Outsourcing in the Philippines: The National Capital Region December 2008 The emergence of the Philippines as an outsourcing destination rests largely on the continued development of the country s national central business district the Manila National Capital Region (NCR). However, not known to many is the fact that Manila NCR is comprised of several cities and a lone municipality, each with a distinct set of characteristics and collectively, it is considered as the backbone of the country s outsourcing services industry. This publication contains copyrighted material. Please do not re-use or reprint anything within this document without written consent from Tholons, Inc.
The Philippines National Capital Region The National Capital Region of the Philippines was referred to as Metro Manila during the late 1980 s. The term was used to collectively identify and group the capital city of Manila together with its surrounding municipalities and cities. Today, as more municipalities in the NCR have transitioned to cityhood status, the Philippines bureau for local statistics more commonly identifies the area as the NCR. Manila NCR is comprised of 16 cities and 1 municipality in a land area of about 620 square kilometers. It has a total population of more than 11 million people. Removing four outlier cities, the average population of each city is estimated at about 430,000 people. The larger cities in terms of population and land area include Manila City, Quezon City and Caloocan City while the Municipality of Pateros has the smallest population. Location Population Land Area (sq/km) Manila National Capital Region 11,496,461 619.7 Caloocan City 1,378,856 55.8 Las Piñas City 532,330 32.7 Makati City 510,383 21.6 Malabon City 363,681 15.7 Mandaluyong City 305,576 9.3 Manila City 1,660,714 25.0 Marikina City 424,610 21.5 Muntinlupa City 452,943 39.8 Navotas City 245,344 8.9 Parañaque City 552,660 46.6 Pasay City 403,064 14.0 Pasig City 617,301 48.5 Pateros (Municipality) 61,940 10.4 Quezon City 2,679,450 171.7 San Juan City 125,338 6.0 Taguig City 613,343 45.2 Valenzuela City 568,928 47.0 Source: National Statistics Office Industries in Manila NCR Industries in Manila NCR are composed mainly of the following activities: wholesale and retail trade, real estate, business activities and services, entertainment and manufacturing. The unique characteristics of each city enable them to excel and hone specific industries which are often shared and affected by adjacent cities. For instance, Taguig City s manufacturing industry in the food and electronics sector is its primary industry. Though this is the case, its immediate proximity to Makati City, the region s central business district, paved way for the emergence of The Global City Fort Bonifacio which is located inside Taguig City. This area is considered as Taguig s central business district and possesses excellent infrastructure (comparable to Makati City) as 2008 Tholons 2 of 11
well as being strategically located in terms of accessibility to neighboring outsourcing hubs such as Mandaluyong City and Pasig City. Over the last decade, the area was developed by Taguig City s local government unit and positioned the area for the business services industry. Today, the city houses several multinationals such as Dell, HSBC, Deutsche Bank, and Fujitsu among others. The map below shows the primary industries of each location within the NCR. Navotas, Caloocan, Malabon, Valenzuela - Manufacturing Quezon City, Marikina City - Manufacturing San Juan City Manila City, Pasay City - Manufacturing - Entertainment: Hotels and Restaurants Parañaque City - Real Estate Pasig, Mandaluyong, Makati - Business Activities and Services - Real Estate - Entertainment: Hotels and Restaurants Taguig City, Municipality of Pateros - Manufacturing Las Piñas City, Muntinlupa City - Real Estate - Business Activities and Services - Manufacturing Source: Tholons Map: BF Homes Properties 2008 Tholons 3 of 11
Outsourcing in Manila NCR The outsourcing industry in Manila NCR today continues to evolve and expand to cover a wider array of business processing services. Its largest segment in the outsourcing industry remains that of contact center services, distantly followed by smaller niche services in back-office processes in FAO, software development and engineering design, transcription services and animation and graphics design. Factors That Drive Outsourcing in Manila NCR Availability of Labor Pool One of the primary reasons for the emergence of Manila NCR as a destination of choice lies with the availability of labor pool in the region, comprised of about 6 million people. In addition, the region has a steady influx of fresh graduates coming from 270 higher educational institutions with four top-tier universities (Ateneo de Manila University, University of the Philippines, De La Salle University, University of Santo Tomas) being recognized as among the top 500 in the world. 