on with India andthe Philippines in the global outsourcing market.University enrolments however have grown 25%

in recent years which increased the countryspotential to compete. Chinas entry to the WorldTrade Organization has spurred the inflow ofcapital as well as Western influence and analystspredict that in due time the labor supply in China


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will be comparable to India in size as well as inskill.

Singapore

Despite high labor costs, Singapore enjoys acomparative advantage from reliablebureaucracy, excellent technical infrastructure,superior educational systems, political andeconomical stability, and stringent enforcementof intellectual property laws for information anddata security. Singapore outsourcers providehigh-value services differentiated from low-value, back-end processes provided by otherAsian countries. To take advantage of thismarket niche, Singapore outsourcers marketadvanced offshore functions such as basicresearch, robotics, healthcare and medicaldiagnostics. Singapore companies in turnoutsource lower-value operations to India andChina to gain cost advantage.

Malaysia

What Malaysia lacks in manpower (itspopulation is significantly smaller than India orChina and thereby cannot meet the sameeconomies of scale) it makes up for in advancedinfrastructure. Malaysia is second only toSingapore in IT competitiveness rankingsbetween countries in Southeast Asia. Stronggovernment support is apparent in efforts suchas the Multimedia Super Corridor project, whichincludes the development of infrastructure inwhat they have called intelligent cities such asCyberjaya and Penang Cybercity, where majorIT leaders such as IBM and Motorola havealready located their regional offshore servicecenters.

Latin American Countries

Latin American countries such as Brazil,Chile and Mexico enjoy the advantage of being

near-shore destinations, or offshore servicingcountries close to the served country, this beingthe United States. Near-shore destinations are inthe same time-zone as most customers, therebylessening the need to arrange multiple 8-hourshifts in the day as well as the need to invest inadditional expenses for hazard pay, safetyinsurance and the like. The A.T. Kearney studyfound Brazil has the best labor skills in theregion, Argentina has the cost advantage, whileChile has the best business environment (e.g. ithas, for instance, supplemented agreements withUS and European companies with IPinfringement penalty clauses). Nonetheless,perhaps the primary advantage of the region ingeneral is the vast availability and incomparablequality of its bilingual (English and Spanish) callcenters, much in demand in the United States.

Eastern European Countries

Eastern European countries such as theCzech Republic, Poland, Romania and Hungaryare possible choices for Western Europeancountries as a near-shore destination. EasternEuropean call centers provide cost, languageskill, and time-zone advantages. Multilingualcall centers for the multilingual Europeanmarket can be easily and efficiently set up inEastern Europe more so than in Latin Americaor Asia. Customers from Germany and theUnited Kingdom moreover may prefer EasternEuropean call centers most particularly for itsbilingual workforce: citizens in most EasternEuropean countries can speak both German andEnglish. Reportedly, however, Eastern Europeancountries, most particularly Russia, need toupgrade telecommunications infrastructure tocompete with the other regions as well as tocomply with European Union requirements.


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V. CONCLUSION

The factors affecting firm strategy, structureand rivalry involve the services offered by localfirms, and how competitive locally providedservices are against those provided by othercountries. Primarily, this involves why thePhilippines is chosen by call center companieswhen making the call center location decision.The factors involving demand conditionsinvolve the evolving needs of the global marketfor call center services, ranging from the basicservice of answering inquiries based on pre-defined scripts to the more complex service ofproviding technical assistance and support. Thesufficiency of related supporting industries willinvolve the state of local educational institutions,real estate, transportation and retail sectors andhow these sectors contribute to sustain thegrowth of the local call center industry. Finallythe conditions affecting the key factors ofproduction, such as local skilled labor andmission-critical technology, will also bediscussed.

