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What has held back Philippine competitiveness and growth?

Low savings rate, high population growth rate, and a dismally low total factor productivity (the efficiency with which inputs are combined to produce output) due to social infrastructure (norms, laws, govt policies and institutions that enforce them shaped by culture and history as conditioned by geographic, climatic, and environmental factors
(M. Alba, The Philippines Quest for Long-Term Competitiveness from the Perspective of Growth Economics, AIM Policy Center: 2007 in Macaranas,

Case Study on Innovation and Competitiveness: The Philippine BPO Industry

Philippines is currently among the most cost-competitive destinations for ITBPO services

Source: Everest Analysis

Manila NCR is Southeast Asia top outsourcing destination (Source: Tholons Survey, 2012)

Working Definitions
BPO refers to a broad range of business outsourcing activity with the end view of improving ones process BPO is the delegation of one or more ITintensive business processes to an external provider that, in turn, owns, administrates and manages the selected process based on a defined and measurable performance metrics. (Def. from Gartner Dataquest) A BPO company enters into a contract with another organization to operate and manage

Types of BPOs

On-shore BPO: When an enterprise outsources its activities to another company located in the same country Near-shore BPO: When activities are outsourced to a neighboring country Off-shore BPO: When business processes are outsourced to a remote or far off country

BPO is an IT-Enabled Services (ITES), and is one of the fastest growing segment in the industry.

Why Outsource? Perceived benefits


Reduce or control operating costs Higher level of service for the same or even lower cost service To be able to focus on your core business Gain access to world-class expertise and those not available internally Enhanced efficiency and productivity Reduced labour cost Predictability of costs Utilization of common applications; freeing up of some financial and human capital

When to Outsource?
Predictability of the service/process is not important Limited opportunity for the firm to be distinct competitively through a particular process or service Company not stripped of the technical know-how necessary for future innovation Limited company expertise, inefficient, or technically inferior

BPO: A Global Operation


A US$142 billion market for IT-enabled services
(Source: NASSCOM McKinsey Study, 2008)
Data search, integration & management (31% or 44B) Customer interaction services (24% or 33B) Remote education (13% or 18B) Finance & accounting services (11% or 15B) Networking consulting & management (11% or 15B)

BPO: A Global Operation


A US$142 billion market for IT-enabled services
(Source: NASSCOM McKinsey Study, 2008)

Others: (12% or 16B)


Translation, transcription & localization (2B) Engineering & design (1B) HR services (5B) Website services (5B) Market research (3B)

IT-BPO industry to increase from US$500 billion in 2009 to US$1.5 trillion in 2024 (Tholons, 2011)

Profile of the BPO Industry in the Philippines


Most attractive global provider of ITBPO services in Asia
(Economist Survey: M. Alan in MBOL May 29, 2012)

IT-BPO revenues for the Philippines reached US$11 billion and 640,000 direct employees in 2011 (BPAP, 2012) Key driver of economy; fastest growing source of employment and revenue

Profile of the BPO Industry in the Philippines


IT-BPO revenues for the Philippines reached US$11 billion and 640,000 direct employees in 2011 (BPAP, 2012) Contact center, more than 50% of revenues, is key driver of industry growth; outpaced India
(BSP in ABS-CBN.com April 6, 2012)

30% share of US market; 20% of AsiaPacific; 8% of global market (BOI in SRI,

Philippines is also relatively stable, though there are concerns around safety and labor pool sustainability

Source: Everest Analysis

Philippine BPO: The Early Stages

Started in 1992 Accenture Followed in 1997 Sykes Continued to 2000 eTelecare, People Support 2006 ePLDT/Ventus Unattractive BPO destination

OPPORTUNITY-Driven INNOVATION SYSTEM


Pivotal actors: Public or Private Innovation trigger: Policy or Market
1. Nascent phase: Companies/ individual entrepreneurs have identified new market opportunities, but no recognizable sector has yet emerged. 2. Emergence phase: Sector takes off, rapid growth driven by activity of private sector or NGOs 3. Stagnation phase: competition forces increasing and evolutionary pressures to innovate DYNAMIC INNOVATION SYSTEM can be established (PPP)
Agile response to emerging challenges and opportunities Delivers economic growth in socially inclusive and environmentally sustainable ways

(Source: World Bank, Enhancing Agricultural Innovation, 2007 in Macaranas,

2012)

The global offshore services market is growing at a healthy pace, and will more than double by 2016

Source: Everest Analysis; NASSCOM

BPO: Growth stage

The Philippines has established itself as a mature Tier 1 destination in a competitive global environment

ORCHESTRATED INNOVATION SYSTEM


Pivotal actors: Public or Private Innovation trigger: Policy or Market

1. Pre-planned phase: no research or policy made, no opportunities identified 2. Foundation phase: priority sectors/commodities identified, government supports research and policy intervention, but have limited effect on growth. 3. Expansion phase: government intervenes with projects and special programs to link actors in the innovation system DYNAMIC INNOVATION SYSTEM can be established (PPP)
(Source: World Bank, Enhancing Agricultural Innovation, 2007 in Macaranas, 2012)

For the Philippines, 2016 revenues can vary from US$15 billion to US$25 billion depending on the strength of industry effort and government support.

