GICs Provide IT-ADM Cost Savings of 30-70% | Market Insights™
Most GICs (shared services centers) provide base skills IT-ADM cost savings of 30-70% above source markets.
Most GICs (shared services centers) provide base skills IT-ADM cost savings of 30-70% above source markets.
Most GICs (shared services centers) provide transactional business process (BP) cost savings of 30-80% above source markets.
Even excluding Brazil, which is more than 5x the annual BPO operating cost per FTE of India, annual BPO operating cost per FTE varies by more than 200% across cities and regions
85% of the all GIC FTEs are located in only 6 countries: 55% located in India; 30% spread among Philippines, Poland, China, Malaysia, and Costa Rica
Annual ITO operating cost per FTE varies by more than 4x across regions
November 7, 2013, marked the start of devastatingly dark days in the Philippines, as Typhoon Haiyan battered certain areas with sustained wind speeds of 196 miles per hour. The typhoon crossed the Visayas Island group of the central Philippines, causing havoc on the eastern coast from northern Luzon to southern Mindanao. The worst affected region was the Leyte province, where most of its capital city, Tacloban, was destroyed (see the image below for Haiyan’s path within the Philippines).
Source: United Nations OCHA and the Washington Post
While of course loss of life, suffering, and the need for all types of aid are top of mind concerns for citizens around the world, the severity of the typhoon’s damage raised concerns regarding its impact on business operations and business continuity in the country, particularly in the global services sector.
The Philippines is a global leader in delivery of voice business processes (BP) and has a rapidly growing information technology and business process (IT-BP) industry. The country is also making strides in some of the niche BPO segments such as the healthcare sector, which alone offers an annual revenue potential of US$1 billion by 2016. Global buyers and service providers have built a strong presence in the Philippines, and typhoon threat is a geographical risk trade-off that companies have made in return for a good-quality English-speaking talent pool and notable cost arbitrage over U.S. cities.
Following is a list of the recent and deadliest typhoons in the Philippines:
|Name||Date of Impact||Casualties|
|Haiyan/Yolanda 2013||November 7–8, 2013||1,774+ (accurate estimates yet to arrive)|
|Bopha/Pablo 2012||December 2–9, 2012||1,146|
|Washi/Sendong 2011||December 16–17, 2011||1,268|
|Fengshen/Frank 2008||June 20–23, 2008||1,410|
|Durian/Reming 2006||November 29-December 1, 2006||1,399|
Typhoon Haiyan is the 23rd typhoon to hit the Philippines this year and is unarguably the most severe natural calamity to affect the country in recent times. Although the devastation caused by Typhoon Haiyan was massive, it was concentrated in the central and eastern provinces, and metro Manila remained unharmed. Since the majority of IT-BP centers are located in metro Manila, the impact of the typhoon on the IT-BP industry was minimal.
However, it did affect IT-BP operations in the cities of Cebu, Iloilo, and Dumaguete, where work was suspended by the respective city mayors in preparation for the typhoon. Temporary power outages and disruption in telecommunications infrastructure led to higher absenteeism in these cities. Flight connectivity was hampered with the cancellation of a number of domestic and international flights. While there are no confirmed reports of damage to specific IT-BP delivery centers, some located in the path of the typhoon may have suffered infrastructural damage. These include a 200 FTE BP center in Pili, Camarines Sur province, and another 200 FTE BP center in Palo, Leyte province.
As the country deals with the devastation and destruction through rescue and relief operations, it is important for global services stakeholders to understand and review their service delivery presence in the Philippines. Players need to be mindful that choice of locations susceptible to natural hazards requires an efficient business continuity plan (BCP). Redundancy measures for critical business processes, which may suffer downtime caused by such incidents, should be in place to avoid disruption in business operations. Although acts of nature are highly unpredictable, their effects can be minimized by acknowledging the impact on business operations during evaluation of locations for global service delivery.
India, China, and Philippines are often lumped together in regard to their roles in global services delivery. The reasons are not hard to fathom – these three geographies are consistently featured as leading locations for global services delivery (both new centers and expansions). In addition, their common availability of large talent pools coupled with low-cost operations make them highly relevant in global services delivery discussions.
However, a deeper analysis of the source markets served by these countries reveals some country-specific findings that are relevant for incumbents as well as new players with plans for these geographies. The chart below provides the distribution of IT-BPO services revenue in these countries in terms of source geographies served.
