UPDATES ON THE PHILIPPINE CALL CENTER INDUSTRY:

THE ISSUE OF SUSTAINABILITY

Aileen S. Alava

Assistant Professor

University of the Philippines, Diliman

College of Business Administration

Abstract

Facing high expectations as the newest “sunshine industry”, the call center

industry in the Philippines appears to have dimmer prospects in the coming years.

Having experienced rapid growth in the past, the industry is expected to

disappoint a bit as analysts observe a slowdown in the industry’s growth from

2003 to 2005. Contrary to the fears that demand will be lost to neighboring

competitors India and China, the industry may be losing speed not because of a

shrinking market but because of decreased labor supply. Various reasons have

been offered to explain why the slowdown is expected. Aside from manpower

supply, local information and communications technology (ICT) infrastructure has

also been identified as a possible constraint limiting the industry from fully

achieving its potential. This paper will provide industry player and market

information, as well as updates on how the industry’s participants are seeking to

address these challenges.

The call center industry is heralded as the newest sunshine industry in the country,

earning around US$1 billion in 2005 alone. The industry currently provides employment

to around 96,000 Filipinos as call center agents. Employment for this sector has more

than doubled every year, starting with 1,500 seats in 2000 and finishing with around
60,000 seats in 2005. The call center industry is part of the outsourcing industry, which

also includes medical transcription, IT support, animation, software development,

financial accounting and payroll processing services. Outsourcing is an outgrowth of the

success of a deregulated telecommunications industry. Intense competition spurred

massive investment in technology and manpower skill among Philippine

telecommunications service providers, leading to services that were better in quality,

lower in price, and more advanced in technology—in some cases, more so than other - 2 -

countries, making the Philippines, from a global standpoint, a relatively more attractive

destination for telecoms-centric, IT-based services such as call center operations.

The Board of Investments (BOI) reports that 2005 revenues in outsourcing

amounted to US$2.49 billion, and projects revenues to jump upwards 52% to reach

US$3.79 billion this year. The Business Process Association of the Philippines (BPAP)

and the Commission on Information and Communications Technology (CICT) have

jointly released forecasts predicting that there will be 103,000 new outsourcing jobs this

year, a 44% increase from the number of new outsourcing jobs in 2005 of about 81,000.

New jobs created last year, meanwhile, represented a 53% increase from jobs

generated in 2004, about 53,000 new jobs. Call centers are expected to lead in

employment generation in the outsourcing sector, much in the same way it has led

investments for the last five years.

The Call Center

A call center is a customer-oriented business operation handling multiple types of

customer-oriented functions such as marketing, selling and servicing, through multiple

channels of customer interaction such as electronic mail, the World Wide Web,

electronic messaging, voice messaging, fax messaging, and traditional mail. Call centers

serve various stakeholders of an organization: from prospects to customers, suppliers to

competitors, as well as distributors, partners, and employees. The term “call center” is

used as a collective term to refer to these operations for the reason that the primary

means of contact facilitated by these businesses are through telephone calls.

Call centers handle both inbound and outbound calls. Inbound calls are initiated

by the customer and the call center’s duty is to respond to whatever requests for

information or service the customer has. Inbound calls include:

 Inquiries, - 3 -

 Requests for assistance from help desk offices,

 Payment authorization,

 Order taking and fulfillment,

 Recording of complaints,

 Customer service and support functions,

 Disputes handling and monitoring,

 Transcription services,

 Verification of electronic eligibility,

 Request handling,

 Sales by telephone,

 Lead generation and marketing, and

 Requests for billing services.

Outbound calls are initiated by the call center representative to a pre-defined list

of prospects or customers given by the organization. Outbound calls cover:

 Telemarketing activities,

 Advisory services to selected clients,

 Verification of sales orders prior to delivery and billing,

 Credit and collection concerns,

 Reactivation and reinstatement of services,

 Loyalty program updates, and

 Proactive customer support services such as preventive maintenance calls.

The Global Field

In 2004, Frost and Sullivan predicted that revenues in the call center industry will grow

from US$655M in 2000 to US$1.5B in 2007. In contrast, the Philippine call center

industry has reached US$1B in 2005 while the Indian call center industry has reached

US$2.5B in the same year. The industry indeed is growing at a rate faster than has ever

been forecasted in the past. The global demand for outsourcing services is forecasted to

hit the $180 billion mark by 2010, according to a September 2005 report by McKinsey

and Company. The demand for customer call services is expected to reach US$43

Billion, 24% of the global demand for outsourcing. Philippine call centers aim to capture

around 5% of the global outsourcing market, which means a revenue stream that could

reach US$10 billion annually, or roughly a 25% global market share in customer call

services outsourcing. - 4 -

Global Demand for White Collar IT

Services in 2010

11%

11%

11%

4%

4%

3%

3%

1%
28%

24%

Contact

Services

Source: McKinsey and Co.

Global activity in outsourcing was spurred by the trend towards “offshoring”, a

shorter term for offshore outsourcing, the arrangement by which one company contracts

with service providers located outside the country for services that could also be or

usually have been provided in-house. Outsourcing business processes to remote

locations is made possible by advancements in the telecommunications sector in the

outsourcer countries. Lower labor cost in these destination countries (e.g. India, China,

the Philippines) compared to the home countries (e.g. the United States, the United

Kingdom) of the service-demanding companies as well as improved connectivity cost

from continued technological improvements and deregulation in the telecommunications

sector in these new offshore countries have made offshore outsourcing attractive. The

costs of operating a call center in the Philippines, for example, is reportedly 40% lower

than in the United States (55% cost savings from labor less 15% incremental cost from

travel and telecommunications requirements). Offshore outsourcing in general brings in

around 25% to 50% in cost savings.

The social effects of globalization have made manageable the challenges of

cross-cultural communication: many offshore destinations have a Western heritage and

almost all are exposed to Western culture, even pop culture, through the Internet, cable - 5 -

television, and other entertainment media, e.g. movies, books. The differences in time

zones between the servicing and the served countries are addressed through alternate

six- to eight-hour shifts in the day, enabling call centers to maintain 24-hour service
agent availability, with incremental costs incurred for the perfunctory hazard pay and

other risk benefits, costs that, although necessary, would still be significantly less of a

burden than to hire service agents in the served countries, e.g. US, UK, Japan.

