Source: Computerworld, September 15, 2003

Country Analysis: Philippines

The Philippines, one of the largest offshore destinations for business process outsourcing (BPO), is home to a USD $350 million¹ offshore outsource software services sector.  The primary focus of the Philippines software development firms is on systems and application development and maintenance of legacy applications.  The Philippines strength lies in its cultural affinity with the US.  The Philippines, with their highly westernized culture (a US protectorate for nearly 50 years), along with the fact that the country is the third largest English speaking nation makes it an excellent destination for those looking to easily and cheaply transition low-level maintenance work to an offshore location.  Another aspect that favors the Philippines as a offshore outsource services location is that it is seen as a safety valve against possible service disruptions due to political tensions in larger locations such as India or Russia. 

The downside for the Philippines software services sector is that it lacks the size and scale of its primary competitor, the Indian software industry.  The main problem for the industry is that the Philippines need more software development companies.  Currently, there are only about 30² software companies focusing on software development for the offshore market.  This compares unfavorably to the almost 800 software companies currently focusing on the software services sector in India.  Also, none of the Philippine software companies possess major certification such as Carnegie Mellon Universities Capability Maturity Model (CMM) certification.  While most of the major Indian firms are certified at level 5.  Another major issue that faces the software services sector is the security situation and political instability in the Philippines.  The nation has been hit with a guerilla insurgency which gives pause to foreign corporations when choosing a partner in their offshore software development site.  Although, India, Russia and China also have their share of political turmoil, their size and stature make it a much easier choice when companies pick locations for offshore work.  In the end, the only solution for the Philippines is to continue offering low-cost, dependable solutions for multi-national corporations (MNC's) BPO needs.  This will allow the nation to pick up more business to scale up its industry and allow foreign corporations to overlook any political or security issues. 

Human Capital

Although the Philippines has an English-speaking, highly skilled workforce (86 Universities which produce 380,000 graduates annually³), the nation needs more software engineers.  Currently, the nation only has about 30,000 software programmers, working for about 30 software services firms.  The university system and IT training schools produce about 10,000 new software graduates every year.  This compares poorly with India and China which produce 5 to 7 times that number of software graduates annually⁴.  This means that right off the bat, the nation cannot compete for large software outsourcing contracts due to limits on the size and scalability of Philippines software firms.  Wages for Philippine software programmers compare favorably to Indian and Russian programmers with the average annual programmers salary at USD $7,250⁵.       

Telecommunications Infrastructure

The Philippines telecommunications sector was deregulated in the early 1990's, leading to a rapidly expanding market.  However, even with deregulation, the system remains insufficient and does not compare favorably with other South East Asian nations such as Hong Kong and Malaysia.   The Philippines has about 4.0 lines (per 100 population), for a total of 3,296,000 lines⁶ for the entire country.  The mobile phone market has increased by over 13 million subscribers in fours years, to a total of 15 million subscribers throughout the country by the end of 2002⁷.  In terms of Internet users, the total number has increased to over 4 million by the end of 2002, compared to just over 1 million in 1998.  However, the penetration rate for PCs remains low, with 20 PCs per 1,000 people⁸.     

Government Support

The Philippines government started taking initiatives after witnessing the success of the Indian software services sector and has started to promote itself as a viable offshore software outsourcing hub.   To increase visibility of the software services sector, the government formed the Information Technology and E-Commerce Council (ITECC), an interagency government and private body sector which advises the Philippine government on IT and e-commerce policies and projects.  The focus of the governments information and communications technology (ICT) policy is on five areas: enhancing the Philippines information infrastructure; providing a regulatory environment conducive to growth; promoting services such as call centers, BPO, software development, data transcription; and developing IT parks and zones.  The Philippine government encourages growth in the ICT sector through favorable tax and regulatory policies designed to encourage investment in the country.

Industry Association Support

Outsource Philippines is an organization which acts as a information gateway to the Philippines major ICT activities of BPO, Call centers, transcription services, software development and maintenance.  This organization purports to fulfill the same capacity as India's NASSCOM, which is to provide potential outsourcing clients with industry sector and company information.  This organization also promotes certification within the Philippines ICT industry to improve the overall level of service that the associations members provide to clients.  Finally, the organization acts to promote the Philippines IT services sector by lobbying the Philippines government and foreign governments on behalf of Philippines companies.

Regional IT Cluster

Almost all of the Philippines offshore software services firms are located in one area, the National Capital Region (Metro Manila).  There is very little economic development, and almost no software services firms outside of the Metro Manila region, especially in the Southern Philippine islands.  The reasons for the concentration of software services firms are the concentration of human capital available in the Manila area (especially educated IT professionals), the infrastructure available (especially telecommunications infrastructure), the location of the central government in Manila, and the easy availability of flights into and out of Manila.