CONFERENCE ON SERVICE SCIENCE, CONFERENCE ON SERVICE SCIENCE, MANAGEMENT & ENGINEERING (SSME): MANAGEMENT & ENGINEERING (SSME): Towards Philippine Global Competitiveness Towards Philippine Global Competitiveness In In Offshoring Offshoring & Outsourcing & Outsourcing August 5-8, 2008 Audio-Visual Room, CICT Building C.P. Garcia Ave., Diliman, Quezon City
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CONFERENCE ON SERVICE SCIENCE, CONFERENCE ON SERVICE SCIENCE, MANAGEMENT & ENGINEERING (SSME):MANAGEMENT & ENGINEERING (SSME):
Towards Philippine Global Competitiveness Towards Philippine Global Competitiveness In In OffshoringOffshoring & Outsourcing& Outsourcing
August 5-8, 2008
Audio-Visual Room, CICT BuildingC.P. Garcia Ave., Diliman, Quezon City
Philippine IT-enabled services and BPO industry: on the world stage
OSCAR SAŇEZCEO Business Processing Association Philippines
Business Processing Association Business Processing Association of the Philippinesof the Philippines
●
Private sector-led organization representing all sectors of the BPO and IT-Enabled Services (ITES) industry and their support industries
Created to give the Philippine BPO industry a single point of contact for the world; one-stop information and advocacy gateway
●
210 company members and 5 association members (CCAP, PSIA, MTIAPI, ACPI, GDAP).
●
Full-time management team leading the execution of all initiatives
3
OffOff--shoring and outsourcing (ITshoring and outsourcing (IT--BPO) involves IT applications, BPO) involves IT applications, business process, and design/engineering servicesbusiness process, and design/engineering services
Source:
McKinsey Global Institute; Gartner 2005 database; IDC; interviews
IT applications services (ITO) Business process services (BPO) Engineering services (ESO)
Application development and maintenance•
Application development•
AD integration and testing•
Application MaintenanceSystem Integration•
Analysis•
Design•
Development•
Integration and testing•
Package implementationIT Infrastructure Services•
Help desk•
Desktop support•
Data centre services•
Mainframe•
Network operations•
IT consultingSoftware product development•
New product development•
System testing•
Localization/Support•
Gaming
Horizontal processes•
Contact centers•
Human resources•
Finance and accounting•
Supply chain (procurement, logistics management)
Industry/vertical processes•
Banking and insurance •
Telecom •
Public sector •
Utilities •
Health care •
High-tech •
Oil & Gas •
Consumer productsKPO•
Business research, financial research•
Animation•
Data analytics•
Legal process and patent research•
Other high-end processes
Manufacturing Engineering•
Upstream product engineering–
Concept design–
Simulation–
Design engineering•
Downstream product engineering–
CAD/CAM/CAE–
Embedded software –
Localization•
Plant and process engineeringArchitecture design• Design process• Building Management models
Outsourcing and Off-shoring (O&O) Services: Three main sectors
1 2 3
4
Direct employment FTEs
Revenues USD billions
Source:
BPAP/McKiinsey
Team analysis
1.5
2004
4.9
2007
+49%
100,500
2004
299,168
2007
+45%
Philippines ITPhilippines IT--BPO industry currently has close to USD 5.0 BPO industry currently has close to USD 5.0 billion in revenuesbillion in revenues
•
Strong intrinsic skills–
English language–
Cultural affinity to US –
Large pool of talent•
Competitive factor costs –
Labor–
Real estate–
Telecom •
Best in class incentives
Philippine ITPhilippine IT--BPO: Growing all sectors at tremendous rateBPO: Growing all sectors at tremendous rate
Sector 2007 Revenues ($000,000)
Past 3 years ave
growthContact Centre 3,600 52