The Asia Pacific region outperforms other regions such as Eastern Europe,

South America and Africa and stands to take most advantage of the continuous growth

in outsourcing. Japan and South Korea are seen to increase nearshore outsourcing

investments in low-cost, labor-rich neighboring China while Southeast Asian countries

benefit from close-to-Western cultures, open economies, and advanced technologies for

a similar cost advantage. Frost and Sullivan forecasts that call centers in Asia will grow

from 21,360 in 2004 to 39,248 call centers in 2011, at a compound annual growth rate of

9.1 percent.

Forecast Growth of Call Centers in Asia Pacific

21,360

39,248

15,000

20,000

25,000

30,000

35,000

40,000

45,000

2004 2005 2006 2007 2008 2009 2010 2011

*At a Compount Annual Growth Rate of 9.1%, as forecasted by Frost and Sullivan

Source: Frost and Sullivan

Of the Asian destinations, India is the top choice, with other nations such as the
Philippines, Malaysia, Singapore, and China following closely. The Philippines, having

an American-influenced culture, a proficiency in English comparable to India without the - 6 -

heavy accent, and a skilled labor force, is considered the greatest threat to Indian

domination in this sector.

The A.T. Kearney Global Services Location Index in 2005, a survey conducted to

measure the relative attractiveness of offshore locations with regard to financial structure

(40%), people skills and availability (30%), and business environment (30%) has

identified the ten most attractive countries for offshoring in 2005 as: India, China,

Malaysia, the Philippines, Singapore, Thailand, Czech Republic, Chile, Canada and

Brazil. The study included the following metrics for each assessment category:

Category Sub-Category Metrics

Financial

Structure

Compensation Cost Average wages, Median compensation

costs for relevant positions (call center

representatives, IT programmers,

operations managers)

Infrastructure Costs Occupancy, electricity and communications

systems, travel to customer destinations

Tax and Regulatory

Costs

Relative tax burden, costs of corruption,

fluctuating exchange rates

People Skills

and
Availability

Cumulative business

process experience

and skills

Existing IT and BPO market size, call

center and IT quality rankings,

management and IT training quality

rankings

Labor force

availability

Total workforce, university-educated

workforce

Education and

language

Scores on standardized education and

language tests

Attrition rates Relative BPO growth and unemployment

rates

Business

Environment

Country environment

(economic and

political aspects)

Investor and analyst rating of overall

business and political environment, AT

Kearney’s Foreign Direct Investment

Confidence Index™, extent of bureaucracy,

government support for ICT sector

Country

infrastructure

Blended metric of infrastructure quality

(telecoms, IT services)

Cultural adaptability Personal interaction score from AT

Kearney’s Globalization Index™

Security of

intellectual property

Investor ratings of IP protection and ICT

laws, software piracy rates

Source: A.T. Kearney - 7 -

Among the offshore locations, the Philippines is rated highest in Financial

Structure, India leads in People and Skills Availability while Singapore is rated highest in

the Business Environment category for the year 2005. The previous 2004 index exhibits

mostly the same players, with slightly different rankings: India, China, Malaysia, Czech

Republic, Singapore, Philippines, Brazil, Canada, Chile and Poland. The Philippines,

Thailand and Chile moved up from the 2004 rank. The Philippines benefited from slight

improvements in the people and business environment factors, while Thailand and Chile

gained from people and skills availability as well as business environment. Regardless

of differences, however, the report emphasized that each country studied exhibit

characteristics that are each attractive to companies wishing to outsource their offshore

locations. The study highlighted that offshoring is not a “one-size-fits-all” strategy and
that the final selection of country will still be based on factors entirely arbitrary and

exclusive to the company making the outsourcing decision.

AT Kearney Global Services Location Index 2005

3.5

3.2

3.0

3.6

1.6

3.3

2.6

2.7

1.1

2.9

2.9

2.7

2.6

3.0

1.3

1.2

2.0

1.0

2.7

1.5

1.9

1.9
2.4

1.2

1.2

1.4

1.6

1.3

2.1

1.8

1.1

1.2

1.4

0.9

1.1

1.0

2.0

1.4

1.2

1.1

0.9

0.8

India

China

Malaysia

Philippines

Singapore
Thailand

Czech Republic

Chile

Canada

Brazil

Mexico

Poland

Hungary

Cos ta Rica

Financial Structure Business Environment People Skills and Availability

Source: A. T. Kearney

The 2005 ratings were gathered from the AT Kearney Global Services Location Index 2005, which uses

the same categories and evaluation metrics as the AT Kearney Offshore Location Attractiveness Index

2004. The difference in the two reports is in the inclusion of non-offshore destination countries such as
the

United States, the United Kingdom, France, Germany, etc. in the 2005 Attractiveness Index. - 8 -

AT Kearney Of fshore Location Attractiveness Index 2004

3.7

3.3

3.1

2.6

1.5

3.6
3.2

1.0

3.0

2.9

2.7

1.6

3.4

3.1

1.1

1.3

0.9

1.8

2.0

2.6

0.9

1.4

2.5

1.7

1.6

1.7

2.2

1.2

1.3

1.1

2.1
1.4

0.7

0.9

1.4

0.9

0.9

1.9

0.7

0.9

0.9

1.4

0.6

0.7

0.7

India

China

Malaysia

Czech Republic

Singapore

Philippines

Brazil

Canada

Chile

Poland

Hungary
New Zealand

Thailand

Mexico

Argentina

Financial Structure Business Environment People Skills and Availability

Source: A. T. Kearney

India. Among the top contenders for offshore locations, India is the country with

the most experience. The emergence of call centers as an opportunity for national

growth came at the heels of deregulation in the telecommunications industry in the mid-

1990’s, much like the Philippine experience. The outsourcing sector, the first participants

of which were medical transcription service companies then followed by data

management and customer support providers, began to take root in the late 1990’s. As

in the Philippines, the first operations consisted of support subsidiaries of multinational

companies servicing the parent company.

