ILO Asia-Pacific Working Paper Series

Busi ness process outsourci ng i n the Phili ppi nes:

Challeng es for dec ent work

L or e nza E r ri ghi , S am ee r Kha tiw a da a nd C harl e s Bo dw ell

D ec embe r 2016
 Contents

Preface………………………………………………………………………...………..…………….. iii
Acknowledgements…………………………………………..…………….……………..……………v
Abstract…………………………………………………………..…………….…………..…………. vi
Acronyms…………………………………………………………..………….……………..………. vii
1. Introduction……………………………………………………..…………….…………………....1
2. Global trends in the BPO industry ……………………………..……………….………………....2
3. BPO in the Philippines …………………………………………..…………….………………..…8
4. Challenges for decent work in the BPO sector…………………..…………….………………….14
4.1 Skills shortages……………………………………………..……………….………………...14
4.2 Employee health and well-being ………………………………..……....................................18
4.3 Women in the sector…………………………………………………..…………….…...……20
4.4 Workers’ voices, collective bargaining and ability to organize ………….……….…….……21
5. Conclusions…………………………………………………………………….…..…….....23

References………………………………………………………………………………….………….24
Annex………………………………………………………………………………………….…........29

List of figures

Figure 1. Foreign direct investments into India and the Philippines, 1985–2015................................... 5
Figure 2. Anticipated influences on future outsourcing decisions cited by firms, 2014 (% of respondents
more likely to outsource as a result of following developments) ........................................................... 7
Figure 3. Value added by sector in the Philippines, % of GDP (2001=100) .......................................... 9
Figure 4. Size of the BPO subsectors in the Philippines (in terms of sales revenue), 2005–13........... 11
Figure 5. Employment growth in the BPO sector, 2004–13 (2004=100) ............................................. 12
Figure 6. Wage premium: Ratio of average annual wage in the BPO subsectors to average annual wage
in the Philippines, 2009–13................................................................................................................... 13
Figure 7. Profile of companies that responded to the ILO (number of employees covered) ................ 14

List of tables

Table 1. Size of BPO subsectors, in terms of sales revenue (US$ million) .......................................... 10
Table 2. Total jobs in the BPO subsectors in the Philippines .............................................................. 11
Table 3. Economic indicators for the BPO sector in the Philippines, 2004–13 ................................... 29
Table 4. Economic indicators for the contact centre subsector, 2004–13 ............................................. 30

Decent Work Technical Support Team for East and South-East Asia & the Pacific iv
 1. Introduction
Information and communication technology (ICT) innovation together with increasingly fragmented
production processes have encouraged the outsourcing of labour-intensive services to countries such as
the Philippines. Today, an American consumer living in Memphis, Tennessee, might call the American
Express (Amex) credit card help line and be connected to someone in Manila, who will then provide
them with assistance.1 Companies such as Amex are taking advantage of the separation of services
production and consumption made possible by ICT innovations. Seeking cost efficiency, companies
may outsource their non-core business processes to specialized third-party service providers, which
may then offshore their labour-intensive operations to developing countries with lower labour costs.
Meanwhile, large multinational enterprises (MNEs) have directly offshored their labour-intensive
services to cost-competitive locations by establishing “global in-house centres” (GICs).

The Philippines serves as a leading destination for business process outsourcing (BPO). This industry,
its growth driven mainly by contact centre services, is expected to reach US$25 billion in total revenue
by 2016 – approximately 7.3 per cent of GDP, nearly equivalent to foreign remittances in terms of
economic importance. BPO sector growth in the Philippines is driven by a host of factors, chief among
them the following: low labour costs; a highly skilled and educated workforce; widespread command
among the workforce of a relatively neutrally accented English language; competitive infrastructure;
and government tax incentives. The BPO sector currently employs 1.3 million workers in the
Philippines and, if recent employment growth trends are any indication of future developments, then
the sector is likely to prove an important source of job creation. Furthermore, average BPO sector wages
tend to range considerably higher than the national average, while more than 50 per cent of BPO
workers are women.

