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Key Selection Criteria
Growing global demand for outsourced and offshored contact center services has put pressure on India's ability to contain costs while delivering quality. In the words of one observer, "Outsourcing in India has reached a near-term peak and meaningful expansion from this point forward will result in higher costs and lower quality delivery" (Asia Times Online). Although India's position remains strong, many firms are choosing to develop or increase capacity in the Philippines for reasons described in the next section.
Benefits
Here are the key benefits driving this trend:
Low cost. The average monthly wage of a Filipino contact-center agent is $402, which is more than 50% higher than the minimum wage in metro Manila (Unless otherwise stated, these figures and those that follow are taken from: Amante, Maragtas [In Press] "Outsourced Work in Philippine BPOs" in Jon Messenger [editor], Remote Work and Global Sourcing: Work organization and employment conditions in offshored business process services. Geneva: International Labor Organization). Managers receive an average total compensation of $1,303. Real estate costs are lower than North America and India, and telecommunication costs, although higher than North America, are lower than India. This results in a loaded hourly cost of as little as $10 per hour per agent, with averages between $13-$18 per hour, roughly equivalent to India (source: Call Center Magazine). With US rates ranging from $30-$60, the savings are significant. (Hourly rates are used here for ease of comparison, although other fee structures are available such as per connect minute, per talk time minute, per call, or by headcount.)
Educated workforce. But what does $10 an hour buy? Usually a college graduate: 81% of those working in contact centers have a bachelor's degree and 7% a master's degree. Most graduates work as agents and those that are technically trained can also work as network administrators and system integrators. In a country with an 8% unemployment rate and a 23% underemployment rate, working in a contact center is a good job, and one that's not easy to get, only 5%-20% of applicants are hired.
Good English language skills and understanding of American culture. The Philippines were an American colony from 1899 to 1946, during which time Filipinos began to be educated in American English. English remains one of two official languages and is widely used in business, education, and the media. In most contact centers, this fundamental English mastery is supplemented with accent reduction training. While Filipinos have a distinct culture, they are also interested in and have absorbed many American cultural traits. Basketball is the most popular sport and shopping malls—a social hub for Philippine society—are filled with Western chains like Starbucks and The Gap.
Customer service character. Filipino agents are often praised by foreign managers for their warmth, patience, and listening skills, traits that are highly valued in Philippine culture and important for contact center agents. Managers are also often impressed with their work ethic.
Solid telecommunication infrastructure. The Philippine telecommunications sector has been deregulated, resulting in a highly competitive industry that delivers lower international transmission costs than India as well as redundant links to major centers. Fiber-optic backbones provide low-latency transmission (< 200 ms) that is adequate to support robust VoIP functionality, including hosted technology.
Government support for the outsourcing and offshoring sector is significant and includes $24 million toward training and education, and, as part of the Philippine Economic Zone Authority (PEZA) program, a corporate income tax holiday, exemption from duties, simplified import and export procedures, and benefits on par with other countries in the region.
Adequate financial stability. After years of running a deficit, the Philippine government began reporting a surplus in 2006 which has now grown to over 1.5% of GDP. The government has used this budget surplus to prepay some of its debts, motivating Moody's Investors Service to upgrade its sovereign credit rating from stable to positive, although Standard & Poor's has maintained its stable rating.
Concerns
The following concerns need to be understood but are unlikely to have a significant impact on an outsourcing project:
Security is a concern that is worth evaluating for any offshore destination because security disruptions can interrupt service, or worse, put employees' safety at risk. In the Philippines, the southern province of Mindanao is home to a secessionist movement that has erupted in occasional violence within that province. However, this violence has never extended to the major cities where most contact centers are located, such as Manila and Cebu, nor has the movement engendered the sympathies of the population at large. Additionally, progress has been made towards a peace in talks brokered by Malaysia. Security risk is difficult to quantify; however, given that the scale of violence in the Philippines has been far below that of other developing nations like India, or even Western nations like the US, the UK, and Spain, security risk is likely in an acceptable range as long as appropriate precautions are taken by the outsourcing partner (for example, avoiding high-risk regions and restricting access to the contact center).