Low-cost and highly-skilled labor, significant improvements in IT infrastructure,

and a positive business environment spurred by industry organizations such as the

National Association of Software and Services Companies (NASSCOM) propelled

exponential growth for the industry in the years to follow. The NASSCOM estimates

yearly growth of 37 percent for the outsourcing segment with the call center industry

leading the sector. Call centers comprised 46% of the total US$4.6billion revenue the

outsourcing sector earned in 2005. India is the strongest contender in the sector and is

often tagged as the world’s first-choice in offshore outsourcing. - 9 -

In recent years, however, more call center investment decisions are being made

in favor of the Philippines over India. American English being the dominant lingua franca

in sales and support transactions coursed through call centers, the Philippines has a
definite advantage with a culture that is closer to the West and an English tongue that is

the easiest to understand in the whole of Asia, partly to exposure to American television

and pop culture, as well as English being the medium of instruction in all education

levels. It has been observed that India’s pool of talent has the advantage in technical,

specialized occupational skills while the Philippines’ competence is in liberal arts, which

provides more general knowledge as well as capabilities needed for back-office

processing, e.g. communication skills, and cultural adaptability.

A weakness that may dampen India’s prospects is in cultural adaptation. The

2003 story of Dell and Lehman Brothers reportedly bringing back their call centers to the

United States due to customer complaints about difficulties communicating with Indian

agents is now a business anecdote of some renown. Indian outsourcers, however,

emphasize having talent with the highest skills to counteract the effects of culture

dissimilarity: NASSCOM reports that 60% of India’s technical manpower has more than

four years of experience and even a bigger proportion of this talent pool have

engineering degrees.

China. China is the preferred choice as a call center location for companies

targeting South Korea (attracted by ethnic Koreans living in China) with which it has the

closest cultural ties. China is the only other country in the world comparable to India as

far as size and cost of labor supply is concerned. This potential advantage, however, is

constrained by the fact that China still obviously lacks English-speaking manpower and

in this regard cannot as of yet compete head-on with India and the Philippines in the

global outsourcing market. The country’s entry to the World Trade Organization has - 10 -

spurred the inflow of capital as well as Western influence and analysts predict that in due

time the labor supply in China will be comparable to India in size as well as in skill.

Singapore. Despite high labor costs, Singapore enjoys a comparative advantage

from reliable bureaucracy, excellent technical infrastructure, superior educational

systems, political and economical stability, and stringent enforcement of intellectual

property laws for information and data security. Singapore outsourcers provide highvalue services
differentiated from low-value, back-end processes provided by other

Asian countries. To take advantage of this market niche, Singapore outsourcers market

advanced offshore functions such as basic research, robotics, healthcare and medical

diagnostics. Singapore companies in turn outsource lower-value operations to India and

China to gain cost advantage.

Malaysia. What Malaysia lacks in manpower (its population is significantly

smaller than India or China and thereby cannot meet the same economies of scale) it

makes up for in advanced infrastructure. Malaysia is second only to Singapore in IT

competitiveness rankings between countries in Southeast Asia. Strong government

support is apparent in efforts such as the Multimedia Super Corridor project, which

includes the development of infrastructure in what they have called “intelligent cities”

such as Cyberjaya and Penang Cybercity, where big-name ICT players such as IBM and

Motorola have already located their regional offshore service centers.

Latin American Countries. Latin American countries such as Brazil, Chile and

Mexico enjoy the advantage of being “near-shore” destinations, or offshore servicing

countries close to the served country, this being the United States. Near-shore

destinations are in the same time-zone as most customers, thereby lessening the need

to arrange multiple 8-hour shifts in the day as well as the need to invest in additional

expenses for hazard pay, safety insurance and the like. The A.T. Kearney study found

Brazil has the best labor skills in the region, Argentina has the cost advantage, while - 11 -

Chile has the best business environment (e.g. it has, for instance, supplemented

agreements with US and European companies with IP infringement penalty clauses).

Nonetheless, perhaps the primary advantage of the region in general is the vast
availability and incomparable quality of its bilingual, English- and Spanish-language call

centers, much in demand in the United States.

Eastern European Countries. Eastern European countries such as the Czech

Republic, Poland, Romania and Hungary are possible choices for Western European

countries as a near-shore destination. Eastern European call centers provide cost,

language skill, and time-zone advantages. Multilingual call centers for the multilingual

European market can be easily and efficiently set up in Eastern Europe more so than in

Latin America or Asia. Customers from Germany and the United Kingdom moreover may

prefer Eastern European call centers most particularly for its bilingual workforce: citizens

in most Eastern European countries can speak both German and English. Reportedly,

however, Eastern European countries, most particularly Russia, need to upgrade

telecommunications infrastructure to compete with the other regions as well as to comply

with European Union requirements.

The Local Call Center Industry

The Department of Trade and Industry reports that there are 85 call center companies

operating in the Philippines. Call center companies should be distinguished from call

center sites. A “site” is a facility housing a call center operation and a call center

“company” may operate multiple sites. Sykes Asia, for example operates four sites in the

Philippines while People Support operates three. There are three categories of call

center companies:

 Foreign-owned call centers with Philippine subsidiaries. These are call

centers owned by foreign companies, usually from the United States, that

have branched out to offshore outsourcing. - 12 -

 Insourced call centers of large multinational corporations. These are

operations that are dedicated to the parent companies and whose objective is
to bring competitive advantage by transforming an erstwhile internal backoffice function into one that is
revenue-generating.

 Filipino-owned call centers. These call centers are wholly owned by Filipino

entrepreneurs or corporations (e.g. Smart, PLDT, Globe, etc.) that seek

customers from the United States, Europe and Asia, particularly from Japan

and Singapore.

The table below lists some call centers operating in the country and groups them

into the three categories mentioned above.

Foreign-owned call

centers

Insourced call

centers

Filipino-owned call centers

Sykes Asia

Clientlogic Services

E-Telecare International

Infonxx Philippines

PeopleSupport Philippines

Source One

Communications Asia

ePerformax Call Centers

Corporation

Hellocorp. Philippines

Epixtar Philippines IT

Enabled Services Corp.

