Why the Philippines is Emerging as a Leading Destination for Knowledge Process Outsourcing

August 25, 2015
|By Garegin Hakobyan

The Philippine outsourcing sector is a mature industry that has naturally evolved towards core and higher-value service offerings. Locally, Knowledge Process Outsourcing (KPO) services are often called “non-voice” or back office services, referring to activities outside contact center, customer and IT support services. In 2014, knowledge process outsourcing in the Philippines comprised 40 percent of the country’s outsourcing industry. The Information Technology and Business Process Outsourcing Association of the Philippines (IBPAP) predicts that the Philippine outsourcing sector will reach $25 billion in revenues and employ about 1.3 million people by 2016.

The Philippines consistently leads rankings as an overall offshoring destination due to low labor and operating costs, excellent English proficiency, highly-skilled talent pool, cultural affinity with the West, good infrastructure and relative political and economic stability. In its 2014 Global Services Location Index, A.T. Kearney ranked the Philippines number 7 among 51 countries in terms of back office services.

KPO Industry in the Philippines

Like India’s KPO industry, the Philippine KPO sector has evolved along similar lines. Starting with contact center services and low-value back office work like data entry and IT maintenance, the country is now considered an established destination for animation and design and content/publishing KPO services (Sathe and Aradhana, Sourcingmag.com). Back office and non-voice services contributed $1.1 billion in revenues to the country’s outsourcing sector in 2009. Former IBPAP executive director for information research Gillian Virata said that the Philippine KPO industry is expected to reach the same market size as the voice service sector by 2015-2016. Non-voice services are already growing at a faster rate than traditional voice services.

Banking and Finance Services

The banking and financial services industry is leading KPO activity in the country, with global financial institutions providing underwriting, research and analytics, training and consulting, profit and loss, risk mitigation, and other BFSI-related services. KPO vendors also provide strategic research, market research, financial services research, analytics, and competitive intelligence monitoring.

Legal Services

Companies from the Philippines are expected to compete strongly with Indian providers of legal and paralegal services to the United States. Besides its cultural affinity with the West and excellent English proficiency of its talent pool, the Philippines used to be an American colony, and its laws are patterned after those of the U.S. Integreon is an established legal services provider in the country, specializing in discovery, contract management, compliance, legal research and knowledge management, intellectual property, and due diligence.

Medical Services and Research and Development

Many Chinese research and development pharmaceutical firms have set up offices in Metro Manila due to relatively lower rental and operating costs compared to traditional destinations like India (Should MNCs Stop Paying Rent Overseas, Cushman & Wakefield 2014). The country also has a pool of 250,000 nursing graduates, about half of which are expected to be employed in the healthcare services sector in 2016 (Healthcare Information Management Outsourcing Association of the Philippines, 2014).

Animation and Design

The Philippines has established itself as a successful animation and design outsourcing destination. The Animation Council of Philippines estimates that global animation industry revenues have been growing at 20 to 30 percent over the past few years, increasing demand for low-cost, highly skilled creative labor. The rise of the animation outsourcing industry in the Philippines began in the early 1980s, with FilCartoons, Burbank Animation Inc. and Asian Animation setting up operations in the country and providing animation exports to foreign companies.

In 2008, the Philippines had over 50 animation companies, mostly small and medium-sized companies. Larger animation companies include TOEI Animation, Roadrunner and Toon City Animation Inc., which employs about 1,300 animators and artists (about 18 percent of the country’s animation labor pool. Overall, the Philippines employed about 7,000 people in the animation sector in 2008 and generated up to US$97 million in 2006 and US$105 million in 2007 (The Philippine Animation Industry landscape, Tholons 2008).

Attractiveness Factors for KPO in the Philippines

A.T. Kearney’s 2014 survey showed that the Philippines’ higher total score in back office services was due to an improvement in two key measures, business environment and people skills and availability. While the country gained a lower score on financial attractiveness, these two measures contributed to its overall attractiveness as a KPO destination.

Business Environment

The Philippines has an investor-friendly regulatory environment that attracts foreign companies looking for KPO services and vendors wishing to set up or expand local KPO centers. The Philippine Board of Investments (BOI) provides many incentives to these locators, including an income-tax holiday for four to eight years, additional deduction on labor expense for the first five years from registration, value added tax (VAT) exemption on allowable local purchases such as telecom, electricity and water, and domestic sales allowance of up to 30 percent of total sales. Other incentives for businesses located in economic zones include exemption from import duty fees and taxes on imported raw materials and equipment, the option pay a special 5 percent tax on gross income, and permanent residence status for foreign investors with initial investments of a certain amount.

People Skills and Availability

Everest Group ranks the Philippines second to India in terms of cumulative talent competitiveness based on the size of graduate pool, experience, scalability, and quality of English. Although the country’s skilled talent pool is smaller than that of India and China, the employable portion of the labor force is highly educated, skilled, and experienced. The Philippines produces about 370,000 college graduates every year (IBPAP estimates graduates to be more than 500,000), with Metro Manila producing about 20,000 technical majors each year. The educational system for legal and accounting professions is also based on Western systems.

In 2006, the Professional Regulation Commission reported that the country had 100,000 CPAs, 95,000 physicians, 26,000 electrical and communication engineers, and 22,000 chemical engineers. In 2010, the country had 119, 378 graduates in the medical, natural sciences and allied sciences, 117,339 business and accounting graduates, 68,811 social and behavioral sciences graduates, 50,734 engineering and architecture graduates, 47,928 IT and mathematics graduates and 12,269 fine arts, mass communications and humanities graduates (National Statistics Office and Commission on Higher Education data). In 2015, IBPAP expects the number of law graduates to reach 2,976 and finance and business field graduates to reach 129,168. The country also has a large pool of paralegals and CPAs.

Government Support

The Philippine government strongly supports the outsourcing industry, implementing aggressive promotion initiatives for key sectors and providing support for locators in the form of economic zones and other incentives. IBPAP’s comprehensive road map for 2016 targets 20 percent year-on-year growth for the outsourcing sector.

Labor Cost

IBPAP reports that all-in costs and labor costs for English-speaking professionals in the Philippines are among the lowest in the world. In 2012, Everest Group estimated the average ongoing costs for finance and accounting outsourcing in Metro Manila at US $18,000 to $20,000 per year. The country’s inflation rate is also predictable and manageable. For the first three months of 2015, headline inflation remained low and stable due to strong foreign direct investment, steady inflow of remittances from overseas Filipino workers, manageable debt, and ample central bank reserves.

Infrastructure

The Philippines has plenty of low-cost, high-quality real estate in both urban and rural areas (the country’s supply of office space is expected to reach 6 million square meters by 2015 in Metro Manila alone), reliable and low-cost telecommunications infrastructure, reliable and consistent power supply and 24/7 low-cost transportation. Telcos in the country continue to improve and expand their networks to ensure reliability, and the government continues to upgrade transport infrastructure.

Knowledge Process Outsourcing in the Philippines

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