- The outsourcing industry in the Philippines is more buoyant after the uncertainty caused by the anti-US rhetoric that President Rodrigo Duterte employed during his first year in power.
- Moving up the value chain by developing worker skills remains a major challenge for an industry that faces a threat from robotics.
- Slowing revenue growth and job generation are likely to persist over the medium term.
Enthusiasm among business process outsourcing (BPO) firms in the Philippines is back, more than a year after President Rodrigo Duterte was elected. However, growth will continue to slow as staff training remains a challenge and robots emerge as a threat.
The industry had a rough start to Mr Duterte's administration, whose populist, anti-US stance dented investor confidence in one of the country's crucial economic sectors. But the rhetoric used by Mr Duterte while US President Barack Obama was in the White House has softened. President Donald Trump has praised Mr Duterte's war on drugs, mollifying the Philippines leader at a time when Mr Trump's protectionist stance was a concern for the BPO industry. The US accounts for almost 75 per cent of BPO revenue in the Philippines.
This means renewed confidence in a sector that generated more than $22bn in revenue last year. "A combination of events, anti-US rhetoric and the election of Trump" caused some concern in the industry, said Rey Untal, president of the IT-BPO Industry Association of the Philippines (IBPAP). "They were on a wait-and-see attitude. Now, I can sense enthusiasm is returning."
This is good news for the 1.14m BPO employees in the Philippines. Among those who responded to an FTCR survey, 43 per cent do not think Mr Duterte's tirades against the US will harm their employment prospects in the future (see chart). The cheerier atmosphere allows BPOs to shift their focus back to expansion by retaining employees, hiring new ones, and taking advantage of the government's inclusive growth agenda to tap cheaper locations from which to operate.
Even before Mr Duterte took office, the BPO industry had forecast slowing growth in revenue and employment up to 2021 (see chart).
Gone are the days when the sector claimed it would quickly surpass overseas remittances in terms of dollar revenues. Both sectors are vital to the Philippines, their rise keeping the economy afloat in the aftermath of the 2008 global financial crisis (see chart).
Mr Untal said much of the slowdown was the result of "maturing companies" that have limited scope to expand. However, we believe it also highlights the sector's lingering challenge of training employees so they can move to higher-skilled jobs, such as those in animation and healthcare, from their traditional role in call centres (see chart). This would enable BPOs to move up the value chain and take on new business.
There are pros and cons to a voice-concentrated BPO industry. On the upside, Mr Untal said, call centres have enabled BPOs to absorb fresh graduates looking for jobs. The difficult part, however, is keeping hold of them. IBPAP data show that 4.8 per cent of employees in the voice sector either quit or are dismissed every month, higher than the industry average of 3.3 per cent. While most of those end up in jobs within the industry, staff turnover has made it difficult to develop highly skilled workers who earn more, have a better standard of living and can help BPO firms to evolve.
In recent years, companies have enticed more workers to stay by offering them packages that include training, Mr Untal said. Applicants are told during the hiring process how they might advance their career once taken on.
The shift last year from 10 to 12 years of basic education in the Philippines is also positive for BPOs. With fewer graduates entering the labour market before 2018 because of additional years of study, BPOs can concentrate on training their existing workforce amid risks that artificial intelligence (AI) could soon replace their employees.
Although Mr Untal said the industry was prepared for AI's increasing role in the workplace, efforts to ensure that robots will benefit, rather than disrupt, business are limited by a lack of data. Although there is no precise gauge of the extent of AI penetration in the BPO industry, there is a broad view that the technology is developing quickly and poses a threat.
Many observers just a few years ago said it would take decades before AI had an impact on the workplace. Now, automated voice response is considered old technology compared with newer types of robots that collect and segregate data.
The BPO industry's response will need to focus on retraining workers and complementing them with robots, rather than laying them off. John Forbes, a senior adviser to the American Chamber of Commerce in the Philippines, said there was still scope for humans in higher-skilled areas such as data analytics. "How quickly Filipinos obtain skills to perform those tasks will be key to BPO growth going forward, but they better start running to do that now," Mr Forbes told FTCR.
Government intervention has been limited to co-operation with the industry on vocational courses for BPO workers, and fiscal incentives for companies to relocate such as exemption from sales tax. The government has denied reports that it plans to remove such tax breaks under a law set to be implemented next year.
Nevertheless, Mr Duterte's desire to encourage economic growth outside Manila has pushed some of the 600 BPO companies in the Philippines to look for locations beyond the capital and other popular cities such as Cebu and Davao, where most of them are currently located (see chart).
While expansion beyond Manila will create more jobs in provincial cities, BPOs will have to spend more on training and development programmes. In the long run, tax breaks may not offset investment. The timely rollout of the government's infrastructure projects, especially in parts of the country where even road access is limited, is important to maintain the industry's competitiveness.
The government would like BPOs to expand to what it calls "next-wave" cities across the country's three main regions: Luzon, Visayas and Mindanao. Most of these cities are in Luzon and Visayas, where there is a reliable electricity supply. However, the government will need to resolve Mindanao's lack of electricity if the island, home to 40 per cent of the Philippines' poor, is to get its share of BPO investment.
This article was first published on August 3 by FT Confidential Research.
FT Confidential Research is an independent research service from the Financial Times, providing in-depth analysis of and statistical insight into China and Southeast Asia. A team of researchers in these key markets combine findings from proprietary surveys with on-the-ground research to provide predictive analysis for investors.