FIAS/World Bank. Study of Linkages in the Philippine ITES Industry

Transcription

1 FIAS/World Bank Study of Linkages in the Philippine ITES Industry June 27, 2005 F. Ted Tschang Lee Kong Chian School of Business Singapore Management University for the Foreign Investment Advisory Service (FIAS) A joint service of the IFC and the World Bank

2 Outline Introduction General picture why outsourcing occurs, constraints Current Philippines situation SWOT An outsourcing model and a case Firm Capability and Linkages: Domestic, MNCs Policies

3 FIAS/World Bank ITES sector study 5 sectors Business Process Outsourcing Call centers Software Services Animation Medical transcription Strengths, weaknesses, opportunities, threats Linkages, foreign investment Policy guidance

4 FIAS/World Bank ITES sector study No conventional (supply chain) linkages, consider ITES as one big engine (e.g. India) Opportunity for Philippines to leap frog Foreign investment Is nature of investors, skills, capability different?

5 Global Picture: Why does outsourcing occur? Major factors affecting 8 sectors (McKinsey, 2005) Drivers s/w ITES bank insur phar auto hlth retail Cost pressure Cost differential Global exper. in managing Inhibitors Suitability of business processes for global work Scale of business processes to be globally resourced Return on investment vs alternative profit-max strategies

6 Global Picture: Demand-side (8 sectors) Some key findings (McKinsey, 2005) 2003 Offshore Employment (FTEs*) 2008 Offshore Employment (FTEs*) Theoretical Maximum (FTEs) IT services 371, ,000 2,800,000 Retail banking 93, ,000 3,300,000 (all banking) Packaged software 38, , ,000 Retail 28,000 42,000 4,500,000 Insurance 20,000 38,000 2,300,000 Pharma 10,000 21, ,000 Healthcare 4,000 22,000 4,600,000 Auto 1,000 4, ,000 Total 565,000 1,235,000 18,300,000 * FTEs in low wage countries

7 Global Picture: Demand-side Some key findings (McKinsey, 2005) Actual total worldwide offshore employment in services projected at 4.1 million in 2008 Offshore employment will grow gradually Chance for sustainable growth Limits from companies global capabilities Deters companies more than regulatory barriers -> high hanging fruit are to consult on improving processes Engineering and finance/accounting occupations are most susceptible (to outsourcing) Reflects the codification of these occupations

8 Global Picture (Supply-side): Dominant BPO and IT producing offshore services market countries (McKinsey, 2005) Country $Billion (2003) India 12.2 Notes Ireland 8.6 Mainly MNC captives Israel 3.6 Estimated, Mainly MNC captives China 3.4 Estimated Canada 3.8 Philippines 1.7 Other Asia 2.4 Excluding Australia (0.4) Latin America 2.3 E. Europe and Russia 0.9

9 Global picture: Supply-side Suitability of college graduates worldwide (McKinsey, 2005) Of 100 graduates with the correct degree, how many would you employ if you had demand for all? engineer fin/accounting generalist Russia Czech Poland Hungary China Philippines India Malaysia Brazil Mexico

10 Supply-side (McKinsey, 2005) (assessment of Philippines is added in) Factors limiting suitability of graduates: 1. Quality/capability: 13% (worldwide) -/+ 2. Accessibility = fragmentation + (of graduates) x mobility ++ (willingness to move) 3. Domestic competition +++ Also Middle manager shortage -/+ Many small countries have sizable attractive talent pools Philippines

11 Issues that pertain to ITES AT Kearney 2004 Overall: Philippines is 6 th out of 25 People skills: Philippines is 11 th (second pack) (India is 1 st, China 7 th, S. Africa 10 th, rest are DCs) Skills score is much closer to E. Europe than McKinsey s Business environment: Philippines is 22 nd Financial structure: Philippines is 3 rd IDC Asset advantage (tech, know-how): Philippines is 4 th of 10 countries (after Canada, India, Ireland) Cost advantage: Philippines is 3 rd after India, Jamaica

12 Statistics Software Development Global market size (US billion) (2002) Philippines: revenue (US million) (2001) Phil: No. Employees (2004) Phil: No. Companies (2004) $56 b $ (52 firms BOIreg d) Phil: Ind Growth Rate ( ) Call centers $6.5 b $173 60,000 est. 92 (latest) 100% BPO $20 25 b $5-6 (finance and accounting only) Animation $1.3 b $ Medical Transcription 15 (5-6 F&A only, (2002)) 24 $10 35 b $40 1,500 22

13 Philippines: strengths and weaknesses Strengths Good skills (including IT) Language affinity (but ) A western country Branding (at least in the short lists) Weaknesses (conventional) #1 corruption (weakens perception of fairness) * #2 macroeconomic instability (weak environment for investments) * Poverty, social stability * based on World Bank E Asia PREM ICA report

14 Opportunities, threats Weaknesses (recent findings) Skills getting thin (need bigger proportion of qualified) Local industry players small, weak Productivity, R&D, linkages not closely watched Opportunities: Expanding markets More fragmented Increasingly independent clients Clients that want to source from both countries Deepening capability increasing value addition to clients Threats: competition at two ends (India, China etc.)

