Why the Philippines is one of the Top Offshore Software Testing Destinations in the World

June 15, 2015
|By Garegin Hakobyan

The Philippines consistently leads rankings of offshore outsourcing destinations in the world. Currently, Metro Manila is no. 2 in the 2015 Top 100 Outsourcing Destinations list by Tholons. The IT and Business Process Association of the Philippines (IBPAP) projects $25 billion in revenues from the IT and BPO sector and employment of 1.3 million workers by 2015. The country’s traditional strength is contact center services, but Philippine providers are increasingly expanding into higher value services like information technology and outsourced software development and testing. 

Outsourced Software Development Testing in the Philippines

According to World Bank study, the country’s IT-Enabled Services which includes outsourced software development to the Philippines, has not grown as fast as call centers, but the growth of the IT segment has certainly picked up. One study estimated the number of software firms in the country at 300, 19 percent of which employ over 100 workers (Briefer on the 5 ICT Priority Sectors, ICT Division, Board of Investments). The Philippine software association reported there were about 1739 “IT” firms in the country in 2006, using a broad definition of IT. Most of these companies are located in Manila or Cebu.

Besides major testing providers, there are many local firms and subsidiaries of global software development companies that offer software testing, maintenance, app development, analysis and design. A number of them are certified at level 5 of the software Capability Maturity Model.

Attractive Destination for Offshore Software Development

Despite a relatively smaller pool of qualified and experienced developers and testers, buyers continue to find the Philippines an attractive outsourced software testing destination due to several reasons:

Low Labor Cost

Outsourcing software development and research can potentially reduce the cost of IT and IT-related services, including software testing, by as much as 60 percent (Outsource, Outsource, and Outsource Some More by Griswold, D. T., National Review). In Metro Manila, entry-level IT professionals receive a monthly salary of about $320 to $340 (Tholons and Global Services Top 50 Emerging Global Outsourcing Cities, 2009).

Workforce

The success of offshore testing projects depends on the quality and availability of a well-educated and highly-skilled IT workforce. According to the 2010 KPMG study Philippines: The New Outsourcing Hub, the country has the human resource capacity to develop a strong ITES industry. Majority of the population is young, and the literacy rate is at 92.3 percent. 

The country produces about 380,000 college graduates every year, of which 50,000 to 70,000 are IT/computer science or mathematics majors. Metro Manila alone produces about 22,000 technical majors each year (Global Services Media, 2010). According to KPMG, the Philippines is the number three producer of IT and technical talent behind China and India. 

KPMG also mentioned that unemployment and underemployment rates in the country are favorable to businesses because the ITES sector can expand more quickly. Everest Group ranks the Philippines only second to India in terms of cumulative talent competitiveness based on the size of graduate pool, experience, scalability, and quality of English.

The IT industry works with educational institutions to incorporate short-term training programs in the curriculum and make graduates immediately employable. Another program involves partnerships with top-tier universities to promote post-graduate courses in BPO management to fill the demand for mid-level managers.

Government Support

The Philippine government is a strong supporter of outsourcing in the Philippines, aggressively promoting key sectors, including software development. Through the Technical Education and Skills Development Authority or TESDA, the government provides training for work scholarship programs and qualifications for the Philippine outsourcing sector. The government works with IBPAP, local chambers of commerce, and the Board of Investments (BOI) that provides tax incentives, brings companies together in networking events, trade missions and exhibitions, and coordinates efforts in every segment. The government has formed the Philippine Export Zones Authority (PEZA) to give foreign businesses and BPO locators tax breaks and other incentives. 

Infrastructure

Software development and testing centers require robust, low-cost IT infrastructure. According to the Top 50 Emerging Global Outsourcing Cities study by Tholons and Global Services, telecommunications companies in the country continue to improve and expand their networks to ensure reliability. The government also continues to upgrade transport infrastructure. Low-cost and multiple international direct dialing services are readily available, and three transpacific undersea cable systems connect the Philippines to North America. Another cable system that will connect the Philippines to Hawaii, California and other Southeast Asian countries is currently under construction. The new cable system will greatly help the IT industry and companies that use up large bandwidths. In addition, the country’s supply of office space is expected to reach 6 million square meters by 2015 in Metro Manila alone (The Philippines: Outsourcing’s New Destination by KPMG, 2011-2012).

Business Environment

Countries that outsource to the Philippines include the United States, Canada, Europe, Australia, New Zealand, Japan, Korea, the Middle East, and others. The Philippines enjoys an investor-friendly regulatory environment, attracting software development and testing firms, both new and established. 

Board of Investments incentives include an income-tax holiday for four to six years and additional deduction on labor expense for the first five years from registration. PEZA incentives include income tax holidays, the option pay a special 5 percent tax on gross income thereafter, exemption from import duty fees and taxes on imported raw materials and equipment, and permanent residence status for foreign investors with initial investments of a certain amount.

Cultural Compatibility

The Philippines and the U.S. has had a long history of business, political and cultural affiliation (Outsourcing in the IT industry: The case of the Philippines, International Entrepreneurship & Management Journal). The Philippines has better cultural affinity with the West than other countries in Asia, making communication among buyers, providers and IT employees easier. English (typically American English) is taught from pre-school to college, making IT graduates and technicians highly articulate. According to the local Social Weather Stations (SWS), 83 percent of college graduates write in English, 72 percent speak in English, and 60 percent think in English. 

Economy and Political Stability

Philippine President Benigno Aquino III succeeded Gloria Macapagal Arroyo during a peaceful transition in 2010. According to former IBPAP CEO Oscar Sañez, the Philippine economy has fared better than most countries during the recent global financial crisis. The strong inflow of remittances from Filipino workers overseas sustained the economy during that period. Outsourcing in the Philippines also pulled its own weight and made up for zero growth in electronics and semiconductor exports. The economy grew by a record 7.3 percent in 2010, the highest figure for over two decades. The International Monetary Fund projects a 6.7 percent GDP growth for 2015 due to higher government spending and private construction activity, while the government expects the economy to grow by 7 to 8 percent (Reuters, 2015). 

Staff Leasing in the Philippines for Outsourced Software Development & Research

What is Outsourcing provides more info about business process outsourcing. For additional information about software development outsourcing, please visit our Software Development page.

Next Software Development Offshore Outsourcing: Main Growth Drivers. 

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