1 According to the National Statistics Office, out of the 270 higher education institutions, about 90,000 students graduate every year in Manila NCR alone. 23% (about 22,000) of these comprise technical graduates while 77% (about 75,000) are non-technical graduates. Graduates from both private and public higher educational institutions are given English as a medium of instruction (MOI) which in turn support the country s contact center industry. English is also recognized as an official language next to its native vernacular of Tagalog - a factor that elevates the country s image as a top choice for providers of voice-based services. However, this does not limit the region only as a destination for voice-based services. In fact, the continued supply of technical graduates as well as graduates that can support non-voice services have also helped drive growth of other outsourcing segments. Though the non-voice BPO segment is relatively smaller compared to the voice segment, its employee base count has a year on year growth rate of 41% from 2004 to 2007. Sound Infrastructure Being the most urbanized region in the country, Manila NCR is also able to compete with global outsourcing destinations due to its sound telecommunications and transportation infrastructure. Three of the country s top connectivity providers The Philippine Long Distance Company, Bayan Telecommunications and Globe Innove all have widespread presence in the region. Competition amongst these providers has also kept access costs competitive, which in turn boosts the region s attractiveness as a service delivery center and particularly for voice-based service providers. The transportation infrastructure, which includes road and rail networks and international connectivity, also makes the region an accessible outsourcing destination. With a reliable transportation infrastructure in place, Manila NCR in effect becomes one big city where labor can conveniently move from different points (cities) within the region. As outsourcing is not limited to a singular or isolated location, road networks and public transportation infrastructure allows for a more fluid movement of employees from across the region. For instance, the subway equivalent of Manila NCR includes three intersecting railways 1 Source: The Quacquarelli Symonds World University Rankings 2008 2008 Tholons 4 of 11
which include the Light Rail Transit 1 (LRT1), LRT2 and Metro Rail Transit (MRT). These railways are one of the most used forms of public transportation in Manila NCR and connect the major points of the region. Likewise, having an efficient transportation infrastructure allows service providers to locate in multiple points within the region, as labor within the transportation system can easily move from destination to destination across the NCR. This in turn allows for service providers to scale within a smaller geographical, providing for easier logistical management. It would be more economical for example, for companies located in Makati to establish a delivery center in a different point in Manila NCR such as Mandaluyong City instead of expanding in destinations outside the region. The Presence of Makati City in the Region During the mid 1990 s, and even before the establishment of the outsourcing in the Philippines, Makati City earned the reputation of being the premier destination for the establishment of multinational businesses. With the presence of such companies in the area, and as many of them selected the city as their headquarters for the Southeast Asian region, multinationals in the outsourcing industry likewise found opportunity for growth in the city. As the global outsourcing industry matured, investments increased in the city due to the growing demand in the sector. It was in this context that the larger Manila NCR was instrumental in facilitating the growth of Makati City as a premier outsourcing destination - by providing much needed labor to meet industry demand. The growth of Makati City as an outsourcing hub also improved the development of the outsourcing ecosystem of the region, and evidenced in the emergence of surrounding cities as alternative destinations. Furthermore, with heightened competition amongst providers, cascading effects on rental costs, labor wages and company incentives to employees likewise followed. These cause-and-effect scenarios between Makati City one of the emerged outsourcing cities 2 in the world and Manila NCR is a fundamental dynamic of the city and the region s development as outsourcing hubs. Cost Advantage Arguably, amongst