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The rise of the back office

After the BPO phenomenon, back office processing is not tagged as the next growth area that the Philippines may tap with its large quality manpower base
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Starting with call centers, the “business outsourcing” catchphrase has been making the rounds in the corporate sector since the early 2000s. Then, within the next few years, medical transcription services also became in vogue. Now, the latest byword in the total business process outsourcing (BPO) lingo is back office processing.

The expansion of the country’s BPO business into back office processing is only logical, says the Business Process Association Philippines (BPA/P). Because of the 12-hour time difference between their US clients and the Philippine call-center and medical-transcription providers, the latter have to do their work mostly during nighttime in the Philippines. The local facilities of Philippine BPOs are therefore largely underutilized during daytime, so they need to find other service areas to maximize the use of their investments.

Back office processing or shared services, like its BPO forerunners, is the contracting of particular business tasks to a third-party service provider. The main difference is that this service sector deals not with handling telephone calls but with internal business functions such as accounting and bookkeeping, human resources, logistics, supply chain management, and the like.

By considerably reducing the cost of these essential functions, back office processing can significantly improve the bottomline of the businesses that avail of it. In turn, the outsourcing arrangement is now creating a booming industry in such countries such as China, India, and the Philippines where the costs of such services are comparatively lower.

AN EMERGING POWER

Although ranking third behind China and India, the Philippines is definitely growing in the outsourcing field. In fact, the 2005 Annual Global Services Location Index published by A.T. Kearney, a leading global management consulting firm, showed that the Philippines had jumped from sixth to fourth place—the biggest riser in the field—as the most attractive location for offshore services.

“Compared to India’s population, ours is very small, but we’re doing fine as it is,” says Mitch Locsin, executive director of the BPA/P. “We have been experiencing an 80 to 100 percent growth year-in, year-out since 2000. No other country, not even India, has seen that kind of growth.”

BPOs, in fact, have been one of the fastest growing sectors in the Philippines during the past five years. Says the August 2006 Industry Bulletin: Business Processing Outsourcing Edition issued by SGV and Co.: “Coming from a revenue base of about $350 million in 2001, BPO revenues have reached $2.4 billion in 2005, fueled primarily by strong global demand.”

A BPA/P article observes about the country’s BPO industry: “The Philippines is extremely competitive not only because it offers significant cost savings over doing specific tasks in-house [about 30 to 40 percent], but also because it’s a market in which the quality of the service is the primary consideration. Other outsourcing contenders may be able to offer lower-cost services, but few can beat the problem-solving disposition and customer service orientation of the Filipino people.”

Indeed, the strongest pull of the Philippines seems to be its own domestic BPO work force, of which about 24,500 have already been working full-time in the back office processing sector since early 2006. The country has another major built-in advantage: the estimated 385,000 young Filipino professionals who graduate each year receive an education with English as the primary mode of instruction. And according to the World Bank, the Philippines had an attractive literacy rate of as high as 93 percent in 2004.

Says the Department of Trade and Industry (DTI): “The Filipino workforce is consistently ranked among the very best in Asia by such international authorities as the Economist Intelligence Unit and the Swiss International Institute for Management Development (IIMD).” The Swiss IIMD has, in fact, ranked the Philippines in the number 1 position in terms of available skilled workers, number 2 in available senior managers, and number 12 in qualified engineers out of the 60 Asia Pacific countries.

The DTI further states: “There are more than 100,000 accountants and business-related college graduates [in the Philippines], the biggest pool in the region. About 3,000 accounting graduates become certified public accountants (CPAs) every year. In the first quarter of 2005 alone, the country had about 113,300 licensed accountants.“

These graduates are well-versed in the United States’ Generally Accepted Accounting Principles (GAAP) and International Accounting Standards (IAS) for financial reporting, an attribute that has led the GAAP to cite Filipino accountants as “among the best in the world.”