Teletech
Vocativ Systems

Convergys

Dell Philippines

America Online

Citibank

General Electric

Accesscall Solutions

Advanced Call Solutions,

Inc.

Ambergris Solutions

Cyber City Teleservices

C-Quadrant Corporation

I-Calls Corporation

Parlance Systems

ePacific Global Call Center,

Inc.

Link2Support

Equicom Systems Mngt

Callpoint Outsource

Services, Inc.

SVI Connect

SMeVentures Inc.

Sterling Global Call Center

From initially focusing on supporting responses to email and technical support

inquiries, call centers have now developed services for most types of customer
interaction, from travel services, financial services, technical support services, education

support services, consumer services, on-line business to consumer support and on-line

business to business support.

Ownership. The first call center company to invest in the country, according to

records of the BOI, besides support departments of multinational companies relocated

offshore to take advantage of lower costs (e.g. America Online), is US-based Sykes Asia, - 13 -

which made its investment in 1997. Another US-based firm, PeopleSupport, followed in

2000, along with the first 100% Filipino-owned call center, SVI Connect Corporation, a

subsidiary of software solutions provider Software Ventures Incorporated (SVI). Since

then, more and more Filipino entrepreneurs and corporations have invested in the sector.

Among all BOI-registered call centers, 47% have 100% Filipino ownership.

Over the years, this percentage of completely Filipino-owned call centers vis-à-

vis call centers completely or partly owned by foreign investors has hovered by the 50%

level. The source of employment increases can therefore be attributable to local

investment only partly. Increasingly more employment is generated from foreign

investments in Philippine-based call centers than from Filipino entrepreneurs. A

breakdown of employment figures from BOI Registered call centers from 2000-2006

show that out of all employment generated (as registered with the BOI) in this five year

period, a little more than 50% came from investments in 100% Filipino-owned call

centers. Back-room call center operations of large multi-national corporations like Dell

and General Electric have not yet been considered in these figures, considering these

large global companies employ agents numbering to the thousands at a time.

Percentage of 100% Filipino-Owned Call Centers Vs. All BOI-Registered Call

Centers, 2000-2005

2000
33.33%

2001

50.00%

2002

50.00% 2003

40.91%

2004

48.39%

2005

48.89%

As Of

Feb 2006

46.94%

0%

20%

40%

60%

80%

100% - 14 -

Employment Figures from BOI Registered Call Centers, 2000-2005

3,305

5,878

10,403 10,697

15,319

18,690
3,455

10,249

18,084

22,376

29,335

34,666

5000

10000

15000

20000

25000

30000

35000

40000

2000 2001 2002 2003 2004 2005

Employment f rom FilipinoOw ned Call Centers

Total Employment f rom

Call Centers

Percentage of Employment from Filipino-Owned Call Centers,

from BOI Registered Employment in Call Centers, 2000-2005

95.66%

57.35% 57.53%

47.81%

52.22% 53.91%
0.00%

20.00%

40.00%

60.00%

80.00%

100.00%

2000 2001 2002 2003 2004 2005

Source: Board of Investments

Location. Call centers are now distributed in close to 20 key areas all over the

country. A large portion of this population is located in Metro Manila, most of which are in

the business districts of Makati (32%), Pasig (22%) and Quezon City (16%). Many call

centers have also opted to locate in provinces near Metro Manila such as Laguna,

Pampanga, and Rizal, presumably to take advantage of skilled manpower residing close

to these areas as well as tax incentives offered in government-designated special

economic zones and IT parks.

The growth of the industry in Makati and Pasig has been more organic in nature,

perhaps due to the inherent attractiveness of these areas to investors: the level of

development in infrastructure and business environment in the two areas is more

advanced than in the others, with the country’s most important business district being

Makati and the second most important being Ortigas Center in Pasig. Majority of local

customers are headquartered in these areas while overseas clients will have their - 15 -

Philippine offices in these two cities as well. Furthermore, most technology providers, i.e.

software and equipment vendors as well as service providers, are located in Ortigas or

Makati. The two cities are also transportation hubs and therefore more convenient for

call center agents to commute to and from their place of residence.

Distribution of Call Centers in the Philippines

Makati

32.04%

Pasig

22.33%

Quezon City

16.02%

Iloilo

0.97%

San Juan

1.94%

Mani la

2.91%

Pampanga

2.91%

Cebu

3.88%

Taguig

1.46%

Laguna

1.46%

Davao

0.49%

La Union

0.49%
Rizal

0.49%

Las Pinas

0.97%

Baguio

0.97%

Mandaluyong

4.85%

Munt inlupa

5.34%

Cagayan de Oro

0.49%

Source: callcenterdirectory.net, DTI

Quezon City is a close third, its attractiveness presumably originating from its

being the largest populated city in Metro Manila, as for example, many students live as

well as study in universities in the area. The designation of IT parks such as the

Eastwood City Cyber Park where call centers can gain incentives by locating, has added

to the growth of call centers in Quezon City (incidentally, almost half of all call centers in

Quezon City are located in Eastwood). Similar efforts to attract growth in other areas

through IT incentives have also been adopted by Taguig, Pampanga, and Laguna, e.g.

Fort Bonifacio E-Square IT Park in Taguig in Fort Bonifacio Global City, Taguig, the

Clark Special Economic Zone and Cyber City IT Park in Pampanga, and the Light

Industry and Science Park in Cabuyao, Laguna. Still other call centers have opted to set - 16 -

up operations in areas far from Metro Manila such as Baguio and even beyond Luzon

such as Cebu, Iloilo, Davao, and Cagayan de Oro.

Employment. The DTI estimates employment generated by the local call center

industry at 96,000 jobs as of 2005, a 30% increase from 2004 employment figures.

These jobs came out of an estimated demand of 60,000 “seats” for 2005. A seat refers

to a call center agent available to handle calls (both inbound and outbound) at any given

time. Most call centers operate in two to three alternating shifts in a 24-hour period. Each

seat would constitute employment for at least 1.6 personnel working alternate, daily 8-

hour shifts.

