360° Vendor Management

The Philippine Outsourcing Dilemma

The Philippines has been an outstanding outsourcing location over recent years.  It has an American heritage with close proximity to Hong Kong, Singapore, Taiwan, Korea, and Japan.  There is a reasonably robust telecommunications infrastructure and there has been extensive capital infusions from China and many other countries.  For foreigners, travel and accommodations in the Philippines is easy.  Probably the most impressive opportunity is the abundant,  well-educated, and friendly English-speaking labor force.  Any outsourcing executive who has traveled to India, China, or Costa Rica instantly finds the Philippine people irresistible.

Despite the never-ending flow of positives clients, vendors, advisory firms, and the Philippine government use to describe the Philippine outsourcing market, the present day reality is much different.  The Philippines actually poses a significant future risk to your operations.  Here’s why:

• Workforce Attrition - Less than 3-4 years ago, more than one well-known CEO in India explained to us, “There is an unlimited labor pool.  Wages will never increase.”  Well, that certainly wasn’t true.  Vendors and captives also exploited low wages by bidding-up labor markets in a savage back and forth talent war.  Many companies sought shelter in Tier 2 cities, but the peaceful period was brief, and companies turned for shelter in Tier 3 cities - where the same fate ha occurred.  The Philippines are experiencing the exact same phenomenon.  In fact, one CEO even recently pitched opening a center in the Southern islands, which is a place no company should consider, unless tapping into Tier 2 cities along the Indian-Pakistan border or Pakistan-Afghanistan appeals to you.
• Complex Services Meet Inexperience - One aspect of BPO that differs from ITO is that there is no education program to develop call center and backoffice outsourcing operations leaders.  Consequently, there are insufficient quantities of talented middle management in the Philippines.  Now that most companies have outsourced a little “easy stuff”, they are  outsourcing significant amounts of simple work, more complex work, as well as acquiring transformational services.  The management challenge is huge.  Where a call center used to get by on relatively easy workforce management planning, large operations demand sophisticated WFM skills.  These skills are incredibly hard to find in the Philippines, unless you import them or buy them from other vendors/captives (see the attrition issue above).
• Political Uncertainty - One of the great underestimated aspects of the Philippine political scene is its complete uncertainty.  You’ve probably already read the annually updated US State Department Travel Advisory.  However, take a moment to review all the other countries with similar warnings.  Pundits will argue that 1) the problem is in the south and 2) no government would stop the expansion of the outsourcing industry.  We generally agree, with two major caveats.  First, it takes but one election to ruin a country’s future.  Second, if the Philippines become an unsafe destination for business men to visit or for long term deployment of vendor management personnel, outcomes become difficult to manage.
• Currency - Currency instability is challenging in the Philippines.  While Indian companies took significant steps to hedge their currency, most operations in the Philippines are owned by foreign companies.  These companies don’t hedge, so they pass their costs onto you.

Essentially, the Philippines of today is the India of 3-4 years ago.  There is no reason to expect a different outcome.

However, while there are challenges, sophisticated vendor managers can mitigate every one of these challenges if they focus on strategic, long term issues that accompany outsourcing efforts.  Vendor managers who focus solely on day-to-day issues will run into profound problems if they don’t diversify locations, manage financial currency risk, or seek creative ways of bridging the middle management talent gap.  If managed effectively, the promise of the Philippines is definitely positive.

This entry was posted on Tuesday, March 25th, 2008 at 7:22 am and is filed under Outsourcing, Outsourcing Vendor Management. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.