Experience Excellence, Experience Philippines The Philippine IT-BPO Industry Jonathan Defensor De Luzuriaga Executive Director – Industry Affairs Business Processing Association Philippines

Business Process Outsourcing Voice Non-Voice (F&A, , HR) IT Services Outsourcing Software Development IT and Data Center Operations IT Infrastructure www.bpap.org Engineering and Design Services Outsourcing Engineering Design Architecture Design

Business Process Outsourcing

Voice

Non-Voice (F&A, , HR)

IT Services Outsourcing

Software Development

IT and Data Center Operations

IT Infrastructure

Engineering and Design

Services Outsourcing

Engineering Design

Architecture Design

O&O market USD billions Source: Team analysis ~45 2005 ~130 2010 CAGR +24% Addressable market Actual penetrated market ~450 10% ~30% 30

Philippine IT-BPO industry currently has over USD 6 billion in revenues Source: Team analysis 1.5 2004 6.1 2008 42% 299,168 2004 371,965 2008 39% 285 Direct employment FTEs Revenues USD billions Strong intrinsic skills English language Cultural affinity to US GAAP familiarity Competitive factor costs Labor Real estate Telecom Best in class incentives

Strong intrinsic skills

English language

Cultural affinity to US

GAAP familiarity

Competitive factor costs

Labor

Real estate

Telecom

Best in class incentives

Philippine IT-BPO: Growing All Sectors Source: Joint BPAP/BOI/PEZA/CICT Task Force Sector 2007 Revenues ($000,000) Past 3 years Ave growth Contact Centre 3,600 52 Back Office (non-voice BPO) 398 46 Transcription (non-voice BPO) 197 24 Animation 105 38 Software 423 35 Engineering/Design Process 152 55 TOTAL Philippine IT-BPO (export only) 4,875 50

* Contains multiple countries Source: Duke University/Booz Allen Offshoring Research Network 2006 survey Percentage of firms citing offshore location of choice China Eastern Europe* Other Asia* 18 Others* 21 India 19 Philippines 14 Latin America* ITO ESO 13 45 12 49 13 45 19 12 BPO Back office Call center 5 2007 Outsourcing Destination of the Year – National Outsourcing Assoc, UK # 2 # 2

Cost to employer index across average of 7 occupations, 2005/06, Index, US = 100 India Philip-pines China Mala-ysia Mexico Chile Poland Hun-gary Brazil Czech Repu-blic Russia Can-ada US Japan Ireland UK Ger-many Labor index was created based on average cost to employer on an hourly basis relative to the US for 7 occupations Cost to employer includes wage, bonus, and benefits Despite many changes, the top 5 low cost countries remain the same Source: McKinsey Global Institute; Watson Wyatt 2005/06 report

Labor index was created based on average cost to employer on an hourly basis relative to the US for 7 occupations

Cost to employer includes wage, bonus, and benefits

Despite many changes, the top 5 low cost countries remain the same

Source: www.infodev.org/en/Publication.170.html (copyright: World Bank)/ZDNet Asia 2007 The Philippine Talent Value Proposition: Cost Competitiveness BPO Sector Average Entry-Level Salaries (in $/year) South Africa 19,764 Mexico 18,653 China 5,680 Egypt 4,237 India 3,911 Philippines 3,858 IT Professionals Annual Average Salary (US$) Hong Kong 51,964 Singapore 41,601 Malaysia 16,696 India 14,702 Indonesia 11,231 Philippines 10,730

“ Of 100 graduates with the correct degree, how many would you employ if you had demand for all?” Per cent Engineer Countries * Mexico is the only country where interview results (higher number) were adjusted ex-post since interview base was thinner Source: Interviews with HR managers; HR agencies and Heads of Global Resourcing centers; McKinsey Global Institute Asia Latin America Eastern Europe Suitability rates are empirically based on a total of >80 interviews with HR professionals working in each country 42* 35* Finance/accounting Generalist China Philippines India Malaysia Brazil Mexico Russia Czech Republic Poland Hungary