LIST OF OPERATORS GROWING

Currently, there are about 120 BPO operators in the Philippines. Of the larger players, several are multinational companies: AIG Business Processing Services, Inc., Caltex Shared Service Center (CSSC), Maersk Administrative Center Ltd., and Procter & Gamble Asia Pte. Ltd. These companies mainly perform accounting and financial services for their overseas business units and other companies.

Among the major independent local providers, on the other hand, are Business Process Outsourcing International, SPI Transact, and Summersault. Business Sense is one particular local accounting outsource firm that attests to the industry’s rapid growth. Says its owner, Henry Ong: “I initially put up my business advisory firm to help entrepreneurs who lacked financial management skills. We help them establish a good accounting system and advise them on their financial planning needs. We started out with two people about seven years ago. Now, we’ve grown to over 30 partners and employees.”


If you want to start a back office processing company, it’s best to choose a service function where you are already strong. There are several functions to choose from: financials (one of the most popular), data and transaction processing, network management, disaster recovery, inventory, logistics, supply-chain management, sourcing, tax reporting, and many other requisite—but not crucial—office operations.

The key to a successful BPO operation is high-quality human resources—a factor that overseas clients consider even more important than cost. In particular, you need to hire quality employees who have been sufficiently trained and are conversant in the English language, on top of being competent in the particular service function you will be providing. Indeed, to be sure that your employees meet these requirements, you may need to send them to a call center training academy or another BPO training establishment.

Apart from manpower costs, marketing costs will require a large chunk of your initial capital, which may run into the tens of millions. To begin with, most back office processing companies need to set up a small marketing arm overseas in addition to putting up a comprehensive website. Other large expense areas are office space, electricity, data backup, computers, and other office equipment.

If you take the option of servicing the back office processing requirements of local companies, your manpower and other costs would be considerably lower. You would probably spend well under P10 million, as the costs of most of your operations would be similar to those of a regular start-up service-oriented business.

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MORE REGULATION NEEEDED

The major risk, though, is that the relatively new and still turbulent BPO industry is in need of more regulatory measures. According to a study by Ceferino Rodolfo of the University of Asia and the Pacific (UA&P) entitled “Sustaining Philippines Advantage in Business Process Outsourcing,” because most BPO companies run in climate-controlled sites non-stop, the high cost of power may be a drawback. Other major factors that need to be stabilized are the training and hiring of qualified employees as well as the work benefits—not to mention the country’s overall economic situation.

At any rate, the Philippines aims to grow the BPO industry to a much bigger size in the coming years. Against a worldwide BPO market size of $641.2 billion by 2009 as projected by the market intelligence firm IDC, the Philippine BPO industry is projected to grow to $12.4 billion by 2010. This is according to joint estimates of the BPA/P, the Board of Investments (BOI), and the Commission on Information and Communications Technology (CICT), which also project the creation of 303,000 new jobs and the overall growth of the total BPO workforce to 1.1 million.

The call center industry is expected to account for only 300,000 of this projected total BPO workforce—a clear indication that back office processing services would eventually comprise the biggest chunk of the Philippine outsourced business processing industry.

Thus, depending on your scale, line of services, and customers, your earnings if you go into the back office processing business could be very substantial indeed.

Success Tips in the BPO Business

Invest in human capital. Mitch Locsin, executive director of the Business Processing Association Philippines, says: “Before, investors would come in and ask, ‘How is the political stability? How is the insurgency in Mindanao?’ In the last six months, however, the question being asked is, ‘How good is the human resource?’ The top concern of investors now is whether we can supply the demand, so there’s a very real need to improve the quality of our labor pool through education.”

Develop partnerships. Rather than competing with local companies, local BPO companies are being pitted against countries all over the world. As of now, the Philippines still has a relatively small piece of the pie. And for our country to succeed in the BPO business, there should be unified standards as well as shared practices for the industry.

Constantly develop and grow. Business process outsourcing is a rapidly evolving industry, not just in the Philippines but globally. So although it is best to work on your company’s strength, you must always keep on top of the trends and look for ways to improve you business.

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