Philippines, India Compete for Outsource Dollars

Has the Philippines surged past India, its bigger outsourcing rival and a Business Process Outsourcing superpower, as the world's favorite back office?

The latest industry figures suggest that, to the consternation of India-based outsourcing industry, the Philippines has surged past India, recording US$5.7 billion in pure voice-based revenues so far in 2010. That is compared with US$5.58 billion for India. Voice-based work accounts for nearly half of India's total outsourcing exports, valued at US$12.4 billion.

The Philippines, the second largest BPO industry in the world, has been snapping at India's heels for a while now, with an industry built on cheaper manpower, tax breaks and government investment in infrastructure. The island nation currently ranks number one in the availability of knowledge-based jobs and workers and fourth in labor quality in all of Asia, according to a study by the US-based Meta Group.

India's position, on the contrary, has eroded significantly as the number one choice of US companies for backroom operations, suggests a survey by Michigan-based Kelly Services Inc.

More and more small and medium-sized American companies appear to have been voting with their feet for the Philippines over India as their BPO headquarters of choice. A raft of global companies – like MSN-Microsoft, Cisco, HSBC, AT&T, IBM, Washington Mutual, Sallie Mae, Expedia, Intuit, Transunion, Alltell and Bellsouth -- have already shifted work for their outsourcing needs.

Even Indian BPO majors have opened large centers in pockets like Metro Manila, Cebu City, Davao and Angeles. According to The Economic Times, EXL has a centre in Pasay with more than 800 employees. IBM and Accenture are estimated to have more than 20,000. Convergys this year announced plans to hire about 3,000 people around Manila, while Sitel plans to hire 4,000. Aegis also acquired Philippine outsourcing company PeopleSupport for US$250 million in 2008.

Powering the Philippines growth story are the burgeoning call centers in pockets like Manila, Cebu, and Davao City. Cheaper manpower, among other things, has made the Philippines a much more viable option in recent years, especially where medium-sized businesses are considered.

The US$9.5-billion Philippines O&O (off shoring & outsourcing) industry grew at a compounded growth rate of 27.6 percent in the last two years while India's BPO industry trialed at less than half CAGR of 11.92 percent over the same period.

There are many reasons why the Philippines' may well topple India. According to a senior National Association of Software Companies official: "High staff turnover of nearly 60 per cent remains India's biggest challenge in retaining its supremacy as the world's favorite BPO destination."

"Don't forget, India's GDP is growing at a much faster clip than the Philippines," the official said. "In 2009, Filipino GDP grew at 1 percent compared to India's 7.4 percent." This high growth rate gives the young Indian workforce the incentive to look for better job opportunities in other lucrative service sectors like finance, telecoms and insurance.

Staff tenure in India, the official added, is staggeringly low at only 11 months compared with the Philippines at 19 months. A prime reason for this, he says, is the scarcity of competing options in the Philippine employment sector.

"The Philippines also enjoys other advantages over India like a better affinity with western culture and a politically stable environment," said Prabhu Nivare, a Mumbai-based IT consultant. "Add to it higher tax incentives and business-friendly policies and it explains why the Philippines has emerged as a threat to India."

Analysts also point out that during the financial crisis, the Philippine government invested heavily in infrastructure that allowed the nation to compete better globally.

Moreover, IT and outsourcing enterprises in the Philippines enjoy a 100 percent tax exemption for up to eight years. The island country also provides cost benefits for infrastructure, operational expenses and business continuity.

"The Philippines has gained prominence as it remains a less expensive option," Nivare said. "In some specific industries, employee costs in India have spiraled up to 60 percent of comparable costs in the US while in the Philippines the corresponding rise has been only 30 percent."

This development is all the more ironic considering till 2008, the Philippines revenue in the BPO sector stood at US$6.8 billion while India recorded US$11 billion.

Another comparative advantage the Philippines enjoys is the superiority of its telecom infrastructure which is more safely set up and maintained because of attractive economic incentives and highly skilled human resources. Kelly Services in Michigan found out that the Philippines has the highest agent productivity in the region. "Filipino call center agents handle an average of 107 outbound and 98 inbound calls in a day compared to Indian call center agents who can only handle 78 outbound and 73 inbound calls per day", reported Kelly.

The high quality of the Philippines' workforce, assert analysts, is sustained in part by its impressive literacy rate of 93.4 percent according to the United Nations Development Program as compared to India's figure of 61.0 percent.

"Apart from offshore software development and other IT services, the Philippines has also been aggressively tapping the global animation market, which is growing phenomenally," says Satish Parashar, CEO of Horizons, an offshore advisory firm.

Major animation studios like Marvel, Disney, Warner Brothers and Hanna Barbera and Japanese anime studios like Toie, Parashar said, have already established their presence

in the Philippines.

In a paper titled "The Great Call Center Debate: India vs the Philippines," an official of a top US-based BPO company noted the advantages enjoyed by Filipinos over Indians in the industry.

"Filipinos speak idiomatic American English better than Indians, and their accent is more neutral. The Philippines is an outstanding destination for a wide variety of offshore services. They have gained great traction especially in voice work," wrote Chris Repholz, senior vice president of the outsourcing company Zenta.

The paper also cited "better affinity with the American culture, lack of competing industries for skilled workforce, and higher tax incentives" among the leading reasons behind "the unprecedented rise of the Philippines' BPO industry."

The goal to overtake India is part of the five-year (2011-2016) road map for the Philippine information technology and BPO sector. The objective is to expand it to a US$25-billion industry employing 1.3 million people.

According to the International Labor Organization (ILO) in its first in-depth study of the workplace in the four top BPO destinations in the world -- India, the Philippines, Argentina and Brazil – the working conditions in the Philippine BPO industry are of "reasonably good quality" compared with those in developing countries.

The study, titled Offshoring and Working Conditions in Remote Work, said that Filipino BPO employees earn 53 percent more than workers of the same age in other industries. The average monthly salary is P16,928 (US$388.70), with benefits such as meal and transport allowances. Hours of work in the BPO industry are also quite reasonable by local standards, in stark contrast to the often excessively long hours of many workers in the developing world including India

So is this reason enough for serious concern on the part of the Indian outsourcing industry? Yes and no, Indian analysts say. While many feel there is enough business for everybody in the exponentially growing global market, others are not so sure.

"India retains its core advantages and won't be so easy to dislodge from its frontrunner position," Nivare says. "Each year, 120,000 IT professionals enter the Indian workforce because of an education system that lays an overt emphasis on science and math." That is not true of the Philippines educational system, which has come under considerable criticism.

"Bandwidth in India is also far superior due to their private undersea cable and the state-owned Videsh Sanchar Nigam Ltd," says Brahm Gutgutia, a Hyderabad telecom entrepreneur and an IIT alumnus. "Telecom rates are quite low as a result of the industry's privatization. Furthermore, software development remains a very lucrative business in India, attracting IT giants such as Microsoft, IBM, HP and others," adds the businessman.

Even so, the Philippines, according to industry estimates, is expected to grow at a steady pace of at least 20 percent annually in BPO exports over the next five years. Given this environment, Indian BPO outfits would do well not to be complacent. They should instead focus on launching more innovative products and checking staff turnover.

The Indian government too, should sit up to take note and work towards improving the country's security environment and promoting business-friendly policies before it's too late, the analyst say.

Neeta Lal is a New Delhi-based senior journalist; neetalal@hotmail.com