Offshoring: Is Philippines Next Big Destination?

The Philippine contact center industry has grown rapidly and is now a close second to India in terms of market share. Provided that the customer service quality can be maintained and the costs of managing the outsourcing relationship do not overwhelm the savings from offshoring, contact center outsourcing to the Philippines is a good investment.

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This article was originally published by Info-Tech Research Group. Copyright (c) 1998-2008 Info-Tech Research Group. All rights reserved. Reprinted with permission.

Executive Summary

The Philippine contact center industry is now a close second to India with revenues of $4 billion US per year. Its success results from high quality service delivered by educated English-speaking agents, over a stable telecommunication infrastructure at a very low cost.

Field research conducted in the Philippines found the following benefits:

  • Low cost.

  • Educated workforce.

  • Good English language skills and understanding of American culture.

  • Customer service character.

  • Solid telecommunication infrastructure.

  • Government support.

  • Adequate financial stability.

The research also exposed a number of risks, the most important of which are decreased customer service quality and unbudgeted outsourcing relationship management costs. On the whole, outsourcing contact center services to the Philippines makes sense for companies that can manage these risks successfully.

When most people in the English-speaking world think of contact center offshoring, they think of India. After all, in fiscal 2008 India had customer interaction service revenues of $4.7 billion US (NASSCOM), making it number one. However, the Philippines have seen strong growth in contact center revenues, and now run a close second at $4.0 billion US (BPA/P).

All major North American contact center providers have a presence in the Philippines, including Convergys, ICT, Sitel, Sykes, West, Teletech, and Telus, and most of these continue to add new centers and new seats, despite a slowing US economy. For example, Teletech now has 15,000 employees, which is more than a nine-fold increase from the 1,600 employees it had in 2005. Multinational firms like Dell, Citibank, AOL, and HSBC have established their own contact centers. Homegrown providers have also seen strong growth, for example, ACS has grown to over 7,000 seats in six centers.

The UK's National Outsourcing Association (NOA) awarded the Philippines the "Best Offshoring Destination of the Year" prize for 2007, describing it as "...a global player in the offshoring marketplace. Its attraction is due to a combination of important offshoring fundamentals alongside some highly valuable offshoring extras" (BPA/P).

How did the Philippines get here? What does it mean for companies who are considering outsourcing their contact center, whether for customer care or technical support? This research note considers these questions based on data from field research conducted in the Philippines that included site visits and 18 interviews with contact center executives, their customers, and other industry leaders.

Next: Key Selection Criteria

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Key Selection Criteria

Growing global demand for outsourced and offshored contact center services has put pressure on India's ability to contain costs while delivering quality. In the words of one observer, "Outsourcing in India has reached a near-term peak and meaningful expansion from this point forward will result in higher costs and lower quality delivery" (Asia Times Online). Although India's position remains strong, many firms are choosing to develop or increase capacity in the Philippines for reasons described in the next section.


Here are the key benefits driving this trend:

Low cost. The average monthly wage of a Filipino contact-center agent is $402, which is more than 50% higher than the minimum wage in metro Manila (Unless otherwise stated, these figures and those that follow are taken from: Amante, Maragtas [In Press] "Outsourced Work in Philippine BPOs" in Jon Messenger [editor], Remote Work and Global Sourcing: Work organization and employment conditions in offshored business process services. Geneva: International Labor Organization). Managers receive an average total compensation of $1,303. Real estate costs are lower than North America and India, and telecommunication costs, although higher than North America, are lower than India. This results in a loaded hourly cost of as little as $10 per hour per agent, with averages between $13-$18 per hour, roughly equivalent to India (source: Call Center Magazine). With US rates ranging from $30-$60, the savings are significant. (Hourly rates are used here for ease of comparison, although other fee structures are available such as per connect minute, per talk time minute, per call, or by headcount.)

Educated workforce. But what does $10 an hour buy? Usually a college graduate: 81% of those working in contact centers have a bachelor's degree and 7% a master's degree. Most graduates work as agents and those that are technically trained can also work as network administrators and system integrators. In a country with an 8% unemployment rate and a 23% underemployment rate, working in a contact center is a good job, and one that's not easy to get, only 5%-20% of applicants are hired.

