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Outsourcing: The Philippines vs. China and India

By Dennis Posadas
January 05, 2009
Filipino software execs say their infrastructure and ties to the U.S. give them an edge over their bigger rivals, but a seasoned talent pool is lacking

As the Philippine software sector looks for new avenues for growth, it needs to be more nimble than China or India in looking for new opportunities. According to the Philippine Software Industry Assn. (PSIA), the industry had $423 million in revenues from both outsourced and product software in 2007, up from $200 million in 2005, and currently employs around 28,000 software developers. In 2009 most of its business will come from customer support activities such as project maintenance and customer-requested modifications, with a smattering of new-product sales.

Compared with countries such as China and India, argues Beng Coronel, the current PSIA president, the Philippines has better infrastructure and a cultural affinity with the U.S. But the uncertainty brought about by U.S. President-elect Barack Obama's promise to cut incentives for companies that ship jobs overseas is casting a cloud on the sector's plan to reach $1 billion in revenue by 2010. The PSIA estimates 45% of its offshore software work came from the U.S., followed by Europe and Japan with roughly 25% each of the total.

While growth prospects are still uncertain for the big players operating in the Philippines, the situation is critical for smaller local software companies run by entrepreneurs, who make up about 90% of the sector. For example, Joey Gurango, CEO of human resource software management firm Gurango Software, has put his initial public offering plans on hold until the global economic crisis settles. Founded in 2003 with an initial investment of $2 million, Gurango has enjoyed annual revenue growth of 40% over the past two years, but the CEO has cut his forecast for 2009 to a 10% rate. He does not expect sales of new software licenses to expand, and plans to grow instead by shifting his emphasis to support for his current clients.

Lack of Seasoned Talent

Francisco Sandejas, managing partner of Narra Venture Capital, is treading carefully, too. He's monitoring customer plans for his investment in mobile and Web outsourcing provider Stratpoint, although the company expects to double revenues in 2008 from 2007, and even though it's relatively cheaper to set up a software company in Asia. Narra VC typically invests in the $1 million to $3 million range for U.S. investments, but in Asia tranche sizes for software venture capital are usually much smaller, even as low as $250,000 for venture projects in the Philippines.

According to Roger Ling, ASEAN software market analyst for IDC, the Philippine packaged (not custom) software market for 2007 has been estimated at $177 million, with an average annual growth rate of 14.3%. When asked how the Philippines compares with China, India, and Vietnam for software outsourcing, Jude Daniel Alberto, information technology ASEAN research manager for IDC, said in an e-mail that the "Philippines needs to contend with the development of alternative locations for outsourcing, as human resources continue to improve in other countries, while faced with the challenge of its qualified labor pool becoming sparse." According to IDC's Alberto, China and India, and to some extent Eastern European and South American countries, have improved because of the size of their labor pool. And some players are now actively looking at near-term expansion in Vietnam.

Although the Philippines graduates about 37,600 IT graduates annually, according to Gurango, the main bottleneck for the growth of the Philippine software sector is the difficulty of finding seasoned software architects and managers. "Try to look for an application architect or product manager with 10 to 12 years' experience in software development," he says, "and you will probably have a hard time finding them." Philippine universities churn out graduates with advanced degrees in computer science, but Gurango says the numbers are not enough, since the talented software developers are scooped up in droves by companies based abroad.

Trend Micro, a Tokyo-listed antivirus software company, employs 1,100 people in the Philippines, one-third of its total workforce. According to Trend Micro Philippine site manager Mitchel Chang, "Filipino software professionals have an excellent service-oriented attitude, are responsive, passionate, and have strong English skills." However, he agrees that finding experienced senior software professionals and senior managers with international work experience is a big challenge. "It is critical for the Philippines to build up even more senior software professionals domestically or help attract some of the overseas experienced software professionals to repatriate back to the Philippines," he says.

Narra VC's Sandejas, a Stanford-trained PhD in electrical engineering, echoes Gurango and Chang. "There is a smaller number of computer scientists and computer engineers with long-term experience and also [a smaller number] with a deeper understanding of core technological concepts, such as those who can change graphics or transmission coding in commercially demanding applications, or those who can invent new search algorithms," says Sandejas. If the Philippines wants to become a serious player in high technology, he says, the local software industry needs to work closely with Philippine universities to beef up the number of science and technology graduate degree holders.

Domestic Stimulus Package?

A domestic stimulus package for technology entrepreneurs, combined with expanded efforts to increase the number of graduate students in computer science, might help the software sector weather the slump. "If government decides to spendólet's say spending on computerization of the elections or the wiring up of schoolsóit could prime the local tech sector," Sandejas said. He is unsure whether a recession in the U.S. will result in the growth of software outsourcing opportunities for Asia, but he is hopeful. "Any cost reduction in the U.S. will yield more than cost reduction efforts in Asia, because U.S. engineers are more expensive," he argues.

Despite Obama and the Democrats' promise to cut incentives for outsourcing, sending contract work offshore may still remain attractive due to the quality of work and significant cost savings offered by countries such as the Philippines. But to increase its share of the business, the Philippines needs to improve its technical talent pool with the help of academia, persuade its seasoned professionals abroad to return, and help its entrepreneurs stay the course during this downturn.

Dennis Posadas is the author of a new business fable on technopreneurship to be published by Pearson Asia in 2009.

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