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October 2009 | Outsourcing Blog | BPO Industry Updates and Articles

There is no stopping the outsourcing industry in the Philippines, not even the global financial crisis.

In the Global Services-Tholons study entitled “Top 50 Emerging Global Outsourcing Cities”, the Philippines has been ranked second, next to India, in the list of Top 5 Offshore Nations. China, Ireland, and Brazil also made it to the list.

The Philippines in the global outsourcing scene

The country first made its presence known in the global outsourcing scene as an ideal destination for voice-based services. Through the years, it has evolved into a hub not only for contact centers but also for non-voice BPO services including IT, back-office functions, as well as medical, legal, finance and accounting, and human resources outsourcing. Also, Western companies which are struggling to stay afloat during these rough times feel compelled to outsource business tasks as a cost-cutting measure, and are discovering the country as the ideal offshoring destination. That is why there is an ever increasing demand in the outsourcing industry.

In 2008, the BPO industry in the country had registered a total of US$6 billion in revenues, and employed more than 250,000 people. With an estimated revenue of US$7.3 billion by the end of 2009, it is predicted that the Philippine outsourcing industry will see continuous growth and will remain resilient in the current global economic downturn.

However, the report revealed that three cities in the Philippines - Pasig City, Quezon City, and Mandaluyong City - were removed from the list of top emerging outsourcing cities. This may be the case, but Manila-NCR is still included in the Top 8 Global Outsourcing Cities (ranked no. 4). When it comes to the Top 50 Emerging Global Outsourcing Cities, Cebu City reigns supreme for the second year running.

The Philippines' large pool of English-speaking and highly skilled individuals, affinity with Western culture, low labor and operational costs, and continuous support from the government are all major factors that make the country an ideal outsourcing destination. By looking at the findings of this study, there is no doubt that the outsourcing industry in the country will continue to flourish in the years to come.

In a given discussion regarding the outsourcing industry, cities like Manila, Bangalore, and Malaysia would typically be under the microscope. The fact that such a discussion two to three years ago would be completely different today is testament to the speed at which the industry advances and the number of variables it involves. The debates regarding advantages and risks of outsourcing to one city or the other, for instance, is changing for two main reasons: the arrival of new outsourcing locations such as Cebu, and the development of multi-location strategies. Whether it be call center outsourcing, medical transcription, or content moderation, the effects of outsourcing jobs to foreign countries involve new innovations that are shaping the landscape of cities across the globe.

As the current economic crisis extends its blight throughout Asia, it has provided a catalyst to measures undertaken by affected nations to fortify outsourcing capabilities. Given the interdependence of today's global community amid an economic downturn, this has directly influenced decision-makers that weigh the pros and cons of outsourcing. Tier-2 and tier-3 cities within Asia are abuzz as outsourcing jobs to foreign countries continues to prove as the solution for many struggling businesses, namely in the US. Though many analysts have pinned outsourcing as a solution to uplift the standard of living, many who have lost their jobs to foreign countries wonder, how does outsourcing help America?

Advantages and disadvantages of outsourcing

The negative effects of outsourcing jobs is displayed in Forrester Research's dim forecast of 3.3 million service jobs in America going offshore by 2015.  As nations under pressure struggle, new cities are emerging to heed the calls for offshore services at lower costs; as displayed in Tholon's survey of the “Top 50 Emerging Global Outsourcing Cities”. China, which is among the Asian nations suffering the most from the global recession, has begun to provide tax breaks and subsidies to maximize the advantages of outsourcing to foreign countries. Shangai, Beijing, and Ho Chi Minh City all occupy spots in the top five on Tholon's survey. Meanwhile, plagued with terrorists attacks and scandals, India is under pressure to maintain its place as the top destination for outsourcing. Leading the emerging destinations list is Cebu – a city that, only three years ago, had but a few highrise buildings dedicated to call center outsourcing in its central IT hub. Boasting a significantly more affordable labor force, quality graduates, and a relatively relaxed coastal environment, Cebu is currently an outsourcing hotspot with advantages that cannot be ignored.

With more and more quality outsourcing destinations arriving on the scene, the advantages and disadvantages of outsourcing depend highly on what service is to be outsourced. Where once outsourcing jobs to foreign countries meant packaging all services to one city, service providers are now realizing the advantages of utilizing a multi-city model in which specific service lines are assigned to the most suitable locations. Upon weighing the pros and cons, the multi-city model may prove to be far more efficient. This means that there are now “global Business Process Outsourcing providers” that clients can consider, and, more importantly, local providers need to be able to contend with.