Employment Generated by Call Centers, 2000-2005

2,400

5,600

12,000

32,000

67,000

96,000

20000

40000

60000

80000

100000

120000

2000 2001 2002 2003 2004 2005

Number of Seats, 2000-2005

1,500

3,500
7,500

20,000

42,000

60,000

10000

20000

30000

40000

50000

60000

70000

2000 2001 2002 2003 2004 2005

Year

Source: Department of Trade and Industry - 17 -

In 2004, the Philippines had the largest growth in number of seats compared to its

competitors in the call center industry, China and India:

China 38,000 54,000 +42%

TOTAL 154,000 252,000 64%

20,000

96,000

2003

40,000

158,000
2004

Philippines +100%

India +65%

Country Growth Rate

China 38,000 54,000 +42%

TOTAL 154,000 252,000 64%

20,000

96,000

2003

40,000

158,000

2004

Philippines +100%

India +65%

Country Growth Rate

Source: SGV Review 2003

Nonetheless the Philippine share of the market is still only a small portion of that

of India’s: total number of seats in Philippine call centers (40,000) figure to only a quarter

of that of India’s (158,000) and a miniscule proportion to that of the United States (an

estimated 3 million seats in 2004). Further growth in global demand is still to be

expected as various industry estimates report the demand for call centers to reach

anywhere from between 40,000-75,000 new agents hired in the Philippines per year

starting 2005. However, while the demand for call center seats is steadily increasing, the

growth rate of call center operations year-on-year is falling.

11,000 agents
5,000 agents

20,000 agents

Unmet Hiring

Requirements

2003 40,000 20,000 50%

40,000

40,000

New

Agents

Required

29,000

35,000

New

Agents

Hired

2005 27.5%

2004 12.5%

%age

Unmet

Year

11,000 agents

5,000 agents

20,000 agents

Unmet Hiring

Requirements
2003 40,000 20,000 50%

40,000

40,000

New

Agents

Required

29,000

35,000

New

Agents

Hired

2005 27.5%

2004 12.5%

%age

Unmet

Year

Number of Seats, 2000-2005

1,500

3,500

7,500

20,000

42,000

60,000

10000
20000

30000

40000

50000

60000

70000

2000 2001 2002 2003 2004 2005

Year

133%

114%

166%

110%

42%

% Growth per year - 18 -

The challenge for employment is while the demand for call center services in the

Philippines is steadily increasing, the country’s supply of talent is insufficient. The

slowdown in growth is attributed to insufficient and inconsistent supply, in turn explained

by low acceptance rates in hiring of call center agents in existing call center sites and

high attrition rates, exacerbated by the practice of “poaching” between call center

companies.

Technology and Infrastructure.

World-class technologies in software,

hardware and telecommunications

equipment, as well as highly advanced

technical skills are employed by call centers

to handle the operations needed to provide

the centers’ services. CRM technologies,

interactive voice response systems (IVR),

computer telephony integration technologies

(CTI), call management systems,

automated quality monitoring and recording

systems. Aside from these operational

technologies, however, a call center’s

primary technological backbone would be composed of network and telecommunications

infrastructure technologies owned by the call center as well as technologies available to

the public, i.e. the national telecommunications infrastructure, and technologies available

from local suppliers, i.e. voice over Internet protocol (VOIP) equipment and software.

The extent that such technologies are available and easily accessible to local

businesses affects the competitiveness of the Philippines in the global call center

industry.

Networked Readiness Index Ranking

24

27

34

36

40

39

50
51

75

41

68

70

67

68

10

20

30

40

50

60

70

80

Rank 2004 Rank 2005

Singapore

Malaysia

Thailand

India

China

Indonesia

Philippines

Vietnam - 19 -
It is interesting to note that, despite being one of the top choices in the world as

outsourcing location, the Philippines ranks, and has always ranked poorly in network

readiness surveys, seen by most investors as measures of the competitiveness of a

country in information technology. In both the 2004 and 2005 Network Readiness Index

(NRI) listing compiled by the World Economic Forum (WEF), the Philippines ranked in

the lower levels: 67

th

place in a group of 100 in 2004 and even lower in 2005 (70

th

place).

Other outsourcing destinations fare similarly: India, the top location for offshore

outsourcing is at 40

th

place while China, 2

nd

in the AT Kearney Index, is at 50

th

place.

The WEF NRI is a measure of relative performance in the following areas:

a) aspects of the environment of a given nation for development in information

and communications technology (ICT) such as the regulatory regime and

legal framework for ICT, and the available infrastructure;

b) networked readiness of individuals, businesses and governments;

c) ICT usage by individuals, businesses and governments.

The apparent inconsistency between networked readiness and other IT

competency ratings for the Philippines and the remarkable growth of IT-based services,

made plain by records of investment, revenue, and employment actually generated by

the sector, is attributed by industry analysts to the observation that indices and rankings

comparing countries with each other consider all the regions in the country, from the

most advanced areas to the undeveloped ones. Developed countries such as the United

States, Japan, and Germany have progressed to a point where the availability of

telecommunications technologies and other related services in the less urbanized

regions are virtually at par with that of the most industrialized areas. Developing

countries are characterized by a marked difference in infrastructure and economic

activity between the centers of business and the rural, residential areas.

Such is the case of both India and the Philippines where the small portion of the

population living and working in the centers of business enjoy advanced technology

while the rest have very limited access to even the most basic computing technology, - 20 -

e.g. Internet access, if at all access is given them. Nonetheless, call centers in

developing countries choose to locate only in the industrialized, technology-enabled

centers of business. Thus they are able to employ, and at a cost advantage, the network

infrastructure, hardware equipment, software and consulting services at a comparable

technological level to those used by call centers in more developed countries.

Revenue. The call center industry earned US$1 billion in revenues in 2005, a

growth of 42.86% from 2004’s earnings of US$700 million. The Institute for Deveopment

and Econometric Analysis (IDEA) reports that this figure comes to 10% of the total

annual dollar remittances from overseas foreign workers.) Revenues in the sector have

steadily grown from 2000 to 2005, despite an observed slowdown in growth, evidenced

by smaller growth rates in 2004 and 2005 as compared to the previous years, more

particularly in 2003 when the industry grew by 166%, its highest growth rate ever. A still
optimistic CCAP nonetheless predicts that revenues will continue to expand and will

eventually result in a 70% growth at the close of 2006.

