The BPO Challenge: Leveraging Capabilities, Creating Opportunities

As APEC seeks to promote free trade and economic cooperation in the Asia-Pacific region, cross-border ICT-enabled services and business process outsourcing (BPO) are expected to contribute to economic integration and growth in the region. ICT-enabled services have grown significantly over the years and across many parts of the globe including several developing countries in the Asia-Pacific region.

While there may not be a single standard approach to developing the ICT-BPO sector, the successful experiences of developing countries can provide useful insights and practical lessons for countries contemplating to set up their ICT-BPO service industries. Using data from the Philippines, this paper describes the evolution of ICT-BPO services exports in the country and examines the factors that facilitated its transition from providing low-end contact center services, to back-office operations, and to higher value-added services.

The paper also reviews some of the APEC initiatives relevant to the growth and expansion of ICT-BPO services in the region. The Philippine experience has shown that IT-BPO services is one area of trade in services where developing countries can take a shot at sustainable development, without relying so much on traditional primary industries and natural resource.

Although the presence of an educated workforce and good telecommunication infrastructure do not always guarantee success in this area, the investments in human capital and critical telecoms infrastructure—considered by many as a backbone for other important industries—are more than enough reward for the decision or attempt to pursue and board the IT-BPO bandwagon. There is still enough space and opportunity for other developing countries to build appropriate domestic capacity to effectively participate in this sector.

Keywords: ICT, IT-BPO, Services Trade Liberalization

For the first time since 1996, the Philippines hosted the APEC Summit in 2015. As input to the summit agenda, government agencies including PIDS were tasked to prepare policy research on issues forming the basis for priorities the Philippines would push during the forum.

Cross-border ICT-enabled services and BPO are especially significant to the Philippines and many APEC economies. These services have grown significantly across the Asia-Pacific region and play an important role in the growth and evolution of APEC economies and in enhancing regional economic integration.

The APEC National Organizing Council identified four priorities for the Summit: Enhancing the Regional Economic Agenda; Fostering SME participation in regional and global markets; Supporting and Investing in Human Resources; and Building Sustainable and Resilient Communities. ICT-enabled services and BPO fall under Enhancing the Regional Economic Agenda.

ICT-enabled services (also called ICT-enabled or IT-BPO), including BPO/BPM, are among the fastest-growing segments of tradable services worldwide. Advances in ICT have rendered distance and delivery costs practically irrelevant for cross-border services trade. While industrial countries still dominate, some of the most dynamic exporters are developing economies in the Asia-Pacific region — notably India and the Philippines.

Mattoo and Wunsch (2004) attribute the rise of cross-border services trade to: (i) advances in ICT enabling services trade; (ii) investments in education in developing economies creating abundant skilled labor at lower cost; and (iii) changing business practices leading to outsourcing/offshoring of non-core services to third-party providers in low-wage countries. A significant portion of these offshored activities are ICT-BPO services.

Despite growing tradability, services exports’ share of total exports in many APEC economies remains modest (~15%). Some transaction costs are inherent (distance, cultural differences), but others are artificial and compressible through policy reforms (e.g., regulatory coherence, liberalization). Domestic regulations and protectionist views can limit trade and constrain productive services, contributing to uneven performance across countries.

While there is no single approach to developing ICT-BPO, successful experiences of developing countries yield practical lessons. Using Philippine data, this paper describes the evolution of ICT-BPO exports and factors facilitating the shift from low-end contact centers to back-office operations and to higher value-added services. The paper also reviews APEC initiatives relevant to ICT-BPO growth. The analysis relies on secondary data (ADB, World Bank, industry associations) and consultations with industry representatives.

The ICT-enabled services and BPO sector spans a wide range of activities across sectors. As technology advances, the scope evolves, complicating efforts to standardize global definitions. Global definitions oscillate between broad and narrow frameworks (UNCTAD 2008). Broadly, ICT and ICT-enabled services cover IT applications, engineering services, and services delivered over networks.

