At the bottom of this post, there is an update for 2012, and a full version of the report on which this post is based is available as free download from this blog’s sponsor [1].

I recently led an Info-Tech Research Group study that reviewed the key low-cost Asian destinations of China, India, and the Philippines for IT outsourcing services like helpdesk and application/Web development and maintenance. The study included in-depth interviews with clients and vendors, site inspections, and analysis of published data. My intention was to take the guesswork out of choosing the most suitable offshore outsourcing destination. This post pinpoints some the key findings of one report based on the study, entitled The Philippines for Outsourced IT Services [1]. China and India are covered in other posts.

Info-Tech’s Eight Location Criteria: How Do the Philippines Stack Up?

We put together eight evaluation criteria: (1) affordability, (2) language, (3) cultural affinity, (4) resource availability, (5) government support, (6) geopolitical stability, (7) infrastructure, and (8) data security. Here is how the Philippines stacked up:

  1. Affordability: Salaries for technical professionals in the Philippines are among the world’s most competitive. Entry level positions average under $10,000 US annually. Real estate and telecommunications costs are also low, which results in fully loaded billing rates of $18 to $30 US per hour, depending on the skill set and experience of the resource. Wage inflation is lower than other locations like India.
  2. Language: The Philippines was a US colony from 1899 to 1946. During this period American English became a medium of instruction in many schools. English is now an official language, and is widely used in business, education, and the media. The Filipino accent leans towards American English and the quality of spoken and written language is high. Service providers leveraged this competency to create a robust contact center outsourcing industry with revenues running a close second to India ($4.0 vs. $4.7B US; [2][3]). All major North American contact-center providers have a presence in the Philippines, including Convergys, ICT, Sitel, and Sykes. Most IT professionals in the Philippines are comfortable with English. This is ideal for helpdesk tasks but is also very useful in development and maintenance roles. Other language skills are also available in Mandarin Chinese, Spanish, German, and Japanese.
  3. Cultural Affinity: While Filipinos have a distinct culture, they have absorbed many American cultural traits, and share similar interests to Americans. Basketball remains the most popular sport and shopping malls—a social hub for Philippine society – are filled with Western chains like Starbucks and The Gap. Many educated Filipinos have worked overseas and returned home to enrich the local culture with an orientation to Western perspectives. Still the Philippines maintains certain values that are more Asian, such as saving face. This can lead to behaviors that can be problematic, particularly for client organizations that have an open, collaborative management style. Team members (particularly junior staff) may be reluctant to challenge the proposals of other team members and this can reduce the effectiveness of collaborative brainstorming and review. Staff may commit to work deliveries that won’t work for them. Good outsourcing managers are aware of these cultural issues and have trained staff to become more comfortable with current Western behavioral styles.
  4. Resource Availability: The Philippines has a population of 97 million, with a median age of 22, a 92% literacy rate [4], and a steady stream of college graduates entering the labor market ($2.4M US since 2006 [5]. The talent pool for service is reasonably deep and providers can draw from it, now and in the future. The only current weak point in the resource picture is a shortage of local, experienced middle and senior management.
    A tightening in the contact center sector, squeezed the number of available talent, which increased attrition, supply of the technical talent required by application outsourcers has been good. All service providers interviewed for this research reported very low attrition rates.
    Software development, maintenance, and helpdesk services account for $601 Million US of export revenue and employ 35,000 people full time in the Philippines [6]. These revenues are divided between about 400 players that vary in size and stability from large multinational outsourcers (e.g. Accenture), to established local firms (e.g. Point West Technologies with around 500 employees), to small niche players (e.g. ERP developer ASP with 40 employees).
  5. Government Support: Government support for the outsourcing sector is significant and includes $24M US toward training and education, and, as part of the Philippine Economic Zone Authority (PEZA) program [7], a corporate income tax holiday, exemption from duties, simplified import and export procedures, and benefits are on par with other countries in the region.
    The Philippine government’s Technical Education and Skills Development Authority started a scholarship program to subsidize training for the outsourcing industry. Subsidized topics include technical subjects like Oracle, Java, and RPG.
  6. Geopolitical Stability: The rural region of the southern region of Mindanao is home to a secessionist movement that has erupted in occasional violence within that region. However, the violence has never extended to the Metro Manila and Cebu, and even Davao City (the capital of Mindanao) is well insulated from the movement, which does not engender the sympathies of the population at large. The scale of violence in the Philippines has been far below that of other developing nations like India, or even Western nations like the US and UK, security risk is likely in an acceptable range as long as appropriate precautions are taken by the outsourcing partner. Transparency International’s 2009 Global Corruption Barometer reported prevalent corruption in most developing nations and the Philippines are no exception, with 11% of respondents saying they had paid a bribe to receive a service, compared to 12% in India and 2% in the US. Interestingly, these figures are down significantly from the 2007 version of the same survey, which reported 32% for the Philippines and 25% for India.
  7. Infrastructure: The Philippine telecommunications sector has been deregulated, resulting in a competitive industry that delivers low international transmission costs as well as redundant links to major centers. Fiber-optic backbones provide low-latency transmission (< 200 ms) that is adequate to support robust VoIP functionality, including hosted helpdesk technology. Air transport, telecommunications, utilities, and office space are good in the both cities of Manila and Cebu as well as cities of Clark, Subic, Baguio, Iloilo, and Davao.
    Additionally, the Philippine government has created the CyberServices Corridor, running over 600 miles from the North to the South of the country. It is supported by a $10B US high bandwidth fiber backbone and digital network, and is home to numerous service providers.
  8. Data Security: The Philippines are compliant with WTO’s Trade-Related Intellectual Property Rights (TRIPS) agreement on intellectual property. An e-commerce act was passed in 2000 and additional computer crime legislation is planned. However, enforcement of legislation can be weak. There is a backlog of copyright infringement cases in the courts, which are generally ill equipped to handle them. Organizations with intellectual property or privacy concerns need to add contractual protections and evaluate the service provider’s business and development processes for their ability to deliver these protections. A SAS 70 audit can cover intellectual property and privacy risks.
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Philippines’ Strengths

