In a recent statement, Benedict Hernandez, President and CEO of the Business Processing Association of the Philippines (BPAP), said the rejection of the anti-outsourcing bill in the US is proof that outsourcing is here to stay and will continue to help companies in the Philippines and the US.
Anti-outsourcing bill rejected
The bill was unable to get enough votes to be approved with 56-42, and was dismissed by the US Senate.
The act aims to provide more employment opportunities for people in the US. However, companies that are moving jobs offshore will no longer receive tax breaks and other benefits from the US government.
The outsourcing process was seen to have helped US businesses to stay afloat during trying times. In fact, Hernandez added that outsourcing has little to do with job losses in the US. Instead, it helps those businesses reallocate resources instead of spending them on additional personnel.
Hernandez highlighted several points from a study done by Matthew Slaughter, an economist at Dartmouth’s Tuck School of Business. He stated that for every job subcontracted abroad, at least two more are created in the US.
The annual revenue of the outsourcing industry in the Philippines is predicted to grow $25 billion and provide 1.3 million jobs. In 2011, the IT-BPO industry contributed $11 billion in revenue and employed about 640,000 Filipinos.
Decline in BPO activity
According to the EMEA (Europe, the Middle East, and Africa) TPI Index released by the Information Services Group (ISG), the volume of outsourcing deals has declined 29 percent over the years. ISG added that the total contract value dropped 21 percent during 2011’s Q2 up to present. For this year alone, outsourcing deals dropped 11 percent during Q2.
Two outsourcing segments were identified at ComputerworldUK as to have noticeably dropped in total contract value. IT outsourcing (ITO) posted a 26 percent decline and dropped to €9.1 billion. On the other hand, business process outsourcing (BPO) fell to €5.1 billion, a 27 percent decline.
Duncan Aitchison, EMEA Partner at ISG, said the situation is driven by the lack of mega-deal activity and fewer contract deals in general - even small ones. He added that there is still a possibility for the UK to recover as he sees that companies based in the region will turn to multi-sourcing to resolve outsourcing issues.
Meanwhile, the UK region was hit hard by the unstable economy in the eurozone with outsourcing deals dropping 16 percent year-on-year. KPGM Institute noted that those who are planning to outsource have in fact dropped 25 percent from 2010. Moreover, 12 percent were not happy with their service provider, while 46 percent remain unsure.
Emerging Markets Nab Super-sized IT Outsourcing Contracts
According to the 2012 Global TPI Index, an upsurge in super-sized IT outsourcing contracts with values reaching $1 billion and up from companies based in the US and Western Europe were sent out offshore. In fact, during the same period of last year, only one mega deal was moved offshore, compared to this year’s five big ones. Three of which were subcontracted to Brazil and India. Four of the deals were new ones, and one was restructuring.
John Keppel, Partner and President of Research and Managed Services at ISG, said mega-deal activity varies almost every quarter, but the offshoring destinations are noteworthy. He added that emerging markets will shape the future of outsourcing and that the US and Western Europe have a major influence on the impending restructuring activity within the sector.
Moreover, 30 percent of the mega ITO deals’ global contract value amounting to $6.3 billion awarded in Q2 2012 were from the telecom, banking, and consumer goods industries. Mega-partnerships with annual contracts valued $100 million or more were also initiated during the second quarter.
Growth of IT-BPO industry
Senator Edgardo Angara recently said the Information Technology and Business Process Outsourcing (IT-BPO) industry of the Philippines can be the key factor to drive the growth of the economy.
He added that the IT-BPO industry’s robust state was able to go beyond the previous predictions based on the public-private partnership [PPP].
Furthermore, the senator shared information from the Business Processing Association of the Philippines (BPAP) which stated that the IT-BPO industry of the country was able to grow 24 percent from 2010, posted $11 billion in revenue in 2011, and provided 638,000 or 22 percent more jobs.
BPAP also anticipates that the industry will contribute $25 billion until 2016, and account for nine percent of the country’s gross domestic product (GDP). It will also represent 10 percent of the global IT-BPO market and provide 1.3 million jobs to Filipinos.
Angara noted that the IT-BPO sector rapidly grew in terms of work force and revenues over the past decade and has become one of the leading sources of jobs. He recommended that the government should exert extra effort to maximize the industry to its full potential.
The first quarter data report recently released by the World Trade Organization and the United Nations Conference on Trade and Development showed that even if the Philippines has a robust business process outsourcing (BPO) sector, it’s still far from matching its neighbouring countries in terms of the overall commercial services segment.
BPO sector robust but still outdone by fellow Asian regions
Processes like BPO, financial services, tourism, transportation, as well as shipping and telecommunications make up the country’s commercial services export segment. It posted an 8.9% growth rate for this year’s first quarter, but was outdone by fellow Asian regions such as Indonesia, Malaysia, Singapore, and Thailand.
During the first quarter of 2011, the Philippines traded $3.8 billion worth of commercial services, while it reached $4.14 billion in the same period this year. Meanwhile, the Southeast Asian region was led by Singapore with $28.16 billion. Thailand posted $11.9 billion, Malaysia with $9.1 billion, and Indonesia with $5.6 billion.
The country was still at the bottom in terms of importing. Last year, the country imported $2.78 billion worth of services for the first quarter, whereas it increased 7.9%, reaching $3 billion in the same period this year. Nearby countries like Indonesia posted $8 billion, Malaysia with $10.3 billion, Thailand with $12.7 billion, while Singapore posted the largest figure at $27.5 billion.
The data also stated that the country’s commercial services surpassed the global rates in exports (3%) and imports (5%).
PH President Eyeing More Foreign Direct Investments
Apart from creating more jobs and improving the country’s economic state, President Benigno Aquino III and his administration are working on attracting more foreign direct investments (FDI) to gain more than $10 billion a year for the industrial and services sectors.
According to Department of Trade and Industry (DTI) Secretary and Board of Investments Chairman Gregory Domingo, 24 business investors from countries such as Russia, Japan, and Turkey arrived in the Philippines during the first half of 2012 and they are quite interested in shipbuilding, agriculture, energy, steel, garments, and business process outsourcing (BPO).
The Board of Investments’ earlier projection of P400 billion is aligned with the $10 billion FDI goal.
The 2012 Investment Priorities Plan identifies 13 economic functions namely: agriculture/agribusiness and fishery, creative industries/knowledge-based services, shipbuilding, mass housing, iron and steel, energy, infrastructure and PPP, research & development, green projects, hospital and medical services projects, motor vehicles, strategic projects, and disaster prevention and recovery projects, which will receive tax grants from the government.
Domingo noted that President Aquino’s support played a huge role in the development of the country’s position in the global investment community.
2Q12 Recorded Improved APAC Outsourcing Market
The 2Q12 Global TPI Index data published by technology insights and market consultancy firm Information Services Group (ISG) states that even if there were fewer deals closed during the second quarter, the value of the entire outsourcing market increased.
An increase of 7 percent was posted from 2011 Q2 and 2012 Q1, based on commercial contracts amounting to $25 million and above, reaching a total contract value (TCV) of $21.4 billion. Developments in the Asia Pacific region’s business process outsourcing (BPO) industry fuelled the growth.
On the other hand, the industry saw a decline in contract activity during the second quarter with only 173 transactions. This is a 22-percent decline year-over-year and 14 percent sequentially. However, the market saw large contract awards with TCV valued at $1 billion and above. Mega partnerships were also established during these periods, with contracts having an annual contract value (ACV) of $100 million or more.
According to John Keppel, Partner and President at ISG, the global outsourcing market improved year-over-year but it wasn’t able to match last year’s outstanding figures in value and activity.