What’s Going On In The Offshore, Back-Office Processing Outsourcing Services Market in the Philippines?

Surveys reflect similar findings among PITON consultants and other BPO companies in the country. Expansive growth is expected in 2007.

Now that 2006 is coming to a close, it is useful to analyze actual the market activity of offshore back-office processing outsourcing services in the Philippines versus the overall perception for the year.

It is important to measure performance to see where this industry is really headed.

PITON’s quarterly surveys—in which we query our own global advisors and the local industry’s high performers—present insights into sector trends and projections.

Each quarter, 70 to 100 senior advisors and nearly 20 leading BPO providers answer our questions on the market. This year’s headline is “stability”— demand, pricing, capacity, and sales cycles did not vary significantly from quarter to quarter.

Strong demand. Sector demand for offshore back-office processing outsourcing services in the Philippines remains strong. Although its strength dropped from torrid in the first quarter, it does nothing to diminish clients’ continuing desire to invest in the nation.

A majority of PITON’s advisors cited increased levels of PH market growth (versus declining) in each quarter, with their citations ranging from 83 percent observing growth in the first quarter to 59 percent citing growth in the fourth quarter. In comparison, other companies market growth of 67 to 93 percent, depending on the quarter polled.

HRO and FAO firms lead demand. Last year, HRO was the strongest area. Truth is, HRO has claimed the top spot every single quarter, ranging from 26 to 29 percent of cumulative advisor citations, followed by FAO, which ranged from 18 to 23 percent of advisor citations.

Between 66 and 80 percent of total advisors polled each quarter stated that benefits and payroll were the strongest HR functional process areas in last year’s surveys. Their  responses validated the same findings. Within FAO, accounts payable was again cited as the leading sub-process by an overwhelming number of advisors (80 to 93 percent).

Accounts receivable/credit and collections was the second strongest FAO demand, cited by 59 to 79 percent of our advisors; travel and entertainment (51 to 56 percent) was third. FAO enterprises confirmed these results.

Sales Cycle and Time-to-Contract. Last year, the sales cycle was also very stable quarter to quarter, as declared by 64 to 74 percent of PITON advisors.

A majority of them—71 to 82 percent—also cited a stable sales cycle. In our experience, the average cycle is 9 to 12 months. The time-to-contract is typically four to five months; this remained stable last year despite heightened noise from Wall Street analysts worried about contract signings.

Preferred Delivery Models. There is much debate over different back office delivery models. While the concept of transformation is compelling to buyers, there is uncertainty over what it means.

In the previous year, the preferred delivery model was “outsource and transform,” according to PITON advisors. The traditional “transform first and outsource later,” and the more incremental “outsource and continuous process improvement” models were not deployed as frequently.

Pricing. Throughout the previous year, pricing was cited as stable by 43 to 68 percent of PITON’s advisors in each quarter. The majority of the respondents also stated that pricing remained steady for three of four quarters in 2005.

This pricing equilibrium between buyers and outsourcing companies is healthy for the PH industry as a whole, with neither side currently gaining undue advantage over the other party.

Multi-shore. Advisors stated that the offshore and multi-shore component of offshore back-office processing outsourcing services in the Philippines remained strong and stable inside and outside of the country, with 48 to 55 percent per quarter citing steady demand.

BPO companies on the other hand, claimed that offshoring was strong and rising practically every quarter, with citations ranging from 48 to 69 percent per quarter. Most of the outsourced work in the country last year was performed by multi-national companies, not necessarily pure local providers.

Contract Profitability. Finally, the health of the local industry appears to be stabilizing. Consolidation among the enterprises has helped. In 2006, providers improved profitability, reaching it in 12 to 24 months with returns on invested capital of 10 to 20 percent. This bodes well for a prosperous and productive 2006 as this innovative market continue to grow and reach new heights.

To learn more about our industry-specific BPO capabilities please contact us by calling +1-310-844-7805 or by filling out our inquiry form. We look forward to hearing from you.