Given ICT innovations and increasingly prevalent automation, however, the Philippine BPO sector will
need to make the transition towards higher value addition and more knowledge-intensive activities.

As this paper shows, the BPO sector in the Philippines faces several challenges vis-à-vis decent work.
Referring to case studies of several large firms operating in the country, structured interviews conducted
for this study indicated the following:

• the BPO sector faces an inadequate supply of skilled workers, high turnover and difficulty in
retaining talent, difficulties that will likely be compounded as the sector moves towards higher
value added services;
• the sector demands high performance standards, which is in itself not bad, but an in-and-out
(high turnover) sector culture has exacerbated stress-related health issues, and employees tend
not to enjoy a work-life balance (e.g. child care provisions for women workers are rare);
• even though women comprise more than 50 per cent of BPO workers, they tend to be
concentrated in low-paid and low-skilled jobs, plus they face obstacles in terms of upward
mobility and equal pay; and

1
Amex is used here only as an illustrative example; it is not one of the companies examined in this study.

Decent Work Technical Support Team for East and South-East Asia & the Pacific 1
 • given that unions are almost non-existent in the BPO sector, worker voices and representation
remain weak, undermining prospects for decent work.

The following section places the BPO sector’s growth in the Philippines within the context of a global
overview of that industry. Section 3 looks at BPO sector trends in the Philippines, drawing lessons for
future growth and potential challenges. Section 4 draws upon structured interviews conducted for the
purpose of this study, and examines challenges for decent work in the Philippine BPO sector. Section
5 presents the study conclusions.

2. Global trends in the BPO industry

Evolution of the BPO industry has been led by innovations in information and
communication technology (ICT)

Business process outsourcing (BPO) is defined as the transfer of a company’s non-core activities to a
third party that uses information technology for service delivery. Depending largely on the level of
specialization and the type of control the lead firm is willing to relinquish, business processes are
usually outsourced either to an independent third party or to a MNE subsidiary, also known as a global-
in-house centre (GIC). There are two types of outsourcing: i) “nearshoring”, undertaken in geographical
proximity to the lead firm; and ii) “offshoring”, where the service provider is remotely located
(Messenger and Ghosheh, 2010).2 Indeed, enabled by improvements in ICT, firms have outsourced non-
core activities to locations with lower labour costs, sufficiently high human capital and adequate ICT
infrastructure. (The Republic of India and the Philippines have become the two largest destinations for
BPO.) As a result, BPO has become one of the most important global supply chains (GSCs) in the
service category. In 2012, the industry was worth $100 billion; by 2020, according to estimates, it could
be worth $250 billion.

Companies that outsource their business services come from a wide variety of industries, notably
banking, retail, tourism and medical services. Unsurprisingly, BPO involves a wide range of activities
and is divided into subsectors depending on the types of service provided. BPO services may be
classified in a number of ways, but this paper follows the classification adopted by the IT and Business
Process Association of the Philippines (IBPAP), which specifies seven BPO subsectors: back office
operations; contact centres; software development; animation; data transcription; engineering
development; and digital content creation (Box 1). The BPO sector can also be divided into two broader
categories, depending on whether the services provided involve back-office or front-office operations,
the latter involving consumer support services through direct interaction with the clients’ customers.

Box 1
BPO subsectors
• Contact centres provide both inbound and outbound voice services for sales, customer service,
technical support and other business processes.
• Back office operations provide services related to finance, accounting (i.e. bookkeeping) and human
resource management (i.e. payroll processing).

2
In some countries, for example the Federative Republic of Brazil, business processes may be outsourced to
enterprises in the same country.

Decent Work Technical Support Team for East and South-East Asia & the Pacific 2
 • Software development services include all the processes required for the creation and management of
software, e.g. analysis, design, prototyping, programming and testing, customization, maintenance.
• Animation services involve the design and provision of cinematographic drawings and models of
inanimate objects through 2D and 3D technology.
• Data transcription services are used to interpret and transcribe oral dictation for such clients as health
professionals and legal offices.
• Engineering development involves the engineering and design of such products as civil works,
buildings and components, and electronics.
• Digital content services provide such digital products as music and information available on electronic
media.
Source: IBPAP in Bird and Ernst (2009).

