Getting to 20% With Ayala

As eTelecare's (ETEL) shares tumbled, the Philippines' oldest conglomerate and owner of the country's biggest bank and biggest real-estate company made good on its intentions to boost its stake.

According to information reported by Ayala Corp. to US regulators, the conglomerate now owns 6.39 million ETEL shares, or 22.22% of the BPO. Ayala first bought into ETEL in June 2006, when press reports said it paid about 800 million pesos for 11% of the company, using LiveIt Solutions Inc. as its investment vehicle.

The shares may have just been transferred from one Ayala pocket to another. Check out Ayala Corp.'s US SEC filing. There are more layers in this than a wedding cake: Ayala wholly owns Azalea International Venture Partners Ltd., which wholly owns LiveIt Investments Ltd., which in turn wholly owns Newbridge International Investment Ltd. Newbridge, after all, was an original investor in eTelecare. In an early November filing, Ayala said additional investments in eTelecare were for "investment purposes."

Ayala Corporation currently intends, depending on market and other conditions, and in its sole discretion, to consider acquiring additional Shares of the Issuer and thereby increase its total beneficial ownership interest to 20% of total outstanding Shares on a fully diluted basis (or approximately 22% of the Issuer’s total current outstanding Shares on an undiluted basis), in order, among other things, to allow Ayala Corporation to account for its Shares under the equity method of accounting.

Even then, it's usually a good sign when a major shareholder puts it on record that it is the shareholder on record, instead of burying it in an offshore vehicle domiciled in some balmy tax haven. After all, Ayala will not want to get above the 20% threshold if it's expecting poor performance from ETEL going forward.

People Say The Price Isn't Right

On the same day that it rejected a cash bid from IPVG Corp. to buy the company for $15 a share, PeopleSupport came out with a bullish forecast, saying it would generate more revenue and earnings than analysts had expected.

LOS ANGELES (AP) -- PeopleSupport Inc., an offshore business process outsourcing provider, said Wednesday it expects its fiscal 2008 profit to beat Wall Street's expectations. The company forecast income between 65 cents and 81 cents per share in 2008, with revenue of $180 million to $190 million. Analysts polled by Thomson Financial predict earnings of 57 cents per share on revenue of $170.8 million.

Not all the pieces of the unfolding drama are visible on the board. The unsolicited IPVG bid, in the parlance of bankers, put PSPT "into play." Now the usual drill in this scenario is to reject the first buyout offer and holdout for more; from the shadows other bidders will emerge. You can be sure that teams from other BPOs are now crunching numbers with their favorite investment bankers to see if they should battle for PSPT and top IPVG's $15/share offer.

In the PSPT's press release, PSPT quoted its independent director Frank Perna as saying, “We have carefully reviewed the proposal and believe it to be inadequate and not to merit further attention. We have also reviewed the strategic plans in place for the Company and believe that the implementation of those plans is the best way to enhance shareholder value at this time."

The translation: we have a price at which we will sell.

eTelecare Loses It

How would you like to be the relationship manager at eTelecare Global Solutions who just lost a major account? The Manila-based company, which debuted on the Nasdaq just a few months ago, saw its shares drop below its IPO price after it disclosed that the "significant client" cancelled a program that brought in $15.6 million in revenue during the first half of 2007.

Customer churn is part and parcel of the BPO business, but when you are a newbie company touting the superiority of your outsourcing practices, losing a major customer deals a body blow to your reputation.

eTelecare expects 2007 annual revenues to be in the range of $240 million to $250 million, with net income of $19.2 million to $21.5 million, or $0.63 to $0.71 per diluted ADS. This compares to the previous guidance for 2007 annual revenues in the range of $250 million to $260 million, with net income of $22 million to $25 million, or $0.72 to $0.82 per diluted ADS.

