Sunrise to Sunset for the BPO Industry
We have a critical crisis for the Business Process Outsourcing (BPO) industry in the Philippines.
We tag an industry as a sunrise sector for its potential to expand and deliver returns in terms of revenue and employment generation. One such industry is the BPO group that has been tagged by the Philippine Government to deliver 900T jobs for the Filipino people and deliver an estimated revenue of USD 11B by 2010. The numbers look promising, the 2007 estimates indicate that we already have 190T employed in the Call Center Sub-Sector (CCS) of the BPO industry and the country is posting a Compounded Annual Growth Rate of (CAGR) 63% in terms of human resource expansion.
On the other hand, in 2 to 3 years the Call Center Sector will stagnate and move on to more competitive countries that can fill in the growing deficit in Philippine resources: qualified human capital. As with any other economic indicator and activity, the BPO industry is dictated by the Law of Supply and Demand.
According to CHED the Compound Annual Growth Rate (CAGR) of graduates increase by 6% annually (448T to 464T from 2006 to 2007) and human resource experts of the BPO industry tag a maximum of 10% from the graduates that can be directly absorbed into the BPO labor pool or roughly 46T for 2007. Compare this with the CAGR Human Capital Requirement of the CCS that is posting 63% annually (170T to 220T from 2006 to 2007) and you will quickly see where the deficit is.
The Call Center Industry is suffering from an extremely high attrition rate that can reach as high as 60% annualized attrition (6 out of 10 employees eventually resign from the company) but is regarded as an effect of the industry cannibalizing itself. This simply means that more operators are putting up services in the country and they tend to pirate employees of existing companies. The more important measure is industry attrition or people that move out of the industry. It is safe to say that 25% of the labor pool eventually moves out of the industry with health, continuing education and career shift as the primary reasons for the attrition.
Using these factors, for the year 2007 we are expected to fill in 50T in terms of human capital growth and replace an additional 43T that moved out of the industry for 2006. This totals to 93T employees versus the 46T that our education system can generate as employable.
We are currently at 50.27% short of the target for 2007 or 47T jobs that cannot be filled in versus the 93T that is expected for this year. This is expected to grow exponentially worse in 2008 onwards.
The supply is not matching the demand and the usual economic response is currently being felt in the industry: increased salary baseline to remain competitive + loss in potential revenue. This is compounded by a relatively strong Peso versus the American Dollar that is causing companies to re-evaluate revenue margins. Whereas 70% is the baseline in terms of Employee Related Gross Margins (ERGM), the combination of attrition, high peso value, increased hiring cost, and lost potential revenue is causing companies to drastically review fiscal year forecast to tag 60% as the ERGM target. In this industry where a single percent means millions of dollars, 10% decrease is something that should make the off-shore managers think twice about elevating the human resource capital as the single biggest problem that this industry is facing.
If I am the CFO based in North America doing an analysis of this data I would quickly assess that the Philippine margin that is supposed to cover for overly expensive operations in North America is not going to deliver my global margin. I would have to quickly look over to different horizons where the company can expand and generate returns - in a neighboring country with more than a billion people and maniacal, almost dictatorial programs implemented to generate English competent workers combined with aggressive government support, the plan is almost set out and I can almost imagine board meetings being set into place to discuss this direction.
Realistically speaking, the global operators are not going to shut out the country and move everything to China: not in five years and probably within the next ten years. From a global strategic perspective, Philippines can be sustained as a back-up whereas the bulk of operations will be set up somewhere else. Goodbye to 900T jobs in 2010 and USD 11B in revenue for the country.
If interventions are not put into place, we might see the sunrise quickly descend into sunset for the BPO industry.
--------------------------------------------
This is a first of two articles that covers the current BPO and CCS situation in the Philippines. The next installment will cover the programs that the industry, academe and government can employ to address the human capital crisis - as the cliché goes, there is a ray of hope.
We tag an industry as a sunrise sector for its potential to expand and deliver returns in terms of revenue and employment generation. One such industry is the BPO group that has been tagged by the Philippine Government to deliver 900T jobs for the Filipino people and deliver an estimated revenue of USD 11B by 2010. The numbers look promising, the 2007 estimates indicate that we already have 190T employed in the Call Center Sub-Sector (CCS) of the BPO industry and the country is posting a Compounded Annual Growth Rate of (CAGR) 63% in terms of human resource expansion.
On the other hand, in 2 to 3 years the Call Center Sector will stagnate and move on to more competitive countries that can fill in the growing deficit in Philippine resources: qualified human capital. As with any other economic indicator and activity, the BPO industry is dictated by the Law of Supply and Demand.
According to CHED the Compound Annual Growth Rate (CAGR) of graduates increase by 6% annually (448T to 464T from 2006 to 2007) and human resource experts of the BPO industry tag a maximum of 10% from the graduates that can be directly absorbed into the BPO labor pool or roughly 46T for 2007. Compare this with the CAGR Human Capital Requirement of the CCS that is posting 63% annually (170T to 220T from 2006 to 2007) and you will quickly see where the deficit is.
The Call Center Industry is suffering from an extremely high attrition rate that can reach as high as 60% annualized attrition (6 out of 10 employees eventually resign from the company) but is regarded as an effect of the industry cannibalizing itself. This simply means that more operators are putting up services in the country and they tend to pirate employees of existing companies. The more important measure is industry attrition or people that move out of the industry. It is safe to say that 25% of the labor pool eventually moves out of the industry with health, continuing education and career shift as the primary reasons for the attrition.
Using these factors, for the year 2007 we are expected to fill in 50T in terms of human capital growth and replace an additional 43T that moved out of the industry for 2006. This totals to 93T employees versus the 46T that our education system can generate as employable.
We are currently at 50.27% short of the target for 2007 or 47T jobs that cannot be filled in versus the 93T that is expected for this year. This is expected to grow exponentially worse in 2008 onwards.
The supply is not matching the demand and the usual economic response is currently being felt in the industry: increased salary baseline to remain competitive + loss in potential revenue. This is compounded by a relatively strong Peso versus the American Dollar that is causing companies to re-evaluate revenue margins. Whereas 70% is the baseline in terms of Employee Related Gross Margins (ERGM), the combination of attrition, high peso value, increased hiring cost, and lost potential revenue is causing companies to drastically review fiscal year forecast to tag 60% as the ERGM target. In this industry where a single percent means millions of dollars, 10% decrease is something that should make the off-shore managers think twice about elevating the human resource capital as the single biggest problem that this industry is facing.
If I am the CFO based in North America doing an analysis of this data I would quickly assess that the Philippine margin that is supposed to cover for overly expensive operations in North America is not going to deliver my global margin. I would have to quickly look over to different horizons where the company can expand and generate returns - in a neighboring country with more than a billion people and maniacal, almost dictatorial programs implemented to generate English competent workers combined with aggressive government support, the plan is almost set out and I can almost imagine board meetings being set into place to discuss this direction.
Realistically speaking, the global operators are not going to shut out the country and move everything to China: not in five years and probably within the next ten years. From a global strategic perspective, Philippines can be sustained as a back-up whereas the bulk of operations will be set up somewhere else. Goodbye to 900T jobs in 2010 and USD 11B in revenue for the country.
If interventions are not put into place, we might see the sunrise quickly descend into sunset for the BPO industry.
--------------------------------------------
This is a first of two articles that covers the current BPO and CCS situation in the Philippines. The next installment will cover the programs that the industry, academe and government can employ to address the human capital crisis - as the cliché goes, there is a ray of hope.
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