More than four-fifths of the global services delivery in China is focused on the domestic market with a limited scale of global delivery to North America and Europe. The availability of an English-speaking workforce continues to be a concern for global organizations as are perceptions related to IP / data protection regulations. There is a distinct value proposition for China to serve its regional markets (e.g., Japan and South Korea) given factors such as time zone similarity, cultural affinity, and language availability.
In contrast, the Philippines is almost exclusively leveraged to serve the United States. Voice BPO has been the traditional growth engine for the Philippines, given cultural affinity and a large English-speaking workforce. However, of late, the Philippines market has also seen traction in BPO functions (particularly industry-specific non-voice BPO) and IT services, indicating diversification of service portfolio beyond voice.
And lastly, India has a distinctive value proposition around serving both the domestic and global markets. Leading players have multi-function scaled operations for global delivery to North America and Europe. In addition, India also sees large demand from the domestic market, particularly for technology and voice operation, and players typically leverage multiple cities within the country (including tier-2/3 cities) for serving this demand. However, unlike China, a very small proportion of service delivery from India is targeted towards the Asia Pacific market primarily due to the constraints around East Asian languages.
Global adopters are increasingly accepting a multi-location approach towards building their portfolios. As they think about their location strategy for Asia, they would be wise to consider roles for India, China, and Philippines based on their unique factors related to source markets and functions for delivery.
The Philippines, which is already giving competition in voice-based services to the leading offshoring destinations in Asia, is now eyeing to further up the ante. The country continues to see robust growth in its voice segment and credible activity in non-voice services.
With its sizeable graduate pool, low-cost of operations, and English language advantage, the Philippines offers an attractive proposition for organizations looking for destinations to offshore services. The Philippines IT-BPO industry registered US$11 billion in 2011 on the back of successful expansion in services and increased geographic diversity. The sector is generating 640,000 direct jobs and another 1.5 million indirect jobs. Given the robust growth, the Philippines is likely to achieve its target of US$25 billion in revenues and generate 1.3 million direct by 2016 as per the IT-BPO Road Map 2016 developed by Everest Group.
The country is also seeing an increase in the share of non-voice work (including IT/ESO) which now contributes about 30% to the industry and there is evidence of credible activity in complex processes, e.g., legal, analytics, although their scale remains small. This is largely because buyers are now looking to diversify their delivery operations beyond established markets and are witnessing satisfactory experience from country’s non-voice services. Geographic diversification beyond the United States is also gaining traction and focus on multi-lingual services is increasing.
One of the key reasons behind this success is government’s commitment to the sector which is working to position the country as an attractive destination for diversified services with the target to double share of revenue from other service lines. Continuing in this direction, the government and BPAP are initiating steps to enhance country’s value proposition at segment level (e.g., ESO, animation), with a significant attention on non-voice services.
…however, some concerns remain
Activity in Next Wave CitiesTM is evolving at slow pace. Analysis of the delivery location pattern of top 20 service providers and Forbes 2000 companies reveals that of the 35 centers set-up in the Philippines in last three years, only three were located outside Metro Manila and Cebu. Clearly, Philippines has its task cut out in order to position these cities as alternative locations beyond Metro Manila and Cebu and widen the talent base to ease the supply of talent and address high attrition.
Moreover, ITO and Engineering Services are still not prevalent. The country also needs to continue to increase its alignment towards the United Kingdom and Europe, which are the biggest growth markets after United States. In addition, the country has a high risk of natural disasters. The most recent example is the typhoon activity in 2011, which led to power cuts and disruption of daily activity in Manila. Companies are, therefore, mindful of business continuity plans when they evaluate the Philippines for expansion of their delivery network.
While the government and industry associations are striving to enhance the attractiveness of Philippines IT-BPO sector, it remains to be seen how much the country can get players to think of itself for considerations beyond the arbitrage in voice-based services and more as a broad-based global sourcing destination.