Growth Rates for Call Center Revenues,

2000-2005

42.86%

118.75%

166.67%

114.29%

133.33%

0.00%

20.00%

40.00%

60.00%

80.00%

100.00%

120.00%

140.00%

160.00%

180.00%

2001 2002 2003 2004 2005 - 21 -

Annual Revenues in US$M, 2000-2005

24

56

120

320
700

1,000

1,700

200

400

600

800

1000

1200

1400

1600

1800

2000 2001 2002 2003 2004 2005 2006

*70% revenue growth in 2006 forecasted by the CCAP

Source: DTI

Out of 85 call center companies, the top 10 call centers in net sales earned

around 50% of the total revenues earned by the industry. Around 20 call center

companies were included in the most recent release of the IT Yearbook which includes

the top 500 IT companies (released 2003) in the Philippines. The top 10 call centers in

this list are the following:

 Sykes Asia (USA)

 E-Telecare International (USA)

 Infonxx Phils (USA)

 Cyber City Teleservices Ltd. (Philippines)

 Ambergris Solutions Philippines (Philippines)

 PeopleSupport Philippines

 iCalls Corporation (Philippines)

 Clientlogic (USA)

 Parlance Systems Inc (Philippines)

 ePacific Global Call Center Inc (Philippines)

In both 2003 and 2002, the ten leading call centers in revenues attributed more

than 50% of the revenues earned in the sector, 59% in 2002 and 53% in 2003. Within

this share, the top three call centers Sykes Asia, E-Telecare, and Infonxx together

contributed more than 50%. - 22 -

2002-2003 Revenues in PhPM

3,699

8,836

6,240

16,640

2,000.00

4,000.00

6,000.00

8,000.00

10,000.00

12,000.00

14,000.00

16,000.00

18,000.00
2002 2003

Revenue of Top 10 Call Centers (from SEC)

Revenue of Call Centers in (DTI Figures)

2002 Net Sales of Top 10 Call Centers

Total Revenue: PhP3.7B

Etelecare

23%

Everyone

else

42%

Sykes

Asia

25%

Infonxx

10%

2003 Net Sales of Top 10 Call Centers

Total Revenue: PhP8.8B

Etelecare

20%

Everyone

else

42%

Sykes

Asia

23%
Infonxx

15%

Source: DTI, SEC, IT Yearbook 2003

All ten leading call centers operate hundreds to thousands of seats and have

large-scale operations requiring investments in infrastructure, hardware and software for

call center operations. The huge capital outlays required constrain small- or mediumsized startups in
entering the competition. However, through call center “houses”, a

number of smaller call centers have joined the industry. A “small” call center has on

average 40 seats compared to seats numbering to the thousands employed in the large

scale call centers in the country, e.g. Sykes Asia, Convergys, PeopleSupport, etc. Call

center “centers” such as Business Beanstalk and Five9’s Virtual Call Center (VCC) have

been established to “house” smaller operations run by Filipino entrepreneurs. Large call

centers typically invest in large-bandwidth, dedicated T1 lines to support its connections

with its customers from all over the world. Smaller call centers, however, take advantage - 23 -

of voice over internet protocol (VOIP) technology to enable them to provide similar

services for a significantly lower cost of capital. The difference in technology, however,

sets limitations on the services “call centers in a box”, as coined in a presentation made

by call center eTelecare, are available to provide as, for example, large volumes of

incoming calls may not be as effectively managed as scheduled, periodic, outgoing calls.

Smaller call centers may not be able to provide customer relationship management

solutions as comprehensive as those offered by large scale call centers. These

establishments allow Filipino entrepreneurs to start a call center with minimal capital.

VCC, for instance, aims to develop up to 500 small call centers in the provinces which,

at an average rate of 40 seats per call center, would generate up to 80,000 new jobs.

In addition to the revenues from large and small call centers alike, the sector also

spurs growth in other industries. For every one call center job, reportedly two other
support service jobs are created, most apparently in the real estate, retail, and food

service industries which provide services to an emerging new type of “middle class”

citizens, typically composed of call center agents who are in their mid-20’s, college

graduates, and are now unexpectedly gaining a higher purchasing power than ever

before and who, being mostly single and unburdened with familial responsibilities and

highly influenced by peers and popular culture, have the inclination to spend as much as

they make.

In the real estate sector, CB Richard Ellis reports a 5.8% year-on-year increase

on the cost of office space in the business districts of Metro Manila. Business World

reports that the average vacancy rate in Ortigas and Makati has dropped to 5% in 2005

from 11-13% in 2000 while rent per square meter has increased on the average from an

estimated PhP250 to PhP375 in Ortigas and from PhP450 to PhP650 in Makati.

Convenience stores and fast food establishments are among the sectors most

prominently experiencing growth from the expanding call center industry. The boom in - 24 -

office building construction for call centers is met with the rise of food and retail outlets

located in these establishments, if not at the ground floor of these buildings (prompting

the relaxation of some community regulations regarding location of certain types of

businesses), then in nearby structures, such as malls, or in entirely new property

developments, e.g. reportedly a 1,500 sq.m park will rise in Ortigas to house coffee

shops for call center agents.

Other Industry Participants. The Philippine industry is regulated and monitored

jointly by the efforts of the Board of Investments, the Department of Trade and Industry,

economic zone authorities where call centers are located, and industry associations

representing call center companies, both Filipino- and foreign-owned.

The Board of Investments serves both as an advocacy-promoting and

operations-monitoring arm of the government in this industry. It organizes missions to

other countries to disseminate facts and figures about the current state of the industry for

the purpose of pulling in more investors to establish or transfer their call center

operations to the Philippines. The resulting investment proposals are also assessed by

this agency and consequently approved and registered. Once these decisions have

been made, the BOI then facilitates the activities needed for the investor to locate,

establish, and eventually operate its call center operations.