Back Office (non-voice bpo) 398 46
Transcription (non-voice bpo) 197 24
Animation 105 38
Software 423 35
Engineering/Design Process 152 55
TOTAL Philippine IT-BPO (export only)
4,875 50
5Source: Joint BPAP/BOI/PEZA/CICT Task Force
• All sectors growing; Contact centres is 2/3 of industry and growing 52%/yr over the past 3 years• Back-office
services primarily in F&A, HR, Legal and Health services now 15%, growing 46%/yr• Software development is 10% of industry and continues to grow at 35%/yr
6
Philippines now the third outsourcing destination Philippines now the third outsourcing destination in the world, 2in the world, 2ndnd outside of North Americaoutside of North America
Source:
Everest research
7
•
Considerable pool of generalist and specialist talent•
Strong English skills, both verbal and writtenSuitable and abundant talent
1
The foundations of the PhilippinesThe foundations of the Philippines’’ success success
Source:
BPAP/McKinsey Team analysis
LowHigh
Quality infrastructure
•
World-class telecommunications•
Abundant and low-cost real-estate in major urban areas•
Accessibility3
Conducive business environment
•
Competitive incentives (e.g., income tax holiday)•
The Philippine talent value proposition: Large pool of EnglishThe Philippine talent value proposition: Large pool of English-- speaking talent speaking talent
Source:
Phils
Comon
Higher Education : CIA World Factbook
2007; *China data for unemp
and literacy is major Cities only
Suitability rates are empirically based on a total of >80 interviews with HR professionals working in each country
Number of college degree graduates
2007 Annual growth
Business & Accountancy 128,000
Engineering & Tech 55,752
IT-related courses 42,047
Architecture 3,100
Medical Sciences 31,400
Fine Arts/Humanities 7,660
TOTAL Tertiary level 454,818 3.8%
Pop Labour force Unemp
rate Literacy
World 6,602M 3,400M 6.3% 82.0%
India 1,130M 509M 7.8% 61.0%
China 1,322M 798M 4.2%* 90.9%*
Brazil 190M 96M 9.6% 88.6%
Philippines 90M 36M 7.9% 92.6%
Over 400,000 college-
degree graduates annually out of 90 million population and a 36 million size labour force with literacy rate of 92.6%
9
“Of 100 graduates with the correct degree, how many would you employ if you had demand for all?”Per cent
EngineerCountries
The Philippine talent value proposition: Quality The Philippine talent value proposition: Quality
*
Mexico is the only country where interview results (higher number) were adjusted ex-post since interview base was thinner
Source:
Interviews with HR managers; HR agencies and Heads of Global Resourcing centers; McKinsey Global Institute
Asia
Latin America
Eastern Europe
Suitability rates are empirically based on a total of >80 interviews with HR professionals working in each country
42* 35*
Finance/accounting Generalist
20
13
35
25
10
50
50
50
10
20
China
Philippines
India
Malaysia
Brazil
Mexico
Russia
Czech Republic
Poland
Hungary
30
20
40
30
50
15
15
25
13
25 11
8
20
10
30
3
30
15
20
10
10
•
Frost & Sullivan, August 2007: Philippines among top 10 shared services and outsourcing locations in the world
•
IMF, March 2007: “The Philippines has established a strong presence in voice-based BPO sectors such as call centres, and there are also signs of growth
potential in other offshore services, such as medical transcription and animation.”
•
Gartner, Dec 2007: The Philippines has become a destination for call centre and back-office finance and accounting operations; rates highly in cost, labour quality and language/cultural compatibility.
•
Nomura Securities, November 2007: “We think that the Philippines has grown into the No. 2 outsourcing base after India in call centre–based BPO fields.”