Firm Strategy, Structure and Rivalry

As earlier mentioned, the first factoraffecting competitiveness is firm strategy,structure and rivalry, which primarilycontributes to why the Philippines is chosen bycall center companies when making the callcenter location decision. The offshore locationdecision is influenced by a number of factorsand it is against these criteria that India, China,the Philippines and other countries areevaluated. It follows that it is in these attributesthat the Philippines should perform for a distinctcompetitive advantage over the others. Thesefactors include the following: quality and cost oflabor (including technical competency andlanguage skills), connectivity (i.e.,telecommunications bandwidth) cost andreliability, mature business, regulatory andtechnological environments for outsourcingoperations, political stability, and culturalalignment between the offshore outsourcer, theoutsourcing company, and the customers to beserved by the call center.

Figure 11

Factors Affecting the Call Center Location Decision

Decision Criteria in Selecting

an Offshore Call Center

Quality and Cost of

Labor

Reliability and Cost of

Connectivity

Mature Business

Environment

Political Stability

Cultural Alignment

Among these success factors, the Philippinescompetes strongest in (1) quality and cost oflabor, and (2) cultural alignment. It is in thesetwo factors that exponential growth in 2003 and

2004 can be attributed. The challenge ofsustaining the Philippines advantage in theindustry can be discussed from two vantagepoints: first from the view of creating a distinct


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competitive advantage and second from the viewof ensuring the distinct advantage created isimpervious to erosion. Threats arise fromdeliberate attempts by competing entities toundermine it and from developments in callcenter operations and technology that will shiftthe bases of competition.

The benefit of lower cost is the Philippinesmost substantial value offering to call centerinvestors and customers. The results of the ATKearney survey have shown that while otherfactors are also significant, the globalcompetition in the call center sector continues tobe driven by cost at the present: it remains to bethe most important factor in the perception ofthe attractiveness of an outsourcing location.In this regard, the countrys low infrastructureand compensation costs, as well as the provisionof special tax concessions within specific zoneshave contributed significantly to making thecountry a preferred choice among investors. Inaddition, the results of the study alsoemphasized that in the Philippines, call centerswere given most emphasis among theoutsourcing sectors and likewise highlighted theefforts of the government to promote theseservices by establishing special economic zonesthat provide investors with freeport privileges,tax shields and holidays.

Among the participants in the global callcenter industry, India outperforms all othercountries with a combination of advantages:low-cost labor as well as a progressiveeducational system ensuring a continuous supplyof highly-skilled employees, reliable low-costinfrastructure, supportive business government,and a wealth of management experience in thecall center industry, as well as in otheroutsourcing services. The Philippines directlycompetes against India by providing labor andinfrastructure at comparable rates andfurthermore provides the advantage of aWesternized culture and better performance inconversational English to appeal to US-and UK-based customers. Singapore has the highestcompensation rates but has the advantage ofgood government reflected in lower costs ofbureaucracy and corruption. Chinas major

advantage is its massive pool of available low-cost talentonly China can directly competewith India in size of available laborhoweverlabor skills are still limited in languageproficiency and management experience in theindustry.

What makes India a success story is thecombination of multiple sources of advantageavailable to the call center investor. ThePhilippines current competitive advantagemeanwhile is in the combination of lowcompensation cost and high English proficiency,and while this advantage continues to bringadditional revenues and employment to thesector, growth rates have also been observed tobe decreasing, apparently due to two observabletrends: low acceptance rates and high attritionrates. Both low acceptance and high attritionthreaten the advantages of labor availability, costand quality of Philippine call centers.

The advantage of cost over other factors,i.e., people and environment, affecting theoffshore location decision is nonetheless not aperpetual one. The leveling of technicalcompetency between the different countriesthrough globalization and convergence oftechnologies as well as the homogenization ofsocial conditions between different economiesmay affect the importance of cost as a successfactor. The ubiquity of information availablethrough advanced mass media andtelecommunications have also brought about lesscultural heterogeneity between the countriescompeting as call center locations. Theadvantage of cultural alignment is therefore notexclusive to the Philippines and, further, is onethat erodes with the passage of time and theavailability of communications technology.