Source: Phils Comon Higher Education : CIA World Factbook 2007; *China data for unemp and literacy is major Cities only Suitability rates are empirically based on a total of >80 interviews with HR professionals working in each country Abundant labor force of 36 million Over 400,000 college graduates per year Large pool of accounting and business graduates English proficiency Affinity with Western culture Customer service orientation Highly trainable Cost effective High level of commitment and loyalty Number of college degree graduates 2007 Annual growth Business & Accountancy 128,000 Engineering & Tech 55,752 IT-related courses 42,047 Architecture 3,100 Medical Sciences 31,400 Fine Arts/Humanities 7,660 TOTAL Tertiary level 454,818 3.8% Pop Labour force Unemp rate Literacy World 6,602M 3,400M 6.3% 82.0% India 1,130M 509M 7.8% 61.0% China 1,322M 798M 4.2%* 90.9%* Brazil 190M 96M 9.6% 88.6% Philippines 90M 36M 7.9% 92.6%

Abundant labor force of 36 million

Over 400,000 college graduates per year

Large pool of accounting and business graduates

English proficiency

Affinity with Western culture

Customer service orientation

Highly trainable

Cost effective

High level of commitment and loyalty

Voice services Data transcription Simple back-office processes Customer care surrounding voice Higher-value processes, e.g., F&A, HR Pharma, Healthcare New service lines (e.g., design, tactical CRM) Joint-service companies IT-BPO bundling Build reputation for operational excellence, business model innovation Consolidate position in voice, develop position in adjacencies, “natural” affinities Leverage intrinsic strengths, establish capabilities “ Building blocks” Talent Cost Business Environment Risk Management Infrastructure

Voice services

Data transcription

Simple back-office processes

Customer care surrounding voice

Higher-value processes, e.g., F&A, HR

Pharma, Healthcare

New service lines (e.g., design, tactical CRM)

Joint-service companies

IT-BPO bundling

Presence of Dedicated IT Parks Right in the Center of Business Districts McKinley Hill Taguig The Philippine Workplace Infrastructure Proposition: IT-BPO designed, reliable infrastructure Northgate Cyberzone Muntinlupa City RCBC Plaza, Makati City Bonifacio Technology Center, Taguig City Eastwood City Cyberpark Quezon City PBCom Tower Makati City METRO MANILA

Friendly people Value-for-money housing Modern recreational facilities First-rate educational institutions Presence of International schools Presence of International schools (e.g. Brent School, International School Manila, British School) A growing favorite tourist destination 8.7% increase in tourist arrivals (3.09 million) 41% increase in tourist spending Expatriates’ top choice for quality of life HOSPITABLE LIFESTYLE

Friendly people

Value-for-money housing

Modern recreational facilities

First-rate educational institutions

Presence of International schools Presence of International schools (e.g. Brent School, International School Manila, British School)

A growing favorite tourist destination

8.7% increase in tourist arrivals (3.09 million)

41% increase in tourist spending

Frost & Sullivan , August 2007: Philippines among top 10 shared services and outsourcing locations in the world The Philippines has a significant and growing position in the technology vertical; it has an emerging presence in finance and insurance and in entertainment ; it has a stable no. 6 position in transportation and logistics ; and is 9 th in the world in the healthcare industry. The Philippines is one of the 3 most-preferred locations for SSO operations for the energy vertical where it is ranked as the most cost-efficient in the world; the country has a high standard of infrastructure quality at a lower cost due to its liberalized telecommunications industry IMF , March 2007: “The Philippines has established a strong presence in voice-based BPO sectors such as call centers, and there are also signs of growth potential in other offshore services, such as medical transcription and animation.” “ The Philippines is an attractive outsourcing destination. According to some business attractiveness surveys, the country is highly ranked as an outsourcing location, compared with other key destinations. ADB , March 2007: The Philippines is comparable to or even fares better than other emerging BPO providers in areas such as quality and cost of labor and certain infrastructure costs “ The Philippine BPO sector is expected to experience high growth because it has been marked by a steady flow of investments, especially in the contact centers.” Nomura Securities , November 2007: “We think that the Philippines has grown into the No. 2 outsourcing base after India in call center–based BPO fields.” The Philippines is viewed as a Favorable Location for IT-BPO Services

Frost & Sullivan , August 2007: Philippines among top 10 shared services and outsourcing locations in the world

The Philippines has a significant and growing position in the technology vertical; it has an emerging presence in finance and insurance and in entertainment ; it has a stable no. 6 position in transportation and logistics ; and is 9 th in the world in the healthcare industry. The Philippines is one of the 3 most-preferred locations for SSO operations for the energy vertical where it is ranked as the most cost-efficient in the world; the country has a high standard of infrastructure quality at a lower cost due to its liberalized telecommunications industry

IMF , March 2007: “The Philippines has established a strong presence in voice-based BPO sectors such as call centers, and there are also signs of growth potential in other offshore services, such as medical transcription and animation.”