The Philippine Economic Zone Authority (PEZA) as well other Freeport agencies

mandated to regulate the operations of companies located in economic zones, freeport

zones, cyber- or IT- parks and cyber- or IT- buildings, step in to monitor and enforce the

trade policies, concessions, and limitations imposed on call centers located in their area

of authority.

Outsourcing companies in the Philippines are moving towards organizing

themselves into associations, for the outsourcing sector as well as for the smaller

subsectors, such as call centers, medical transcription service providers, software - 25 -

development companies, and business process outsourcers. The Business Processing

Association of the Philippines (BPAP) is the quasi-“umbrella” association of all ITenabled service
associations in the country. Call centers are encouraged to join the Call

Center Association of the Philippines (CCAP), established in October 2001 to be the

“official organization of outsourced call center providers”. The BPAP and the CCAP

actively promote the services of their members through exhibitions, conferences, trade

missions and other events abroad for the purpose of bringing more investment as well

as contributing to the development of standards, competencies, technologies and skills

in their industry’s practices. The CCAP has a membership pool of 25 call center

companies at present, from a founding member population of only seven call centers in

2001.
Issues and Challenges

The offshore location decision is influenced by a number of factors and it is these criteria

that India, China, the Philippines and other countries are evaluated against. It follows

that it is in these attributes that the Philippines should perform for a distinct competitive

advantage over the others. These factors include the following: quality and cost of labor

(including technical competency and language skills), connectivity (i.e.

telecommunications bandwidth) cost and reliability, mature business, regulatory and

technological environments for outsourcing operations, political stability, and cultural

alignment between the offshore outsourcer, the outsourcing company, and the

customers to be served by the call center. - 26 -

Decision Criteria in Selecting

an Offshore Call Center

Quality and Cost of

Labor

Reliability and Cost of

Connectivity

Mature Business

Environment

Political Stability

Cultural Alignment

Among these success factors, the Philippines competes strongest in (1) quality

and cost of labor, and (2) cultural alignment. It is in these two factors that exponential

growth in 2003 and 2004 can be attributed. The challenge of sustaining the Philippines’

advantage in the industry can be discussed from two vantage points: first from the view

of creating a distinct competitive advantage and second from the view of ensuring the
distinct advantage created is impervious to erosion arising either from deliberate

attempts by competing entities to undermine it or from developments in call center

operations and technologies that will shift the bases of competition.

The benefit of lower cost is the Philippines’ most substantial value offering to call

center investors and customers. The results of the AT Kearney survey have shown that

while other factors are also significant, the global competition in the call center sector

continues to be driven by cost at the present: it remains to be the most important factor

in the perception of the “attractiveness” of an outsourcing location. In this regard, the

country’s low infrastructure and compensation costs, as well as the provision of special

tax concessions within specific zones have contributed significantly to making the

country a preferred choice among investors. In addition, the results of the study also

emphasized that in the Philippines, call centers were given most emphasis among the

outsourcing sectors and likewise highlighted the efforts of the government to promote - 27 -

these services by establishing special economic zones that provide investors with

freeport privileges, tax shields and holidays.

The advantage of cost over other factors, i.e. people and environment, affecting

the offshore location decision is nonetheless not a perpetual one. The leveling of

technical competency between the different countries through globalization and

convergence of technologies as well as the homogenization of social conditions between

different economies may affect the importance of cost as a success factor. The ubiquity

of information available through advanced mass media and telecommunications have

also brought about less cultural heterogeneity between the countries competing as call

center locations. The advantage of cultural alignment is therefore not exclusive to the

Philippines and, further, is one that erodes with the passage of time and the availability

of communications technology.
Among the participants in the global call center industry, India outperforms all

other countries with a combination of advantages: low-cost labor as well as a

progressive educational system ensuring a continuous supply of highly-skilled

employees, reliable low-cost infrastructure, supportive business government, and a

wealth of management experience in the call center industry, as well as in other

outsourcing services. The Philippines directly competes against India by providing labor

and infrastructure at comparable rates and furthermore provides the advantage of a

Westernized culture and better performance in conversational English to appeal to USand UK-based
customers. Singapore has the highest compensation rates but has the

advantage of good government reflected in lower costs of bureaucracy and corruption.

China’s major advantage is its massive pool of available low-cost talent—only China can

directly compete with India in size of available labor—however labor skills are still limited

in language proficiency and management experience in the industry. - 28 -

What makes India a success story is the combination of multiple sources of

advantage available to the call center investor. The Philippines’ current competitive

advantage meanwhile is in the combination of low compensation cost and high English

proficiency, and while this advantage continues to bring additional revenues and

employment to the sector, growth rates have also been observed to be decreasing,

apparently due to two observable trends: low acceptance rates and high attrition rates.

Both low acceptance and high attrition threaten the advantages of labor availability, cost

and quality of Philippine call centers.

The consistency of supply of qualified call center personnel is threatened—as

reflected in a very low 3% acceptance rate—by apparent degradation of the quality of

primary and secondary education in both private and public schools. Although it has

been reported that the average 10-year-and-above literacy rate in the Philippines is

above 93%, literacy is not enough to ensure a position for a call center applicant. Basic
English proficiency, for that matter, is considered a minimum requirement, enough for

the agent to be considered for a position, but still insufficient to match the higher levels

of conversational and even colloquial proficiency required for hiring. While low cost labor

still works to the country’s advantage, labor on the average making up 60% of the total

costs of operating call centers, such an advantage will not be sustainable if the country

is not able to supply as much as is needed by steadily growing demand.

While hiring is becoming more and more stringent, English proficiency in the

formative levels of education remains below average. English language skills tend to

diminish over time, as shown by statistics reported by the Department of Education, e.g.

Grade 4 public school students show national average of 42% in English, while high

school students show 30%. As English and communication subjects are required less in

college, it may be expected that the level of proficiency will deteriorate more in the

tertiary levels of education. Although English continues to be widely used in business, in - 29 -

government (at least in the high levels), and in the Internet, and required in school,

programs in local mass media and entertainment are dominated by Tagalog films,

making mastery of English a more difficult task for the average call center applicant. The

current state is reflected in the low acceptance rate among applicants in call centers and

other BPO companies. Out of every 100 new college graduates applying, only three are

hired.

