Outsourcing to the Philippines

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    In today’s Baker & McKenzie webinar, “Global Sourcing: Destination The Philippines,” I learned a few things about that country’s services businesses that I didn’t know. (Of course, aside from speaking with several service providers and a spokesman from the Philippines embassy in New York City, what could I really know about outsourcing there?)

    What makes the destination attractive? NeoIT consultant Eugene Kublanov laid it out: There are huge numbers of “human resources” (I call them people). Each year, 400,000 students graduate from universities in the Philippines — many of them heading to the domestic market, but a goodly number stoking the engines of call center, IT and business process operations.

    There’s an incredibly strong telecom infrastructure — an inter-island fiber optic network — which has been built by pldt, the national phone company.

    The government has been “extremely supportive” of call centers, through providing tax breaks, setting up economic zones and even modifying employment rules where the services sector is involved.

    The cost structure includes savings in the area of labor (the daily minimum wage in the metro Manila area is $5.91) and telecom-related transmission (which tends to be less expensive than in India).

    Also significant: a “cultural alignment” between the US and the Philippines that makes call center agents “extremely well qualified to work with US customers.” Our educational systems, legal systems, culture and customer service orientations are comparable in many ways.

    Managers coming from the US find the fit comfortable — a change from home, but “hospitable enough.”

    Not all activity is centered in Manila, according to Mr. Kublanov. Cebu, a city that’s mid-island, has also been attracting a number of companies recently.

    Companies currently running captive centers include Citibank, HSBC, Safeway, P&G, AOL, Fluor and UPS. Domestic providers include SPI Technologies, Source1 Solutions, PeopleSupport, eTelecare and ICT Group. Global providers also have a presence, of course; among these are IBM, Accenture, Sykes, TeleTech and Convergys.

    The captives are setting up operations to do call center work, including customer support, email support, tech support and help desk support; financial and accounting, including invoice management, AP, payroll, inventory costing and procurement; IT and engineering, including design and engineering, R&D and IT virus development, beta testing, and software development and testing; and back office processing, such as policy changes, claims disbursements and premium processing.

    NeoIT is a proponent of the “portfolio approach” for large companies with an international presence. By this it means to spread around your offshore work between captive and third-party service providers and among different countries. In that way you mitigate your risk and maximize your financial returns. Whereas, in their experience, India should attract about two-thirds of your offshoring services, the Philippines is good for about 15% — almost equal to the allotment they’d advise for Russia, Canada and Mexico combined.

    So is political turmoil tearing the country apart? From what I heard in the Webinar, not to worry. President Arroyo’s admission that she spoke to an election official regarding the last presidential campaign has set into motion the laws addressing that particular ethical lapse. She may be impeached, but the rule of law will prevail. As attorney Chris Lim with Quisumbing Torres/Baker & McKenzie explained, “The business environment won’t be affected by this political situation.”

    The legal environment there involves a court system where laws can be enforced — though “the judicial system takes a while.” Intellectual property laws are up to date and there’s been no illegal activity around data privacy akin to what we’ve been experiencing in the US or India that Mr. Lim could recall. (Yes, he did bring up the existence of viruses and hacking, which has been outlawed.)

    Labor laws and typical practices set wages, the number of days that people get off (for every six days of work, they’re entitled to a day of “rest”), vacation (typically two to three weeks a year, sick time (typically 10 days a year), and a premium for night work — which is about 10%.

    Here’s where the outsourcing industry gets a break. Believe it or not, women, by law, can’t work between the hours of 10 p.m. and 6 a.m. — the night work hours. But the official policy of the government is to grant an exemption — on request — for those companies in the outsourcing industry.

    Incentives include various forms of tax breaks specifically for IT services. These include BOI Guidelines and PEZA. (They’re also the reason attorneys need to be part of an offshoring engagement. Understanding how to plug into this stuff isn’t something just anybody can do.)

    As Mr. Lim explained, “The government is moving heaven and earth to make the outsourcing industry successful.”

    Next month, I hope to speak with the Philippines ambassador to the US and find out what new efforts are afoot to draw IT and business process work to that part of the world.

    My guess is that host Baker & McKenzie will make the broadcast available in archive form. If you’re going through the exercise of learning about different countries in order to flesh out your offshoring “portfolio,” this will give you a quick introduction to the topic in a fairly objective manner.

    At the end of August, the company will be examining China. To register, send email to [email protected]

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