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BUSINESS PROCESS OUTSOURCING IN THE PHILIPPINES: CHALLENGES AND

OPPORTUNITIES

I. INTRODUCTION

The World Bank defines outsourcing as the contracting of a service rovider to co!letel" !anage#deliver and oerate one or !ore of a client$s functions %e.g. data centres# net&orks# deskto co!utingand soft&are alications'. % World Bank (Co!!erce Develo!ent Reort# )**+'. Initiall"# fir!slooked at outsourcing e,clusivel" fro! the ersective of cost-reduction. t resent# al!ost ever"organi/ation outsources in so!e &a". T"icall"# the function 0eing outsourced is considered non-coreto the 0usiness. n insurance co!an"# for e,a!le# !ight outsource its 1anitorial and landscaingoerations to fir!s that seciali/e in those t"es of &ork since the" are not related to insurance orstrategic to the 0usiness. The outside fir!s that are roviding the outsourcing services are third-art"roviders# or as the" are !ore co!!onl" called# service roviders.

Outsourcing2as a 0usiness strateg"2is not actuall" ne&. (seciall" in the !anufacturing sector#co!anies have long racticed su0contracting. In fact# starting fro! do!estic su0-contracting#co!le, international sul"-chains are no& driving highl" glo0ali/e industries such as gar!ents#electronics and auto!otive arts and co!onents. 3roduction activities are routinel" outsourced toleast-cost# countr"-locations.lthough outsourcing has 0een around as long as &ork seciali/ation hase,isted# in recent histor"# co!anies 0egan e!lo"ing the outsourcing !odel to carr" out narro&functions# such as a"roll# 0illing and data entr". Those rocesses could 0e done !ore efficientl"# andtherefore !ore cost-effectivel"# 0" other co!anies &ith seciali/ed tools and facilities and seciall"trained ersonnel.

4tarting in the (,ort 3rocessing 5ones %(35'# t"es of activities evolved. Traditional !anufacturingactivities# such as the roduction of te,tiles and clothing# is still co!!on# 0ut !an" ne& /onesseciali/e in articular goods sectors# such as electronics and che!icals or in services sectors such asIT and financial services. 4ecificall"# services in (35s have gained i!ortance over the "ears#although its !onu!ental rise &as articularl" noted at the turn of the )6st centur". 7ro! a 0roaderersective# the rise of services in (35s &as art of the glo0al surge in service foreign directinvest!ents %7DI's &hen the li0erali/ation of 7DI olicies gained !o!entu! during the 688*s. Inarticular# this 0oo! of the services sector &as signaled 0" the i!le!entation of WTO9s :eneralgree!ent on Trade in 4ervices %:T4' in ;anuar" 688< as a result of the Urugua" round negotiations.ccording to :T4 Watch# the ai! of the trade agree!ent is to graduall" re!ove all 0arriers to tradein services. The agree!ent covers services as diverse as 0anking# education# health care# ru00ishcollection# touris! and transort. =ike other WTO trade agree!ents# :T4 oerates on the >ost7avored Nation rincile. 3redicta0l"# such a trade agree!ent e,erted an added ush for the greaterli0erali/ation of trade and invest!ent in services. The t"es of services located in (35s have e,andedraidl"# fro! co!!ercial services and si!le data entr" to call centres# !edical diagnoses#architectural services# as &ell as 0usiness# engineering and financial services.

The United Nations Conference on Trade and Develo!ent %UNCTD' cited three !ain reasons forthe general shift to services in the sectoral co!onent of glo0al 7DI flo&s?

6. 4ervices are the largest roductive sector in !ost econo!ies# and their co!etitive %that is#efficient' roduction is critical to the &elfare of a societ" as a &hole@

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). >an" services are crucial inuts into roducts that co!ete in do!estic and international!arkets@ and

+. dvances in infor!ation and co!!unication technologies %ICTs' facilitate trade in services asthe" !ake it unnecessar" for roviders and users to 0e close to one another.

