JETRO Philippine IT Industry Update 2006 No.

5 (10/15/2006)

JETRO Philippine IT Industry Update 2006-No. 5

Table of Contents 1 2 2.1 2.2 2.3 2.4 2.5 3 3.1 3.2 4 4.1 4.2 4.3 1 Introduction.....................................................................1 Industry Overview and Trends.......................................1 Philippine BPO Industry Overview................................1 PLDT Entered BPO in Full Scale by Acquisition of SPI ..........................................................................................2 Ayala Group Back Office BPO .......................................2 Guidelines for the Protection of Personal Data in Information and Communications System in the Private Sector................................................................2 Philippines and India: From Competition to Collaboration ..................................................................3 Possibilities of Back Office BPO from the Philippines for Japanese Market .......................................................3 Geographical Advantage: Not Utilized at This Moment ..........................................................................................3 Possible Areas of BPO for Japanese Companies ........4 Case Studies ...................................................................5 NYK-Filjapan Shipping E-Services Corp. (NESC) ........5 Infinit Outsourcing Inc (Infinit-O) ..................................5 Re:source Partners (RSP) ..............................................6 Introduction that the Philippines is the fourth attractive offshore destination following India, China and Malaysia. It seems apparent that these high rating of the Philippines by the reputable third-party organizations are positively impacting the growth of Philippine BPO industry. Not only many of large global companies have located captive shared service centers, but also there are number of major third party BPO service providers in the Philippines. (See Figure 1) Table 1: Philippine ITS/ITES Industry Revenue by Segment
(In US$ Million. Data for 2004 and 2005 are actual, while 2006 and 2 later are projection.)
ITS/ITES Segment Customer Contact Back Office Software Development Medical Transcription Animation Engineering Design Other Data Transaction Legal Transcription Digital Contents Total
2004 1,024 120 170 42 52 34 26 4 3 1,475 2005 1,792 180 204 70 74 48 39 6 7 2,420 2006 2,688 288 272 126 111 68 52 9 13 3,627 2007 3,488 488 374 238 185 102 78 13 26 4,992 2008 4,192 880 561 476 315 170 104 20 52 6,770 2009 4,816 1,496 850 952 500 255 130 28 104 2010 5,296 2,392 1,275 1,708 759 357 169 36 208

The Philippines has been known as one of the best outsourcing destination for global call centers and the industry experienced phenomenal growth in the past 6 years1. While the growth rate of Call Center industry is starting to slow down, Business Process Outsourcing (BPO) of back office operations is expected to grow rapidly in the coming years following the similar path of Call Center Industry. This issue features the back office BPO industry in the Philippines. 2 Industry Overview and Trends 2.1 Philippine BPO Industry Overview According to Business Processing Association Philippines (BPA/P, about 140 member companies), an industry association for the countrys IT Services and IT-enabled Services (ITS/ITES) including BPO, there were about 62 Back Office BPO service providers and around 24,500 people were employed in this industry segment as of 1st Quarter 2006. Estimated revenue in 2005 was US$ 160 Million which grew 80% from the previous year. Back Office BPO industry size is currently only 1/10 of the Call Center industry which generated US$ 1.7 billion revenue and employs more than 110,000 in over 100 centers in 2005. However, BPA/P projects the revenue of this segment to grow at the compounded annual growth rate (CAGR) of 67% during 2005 to 2010 reaching US$ 2.4 billion by 2010. (See Table 1). U.S. based offshore advisory firm neoIT has assessed the Philippines as the second attractive BPO destination following India, as a result of their comparative study of 15 offshore and nearshore destinations. On the other hand, U.S. based research firm A.T. Kearney also concluded in a similar study
Please refer JETRO Philippine IT Industry Update FY2006-No.1 featuring Call Center Industry.
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9,131 12,200

