Chapter 1 3 Evaluating the Internal Capabilities and ... · 197 Chapter 1 3 Evaluating the Internal Capabilities and External Linkages of the Philippine IT— Enabled Services (ITES)

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Chapter 1 3

Evaluating the InternalCapabilities and External

Linkages of the Philippine IT—Enabled Services (ITES) Industry

ABSTRACT

Ciarissa SalesUniversity ofLe4zig, Germany

Utz DornbergerUniversiiy ofLe4zig, Germany

Over the pastfive years the Phili~ppine IT-enabled services industry has grown tremendously, fuelledprimarily by strong global demanci The main competitiveness drivers ofthe Philippines as an atiractive location for offshore IT-enabled services are well documented. highly skiiled~ English proficientworkforce; bw labour costs, cultural affinity towards the United States; reliable telecommunicationsinfrastructure; and business-friendlypolicies lt is this rare combination ofresources that has attractedmany FDIs to bocate their outsourcing Operations in the Philz~ppines which has made the country aprimebocationfor customer contact service centres and business process outsourcing. This chapter examinesthe internal capabilities and external linkages ofthe Phihppine ITES industry based on an empiricalstudy. Itfocuses on how these various capabilities and linkagesplay a signjficant role infacilitating theITES industry ~ growth and long term sustainability

INTRODUCTION

Globalization has enabled the seamless delivery ofinformation technology and business process services across borders, through time zones, and overoceans. lt has transformed our world into more ofa global village than lt has ever been. The demand

DOl: IO.4Ol8/978-1-6152O-7O9-1.~hOI3

for outsourced services, particularly in offshoredestinations, is growing exponentially. In today‘shighly competitive global market, outsourcing isincreasingly seen as a strategic management Optionto reduce costs while allowing the enterprise tofocus on its core competencies, thereby achievingefficiency within the organization. McKinsey andCo. forecasts demand for outsourcing services to

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Evaluating the Internal Capabilities and External Linkages of Philippine IT-Enabled Services

reach US$180 billion by 2010, with the customercontact services, finance and accounting, andhuman resource sub-sectors taking up the largest shares (Reloc8 Asia Pacific Group, 2007).Therefore, a fierce race in becoming a leadingoffshore destination has inevitably been set intoplay and driven by global competition.

Many countries are now starting to developtheir IT-enabled services (ITES) and businessprocess outsourcing (BPO) industries to cater tothe growing demand in outsourced services. Themarket leaders in supplying services at present areIndia and Canada. md ja‘s early software servicesfirms have been able to leverage their earlier headstart in software services into capabilities forother ITES sectors such as BPO and call centres.Canada has historically been a significant outsourcer because a significant portion ofthe U.S.,the largest client ofBPO services at present, is amajor trading partner. Ireland is also a big playerin lT services exports. However, 2003 witnesseda significant growth in services exports in othercountries such as China, Russia, and the Philippines. At the same time, countries such as theCzech Republic, Poland, Hungary, and Mexicoemerged from relatively insignificant marketsto legitimate contenders for market share in thegrowing ITES market (neolT, 2004). In addition,many countries have had some success in attractingsuch work, or have the potential to do such work.These include Malaysia, Jamaica, South Africa,Ghana, and Costa Rica (Tschang, n.d.).

Over the past five years the Philippine ITenabled services industry has grown tremendously,fuelled primarily by strong global demands. Therapid growth of the ITES industry can be attributed as a result oftwo forces: 1) the informationrevolution, which has made the movement ofinformation fast and cheap; and 2) the drarnatically lower costs of carrying out some businessOperations ifl developing countries due to relativeabundance of cheap educated manpower. Thisenticed businesses in industrialized countries tooutsource certain backroom Operations lfl the Phil

ippines, leading to the expansion of such Serviceactivities in the country like call centres for custorner relations, medical and legal transcription,financial and personnel management, engineering design, animation, development of web andsoftware programs, and other services poweredby information and communications technology.The Philippine government has already identifiedthe ITES industry as one ofthe teil industries thatwill bring in huge revenues for the country underthe Ph i lippine Export Development Plan (PEDP).In 2007, the sector has reached a size of aboutUS$4.9 billion from just about US$350 millionin 2001. The Philippine outsourcing industry isprojected to generate US$12 billion in annualrevenues and employ over 1 million workersby 2010 (Locsin, 2006). The Philippines is nowincreasingly being recognized as one ofthe locations that companies are seriously looking intoas a major outsourcing destination. In 2005, thePhilippines was voted by lT Executives aroundthe world as one ofthe Top Four Leaders in theOutsourcing Market, next to India, China andMalaysia (Our Corporate Bureau, 2005). In July2007, the International Data Corporation (IDC)released a report about the new Global DeliveryIndex (GDI) which compares cities in the Asia/Pacific as potential offshore delivery centres,based on a comprehensive set of criteria such ascost of labour, cost of rent, language skills, andturnover rate. In the report, Bangalore and Manilaranked numbers one and two respectively out of35 AsialPacific cities studied (“China to toppleIndia“, 2007).

Indeed, the Philippine ITES industry has anopportunity to play a profound role in the Philippine‘s economic development directly and mdirectly through spillovers. Evidently, the industryhas done a lot to ease the country‘s unemployment problem because of the thousands ofjobsit is generating. However, this industry is also avery dynamic sector that is growing by Ieaps andbounds. Inevitably, various challenges and issuesemerge. At this point, the Philippine ITES indus

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Evaluating the Internal Capabilities and External Linkages of Phiippine IT-Enabled Services

try‘s two greatest problems are: 1) the loomingshortage in qualified, highly skilled workforcethat may hold back the industry from sustainingits current growth rate and 2) strong competitionfrom other low-cost countries. Add to these arethe problems faced by the country in general,such as political and social instability, which havegreat potential to affect foreign investments in thelong run. Although the Philippines has markedadvantages in the field of offshore outsourcing,it must overcome significant obstacies in orderto effectively compete with other outsourcingdestinations. Therefore, the main questions whichwe would like to answer in this chapter are:

• What are the key success factors in enhancing the competitive advantage of thePhilippine IT-enabled services industry?