The use of ICT allo&s kno&ledge to 0e codified# standardi/ed and digiti/ed# &hich in turn allo&s theroduction of !ore services to 0e slit u# or frag!ented# into s!aller co!onents that can 0elocated else&here to take advantage of cost# Aualit" of service# and econo!ies of scale or other factors.This frag!entation has e,ceeded that in !anufacturing. side fro! !aking services transorta0le# ne&technologies also often si!lif" the tasks involved and so allo& the! to 0e relocated !ore easil". sintense glo0al co!etition ushes !anufacturing rocesses to seek cheaer roduction hu0s for artsand co!onents# service activities are si!ilarl" 0eing frag!ented and far!ed out in search of the !ostcost-effective sul" net&ork &ithin the organi/ation or to a third art"# &ithin the countr" or offshore.s co!anies search for &a"s to reduce costs# the use of outsourcing and offshoring via ICTs gro&stre!endousl". On the other side# the i!ortance of (35s in develoing countries is !a,i!i/ed as!agnets for foreign invest!ent and hosts to the 0oo!ing offshore outsourced 0usiness rocesses.

UNCTD defines 0usiness rocess outsourcing %B3O' as the transfer to third arties of theerfor!ance of service-0ased functions once carried out &ithin a co!an"# or !ore generall"# &ithinan organi/ation. B3O can occur onshore &ithin national 0orders or offshore in re!ote foreigncountries. !arket. ccording to UNCTD# B3O has 0eco!e increasingl" i!ortant due to t&otechnical advances?

6. The availa0ilit" of lo&-cost %high-seed' data net&orks# ri!aril" the Internet@). The &idesread digiti/ation of te,ts# i!ages# sounds and videos. %Digiti/ed files are eas" to send atver" lo& cost virtuall" an"&here in the &orld'.

:lo0al research fir! :artner# ho&ever# defines B3O !ore articularl" as the delegation of one or!ore IT-intensive 0usiness rocesses to an e,ternal rovider that# in turn# o&ns# ad!inistrates and!anages the selected rocess%es' 0ased on defined and !easura0le erfor!ance !etrics. It should 0enoted that under this definition# B3O activities refer to such rocesses &hich are carried out &ithinfor!ation and co!!unication technologies.

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Bo, 6 - =ist of t"ical B3O services

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4ource? UNCTD (-co!!erce and Develo!ent Reort )**+

The e,ansion of international outsourcing has contri0uted to the e!ergence of a ne& 0reed of TNCsthat sulies services to other co!anies# rather like contract !anufacturers have done in!anufacturing. 4o!e have 0eco!e glo0al la"ers 0" setting u foreign affiliates around the &orld#hence 0eco!ing ke" targets for invest!ent ro!otion agencies seeking to attract 7DI into e,ort-

oriented services.

Outsourcing eventuall" took the ath of off-shoring2or locating to lo&-&age countries. ccordingto a World Bank aer titled The :lo0al Oortunit" in IT-0ased 4ervices# ri!ar" considerationsfor co!anies !aking offshoring decisions include la0our cost# infrastructure costs and facilities costs.Based on the relative ercentage of each cost ele!ent# la0our cost is the !ost i!ortant consideration#accounting for al!ost half of the &eighted cost ele!ents in 0oth an IT services fir! and IT-ena0ledservices %IT(4' fir!. With la0our cost the heaviest &eight in the cost eAuation and the 0iggestdeter!inant of cost co!etitiveness a!ong host countries# outsourcing co!anies have ri!aril"sought countries &here &ages are cheaer in order to !a,i!i/e rofits. T"icall"# these countries areless develoed econo!ies &ith a large 0ase of educated &orkforce. =o&-&age skilled &orkers and

rofessionals# couled &ith efficient and cost-effective teleco!s infrastructure# &ere the !ain valueroosition of lo&er-inco!e countries.