Figure 1: BPO companies operating in the Philippines Back Office BPO companies in the Philippines perform broad range of services such as Finance & Accounting, HR Management, Payroll, Logistics, Publishing, and so on (See Figure 2). As a recent trend, some companies have started offering Knowledge Process Outsourcing (KPO) services which require higher skill and expertise in certain business process areas. Shifting or diversifying from relatively low
Source: Commission on Information and Communications Technology (CICT), Board of Investments (BOI), Business Processing Association Philippines (BPA/P), etc. (As of August 2006)
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JETRO Philippine IT Industry Update 2006 No. 5 (10/15/2006) value-added voice services to high value-added Back Office BPO and to even higher value KPO services built upon highly specialized expertise seems to be a natural move for many companies that were originally voice service centric call centers. Figure 2: BPO & KPO Services

2.2 PLDT Entered BPO in Full Scale by Acquisition of SPI One of the recent notable moves in the Philippines BPO industry is the acquisition of the worlds ninth largest BPO service provider SPI Technologies by ePLDT, an IT business subsidiary of the Philippines largest telecommunication service company, PLDT. The purchase price was about US$160 million inclusive of debt 4. ePLDT also operates a fast growing call center under the brand of Ventus (4,500 employees). SPI was established in Manila in 1980, and then it has expanded to a global BPO provider which now operates 23 centers in North America, Europe and Asia and has over 6,000 employees. They provide BPO services mainly in four fields namely, medical, legal, publishing and data transactions. In publishing division, SPI has recently opened new offices in Pondicherry, India and Dumaguete, Negros Oriental in the Philippines5. In the new office in Dumaguete, more than 550 contents specialists provide services like XML structuring and editorial services to clients worldwide.

While the Call Center industry in the Philippines is currently encountering a shortage of English proficient manpower supply, Back Office BPO industry can absorb portion of the unutilized manpower in call center industry because some of the Back Office BPO operations do not require high English proficiency as voice service based Call Center industry does. On the other hand, global competitiveness of the Philippines may be challenged by other outsourcing destinations when English capability is not the primary criteria for selecting outsourcing destination. The two tables below present salary level data of Philippine BPO industry from BPA/P and from neoIT research. Table 2: Philippine BPO Salary Level by BPA/P
Type of Skills General BPO Staff Annual Salary(*) From US$ 2,824 To US$ 3,529 HR Analyst From US$ 3,059 To US$ 4,235 Financial Analyst From US$ 3,059 To US$ 4,235 Engineering From US$ 4,235 To US$ 5,882 ICT Operation From US$ 3,059 To US$ 4,235 (*)Original data from BPA/P(March, 2006) was monthly salary in Php. It was converted to US$ by exchange rate of US$1 = Php. 51 then multiplied by 12.

By this acquisition of SPI, which symbolizes PLDTs full scale entry to BPO industry, ePLDT became one of the largest BPO company in the country with 11,000 employees. ePLDT is enhancing its service offering lineup as a comprehensives BPO service company. 2.3 Ayala Group Back Office BPO Ayala Group, one of the largest conglomerate in the Philippines established a 100% subsidiary LiveIt Solutions, Inc, a holding company for the groups BPO businesses6. Their first investment was in eTelecare Global Solutions, Inc., a large call center company. LiveIT recently acquired an 11% stake in eTelecare for approximately P800 million. Mr. Alfredo I. Ayala who was appointed as CEO of LiveIt Solutions was formerly the CEO of eTelecare and the Chairman of SPI which was mentioned above. While eTelecare is currently one of the the leading call centers in Asia which has 12 centers with 7,000 employees in the Philippines and U.S., LiveIt announced their intention to actively invest in comprehensive non-voice service providers. Both of ePLDTs SPI acquisition and Ayalas LiveIt establishment to start investment in BPO industry were made public towards the end of June 2006. This wave of large-scale investments by leading Philippine companies indicates that these large enterprises take the importance of BPO business opportunities seriously. 2.4 Guidelines for the Protection of Personal Data in Information and Communications System in the 7 Private Sector In June 2006, Department of Trade and Industry (DTI) issued Department Order No. 08, series of 2006 entitled
SourceSPI Press release, Jun 10,2006 SourceSPI Press release, Sep 4,2006 6 SourceAyala Corporation Press release, Jul 29,2006 7 Department of Trade and Industry, Department Administrative Order No. 08, series of 2006
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Table 3: Philippine BPO Salary Level by neoIT3