•
Everest Consulting, Apr 2008: The Philippines is now the third largest destination geography for BPO services
•
Frontier Strategy Group, September 2007: The Philippines is among seven key markets that are “above the rest”
and are the “most critical to achieving corporate growth and outperforming the competition in 2008 and beyond”
•
National Outsourcing Association (UK), October 2007: Philippines awarded Off-shoring Destination for 2007
The Philippines is viewed as a favorable location for BPOThe Philippines is viewed as a favorable location for BPO--IT IT servicesservices
11
O&O marketUSD billions
Source:
Team analysis
~45
2005
~130
2010
CAGR+24%
OffshoringOffshoring and outsourcing is a large and growing marketand outsourcing is a large and growing market
Addressable market Actual penetrated market
~450
10% ~30%
12
Global offshore BPO industry offers large Global offshore BPO industry offers large growth potentialgrowth potential
Insurance
*
25-35
35-4010-12
10-128-10
20-25 120-150
Retail Banking
*
Travel & hospitality*
Auto mfg*
Telecom* F&A/HR Total
Industries Horizontal functions
4-5
10-15
Pharma* Others*
Current offshoring
2005 penetration **
Innovation can further expand the addressable market
Estimated addressable market*** by 2010USD billion
6% 9% 3% 9% 9% 8% 9% 9% 8%
Potentially offshorableAlready offshored
*
Including call centres, procurement opportunities; excluding opportunities in horizontals, e.g., F&A, HR**
Proportion of addressable market offshored
today; India share assumed as 46% ***
Includes addressable markets in currently offshoring
industriesSource: McKinsey Business Technology Office; McKinsey Global Institute; McKinsey Outsourcing & Offshoring
Defining processes that are offDefining processes that are off--shorableshorable
*
Includes checking and savings accounts, money market, CDs and other basic retail products; excludes investment management, trust
and fiduciary services**
Includes consumer loans, auto finance, other unsecured consumer credit, small business lending; excludes mortgage, credit cards and corporate lendingSource:
McKinsey Business Technology Office (BTO) practice; McKinsey Global Institute; McKinsey Outsourcing & Offshoring
Rich opportunity to develop F&A Outsourcing capabilityRich opportunity to develop F&A Outsourcing capability
14
15
Further value creation in ITFurther value creation in IT--BPO would involve moving from BPO would involve moving from factor cost to revenue enhancementfactor cost to revenue enhancement
Source: McKinsey Global Institute, McKinsey Outsourcing & Offshoring Practice
Labour cost arbitrage
Factor cost
Process productivity
Skills arbitrage
Automation
Centralisation
Reengineering
Cost avoidance
Leakage prevention
Capital cost avoidance
Opportunity loss (time or information)
Service extensions
Data mining
Price elasticity
Revenue enhancement (existing services)
‘Below the waterline’
products for existing markets
New markets
Skills-limitedservices
Revenue enhancement (new services)
Top software provider
Value creation from O&O
•
Lowered support costs by over 60% by moving to India and Philippines
•
25% of development team in China, India, Hungary, and other offshore sites
•
£50mn/yr saved through revenue audits
•
USD20+ million HRIS capital outlay avoided by outsourcing HR
Examples
Leading financial institution
•
Live customer support for USD40 per application
•
Focused sales campaigns extended to a wider range of credit card customers
Current focus of most offshorers
Leading industrial MNC
Leading high tech company
Leading telco, and top NA bank
16
The Philippines has the intrinsics to compete in The Philippines has the intrinsics to compete in several emerging service areas, but will need to several emerging service areas, but will need to take action to capture the opportunity take action to capture the opportunity
Source:
McKinsey Global Institute; BPAP team analysis
Low
Domain expertise required
High
17
The Philippines has the intrinsics to compete in The Philippines has the intrinsics to compete in several emerging nonseveral emerging non--voice areas, but will need to voice areas, but will need to take action to capture the opportunity take action to capture the opportunity
Source:
McKinsey Global Institute; BPAP team analysis
Low
Domain expertise required
High
Must get the macro issues right to attract any/all players
These five slivers could potentially represent up to These five slivers could potentially represent up to a third of the Philippines 2010 aspirationsa third of the Philippines 2010 aspirations
*
