OFFSHORING & OUTSOURCING INDUSTRY: PHILIPPINES IT/BPO SERVICES SECTOR September 2009 Introduction

The Philippines market share for the global offshoring and outsourcing (O&O) industry has grown to 15% in 2008, making the Philippines the third largest O&O destination in the world.
IT Industry Competitiveness Index, 2008: Overall Scores and Ranks of Asian Countries Rank in Asia 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 Country Taiwan So. Korea Singapore Japan Hong Kong Malaysia Thailand Philippines India China Sri Lanka Indonesia Bangladesh Vietnam Pakistan Score 69.2 64.1 63.4 62.2 54.1 34.2 31.5 29.8 28.9 27.6 24.9 23.1 22.4 21.4 20.9 Global Ranking 2008 2007 2 6 8 3 9 11 12 2 21 21 36 36 42 41 47 47 48 46 50 49 54 50 58 57 60 61 61 62 60

The Philippines, whose offshore market has grown 46 percent annually since 2004, is poised to emerge Source of Date: The Economist Intelligence Unit, September 2008 as a leading destination for non-voice business process outsourcing (BPO) work. It has emerged as a key destination for English-based work especially for the North American market. In terms of IT industry competitiveness, the Philippines has maintained its 47th position in the world in 2008 and 8th in Asia. The ranking is based on six indicators: overall business environment, IT infrastructure, human capital, legal environment, R&D environment, and support to IT industry development. The countrys improvement in IT infrastructure and human capital has helped sustain this global position. Since 2003, more than 80% of the IT/BPO services catered the US market. Exports to Europe and Asia are also growing. Other markets include Japan, Canada, Australia, New Zealand, the Middle East and Africa. The Philippine IT/BPO industry has a wide breadth of competencies in the following sectors: - Contact/call centers; - Business process outsourcing or BPO (finance & accounting, HR, payroll); - Knowledge process outsourcing or KPO (marketing research, medical research, legal case research & preparation, insurance, mortgage); - Medical, legal and other data transcription; - Film animation; - Software development; - Engineering and construction design; and - Game development or content development.

Market Opportunity
Market size Global O&O market exceeded US$55 Billion in 2008 - Annual growth rate estimated at 20% over the next 5 years Estimated global O&O market - 2009 US$66 Billion - 2010 US$79.2 Billion Philippines O&O forecast, 2010 US$12 Billion revenue; 25% annual growth. Presence of a demand-supply gap

Industry projects about US$12 Billion revenue for 2010. This corresponds to the 15% share of the US$79.2 Billion projected penetrated market for 2010, provided the Philippines sustains its market share of 15% recorded in 2008. Out of the US$450 Billion projected global demand, around US$370.8 Billion remains untapped, which is a huge opportunity for the global O&O industry.

Philippine Advantage
Technology that supports the industry Expanding technologies on fiber and copper network, wireless technologies (CDMA, GSM, WAP, GPRS, 3G, wireless broadband), radio and VSAT Support infrastructure Digital fiber optic backbone network (FOBN) Nationwide radio microwave terrestrial network Next generation networks (NGN), characterized by the use of Internet Protocol (IP), MultiProtocol Label Switching (MPLS) and Wave Division Multiplexing (WDM). Ideal locations NEXT WAVE CITIES Metro Manila, Metro Cebu and Baguio Metro Laguna1 Legazpi the Next Wave Cities Batangas Metro Cavite2 Leyte Cabanatuan Iloilo Pampanga South Around 165 ready-to-occupy IT Cainta Davao San Fernando Parks and Buildings all over the Camarines Sur Bacolod Subic/Olongapo Dagupan Angeles/Clark/Mabalacat/Dau Tagbilaran country. Dumaguete Baliuag/Marilao/Meycauayan Tarlac Human resources General Santos Cagayan de Oro Tuguegarao La Union Malolos/Calumpit Urdaneta Availability Lipa 1 More than 490,000 college(Sta. Rosa, Calamba, Los Baos, Cabuyao, San Pablo City) 2 (Bacoor, Dasmarias, Imus, Cavite City) degree graduates in 2008, 66.6% of which have courses suitable for the IT/BPO or cyber-services sector. Annual growth rate of tertiary level graduates is estimated at 3.8%. Quality 3rd largest English-speaking country in the world 72% of the population fluent in American English English language as the basic communication medium used in business, government and schools. Highly educated, flexible, productive, loyal, dedicated workforce with excellent work ethics and attention to detail Strong affinity for western culture. Costs advantage Average annual salary of IT professionals in the Philippines handling various types of IT job functions is the most competitive in Asia.

Cost of bandwidth went down by at least 85% in the last 5 years.

AVERAGE ANNUAL SALARY BY COUNTRY AND JOB FUNCTION (IN US$)

IT Project Systems Manageme Manageme Developme nt nt nt China 25,103 21,574 11,788 Hong Kong 89,770 61,304 51,228 India 18,354 16,783 10,325 Indonesia 10,376 8,114 4,564 Malaysia 26,407 21,604 14,297 Philippines 12,466 11,119 8,199 Singapore 65,785 51,158 34,010 Thailand 29,066 22,285 13,237 Source: ZDNet Asia Survey, Oct 2008 May 2009 Country Commu nication 11,762 64,062 8,823 5,177 17,804 7,423 36,130 14,987 Suppor t 9,824 44,794 6,584 3,897 11,976 4,730 29,562 13,155 Admini stratio n 13,728 53,580 8,320 4,887 14,499 8,165 37,033 17,520 Other IT Professio nals 7,124 62,080 11,499 5,688 19,511 6,406 50,499 23,600

Industry Potentials
Growths Number of industry players From an estimated 300 companies in 2004 to 618 in 2008, or an increase of 106% in 5 years. Investments (in terms of project cost) BOI-registered IT/BPO projects alone Project cost increased to Php 26.20 Billion in 2009 (July) from Php 18.64 Billion in 2004, or an increase of 40.66%. Employment Estimated 475,000 full-time employees (FTEs) as of August 2009 from 371,965 FTEs in December 2008, or an increase of 27.7% in a period of 8 months. Average annual increase of 40% in employment generation from 2004-2008. Revenue US$6.061 Billion revenue generation in December 2008. Average annual increase of 43% in revenue generation from 2004-2008.

