Attracting more offshoring to the Philippines

Despite recent gains, much work needs to be done.

The Philippines is emerging as an important supplier of labor to the global offshoring market, but new research finds that although the country has marked advantages, it must overcome significant obstacles to compete with nations such as India. The stakes are high: from 2003 to 2008 alone, the McKinsey Global Institute (MGI) estimates, an additional 2.6 million offshore services jobs will be created around the world, offering a valuable source of employment and exports for the low-wage countries that capture them.

Offshoring is already important to the Philippines. In 2003 the country supplied $1.7 billion worth of offshore services to the world economy (Exhibit 1); today around 100,000 people are employed in call centers. Low costs are one reason for the country's emergence as an offshoring location. Among the ten countries we examined for this article, the Philippines has the second-lowest hourly wage for offshoring professionals, at 13 percent of the US level; the salaries of Indian workers were the lowest, at 12 percent; wages in Malaysia are around twice that level.

The Philippines has a larger pool of workers suitable for multinational companies than its relatively small population of 88 million would suggest. For every 100 college graduates with finance and economics degrees from countries in our sample, executives of multinationals said they would hire 30 in the Philippines, compared with just 15 in India; the corresponding figures for generalists and life science researchers, respectively, were 25 versus 10 and 20 versus 15. The Philippines even compares favorably on the suitability of its engineering graduates for employment with multinationals—a particular strength for India. Moreover, a higher percentage of the Philippines' population than of India's has earned a college degree.

The Philippines lags behind other potential destinations on five additional criteria that companies consider when choosing an offshore location, however (Exhibit 2). Of the countries we studied, it has the poorest risk profile—a legacy of natural disasters, security threats, and data theft—and very few third-party vendors. As a potential domestic market for services, the Philippines attracts only a fraction of the enthusiasm China and India generate.

The country's subpar business environment suffers from strict labor laws, high levels of corruption, and a surfeit of bureaucracy. Obtaining approval to open a call center in the Philippines, for instance, takes twice as much time as it does in India or Malaysia. Another drawback is a paucity of direct flights from the Philippines to distant markets such as the United States.

Management talent is also scarce in the Philippines, partly because its offshoring industry is still in the early stages of development and has yet to develop many managers. Furthermore, the country's economy is dominated by small and midsize companies that are often family owned and don't produce much management talent. The Philippines has a large diaspora that could be a potential source of managers, but these emigrants tend to take nonmanagerial jobs (as contract workers and nurses, for example) so they return home without suitable experience.

To remove these obstacles and further spur economic growth, the government must work with the private sector to attract foreign businesses and to increase the number of flagship multinational companies in the Philippines. Improving the infrastructure would be one place to start. Of the countries we examined, the Philippines has the highest electricity prices and one of the most expensive telecommunications systems. Although the country has enjoyed some success developing "cyber parks" (special zones with concentrated world-class infrastructure), it should expand this effort and pay more attention to enhancing their physical and digital security.

Whether multinationals view the Philippines as an attractive offshoring destination will ultimately depend on how they weigh the country's risks against its rewards. Indeed, cost-conscious companies may well regard it as an attractive offshoring location now (Exhibit 3). As its public- and private-sector leaders address the remaining barriers, the Philippines will become even more eye catching.

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