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Economist: Philippines Is Number One

Manila Bulletin 

Tue, May 29, 2012

MANILA, Philippines --- The Philippines is the most attractive global provider of IT-BPO services in Asia, followed by China and India - in that order - according to the results of a survey by the Economist Corporate Network (Economist). Forty-five percent of respondents said the Philippines was an attractive services provider, while 35% said the same for China. Only 25% of respondents said India was an attractive provider of IT-BPO services, in general.

However, India remains the global leader in software and services, which accounts for 87% of India's IT-BPO industry, largely because of the high number of highly qualified technical personnel it can offer. Increased demand for these services appears to suggest that India's software industry will continue to grow rapidly. The National Association of Software Services Companies (Nasscom) forecasts growth of 14% this year.

Software and services was the fastest-growing segment of outsourced services among the 10 Asian countries covered by the Economist survey. About 50% of respondents contributed to the US$75 billion in software and services India generated last year, an amount almost seven times total IT-BPO revenues for the Philippines of $11 billion. Twenty-six percent of respondents outsourced software and services to China, which reported export revenues of $30.4 billion in 2011.

And 12% outsourced software and services to the Philippines. IT outsourcing (ITO) - which includes software and other related services - grew 37% in 2011 according to data provided by the Business Processing Association of the Philippines (BPAP) to about $1 billion. Nora Terrado, president of the Philippine Software Industry Association (PSIA), says the sector employs approximately 50,000 professionals. Ms. Terrado attributes growth in ITO to increased demand by international clients.

Some industry executives and analysts have doubts that India's software industry can achieve the Nasscom forecast, despite the enthusiasm for software and services outsourcing among respondents to the Economist survey. According to a recent report in The Times of India, "Most IT companies reported significant growth during fiscals 2010 and 2011 and relatively flat growth during fiscal 2012, but the outlook for FY13 is extremely bleak."

A senior market analyst quoted in the Times report attributes the slowdown to reduced spending in developed markets, which he said "has drastically come down. Though Nasscom forecasts growth of up to 14%, there are companies that say it's a very ambitious target." Others blame the regulatory environment, claiming that regressive tax measures are threatening the long-term prospects for India's IT-BPO industry.

For example, tax authorities have reclassified IT-BPO services from exports to "on-site" revenues, making them subject to higher taxation. This despite the Indian government's position in World Trade Organization negotiations that "on-site activities are an integral part of the services trade," according to Jaithirth Rao, a Mumbai-based entrepreneur. Breaks on capital investments have also been eliminated, claims Rao: "Requirements to withhold taxes on implied royalty on imported software has been made retrospective."

Rao concludes that "We seem to be cutting off our noses in order to spite our faces." It's no wonder that respondents to the Economist survey have increasing doubts about India's value proposition, given this and other tax and regulatory measures that threaten the IT-BPO industry. With 2.8 million Indians employed directly by the industry and 8.9 million indirectly employed, the stakes are high.

In the Philippines, the IT-BPO industry grew to $11 billion in revenues and 640,000 direct employees in a little more than a decade, according to BPAP. At $11 billion, it's about one tenth the size of India's IT-BPO industry. Unlike India, non-voice complex services account for only about 35% of revenues, but these services are the fastest-growing segments of the industry, adding weight to the suggestion that the Philippine IT-BPO industry is shifting to higher-value services.

As it does, it's becoming increasingly difficult for some legislators and local government officials to resist making India-like intrusions into the vibrant industry. The latest sign of unproductive meddling was the filing of House Bill 6073 - ostensibly seeking to promote occupational health and safety in the IT-BPO industry - by Bayan Muna Rep. Teodoro Casiño. Mr. Casiño cites high turnover in the industry as justification.

However, an industry survey by BPAP and Outsource2Philippines (O2P) earlier this year showed that more than half of the industry has annual attrition of 0-15%, not much different from any other industry. Over 70% has attrition below 20%. Yet Mr. Casiño's bill would create Occupational Health and Safety workplace representatives to monitor the work environment in IT-BPO firms, presumably at their cost.

No firm can prosper if it can't create a productive, positive work environment even though the IT-BPO industry pays higher-than-average salaries. Mr. Casiño and like-minded colleagues, rather than seeking to undermine the Philippines' top job generator, should instead look for ways to ensure that the Philippines remains the world's preferred global center for IT-BPO services and continues creating direct and indirect jobs for constituents.

No one should prefer the India alternative.