There is a thin line between IT/ICT services and ICT-enabled services. IT is the backbone enabling ICT-enabled/BPO services. Their growth is intertwined (ADB 2010). Many BPO activities overlap (e.g., customer care can include call centers and technical support). Many services do not neatly fit the GATS classification; several support activities lack corresponding W/120 entries (Mattoo & Wunsch-Vincent, 2004).

Because BPO activities are performed on behalf of many sectors, BPO is not formally a GATS sector; the most amenable classification is Other Business Services, which is broad. GATS and UN classifications date to 1991, before the proliferation of modern tasks. Governments rarely collect detailed ICT-enabled services data; many statistics come from industry associations (e.g., NASSCOM, Tholons) and international agencies (UN, WTO, OECD).

Despite CPC upgrades, not all current or future tradable services are captured. As technology evolves, composition changes, making categorization challenging. Gereffi and Fernandez‑Stark (2010) address this via a Global Value Chain (GVC) framework that relates value to human capital requirements (education, experience) across service chain stages.

The offshore services value chain divides services into horizontal (cross‑sector) and vertical (industry‑specific). Horizontal includes ITO, BPO, KPO — spanning repetitive transactional work to analytical tasks. Vertical services require industry‑specific knowledge. By mapping human capital needs per stage, developing countries can identify entry points and policies to build capacity for target segments.

The offshore IT‑enabled services industry has grown significantly and is the fastest‑growing segment of Other Commercial Services, overtaking travel and transport. Knowledge‑intensive business services — computer/IT services, R&D, and other business activities — lead growth. Within APEC, India, the Philippines, and China are the most established destinations (Tholons 2014).

The Philippine ICT/IT‑BPO sector encompasses telecommunications; broadcasting/media; electronics manufacturing; IT software/ITO services; and IT‑enabled BPO (voice and non‑voice including KPO such as transcription, animation, game development, software development). Telecom deregulation in 1993 was pivotal, improving infrastructure and enabling BPO growth.

From 2004–2011, the industry posted double‑digit growth, showing resilience through the 2008–2009 crisis. By 2011, the sector captured 5–9.5% of the global outsourcing market. Contact centers comprised ~64% of workforce and >67% of revenues; in 2010, the Philippines overtook India as the world’s leader in voice BPM and ranked second in non‑voice.

BSP estimates that 2011 IT‑BPO revenues accounted for 5.4% of GDP (up from 1.4% in 2004). Government surveys (BSP’s Survey of IT‑BPO Services; PSA’s ASPBI) have improved measurement of the sector’s contributions, including employment, export sales, gross income, and foreign equity.

Foreign equity investment has been substantial across subsectors (notably contact centers, transcription, software development). Americans and Europeans are major investors, aligning with client locations. While the US has been the traditional market, demand from the EU and Japan has grown, particularly for animation and software development.

In less than a decade, the Philippines transformed into a mature offshore services location. Employment rose from ~100,000 (2000) to ~443,000 (2009); revenues from USD 1.5B (2004) to USD 11B (2009).

Initial entry was via call centers (1990s pioneers included Accenture, Sykes, Teleperformance). By mid‑2000s, providers expanded into transcription and back‑office finance/accounting, cementing global prominence. Toward the late 2000s, the industry shifted into higher value‑added segments (e.g., medical transcription), signaling readiness for vertical specializations. The rebranding from BPO to BPM reflects increased capability to handle more complex services.

Key drivers include: abundant English‑proficient labor with cultural affinity to the West; competitive telecommunications infrastructure; cost advantages (labor, real estate); government incentives; proactive industry associations.

The Philippines’ edge includes English proficiency with neutral accent and a strong service culture. Similarities with US legal/accounting systems supported shifts into legal transcription and F&A outsourcing. Operating costs have compared favorably with regional peers.

