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The Philippines: The new BPO capitol of the world?

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By Fernando Vidaurri

Earlier this year, Tholons Inc., a leading U.S.-based services globalization and investment advisory firm, published a report that placed Manila ahead of Mumbai as the second-largest outsourcing destination in the world. Cebu also figured among the top 10 preferred destinations. In fact, over the past couple of years, the Philippines has seen a fast growth in the BPO industry.

The business process outsourcing (BPO) industry has not always been a fast-growing market. Accenture set up the first call center in 1992. However, only after restrictions were eased in 1995 with the Special Economic Zone Act did the industry start growing. The past 10 years, in particular, saw rapid growth, with industry revenue growing 10-fold from $1.55 billion in 2004 to $15.5 billion in 2013. The number of employees working in this industry rose by a similar percentage, from 101,000 to 900,000 over the same time period.

An English-speaking and highly educated workforce

The large college-educated, English-speaking labor force has been one of the main factors behind this growth. Owing in part to their past colonial history, as well as their modern education system, a high number of Filipinos speak English with an American accent. Their culture is Western oriented, and many of them have studied or worked in the U.S. or have been taught to speak with an American accent at school.

Each year, the country produces more than 450,000 graduates every year, who contribute to the qualified labor pool. The country makes higher education a priority. This fact, coupled with the 95 percent literacy rate, provides a big advantage over other Asian countries. Additionally, all schools in the Philippines teach in English, making the country the third-largest English-speaking country in the world. All of these factors, plus being one of the most Western-oriented countries in Asia, have benefited the BPO industry.

Business incentives

The rapid growth in the BPO industry can also be attributed to government regulations and incentives for doing business in the country. The legal regulatory framework and financial reporting guidelines of the Philippines are based on American systems, reflecting the links between the U.S. and the Philippines. Additionally, the 1995 introduction of Special Economic Zones eased restrictions by lowering area requirements for developers and offering tax incentives.

Companies that set up a business in the country enjoy capital-related, operation-related and taxation-related benefits including exemptions on local tax and permits, duty-free import of capital equipment, permanent residence for foreign investors and four-year exemption of corporate income tax, extendable to eight years. Companies also benefit from one of the lowest-cost office rental markets in the region.

Internet connectivity

The young population is also very technologically savvy; in fact, Filipinos are some of the most active social media users in the world. However, the country’s connectivity still lags behind other countries in the region, exemplified by its relatively low rankings in indices of Internet connectivity. The Net Index report published in May by Internet broadband testing company Ookla shows the Philippines has an average download speed of 3.64Mbps, well below the world average of 23.3Mbps.

Slow connectivity speeds, especially when compared to other countries in the region, can influence investors seeking to do business in the region, despite the multitude of other advantages the country offers. According to real estate services firm KMC MAG Group, connectivity issues and infrastructure still put a cap on further investment.

Recognizing the impact of poor infrastructure on attracting foreign direct investment (FDI), the country’s politicians have taken action to remedy the problem. Last year, a bill was filed in the Senate that would require communication companies to provide faster Internet connections. Senate Bill 2238 would impose minimum Internet connections of 10Mbps on local telecommunication companies and ISPs operating in the country. The bill is still pending in the committee, but if passed, it would be a good step toward improving Internet connectivity in the country.

Future outlook

The good news is also that growth is not just confined to Manila but has spread to other cities around the country. Cebu already ranks eighth in Tholon’s Top 100 Outsourcing Destinations and is joined by six other Filipino cities in the Top 100. The industry accounts for 6 percent of the GDP of the country and is expected to grow as more companies look to the Philippines to take advantage of the talented work pool and lower rents in the interior the country.

The high number of English-speaking graduates, the emphasis on higher education and the relatively young age – average 23 years — promise great potential not only for the BPO industry but for the country. Despite the connectivity challenges, the IT and Business Processing Association of the Philippines projects that the industry will create 372,000 new jobs between 2014 and 2016. The BPO sector is projected to employ some 1.3 million Filipinos and generate up to $27 million in annual revenue by 2016.

While the country is largely open to investment, the Philippines can prove a tricky market to crack for first-time entrants. To best take advantage of the country’s strengths, as well as anticipate possible challenges to doing business, it is highly recommended that you enlist the assistance of a professional services firm experienced in operating regionwide. Contact us to find out how we can help your business grow.

This article was first published on www.dezshira.com.

Since its establishment in 1992, Dezan Shira & Associates has been guiding foreign clients through Asia’s complex regulatory environment and assisting them with all aspects of legal, accounting, tax, internal control, HR, payroll and audit matters. As a full-service consultancy with operational offices across China, Hong Kong, India and emerging ASEAN, we are your reliable partner for business expansion in this region and beyond.

Contact us at info@dezshira.com or asean@dezshira.com or visit www.dezshira.com.