Most BPO remains highly labour intensive, and countries with high educational
endowments and modern ICT infrastructure most surely benefit

Despite the increasing reliance on information technology (IT) for the delivery of services in the BPO
sector, most related activities remain labour intensive. This is the main reason outsourcing companies
rely on developing countries with both abundant supplies of low-cost labour and high technological and
educational endowments. Thus India and the Philippines, both with abundant supplies of educated
workers, present two of the most favoured BPO destinations. A global ranking of destination cities for
BPO services in terms of availability of competitive human capital, good business climate and ICT
infrastructure shows that the top-ten list is dominated by India, followed closely by the Philippines
(Tholons, 2014). In fact, Krakow, Poland, is the only city outside of Asia and the Pacific to appear in
the top ten. If countries rather than cities are considered, on the other hand, then top BPO destinations
include the Republic of Costa Rica, the Czech Republic, Ireland, Malaysia and the Socialist Republic
of Viet Nam.

India, the world’s largest BPO service provider, possesses both the educational and technological
endowments and the advantage of low labour costs (see Box 2). Studies have shown, however, that the
Philippines fares better than India in terms of the quality of its talent – a recent study found that 30 per
cent of Filipino graduates are employable, compared to only 10 per cent in India.3 The Philippines’
comparative advantage in the BPO sector has been attributed to three main factors: English is spoken
with a neutral accent (which is typically untrue in India); the workers share cultural similarities with
Americans (because of the country’s colonial past); and Filipino workers bring a typical cordiality to
their work (Lee et al., 2014). Globally, the success of the BPO sector is closely tied to continued
investment in skills and modernization of telecommunications infrastructure.

BPO is an industry that has benefitted from low-cost locations with relatively highly endowed, skilled
workforces. Many BPO services involve repetitive tasks that are considered low skilled in much of the
developed world. 4 However, such services are often provided by high-skilled professionals in the
developing world, who are attracted to the sector by higher wages. Indeed, evidence suggests that
median hourly earnings in the ICT sector and ICT-related occupations (including BPO) is about 150 per

3
The Associated Chambers of Commerce & Industry (ASSOCHAM): “India’s losing 70 per cent incremental
voice & call centre business to Philippines: Study” (6 Apr. 2014). See
http://assocham.org/newsdetail.php?id=4455 [accessed 8 Dec. 2016].
4
This has been less true in recent years, as countries have moved up the value chain. For example, back office
services and knowledge process outsourcing (KPO) jobs tend to be high-skilled, both in developed and
developing economies.

Decent Work Technical Support Team for East and South-East Asia & the Pacific 3
cent higher than they are in urban non-ICT sectors. Furthermore, firms engaged in industries
characterized by greater Internet and software intensity faced higher wage increases across all skills
level compared to the rest of the economy (World Bank, 2016).

Research shows that the BPO sector is likely to continue growing in the near future, as firms will need
to achieve greater competitiveness by focusing on their core business, meanwhile outsourcing their non-
core activities to more competitive and specialized service providers (HfS Research, 2013). Aside from
the People’s Republic of China, India and the Philippines, countries that are likely to see further BPO
sector expansion include Brazil, the United Mexican States, the Republic of Poland, and Romania
(Deloitte, 2014). On average, the ICT sector in developing countries employs 1 per cent of their total
workforce, while in the Organisation for Economic Co-operation and Development (OECD) countries,
around 3–5 per cent of the workforce are engaged in the ICT sector (World Bank, 2016). As new
technological advances, notably cloud computing and automation, transform industries such as the BPO
sector, companies engaged in offshoring non-core businesses will increasingly recognize a country’s
ability to adapt to new technology and innovation, beyond any cost advantages stemming from low
wages (Deloitte, 2014).