Assumes the following CAGRs: healthcare, 44%; F&A, 33%; HR, 25%; ITO, 17%; ESO 19%**
Assumes the following CAGRs: healthcare, 54%; F&A, 72%; HR, 43%; ITO, 36%; ESO 85%Source:
BPAP; team analysis
•
Maintaining our current market shares across these five slivers would triple revenues by 2010
•
Additional penetration could yield 2-3x
Philippines revenues
Healthcare
F&A
HR
ITO
ESO
Totals
70
83
40
211
48
456
22
5
5
1
<1
2005
Maintaining market share, 2010*
Growing market share, 2010**
Implied market sharePercent
Represents 30% of Philippines 2010
O&O aspirations
600
1,000
240
1,000
1,000
3,840
30Percent of 2010 aspiration
400
350
120
450
120
1,440
11
USD millions
ILLUSTRATIVE
19
Healthcare: Philippines has substantial strength in Healthcare: Philippines has substantial strength in medical servicesmedical services
•
Although the market is still in its nascent stages, India is emerging as a strong contender for offshoring healthcare services
USD millions
Medical transcription–
Dictation conversion to text–
Maintain and update electronic recordsImaging
–
Document indexing–
Conversion of legacy documentsDisease codingMedical billing
–
Payment posting, reconciliationsForms and claims processing
–
Claims entry–
Member, provider, and agent customer care
*
2005 figures; excludes ITO and ESO; market share assumes 7,000 seats at USD11,900/seatSource:
However, it is facing declining margins due to the rise of transformational business processing outsourcing, which is capturing a significant amount of traditional ITO business
Global landscape
41 ITO
Global offshoring100% = USD44.5 bn
9
2001
18
2005
+21%
•
Philippines ITO is dominated by Accenture with the captive presence largely in helpdesk and technical support functions
•
Approximately 8% of the Philippines O&O efforts in ITO
Philippines
1 ITO
Philippines’
market share*100% = USD18 billion
•
Pointwest•
ADTX•
HP•
Accenture•
Headstrong
•
Sun Micro•
Intel•
Dell•
Intel
Providers Captives
•
Mature industry (20+ years)•
~100k graduates per year•
Workers perceived to be highly proficient in technical and business skills for ICT projects
•
Perception on process maturity (i.e., SEI-CMM certification)
•
Limited captive landscape•
High dependence on helpdesk
•
RCG IT•
Trend Micro•
Netsuite•
Gurango
Enablers Constraints
Cost Talent suit.
Vendor lndscp
Risk profile
Infra-structure
Biz environ
Talent avail
AD&AM–
Development–
Testing–
Review–
Support–
Quality control/acceptance testingSystem integration and package implementation
–
Analysis–
Design and developmentTraditional IT (IT infrastructure)
–
Desktop and server–
Network
Global revenue pool
Processes commonly offshored
Growth indicator UncompetitiveCompetitive
23
Limited penetration in Engineering Services offshoring (ESO)Limited penetration in Engineering Services offshoring (ESO)
•
High tech/telecom and automotive have been the leading industries, with bulk of offshoring going to China, India, Mexico and Taiwan
BPAP to provide services that would encourage BPAP to provide services that would encourage development of Next Wave Citiesdevelopment of Next Wave Cities
Source:
Team analysis
City readiness•
Which cities are ready?•
What are the gaps?•
Where is specific expertise?Penetration•
Who is operating here today? •
What activities do they undertake?
•
Where are they located? •
How many FTEs?
Segment readiness•
How have various slivers fared in the Philippines?
•
Which slivers have natural fit for the Philippines, i.e., growth prospects?
Topics
•
Investors/locators•
Real estate developers•
Utility providers•
Colleges and universities
•
National government•
LGU's•
Others
Information “demands”
Information Services
BPAP Inventory
BPAP city scorecard
Case studies
Next wave cities
29
Ilocos Cagayan Valley
Central Luzon
Southern Tagalog
Bicol
Western Visayas
Central Visayas
Eastern Visayas
Western Mindanao
Northern Mindanao
Southern Mindanao
Central Mindanao
Cordillera
*
Super cities have a theoretical capacity of >15k, large cities of 10-15k, mid-sized cities 5-10k; the remaining 27 cities offer a theoretical capacity of less than 5,000 FTEs (for a total theoretical capacity of ~62,000-85,000
FTEs)Source:BPAP Scorecard; O&O inventory
BPAP leading the work with ICT Councils and BPAP leading the work with ICT Councils and private sector to prepare the new sites for ITprivate sector to prepare the new sites for IT--BPOBPO
106201
68
Largecities
47104
Mid-sized cities
308
Total
158
28
Supercities*
Davao
Additional FTEs Theoretical capacity
at current yield rates
Theoretical capacity of the top 15 cities sustains an O&O