4ource? UNCTD World Invest!ent Reort )**

. B3O in the 3hiliines

B3O oerations in the 3hiliines# &hich enco!ass call or contact centers doing 0ack-office functionsfor international fir!s eseciall" those 0ased in the United 4tates# !a" 0e generall" classified intovoice and non-voice. oice services cover !ost call center oerations# &hich involve either calling thecusto!er located a0road %out0ound accounts' or receiving calls fro! the client %in0ound accounts'.These are activities that tend to focus on direct custo!er care. Non-voice services# on the other hand#range fro! !edical and legal transcrition# finance and accounting !atters such as treasur"# risk# andta, !anage!ent# hu!an resources issues such as a"roll# recruiting# and staffing# and high-end

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rocesses like ani!ation# 0usiness and financial research# and further data anal"ses.

!ore refined classification of B3O su0-sectors is rovided 0" the Deart!ent of Trade and Industr"%see Bo, )'. Of all the su0-sectors# the 0iggest is the contact center su0-sector# also kno&n as callcenters# &orth U4< 0illion in revenues in )**8.The 3hiliine B3O industr" has osted strong# stead"gro&th. In the national inco!e accounts# the real gross value-added %:' for 0usiness services# &hich

includes the B3O industr"# gre& 0" an annual average rate of ).< ercent# fro! 36E.* 0illion in )**to 3+*.+ 0illion in )**F. >ean&hile# the share of 0usiness services to :D3 increased fro! 6.< ercentin )** to ).6 ercent in )**F. In ter!s of revenues# the B3O sector generated G.6 0illion in )**F# a).E ercent surge fro! the +

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nother factor contri0uting to the 3hiliines9 attractiveness as an offshoring location is the availa0ilit"of highl" skilled la0our. ccording to an I=O stud"# the countr" offers a large la0or ool of collegegraduates &ith a ver" good co!!and of (nglish. It added that surve"ed call centers stated that the7iliino accent is neutral as co!ared to the Indian &orkforce# &hich ossesses a stronger accent.

II. I44U(4

7ro! )#** e!lo"ees in )***# e!lo"!ent in the B3O industr" steadil" gre& to )#*** in )**8#E*#*** of &hich &ere created in )**8. Industr" e,erts esti!ated that 8*#*** ne& B3O 1o0s &ould 0ecreated in )*6*#

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0. vaila0ilit"

The 3hiliines has a relativel" large ool of technicall"-roficient &orkers# &ith 0ackground inco!uter science and rogra!!ing roducing an esti!ate of +*#*** to

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7or e,a!le# assu!ing that candidates &ho are not Aualified al" to an average of four co!anies%and the" are re1ected 0" all'# the success rate for the &hole industr" &ould actuall" 0e a0out F.)K.This !eans that to recruit the )*#*** Aualified agents# the &hole industr" !ust attract )oreover# &ith the increasing difficult" in recruiting Aualified agents2aggravated 0" higher attritiona!ong the e,isting ool of agents2call centers are resorting to the ractice of irating. 3re!iu!s fore,erienced call center agents range fro! 6**K for first-level agents@ to )**K for tea! leaders@ and+**K for !anagers and directors. The ro0le! &ith irating is e,acer0ated 0" the ro,i!ate locationsof call center facilities. This rovides !an" oortunities for interaction a!ong agents and recruiters.

It !ust 0e noted that even &ithin a secific call center# attrition can var" greatl" deending on the t"eof client-accounts 0eing serviced 0" the agents. 7or e,a!le# retailing co!anies %e.g.# L-!art' andcredit card accounts are high-tension assign!ents &here agents have to deal &ith difficult custo!erco!laints. In these ke" accounts# attrition can 0e higher.

ll these factors are eroding the cost-co!etitiveness of 3hiliine B3Os as call centers no& resort toractices that ulti!atel" increasing costs of salaries and 0enefits. These include?

6. Wage re!iu!s for international call center e,erience). 4igning 0onuses+. >ultile locations. In-house re-e!lo"!ent trainingore 0enefits#e.g.educational oortunities

d. ualit" of :raduates of the 3hiliine (ducational 4"ste!