“ The Philippines is an attractive outsourcing destination. According to some business attractiveness surveys, the country is highly ranked as an outsourcing location, compared with other key destinations.

ADB , March 2007: The Philippines is comparable to or even fares better than other emerging BPO providers in areas such as quality and cost of labor and certain infrastructure costs

“ The Philippine BPO sector is expected to experience high growth because it has been marked by a steady flow of investments, especially in the contact centers.”

Nomura Securities , November 2007: “We think that the Philippines has grown into the No. 2 outsourcing base after India in call center–based BPO fields.”

Philippine IT-BPO: Prospects for Growth Frontier Strategy Group , September 2007: The Philippines is among seven key markets that are “above the rest” and are the “most critical to achieving corporate growth and outperforming the competition in 2008 and beyond” Survey of 100 MNC executives in emerging markets: 85% say that the Philippines is among the top 4 emerging markets in the Asia-Pacific region that they are most interested in expanding into National Outsourcing Association (UK), October 2007: Philippines awarded Offshoring Destination for 2007 FBR Research , October 2007: “Philippines Poised for Several More Years of Hyper Growth” Diamond Consultants , December 2007: The Philippines ranked # 3 behind India and the US in the current location strategy of BPO providers FBR Capital Markets 2008: “We believe that the Philippines has been validated as the location of choice for B-to-C contact centre work” 2007 Offshoring Destination of the Year - Philippines

Frontier Strategy Group , September 2007: The Philippines is among seven key markets that are “above the rest” and are the “most critical to achieving corporate growth and outperforming the competition in 2008 and beyond”

Survey of 100 MNC executives in emerging markets: 85% say that the Philippines is among the top 4 emerging markets in the Asia-Pacific region that they are most interested in expanding into

National Outsourcing Association (UK), October 2007: Philippines awarded Offshoring Destination for 2007

FBR Research , October 2007: “Philippines Poised for Several More Years of Hyper Growth”

Diamond Consultants , December 2007: The Philippines ranked # 3 behind India and the US in the current location strategy of BPO providers

FBR Capital Markets 2008: “We believe that the Philippines has been validated as the location of choice for B-to-C contact centre work”

Our Goals MARKET SHARE HEADCOUNT REVENUES

The Challenge Funding Ownership Authorship Leadership and follow-through

Funding

Ownership

Authorship

Leadership and follow-through

The Action Thought Leaders - meeting of the minds Major stakeholders’ raising the “ante” Creating the work team Creating the “strawman” and signing up the rest of the stakeholders Getting to work

Thought Leaders - meeting of the minds

Major stakeholders’ raising the “ante”

Creating the work team

Creating the “strawman” and signing up the rest of the stakeholders

Getting to work

Note: GDP estimates are at 2005 prices and PHP 46.30 (May ’07) forex. Source: NSCB Economic Accounts; NEDA-MTDP; team analysis Exports USD billions Employment creation Million jobs 98% 2% 117.0 2005 92% 8% 163.0 2010 100% = 95% 5% 47.5 2005 85% 15% 84.3 2010 100% = GDP USD billions BPO estimated to contribute 8% of total Philippine GDP by 2010, higher than the current share of finance, real estate, or transportation and communication Industry’s five year 40% CAGR to outstrip 12% average for exports Industry to provide one of every ten jobs created in the Philippines in the next 3-4 years 94% 6% 2.4 2005-06 90% 10% 6.8 2007-10 100% = PRELIMINARY 10 Others IT-BPO

Source: Team analysis Key issues Suitable and abundant talent Operational performance Quality infrastructure Conducive business environment Need to recruit over one million new people into the industry to reach 10% market share High percent of top talent in emerging areas outbound to other markets (e.g., nurses, engineering, accountants) Mismatch in location density between providers and labor. Smaller labor pools not tapped Wage pressures emerging, reflecting accelerating growth and lack of transparency on wages Competitiveness relative to established players (e.g., India) and emerging players (e.g., Vietnam) at-risk Wage appear to be growing faster than billing rates, creating imperatives for operational excellence, scale and migration to high value services Availability emerging as major issue NCR rental space only available to reach 68% of revenue target Given market uncertainty, facilities being built only on commitment, slowing time-to-market Rental rates rising sharply in Makati Central Business District Need to ensure that current incentive regime continues to sustain competitiveness Most locators concentrated in NCR; other cities may not be O&O-ready Under resourced industry association Good investor support in pre-investment phase; potential to improve in execution phase Persistent issues around critical risk factors that affect outsourcing decision (e.g., IP protection, data privacy) Risk management NEXT WAVE CITIES BUSINESS ENVIRONMENT TALENT TEAM 2010