Box 2
BPO sector in India
India is the top global sourcing destination for BPO, representing 55 per cent of the world’s market share – an
estimated market size of $146 billion in 2015, with export accounting for 67 per cent of total revenues.5 Overall,
the industry accounts for 9.3 per cent of India’s GDP and employs 3.7 million workers (NASSCOM, 2016a).
The Indian BPO industry developed in the early 1990s, following liberalization policies that aimed to attract
foreign direct investment (FDI). India, with a large, low-cost pool of highly educated, English-speaking
workers, provided cost savings of about 40–50 per cent to companies that were able to offshore non-core
businesses (D’Cruz and Noronha, 2010). In the meantime, the Indian BPO sector has progressively upgraded
since the 1990s, creating new markets and industries (Fernandez-Stark et al., 2011).

IT services represent the biggest subsector within the industry, accounting for $68 billion in revenues in 2015,
while business process management (BPM) accounts for $26 billion, which closely matches the size of the
BPO sector in the Philippines. The difference in terminology – BPM in India, as opposed to BPO in the
Philippines – is due to the fact that NASSCOM in India relabelled BPO as BPM to reflect the higher value
added services provided by the subsector. Indeed, the IT-BPM industry in India is highly diversified in terms
of services provided, and has increasingly prioritized skills over scale: in 2015, the industry registered 7 per
cent growth in employment, compared to 13 per cent growth in revenue (NASSCOM, 2016b).

Foreign direct investment: The main factor in BPO sector development

In some cases, countries have developed BPO capabilities through indigenous firms, but explosive
growth has typically come only with the inflow of foreign direct investments (FDI) as foreign firms
started looking for low-cost locations to outsource service delivery. The first wave of growth occurred
as MNEs started establishing subsidiaries. India provides a case in point, where local companies started
providing computer programming services in the 1980s, but the BPO sector only began to boom in the
1990s, when foreign firms began to establish operations in the country (Messenger and Ghosheh, 2010).

Indeed, FDI inflows to India were flat until the early 1990s, swelling in the late 1990s and continuing
on an increasing trend ever since, albeit with a decline in the aftermath of the financial and economic

5
The NASSCOM definition and scope of the IT-BPO industry in India is broader, including as it does IT
services, business process management, product development, software products, hardware and e-commerce.

Decent Work Technical Support Team for East and South-East Asia & the Pacific 4
crisis in 2008–09 (Figure 1). As a share of GDP, FDI inflow into India in 1992 was 0.1 per cent ($0.3
billion); this increased to 1 per cent in 200, and by 2008 it amounted to 3.5 per cent ($43.4 billion). It
declined after the crisis but has recently picked up again, at 2.1 per cent of GDP in 2015 ($44 billion).
Meanwhile, in the Philippines the trend in FDI has been more volatile, already peaking as a share of
GDP back in 1998, at 3.2 per cent ($2.3 billion). By 2008, it was 0.8 per cent of GDP, or $1.3 billion –
in the last few years, however, FDI inflow into the Philippines has followed an upward trend: in 2015,
it was 1.9 per cent of GDP, or $5.7 billion (still considerably smaller than that in India).

Figure 1. Foreign direct investments into India and the Philippines, 1985–2015

As a % of GDP Philippines As a % of GDP India

Net inflows (BOP, US$ millions) Philippines Net inflows (BOP, US$ millions) India

50000 4

45000
3.5

40000
3
35000

2.5
30000
US$ milliond

% of GDP
25000 2

20000
1.5

15000
1
10000

0.5
5000

0 0
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015

Source: World development indicators, 2016.