Ulti!atel"# the ro0le! &ith the recruit!ent of agents can 0e traced to the Aualit" of the 3hiliine(ducational 4"ste!. Based on intervie&s# entr"-level B3O alicants are tested generall" on four %'Cs? Co!!unication 4kills# Custo!er Orientation# Co!uter 4kills# and Core 4kills %e.g.# secificrofessional reAuire!ent or roduct kno&ledge'. Jo&ever# the !ost ressing concern of B3Os#eseciall" of call centers# is the declining (nglish roficienc" of 7iliinos.

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To address this# the call centers are engaging in a variet" of fir!-secific and in cooerative !easuresincluding?

6. =iaison &ith cade!ic Institutions H a nu!0er of call center co!anies initiated 1oint courses &ithcolleges and universities to offer electives on call center-related skills.

). 3re-e!lo"!ent training for the high-failure alicants %i.e.# those that can 0e trained'. 4o!e ofthese are alread" using soft&are-aided language training rogra!s.

Deficiencies in language skills can actuall" 0e re!edied. Based on intervie&s# an average-level (nglishseaker could acAuire the needed fluenc" if i!!ersed eight %F' hours dail" in a urel" (nglishenviron!ent for one !onth. 7or a 0elo&-average seaker# one needs to 0e i!!ersed for a0out three %+'!onths.

There are also (nglish training rogra!s run 0" third-art" roviders. Jo&ever# these are Auite costl"and have uncertain effectiveness. 7or e,a!le# 0ased on an intervie a three-da" training se!inar for6< eole costs a0out 3hG*#***.

If (nglish roficienc" is the !ost i!!ediate concern of the industr"# the countr" faces a !ore seriousthreat in the !ediu!-to long-ter!. There is an o0served decline in the Aualit" of education in the3hiliines# eseciall" in ke" discilines such as >ath and 4cience. The countr" has 0een consistentl"lacing near the 0otto! of co!etitive e,a!inations that test the general level of >ath and 4ciencekno&ledge of Fth grade students.

). . Teleco!s Infrastructure

>ost third-art" anal"sts lace teleco!s infrastructure as a ke" strength of the 3hiliines. Thisadvantage can 0e traced to the li0erali/ation and deregulation of the sector in the 688*s. ccording tothe DTI# these advantages include?

6. a good infrastructure for 0oth voice and data# co!ared &ith other sian countries). redundant international connectivit"# including fi0er otic ca0le and satellite co!!unication+. availa0ilit" of significant a!ount of trans-3acific data co!!unication 0and&idth. a high-Aualit"# lo&-cost 0and&idth that is e,anding the do!estic teleco!!unication net&ork@ of&hich si, latfor!s are availa0le? a. 7i,ed liner0. Cellularc. Ca0le Td. Over the ir Te. Radiof. The er" 4!all erture Ter!inal %4T' 4"ste!

).B. Real (state

The 3hiliines has readil" availa0le locations &ith the necessar" IT infrastructure caa0ilit" to suortB3O co!anies. ccording to the DTI# B3Os are resentl" ri!aril" located in the follo&ing areas?

6. >etro >anila# secificall" the central 0usiness district of >akati and the 0usiness districts ofOrtigas# 7il-invest la0ang# and 7ort Bonifacio.). Technolog" arks located &ithin the >etro >anila area %i.e.# redo!inantl" su0ur0an locations 1ust

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outside >anila'+. T&o re-urosed !ilitar" 0ases located t&o or three hours outside >anila %4u0ic and Clark'. (sta0lished regional gro&th centers# eseciall" Ce0u in the isa"as@ and Davao in >indanao.