Contribution to the economy Percent of GDP Total BPO: 3.6% share in GDP in 2008. Percent to total exports IT/BPO accounts for 12.36% of total Philippine exports in 2008.

Government Support
Enabling laws/policies Medium-Term Philippine Development Plan 2004-2010 - Reduction of connectivity cost - Development of ICT Human Resource Executive Order No. 561 dated 19 August 2006 creating the Philippine Cyber Corridor, an ICT belt stretching 600 miles from Baguio City to Zamboanga designed to provide a variety of cyberservices at par with global standards, and supported by a $10 Billion high bandwidth fiber backbone digital network. 2009 Investment Priorities Plan providing fiscal and non-fiscal incentives to Business Process Outsourcing or voice and non-voice IT-enabled services. Allocation of Php 350 million scholarship funds for the training of near-hires in IT/BPO. Data Privacy Bill proposed in Congress to ensure protection of personal information in the ICT
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systems in government and private sector. Development plans and programs Roadmap 2010 aiming to capture 10% of the global offshoring and outsourcing market share by 2010. Adoption of Service Science, Management and Engineering (SSME) curriculum in colleges and universities nationwide to develop the critical mass of skilled manpower needed to sustain Philippine leadership in global O&O industry.

Incentives
Fiscal 4 to 8 years Income Tax Holiday (ITH); Special 5% tax rate on gross income after the lapse of ITH (for IT Park/Eco-zone locators); Tax and duty exemption on imported capital equipment (for IT Park/Eco-zone locators); Dutyfree importation of capital equipment (for BOI-registered firms under E.O. 528); Exemption from 12% input VAT on allowable local purchase of goods and services, e.g., communication charges (for IT Park/Eco-zone locators); Additional deduction for labor expense; Non-fiscal Unrestricted use of consigned equipment; Exemption from wharfage dues and export tax, duty, impost and fees; Employment of foreign nationals; Special Investors Resident Visa.

Costs of Doing Business

Salaries and wages
Average Annual Salary (in US$)
IT Job Function Data Encoder/ Transcriptionist Call Center Agent/ Customer Service Representative Team Leader/ Technician Analyst/ Software Developer MIS/Systems Administrator Manager/ Department Head National Capital Region 3,223 4,219 4,840 5,812 5,987 13,331 Regional/ Provincial 2,976 3,384 3,936 4,800 4,956 11,484

Rentals, lease, acquisition (average) Office space rental NCR: Php 500/sq.m.; Regional/Provincial: Php 250/sq.m. PEZA-accredited IT Building lease US$300/station/month (24/7) including TELCO, back-up power generator, security surveillance system, etc. PEZA lots lease US$0.40/sq.m.

Source of Basic Data: Clark Development Corporation and BPAP. (Computed based on a minimum wage rate of P382/day in NCR and P302/day in the regions. Overtime pay, allowances and other company benefits not included. Exchange rate use is P48/US$1.)

Contacts

Board of Investments Ms. Evariste M. Cagatan OIC-Director, International Marketing Department G/F, Industry and Investments Building 385 Sen. Gil J. Puyat Avenue, Makati City 1200 Tel. No. (+632) 896-8907 Fax No. (+632) 895-3521 E-mail Address: [email protected] Website: www.boi.gov.ph Business Processing Association of the Philippines (BPAP) Umbrella organization Mr. Oscar Saez CEO 9/F, The Palisades Condominium, 107 Perea St., Legaspi Village, Makati City Tel. No. (+632) 817-2727 Fax No. (+632) 817-8141 E-mail Address: [email protected] Website: www.bpap.org Animation Council of the Philippines, Inc. (ACPI) Ms. Grace Dimaranan President 3/F, Bonifacio Technology Center, 31st corner 2nd Avenue, Crescent Park West, Taguig City Tel. No. (+632) 871-1590 Fax No. (+632) 687-7362; (+632) 871-1590 E-mail Address: [email protected]; [email protected] Website: www.animationcouncil.org Contact Center Association of the Philippines (CCAP) Mr. Jojo Uligan Executive Director 2/F, BPI-Fareast Building, Sen. Gil J. Puyat Avenue, Makati City Tel. No. (+632) 634-7444 Fax No. (+632) 638-4781 E-mail Address: [email protected] Website: www.ccap.ph Game Developers Association of the Philippines (GDAP) Mr. Gabby Dizon President 2/F, LFG Building, 82 Panay Avenue, Quezon City Tel. No. (+632) 332-0867 Fax No. (+632) 332-0867 E-mail Address: [email protected]; [email protected] Website: www.gdap.org.ph Medical Transcription Industry Association of the Philippines, Inc. (MTIAPI) Ms. Myla Rose M. Reyes President 9/F, The Palisades Condominium, 107 Perea St., Legaspi Village, Makati City Tel. No. (+632) 474-8781 E-mail Address: [email protected] Website: www.mtiapi.com Philippine Software Industry Association (PSIA) Ms. Beng Coronel President 9/F, The Palisades Condominium, 107 Perea St., Legaspi Village, Makati City Tel. No. (+632) 817-2727 Fax No. (+632) 817-8141 E-mail Address: [email protected] Website: www.psia.org.ph