Corruption is another concern that is worth considering. Bribery adds to the cost and complexity of doing business and executives from most Western nations are now legally prohibited from bribing government officials since legislation to comply with the Convention on Combating Bribery of Foreign Public Officials has been widely enacted since 2000. US companies are also grappling with a more aggressive enforcement of the US Foreign Corrupt Practices Act (FCPA). Transparency International's 2007 corruption survey reported pervasive corruption in most developing nations and the Philippines are no exception, with 32% of respondents saying they had paid a bribe to receive a service, compared to 25% in India and 2% in the US. Bribery is a cost of business for many local managers in the Philippines: three out of five managers were asked for a bribe at least once in the previous year (source: SWS, 2007). However, these are local companies, many of which do business with the government. Although the extent to which corruption impacts outsourcing clients has not been determined with certainty, all the contact center managers interviewed for this report said that corruption had no impact on their business. Given that most businesses will interact primarily with their outsourcing partner and not with the government or local suppliers directly, corruption is unlikely to be a key factor in outsourcing to the Philippines.
Risks
The following risks need to be understood and planned for in order to maximize the success of an outsourcing project:
Tightening labor pool. With contact center growth averaging 43% per year since 2004 (BPA/P), finding the right talent is becoming more challenging. Nor is attrition a trivial issue for Philippine contact centers: a survey of 72 employers found that 30% had attrition rates from 5%-10% and 46% reported rates of 11%-25% (BPA/P). In the near term, the industry has responded to this challenge with near-hire training and by opening contact centers in new regions. Near-hire training raises the competency of candidates that are close to but do not reach job requirements. Currently, most contact centers are in the largest two cities: metro Manila and Cebu. New centers are being opened in places like Baguio City, Clark, and Iloilo City in order to draw on a wider pool of candidates. In the long term, a partnership between the government, educational institutions, and the private sector is working on developing more talent from the pool of 2.4 million college graduates that were projected to enter the labor market between 2006 and 2010.
Action point:
Question prospective outsourcing partners about how they plan to handle the tightening labor pool.
Customer service quality. A common concern about contact center offshoring is whether or not customer service quality can be maintained. The key to maintaining or even enhancing quality is to adequately measure and support it. Include key performance indicators (KPIs) that impact quality, such as customer satisfaction metrics, first-call resolution rates, and average hold times, in the outsourcing agreement along with mutually agreeable KPI measurement methods, penalties, and rewards. Baseline these values before the outsourcing project and compare the values collected in the outsourced environment with the baseline data. This both encourages the outsourcing vendor to plan for quality and allows both vendor and client to respond rapidly if quality slips. Support for quality includes adequate product-specific training for the outsourcer's contact center agents. Quality must be negotiated, measured, and supported, not just hoped for.
Action points:
Include KPIs in outsourcing agreement. Compare baseline KPIs with post-outsourcing KPIs. Include adequate product-specific training.
Outsourcing relationship management. Successful outsourcing requires an investment of resources in the outsourcing venture. Managers or a trusted third party must travel to the prospective sites to evaluate vendors and visit them from time to time during the span of the contract (although some vendors will say this isn't necessary, it is). Manila is about a 20 hour flight from New York, roughly the same as Bangalore. Typically, a resource must be assigned to manage the relationship with the outsourcing partner to ensure that service levels are maintained. The cost of managing the relationship must be factored into the outsourcing business case.
A poorly managed outsourcing project will not yield the expected savings, or worse, result in degraded service quality that tarnishes brand image and drives away customers. A well managed outsourcing project will reduce costs and maintain or even improve service quality; however, it requires an appropriate investment of time, money, and resources to be successful.
Action point: Plan and budget for managing the outsourcing relationship.
Alternatives to Offshoring
Cost reduction is the primary motivation for contact center offshoring, so evaluating alternative ways to reduce customer service costs is a natural part of a complete offshoring evaluation. Some less commonly considered cost reduction measures include:
Move to a virtual contact center. Especially for centers where significant capital investments are on the horizon, hosted or virtual contact center technology is mature enough to be considered as a cost reduction measure.
Add home-based agents. Virtualization has allowed some companies to integrate home-based agents into their contact centers, allowing them to recruit better qualified and more loyal agents without incurring new office overhead.
Improve Interactive Voice Response (IVR) integration. A carefully crafted IVR script, integrated with the backend system and agent software, can divert simple calls and reduce call handle time on more complex calls by populating agent-facing software with data that would otherwise have to be collected by the agent.
Enhance agent-facing software usability. Call handle time can be significantly reduced by consolidating agent-facing software and making it more user friendly. For more information on usability engineering, refer to the ITA Premium research note, "What Does an iPod Have in Common with a Contact Center?"
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