Experience Level Entry Level Team Leader Project Manager Annual Salary US$ 5,748 US$ 9,629 US$14,906

Source neoIT Offshore and Nearshore ITO/BPO Salary Report 2006

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JETRO Philippine IT Industry Update 2006 No. 5 (10/15/2006) Guidelines for the Protection of Personal Data in Information and Communications System in the Private Sector. In the Philippines, there had been no privacy and personal information protection guidelines, although there has been E-Commerce Law passed in 2000. BPO industry players have started feeling that Foreign clients became more discerning to select BPO service providers, and they are urged to present how they are protecting data8. This market requirement pushed the government to issue the guideline. The guideline encourages private entities to establish and adopt privacy policies. To provide support to such private entities, DTI newly establishes DTI Accreditation Office. DTI Accreditation Office will accredit third-party Certifiers, which are capable to evaluate and certify the private entity in implementing appropriate personal information protection. This evaluation and certification will be done based on the voluntary application by companies which would like to have the certification. The name of standards to be used for evaluation, such as ISO, is not particularly mentioned in the guideline, though it is indicated to utilize internationally recognized data protection standard. Furthermore, Privacy Complaints Office is established under the Accreditation Office to accept reports of complaints concerning personal data privacy violations under the guideline. The guideline applies to all types of personal data without regard to whether or not that personal data is of local origin or from foreign countries. While this appears to be a significant initial step forward for the personal data protection in the Philippines, it is also perceived by some as a stop-gap measure because this guideline is still a Department Administrative Order by DTI and Congress has yet to pass a law on such concern. . 2.5 Philippines and Collaboration India: From Competition to Philippines have been competing over outsourcing business opportunities for the U.S. and European market where clients seek English proficient personnel. The newly formed partnership agreement between BPA/P and NASSCOM will shift the relationship of the two countries from competition to collaboration and they will be jointly working towards greater success in global outsourcing market where the large demand expansion almost guaranteed.

It will be a great advantage for the Philippines to be able to learn from the best practices of India which is ahead in BPO businesses. Main areas of collaboration agreed are as follows; Strategic Communication (of the benefits of liberalization in general and outsourcing of business processes in particular) Geographic Risk Mitigation (Philippines and India as a Geographic mitigation package) Shared Best Practices and Adherence to International Standards Data Security and Privacy Workforce Development Collaboration and Cooperation Infrastructure Improvement 3 Possibilities of Back Office BPO from the Philippines for Japanese Market While back office BPO for English speaking world, especially for US market is rapidly growing, is Japan included in the Philippine BPO industrys target? For U.S and European companies have been achieving cost reduction by utilizing global resources, it is inevitable for Japanese companies to outsource their non-core operations to match the cost competitiveness. However, we found out that the number of Philippine based companies offering Back Office BPO to Japan market was really limited. It is also the fact that in BPA/P marketing strategy Japan, a non-English speaking market, is not a priority target even in their market diversification strategy to expand reach to non U.S. market. 3.1 Geographical Advantage: Not Utilized at This Moment From the Philippiness perspective as BPO service provider, an obvious advantage of servicing Japan compared with U.S. is geographical proximity. For Philippine based companies to provide services to U.S. clients in the same working hour with them, employees in the Philippines need to work midnight, so-called graveyard shift. For Japanese market, however, almost normal working hours can be applied due to only 1 hour time difference. Companies which already have operations of BPO service for Europe and North America can better utilize the facility by servicing U.S. customers at night time and for Japanese customers in daytime.

In early September 2006, a delegation from Indias National Association of Software and Service Companies (NASSCOM) lead by its Chairman Mr. Kiran Karnik (in the picture, top) visited the Philippines. During the visit, Mr. Karnik signed a Memorandum of Agreement with BPA/P Chairman Mr. Bong Borja (in the picture, bottom) to establish cooperative and collaborative relationship between these two industry associations. NASSCOM has over 1,000 member companies (seven times as large as BPA/P) and it has been the key driving force behind the global success of Indias ITS/ITES industry. NASSCOM estimates Indias export sales of software and services in 2006 to be about US$ 24 billion, and is targeting to achieve US$ 60 billion in 2010. Mr. Karnik delivered a key note speech and also joined a panel discussion at BPA/P-NASSCOM Conference (picture on the upper right). He said that the global outsourcing ecosystem serves only about 10% of the total outsource-able volume today and therefore, the potential of outsourcing service market is still huge. For years, India and the
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Source: Business World, article on Aug. 9, 2006

