Philippines: Next big outsourcing destination?

The Philippines is trying to position itself as the next major global outsourcing destination, in competition with the major outsourcing powers of India and China. Despite a number of different initiatives that have been announced recently there are still major challenges to be faced, says global advisory and consulting firm Ovum.

According to David Mitchell, OVUM SVP IT Research, "there needs to be major investment in the education system in the Philippines, to deal with the anticipated skills shortfall.”The Philippines has set out major ambitions in the global outsourcing industry, aiming to have annual revenues of $12–13 billion by 2010, according to presentations this week by the CEO of the Business Processing Association of the Philippines – Oscar Sanez. As part of that growth the industry will need to find an estimated 420,000 additional workers, to serve the anticipated growth of contracts. 

Of course, there will be expansion of the basic call centre operations that do not have high skill requirements. However, there are also ambitions to grow medical and legal transcription services, engineering services and other higher-value outsourcing tasks. For all of the outsourcing activities there are skill requirements for language, IT, management and customer service – and the various elements of the Philippine education system need to respond positively here. However, the more specialist skills, and the sheer number of different specialist skills that will be needed, are likely to be more difficult to produce without significant support and investment from government in secondary, tertiary and vocational education.

This support will be much more readily provided if the proposed Department on Information and Communication Technology (DICT) in the Philippines is created, with a remit to increase the level of effectiveness of policy development in the country – as has been suggested recently.

“Smaller economies in emerging markets need to have focus, and avoid competing with larger economies on cost alone", said Mitchell.

If DICT is created it should rally the ICT economy around a maximum of four capability areas, aiming to create high-value businesses rather than commodity outsourcing capabilities. The reason for the exhortation that the Philippines needs to focus is two-fold. Firstly, the country is not large enough to compete against India and China on the basis of scale, and so the country needs carefully to select its battles. Secondly, focus brings the ability to charge premium rates, for skills that are rarer. This means the Philippines can avoid being dragged into a low-wage, low-investment spiral.

To date one focus area in the Philippines has been the development of software-as-a-service (SaaS) businesses, including companies such as Morph Labs. A further hotspot of SaaS activity is developing at one of the technology parks in the Philippines.

Open source is set to be another area of focus. A new technology park, located at the University of the Philippines, is due to open in December and will focus on developing businesses around open source. However, the key will be to ensure that the open source businesses that are created develop high-value assets, rather than developing as low-value services businesses. This needs to happen to ensure that the Philippine businesses have a greater ability to scale; something that will be crucial, given the labour shortfall that was highlighted above. Working on open source software, hardware and peripherals is all part of the initial open source plan for the latest technology park. Again there are local roots to the open source activity, just as there were for SaaS. Here the creation of an open source electronic health record application (released in beta in May this year) is a good example.

The planned creation of two additional technology parks in the next year or two creates further opportunity to extend the areas of focus. However, there is a danger that too many areas of focus emerge in the Philippine ICT economy, meaning that it will become difficult to gain the depth of skills required to develop globally competitive business that can sustain premium rates – as opposed to the low-rate economy associated with much outsourcing and BPO activity.