• How can the Phili~pines sustain its strongperformance as a leading offshore outsourcing destination in the midst ofstrongcompetition in the global market?

This research tries to elaborate answers to thesequestions by evaluating the internal capabilitiesand external linkages of Philippine ITES flrmsbased on an empirical study. lt focuses on howthese various capabilities and linkages play asignificant role in facilitating the ITES industry‘sgrowth and long term sustainability.

BACKGROUND

The rapidly globalizing economy has openeda huge door of opportunity for the Philippinesin the form of IT-enabled services. Such strongindustry development has caught the attention ofmany scholars, researchers, and academics dur-ing the past few years and has prompted manyto write reports and research studies discussingthe ITES industry in detail. Most ofthese reportsand studies are based on government data andprimary source materials but they generally just

tend to describe what is happening in the industry or present its inherent advantages over othercountries, such as the study made by E. Antonioand W. C. Padojinog who examined the profile ofthe IT-enab led services industry, its prospects andpotential contributions to the Philippine economy(Antonio & Padojinog, 2003). Very few reports andstudies actually analyses firm-level conditions andfactors why Philippine ITES firms perform so welleven in the international market. Thus, we wouldlike to better understand the factors influencingthe success ofthis service export industry and toassess future prospects as to how lt can sustainits strong performance in the next few years. Weused two broad bodies of literature to supportthis study: 1) the resource-based view of the firm(RBV) and 2) the social capital theories. Applyingboth the RBV and social capital theories, we willtry to examine the firms‘ intemal capabilities andexternal linkages.

Resource-Based Viewof the Firm (RBV)

Understanding sources of sustained competitiveadvantage for firms has become a major area ofresearch in the field ofstrategic management. Sincethe 1960‘s, a single organizing framework hasbeen used to structure much ofthis research. Thisframework suggests that firms obtain sustainedcompetitive advantages by implementing strategies that exploit their internal strengths, throughrespondingto environmental opportunities, whileneutralizing external threats and avoiding internalweaknesses. Although both internal analyses oforganizational strengths and weaknesses and extemal analyses of opportunities and threats havereceived some attention in the literature, recentwork has tended to focus primarily on analyzinga firm‘s opportun ities and threats in a competitive environment. As exemplified by research byPorter and his colleagues, this work has attemptedto describe the environmental conditions thatfavour high levels of firm performance. Porter‘s

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(1980) “five forces mode!“ forexample, deseribesthe attributes of an attractive industry and thussuggests that opportunities will be greater, andthreats less, in these kinds of industries.

However, much of this type of Strategie researeh focus more 011 the analysis ofthe impact ofa firm‘s environment 011 its competitive positionand has plaeed little emphasis on the impact offirm attributes on a firm‘s competitive position.Instead ofunderstanding the impact ofa firm‘senvironmental performance, the RBV exarninesthe link between a firm‘s internal characteristicsand its performance. The fundamental principleof the RBV is that the basis for competitiveadvantage ofa firm lies primarily in the application of the bundle of valuable resources at thefirm‘s disposal. Barney (1991) referring to Daft(1983) says: “...firm resources inelude all assets,capabilities, organizational processes, firm attributes, information, knowledge, etc; controlledby a firm that enable the firm to conceive andimplement strategies that improve its efficiencyand effectiveness“.

A firm is said to have a sustained competitiveadvantage when it is implementing avalue creatingstrategy not simultaneously being implementedby any current or potential competitors and whenother firms are unable to duplicate the benefitsof this strategy. Not all firm resources hold thepotential of generating sustained competitive advantages. To have this potential, a firm resourcemust have four attributes. First, it must be valuablein the sense that it exploits opportunities and/orneutralizes threats in a firm‘s environment. Resources are valuable when they enable a firm toconceive or implement strategies that improve itsefficiency and effectiveness. Second, it must berare among a firm‘s current and potential competition.Afirm enjoys a competitive advantage whenit is implementing a value-creating strategy notsimultaneously implemented by large numbers ofotherfirms. Third, itmustbe imperfectly imitable.Valuable and rare organizational resources canonly be sources ofsustained competitive advantage

iffirms that do not possess these resources cannotobtain thern. For firm resource to be imperfectlyimitable, one condition could depend on the ability of the firm to obtain the resource based onunique historical conditions or circumstances.The RBV approach asserts that firms are notonly intrinsically historical and social entities,but that their ability to acquire and exploit someresources depends upon their place in tirne andspace. Once this particular unique time in historypasses, firrns that do not have space-dependentand time-dependent resources cannot obtain them,and thus these resources are imperfectly irnitable.Another reason that a firm‘s resources may beirnperfectly imitable is that they may be verycomplex social phenornena, beyond the abilityoffirms to systematica!ly manage and influence.When competitive advantages are based in suchcomplex soda! phenomena, the ability of otherfirrns to imitate these resources is significantlyconstrained. A wide variety of firm resourcesmay be socially complex. Examples include theinterpersonal relations among managers in a firm,a firm ‘s cu!ture, a firm ‘s reputation among suppliers, and customers. Fourth, the final requirementfor a firm resource to be a source of sustainedcompetitive advantage is that there must be nostrategical ly equivalent valuable resources that arethemselves either not rare or imitable (substitutability) (Barney, 1991).

Social Capital

Social capital, generally defined as the actualand potential resources embedded in relationships among actors, is increasingly seen as animportant predictor of group and organizationalperformance. Social capital is an “umbrella concept“ that acknowledges the inherent value ofsocial structures such as relationships, networksand groups. lt refers to the value ofmembershipin a social group and the benefits individual actorsderive from their social relationships. The centralthesis ofsocial capital theory is that “relationships

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Evaluating the Internal Capabilities and External Linkages of Phiippine IT-Enabled Services

matter“ and that “social networks are valuableassets“. Interaction enables people to build communities, to commit themselves to each other, andto knit the social fabric. A sense ofbelonging andthe concrete experience of social networks (andthe relationships oftrust and tolerance that can beinvolved) can, it is argued, bring great benefits topeople (Smith, 2007).