15 Issues The significant problems we face cannot be solved at the same level of thinking we were at when we created them." - Albert Einstein ( )

16 Issues Better models for how outsourcing occurs and firms grow Most analyses predicated on country level (e.g. needs of MNCs) Current outsourcing analyses/models are predicated on two or three simple factors: cost, quality and skills (as well as financial, business environment) But holding MNC, helping it deepen and grow not well understood Needs for domestic firms not recognized in consultants analyses Implications for policy How to improve industry (productivity) How to maximize economic/industrial impact (linkages)

17 Sector-specific strengths and weaknesses Initial skills all 5 Depth of pool CC Good Moderate Weak/Low Local cos S/W, BPO Anim MNCs BPO, CC Value add S/W, Anim BPO, CC MT Competition@ Low Medium High Low end CC BPO, MT S/W, Anim. High end BPO, Anim. S/W

18 A Model of outsourcing evolution Who starts the firm Domestic firm (entrepreneur, expatriates) MNC intrapreneur Initial conditions Human capital, financing, management, client/contacts Value addition (to client) (upgrading capability) Economies of scale (growth by adding human capital) Increase R&D, productivity How is further value extracted by region (linkages)

19 Model: Initial conditions (all sectors) Strong domestic firms are essential to economy Complements MNCs, gives options Domestic firms deepen capabilities (e.g. Taiwan, India) Internal capabilities of firms depend on: Finances (resources) Adequate: CC, BPO (MNC) Inadequate: animation, software (SMEs) Human capital: reaching limits in CC, BPO Management Inadequate: selected animation, local firms Clients/Contacts Inadequate: selected sectors (software, animation)

20 Model: value addition After startup/foreign investment Value addition Scale up ( competition catches up) Upgrade: conceptual work, organize client processes Codification and productivity increases Philippines competitiveness depends on: Codification of tasks (e.g. animation and BPO highly codifiable -> easily transferable into and out of!) Tacit, low and high cognitive tasks not easily transferred because of language, cultural issues (e.g. animation and call center work) Adding value, e.g. productivity by automating codified work, or tacit (conceptual) work

21 Extracting further value (via linkages) Original notion of linkages: backward, forward linkages supply chains foreign investment (learning, contacts, capital) Inter-sectoral effects (e.g. economic spillovers) New notions for new sectors ITES does not have conventional supply chains

22 Extracting value (via linkages) Clusters (supplier networks, labor pools, complementary capabilities) Software firms that help BPO (productivity) Domestic vs. MNCs (captive centers) can both work on MNC needs (who wins matters less in national picture) Knowledge spillovers (e.g. lead firms, employee circulation) Spinoffs create diversity of approaches /possible technological configurations lead firms to assist (e.g. Infosys) Transcontinental networks and communities of practice Overseas linkages (returnees) E.g. India software, Taiwan electronics Institutions, e.g. NASSCOM

23 Case: Animation industry Global market: US 45 bill now, 50+ billion by 2005 worldwide (NASSCOM) High value added industry, unstable Application areas ( products ): Conceptual hi end: Feature films, and 3D (US-based) Codified low end: series (cartoons), Movie CG effects, commercials, 2D (most of Philippines work) Market (supply) Japan (430 studios) e.g. Toei with 400, many smaller Korea (200) Philippines (24): small studios - people pool: India (15): large diversified studios China - new policies to encourage domestic programs Singapore government funding, coordination

24 A story using the model: animation sector Who starts, upgrades the firm Domestic firm (expatriates), MNCs (e.g. Disney) Initial conditions/capability Strong: Human capital, cultural advantages (initially) Weak: Finance and management (domestic firms), networks How is value added (to client), capability upgraded Little upgrading, no R&D, some increase in efficiency (see technology) No scale economies (average co. is small) Linkages (personal) No local investments, investments in productivity How is further value extracted (further linkages) No spinoffs, spillovers minimal lead firms in some areas (e.g. training) External conditions: Industry s downturn broke many firms Technology: codification of processes reduced jobs

25 Policy improvements needed (generally for all ITES sectors) Initial conditions/upgrading capability Human capital - Curricula reform, investments in education, e.g. software engineering, BPO (what does it need?) Management education (for domestic firms) Financing (government grants?) Value addition (to clients) awareness Economies of scale: domestic MNC clients, government procurement Increase: R&D, productivity

26 Policy improvements needed Conventional linkages Domestic market govt, local MNC procurement Foreign investment from facilitating environment to being proactive (lead firms like Lucas), joint ventures (e.g. I-Flex) Inter-sectoral effects (e.g. economic spillovers) value extraction (via linkages) Cluster effects Knowledge spillovers Transcontinental networks developing contact with non-resident Filipinos and returnees Associations branding, etc. Plus: government staffing, resources

27 Greater appreciation of the limits to outsourcing It s been an assumption in policy circles (government, and international agencies alike) that services are an effective way to leapfrog development (e.g. India path) But, as the Philippine animation case proves: Much of services and content is low value added (like manufacturing) and can easily be lost to others Climbing the ladder to creative parts of the process is not easy or proven, e.g. because content can t cross cultural boundaries easily (one way street) Other environment factors (business cycle, small firm size etc.) can dictate against sustainability of industry, firms

28 Animation Production Process Conceptualiza- Tion Pre- Production Production Post- Production -ideas, script -(acquire IP) -Scripting, drawing -> Storyboarding -> Story reels For outsourcing -specifications (timing and color sheets etc.) 3D: -digital animation process 2D: -painting -animating - All: -Voice-overs -editing - re-takes

29 Source: McKinsey, 2005

30 Source: McKinsey, 2005

31 Source: McKinsey, 2005