There are several factors that make the Philippines a strong offshoring location:

  • Excellent communication skills. High levels of English fluency, neutral accents, and good cultural affinity make it easy for Filipinos to understand Westerners and to make themselves understood. This is particularly needed for helpdesk services, but it is very important software development, where a mutual understanding of requirements is essential to success.
  • Low churn. Demand for IT services in the Philippines is strong and growing at a steady pace, but has not seen the hyperactivity of the Indian market. As a result, resources tend to stay with the same outsourcer for years, which results in greater project stability and lower ramp up expenses.
  • Low cost. Salaries, real estate, and telecommunication costs are low. Wage inflation is modest, so the overall cost of business is reasonable and likely to remain so.
Philippines’ Weaknesses

The Philippines also has several weaknesses that need to be taken into consideration:

  • Large scale projects. Few Philippine providers have more than 500 technical resources on staff, making large engagements difficult to resource.
  • Poor data security. Enforcement of intellectual property and privacy legislation is weak. These are not common, but organizations must take steps anyway to prevent issues from coming up.
  • Asynchronous time zones. North American customers sometimes find that communicating with Philippine providers means meeting very early in the morning or late at night. This can strain resources in both the client and vendor organization when compared to near-shore locations. While some projects leverage the time zone difference with around the clock development – for example handing off changes at the end of the business day and getting them back first thing in the morning – only a minority of outsourcing clients we spoke to were able to get time zone differences to work in their favor.

Follow these recommendations when considering the Philippines as an offshore destination:

  1. Shortlist vendors. By themselves Locations come with their own obstacles and challenges. Well selected vendors can work around these limitations. Find prospective vendors through a professional association like the Philippine Software Industry Association (PSIA)[6], the Business Processing Association of the Philippines (BPA/P)[2] or through an advisory service.
  2. Discuss weaknesses with prospective vendors. Vendors’ general outsourcing strengths can be evaluated, including technical competency, governance, and project management. However, question them about how they handle location-specific limitations. Be prepared to walk away from a vendor if the answers are unconvincing. For the Philippines, include questions like: How do you recruit and train middle managers? How do you deal with cultural differences between onshore and offshore team members? How do you ensure data security and protect intellectual property? How do you deal with time zone differences? How do you manage time zone stress in your staff?
  3. Consider the Philippines for helpdesk services. High levels of English proficiency, cultural affinity, and an established contact center industry make this a natural fit.
  4. Consider the Philippines for mainframe maintenance. The availability of resources with mainframe competencies makes mainframe maintenance and legacy conversion projects easier to resource in the Philippines than in other locations.
Update 2012

Since President Aquino took up his post on June 2010, he has pursued a selective anti-corruption agenda that led to the dismissal and replacement of the Supreme Court Chief Justice. He has also signed the Data Privacy Act 2011 and the CyberCrime Prevention Act in 2012, pending final arguments and voting.

Tax reforms, a balanced budget, disciplined fiscal measures (including modest economic stimulus and infrastructure expenditures) have worked together to raise the country’s reputation as an investment location. The country’s credit rating is on a 9-year high, and the Business Process Outsourcing industry is currently on-pace to exceed the annual growth goal of 15% for 2012.

There is also an emerging mobile development specialization. For example, Filipino app developers won two of three possible Google Apps Developer Challenge prizes for the South East Asian region in 2012 [8].

References & Links
  1. A complimentary copy of the full report is now available from Code Crew > News & Downloads > Philippines for Outsourced IT Services.
  2. Business Process Association of the Philippines (BPAP)
  3. National Association of Software and Services Companies (NASSCOM)
  4. CIA World Fact Book
  5. Outsourced Work in Philippines BPO, International Labour Organization, Maragtas S.V. Amante, In press – January 2008
  6. Philippine Software Industry Association (PSIA)
  7. Philippine Economic Zone Authority
  8. Google Apps Developer Challenge 2012