High attrition rates and the increase in “poaching” and “piracy” of agents on the

other hand threaten the low cost of labor as companies invest in benefits and

compensation packages to ensure agents will not move to a competitor. The labor

attrition rate in the Asia Pacific region is reported to be 19.1% according to Frost and

Sullivan. In comparison, the turnover rate in the Philippines is reported to be 35%, in

India 22%, and 35-50% in the United States and the government and industry sectors
look for ways to reduce turnover to the industry standard. At this rate, a job in a call

center is already considered as a career in the Philippines, and not looked upon as

merely a “temp” position as in the United States. Nonetheless, “poaching” or “pirating” of

employees between call centers has already been observed because of the limited

talent pool. Call centers are challenged to implement best practices in curbing employee

attrition in the call center industry such as a flexible and conducive environment, high

incentives, and training schemes, and more importantly, a career path development plan

to convince college graduates that being a call center agent is not a “dead-end” type of

job.

Another challenge to gaining employment is the emergence of automation

technology. Despite the low-cost labor advantage offered by offshore call centers,

companies continue to look ways to gain even more cost savings, if not from a more

efficient and thereby cheaper workforce, then from automation technology. Meta Group’s

technology research services group reported an increasing number of clients choosing - 30 -

to implement voice-automation technology systems to handle standard, routine inquiries,

e.g. account balances, product and service, payment offices, etc., instead of contracting

the services of an outsourcer in a low-cost country or establishing their own call center

operations offshore.

Only customer calls requiring more complicated assistance will be routed to

offshore call centers, perhaps from the Philippines or India. This direction means that

customers will have higher expectations from call center agents in offshore countries.

Agents will no longer be able to rely on simplified question-and-answer instructions or

“scripts” to answer more complex questions that will be asked of them. Industry analysts

observe that, out of 100 applicants, only three to five are hired given existing skill

requirements. Support services for more complex inquiries, perhaps requiring technical
information or instruction, will consequently require higher technical competency, as well

as more than adequate communication and problem-resolution skills. Should such

requirements be made necessary, it is expected that the hiring rate will be much lower in

the years to come, unless initiatives are implemented to enhance the skills and

capabilities of existing as well as future workers in this sector.

Low infrastructure development in areas outside Metro Manila also threaten the

cost advantage as call centers are constrained with only a few places to locate their

operations and while the choice of locations is limited, the cost of real estate increases,

giving call center investors very few alternatives on where in the Philippines to operate.

While on the one hand the rise in real estate prices is seen as contributing to the trickleeffects of
revenue growth in the call center sectors, on the other hand it can be seen as

a threat to the country’s cost advantage as far as real estate and infrastructure costs are

concerned.

On the brighter side, it can also be observed that the end of 2005 and the early

half of 2006 have seen efforts by various industry participants to address the issues - 31 -

labor availability and skill shortage. This means that while the sustainability of

competitive advantage is threatened by internal factors, there have been efforts by the

call centers, government, and other sectors (e.g. schools, training institutions) to sustain

the advantage. President Gloria Macapagal Arroyo for one has issued an order directing

the Department of Education to revert to English as the primary medium of instruction in

the primary and secondary levels. In the tertiary levels, some universities, i.e. University

of the East, and the Pamantasan ng Lungsod ng Maynila, have started “Speak English”

campaigns. Some call centers likewise enforce a “No Tagalog” rule while within the call

center premises. A quick walk through food establishments in close proximity to call

center hubs will reveal that agents take this rule seriously, and continue to speak heavily

accented English amongst their peers even beyond work hours.

The shortage in proficient English speakers has spurred the growth of foreign

and local language proficiency services to improve conversational English to increase

the hiring rate, opening the opportunity for local entrepreneurs to participate in a lesstechnology-
intensive industry complementary to the call center industry, and one that

has global market demand notwithstanding. Language training and proficiency

assessment service providers such as Carnegie Speech (of Carnegie Mellon University)

and the John F. Kennedy Center Foundation-Philippines, have located in the country

taking advantage of the opportunity to share into the growing market of call centers, and

consequently of call center agent training and recruitment. Language services such as

these make use of speech recognition technology besides traditional training methods to

enable detection of errors in accent, punctuation, and grammar in the spoken English

language. With English considered a native tongue among college-educated Filipinos, it

can be reasonably expected that such errors are curable, and will require less time and

effort than a similar initiative in India or China. Incidentally, more Philippine companies

can venture into offering these complementary services as a way to expand its share in - 32 -

the call center industry market and also as a way to bring down the cost of these

services to reach more potential hires. The sector providing English proficiency training

services earns up to $30 billion annually worldwide.

An unresolved issue however remains to be who will bear the cost of such

improvements. Some call centers have shouldered the cost themselves, offering free inhouse training
for new hires. Still others have established joint efforts with existing

universities to incorporate similar training and instruction in the regular university

curriculum. Call centers have established personnel development initiatives, e.g. inhouse training and
evaluation, to enhance skill, and compensation and benefits

initiatives, e.g. higher allowances, all-expense paid holidays and vacations, career

development planning, etc. to curb attrition rates, ensure greater stability of the

workforce size, and lessen the “poaching” of call center agents. More call centers are
also contributing to the development of the countryside, more specifically the locations

outside Metro Manila such as Cebu, Davao, Baguio, etc. Expanding call center

operations to provinces will provide more labor supply, and breathing room to answer to

the intense scrambling for office space in Metro Manila. Call center operations will also

encourage infrastructure development in other metro cities, with the possibility of

replicating the development in the cities of Metro Manila in infrastructure and skill to the

countryside areas.

Whether these efforts will eventually sustain the advantage or not will be

determined by two developments industry participants should take care to observe at the

close of the year: the first development is how the market will respond to the industry’s

efforts, i.e. whether the growth in demand will be sustained by continuous inflow of new

contracts from existing and new investors and the attainment of forecasted increases in

employment, facility expansion and investment; while the second development is how

the industry will answer the demands of the market, i.e. whether the total operational - 33 -

capacity (as to labor supply, connectivity, technology, facility and real estate) of the

entire sector combined will be sufficient to respond to the rise in demand.

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