Demand Conditions

Despite the low-cost labor advantage offeredby offshore call centers, companies continue tolook for ways to gain even more cost savings, ifnot from a more efficient and thereby cheaperworkforce, then from automation technology.Meta Groups technology research servicesgroup reported an increasing number of clients


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choosing to implement voice-automationtechnology systems to handle standard, routineinquiries, e.g., account balances, product andservice, payment offices, etc., instead ofcontracting the services of an outsourcer in alow-cost country or establishing their own callcenter operations offshore.

The eventual outcome of this development isthat, with the existence of automationtechnology, only customer calls requiring morecomplicated assistance will be routed to offshorecall centers, perhaps from the Philippines orIndia. This direction means that customers willhave higher expectations from call center agentsin offshore countries. Agents will no longer beable to rely on simplified question-and-answerinstructions or scripts to answer more complexquestions that will be asked them. Industryanalysts observe that, out of 100 applicants, onlythree to five are hired given existing skillrequirements. Support services for morecomplex inquiries, perhaps requiring technicalinformation or instruction, will consequentlyrequire higher technical competency, as well asmore than adequate communication andproblem-resolution skills. Should suchrequirements be made necessary, it is expectedthat the hiring rate will be lower in the years tocome, unless initiatives are implemented toenhance the skills and capabilities of existing aswell as future workers in this sector.

Sufficiency of Related Industries

The Philippines weakness in informationtechnology infrastructure threatens the ability ofthe country to compete where value-addedservices require a higher telecommunicationsbandwidth. Despite being one of the top offshorelocation choices in the world, the Philippinesranks, and has always ranked poorly in networkreadiness surveys, seen by most investors asmeasures of the competitiveness of a country ininformation technology. In both the 2004 and2005 Network Readiness Index (NRI) listingcompiled by the World Economic Forum(WEF), the Philippines ranked in the lowerlevels: 67th in a group of 100 in 2004 and even

lower in 2005 (70th place). Other outsourcingdestinations fare similarly: India, the toplocation for offshore outsourcing is at 40thplacewhile China, 2ndin the AT Kearney Index, is at50th place. The WEF NRI is a measure ofrelative performance in the following areas:

a) aspects of the environment of a givennation for development in informationand communications technology (ICT)such as the regulatory regime and legalframework for ICT, and the availableinfrastructure;

b) networked readiness of individuals,businesses and governments; and

c) ICT usage by individuals, businessesand governments.

The apparent inconsistency betweennetworked readiness and other IT competencyratings for the Philippines and the remarkablegrowth of IT-based services, made plain byrecords of investment, revenue, and employmentactually generated by the sector, is attributed byindustry analysts to the observation that indicesand rankings comparing countries with eachother consider all the regions in the country,from the most advanced areas to theundeveloped ones. Developed countries such asthe United States, Japan, and Germany haveprogressed to a point where the availability oftelecommunications technologies and otherrelated services in the less urbanized regions arevirtually at par with that of the mostindustrialized areas. Developing countries arecharacterized by a marked difference ininfrastructure and economic activity between thecenters of business and the rural, residentialareas.

Such is the case of India, China and thePhilippines where the small portion of thepopulation living and working in the centers ofbusiness enjoy advanced technology while therest have very limited access to even the mostbasic computing technology, e.g., internetaccess, if at all access is given them.Nonetheless, call centers in developing countrieschoose to locate only in the industrialized,


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technology-enabled centers of business. Thus,they are able to employ, and at a cost advantage,the network infrastructure, hardware equipment,software and consulting services at a comparabletechnological level to those used by call centersin more developed countries. While it is validthat network-readiness surveys include locales inthe Philippines which call centers are notconsidering to locate in, and that these callcenters are eventually established in theindustrialized, technology-enabled centers ofbusiness, it is still worthwhile considering thatthis shortcoming significantly limits the range ofoptions for call center sites in the Philippines.

Low infrastructure development in areasoutside Metro Manila also threaten the costadvantage as call centers are constrained withonly a few places to locate their operations sincethe location options are limited, the cost of realestate in these areas increases. While on the onehand the rise in real estate prices is seen ascontributing to the trickle-effects of revenuegrowth in the call center sectors, on the otherhand it can be seen as a threat to the countryscost advantage as far as real estate andinfrastructure costs are concerned.