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JETRO Philippine IT Industry Update 2006 No. 5 (10/15/2006) In addition, when you need business trips between Japan and the Philippines, it takes only 4 hours from Manila to Narita and vice versa. If you leave Japan around 9:00am, you can arrive in your office in Metro Manila by 2:30pm. It means your afternoon of the traveling day could still be used for some productive activities. For businesses that may require relatively frequent trips between Japan and the outsourcing destination, such geographical proximity would mean significant benefit compared with having to travel to India. 3.2 Possible Areas of BPO for Japanese Companies Now, if we compare the Philippines with Dalian, China where it has almost the same geographical proximity, we cannot deny the Philippines is far behind in terms of the number of Nihongo capable personnel. For back office operations that are not totally routine task, communication with Japanese counterpart using written Nihongo such as email will be required daily. As a matter of fact, it is quite difficult to hire many JLPT (Japanese Language Proficiency Test) Level 1 certified or equivalent people here in the Philippines. If a Philippine based BPO service company needs large number of Nihongo capable resources, there would be no choice but to employ Japanese nationals living in the Philippines who tend to cost higher than hiring Filipino personnel, making it difficult to achieve the desired cost reduction. Large scale BPO that requires Nihongo capable human resource will be impractical to locate in the Philippines at this time nor in the near future. However, if a company could identify and isolate some business processes in which Nihongo is not required or only English is required, outsourcing to the Philippines will be a likely scenario even by Japanese companies. NESC, which is featured in this case study section later, is a good example of successful back office BPO by a Japanese company in the Philippines. Also, a major Japanese trading firm is utilizing Filipino manpower focusing on the entry of its foreign trading partners financial data and to integrate them into the companys internal credit rating system in the headquarters in Japan. It is also possible for Japanese companies with global operations to locate primarily English language based BPO center in the Philippines in which relatively small scale Nihongo based services team may be located too. For example, by consolidating Human Resource (HR) services of a company that operates in many different countries around the world into one center, communication and collaboration among personnel handling each country would be much easier, and you have better chances of accomplishing the global implementation of company-wide rules and standardization. Although we were not able to visit and interview, IBM Business Solutions, Inc., a subsidiary of IBM Philippines is 9 providing HR related services to IBM Asia Pacific from Manila delivery center which has more than 700 employees. There are 48 people including 16 Japanese nationals servicing Japan operation. Among the non-Japanese employees, 7 people are JLPT Level 1 and 5 and 8 people are JLPT Level 2 and 3 respectively 10 . Many of International HR related
They also provide HR related BPO services for Procter & Gamble (P&G), Lenovo and Kodak. 10 Source: Reply to our questionnaire from IBM Business Solutions via E-mail
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operations has been outsourced to this center from IBM Japan. Locally hired Japanese and Nihongo capable Filipinos are providing services in Nihongo. We heard from a former Japanese employee of IBM Business Solutions who used to work for expatriates support of IBM Japan that people who are in charge of the same task for each country such as Korea, China, Austria, Singapore and Japan are working in the same office next to each other and communicate very frequently to accommodate each client; i.e. IBM employees of each country. It is difficult to express quantitatively but those who are working there could feel the advantage of being in one place. Furthermore, though it is also difficult to quantify, many Japanese who experienced working with Filipino comment Filipino and Japanese have a good compatibility to work together. There are many Japanese who appreciate working with Filipinos who are generally very friendly, have little anti-Japan sentiment, cheerful, joyful, earnest and fast to learn new things. For Japanese companies operating globally having offices around the world, it is worth considering Philippines as a location to outsource their Back Office operations. In the next section of Case Studies, we will feature a Japanese company that has successfully outsourced their back office business process to the Philippines and two Filipino companies which are planning or considering their entry to Japanese market.

