Philippines answers the call to prosperity: Canadian companies see opportunity in country's rise in offshore services
Financial Post, September 6, 2008

MANILA -- In a row of cubicles, young women with headsets are talking with customers across the ocean in North America, answering their questions about products they've purchased at a U.S. department store. It's midday and the call centre is mostly empty, but by 2 a.m., the newly renovated room will be packed. And by October, two more floors will be transformed into call centres.

No, this isn't Bangalore. This shiny call centre, operated by global outsourcing company SITEL, is located in the Philippines, now the No. 2 country in the world for offshore services. Following India's model, the Philippines has realized that offshoring -- bringing part of a company's operations to a foreign country -- could be the key to dragging the country out of poverty.

Total offshore and outsourcing revenues in the Philippines grew to US$5-billion in 2007 from US$1.5-billion in 2004. The sector now directly employs 340,000 people and contributes more than 3% of the country's GDP. And the industry trade organization is trying to keep the boom going: Business Processing Association of the Philippines (BPAP) has an ambitious goal of increasing the country's share of the global market from to 10% from 5%, and aims to hit revenues of US$13-billion by the end of 2010. The Philippines is just one of many countries, such as China, Hungary, Poland, Brazil and Mexico, that is trying to tap into the rapidly-growing offshore market.

This SITEL office in Manila is just one of six call centres the company has in the country. The company established 200 call centre seats in the Philippines in the year 2000, and now has 7,500 seats manned by 9,000 employees. SITEL, which is controlled by Onex Corp., Gerry Schwartz's Toronto-based private equity firm, operates call centres in more than 20 countries. Like an increasing number of outsourcing companies, they're looking to spread their business operations across various countries in order to mitigate risk factors in any particular region.

"There's a trend away from putting all the eggs in the India basket," says Paul Schmidt, partner and managing director at TPI, a global outsourcing advisory firm based in Texas. "For our clients, it's not India or some other location. It's India and some other location. They're looking to have a number of global locations, kind of a diversified portfolio, if you will."

The Philippines' widespread use of English and its historical ties with the West -- it was a U.S. colony for almost 50 years -- is helping in the global outsourcing market. "In call-centre work, the Philippines is a strong No. 2 and is very competitive with India," says Mr. Schmidt. "The quality of their voice services is considered very high because of their English proficiency and cultural affinity, particularly for North America, which they have leveraged into supporting the back-end processes as well."

Like India, the Philippines is also buoyed by a strong telecommunications infrastructure, tax breaks and low wages: Total labour costs for an employee are around US$5,000 to $6,000 a year, compared with US$25,000 to $30,000 in North America. The Philippines also has one distinct advantage over India: the local accent is seen as more palatable by some Western customers.

"We decided to start our operations in the Philippines rather than India, because the dialect here is softer," says John Langford, executive vice-president of ICT Group, a Pennsylvania-based global outsourcing company. He is sitting in the boardroom of the company's call centre in Manila's Makati City. "A lot of our clients in the U.S., and also the U.K. and Australia, find the Indian accent very harsh. The Filipino accent is more neutral. A lot of the time, our agents are mistaken for Hispanic."

Out of ICT's 5,000 call centre seats in the Philippines, 200 serve Canadian clients. Most are contracted by Canadian financial institutions to respond to incoming service calls or to make outgoing sales calls. Other Canadian companies with offshore operations in the Philippines include Telus Corp., which has 6,500 employees servicing their own clients and clients of other companies, and Thomson Reuters Corp., which has more than 1,000 employees doing back-office work.

However, there are some red flags for Western companies considering setting up shop in the Philippines. The country is seen as politically unstable, and some foreign companies fear a sudden regime change could alter the business climate. The quality of education is also seen as a limiting factor for the industry's labour pool. "At the moment, we are churning about 800,000 new people into the workforce every year, yet very few of them can qualify for an outsourcing job," says Winston Padojinog, senior economist at Manila's University of Asia and the Pacific. "The acceptance rate for workers in the industry is only about 5%. There's a mismatch of skills, and some of those skills are very basic: English skills and analytical skills."

While achieving 10% of the world's offshore market in the next two years may be a difficult target for the Philippines to reach, the sector is certainly on track for substantial growth. The Philippines' offshore industry is already making moves to expand beyond Manila to other regional centres to keep labour costs down, and call centre managers are working with educational leaders to align graduates' skills with industry needs.

And taking another page from Bangalore's playbook, BPAP is encouraging the industry to move beyond call centres, which currently make up about two-thirds of the country's operations, and move into higher-value outsourcing such as legal services, back-office accounting, architecture and video game design.

Meanwhile, the impacts of the offshore industry are having ripples through the Philippines' economy. Near the call centres, 24-hour shops and restaurants have popped up to cater to the young, well-paid workers. Plus, the industry is having a side effect of retaining some workers in the country, which is well known for sending its people abroad to be homecare workers, nannies, nurses and seafarers.

"One of my goals is to give Filipinos job opportunities here in our own country," says Danilo Reyes, president of SITEL's operations in the Philippines. "Because of the offshoring industry, a lot of would-be migrants have stayed behind because they have a stable, good paying job here that they can be proud of."