Factor Conditions

The 2006 Asian Contact Center IndustryBenchmarketing Report ranks human resourcemanagement, particularly the areas ofrecruitment and agent turnover, as the greatestchallenge faced by Asian contact centers. In thePhilippines, the consistency of supply ofqualified call center personnel is threatenedasreflected in a very low 3% acceptance ratebyapparent degradation of the quality of primaryand secondary education in both private andpublic schools. Although it has been reportedthat the average 10-year-and-above literacy ratein the Philippines is above 93%, literacy is notenough to ensure a position for a call center

applicant. Basic English proficiency, for thatmatter, is considered a minimum requirement,enough for the agent to be considered for aposition, but still insufficient to match the higherlevels of conversational and even colloquialproficiency required for hiring. While low costlabor still works to the countrys advantage,labor on the average making up 46% of the totalbudget of operating call centers, such anadvantage will not be sustainable if the countryis not able to supply as much as is needed bysteadily growing demand.

While hiring is becoming more and morestringent, English proficiency in the formativelevels of education remains below average.English language skills tend to diminish overtime, as shown by statistics reported by theDepartment of Education, e.g., Grade 4 publicschool students show national average of 42% inEnglish, while high school students show 30%.As English and communication subjects arerequired less in college, it may be expected thatthe level of proficiency will deteriorate more inthe tertiary levels of education. AlthoughEnglish continues to be widely used in business,in government (at least in the high levels), and inschool, programs in local mass media andentertainment are dominated by Tagalog films,making mastery of English a more difficult taskfor the average call center applicant. The currentstate is reflected in the low acceptance rateamong applicants in call centers and other BPOcompanies. Out of every 100 new collegegraduates applying, only three are hired.

High attrition rates and the increase inpoaching and piracy of agents on the otherhand threaten the low cost of labor as companiesinvest in benefits and compensation packages toensure agents will not move to a competitor. In2006, the labor attrition rate in the Philippines isreported to be 18% for full-time agents and 24%for part-time agents. India has significantlyhigher attrition rates, as follows:


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Table 2Comparative Mean Attrition Percentage for Full-Time and Part-Time Call Center Agents in

China, India, Malaysia, the Philippines, Singapore and Thailand

Mean Attrition (Full-Time)

Mean Attrition(Part-Time)

China 17% 29%

India 38% 32%

Malaysia 18% 24%

The Philippines 18% 24%

Singapore 16% 21%Thailand 15% 16%

Source: callcentres.net

At this rate, a job in a call center is alreadyconsidered as a career in the Philippines, and notlooked upon as merely a temp position as inthe United States. Nonetheless, poaching orpirating of employees between call centers hasalready been observed because of the limitedtalent pool. Call centers are challenged toimplement best practices in curbing employeeattrition in the call center industry such as aflexible and conducive environment, highincentives, and training schemes, and more

importantly, a career path development plan toconvince college graduates that being a callcenter agent is not a dead-end type of job.

The Challenge of Moving Forward

The question remains as to who will bear thecost of improvements required to strengthen allfactors necessary to ensure the sustainability ofthe Philippines competitive advantage in thecall center industry. Some call centers haveshouldered the cost themselves, offering free in-house training for new hires. Still others haveestablished joint efforts with existinguniversities and the Technical Education andSkills Development Authority (TESDA) toincorporate call center-oriented trainingrequirements in their curricula and courses. Callcenters have established personnel developmentinitiatives, e.g., in-house training and evaluation,to enhance skill, and compensation and benefitsinitiatives, e.g., higher allowances, all-expensepaid holidays and vacations, career development

planning, etc., to curb attrition rates, ensuregreater stability of the workforce size, and lessenthe poaching of call center agents.