The concept ofsoda! capital has received considerable attention recently among sociologists,economists and political scientists. Irrespectiveof disciplinary focus, three thinkers that mostcommentators highlight in terrns ofdeveloping atheoretical appreciation ofsocial capital are PierreBourdieu, James Coleman and Robert Putnam.Pierre Bourdieu developed his concept ofsocialcapital during the 1 970‘s and 1980‘s as one ofthethree forms of capital (economic, cultural, andsocial) present in the structure and dynamics ofsocieties. For hirn, social capital represented an “aggregate ofthe actual or potential resources whichare linked to possession of durable network“. Hestressed that access to social capital occurred viathe development of durable relationships andnetworks of connections especially those amongprestigious groups with considerable stocks ofeconomic and cultural capital. James Coleman‘scontribution to the development ofthe notion ofsocial capital was to develop a rational choicetheory of social capital. According to Coleman,social capital is defined by its funetion. lt is nota single entity, but a variety of different entities,having two characteristics in cornmon: they allconsist of some aspect of a social structure, andthey facilitate certain actions of individuals whoare within the structure. The structure ofrelationscould help establish obligations between soda!actors, create a trustworthy social environment,open channels for information, and set norms andimpose sanctions on forms of soda! behavior. Inhis book Bow!ing Alone, Robert Putnam arguedthat “the core idea of social capital is that socialnetworks have value.. . .socia! contacts affectthe productivity of individuals and groups.“ He

referred to soda! capital as “connections amongindividuals — social networks and the norms ofreciprocity and trustworthiness that arise fromthem“ (Putnam 2000).

The concept of “organizationa! social capital“ points to a resource that is contro!!ed by thecollective, as opposed to a particular individual(Coleman, 1990; Leana and Van Buren, 1999).From an organizational point of view, socialrelationships function as valuab!e resources thatenable individua!s to act as groups and to undertake complex actions likejoint knowledge work.Whereas human capital refers to the know!edge

~. and capabi!ities ofindividuals, socia! capital takesinto accountthe socia! fabric to empower individuals to col!aborate effectively. The resources associated with organizationa! social capita! consistof the re!ationships among ernp!oyees within afirm (“intema! socia! capita!“) as we!! as !inkagesbetween the firm and its extema! stakeholders,competitors and/or customers (“externa! socialcapita!“). Organizations transact with supp!iersand other partners in order to acquire externalresources to produce produets/services at competitive prices, so that they can attract and retaincustomers. Socia! capita! can therefore explainthe basis for the deve!opment of !inkages andconnections to enable firms to adquire resourcesfrom their extema! environment.

Linking the RBV and Social CapitalTheories to the Philippine ITEnabled Services Industry

The Resource-based view ofthe firm and Socialdapita! theories have divergent concerns on theroots offirm performance, with the RBV stressingthe interna!ly accumulated resources or capabilities while social capita! theory has underscoredits relational characteristics with extemal entities. The two theories ought to be synthesized,since firms shou!d develop specific assets whi!eobtaining other critica! resources through theirsocia! networks.

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Evaluating the Internal Capabiities and External Linkages of Philippine IT-Enabled Services

The main competitiveness drivers ofthe Philippines as an attractive location for offshore ITESservices are weil documented: its highly skilledworkforce; bw iabour costs; cultural affinitytowards the United States, its reliable telecommunications infrastructure; and business-friendlypolicies. lt is this rare combination ofresources thathas attracted many FDIs to beate their outsourcing operations in the Phiiippines which has madethe country a prime location for customer contactservice centres and business process outsourcing.The country‘s English ianguage proficiency canbe traced back to its historicai ties with the US.A former American colony for almost 50 years,English was made the medium of instruction inschoois at au leveis. lt adopted a similar formof govemment structure, legal, and accountingsystems. On top ofthat, Fiiipinos watched American TV shows and programs, enabiing thern toeasiiy adopt a neutral American accent. Goingback to the RBV theory, the country was ableto accumuiate a vast Pool of English speakingprofessionals very much accustomed to Westernculture and business processes not by its ownchoice but through its particular path in history.Adding to the country‘s overall competitive advantage is the Filipino people‘s innate customerservice orientation, owing to the country‘s generalculture of heipfulness and respectfulness, whichgives the country an edge particularly in providingcustomer care services.

As to the quaiity and quantity of humanresources, the Philippines is home to over 80million Filipinos, more than half of whorn areyounger than 40 years old. Therefore, it has ayoung population that can contribute immenselyto the global economy in terms ofabundant laboursupply. In the 2002 Global New Economy Index(GNEI) ofthe META Group, a US-based researchfirm, the Philippines was given the highest ratingin Southeast Asia for “excellent availability“ ofskilled ITworkers. The Philippines ranked fourthafter India, Israel, and Ireland. In addition, a studyon the competitiveness of the Philippines‘ lT

sector conducted by Gartner Research in March2002 showed that the Philippine workforce istechnically proficient in computer science andprogramming, and many can achieve the desiredlevel ofexpertise in US business processes (suchas accounting and human resources) and knowledge specific to an industry (for example, medicalterms for transcriptions). Investors will find thatFilipinos are highly trainable, persevering, andresi 1 ient. Literacy rates are also among the highestin Southeast Asia.