Additional factors: Innovations in technology, particularly cloud computing and

business process automation

Innovations in technology and communication systems have an enormous impact on the BPO sector,
creating demand for new skills and affecting employment outcomes. Two types of innovations have
been key for the BPO sector: i) cloud computing; and ii) business process automation. As these
innovations, in particular cloud computing, are broadly adopted, there are likely to be significant
consequences for the labour market. Indeed, cloud computing has the potential to transform fixed costs
into variable costs, rendering the provision of business services more flexible (see Box 3). Cloud
computing allows firms to pay for ICT services according to the extent of their usage. This “pay as you
go” model substantially reduces fixed costs for firms, since they no longer need to invest in expensive
hardware or software to run their daily operations.

Decent Work Technical Support Team for East and South-East Asia & the Pacific 5
 Box 3
Innovations in BPO industry: Cloud application services
• Infrastructure as a service (IaaS) is a self-service model for accessing, monitoring and managing
remote infrastructure such as storage, networking and networking services (e.g. firewalls). Instead of
having to purchase hardware, users can subscribe, paying for only as much of the service as they
consume.
• Software as a service (SaaS) is a software distribution model in which applications are managed by
a third-party vendor and typically made available to clients over the Internet.
• Platform as a service (PaaS) provides operating systems and associated services over the Internet
without any download or installation. PaaS is sometimes called “cloudware” because it moves
resources from privately owned computers into the Internet “cloud”. PaaS can be considered an
outgrowth of software as a service (SaaS).

A recent survey of large firms showed that more than two thirds of firms anticipate that future
outsourcing decisions will be influenced by cloud computing (Figure 2). Other innovations likely to be
important going forward include big data, business process as a service, and hosted virtual desktop.
Indeed, as investments in technology infrastructure and economies of scale become less relevant, these
innovations can level the playing field between big businesses and small and medium-sized enterprises
(SMEs), thereby fostering local development and job creation. Cloud computing could have positive
implications in terms of employment, since this technology enables employees to work from any
location as long as they have access to a reliable Internet connection and the necessary cloud platform.
This in turn enables crowdsourcing, where individuals can provide services to clients looking for
specific tasks to be completed. Moreover, the increasing flexibility of BPO service provision can have
a positive impact on the following vulnerable groups: women, who tend to be constrained by cultural
norms and family obligations; people with disabilities; and individuals who live far from large urban
centres. For example, the Kudum-bashree project in India has allowed companies to outsource IT
services to women-run cooperatives in rural areas, with almost 80 per cent of these women earning at
least one dollar a day (World Bank, 2016). In addition, the fixed-cost savings to BPO firms that derive
from not relying on set locations with the concomitant rent, electricity and transportation costs could
be directed instead to higher wages for employees, assuming international labour standards are
followed.

Decent Work Technical Support Team for East and South-East Asia & the Pacific 6
Figure 2. Anticipated influences on future outsourcing decisions cited by firms, 2014 (% of respondents
more likely to outsource as a result of following developments)

Gamification 13%

Bring your own device (BYOD) 28%

Crowdsourcing 35%

Open innovation 41%

Enterprise mobility 53%

Big data 55%

Hosted virtual desktop 59%

Business process as a service 66%

Cloud computing 69%

0% 10% 20% 30% 40% 50% 60% 70% 80%

Note: The Deloitte Consulting Global Outsourcing Survey 2014 included 157 unique respondents representing 140
public and private sector entities.
Source: Deloitte, 2014.

Automation is another technological innovation affecting the BPO sector. This process involves using
computer programmes to perform repetitive tasks, where the chances of unforeseen errors are lesser
than they would be if humans were doing them. Labour cost advantages can provide firms, where they
offshore their non-core operations to developing countries, with total cost savings of 15 to 30 per cent.
Automation, for its part, is expected to reduce costs by as much as 40 to 75 per cent (KPMG, 2016).
Automation could take the lead in BPO services such as IT support, workflow processes and other types
of back-office operations characterized by high volumes of data and transactions, where queries and
actions are predictable, regular and suitable to automation. The need to cut costs is leading even contact
centres in developing countries to resort to automation for the provision of basic and frequently
demanded services. In South Africa, for example, a local health-care company is already using IBM’s
artificial intelligence system for its customer care operations (World Bank, 2016).

