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BPO sector at risk

A series of events during the past months is nibbling at our once-unshakeable optimism for the country’s business process outsourcing industry.

It started with the anti-US and pro-China/Russia pronouncements of President Duterte in 2016 that shook American investor confidence in the Philippines. The US contributed about 73 percent of the $25 billion BPO industry earnings last year.

This was followed by US President Trump’s economic nationalism ranting and raving where offshore American companies were being bullied to return home, and – more importantly – to stop new US investments outside the homeland.

The declaration of martial law in Mindanao earlier this year contributed to the hesitation of foreign companies about setting up their BPO offices in the Philippines.

Perhaps the biggest blow was the news of a removal of income tax holidays on new investments in the BPO sector (proposed to be raised to 15 percent), and the restructuring of the value added taxation measures, which would also affect industry earnings.

Of course, there are other minor issues such as a growing scarcity of trained personnel, the high turnover manpower rates, rising office and land rentals, and the high cost and poor quality of internet connectivity that are contributing to the industry’s decreased competitiveness.

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Day of reckoning

Summing up past months’ events would have led a keen observer to expect a day of reckoning soon, this despite the continued optimism expressed by our government regulators that the next six years would continue to show robust growth for the BPO industry.

Those who closely watch the industry may have been alarmed by recent news of a substantial 35 percent drop in new investments in the BPO sector registered under the Philippine Economic Zone Authority (PEZA) during the first five months of 2017 compared to 2016.

There have been fresh reports too of Manila and Cebu, the biggest centers for BPO operations in the Philippines to date, slipping lower as the preferred destination of American and European companies when setting up their operations.

Even a global financial economist at Credit Suisse recently came out with a statement acknowledging the drop in the country’s BPO revenues, and by way of underscoring the sector’s significance, ventured to declare that this would adversely affect the country’s overall economic growth next year.

Six-year roadmap

The BPO industry’s private sector-led Information Technology and Business Process Association of the Philippines (IBPAP), in the midst of all the recent negative news, released its latest six-year roadmap, one that will see the industry generate $40 billion in revenues by the end of 2022.

It also aims to create1.8 million jobs, of which 73 percent would be in the mid- to high-value range. Of these, about half a million would be in the provinces. The roadmap also seeks to increase the country’s market share in the world market to 15 percent.

The industry’s focus in the next six years would be in trying to overcome challenges, some old ongoing issues like internet connectivity and manpower quality and reliability, as well as new global trends like artificial intelligence, big data and new delivery models.

Threat to voice services

Call centers, which currently comprise the leading subsector in the BPO industry, are considered to be at highest risk within the next six years. Call center revenues, which currently account for 70 percent of the industry, are threatened by recent technology developments.

Advances in information technology and computer-generated voice services are seen to slowly replace people, and could strategically affect the nature of call centers not just in the Philippines, but also in countries like India and Bangladesh that have significant stakes in it.

We’ve seen artificial intelligence (AI) slowly taking firm root in banking, healthcare and retail. Its success can be gleaned from recent increased spending on AI applications by the respective industries, plus the outburst of new applications developed by software enterprises and independent software vendors to respond to this.

Banks are now using AI for financial assessments and simple data analysis services that are friendly for their customers. Hospitals are bringing in rapid diagnostic tools for X-rays and MRIs. Retail outlets are using AI to bring consumer information closer to the business.

With virtually nothing to limit its development, AI is seen to slowly replace call center agents, and contribute to operational savings and overall corporate profitability.

Preparing for change

The local industry is well aware of this imminent threat, and is looking at ways of surviving or adapting. One response is to strengthen higher-value services that AI applications would find difficult to replace.

This would include knowledge process outsourcing (KPO) such as market research, fraud analytics, equity research and investment, banking insurance, actuarial engineering services, web design and development, data integration, project management research and development, medical transcription preparation and legal processes.

The risk of losing jobs in this new AI environment would still be huge, but focusing on high-value services would mean better salaries for those employed in the industry.

It goes without saying that the industry must move quickly and prepare its workforce to be able to embrace the onslaught of AI and its consequent structural changes in BPO services. Close to 700,000 jobs are at stake here.

BPOs have significantly helped bring down the levels of unemployment in the country, especially those who are freshly graduated from colleges and universities, or in many instances, those who have dropped out of tertiary schooling.

Fortunately, despite the global economic downturn, jobs for Filipinos overseas have not significantly been affected. But it would be wishing for the moon to think that all those who would be laid off from call centers would be able to find jobs overseas.

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Should you wish to share any insights, write me at Link Edge, 25th Floor, 139 Corporate Center, Valero Street, Salcedo Village, 1227 Makati City. Or e-mail me at reydgamboa@yahoo.com. For a compilation of previous articles, visit www.BizlinksPhilippines.net.

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