More call centers are also contributing to thedevelopment of the countryside, morespecifically the locations outside Metro Manilasuch as Laguna, Baguio, La Union, Cebu,Davao, Cagayan de Oro, Iloilo, etc.Geographical diversification, i.e., expanding callcenter operations to provinces, will providemore labor supply, and breathing room to

answer to the intense scrambling for office spacein Metro Manila. Call center operations will alsoencourage infrastructure development in othermetro cities, with the possibility of replicatingthe development in the cities of Metro Manila ininfrastructure and skill to the countryside areas.

Another opportunity available to the sectoris value diversification. Indias move towardsstrengthening non-voice services was not lost onPhilippine ears. In its forecast towards 2010, theDepartment of Trade and Industry (DTI)expressed its target to increase the share of otherBPO services in the total BPO revenue pie whiledecreasing dependence on call centers, whichmight now be showing signs of decline. Thesemiconductor industry in its peak of growthduring the mid-1980s also promptedrecommendations toward diversification towardshigher-value processes. At the time, the sectorprimarily consisted of low-level technology-supported processes, mainly automated simpleassembly of semiconductor devices and producttesting. Even now, industry activity in high-level


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AILEEN S.ALAVA 19

technology-supported activities such as waferproduction and device design are still yet toreach the growth stage.

The Philippines competitive advantage inthe call center industry may be sustained throughthe enhancement of supply conditions,strengthening of related industries, andgeographical diversification. Whether theseefforts will work will be determined by twodevelopments industry participants should takecare to observe at the close of the year: first,how the market will respond to the industrysefforts, i.e., whether the growth in demand willbe sustained by continuous inflow of newcontracts and whether forecasted increases inemployment, facility expansion and investmentwill be attained or exceeded; second, how theindustry will answer the demands of the market,

i.e., whether the total operational capacity (as tolabor supply, connectivity, technology, facilityand real estate) of the call center sector will besufficient to respond to the rise in demand.

These developments will indicate whetherthe call center industry can reverse the tide andhalt impending decline. However, the industryshould be prepared should the slowdown ingrowth rates persist in the coming years,indicating that the countrys advantage has beenweakened by the supply strength of othercountries such as India or China. In this case, aprudent response that call centers shouldconsider is to diversify into other BPO sectorssuch as high-value, non-voice-based services tocompensate for the effects of decline in the callcenter industry.

REFERENCES

A. T. Kearney (2007 & 2005). Global services location index.

Balfour, F. (2003, February 3). The way,way back office. Business Week.

Bharadwaj, G., Varadarajan, P. & Fahy, J. (1993). Sustainable competitive advantage in serviceindustries: a conceptual model and research propositions.Journal of Marketing, 57(4), p. 83.

Business Process Association of the Philippines, http://bpap.com.ph

Board of Investments, http://boi.gov.ph

Call Center Directory, http://callcenterdirectory.net

Callcentres.net. 2006 Asian contact center industry benchmarking report.

Contact Center World. http://contactcenterworld.comCruz, Dennis H. (1981, October) A review of international subcontracting arrangements in the

Philippine electronics (semiconductor) industry, October 1981.

Department of Trade and Industry. http://dti.gov.pg

Domingo, G. (2005, April 11). BOI, BPAP, CICT: What roles they play.Computer World.

Domingo, G. (2005, March 7). Why we rate poorly in technology in global competitive surveys .Computer World.


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Frost & Sullivan (2005, December 20).Assessment of the Asia Pacific contact center markets.

Hookway, J. (2004, October 7). The services spin-off. FarEastern Economic Review.

IBON Databank Phil, Inc. (1990). The semiconductor industry.

Institute for Developmental and Econometric Analysis, Inc. Call center industry and the Philippineeconomy. Lecture delivered at the UP School of Economics. March 2006.

International Customer Management Institute. http://www.incoming.com

IT Matters. http://itmatters.com.ph

McDougall, P. (2004, January 26). Automation takes toll on offshore workers.Information Week.

NOTES

1 Selection of the ten top call center companies is arbitrary and not based on an objective ranking of financialperformance. The subset was intended to illustrate industry concentration: how a small minority of ten callcenters have contributed significantly more revenues to the sector than the other 138.

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