By Gervy Biagtan
Many “pundits” some years back thought that the business- process outsourcing (BPO) will be a transient global phenomenon. Today, about 15 years later, the BPO industry in the Philippines remains growing and expanding across the country.
BPO is a product of globalization of labor markets. Beyond the realm of the Ricardian comparative advantage where large businesses build scale economies with “cheap labor” abroad, the motivation for BPO is also inspired by Michael Porter’s competitive advantage. As such, scale enterprises in wealthier countries migrate some of their work to “cheaper” countries that similarly (if not far better) have the same level of skills on the work required. One example of specialized skill is customer service, where the Philippines has a vast pool of hospitality equipped and English-speaking labor force. This led to the birth of the BPO-customer-service industry in the Philippines. Labor force employed in the BPO industry grew from more than a quarter-of-a-million Filipinos in 2006 to an estimated 1.07 million in a span of eight years (IT and Business Process Association of the Philippines, or IBPAP, 2014). This contributes to about 2.3 percent to 2.7 percent of the employed labor force in the country, and the revenues earned by the industry is more than 5 percent of the economy’s nominal GDP in 2014.
BPO can be classified into several common lines of work: contact centers (often termed as “call centers” in the Philippines), back office knowledge-process outsourcing (KPO) (e.g., payroll, order processing and management); information-technology outsourcing (ITO) (e.g., cloud enabling, software and database management); health care (e.g., medical transcription), animation, and game development. IBPAP’s figures show that in 2014 more than half (64 percent) of all the BPO employees are employed in contact centers, and a third of the BPO’s labor force are in the emerging KPO, ITO and health-care services. The majority of the outsourced work comes from the North American market (77 percent), while the rest come from European and Asia-Pacific regional markets.
The contact centers, which are the major players in the BPO industry, can be further divided into technical-support service (e.g., helping customers with their malfunctioning gadgets); travel and hospitality (e.g., helping customers regarding hotel reservations), health care and health sciences (e.g., providing details of medical coverage); and financial/insurance services (e.g., credit-card or debit-card inquiries or processing requests for insurance claims).
Impact on economy and continuous expansion
Beyond employment and GDP, the BPO industry has produced extensive multiplier effects. This can be seen through tax revenues earned, alongside with the increased consumption of various goods and services (Culaba, 2014). It also indirectly generates employment by spurring the growth of employment in industries that produce basic commodities (Tholons, 2011). It also improves general welfare since the higher incomes earned by the industry (which on average is about more than half of the minimum wage) allows workers to increase consumption not only of basic commodities, but also of leisure and other higher-priced commodities. Furthermore, the yearly expansion of the industry also boosted demand for office space, helping increase real estate values. Lamudi estimated that in 2014 alone 80 percent to 90 percent of the growth in office space are occupied by the BPO industry. Other forecasts reveal vacancy rates in office spaces will remain low for the next years due to the rapid expansion of the industry (Colliers Int’l Philippines, 2014). Moreover, the industry also has diffusing effect in real estate outside Metro Manila. Other cities, dubbed as the Next Wave Cities, like Cebu, Bacolod and Clark have also experienced the BPO expansion
IN an interview with Jonathan de Luzuriaga, former executive director for Industry Affairs of the IBPAP and presently the president of the Philippine Software Industry Association (PSIA), he mentioned several challenges that lay ahead of the industry. These are overseas employment opportunities attracting fresh graduates and the currently employed BPO workers; fiscal incentives offered by the country versus the competitive offers coming from rival countries, like the Latin American (e.g., Costa Rica) and Asia-Pacific countries; and the contribution of academic institutions to help build a BPO-ready work force. In terms of fiscal incentives, Senate Bills 35 and 987 (both seeking to reduce or repeal the tax incentives of BPO companies), threatens to diminish the competitiveness of the Philippines’s ability to attract more BPO activities. On the other hand, despite having tie-ups between universities with BPOs in terms of preparing graduates to be BPO-ready, there still has been no formal integration of BPO-specific education in the top tiered universities.
There is definitely a need for the incoming administration to provide support to the BPO industry in responding to these challenges. At the current rate of growth, the industry will most likely match the revenues received from remittances in the next three years. We believe that, despite its current growth spurt, the best is yet to come for the industry. It is a midnight sun that is yet to set.
Gervy Biagtan is a lecturer at the Economics Department of ADMU and is a director for Process Improvement at TelePhilippines Inc.