The social capital theory stresses the importance of forging ties within and across communities. As the ITES industry continued to grow,representatives ofthe state, the corporate sector,and civil society created forums through whichthey can identify and pursue common goals. Thegovernment spearheaded the creation ofan industry association which in turn created platforms forthe dissemination of knowledge in the industrythrough its surveys and conferences. Drawingupon the success of India‘s lT/software industry,the government identified ITES/BPO as a keycontributor to economic growth. lt prioritized theattraction ofFDI in this segment by establishing“lT Parks“ and “Export Econornic Zones“. lt offered benefits like tax-holidays and special taxrates for lT parks/Ecozone locators. lt liberalizedthe telecommunications industry and opened upnational, long distance, and international connectivity to competition (Tschang, n.d.).

RESEARCH METHODOLOGY

The Philippine ITES firms‘ internal capabilitiesand external linkages were measured using thefollowing determinants and indicators:

The primary research for this study was conducted in Metro Manila, specifically in the central business districts (CBD‘s) of Makati, Pasigand Quezon City where a huge concentration ofITES firms, both domestic and multinational,have set base since the industry took off in 2001.

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Evaluating the Internal Capabilities and External LinkageS of Philippine IT-Enabled Services

DeterminantS

Human resources and climate/institutional culture

Entrepreneurial orientatiOn

Technological capability

The main instrument used to gather primarydata was electronic survey in the form of onlinequestionnaire. The survey was conducted fromNovember 2006 up to March 2007. Atotal of226executives representing a broad cross-section ofthe Philippine IT-enabled services and businessprocess outsourcing industry (BPO) were invitedto participate in the research study. Only oneexecutive per company was asked to fiu out thequestionnaire. They were randomly selected fromthe 2005 ICT Directory provided by the BusinessProcessing Association Philippines (BPA/P), aprivate sector-led organization representing thesix distinct sectors of the Philippine BPO and

EducationAttrition rateProfessional development and training

Services offered to clients

International certificationR&DMarket research

Existence of cooperation with other local or foreign ITES/BPO firmsAreas of cooperation

Membership/affihiatiOflS in industry associationSBenefits derived from membership in industry association

Existence of collaboration with universities or research institutions

Types of government support programs available for ITESIBPO firms j

ITES industry and their supporting industries(see table 2). Out of the 226 executives invited toparticipate, 60 completed questionnaires (27%)were gathered and used for data analysis.

Ninety percent ofthe respondents belong to thetop executives and managers ofthe companies surveyed which means they are very knowledgeableaboutthe company‘s operations andorganizationalcharacteristics. Forty-five respondents, or 75%,are male and the remaining fifteen, or 25%, arefemale. Although there are fewer female respondents, they nonetheless occupy very importantpositions in the industry such Chairman of theBoard, CEO or President ofthe company.

Table 2. Philippine ITES industry — six distinct sectors

Sector No. of Firms No. of Employees Est. Revenue Growth Rate

1) Contact Centre (or Call Centre) 124 145,000 US$1.7 Billion — 90%

2) Business Process Outsourcing (BPO) 62 30,500 US$180 Million 80%

3) Software Development and Maintenance 300 19,000 — US$204 Million 40%

4) Medical Transcription & 64 9,500 US$70 Million 80%Legal Transcription 9 650 US$6 Million 50% —

5) Animation & Graphics 42 6,000 US$40 Million 25%

6) Engineering Design 24 3,800 US$48 Million — 30% —

TOTAL 625 214,450 US$2.2 Billion —

Note: Number oftirms and employees are based on 2006 figures, while estimated revenue and growth rates are based on 2005 figures.

Table 1. Analyticalframework

Internal capabilities

Indicators

External linkages Networking with other ITESJBPOfirms

Participation in industry associationsor informal association networks

Collaboration with universities orresearch institutions

Support from govemment institutions

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All sub-sectors of the ITES industry wererepresented among the 60 respondents. Many ofthe companies indicated that their core businessoperations encompass several of the six ITESsub-sectors simultaneously. For example, a callcentre firm is also into the business ofmedical/legaltranscription while a software development firmis also engaged in BPO. The most number ofrespondents came from the software and development sector with twenty three respondents (38%),foilowed by medicai/legal transcription (27%) andcontact centre services (23%).

Forty five companies, or 75% of the totalnumber of companies interviewed, were established from 2001 up to 2006. As such, many ofthe companies that participated in the survey werebarely five years oid and are therefore reiativelyyoung in the business.

Forty six companies, or 76%, have 1-100empioyees while nine companies, or 15%, have101-500 empioyees. The Philippine Small andMedium Enterprise Developrnent (SMED) Councii defined smaii enterprises as having 10 — 99employees and medium enterprises as having100— 199 empioyees. Therefore, a large numberof the companies that participated in the surveyare categorized as smail and medium-sized enterprises (SMEs).

Fifty three companies, or 88%, are either 100%Filipino owned or Filipino companies that havetied up with a foreign company to run the business(joint venture). Only six out ofthe 60 companiessurveyed (10%) are foreign-owned.

Forty seven companies, or 78%, export theirservices to other countries. The exporting firrnsindicated USAas the top destination oftheirexportservices. Second top export destination, thoughfar behind the USA, was the United Kingdomwhiie Canada and Australia tied in the third place.Because ofclose cultural ties, lt is 110 wonder thatthe Philippines exports primarily most of its services to the United States. For US clients, havingsuch closer cultural links heip reduce some oftheproblems that result from teams working togetherbut have different cultural backgrounds.

THE INTERNAL CAPABILITIESOF PHILIPPINE ITES FIRMS

The resource-based view highlighted the importance of a firm‘s resources and capabilities andhelps explain why some firms perform betterthanothers. Examining a firm‘s internal capabilitieshelps to determ ine its resources and likely sourcesofcompetitive advantage and to establish strategies that will expiolt any sources ofcompetitiveadvantage.

Human Resources

The Philippines continues to attract global companies to set up business process outsourcingfacilities. Besides costs, other top considerationsfor many outsourcing firrns include the educationand language skills ofworkers, the availability ofiabour, and attrition risk in outsourcing destinations.