the most important factors that have led to the emergence of outsourcing in Manila NCR are low costs in labor and office space both of which are essential components in any delivery location. With infrastructure in place and the availability of labor in the area, Manila NCR remains attractive to both service providers and buyers. Salary costs in Manila NCR compares favorably against other Southeast Asian cities as well as destinations in the Asia region. For instance, Singapore and Kuala Lumpur in Malaysia have higher labor wages in both the BPO and ITO sectors compared to the Philippines. This advantage is further magnified for service providers looking for larger headcounts to provide services such as customer support in the English language and back office processes. Recently, the Citigroup announced the expansion of its non-voice BPO segment in the Philippines, where it will double its current employee base from 500 to 1,000 by 2009. In spite of Citi s recent announcement of a 50,000 employee reduction worldwide, plans to expand operations in the country as well as making the country its headquarters for Southeast Asia, remain on track. Though salary cost is not the sole reason for the company s decision to locate in Manila NCR, the Citigroup does indicate that cost advantages in the Philippines as one of the primary reasons for this move. 2 Source: Top 50 Global Outsourcing Emerging Cities 2008 2008 Tholons 5 of 11
Country Location Salary Cost Entry Level BPO Salary Cost Entry Level ITO Philippines Manila NCR US$240-260 US$320 340 India Delhi US$200-220 US$320 340 India Mumbai US$260-280 US$360 380 Singapore Singapore US$1,400-2,000 US$2,500-3,000 Malaysia Kuala Lumpur US$800-1,000 US$1,200-1,600 Vietnam Ho Chi Minh US$260-280 US$340 360 Vietnam Hanoi US$260-280 US$320 340 China Beijing US$260-280 US$320 340 China Shanghai US$260-280 US$300 340 Source: Tholons 2008 In terms of real estate costs, Manila NCR also has an advantage over neighboring locations with Manila NCR averaging about US$2-3 per square feet for Grade-A establishments. This is considerably lower than other cities in the region such as Singapore (US$10-12), Delhi and Mumbai in India (US$9-11) and Hanoi and Ho Chi Minh City in Vietnam (US$5-7). This clear cost advantage in office space rent distinguishes Manila NCR cities from other Tier I cities in Southeast Asian. Recently, CB Richard Ellis Philippines (property consultants), estimated that about 500,000 square meters of new office space were slated for completion by end of 2008 - up from 300,000 square meters last year. This expansion is largely attributed to the growing demand of office space by the local outsourcing industry. Challenges of Manila NCR as an Outsourcing Destination High Attrition Rates (particularly in BPO sector) The outsourcing industry s surge in the NCR has resulted in stiff competition amongst outsourcing suppliers and buyers alike, with Manila NCR supplying low-end bulk services in the voice sector and to a certain extent, non-voice, back-office processes. While labor is plentiful in the region, those most suited for the mentioned service lines are quickly engaged, contracted and fought over by existing outsourcing companies. This is reflected in the high (and rising) attrition rates reported by many providers with a base range of 20-30%. This trend may serve as a disincentive for industry players because of the additional costs attrition entails as providers are forced to increase spending on recruitment and training efforts. With rising attrition rates, companies are also at risk of repeating these costs simply to retain employee bases. Furthermore, the competition which higher attrition rates induces has the tendency to escalate salary across the industry. Diminishing Supply of High Quality Labor Pool The high rates of attrition mentioned may also be reflective of the thinning supply of quality labor in Manila NCR as competition to get the best becomes tighter. While there is a steady influx of graduates in the region, the demand for high quality labor pool has been outpacing supply. In addition, the continued expansion of non-voice services acquiring talent that would have been previously taken by voice-based services also contributes to the diminishing supply of talent - particularly in the country s voice-based BPO sector. According to Business Processing Association of the Philippines (BPA/P) estimates, the industry has seen increasing employment 2008 Tholons 6 of 11
