India overtakes Philippines in the Outsourcing race

India scores over the Philippines as an Outsourcing Destination

India has gained a high level of competence in delivering services to the Western clients who send their jobs and work here. Its ability to leverage its sheer strength in numbers heavily favors India – vis-à-vis other offshore destinations like Philippines - as the most desired country to send business operations that require low-cost talent.

On parameters such as revenue forecasting, English-speaking manpower, and strength of economy, the Philippines is up against Indian figures that are bound to intimidate the Business Processing Association of the Philippines (BPAP).

Take revenue, for instance. India is expected to earn revenues amounting to $48 billion in 2009, and end with a share of 44.8 percent of the total outsourcing pie, according to Canadian-based ICT research and advisory firm XMG Global.

Philippines is predicted to close the year with $7.3 billion or 21.7 percent growth in outsourcing. This is lower than the 24 percent growth forecast due to the slower growth for IT services, and the delay in expansion plans of several captive players.

India’s rising revenue graph can probably be credited to its competent and growing manpower that is also adept in English. Despite being born in a nation that has various native languages, millions of Indians become proficient in English by the time they graduate.

Companies interested in shipping jobs draw from this continuously replenishing army of technical and non-technical graduates.

But in the Philippines, levels of proficiency in English have surprisingly dropped—a factor that it needs to address quickly before growth in its offshoring sector plateaus.

In economic productivity too, India stands on firmer ground. It recorded 6.7 percent growth in GDP in 2008-09 versus the Philippine’s 5.2 percent growth.

It’s not just the GDP that is indicative of the future of job shipping in both the countries. The consequences of the 2008 economic recession have clearly shown that the structure of their respective economies has and will impact its trade—of which offshoring forms an important part.

As the Philippines’ economy is export-oriented, its immediate economic scenario is bleak. Foreign direct investment was expected to slide in 2009-10 as investors streamlined capital.

For the Philippines outsourcing industry to reach the 2006-07 level of earnings it is critical that the US and the European economies gather steam. This is an eventuality that the Philippines can’t really depend upon fully.

India is far less export-driven as compared to the Philippines, and private equity investors, and global fund managers are again channeling direct and indirect investment back into the Indian economy.

Clear evidence of this is that the top Indian share index, as of October 1, 2009, shot up by 10,000 points, or by 74 percent, since January 2009—right in the middle of one of the worst financial meltdowns the world had ever witnessed.

The factor that no country can discount is India’s expanding domestic economy that caters to a burgeoning middle class. It is this class, increasingly well-travelled and well-informed, that itself expects high standards of service execution and thus is fully aware of the quality it needs to produce to entice companies for shipping their jobs.

The still-developing domestic market is a massive opportunity for Indian MNCs to set up and evolve their offshoring operations in the next decade.

On comparing the two countries on various key productivity factors in job shipping, one finds that India’s well-developed expertise in every aspect of offshoring offers many advantages over the Philippines.

India’s scorching growth in the job shipping market a challenge for Philippines :

According to key players in the industry and National Association of Software and Services Companies (NASSCOM), the Indian job shipping industry was predicted to grow by nearly 55 percent by 2012.

This would be largely due to the accelerated growth of Knowledge Process Outsourcing (KPO), and growth of BPO (Business Process Outsourcing).The size of the BPO segment in India increased from $2.6bn in 2002 to $9.7bn in 2007, reflecting a Compounded Annual Growth Rate (CAGR) of 30.2 percent, and was further predicted to grow to $30.1bn by 2012, at a CAGR of 20.5 percent. The size of the knowledge outsourcing segment in India increased from $0.3bn in 2002 to $2.8bn in 2007, reflecting a CAGR of 56.1 percent, and is further predicted to grow to $10.8bn by 2012, at a CAGR of 23.3 percent.