Education

Fifty six companies, or 94%, indicated that majority oftheir employees have bachelor‘s degree— implying that most of the employees in theindustry went through a normal 4-year course atthe university. Two companies have employeesmostly holding Masters degree, while also twocompanies have employees mostly having nondegree or vocational training certificates. Foreignbusiness have been attracted all along to the highnumber of college graduates in the work forceand are impressed by the country‘s contemporaryculture thatvalues college degrees. Each year, thePhilippine educational system produces around400,000 graduates, 60 percent (240,000) ofwhomcome from business administration and relatedcourses, engineering and technology, fine and applied arts, lawandjurisprudence, mathematicsandcornputerscience, medical and allied professions,and natural science (Llorito, 2005). These are thetypes of skills needed to man the growing nonvoice BPO that is emerging. Filipino graduates‘

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- Evaluating the Internal Capabilities and External Linkages of Philippine IT-Enabled Services

knowledge on liberal arts, or studies that providegeneral knowledge and intellectual skills, ratherthan more specialized oceupational skills, givesthe Philippines an advantage over other offshoredestinations like India which are well-known fortheir technical skills. India is reported to havebetter technical universities but the Philippinesis better in liberal arts, which is more appropriatefor back-office processing.

Attrition Rate

One of the main drivers for the industry‘s success is the bw attrition rate. Compared to India,Canada, and the United States where attrition ratesgo as high as 90 percent or even more, the Philippines have a much lower attrition rate at about50 percent. Majority of the companies surveyed(66%) indicated that they do not have problemswith high empboyee tumover.

Many Filipino graduates are lured to work forthe ITES industry because it offers more attractivesalary packages compared with other industries.But in reality, working in this industry is a veryhigh pressurejob that requires high level ofcommitment and skills. What‘s helping the country tomaintain a bw attrition rate is the fact that mostcontact centres now have implemented lifestyleprograms, organizing and providing several activities like sports competitions, battle of the bands,and other recreational activities. Such programsaim to promote a healthy balance of life and workand help reduce or counter stress that goes withacall centrejob.

Professional Development and Training

Fifty respondents, or 83%, indicated that theirempboyees undergo professional developmentandtraining. This shows that the majority ofthe companies are investing in developing the skills andtalents oftheir work force. Only nine companiesdo not have professional development programsfor their employees.

For firrns not showing professional development and training programs for empboyees, themost common cited reason for not having suchkind of programs was hectic work schedule.As early as 2003, industry Executives say theyalready begun to notice shortages in Englishspeakers which has somewhat caused an alarmfor the Philippine outsourcing community. Manycompanies have since then established trainingprograms at private universities and human resource consulting companies that train potentialrecruits. Sensing the potential loss in one of thefew bright spots in the Philippine economy, theNational government has also started to throwmoney at the problem. In 2006, President GloriaMacapagal-Arroyo earmarked US$9.8 millionfor outsourcing training, dubbed as “Trainingfor Work“ scholarship program. As part of thatscheme, students interested in outsourcing jobsare given vouchers that may be used for tuitionat government-accredited human resources institutions (Llorito, 2006). The President has alsoordered the education departmentto make Englishthe primary medium of instruction nationwide.

Entrepreneurial Orientation

The success of the Philippine ITES industry alsodepends in fostering an entrepreneurial environment that promotes the creation of new technobogies, concepts, and processes. Resuits ofthesurvey show that from 2004-2006, thirty sevencompanies, or 62%, have increased the number oftheir service offerings. Twenty companies, or 33%,said the number of services they offered for thepast three years remained constant. No companyindicated a decreasing trend for the same period.Thirty companies, or half ofthe total number ofrespondents, indicated that they offer new services to their clients “most of the time“, whilefourteen companies “always“ offer new servicesto their clients. As already mentioned many ofthe companies indicated that their core businessOperations encompass several of the six ITES

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sub-sectors simultaneously. As such, it is normalfor call centres which operate at night shift to alsoengage in BPO or software development duringday-time to maximize office space and increaseprofitability. During the past few years, outsourcing has expanded beyond call centres into almostevery conceivable business processes such as accounting, financial analysis, design engineering,software development, animation, medical andlegal transcription services, etc. which exhibits avery entrepreneurial mindset among ITES/BPOcompanies.

Technological Capability

Aside from enhancing the language proficiencyand technical skills ofits human resources, anotherchallenge that confronts the industry is the bwlevel of technological capability of ITES/BPOfirms. For instance, survey resuits revealed thatfew companies have certification in internationalquality standards or other internationally recognized qualification levels such as ISO, CMM,eSCM-SP, TQM, etc. Fewer companies also haveR&D departments or conduct market researchactivities than companies that actually engage insuch kind ofactivities.

International Certification

Forty three companies surveyed, or 71%, do nothave certification in international quality standardsor other internationally recognized qualificationlevels. Only sixteen companies indicated thattheyhave international certification. Thus, majority ofthe ITESIBPO companies surveyed do not yethave international certification, which is a markofexcellence that assures consistent product andservice quality. Such certifications are deemedvery important especially to clients abroad.

Research and Development (R&D)

The key source of technological innovation isR&D. However, survey resuits revealed that morecompanies do not engage in R&D activities thancompanies that actually do. Twenty three companies, or 38%, have R&D department while thirtyseven companies, or 62%, do not have such department. Majority of those that have R&D department are software companies. Out of the twentythree companies that have R&D department, oniysixteen companies provided information thattheyspend in average 12.5% oftheir total revenue forR&D expenditure.

Market Research Activities

Market research is an essential part ofany businessthat wants to offer products or services that arefocused and weil targeted. Business decisions thatare based on good intelligence and good marketresearch can minimize risk, identify opportunities, and create benchmark to heip measure thecompany‘s progress. However, survey resuitsrevealed that not all Philippine ITES/BPO firmsare actually engaging in such kind of activities.Only twenty six companies, or 43%, indicatedthat they conduct market research activities. Thisfigure is slightly higher compared to the numberofcompanies which conduct R&D activities.