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On the other hand# its !ain dra&0acks are the follo&ing?a. Increasing difficult" of finding Aualified e!lo"ees %eseciall" for call centers'0. =evelAualit" of education for higher level IT skillsc. 3olitical and regulator" environ!ent# eseciall" the unsta0le olitical situation# graft and corrutionand threats to h"sical securit".

d. Jigh o&er rates2a!ong the highest in the region

III. CONC=U4ION

:lo0al outsourcing has clearl" !ade the structure of international co!etition and conseAuent la0or!arket ad1ust!ents !ore intense. Jo&ever# it is not a ne& he- no!enon. Rather# it is a continuation ofthe rocess of glo0ali/ation that 0egan in the 68ode %te!orar" !ove!ent of natural ersons' &hich facilitates!ove!ent of skilled rofessionals across develoed and develoing countries can accelerate therocess of glo0al outsourcing. The sa!e is true &ith regard to the li0erali/ation of service via >ode +%co!!ercial resence through 7DI'# eseciall" in higher-end outsourcing activities. 7or develoingcountries# it is also i!erative that the" undertake aroriate do!estic olic" refor!s in the for! ofugrading Internet securit" and data rotection la&s# rivac" safeguards# and intellectual roert"rights rotection if the" are to re!ain attractive insourcers.

The th nnual Reort IB> :lo0al =ocation Trends# recentl" released 0" IB> :lo0al Business4ervice# had roclai!ed the 3hiliines as the ne& glo0al leader for 0usiness suort functions#eclising India. The reort anal"/es glo0al location trends 0" looking at the !ove!ent of foreigninvest!ent and the volu!e of 1o0s resulting fro! these invest!ents. ccording to the reort# the3hiliines offers a si!ilarl" attractive 0usiness environ!ent for international 0usiness suortfunctions as India# 0ut has not had the sa!e la0our cost increases as have occurred in various IndianPhot sots9 in recent "ears. Conclusivel"# it is the lo&er la0our cost that has encouraged invest!ent 0"B3O co!anies in the countr".

>ore 0usiness trend anal"sts reorts are contri0uting to the h"e around the 3hiliines as thefrontrunner in the glo0al B3O industr". reort released 0" 0usiness advisor" and research fir!Tholons on the To Ten Trends in 4ervices :lo0ali/ation )**8 included a list of the )*6* To 6**Outsourcing Cities# &hich included !a1or cities in the 3hiliines# >etro >anila# Ce0u Cit"# DavaoCit"# Bacolod Cit"# and Iloilo Cit". >anila ranked th# &hile Ce0u Cit" ranked 8th in the e!erged cit"categor". The rankings &ere e,ected to 0ring !ore invest!ent to the listed cities and encourage localgovern!ents to offer !ore invest!ent incentives in their !unicialities. With the ne& glo0alrecognition of the countr"9s osition in the glo0al B3O industr"# govern!ent suort for the industr" ise,ected to continue and strengthened. side fro! giving incentives to B3Os and investors in digitalinfrastructure# the govern!ent also initiated ca!aigns to develo hu!an caital# setting u trainingrogra!s &hich secificall" ai!ed at heling individuals find 1o0s in B3O co!anies. The govern!enthas also 0een candid in sa"ing that this !ove included educating the "oung on the use of co!utersand the Internet for the ne,t generation of IT-B3O &orkers.

t the olic" level# there have 0een at least t&o ke" ending !easures &hich the govern!ent &as

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ushing for legislation in an effort to hel i!rove the co!etitiveness of the countr"9s B3O industr"#the Data 3rivac" =a& and the nti-C"0ercri!e =a&.The Data 3rotection ct %Jouse Bill No. +F)F'hinges on the rincile that the nature of the B3O industr" involves the handling of sensitive data# thusthe need to ensure the rotection of the integrit" and confidentialit" of data fro! overseas clients. Itrovides for the enali/ation of unauthori/ed rocessing of ersonal data &ith i!rison!ent fro! si,to 6) "ears and a fine of 36 !illion to 3+ !illion.

