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Outsourcing In Asia - Where Next?

Monday, March 30, 2015

Business Process Outsourcing is a business phenomenon that has transformed two economies in Asia: India and the Philippines. But these destinations must continue to adapt as corporate productivity initiatives become ever more competitive, says JLL’s Jeremy Sheldon

The Philippines is not well known for positive headlines. Political upheaval and natural disasters have marred the archipelago’s global image but the nations’ economic fortunes have transformed over the last decade thanks, largely, to the emergence of one industry: business process outsourcing (BPO).

Western companies have flocked to the nation’s key cities – Manila and Cebu – to set up cost efficient call centres that deal with everything from customer service to HR to real estate management.  

In 10 short years, the industry has grown from nothing to produce estimated annual revenue just shy of US$20 billion in 2014. Of course, BPO is not unique to the Philippines. India has a long established reputation as an outsourcing hotspot.

“BPO, in its simplest form, is about labour arbitrage, it requires large numbers of skilled workers and graduates who are based in low cost locations,” says Jeremy Sheldon, head of Integrated Portfolio Services, JLL Asia Pacific.

“India is full of aspiring graduates so it made sense as an outsourcing location. The Philippines emerged because of two factors: its population and its education standards.”

Experts recently estimated that Philippines’ BPO industry will account for 10 percent of the economy by next year. This rapid rise of BPO has been reflected in real estate industry growth.

Last year, office rentals in Manila registered double digit growth driven by BPO demand and 2015 will see a significant supply of new offices and residential space with fifteen developments due to complete throughout the year.  

The Philippines has also benefited from a far less strategic advantage: its polished dialect. The young, well-educated workforce is largely English speaking, which lends itself to the customer service sector. Citibank, Aetna and Chevron are just a few of the multinationals to outsource operations there.  

Many businesses are questioning whether interest in the Philippines means India, which has long been the world's outsourcing capital, is losing its edge. But Sheldon says India’s evolution is quickening in the face of fresh competition.

International businesses have become increasingly confident about their capabilities offshore, pushing more complex work overseas. Higher value manufacturing and research and development centres, for example, now exist in India in place of call centres. Traditionally, companies in the US and Europe would have retained domestic control over such skilled work.  

“India’s position in the outsourcing sector has changed as a result of its own success,” says Sheldon. “As people have outsourced into India there is no question the sector has climbed up the value chain.”

Alternative locations are also enticing businesses outside of the main metropolises of Mumbai, Delhi and Bangalore. “MNC’s such as Accenture, Captive BPO’s for the banking sector and Indian giants such as Infosys and Wipro are all well established in India’s top tier cities,” adds Sheldon. “But as businesses explore more cost effective markets, new cities are emerging.”

Second tier cities such as Kerala, Pune, Hyderabad and Chennai are now competing for a broader segment of the outsourcing business. In Kerala, Infosys set up a campus next door to a university to entice young graduates.

Managing the aspirations of these graduates has, in part, forced India to adapt its economy. When Narendra Modi came to power last year his government promised to shift the nation’s reliance on the IT services sector by creating a manufacturing-centric economy.

“It’s true that young Indian graduates do not want to work in call centres anymore,” says JLL India country head Anuj Puri. “India’s vast demographic dividend is largely unskilled and Modi wants to skill these people in trades.”

“India is still strong in the IT services sector but the Philippines has emerged as a customer services outsourcing destination because culturally, and in terms of language, its more closely aligned with western businesses.”
Navigating risk  
Abundant workforce aside, the search for alternative offshore hubs is increasingly a matter of mitigating risk. Multinational companies, as a rule, will not establish more than 30 per cent of their workforce in one country.

Sheldon says: “We’re in an age where companies are more creditworthy than countries so they need to ensure they aren’t too exposed to a single market “risk”. It was happening before the financial crisis but now the pace of change has increased as companies have become more risk averse and conscious of costs.”

The matter of cost cutting is key if Asia is to remain competitive for Western businesses to operate in; though there are other factors at play.

“Overall, the lessening of political risk makes Asian nations more attractive,” says Sheldon. “But, as you move up the value chain issues like intellectual property can become a challenge, so businesses must still choose their market carefully.”

Myanmar or Vietnam, for example, are unlikely to emerge as a BPO destinations, despite the lure of lower overheads because they do not boast the same levels of transparency and IP protection as countries such as Singapore, which continues to market itself as an attractive hub for high-value manufacturing and R&D.

 “Can Asia remain competitive?” asks Sheldon. “It has the population; it’s perhaps more a question of aspirations and how outsourcing business models adapt as the Asian economies continue to grow. Short answer, absolutely for the foreseeable future.”

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