The existential threat to the Philippines’ BPO industry

Dark storm clouds are gathering for the best English-language Business Process Outsource (“BPO”) industry in the world. The local BPO Trade Association reports that the sector has become that country’s largest source of private employment. BPO engages over one million workers (principally university graduates) and is the second-largest contributor of foreign earnings, totaling $18.4bn, or 6.2% of GDP, with a range of additional benefits to Philippine society through various wealth-multiplier effects.

The success of the Philippines in recent years is in no small part due to: the fabulous character of their people; their English language capability & cultural resonance; and, their strong capabilities in demonstrating customer empathy. Annual revenue growth rates among firms in this industry are reliably reported to have been 17.1% for the period 2010-2016, and although that growth is expected to level-out over the next 5 years to ‘just’ 9.2%, the growth expectation and the hopes of the Philippine nation, remain substantial. More than 70% of Philippines BPO work is voice-based, and as we shall see below, this is its ‘achilles heel’ compared to other countries.

The existential threat comes from several directions. Firstly, the characteristics of high growth require a constant supply of skilled labor. A study quoted by ‘The Business Process Association of the Philippines’ details that the manpower growth needs to 7.8% from 2016 to 2022 however, in that same study, the Association indicated that only 10%-20% of applicants seen by hiring firms were suitable for employment, with English language fluency, as well as analytical and problem-solving skills holding many candidates back from success. In 2013 the Philippines office of the World Bank issued a report titled: “Creating More and Better Jobs”, citing the:  “large mismatch between available skills and available jobs”. The source of the problem can be traced to the Philippine education system. Not only does the Philippines spend far less (% of GDP) than most nations on education, until recently they have relied upon a K-10 cycle as opposed to K-12 that nearly all other nations adopted. Fortunately, this has now been fixed and 2018 sees the first batch of university graduates who have benefited from this extended schooling. Only time will tell if this will be a game-changer and whether sufficient labor will be available for firms to continue to grow at the rates that are hoped for – as of 2016, there was allegedly a shortage of around 50k qualified candidates per year.

The second threat is more dangerous, because it threatens not just growth, but existing business revenues of the BPO industry and this is the ‘rise of the robots’. There’s a two-pronged attack here – automated chat-bots and synchronous [duplex] ‘artificial intelligence’ based on voice services. While chat-bots are making tremendous headway, the startling jump this year has been in automated voice response system. For anyone who hasn’t seen the demonstration, check-out this Google clip on youtube. And it’s not just Google that ready to move forward with these new technological capabilities, it’s also Microsoft, Amazon, Apple and others. According to their proponents, these voice bots will hold a ‘conversation’ with you; frankly the capabilities demonstrated are alarming if you are a call center agent. Even if such capabilities are currently over-hyped, its surely only a small-step away from commercial reality and the impact on BPO services in emerging markets will be absolutely devastating.

For years countries like India and Philippines have traded on the labor cost arbitrage advantages. Western companies have outsourced many jobs to take advantage of a wage-scale cost sometimes 10-20% of the equivalent domestic worker. It’s clear that a farm of servers based on these new capabilities will be extremely efficient in the long-run toiling away for 24 hours a day with no breaks or family emergencies. Within a few short-years, we could easily see ‘escalated cases’, i.e. those requiring a branch-out to a human-being are likely to require less than 10% of the current call-center workforce.

For firms that outsource work to call-centers on the other side of the world, developments such as Google Duplex provide an opportunity for further substantial cost-benefits; this trend seems unstoppable. The urgent need for the Philippines, which is disproportionately dependent on voice-based services versus their national rivals, is to up-skill BPO staff away from call-center work and into higher value-added opportunities such as complex outbound sales and a range of IT services; an area dominated by countries that have less reliance on English language/culture to differentiate their services.

The bottom-line is that the Philippines government urgently need to address how they can intervene to achieve a large-scale value shift, because the existential threat is about to become a dark reality for more than one million BPO workers; perhaps they should read the tea-leaves..

Simon Collier Sep2019