Need to recruit over one million new people into the industry to reach 10% market share

High percent of top talent in emerging areas outbound to other markets (e.g., nurses, engineering, accountants)

Mismatch in location density between providers and labor. Smaller labor pools not tapped

Wage pressures emerging, reflecting accelerating growth and lack of transparency on wages

Competitiveness relative to established players (e.g., India) and emerging players (e.g., Vietnam) at-risk

Wage appear to be growing faster than billing rates, creating imperatives for operational excellence, scale and migration to high value services

Availability emerging as major issue

NCR rental space only available to reach 68% of revenue target

Given market uncertainty, facilities being built only on commitment, slowing time-to-market

Rental rates rising sharply in Makati Central Business District

Need to ensure that current incentive regime continues to sustain competitiveness

Most locators concentrated in NCR; other cities may not be O&O-ready

Under resourced industry association

Good investor support in pre-investment phase; potential to improve in execution phase

Persistent issues around critical risk factors that affect outsourcing decision (e.g., IP protection, data privacy)

Potential Labor Pool TALENT

* Non-traditional pools include college drop-outs with less that two years tertiary education, high school graduates who do not enroll In college, housewives, and retirees ** PPS: Percentage points Source: CHED; MGI; BPAP; NSCB; ADB Statistical Database; interviews; team analysis ESTIMATES Estimated impact (2007-10) Thousand FTEs Thematic program Develop comprehensive assessment and training program Tertiary degree graduates Drop-outs with minimum two years tertiary education Affected talent pools Improve awareness of career opportunities in IT-BPO Tertiary degree graduates Drop-outs with minimum 2 years tertiary education Career shifters Tap alternative talent pools Non-traditional pools* Non-NCR graduates Improve “ability to fund” Drop-outs with less than 2 years tertiary education High school graduates who do not enroll in college Focus on “responsive” curriculum changes High school graduates Total Short-term Low-end FTE impact High-end FTE impact Long-term 30 100 210 10 30 150 20 40 10 30 560 290 TALENT

Tertiary degree graduates

Drop-outs with minimum two years tertiary education

Tertiary degree graduates

Drop-outs with minimum 2 years tertiary education

Career shifters

Non-traditional pools*

Non-NCR graduates

Drop-outs with less than 2 years tertiary education

High school graduates who do not enroll in college

High school graduates

Total

Source: Team analysis Information Services BPAP Inventory BPAP city scorecard Case studies NEXT WAVE CITIES City readiness Which cities are ready? What are the gaps? Where is specific expertise? Penetration Who is operating here today? What activities do they undertake? Where are they located? How many FTEs? Segment readiness How have various slivers fared in the Philippines? Which slivers have natural fit for the Philippines, i.e., growth prospects? Topics Investors/locators Real estate developers Utility providers Colleges and universities National government LGU's Others Information “demands”

City readiness

Which cities are ready?

What are the gaps?

Where is specific expertise?

Penetration

Who is operating here today?

What activities do they undertake?

Where are they located?

How many FTEs?

Segment readiness

How have various slivers fared in the Philippines?

Which slivers have natural fit for the Philippines, i.e., growth prospects?

Investors/locators

Real estate developers

Utility providers

Colleges and universities

National government

LGU's

Others

Davao Metro Cebu Iloilo Metro Manila Naga Baguio Bacoor Bacolod Cagayan de Oro Santa Rosa Legazpi Zamboanga Tacloban *Super cities have >15,000 IT-BPO workers; large cities have a potential capacity of 10,000 – 15,000, mid-sized cities 5,000 – 10,000; another 20-plus cities offer a potential capacity of <5,000 FTEs each. Over 230,000 IT-BPO employees work in the 14 contiguous cities of Metro Manila, making it the BPO capital of the world. Over 30 towns and cities outside of Metro Manila host IT-BPO companies in the Philippines. Angeles/Clark Subic/Olongapo Cainta Calamba Lipa Cabuyao Dagupan Next Wave Cities With 250K IT-BPO FTEs in Metro Manila makes it the BPO Capital of the World; 30 other RP cities host BPO companies NEXT WAVE CITIES Ilocos Cagayan Valley Central Luzon Southern Tagalog Bicol Western Visayas Central Visayas Eastern Visayas Western Mindanao Northern Mindanao Southern Mindanao Central Mindanao Cordillera Large cities Mid-sized cities Super cities*