The country graduates ~500,000 English‑speaking college students annually (notably medical, engineering/IT, and business fields). Public‑private efforts (training, certifications) improved suitability of graduates; surveys (Beshouri & Farrell, 2005) found the Philippines highly competitive in labor suitability and cost.

Telecom infrastructure advantages (multiple undersea cables, fiber, competitive rates) followed 1993 deregulation. Government support (PEZA incentives, ITH) and targeted training funds during the 2008–2009 crisis bolstered capacity. Highly organized industry associations (e.g., BPAP/IBPAP) have been instrumental in marketing and ecosystem development.

The global IT‑BPO market was projected to double from USD 122B (2010) to USD 240–250B (2016). With ~10% share, the Philippines has significant room to grow. The IT‑BPM 2012–2016 Roadmap targeted USD 20–25B revenues, 1.3M direct jobs, 3.2M indirect jobs, and ~8% of GDP by 2016.

Beyond voice BPM (where the Philippines holds ~29% global share), opportunities include non‑voice and complex ITO‑KPO services. Recommendations include continued skills development, investor incentives, infrastructure upgrades, and geographic diversification to “Next Wave Cities” to avoid saturation in Metro Manila/Cebu and tap broader talent pools.

Legislative support (e.g., Data Privacy Act of 2012) aligned the Philippines with international privacy standards, boosting investor confidence in secure offshoring.

The Philippine experience underscores the development potential of IT‑BPO for emerging economies. Asia‑Pacific economies — notably India and the Philippines — have benefitted from offshoring. To fully realize services trade gains, APEC economies must ensure seamless physical, institutional, and people‑to‑people connectivity.

Protectionist sentiments (e.g., offshoring restrictions, data privacy barriers) have emerged in some developed economies. Evidence suggests offshoring is not zero‑sum; long‑term gains accrue to both sending and receiving countries.

APEC frameworks relevant to services include: Bogor Declaration (1994); Osaka Action Agenda (1995); APEC Principles for Cross‑Border Trade in Services; and the APEC Services Action Plan (2009). While many APEC services projects exist, activities specific to IT‑BPO are limited and dispersed across subgroups.

IT‑BPO offers developing countries a pathway to sustainable development beyond traditional primary industries and natural resources. Investments in human capital and telecom infrastructure yield benefits that extend across the economy. There remains space for other developing countries to build domestic capacity and effectively participate.

However, protectionist pressures from developed markets are real risks. Constructive campaigns emphasizing win‑win outcomes of offshoring — under the auspices of entities such as the UN and APEC — can help allay anxieties and support deeper liberalization.

For APEC 2015, recommendations include: emphasize offshore services/IT‑BPO as part of services trade; undertake capability‑building for measurement; strengthen cooperation on better services trade data; increase awareness to mitigate fears of net job losses; and deepen commitment to faster services trade liberalization.

Principal national visions/plans: MTPDP 2004–2010 and 2011–2016; IT‑BPM Roadmap 2010/2016 (IBPAP); Philippine Digital Strategy 2011–2016; National Broadband Plan 2016; IT‑BPO Brand Management Plan; GICT flagship PPPs (2012); DOST’s Smarter Philippines (Smarter Government, Economy, Mobility, Environment, Living, Cities).

Cyber parks & Next Wave Cities: rapid expansion of techno/IT parks and ecozones (PEZA) with fiscal/non‑fiscal incentives; Cyber Corridor and Next Wave Cities initiatives to expand beyond NCR/Cebu.

Fiscal incentives: 4‑year ITH (extendable to 8); special 5% GIT in lieu of all national/local taxes (for ecozone locators) after ITH; tax/duty exemption on imported capital equipment; VAT exemptions on allowable local purchases; additional 50% deduction on training costs under the 5% GIT regime.

Non‑fiscal incentives: unrestricted use of consigned equipment; liberal rules for employing foreign nationals; special investor resident visas.

Legislation: Republic Act 10173 (Data Privacy Act of 2012).

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