Philippines ITES/BPO firms, which are predominantly SMEs in their early stages ofgrowth,mostly rely on experience in understanding theircustomer needs. As such, marketing strategiesare normally developed based on experience andnot through systernatic gathering and analyzingofdata about their target market, competition, ormarket environment. However, market knowledgebased on experience alone may not always becurrent and may become less relevant over time.Ultimately, these firms will need to have a betterunderstanding of the market in which they operate — a market that is driven by globalization, stiffcompetition and more discriminating customers.

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Thus, conducting market research activities willheip these firms to maintain their acivantage, reduce risk, and provide more room for innovationand growth in the long run.

Summary of Findings:Internal Capabilities

Based on survey results, it appears that PhilippineITES/BPO firms are quite strong in the qualityof its human resources. A large percentage ofemployees have bachelor‘s degree. Aside fromEnglish language proficiency, the Philippines‘contemporary culture that values college degreesalso impresses many foreign businesses and helpsto attract them to invest in the country. Attritionrate is also significantly lower compared with othercountries, which is brought about by initiativesofsome firms to implement “lifestyle programs“to improve employee satisfaction. A large percentage of the firms surveyed also invest in theprofessional development and training of theirworkforce. While there is indeed a looming shortage ofhighly skilled, English proficient workersdue to the huge demand for outsourced services,firms are nonetheless taking initiatives to addressthe problem by partnering with universities andhuman resource consulting firms in establishingtraining programs for potential recruits. Likewise,the government is pouring money to develop thecountry‘s human capital.

Majority of the companies surveyed exhibited entrepreneurial orientation. As proof~, manyof them indicated that they have increased theirnew service offerings cluring the past three years(2004-2006). Not a single company reported adecreasing trend in new service offerings for thesame period.

Abig drawback forthe industry is the bw levelof technobogical capability of ITES/BPO firms,a problem that is recognized by the industry association itseif. Survey results revealed that fewercompanies have certification in international quality standards or other internationally recognized

qualification levels. More companies do notengage in R&D activities than companies thatactually do while less than half ofthose surveyedconduct market research activities.

One explanation for this could be that the industry is still in its early stages of growth. Manyof the respondents were just start-ups or youngcompanies. Aside from their age, many ofthesecompanies are still categorized as SMEs. ForPhilippine SMEs, acquiring international certifications or investing in R&D and market researchactivities are normally very costly and are oftennot prioritized especially during the firm‘s earlystages of growth. In contrast, the technologicalcapability of the Indian ITES/BPO industry isundoubtedly more sophisticated and mature.However, more and more Philippine ITESIBPOfirms are expected to build up their technologicalcapability in the next few years to keep up with thegrowing demand and pressures of globalization.

THE EXTERNAL LINKAGESOF PHILIPPINE ITES FIRMS

Organizations, whether established ones or startups, cover only part oftheir value cham and depend critically on their environment. Firms havelimited resources, outsource certain parts of thevalue cham, and transact with other economicactors having complementary assets. Networksare vital to the discovery of opportunities, to thetesting of ideas, and to secure resources for theorganizatiOn.

Networking with OtherITESIBPO Firms

Forty fourcompanies, or73%, indicatedthattheyare able to cooperate or exchange information withother local or foreign ITES/BPO firms. On theother hand, only sixteen companies have no formof cooperation with other firms in the industry.Sales and marketing in the form oftrade missions

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Evaluating the Internal Capabilities and External Linkages ofPhilippine IT-Enabled Services

was cited as the top area where firms cooperate,followed byjoint production and R&D.

For a long time now, the Philippines and Indiahave been talking about collaboration to heip boosttheir chanees in the global outsourcing industry.This Vision has finally turned into reality when theBusiness ProcessingAssociation ofthe Philippines(BPAIP) and India‘s National Association ofSoftware and Service Companies (NASSCOM) signedan agreement in September 2006 to cooperate inseven “strategic“ areas: strategie communications;geographie risk mitigation; shared best practicesand adherence to international standards; datasecurity and priVacy; workforce development,collaboration and cooperation; and infrastructureimprovement. Strategie communications involvesjoint lobbying to promote outsourcing in theglobal market, while geographie risk mitigationwill mean both organizations selling the Philippines and India as one “geographie risk mitigationpackage“. The two organizations will also workon data security and privacy standards for bothcountries, and share best practices in workforcemanagement and infrastructure improvement.

By collaborating with India, the Philippineshave the unique opportunity to learn from itsAsian neighbour and at the same time createits own path to development. Thus, in the ageof globalization, the Philippines and India neednot be mere competitors in the ICT Outsourcingmarket. They could also be strategie partners whotogether can enlarge their respective shares in theglobal outsoureing market.

Participation in lndustryAssociations or Informal Networks

Forty seven companies surveyed, or 78%, aremembers of industry association. On the otherhand, only twelve companies, or 20%, repliedthat they are not part of any association. Nextto clients, the industry association was ehosenby most respondents as source of informationthat influences the eompany‘s suecess. lt ranked

higher than universities or aeademie/researehinstitutes and government agencies. Companiescited access to databases, studies and surveys asthe top benefit they get from being a member ofthe association. This was closely followed byaecess to market opportunities as the association normally organizes trade missions abroadand performs business matehing opportunitiesbetween its members and potential clients. Manyofthe companies surveyed are small in size andthus do not have enough capability to conductsuch activities on their own. Hence, they turn toindustry associations for support in orderto furtherstrengthen their market aceess and performancepotential.