* Service providers/investors, real estate developers, telco providers, utility providers, schools and placement agencies Source: Team analysis Industry* Spread O&O activities more evenly Identify ways to manage the eco-system Provide perspective on needs and location readiness Maintain BPAP Inventory Update scorecard Prepare case studies Perspective on city progress CICT Push for ICT council creation and activeness Coordinate with other government agencies (e.g., DTI) Coordinate data collection on cities Coordinate ICT council meetings Help LGU under-stand buy factors Communicate location opportu-nities to industries NEXT WAVE CITIES National government Align investments and regulations together Support other agencies involved in O&O investments LGU Articulate objectives for the city Push for buy-in of local stakeholders and citizens Next Wave Cities Working Group

Spread O&O activities more evenly

Identify ways to manage the eco-system

Provide perspective on needs and location readiness

Maintain BPAP Inventory

Update scorecard

Prepare case studies

Perspective on city progress

Push for ICT council creation and activeness

Coordinate with other government agencies (e.g., DTI)

Coordinate data collection on cities

Coordinate ICT council meetings

Help LGU under-stand buy factors

Communicate location opportu-nities to industries

Align investments and regulations together

Support other agencies involved in O&O investments

Articulate objectives for the city

Push for buy-in of local stakeholders and citizens

The Philippine Business Environment Proposition: Government Incentives 4 to 8 years income tax holiday (ITH) Special 5% tax rate on gross income after the lapse of ITH (for IT Park/Ecozone locators) Tax and duty exemption on imported capital equipment (for IT Park/Ecozone locators); ZER0 percent duty on imported capital equipment (E.O. 528) Exemption from 12% input VAT on allowable local purchase of goods and services (e.g., communication charges) Exemption from wharfage dues Employment of foreign nationals Source: BOI/PEZA

4 to 8 years income tax holiday (ITH)

Special 5% tax rate on gross income after the lapse of ITH (for IT Park/Ecozone locators)

Tax and duty exemption on imported capital equipment (for IT Park/Ecozone locators); ZER0 percent duty on imported capital equipment (E.O. 528)

Exemption from 12% input VAT on allowable local purchase of goods and services (e.g., communication charges)

Exemption from wharfage dues

Employment of foreign nationals

The Philippine Telecom Infrastructure Proposition: Quality, Cost, and Reliability Advantage Redundant international connectivity Expanding multi-media infrastructure 24 x 7 x 365 support operation Short lead time in provisioning international leased circuits: 30 – 45 days Deregulated telecommunications industry More stable, robust, highly scalable due to numerous fiber optic landings and links Cost of bandwidth has gone down by at least 85% in the last 5 years (from US$14,000 in 2001 to today’s rates of US$ 1,500 per month for E1 lines to U.S.; US$5,000 to U.K.) Source: PLDT/Globe; BPAP analysis

Redundant international connectivity

Expanding multi-media infrastructure

24 x 7 x 365 support operation

Short lead time in provisioning international leased circuits: 30 – 45 days

Deregulated telecommunications industry

More stable, robust, highly scalable due to numerous fiber optic landings and links

Cost of bandwidth has gone down by at least 85% in the last 5 years (from US$14,000 in 2001 to today’s rates of

US$ 1,500 per month for E1 lines to U.S.; US$5,000 to U.K.)

Source: May 9 sponsor workshop; interviews; team analysis Three key areas for BPAP Key issues in the Philippine business environment Lack of institu-tional framework during set-up 1 Weak risk perception 2 Mixed messages on government support 3 Public policy Protect current incentive regime Simplify incentive process Expedite data protection regulation Investor support Set-up advisor certification BPAP portal and helpdesk Operational excellence program Promotion Risk survey Year of Information Security Position Philippines as “destination of choice”

Cultivating value-added partnerships Promoting our strengths Valuing diversity Building a single united front

Cultivating value-added partnerships

Promoting our strengths

Valuing diversity

Building a single united front

THANK YOU VERY MUCH! For more information regarding the association, please visit our website at www.bpap.org

THANK YOU VERY MUCH!

For more information regarding the association,

please visit our website at

www.bpap.org