Sources: BPAP Data; Everest Analysis; World Bank and IMF projections

Governments and industry efforts have supported the development of the Philippines proposition

Source: Everest Analysis

Support the Whole-ofGovernment Approach but innovations carried out by the private sector (consistent with the World Bank observation).

Capacity for Innovation

Malaysia Indonesia

Singapore

Vietnam Cambodia Philippines

Thailand Brunei

Competitivenes s Rank/142 Competitiveness 28 97 46 21 75 2 39 65


Capacity for Innovation 75 85 30 19 95 22 56 58

Score/7
Competitiveness 4.78 3.85 4.38 5.08 4.08 5.63 4.52 4.24 Capacity for Innovation 3 2.8 3.8 4.3 2.7 4.3 3.2 3.2

Correlation Coef. = 0.811


In your country, how do companies obtain technology? [1 = exclusively from licensing or imitating foreign companies; 7 = by conducting formal research and pioneering their own new products and processes] | 201011 weighted average25

Brunei Cambodia Indonesia Malaysia Philippines Singapore Thailand Vietnam

Brunei Cambodia Indonesia Malaysia Philippines Singapore Thailand Vietnam

source: WEF GCR 2011-2012

This create multiple opportunities to drive the next wave of growth for the Philippines

Source: Everest Analysis

While voice and IT ESO continue to grow, nonvoice BPO will drive market growth

Source: Everest Analysis

Whats at stake under various scenarios?

Source: Everest Analysis

What does the Road Map 2016 (PPP) target of US$ 25 billion in IT/BPO revenue mean to the Philippines?

Source: Everest Analysis

Larger tax base with even larger multiplier effects through consumption

Sources: National Statistics Office; Team Analysis

Key Strategic Innovation: Technoware


Low cost Infrastructure High quality infrastructure (e.g, e-learning) Infrastructure: real estate, telecommunications, electricity, transportation

Key Strategic Innovation: Inforware


Marketing Brand visibility Positive perception

Key Strategic Innovation Orgaware

Professional organizations/associations (BPAP, CCAP, etc.) Private-Public Partnership (i.e., BPAPTESDA) Academe-Industry Linkage

Key Strategic Innovation: Humanware


Skills (technical, language) Skills set (effective communication, right attitudes) Educated pool (KPO) Domain expertise (process-specific) Project management; qualified labor

Talent: 2016 talent requirements will reverse the current demand supply situation by 2012

Source: Everest Analysis

Innovation

Singapore

Malaysia Indonesia Vietnam Cambodia Thailand Brunei Philippine s

Availability of latest technologies Rank/142


Availability of latest RANK technologies Brunei 70 Cambodia 98 Indonesia 74 Malaysia 35 Philippines 62 Singapore 17 Thailand 82 Vietnam 133 source: WEF GCR 2011-2012

Score/7
Availability of latest technologies 5 4.5 4.9 5.8 5.2 6.3 4.8 3.8

Innovation 68 85 36 24 108 8 54 66

Score Brunei Cambodia Indonesia Malaysia Philippines Singapore Thailand Vietnam

Innovation 3.15 3 3.59 4.32 2.79 5.33 3.3 3.16

Correlation Coef. = To what extent are 0.838


the latest technologies available in your country? [1 = not available; 7 = widely available] | 201011 weighted average 36

To drive talent intervention programs successfully, concerted actions across six key effort areas is essential

Source: Everest Analysis

Innovation

Singapore Malaysia Indonesia Thailand Vietnam Cambodia Philippines

Brunei

Competitivenes s

Rank/142 Brunei Cambodia Indonesia Malaysia Philippines Singapore Thailand Vietnam Competitiveness Innovation 28 68 Brunei 97 85 Cambodia 46 36 Indonesia 21 24 Malaysia 75 108 Philippines 2 8 Singapore 39 54 Thailand 65 66 Vietnam

Score/7
Competitivenes s 4.78 3.85 4.38 5.08 4.08 5.63 4.52 4.24 Innovation 3.15 3 3.59 4.32 2.79 5.33 3.3 3.16

Correlation Coef. = 0.909


Competitiveness as the set of institutions, policies, and factors that determine the level of productivity of a country. Innovation Improving Institutions, building Infrastructure, reducing macroeconomic instability, improving human capital, efficiency of the labor, 38 financial and good markets.

source: WEF GCR 2011-2012

A refreshed marketing agenda will be key to support achievement of Road Map 2016 targets

Source: Everest Analysis

Process Innovations

Principles of Intervention in Innovation Systems


(Macaranas, 2012)