In Philippines, the vision of the BPAP is that by the end of 2010 the industry would have 10 percent of the world market, and have a revenue of $13bn. In other words, in order to compete with India, the Philippines would have to take away almost 20 billion dollars’ worth of business in the next three years – a target not easy to achieve and pragmatically unfeasible.

Professionals in India outnumber the Philippines :

In Philippines, the job shipping industry still has only about 400,000 employees. A survey carried out in 2005, revealed that only 11,526 applicants or 2.89 percent of the total 400,000 new graduates were accepted into companies that work on the projects sent by western countries.

Presently, over 800,000 Indians are catering to the job shipping sector–double that of the Philippines. This figure is expected to rise to 2,000,000 by 2012 (Source: Nasscom-Everest India BPO study).

The presence of this large employee pool to choose from is an industry advantage that India enjoys. Developed over the last 10 years, it will not be easy for Philippines to replicate.

Indian professionals are more cost-effective than in the Philippines:

In India labor costs have crept upward over the years but have been offset by falling telecom rates. Typical annual salaries range from $7,000 to $15,000 for technical staff employed in companies that work on work sent by western countries, while back-office salaries range from $4,500 to $9,500.

In the Philippines labor costs are higher than India—a big disadvantage in the highly competitive outsourcing industry. Technical salaries range from $9,000 to $17,000 annually, and back office from $5,000 to $10,000.

Lack of proficiency in English adversely affects the Philippines

While it is true that English is the medium of instruction in the Philippines, and the country has poured money into improving English proficiency among teachers, the country is presently equipped with Filipino teachers that have poor English speaking and teaching skills. For instance, more often than not most teachers will revert back to their native dialect when teaching English.

A big obstacle to outsourcing growth in the Philippines is the lack of proficiency in English among the graduates. A study in 2007 found that more than 95 percent of applicants for jobs at outsourced call centers were rejected, largely because their command of English was inadequate.

These days, among ordinary Filipinos, it is increasingly difficult to find anyone under the age of 40 who speaks English with confidence. As of 2007 only seven percent of secondary school graduates had a mastery of English.

In the Philippines, only 46 million people, half of its population, can speak English. While in India, more than 300 million (out of a total population of 1.17 billion) can speak the language-and inevitably English is a major advantage in outsourcing.

In emerging urban cities in India, English is rapidly becoming the second language in homes and in day-to-day communication. This will further boost the growth of India’s job shipping sector.

Rich talent pool of resources is India’s strength :

India has many prestigious technical and non-technical colleges. Every year, India produces around 2,500,000 university graduates, including 400,000 engineers and 200,000 IT professionals. The Philippines turns out 380,000 graduates annually, and only 15,000 of them have core technology knowledge. Here the elephant and ant analogy comes to mind.

With a look to the future, India has also recently allowed foreign universities to open colleges in the country. This will further improve India’s education infrastructure—a core sector for competency in the offshoring market.

Philippines’ standard of education is a matter of concern :

In June 2009, the President of the Federation of Accrediting Agencies of the Philippines (FAAP) cited Philippines’ Congressional Commission on Education (EDCOM) lamenting ‘a continuing decline in the quality of education in this country’. He said this was due to four main factors: a) mismanagement of the education system, b) not investing wisely in education, c) lack of management competencies, and d) systemic corruption.

Another reason why the Philippines’s education system, which comprises 456 state colleges and universities, is not evolving is because three semesters of each eight semester bachelor degree are required to be completely devoted to government mandated subjects. These mandated subjects include the life and works of Filipino national hero Dr Jose Rizal, three subjects of Filipino language, and Filipino cultural subjects. This is not the case in the Indian education system that is molded almost entirely upon Western models.

In India, the education minister, through consensus and comprehensive research, has recently initiated much-needed reforms in the school and college education system—making it more global in structure, and adding accountability as a prerequisite for pay revisions.

This will increase India’s appeal as a leading destination for every type of outsourcing, and protect its competitive advantage in emerging fields of offshoring. such dedicated support, outsourcing is not pragmatic.