Digital Services Maturity by Location | Market Insights™
August 3, 2017
Maturity of digital services varies among established global services locations
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Maturity of digital services varies among established global services locations
Learn more about our Advanced Locations Tool and get a free sample download
Availability of relevant talent for digital and complex services is driving large setups in Singapore, Romania, Ireland, and Mexico
With the uncertain political situation in the Philippines and the comments President Duterte has made about distancing from the United States militarily to align closer to China and Russia, many are concerned about what this means for the relationship between the Philippines and the U.S. And rightfully so – this would be a major shift, and over time could be a cause for concern.
At the same time, the Philippines has been quick to point out that the commercial and social relationships between it and the United States are very strong, and that it wants and expects those to continue.
And therein lies an important point… a rebalancing of military relationships does not automatically lead to poor commercial and social relationships between countries.
In a quick exercise to demonstrate how countries can have a variety of types of relationships with the United States, I did a super simple comparison of several military and social dimensions in the graphic below. In addition to the Philippines, I chose India, Malaysia, and Turkey to represent a cross-section of countries near Russia and China that have some level of meaningful connection to the United States. Turkey is a member of NATO, India is a major trading partner for services and goods, and Malaysia is an interesting mix of relations with China and the U.S. (not to mention the Malay flag looks very similar to the United States flag).
I looked at language, religion, sports, and use of NATO-sourced fighter craft (both trainers and actively deployed.) Those without NATO-sourced fighter craft tend to attain theirs from Russia or China. Most countries not in NATO and near Russia have some mix of fighter aircraft.
Based on this very simple comparison, many in the global services industry might be surprised to see that India appears to be the least well-aligned to the U.S. on most dimensions. In particular, India depends primarily upon Russia for various types of military equipment, beyond just aircraft, and India is an important export market for Russia.
By contrast, the Philippines is very closely aligned to the U.S. on all dimensions, which explains why the average Filipino has a hard time with the concept of weakened commercial and social ties to the U.S.
Time will tell what actually happens. But we should all remember that military, commercial, and social ties can operate somewhat independently. Relationships between most countries are complex and multi-faceted, so a change in one area may be slow to impact the overall relationship.
The average cost of a full-time business process outsourcing employee in the Philippines is about $19,300 a year, compared with $72,300 in the U.K. and $91,100 in the U.S., according to consulting firm Everest Group. The cost calculation includes salaries and expenses related to benefits, administration, facilities, technology and others. Read more at Bloomberg.
The Philippines has been in the news a lot lately, for a range of negative reasons. But is its risk profile becoming such that U.S. enterprises should stop evaluating it as a global sourcing destination, or that those already there should consider pulling out?
That depends on your perspective, especially when you look at both its risk and benefits profiles. I believe one can argue that the current dynamics in the Philippines are potentially a hidden positive for the global sourcing industry. Yes, this bad thing could actually be a good thing.
Before you tell me I’m off my rocker and should be put in a padded room, hear me out.
Among other things, Philippine President Rodrigo Duterte made statements regarding “separation from the U.S.” This understandably caused concerns among multiple global companies with one or another type of exposure to the Philippines. But the Philippine government subsequently tried to clarify that the statements were reflective of intent in foreign and military policy, not business ties. Although a general tilt in military and foreign policy away from the U.S. may eventually hamper business relations, there will probably be little impact in the near term.
That said, while the uncertainty and noise surrounding the Philippines will cause some companies to slow or moderate their exposure to the country’s labor market, a slowing of its offshoring industry growth could be incredibly helpful.
For example, with somewhat less demand for talent, attrition rates should decrease. With somewhat lower attrition rates, employees are likely to develop in their roles to a greater level of proficiency. Additionally, salary increases are also likely to moderate and, with likely less investment into the Philippines, the Filipino peso may weaken and lead to a more attractive cost base.
In other words, assuming that the actual work environment is not disrupted by the new posture, the labor pool should become more attractive – lower cost and more stable – for those organizations continuing to operate in the Philippines.
From an economic standpoint, despite President Duterte’s saber rattling and the unnerving optics, the ties between the two countries won’t be threatened any time soon. The IT and Business Process Association of the Philippines (IBPAP) reported that the IT-BPS industry represented revenue of US$22 billion to the Philippines, and employed ~ 1.2 million FTEs in the country in 2015. With those kinds of numbers, an economic split can’t happen.
Socially, there are very deep ties between the U.S. and the Philippines, much of which is rooted in the fact that English is one of the two official languages in the country. One of the strongest predictors of social ties is language, as the more easily you can communicate with each other, the easier it is to talk about family, share jokes, discuss vacations…topics that help forge bonds.
It’s true that the Philippines’ risk profile appears to be shifting, but largely in ways that seem unlikely to materially impact business ties. For enterprises willing to manage and continue to operate within that environment, it would appear that the benefits of more skilled, language- and culturally-aligned talent at lower prices could easily outweigh the perceived risks.
Of course, there are numerous things you and your location-scoping team should monitor when considering the Philippines as a sourcing destination. The top five are:
Is your enterprise already offshoring to the Philippines, or in the process of evaluating it against other destinations? We’d love to hear your thoughts, perceptions, concerns, and experiences!
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Tuesday, December 13, 2016 | 10:00 a.m. – 11:30 a.m. ET
The recent changes in the Philippines’ political climate have raised alarm in the IT-BPM industry, both in the Philippines and the U.S. Questions abound as to how potential changes in the relationship between the Philippines and the U.S. will impact business relationships that many have come to rely upon.
Everest Group will offer a brief overview of the potential impact on the country’s IT-BPM industry; the group will then spend the bulk of the time discussing how they are thinking about how best to prepare and plan for potential impacts.
Who Should Attend
Senior global services executives and decision makers involved in outsourcing and delivery locations strategy interested in the impact of political changes in the Philippines on the global services industry and how those changes might impact their own strategies.
What You Will Learn
This session will help participants develop an understanding of the potential impact on the IT-BPM industry in Philippines and share thoughts around strategies going forward.
Please note that this event has already occurred.
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