More complex tasks, however, where basic robotic process automation remains insufficient, are still
likely to require human workers. Moreover, as basic services get automated, technological updates
increase the skill intensity of BPO activities conducted by workers. This transition to higher value added
BPO activities is referred as “knowledge process outsourcing”, or KPO. (Fernandez-Stark et al., 2011).
In this context, developing countries, if they want to remain attractive BPO destinations, need to foster
skills upgrading by investing in human capital. At the same time, more focus is needed on issues of
non-inclusive development, as business process automation and KPO are likely to preferentially employ
and otherwise benefit groups of skilled and highly educated workers.

Innovations in the BPO sector can create challenges for the world of work

Indeed, the flexibilization of employment through innovations such as cloud computing could also bring
challenges in terms of decent work stemming from higher volatility in employment and lower access to
social protection, since employees are hired per project rather than on a fixed-term basis. Further

Decent Work Technical Support Team for East and South-East Asia & the Pacific 7
expansion of this “on-demand economy” might require a rethinking of the social protection schemes in
place, perhaps by delinking social insurance from employment through independent social assistance
(World Bank, 2016). Additionally, as a substantial degree of self-management and specialized technical
skills are needed for these flexible, ICT-enabled forms of employment, advances in cloud computing
could perpetuate the creation of elite forms of employment in BPO, benefiting a few highly skilled
individuals while reducing the need for lower-skilled workers. Furthermore, as the pressure for near-
shoring increases – where companies relocate their non-core business services close to home – countries
with low labour costs could see a decline in jobs created by offshoring. The prevalence of offshoring
would depend on the readiness of developing countries to adopt new technological developments, while
still offering cost-competitive prices.

The Philippines scores relatively well in terms of cloud readiness, positioning itself as the tenth top
destination in the world. 6 The expanding BPO industry provides substantial opportunities for
implementation of cloud technology in that country. Moreover, the Philippines was found to score
relatively well in terms of freedom of information as compared to most of its Asian neighbours – this
also facilitates deployment of cloud technology. However, to enable broad implementation of cloud
technologies, improvements are needed in government regulations, data privacy and telecommunication
infrastructure. Moreover, challenges remain for the expansion of BPO activities in rural areas, where
access to quality ICT networks and infrastructure remains limited. Since 2009, IBPAP has supported
the identification of top and emerging locations in the Philippines to set up BPO operations through its
“next wave city” (NWC) project, which aims at bringing economic development to more sites across
the country, as well as enabling efficient operations for BPO companies.

Meanwhile, cloud technology could affect some BPO subsectors more than others. For example, it is
likely to have a strong impact on flexibilization of employment relations in the software development
sector, which demands a relatively high level of skills and autonomy. On the other hand, customer
service operations carried out in contact centres may favour the use of the traditional business model,
as it is easier to assess the performance and motivate employees gathered in a single location. However,
contact centres are still likely to benefit from cloud technologies through the “pay as you go” system.
Indeed, despite the fact that contact centre activities tend to be office-based, innovations in the
traditional business model are emerging – for example, business start-ups in the Philippines that provide
on-demand contact centre services through experienced home-based contact centre agents working at
hourly rates.

3. BPO in the Philippines

In line with the increasing importance of the service sector in the Philippines, the BPO
sector has tripled in the last 10 years

In the last 15 years, the Philippine service sector has grown by over 10 per cent in terms of value added,
while both agriculture and manufacturing sectors have declined by 22 and 10 per cent respectively
(Figure 3). This growth in services has paralleled growth in the Philippine BPO industry. Indeed, the
BPO sector has tripled its global market share from 4 per cent in 2004 to 12.3 per cent in 2014; by 2020,
it is expected to further increase its share to 19 per cent (OBG, 2015). Moreover, the Philippine BPO

6
See http://www.rappler.com/business/industries/215-tech-biz/83186-ph-climbs-cloud-readiness-index
[accessed 8 Dec. 2016].

Decent Work Technical Support Team for East and South-East Asia & the Pacific 8