For more details on the Philippines global sourcing market, refer to the recently released reports by Everest Group:
Recently I was in Manila for the Contact Center Association of Philippines (CCAP) annual industry event, which also marked the CCAP’s 10-year anniversary. There was a great deal of enthusiasm about Philippines having reached an important milestone of becoming the world’s leading voice BPO destination. Prominent industry and political speakers emphasized the fact that Philippines had achieved this distinction on the back of a vibrant ecosystem, a natural affinity toward the services and customers in play, and the significant attention the industry is enjoying relative to the political and economic quarters. One of the eminent presenters summarized the upbeat mood by stating that Filipinos had demonstrated that it is possible to be nice and still win!
The celebrations were well-deserved. The Philippines IT/BPO industry has grown at a healthy clip of ~30 percent annually over the past five years to reach ~US$9 billion in revenues, and is a significant contributor to the country’s GDP, direct and indirect employment, and foreign exchange earnings. Additionally, the industry has catalyzed growth of multiple next-wave cities in the provinces, attracting local talent, entrepreneurs, and governments to participate in the overall economic upswing. Multiple factors, including availability of a robust English-speaking talent pool, relatively neutral accent, cultural similarity with the United States, and a competitive cost environment have contributed to this success.
Yet, one must question whether this success is sustainable and what lies ahead for the industry in the years to come. The global services phenomenon has certainly spawned a new generation of competing destinations beyond India and Philippines. While locations such as China derive strength from regional and domestic market scale and capabilities, countries in Africa are witnessing a significant government-backed push to target the relatively lesser tapped UK and European markets. Other countries such as those in Eastern Europe and Central/Latin America are establishing themselves as the preferred nearshore destinations for Europe and North America, respectively. While it is important for Philippines to protect and enhance its position in the existing strongholds, the competition will be more apparent in the comparatively new markets such as the UK, continental Europe, and Asia Pacific, and in service segments such as non-voice and industry-specific BPO services.
So what must Philippines do to ensure continued growth and success in the emerging global services landscape? Investments in talent capacity and quality are required to meet the industry’s projected entry-level workforce requirements, as are development of specific domain expertise and a steady pool of management/ leadership. The industry’s expansion into next-wave cities needs to be strengthened through adequate physical/social infrastructure development and local government stewardship. Finally, the industry’s stated agenda of further diversification into newer markets and service lines must be supported through renewed and targeted marketing and communication initiatives.
The Philippines IT/BPO industry has set itself an ambitious 20 percent annual growth target over the next five years. Achieving this will require Philippines to proactively shape its destiny and profile, recognizing evolving customer expectations and competitor capabilities. Will there be any surprises?
A colleague and I recently hosted a roundtable for the leaders of captive centers (i.e., offshore operations not belonging to third-party ITO or BPO suppliers) in the Philippines. In attendance were leaders from more than 15 organizations with operations at varying degrees of maturity. So what do you think their reactions were to the discussion?
On one level, most participants could have felt good. Makati City is bustling (and far better organized than, say, Gurgaon or Bangalore). Most operations are growing well, and are perhaps a key factor in the Philippines’ overtaking India in voice BPO. Everyone around the table is facing the same operating issues around attrition, wage increases, staffing for night shifts, and the constant traffic of visitors from the parent company coming to kick the tires and bond with the associates serving internal or external customers halfway around the globe. The issues would have been worrying for the leaders if they weren’t all dealing with the same stuff.
At another level, the leaders should be worried. After all, it’s easy to be absorbed by the operating issues of trying to keep a few thousand people engaged and focused on customer service and attendance, and making sure they’re happy and well-fed in their 24×7 operations. But the world is changing. Parent companies have gotten a lot smarter in what work they send where, and to whom. Third-party providers are the ones renting out a majority of new office space in Manila, and they are eager to grab what market share they can from the captive pie. Many of these third-party operations are led by Indian managers who are perhaps a bit tired of things in Gurgaon or Bangalore and have come to the Philippines to get their next kick in life.
So why does this matter? On one hand, things can continue as-is; after all, life is good as long as headcount in the captive center keeps increasing, isn’t it? On the other hand, status quo can relegate these operations to becoming a mere spoke in the global supply chain of their parent organizations. Decisions that shape their future will continue to be made by the leaders back home, or worse, by peers in these organizations’ centers in India or other locations.
It’s time for the leaders of the Philippines captives to face the fact that business as usual is not going to last as long as the third parties are coming and parent companies are getting more discerning. More importantly, they need to make themselves heard by demonstrating leadership capabilities beyond day-to-day delivery, and taking charge of the offshoring agenda, or at least starting to shape it.