Remedial interventions
(weaknesses in stage 3 , opportunity-driven)
Building coherence and links between research system and the sector Support coordination bodies Strengthen or redesign existing organizations

Maintenance interventions (ensure dynamic systems do not deteriorate after stage 3)


Maintain agility and ability to identify new opportunities and challenges Enhance collaboration across actors and sectors Contribute to the maintenance of an enabling environment

41

Philippines will need to support Next Wave Cities through initiatives in four key areas

Source: Everest Analysis

An enabling legal regulatory environment is key to maintain competitiveness and drive growth

Source: Everest Analysis

Key Competitiveness Strategy of the BPO Industry Cost focus


9Labor cost 9All-in costs 9(Manageable) inflation

Competitiveness strategy: Differentiation focus

Summary

To summarize, achieving $25 billion by 2016 will require a much stronger PPP to drive favorable outcomes across multiple areas

Source: Everest Analysis

Getting to US$ 15 billion and pushing to US$ 25 billion will depend on our ability to overcome systematic challenges and achieve four key objectives

Source: Everest Analysis

Innovation
U.S. Germany Taiwan France U.K.

Switzerland Sweden Singapore Kore a Japa n

China India Thailand Philippines

Australi Malaysia a Hong Kong

Firm-level technology absorption


Firm-level technology absorption 19 61 25 14 15 41 3 8 28 52 10 1 4 13 75 22 18 Firm-level technology absorption 5.8 4.9 5.6 5.9 5.9 5.3 6.3 6 5.6 5.1 6 6.5 6.2 5.9 4.7 5.7 5.9

Rank Australia China France Germany Hong Kong India Japan Korea Malaysia Philippines Singapore Sweden Switzerland Taiwan Thailand United Kingdom United States

Innovation 22 29 17 7 25 38 4 14 24 108 8 2 1 9 54 13 5

Score Australia China France Germany Hong Kong India Japan Korea Malaysia Philippines Singapore Sweden Switzerland Taiwan Thailand United Kingdom United States

Innovation 4.48 3.92 4.72 5.39 4.18 3.58 5.59 4.89 4.32 2.79 5.33 5.76 5.77 5.27 3.3 4.94 5.57

Correlation Coef. = 0.911 To what extent do


businesses in your country absorb new technology? [1 = not at all; 7 = aggressively absorb] | 201011 weighted average

49

source: WEF GCR 2011-2012

Going forward, BPAPs role will need to evolve to drive impact to support Road Map 2016

Source: Philippine IT-BPO Road Map 2016, Commission on Information and Communications Technology , Business Processing Association of the Philippines, Everest Global and Outsources,

Competitiveness with Inclusive Growth: Innovation in the Philippines NCC Framework Quality of Growth

HKR Capital
Financial Markets

Govt or PPP Firm Rivalry, Structure and Strategy Demand Competitivenes s Inputs

(Human)

b. Reducing distortions favoring K


Govt / PPP

Govt / PPP

a. Addressing misgovernance & corruption


Govt / PPP

(Physical )

(consumers)

Inputs
c. Correcting market failures hurting H and R

Inclusiv e Growth *
Govt / PPP

Welfare

Related and Supporting Industries

(Natural)

d. Strengthening regulation

Ideas Things

* Quality Growth (WB) a.Addressing misgovernance and corruption b.Reducing distortions favoring K c.Correcting market failures hurting H and R d.Strengthening regulation Source: Adapted from Macaranas, 2012

Moving Up the Value Ladder


WB innovation Japan, Innovation, framework has U.S.A. Brand Image moved from Knowledge, Korea, HongKong bricks and Technology Based Singapore, mortars China. Taiwan India (stage 1), to Thailand Capitalhuman resource Malaysia, Intensive Brunei management (stage 2), to Indonesia, LaborPhilippines, Vietnam Intensive knowledge management Cambodia, Laos, Physical Resource(stage 3), to Myanmar Based innovation systems (stage Value creation increasingly occurs through sub-regional and bilateral trading 4).
arrangements rather than through global regimes like WTO.
Source: Adapted from Macaranas, 2012

Key Recommendations
Needs to be in leadership position Move towards higher value added services, that is, Knowledge Process Outsourcing (KPO) Innovation powered by better education (e.g., enhanced curricula, system of teaching, better teachers, quality graduates) Industry-Private-Public Partnerships (iPPP) Support for New Wave Cities (i.e., CDO, Davao, Bacolod, Iloilo, Dumaguete, Baguio, etc.) Macroeconomic measures (i.e., tax breaks,

Main References
Board of Investments (BOI) Business Processing Association of the Philippines (BPAP) Contact Center Association of the Philippines (CCAP) Department of Trade and Industry (DTI) Everest Global National Association of Software Companies (NASSCOM) Stratbase Research Institute (SRI) Tholons

Thank you.
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