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JETRO Philippine IT Industry Update 2006 No. 5 (10/15/2006) 4 Case Studies in the Philippines as well as Filipino human resource management long before they made decision about BPO since they have been employing many Filipino seafarers for their shipping line operations12. Although the BPO industry players in the Philippines are expressing concern over manpower supply shortage as the most serious challenge, Mr. Araya says he has not felt such for NECS operation. They can easily hire college graduate personnel who have English skill and computer literate. NECS has so far been enjoying high retention rate, according to him. (On the left side of the bottom picture is the Deputy General Manager Mr. Jonathan R. Manucat.) While their main business currently is B/L data entry for NYK Japan, they are considering accepting the same operation from other NYK branches abroad and also to offer this service to other non-NYK companies. They already had some visitors from Japanese companies which were interested in outsourcing services. Mr. Araya shared with us lastly that NESC has been highly appreciated by NYK headquarter, a world leading logistics company, so they are very confident to provide the same level service to expand their business to customers in other countries or other companies. 4.2 Infinit Outsourcing Inc (Infinit-O) Infinit Outsourcing Inc (Infinit-O) was established in October 2005 by Mr. Richard Eldridge (on the left in the picture) and Mr. Manolo Aquino (on the right in the picture) who are both BPO experts with over 10 years experience providing BPO services to foreign clients. As of October, 2006, they have 45 employees and plan to increase over 100 next year. They are also considering establishing another base in Cebu in addition to their current operation in Makati. Infinit-O targets small to medium enterprises (SME) market and also focuses on providing higher value BPO services than simple data encoding type of services. Typically, today, the majority of the large enterprises have strengthened their cost competitiveness by offshoring work to low cost countries such as India or the Philippines but SMEs are only now beginning to adapt such a similar approach. Mr. Aquino noted SMEs are now realizing they must go into offshoring too but they are at a loss, not knowing where to turn to and where to start. This is the business opportunity Infinit-O wants to capture. Services offered by Infinit-O require deeper knowledge and higher skills in the specific domain than the more common business processes that are outsourced such as data entry, date conversion. For example, investment research and analysis service covers the research of stock prices,
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4.1 NYK-Filjapan Shipping E-Services Corp. (NESC) NYK-Filjapan Shipping E-Services Corp. (NESC) located in the port area of Manila City undertakes Bill of Lading (B/L) data entry for all liner ships of NYK Line (NYK), issued in Japan. NESC is a 100% subsidiary of NYK-FILJPAN SHIPPING CORP., a joint venture of NYK and TDG (Transnational Diversified Group) 11 and was established in 2000. They started the BPO operation from a small scale and expanded considerably in last two to three years because both the productivity and cost savings achieved by NESC was highly appreciated by the NYK headquarters in Japan. As of September, 2006, 120 employees are engaged in B/L entry operation for Japan. Their core operation is to input B/L and compute shipping fare based on information sent via image files or FAX, and then send the processed B/L data back to Japan. They have an established process divided into teams of Rating team and Data Entry team. Data processing time per B/L is normally around 10 to 15 minutes. This means that it takes 10 to 15 minutes per B/L from the moment NESC receives original B/L document, i.e. image file or FAX from Japan to the moment they transmit the data to Japan after they performed shipping rate computation, data entry and verification. Input data verification is performed by both the data entry staff and another person. They handle 17,000 B/Ls monthly on an average basis and their error rate is as low as 0.3%. They are still aiming to achieve even higher accuracy. NESC says that NYK has gained more benefits than just cost reduction and quality improvement through offshore outsourcing. By having to have an offshore team handle the data entry, NYK in Japan also achieved proper documentation and standardization of business processes. In the company tour we observed their workplace and were impressed seeing young Filipino staffs concentrating on their work in their tidy and spacious office. (picture: top) According to the NESC Executive Director Mr. Araya (on the right in the picture), it was quite natural for NYK to transfer B/L entry operation which use only English to the Philippines. That is because they have already been quite familiar with business operations
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A Filipino own company group which has business from logistics, ship management, flight related to IT. http://www.tdg.ph/

Their expectation for Filipino seamen are high, and NYK and TDG funded to establish NYK-TDG Maritime Academy in Camlubang, Laguna in 2007. Its cornerstone laying ceremony was leaded by President Arroyo and former President Ramos on November 2005.