Collaboration with Universitjesor Research Institutions.

lt is a faet that some companies are now hardpressed in finding enough skilled workers tomanage their growing Operations in the country.The problem is not really a shortage in people buta shortage in qualified, skilled and well-trainedpeople. But the good news is that the industry,academe and government recognize the “education gap“ problem and are taking concrete stepsto address that gap. Since this industry is humanresource-driven, there should be a steady supplyof suitable talent and this can be achieved byestablishing partnerships between the privateseetor and the academe. This has already happened to India and is similarly emerging in BPOlocations in the Philippines such as Cebu, Bacolod and Dumaguete. Some specific examplesof collaboration between firms and universitiesor researeh institutions aimed in addressing the“education gap“ are:

• Etelecare, one ofthe leading eall centres inthe country, partnered with the TeehnicalEdueation and Skills DevelopmentAuthority (TESDA) to develop a courseware suited to eall centre work.

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• Exist Engineering, a Philippine-based software firm, is now working with local universities to design courses that will preparefresh graduates for a software engineeringjob at the company.

• Sitel has partnered with the University ofthe Cordilleras (UC) for a five-year testingproject to flesh out a curriculum designedfor BPO flrms. In 2007, the UC started apreparatory course in English proficiency,technical competency and customer relations designed by Sitel. The course givescollege students a concrete idea what it islike to work in a call centre, where the finalstretch oftraining will be an on-site, handson lesson at Sitel (Baguio City).

Support from GovernmentInstitutions

Thirty nine respondents, or 65%, indicated thatthere are no government programs helping theirbusiness to develop. On the other hand, eighteencompanies or 30% have been beneficiary ofseveralgovernment support programs. Companies whichindicated receiving govemment support for theirbusinesses cited business matching activities asthe most common form of government supportprogram, followed by training and scholarshipgrants. Other forms ofgovernment support comein the form of tax breaks and subsidized trademissions.

Survey results revealed that despite the government‘s best efforts to carry out programs that willsustain the industry‘s long term competitiveness,very few companies actually benefit from suchprograms. lt is not to say there are no governmentprograms available, for clearly government support and commitment for this sector is as strongas ever. However, larger-scale programs meant tosupportthe industry were only instituted beginning2006 and may not have been fully implementedyet at the time of the survey. To prove the government‘s strong support for this industry, the

Philippine President already announced in herannual State of the Nation Address (SONA) inJuly 2007 a promise to pour an unprecedentedincrease of investments in developing the country‘s human capital. Some US$642 Million moreinvestments in education were allotted in 2007compared to 2006, bringing the total spendingon education to US$3.3 Billion - the highest inPhilippine history.

Summary of Findings:External Linkages

73% of the companies are able to cooperate orexchange information with other local or foreignITES/BPO finns. Sales and marketing in the formoftrade missions was cited as the top area wherefirms cooperate, followed by production andR&D. The industry association plays a big rolein raising the level of cooperation among ITESfirms especially in marketing their service offerings to potential local and overseas clients. Nextto clients, the industry association was chosen bymost respondents as source of information thatinfiuences the company‘s success. lt ranked higherthan universities or academic/research institutesand government agencies.

The Philippine ITES industry also aims tostrengthen its position in the global outsourcingmarket by creating strategic alliances with otherleading outsourcing destinations. This resultedinto forging an agreementwith outsourcing leadei~India, to cooperate in seven “strategic“ areas.

In view ofthe looming shortage in skilled andwell-trained manpower, firms are establishingpartnerships with the academe through curriculumdevelopment and basic and applied research toensure a steady supply of suitable talent.

65% ofthe respondents indicatedthatthere are110 government programs helpingtheir business todevelop, but one explanation could be that largescale government programs intended to supportthe industry were only instituted in 2006 and maynot have been fully implemented yet at the time of

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the survey. The Philippine government is supporting the vigorous growth ofthe ITES industry bypledging unprecedented increase of investmentsin developing the country‘s human capital.

CONCLUSION ANDRECOMMENDATIONS

The medium-term outlook for the Philippines inthe ITES industry remains to be very positive,particularly ifthe country is able to improve thematurity of its service providers and further develop the quality of its workforce. Leveraging onlabour arbitrage alone will not take the industryto the next level. In order to improve the Philippines‘ competitive advantage, the country shouldcontinuously enhance the suitability ofthe iaboursupply through investments in English languageproficiency; move up the value cham by focusingmore on non-voice sector or services other thancall centres; enhance its technological capabiiity;improve the business environment; and focus oncapturing more markets aside from the US.

Developing the Country‘s HumanCapital Through Education

In the emerging knowledge-based economy, thesustainable competitive advantage ofnations willreside in their ability to harness their countries‘intellectual assets. The key to exploiting the opportunities lies in creating the kind of humanresources that are needed for the global information economy. The Philippines‘ attractiveness asan outsourcing destination is no longer lirnitedto bw labour cost alone, but also to being ableto provide global partners with a human resourcepossessing the “right skill sets and competenciessupported by a sophisticated telecommunicationsinfrastructure“. The number one priority shouldbe developing the country‘s human capital because investor‘s top concern now is whether thePhilippines can actually supply the great demand

for outsourced services. While political stabilityis important to their investment, investors arelooking ciosely at how good the country‘s human resource base is. Particularly detrimentalto the further development ofthe ITES industryis the declining English-ianguage proficiency ofthe population, which could be addressed by arenewed emphasis on English-language teaching.Enhancing English proficiency is important as itis required in all six ITES sub-sectors.

The continued growth of the ITES labourforce will require significant educational reform.One ofthe key issues in the education sector is toreform the curricula and learning objectives (e.g.types ofskills tobe acquired) in orderto meetthechalienges ofITES work. At a minimum the workappears to require improvements in the generalquality of logical-analytical thinking skills asweil as communication skills. A stronger focuson propertraining could help, but rather than justtraining in IT, training involving a broader generaleducation would be more beneficial. In Singaporefor instance, universities and polytechnics haveincorporated in their curricula programs for specific sectors such as animation and videogames,as weil as lT-type programs that emphasizemuitidisciplinary work, new kinds of integrativethinking and problem-solving ability, and strongindustry practicurn. Thus, developing the country‘s human capital requires changes throughoutthe system including the curricula, content, andlearning objectives.