Good English language skills and understanding of American culture. The Philippines were an American colony from 1899 to 1946, during which time Filipinos began to be educated in American English. English remains one of two official languages and is widely used in business, education, and the media. In most contact centers, this fundamental English mastery is supplemented with accent reduction training. While Filipinos have a distinct culture, they are also interested in and have absorbed many American cultural traits. Basketball is the most popular sport and shopping malls—a social hub for Philippine society—are filled with Western chains like Starbucks and The Gap.

Customer service character. Filipino agents are often praised by foreign managers for their warmth, patience, and listening skills, traits that are highly valued in Philippine culture and important for contact center agents. Managers are also often impressed with their work ethic.

Solid telecommunication infrastructure. The Philippine telecommunications sector has been deregulated, resulting in a highly competitive industry that delivers lower international transmission costs than India as well as redundant links to major centers. Fiber-optic backbones provide low-latency transmission (< 200 ms) that is adequate to support robust VoIP functionality, including hosted technology.

Government support for the outsourcing and offshoring sector is significant and includes $24 million toward training and education, and, as part of the Philippine Economic Zone Authority (PEZA) program, a corporate income tax holiday, exemption from duties, simplified import and export procedures, and benefits on par with other countries in the region.

Adequate financial stability. After years of running a deficit, the Philippine government began reporting a surplus in 2006 which has now grown to over 1.5% of GDP. The government has used this budget surplus to prepay some of its debts, motivating Moody's Investors Service to upgrade its sovereign credit rating from stable to positive, although Standard & Poor's has maintained its stable rating.


The following concerns need to be understood but are unlikely to have a significant impact on an outsourcing project:

Security is a concern that is worth evaluating for any offshore destination because security disruptions can interrupt service, or worse, put employees' safety at risk. In the Philippines, the southern province of Mindanao is home to a secessionist movement that has erupted in occasional violence within that province. However, this violence has never extended to the major cities where most contact centers are located, such as Manila and Cebu, nor has the movement engendered the sympathies of the population at large. Additionally, progress has been made towards a peace in talks brokered by Malaysia. Security risk is difficult to quantify; however, given that the scale of violence in the Philippines has been far below that of other developing nations like India, or even Western nations like the US, the UK, and Spain, security risk is likely in an acceptable range as long as appropriate precautions are taken by the outsourcing partner (for example, avoiding high-risk regions and restricting access to the contact center).

Corruption is another concern that is worth considering. Bribery adds to the cost and complexity of doing business and executives from most Western nations are now legally prohibited from bribing government officials since legislation to comply with the Convention on Combating Bribery of Foreign Public Officials has been widely enacted since 2000. US companies are also grappling with a more aggressive enforcement of the US Foreign Corrupt Practices Act (FCPA). Transparency International's 2007 corruption survey reported pervasive corruption in most developing nations and the Philippines are no exception, with 32% of respondents saying they had paid a bribe to receive a service, compared to 25% in India and 2% in the US. Bribery is a cost of business for many local managers in the Philippines: three out of five managers were asked for a bribe at least once in the previous year (source: SWS, 2007). However, these are local companies, many of which do business with the government. Although the extent to which corruption impacts outsourcing clients has not been determined with certainty, all the contact center managers interviewed for this report said that corruption had no impact on their business. Given that most businesses will interact primarily with their outsourcing partner and not with the government or local suppliers directly, corruption is unlikely to be a key factor in outsourcing to the Philippines.


The following risks need to be understood and planned for in order to maximize the success of an outsourcing project:

Tightening labor pool. With contact center growth averaging 43% per year since 2004 (BPA/P), finding the right talent is becoming more challenging. Nor is attrition a trivial issue for Philippine contact centers: a survey of 72 employers found that 30% had attrition rates from 5%-10% and 46% reported rates of 11%-25% (BPA/P). In the near term, the industry has responded to this challenge with near-hire training and by opening contact centers in new regions. Near-hire training raises the competency of candidates that are close to but do not reach job requirements. Currently, most contact centers are in the largest two cities: metro Manila and Cebu. New centers are being opened in places like Baguio City, Clark, and Iloilo City in order to draw on a wider pool of candidates. In the long term, a partnership between the government, educational institutions, and the private sector is working on developing more talent from the pool of 2.4 million college graduates that were projected to enter the labor market between 2006 and 2010.

Action point:
Question prospective outsourcing partners about how they plan to handle the tightening labor pool.