growth rates from 2004 2007 for back-office processes and software development at an average of 60% and 33% respectively, while voice based services has a declining growth rate, though still averaging 52% in the same timeframe. Below is a table showing the growth rate of employees from 2004 2007 per respective outsourcing segment. Outsourcing Segment 2004-2005 2005-2006 2006-2007 Average Growth Rate Customer Care 75% 50% 30% 52% Back Office Processes 50% 60% 69% 60% Data Transcription: Medical/Legal/others 59% 62% 76% 66% Animation & Digital Content 50% 56% 71% 59% SW Development & Engineering Design 23% 35% 40% 33% Source: Business Processing Association of the Philippines Given this situation, expansion windows of existing providers may become increasingly narrow, and as new players continue to locate in the region. Gap Between Academe and Industry While an adequate number of graduates are produced by higher educational institutions in the region, many complete courses that are not directly related or complementary to outsourcing. This requires companies to invest in training and/or re-training new hires so that skill-sets better match industry needs. In a forum convened by the Philippine Chamber of Commerce and Industry held in 2007, a national sense of urgency to bridge the gap between the academe and industries in general was made apparent. The forum acknowledged that the academe must drastically improve the graduate proficiency in the following skills sets: English, Math and Science Technology the basic academic requisites sets needed in the outsourcing industry. Emerging Outsourcing Cities in the Country With the maturity of the global outsourcing industry and resulting increase in competition - service providers are needing to be more stringent in choosing service delivery locations. In the Philippine context, providers are steadily expanding delivery footprints across the archipelago to maximize the country s resources. Though this has been favorable to the industry as a whole, this development has also become a recent challenge for the Manila NCR. For instance, Cebu City, a city in the southern part of the country, is now considered as a top emerging outsourcing destination in the world. In addition, other Tier II and III cities south of Manila NCR - such as Bacolod City, Dumaguete and Iloilo City - are emerging as destinations and continue to take the limelight from the NCR. This may be due in part to early signs of saturation and increasing labor costs in the Manila NCR and as compared to the other city centers in the country. 2008 Tholons 7 of 11
Outsourcing in Manila NCR Cities Affecting Cities Collectively, Manila NCR is seen as the destination of choice for outsourcing suppliers and buyers when looking at the Philippines. Though this is the case, distinct cities from within the region possess unique and individual characteristics. The leading outsourcing cities in the region include Makati City, Pasig City, Quezon City and Mandaluyong City. These outsourcing destinations are characterized by the following attributes: Business Catalyst For instance, Makati City is considered as having the highest concentration of businesses in the country and is reflective of its favorable business catalyst parameter. The city is also headquarters to both multinationals and medium enterprises for operations across the country. However, this does not mean that when establishing in the country, that companies are only looking at Makati City. Since specific dynamics such as having sound infrastructure and strategic position in the region are present in neighboring cities such as Pasig and Mandaluyong these two cities have also emerged as viable alternatives for companies locating in the NCR. Strong Support from Local Government Units Another factor is the support given by local government units to the industry. As an example, Quezon City has developed what is now called the Eastwood City Cyberpark where specific floors of buildings are declared Special Economic Zones. These zones are geared specifically to provide incentives for foreign companies, through favorable duties and tax holidays. This promotes the area as a base for outsourcing providers. Eastwood City Cyberpark now houses companies such as Teleperformance, etelecare, Teletech and IBM Daksh. Also recently opened, is the UP-Ayala Technology Park in the heart of the city where it is projected to house about 10,000 to 15,000 employees. The facility is specifically designed for outsourcing companies and is now home to delivery centers for IBM, Pointwest Technologies and HSBC. The area is still being developed and is expected to be fully functional by the end of 2008. Quality of Life and City Ecosystem The relatively high quality of life present in these cities is another cause of their expansion as outsourcing destinations. Makati and Pasig cities have exceptional recreational and non-work related activities as well as safe environments particularly for. On the other hand, the presence of almost one-third