>ean&hile# the nti-C"0ercri!e 3revention ct %Jouse Bills 68*# +66E# 6+)+' seeks to enali/ec"0ercri!es and co!uter-related cri!es &ith i!rison!ent and a fine ranging fro! 36**#*** to3F**#***. This is 0ased on the olic" thrust that the countr" should 0e seen as a secure and relia0lelocation for B3O activities. s indicated in official ronounce!ents 0" 3resident Auino# the highregard for the B3O industr" and the drive to further oen u the sector to !ore industr" la"ers &illre!ain unchanged under the ne& ad!inistration. In his seech in 4ete!0er )*6* at the inaugurationof a ne& facilit" of B3O giant Converg"s# Auino vo&ed to strengthen the countr"9s B3O sector 0"reducing o&er costs# increasing o&er availa0ilit" and ugrading technolog". Je also co!!itted toshorten the a!ount of ti!e and aer&ork necessar" to start a 0usiness.

In the sa!e event# he lauded the stellar role of the B3O sector in the econo!"# citing the thousandsof 1o0s it created as &ell as the duties and ta,es allegedl" contri0uted 0" outsourcing co!anies. Itshould 0e noted# ho&ever# that the sa!e incentives granted to B3O investors under the reviousad!inistration re!ain unchanged.The Technical (ducation and 4kills Develo!ent uthorit"%T(4D' &ants colleges and universities to i!rove their infor!ation co!!unication technolog"%ICT' education curriculu! to ena0le the! to roduce graduates that are co!etent and e!lo"a0le IT&orkers that it said are no& !uch in de!and 0" the local and foreign e!lo"ers.

The 3hiliine govern!ent and the 3hiliine (cono!ic 5one uthorit" have 0een adet at 0ringing0usiness rocess outsourcing fir!s and their oerations inside the secial econo!ic /ones in thecountr". The glo0al trend in (35s of shifting roduction to&ards the service sector fro! !anufacturingin late 688*s signaled the da&n of the for!ation of !odern da" s&eatshos in the service sector underB3Os. 3art of the glo0al outsourcing and offshoring of caital fro! industriali/ed countries todeveloing countries since 68F*s has 0een the esta0lish!ent of e,ort rocessing /ones in thereceiving countries. (35s served &ell as havens for foreign caital in develoing countries# e,loitingthe do!estic chea and docile la0or and ra& !aterials# couled &ith govern!ent olicies that roviderotection for foreign invest!ents. With the sa!e rivileges and incentives given to !anufacturingfir!s inside (35s# the /ones also serve as haven for B3O co!anies to flourish. But outside thegovern!ent ackage for foreign invest!ents including financial incentives such as ta, e,e!tions# ta,holida"s and infrastructure suort that B3O fir!s receive as locators inside 4ecial (cono!ic 5ones#B3O fir!s get !ore fro! non-financial ackages that co!es &ith the govern!ent rogra! to enticeforeign invest!ents. Inside the /ones# B3O fir!s can oerate a0ove 3hiliine la&s# as 3hiliine la&sdo not auto!aticall" al" inside these 5ones including i!le!entation of la0or la&s.

In line &ith continuing the e,ansion and develo!ent of B3O in the countr"# the Business 3rocessOutsourcing ssociation in the 3hiliines %B33' has develoed a five-"ear road !a %)*66-)*6G'for the countr"9s infor!ation technolog" and B3O sector# &ith the o01ective of 0uilding a )

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With the govern!ent and 0usiness &orking together to ensure that the 3hiliines re!ains at the to ofthe glo0al B3O industr"# the govern!ent is not reall" veering a&a" fro! its e,ort-oriented andi!ort-deendent develo!ent rogra! for the countr". With the B3O as its sunshine industr"# thegovern!ent continues to e!hasi/e the service sector over the agriculture and industrial sectors of theecono!" and reduce its dra& further a&a" fro! an econo!ic develo!ent !odel &ith genuine

agrarian refor! and the ro!otion of national industries# econo!ic olicies that are in the interest ofthe !a1orit" of the 7iliino eole.