Customer service quality. A common concern about contact center offshoring is whether or not customer service quality can be maintained. The key to maintaining or even enhancing quality is to adequately measure and support it. Include key performance indicators (KPIs) that impact quality, such as customer satisfaction metrics, first-call resolution rates, and average hold times, in the outsourcing agreement along with mutually agreeable KPI measurement methods, penalties, and rewards. Baseline these values before the outsourcing project and compare the values collected in the outsourced environment with the baseline data. This both encourages the outsourcing vendor to plan for quality and allows both vendor and client to respond rapidly if quality slips. Support for quality includes adequate product-specific training for the outsourcer's contact center agents. Quality must be negotiated, measured, and supported, not just hoped for.

Action points:
Include KPIs in outsourcing agreement. Compare baseline KPIs with post-outsourcing KPIs. Include adequate product-specific training.

Outsourcing relationship management. Successful outsourcing requires an investment of resources in the outsourcing venture. Managers or a trusted third party must travel to the prospective sites to evaluate vendors and visit them from time to time during the span of the contract (although some vendors will say this isn't necessary, it is). Manila is about a 20 hour flight from New York, roughly the same as Bangalore. Typically, a resource must be assigned to manage the relationship with the outsourcing partner to ensure that service levels are maintained. The cost of managing the relationship must be factored into the outsourcing business case.

A poorly managed outsourcing project will not yield the expected savings, or worse, result in degraded service quality that tarnishes brand image and drives away customers. A well managed outsourcing project will reduce costs and maintain or even improve service quality; however, it requires an appropriate investment of time, money, and resources to be successful.

Action point: Plan and budget for managing the outsourcing relationship.

Alternatives to Offshoring

Cost reduction is the primary motivation for contact center offshoring, so evaluating alternative ways to reduce customer service costs is a natural part of a complete offshoring evaluation. Some less commonly considered cost reduction measures include:
Move to a virtual contact center. Especially for centers where significant capital investments are on the horizon, hosted or virtual contact center technology is mature enough to be considered as a cost reduction measure.

Add home-based agents. Virtualization has allowed some companies to integrate home-based agents into their contact centers, allowing them to recruit better qualified and more loyal agents without incurring new office overhead.

Improve Interactive Voice Response (IVR) integration. A carefully crafted IVR script, integrated with the backend system and agent software, can divert simple calls and reduce call handle time on more complex calls by populating agent-facing software with data that would otherwise have to be collected by the agent.

Enhance agent-facing software usability. Call handle time can be significantly reduced by consolidating agent-facing software and making it more user friendly. For more information on usability engineering, refer to the ITA Premium research note, "What Does an iPod Have in Common with a Contact Center?"

Next: Recommendations

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Organizations considering offshoring their contact center—whether for customer care or technical support—should consider an outsourcer with centers in the Philippines, both for the low cost and high quality of service.

To evaluate the offshoring option, follow the steps below, either internally or with the help of an outsourcing consultant:

1. Evaluate the business case. Compare the current cost of running the contact center with the cost of outsourcing. When considering the current costs, remember to factor in overhead including real estate and the capital expense of technology refreshes. When evaluating the cost of outsourcing remember to include the cost of establishing and maintaining the outsourcing relationship, legal fees for contract review, travel, and product specific training of the outsourcer's agents.

2. Compare to alternatives. Offshoring is not the only way to reduce contact center costs and solve recruitment and retention headaches. Consider other options like those under, "Alternatives to Offshoring" above.

3. Find and evaluate prospective vendors, whether these are outsourcers with a corporate head office in the client's home country and contact centers in the Philippines, or those with both head office and contact centers in the Philippines. Some outsourcing clients interviewed for this research chose an outsourcer with its head office in their home country, for ease of contact and for liability concerns (they wanted to be able to sue a local firm if the contract was not respected). Others selected a Philippine-based company because they concluded that it could more successfully manage Filipino agents. In either case, collect the names of prospective outsourcing partners through referrals and industry directories; for example, in the membership list of the Contact Center Association of the Philippines. After developing a shortlist, begin evaluating the prospective partners. For more information on assessment, refer to the forthcoming ITA Premium research note on evaluating a contact center outsourcing provider.

Bottom Line

The Philippine contact center industry has grown rapidly and is now a close second to India in terms of market share. Provided that the customer service quality can be maintained and the costs of managing the outsourcing relationship do not overwhelm the savings from offshoring, contact center outsourcing to the Philippines is a good investment.

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