The Philippines

As companies seek to drive savings through offshore location strategies, the Philippines has emerged as one of the destination of choice for back office operations such as call centers, shared service centers, information processing and IT service operations. After the dot-com recession of 1999, Site Selection Group began locating companies to the Philippines when were desperately trying to cut costs. This was during the very early stages of offshoring in the Philippines, back when less than 50,000 back office employees were operating in the entire country. Today, the Philippines has grown to house more than 800,000 employees performing back office functions ranging from customer service to technical support. 

Companies are now asking if the region can handle the continued influx of companies seeking to expand into this dynamic region of the world. To address these uncertainties, Site Selection Group has profiled the Philippines to evaluate the pros and cons of the region.

Cities to consider in the site selection process
The country’s capital, Manila, with a metropolitan statistical area population of more than 12 million people has become ground zero for companies entering the country. Manila offers the easiest access to all the major global gateways and possesses some of the best English-speaking labor talent. As labor competition has grown, companies have been expanding the search area beyond metro Manila into the surrounding pockets where labor costs are lower and competition is less. Labor costs will typically be 10% to 20% less in the tertiary markets. The following diagram identifies examples of the various cities by tier that should be considered when evaluating the region

Companies that have expanded in the region
The region continues to attract some massive projects from across the world. According to IBPAP, employment in the business process outsourcing (BPO) sector has grown from 236,000 in 2006 to 777,000 in 2012. The largest employers in the country are the traditional third- party BPO firms and large Fortune 500 companies such as Dell, Citibank, Capital One and Bank of America. The following table identifies some of the largest U.S. based employers in the country:

The value proposition of the Philippines

The Philippines continues to offer some of the most desirable location attributes, making it attractive for companies seeking to expand into the region. Some of the key reasons include the following:

• Labor costs are low. You will typically find labor cost to be a fraction of the wages paid in the United States. For example, an English-speaking call center worker earns between $1.50 and $2 per hour depending on the city in which you locate. The comparable employee would cost $10 to $12 per hour in the United States. However, you need to remember that the employee benefit load will range from 45% to 50% as compared to 35% in the United States.      
• Scalability is the key. The challenge with most offshore locations is scalability. The educated workforce in nearshore and offshore locations are typically very small, which makes it very difficult for a company to scale operations beyond 500 to 1,000 employees. A great example is many of the Latin American nearshore destinations that are already beginning to lose their desirability due to shrinking labor supply. However, the Philippines has the scalability for growth considering it has almost 100 million people living in the country with literacy rates of more than 95%. The country has 522,617 annual graduates from higher education institutions. In metro Manila, alone, there are approximately 12 million people of which more than 128,000 college students are graduating each year. This has enabled companies such as Accenture, Convergys and Sykes to grow their employment base to the levels shown above.
• Skillsets of employees are very good in certain geographies. One of the biggest reasons for the success of the country is that English is a primary language. The English skills of Filipinos are considered the best of all competing offshore destinations. In addition, the education levels are very good with metro Manila and Cebu having the capability to perform higher-end activities such as shared service and IT services in addition to traditional call center work. As an example, in metro Manila, there are about 15,000 annual graduates with IT-related degrees that are perfect to work in IT services-related positions. The smaller cities in the Philippines are best utilized for traditional customer services activities.  
• Proven to be a successful location to operate. The success of the Philippines is clearly illustrated by its year-over-year high growth that proves that the region works for companies. The region has successfully functioned as an offshore hub for more than a decade now, which gives it credibility as a sustainable location. This success has a created a “comfort zone” with less risk for failure by companies considering offshore locations to expand. 

Challenges of locating in the Philippines

With high growth comes challenges. There are many challenges that companies will uncover as they try to expand into the Philippines. Some of the challenges include the following:

• Market saturation applies pressure on wages, attrition rates and real estate. More than 500 call centers operate in the country, according to estimates, with some 350 of them in metro Manila. This level of competition draws concern that the market is becoming saturated. The warning signs of high wage inflation and increased employee attrition are becoming a problem. In addition, real estate availability is very low and real estate costs have increased significantly. This trend will continue until market activity cools down.

• Wage inflation is high. Wage inflation is a critical factor that will quickly diminish the savings of locating to offshore geographies. The annual wage inflation rate in the Philippines can exceed 10%, which is a lot higher than the typical 3% wage inflation rate in the United States. There does not appear to be much relief in sight.

• Accessibility to the United States is problemtaic. The average time to fly to the Philippines from the U.S. is approximately 24 hours. It will require at least three days to go roundtrip after time changes, delays and customs. The cost of the plane tickets can range from $1,500 for coach to over $5,000 for business class. These costs don’t even take into consideration the employee productivity that is lost in the process. Bottom-line, it is time-consuming and expensive to manage an offshore operation.

• Terrorist risks are highest in southernmost provinces. The Philippines continues to have a negative perception as it relates to terrorism. Most of the activity is in the southernmost provinces where there are minimal call center operations. The risk is less in places like Manila where there is ample police and military presence.     

• Typhoons continue to cause havoc. The Philippines is located on the typhoon belt which brings an average of 15 typhoons per year to the country. Typically five to six typhoons will make landfall per year causing major flooding and power outages that can go as long as two days in some areas.

• Capital intensive to set-up an operation. The cost to open facilities within the region can be very costly, with little support from landlords or the governments to help offset the upfront expenses of starting up a facility. Rental rates continue to escalate due to demand for space. It is also important to locate in PEZA zones, which provide an economic incentive in the form of a tax holiday

Conclusions

Companies continue to search for the next Philippines and they quickly find out that there really isn’t any other global location offering the same level of scalability at that cost point. The Philippines’ success has almost become its own worst enemy as wages continue to inflate and employee attrition escalates. The region clearly has a lot to offer companies as they seek to lower their operating costs; however, it is only a matter of time before the disadvantages outweigh the advantages of locating in the Philippines. How long is the magic question.