of the region s higher educational institutions is found in Quezon City, giving that city a distinct edge. Though quality of life may seem like a relative factor in a provider s decision in locating, it is nonetheless an essential aspect of a working outsourcing ecosystem. For instance, a family may choose to locate in the above mentioned cities or neighboring cities instead of outlying provinces in the Philippines such as Rizal, Bulacan or Cavite, because of the quality of life present this in turn has the potential to improve the business catalyst and labor pool characteristics of that location. The figure below illustrates how each city s inherent characteristic affects not only its own ecosystem but the ecosystem of surrounding cities within the Manila NCR. 2008 Tholons 8 of 11
High Business Catalyst rating. Developed infrastructure. Makati City Quezon City Large number of HEIs. High population density. Strategic location. (Accessibility to cities located in the north, south east and west of NCR). Mandaluyong City Pasig City Developed infrastructure (at par with Makati City) High Business Catalyst rating. According to the BPA/P, the country s outsourcing industry employed an estimated 300,000 350,000 workers in 2007 where 80-85% of the labor pool were located in the Manila NCR. The table below gives us a snapshot of the major cities within the NCR which are considered as top outsourcing destinations in the region. Rank 2008 Tholons Study Manila NCR BPO Employed ITO Employed Top Outsourcing Companies Present in the City (select) Top 8 Makati City 67,116 10,336 15 Pasig City 26,367 5,472 21 Quezon City 38,352 3,040 Accenture, ACS, Convergys, IBM, ICT, Sykes, West Corp. Alorica, Convergys, Sitel, Sykes, Teleperformance APAC, Convergys, Dell, etelecare, HSBC, Teletech 45 Mandaluyong City 17,978 2,037 Accenture, IBM, Teleperformance, West Corp. - Muntinlupa City 15,341 2,128 - Taguig City 15,581 1,520 AIG, APAC, Convergys, etelecare, Fluor Daniel, HSBC HSBC, Teletech, TELUS, Deutsche Bank - Pasay City 5,034 1,216 Dell, ACS, EXL Service - Manila City 4,075 1,034 IBM, Convergys, Teletech - Marikina City 4,794 304 ICT - Others (NCR) 26,367 3,040 Total NCR 221,005 30,127 Source: Tholons Top 50 Global Outsourcing Emerging Cities 2008 2008 Tholons 9 of 11
Conclusion The Manila NCR region is collectively viewed as the country s leading outsourcing destination. However, it is critical to note that its strength as an outsourcing location lies in the dynamics found in the unique characteristics of its component cities and municipalities. The traits found in Makati City, Pasig City, Quezon City and Mandaluyong City have contributed in developing their respective outsourcing industries. Moreover, as these delivery centers have matured, they have also emerged, not only within the archipelago, but also in global outsourcing landscape. Though this is the case and as several cities such as Taguig City, Muntinlupa City, and Pasay continues to emerge as outsourcing destinations the entirety of the Manila NCR remains as the key element for the progression of component and individual cities to develop their outsourcing capabilities. 2008 Tholons 10 of 11
About Tholons Tholons is a Services Globalization and Investment Advisory firm that combines "Best of Breed" consulting experience with deep execution expertise and investment insights to deliver truly effective services to its clients. Tholons offers a detailed understanding of business processes and combines it with practical hands-on expertise in executing the strategy. Tholons draws upon the considerable experience of a handpicked team, which has successfully formulated and executed globalization strategies to unlock value for Global Fortune 1000 companies. Service providers leverage Tholons expertise to optimize their global delivery model. Tholons advisors engage with government bodies to build compelling strategies for making countries attractive destination for outsourcing. Author: Clark Lester Bautista Editor: Manuel Ravago Research Director For more details about Tholons' Services Globalization and Investment Advisory capabilities, please visit our website at: www.tholons.com You may also contact: Neeraj Huddar neeraj@tholons.com US: +1-646-290-9320 THOLONS Global Offices North America Office 3130 Fairview Park Drive, Suite 500 Falls Church, VA 22042, USA Phone: +1-646-290-9320 Fax: +1-646-349-3546 Europe Office 2 Crawfurd Farm, Ray Mill Road East Maidenhead, SL6 8SU Berkshire, UK Phone: +44-1628-566140 Asia Office India 2/10, 2nd Floor, 80 Ft Road RMV Extension Stage II Bangalore 560 094, India Phone: +91-80-23519760 Philippines 46th Floor, Yuchengco Tower RCBC Plaza, 6819 Ayala Makati City 1200, Philippines Phone: +632-894-9493 2008 Tholons 11 of 11