Moving up the Value Cham

As the world becomes flatter with the outsourcingtrend, Philippine ITES companies are becomingaware that to be able to compete in the globalmarket they have to move up the value cham.With increasing competition from other low-costcountries, the imperative is for firms to shift theirmain activities to a higher level rather than justpassive transactions like the Q&A type of callcentre service or bw level offshore program

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ming. This is indeed a natural progression becausecompanies initiallyjustoutsourcelowvaluefunctions offshore but soon start moving higher valueprocesses when they are comfortable. Most oftheclients ofthe call centres are now looking at whatelse the country can do apart from call centres.Back office business processes are consideredmore high value because they involve more thanjust answering queries from customers. One isactually doing process work and depending on thetype ofthe business process, it could be a highlyspecialized business process like investmentconsulting. In the case of software development,maintenance and coding work are considered tobe in the lower end ofthe value cham and highervalue work is analysis and design.

While the offshore outsourcing industry hasflourished by providing well-specified, structuredand repeatable tasks, the ability to perform morevalue-added, knowledge-based activities likeanalyties, research, and credit analysis is openingup opportunities in Knowledge Process Outsourcing (KPO). This service requires significant areaproficiency and the ultimate goal is to generatevalue for the client by providing business expertiseratherthan process expertise. Highervalue work iswhat is perceived to give the industry a sustainablecompetitive advantage because it calls on creativity,domain expertise, and a reputation for quality.

Enhancing Technological Capability

Building competitive advantage based on low-costservice alone can‘t lead to sustainable growth.This is the oldest, harshest lesson ofthe globaleconomy: Ifwhat you do can be done by anyone,there will always be someone willing to do it forless. Eventually, labour arbitrage will not be themajor focus ofoutsourcing anymore. Within 7-10years, when labour arbitrage has already ran itscourse and with prices always having a certainamount of difference, it will be those with deepprocess knowledge who will be successful. Assuch, prospects are good for those who can bring

data security and have good knowledge of thecomplexity of the compliance environment thatthe U.S. and other potential markets have to liveunder. In a couple ofyears, companies should beable to move to the high-cost segment ofthe market and do more collaboration for bigger projects.Therefore, there isa need forcompanies to invest inthe improvement ofquality processes like gettingcertified and building domain expertise in light ofthe need to “demonstrate“ competitiveness.

Likewise, the country should also invest morein R&D and promote local centres of innovation.R&D is the lifeblood especially of the softwareand BPO sub-sectors which are largely drivenby cutting-edge technology. As such, it would bewise for Philippine firms to conduct “technologyroad map and R&D needs assessment“ to ensurethat they do not miss out on any trends. Whensociety produces lots of scientists and talents, itwould be easy to generate products, services andintellectual properties that entrepreneurs could sellto the rest of the world - and whose competitiveadvantage depends less on labour cost and moreon knowledge content and other intangibles likebranding.

Improving the Business Environment

As the ITES industry continues to shine, thereare areas that need to be monitored in order forthe country to preserve the country‘s position asa leading offshore service provider. The countrystill has a problem with perception as a riskylocation, both politically and economically. Thegeneral business condition should be improved,particularly by creating a stable political condition.The country‘s subparbusiness environment suffersfrom strict labour laws, high levels ofcorruption,and a surfeit ofbureaucracy. Obtaining approval toopen a call centre in the Philippines, for instance,takes twice as much time as it does in India orMalaysia. Another drawback is the lack of directflights from the Philippines to important marketssuch as the United States.

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A number ofITES/BPO locators have startedto grumble about the relatively high costs ofelectricity in the Philippines.Amongthe countriesin the Asia-Pacific region, the country has one ofthe highest per kilowatt-hour power rates. Thisoft-mentioned deterrent to Philippine economicdevelopment remains a disincentive for foreigninvestment, not only in the outsourcing sector, butalso throughout the manufacturing, services andeven agro-industrial sectors of the country. Forcertain outsourcing firms, energy charges havecounted amongtheir largestmonthly expenditures,particularly forcompanies with 24-houroperationsrequiring 24-hourair-conditioning. The passage oflegislation on the privatization and liberalization ofthe country‘s electricity industry was expected tosignificantly lower electricity charges nationwide.Unfortunately, the reforms in this sector have beenhit by bureaucratic snags.

Looking Beyond the US Market

The success ofthe business also depends a lot onthe country‘s ability to attract more markets foroutsourced ITES services in the country. At themoment, the market is heavily skewed towards theU.S. so the country has to strengthen its ability toattractNorthAmerican companies to outsource inthe Philippines. But to further expand its market,the country must look beyond the United Statesand should reach out more to countries that arenearer to it like Japan, Taiwan, Korea, and othermore developed countries inAsia. European countries also constitute a very attractive market foroutsourced IT-enabled services. The Philippinesis an important economic and trading partner ofEurope. About 27 percentofthe total foreign directinvestments (FDI) in the Philippines came fromthe European Union (EU). United Kingdom is stillthe dominant market but outsourcing is gainingground in Germany, the Netherlands, Spain andFrance. The relatively high cost ofdoing businessin Europe is driving European companies to lookat offshore outsourcing as a strategic alternative.The financial services sector is the largest con

sumer ofBPO and IT-enabled services in Europe,followed by utilities and telecommunications,while human resources, finance and accountingare also showing notable growth.

The government must regularly organize tradem issions to Europe such as business forurns, business meetings with potential clients, and high-levelnetworking receptions. Itwould be helpful forthePhi lippines to adopt a country-by-country strategythat will fit the service requirements ofeach market. As for marketing the Philippines to investors,the large population ofFilipinos in US and Europecan be tapped as a “steady and continuous supplyof ITES/BPO marketing advocates“.

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Tschang, T. (n.d.). The Philippines ‘IT-EnabledServices Indust7y Singapore: Lee Kong ChianSchool of Business, Singapore ManagementUniversity.

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