Twenty-five percent of existing BPO service providers will cease to operate in 2012. This is based on a recently published Gartner research which is part of the Special Report entitled “Assess and Manage Vendor Risks to Protect Your Business”. This can be attributed to the current economic downturn, lapses in outsourcing contracts, and not being able to adapt to standardized delivery models.

Vendor risk factors

With these factors in mind, Gartner noted that BPO buyers must take caution before venturing into any new outsourcing contract, and should be aware of the six warning signs indicating that a service provider is not stable enough to maintain a long-term outsourcing relationship:

1. Unprofitable outsourcing deals - According to the research, “Some BPO providers are carrying unprofitable contract portfolios, largely stemming from too-much, too-soon pursuit of deals, without much thought as to how to transition them to a standardized, rationalized, profitable state of ongoing operations.”

2. Inability to get new projects - It is a good sign if the service provider has the ability to constantly take on diverse requirements of different clients.

3. Loss of major contracts to other service providers - Losing a “marquee” deal spells trouble on the part of the vendor. “It will always be prudent due diligence to seek and gain a reference from any current anchor clients to understand how committed they are to the vendor and their experiences in dealing with them.”

4. Inability to bid on new BPO deals because of lack of enough funds - Some service providers cannot take on new BPO contracts because of lack of enough capital. Moreover, the so-called “lift and shift” strategy in which a business process is moved offshore to reduce costs because of lower salaries will eventually create problems for service providers that rely on it because they still need capital for the resources required to do that outsourced task.

5. Exposure to banking / finance sector - With the current financial crisis, those service providers with revenues coming from the finance or banking sector will be in a tight spot. If the outsourcing partner has more than 85 percent of revenue from the banking sector, the buyer should know if this will affect their business operations.

6. Increasing levels of contract cancellation and insourcing - Gartner says that before signing an outsourcing contract, buyers must come up with a plan on what to do when contract ends. Moreover, contracts must be crystal clear, tackling not only the issues that may arise for the first year but also the steps to take in case the buyer decides to expand or have a new project.

During these tough times when outsourcing has become an avenue for companies primarily to cut costs, it is essential to pay close attention to your outsourcing partner. Know the warning signs and be constantly aware of what is happening in the BPO industry. Have a clear picture of what you want to achieve before signing any outsourcing contract.

Effective communication plays a major role in the world of outsourcing where people with different nationalities, culture, and interests work together to achieve their business goals. While it is now easy and convenient to talk to people overseas, thanks to advanced technology, problems are still being encountered because communication best practices are often neglected. This eventually hinders BPO players to establish and maintain long-term outsourcing relationships.

In the first of four-part Best Practices Series 2009 published by Outsourcing Center entitled “Four Communication Best Practices Often Overlooked in Outsourcing Relationships”, 56 buyers who participated in the study noted that communication problems arise from:

1. root cause analysis

2. not being able to understand the buyer's priorities

3. agreeing (or not) on the importance of “noise” or customer's feedback/complaints

4. service provider's failure to listen to the buyer

Communication best practices in outsourcing

The key to having a successful outsourcing relationship is to reach a shared understanding of each other's goals. To achieve this, service providers and buyers must adhere to the four communication best practices that are often overlooked in outsourcing:

1. Service providers must take the “noise” into account. They pay so much attention on meeting the requirements that they fail to look into what customers think about the deliverables, so it is the buyer who ends up dealing with customers' complaints. Providers must understand that “noise” is significant in establishing an outsourcing relationship.

2. Create a communication plan for the period after the transition phase. The relationship usually runs smoothly at the start of the project when both parties understand each other's goals. The problem arises after the transition when the business operation expands and/or venture into new projects. Participating buyers said that providers are not able to identify which tasks are critical for the project and in accordance to the buyer's objectives. The best practice to overcome this is to develop a communication plan for the period after the transition phase so the service provider can determine which should be prioritized.

3. Outsourcing contract should be “crystal clear”. To avoid conflicts, there must be no room for vagueness or ambiguity when it comes to the outsourcing contract. If an issue arises, both parties must identify the cause of the problem and resolve it.

4. Mutual trust must be established. Buyer and service provider need to demonstrate that they truly listen and understand each other. For service providers, pay attention to the buyer's issues and make sure to resolve them. The same goes to buyers. Communication entails two or more parties, and having mutual trust is important to overcome the problem.

This study is a clear indication that communication is more than just talking to the service buyer or provider. It is about understanding each other's issues and concerns and coming up with solutions that will work for both parties. Culture and interests may vary, but shared understanding of objectives must be established in order to develop an outsourcing relationship that is both long-lasting and beneficial to service buyer and provider. The important thing is for buyers and service providers to keep the best practices in communication in mind to avoid problems.