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JETRO Philippine IT Industry Update 2006 No. 5 (10/15/2006) corporate data and relevant information on the internet, in order to , analyze the data gathered and report to the clients potential stock movements.. Clients in the U.S. send research request in their evening time and they can receive the analysis report by the next morning. Another example of Infinit-O services is medical claims processing. Infinit-Os personnel check the consistency between the diagnosis and treatment on the medical claims sent by their clients. Medical claims auditing is performed by people with medical expertise such as nurses and medical allied personnel. Mr. Aquino emphasized in our interview that the most important factor in outsourcing business is building mutual trust between the client and the service provider. At Infinit-O, the usual engagement contract is for one year but most BPO customers renew the contract and continue long term relationships. Satisfied customers usually renew the contract and often expand their operations and generate leads to new customers by their referrals. Infinit-O currently services customers in U.S., Australia and in the Philippines but is strongly interested in expanding its reach to Japanese market. They envision that a realistic approach would be tapping the market by addressing the outsourcing needs of international companies with presence in Japan by taking advantage of Filipinos English capability. A specific possibility would be processing Bills of Lading (B/L) for global shipping companies. Infinit-O considers having a Japanese liaison personnel, if necessary, to lead a team of 10 to 20 non-Japanese speaking BPO team. For the Japanese market, their entry approach is to start from simple work such as data entry and gradually moving up to higher value services. (Website: www.infinit-o.com) 4.3 Re:source Partners (RSP) RSP is a Filipino company providing Design Process Delivery for the architectural, interior design, engineering and construction industry. We asked what triggered them; originally a design office mainly targeted local clients, to launch outsourcing business for foreign design offices. Managing Director & COO Jaylou Marie R. Hernandez (on the left in the picture) shared with us that they started to consider joining the BPO business while they were providing corporate interior design services, which is their home ground, to leading foreign BPO companies coming into the Philippines. (On the right of the picture is Director Client Services, N. America and Japan)
13 by architects. In architectural design, schematic design there is a process which requires tedious and bulk construction drawings. By outsourcing to them, architects will be able to have more time to communicate with clients and concentrate on primary designing, at the same time achieving cost cutting. There are clients who have achieved savings of as much as 40% to 60% in production cost. They say Design Process Outsourcing is the one method to strongly support architects, then by all means to save on cost, architects may seek the support in outsourcing countries. They also provide services like digitization of old paper drawings by using CAD software and visualization of buildings under designing, leading to perspectives, still images and animation.

RSP is conducting recruitment continuously to be able to have the best people. They hire graduates from BS Architecture so that their employees are not merely CAD operators, but skilled and technically competent architects who can analyze and assess the constructability of their clients designs. Security to prevent clients drawing data leakage is being paid the closest attention and they are ready for the faults by mirroring servers that are located in Makati and Ortigas office. To maximize the resource of pricey CAD software (mainly AutoCAD and 3D Revit is implemented partially) and hardware, they plan to move on to shifting working schedule while increasing workforce currently with 200 people. Current clients of RSP are mostly design offices which produce high rise buildings more than 40 floors and office interior design. The main market is Middle East, where there is currently a boom in high rise building construction, and Hong Kong. Since all over the world, especially in Middle East, many Filipinos are working as architects and have good professional reputation, it was very smooth to get the first client in Middle East. This client has ordered them seven projects including a hotel, a hospital and a shopping mall. In the latter half of 2006, they start marketing to US, and then the plan of 2007 will be for expanding their business into Europe and Asia Pacific aside from Hong Kong, especially for Japan market. Currently its preliminary research is being conducted. When they get to enter Japan market, staffing a Japanese architect is already planned. (Website www.resource-partners.com) JETRO Philippine IT Industry Update 2006 No. 5 END

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Their service is to undertake all design processes after

This is a process In American architectural design process. It is like in between fundamental plan and basic plan in Japanese process. Source: http://abeke.net/projectphase.htm

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