Which customer did the BPO lose? From ETEL's prospectus:

As of December 31, 2006, we had 21 active clients for which we had performed 51 different programs since January 2006. We have a particular expertise in communications, technology and financial services. We also serve clients in the travel and hospitality, media and retail industries. Our largest clients in terms of revenue are American Express, AOL, Cingular, Dell, Intuit, Sprint and Vonage.

Buy Now

Short items from Indian press reports that Infosys will buy the BPO operations of Philips Electronics NV. When it closes, it will be another item in the on-going rejigging of the BPO industry. Captive operations become part of independents. And operations that managers once thought vital or contained too many secrets to let outsiders peek at them now become outsource-able. What was it I heard at a cocktail party recently? In rapidly-changing businesses, there are no secrets. Just speed of execution.

India's second-biggest software-maker will be taking over all the costs of this acquisition, similar to the manner in which rival Tata Consultancy Services bought the operations of UK's Pearl Group insurers, the website reported. The acquisition will add to Infosys current BPO unit, which has close to 11,000 employees, providing the company with round-the-clock processing, the report
added.

Here's Times of India's take:

Infosys Technologies is said to be close to acquiring the finance and accounting BPO arm of Philips Global. The Philips arm has an employee strength of 1,500 globally, including a 500 strong force in Chennai. The other facilities are in Warsaw and Bangkok. The BPO arm is said to have assured revenues of $200 million spread over five years.

ePLDT's SPI Making Deals in India

Here's another little tidbit on the globalization front. SPI, a Philippine BPO owned by the nation's largest telecommunications company, is looking to buy Indian companies as it expands its presence in the subcontinent. In the meantime, Indian companies are scouting in SPI's backyard for suitable acquisition candidates in the race to bulk up and develop a full service line. Now which of the many BPO companies around today will become the household name in 2020?

Global healthcare, legal and publishing business process outsourcing company SPi is looking out for suitable acquisitions in India. Ernest L Cu, president and chief executive officer of the Philippines-headquartered Spi, said the company has allocated $50 million for mergers and acquisitions. The company is in talks with investment bankers and is considering several proposals, Cu said while addressing the media here on Wednesday. According to Cu, SPi plans to move its medical billing work to India from the US. He said the setting up of new delivery centre in Chennai and the cost differential between the US and India has made the company favour shifting of medical billing business to Chennai in eight months. The business has the potential to create 150 new jobs. SPi Technologies inaugurated its new 17,000 sq ft facility in the city on Wednesday. The 1,100-seat facility will house the company's publishing and healthcare business operations. The new centre will be the company's fourth in the country after Pondicherry, Coimbatore and New Delhi. Cu said the Indian company would increase its headcount by 700 by the end of this year. In 2003, SPi through its wholly owned Indian subsidiary SPi Technologies Private Ltd
acquired the Pondicherry-based Kolam Information Services Private Ltd, a book
publishing BPO. Two years later, it acquired the medical transcriptions business
of KG Information Services and Technologies Private Ltd in Coimbatore.

Bagging The Citi

Would you buy a business from a bank? Would you buy a business that is solely dependent on that bank? Citibank is close to a sale of its captive BPO, according to Indian press reports. The information asymmetry seems to favor Citibank, since who better knows the bank's prospects -- and the outsourcing potential going forward -- than itself.


If you're a buyer, it makes sense to pay the reported $1.2 billion price if you're confident you can cut costs in the unit faster or deeper than Citi thinks, and if you can use the Citibank BPO as a platform to acquire other bank customers. What better calling card than to say to future customers, "The largest bank in the world outsources to me."

Citigroup's BPO arm, Citigroup Global Services, is likely to find a new owner in a week. Surprisingly, big names like IBM, Infosys, TCS and Blackstone, which were in the race for the BPO firm, have fallen by the wayside, citing expensive valuations. The fight is now between half a dozen suitors comprising Genpact, First Source, WNS, 3i and a couple of private equity investors. Citigroup's BPO arm was recently put on the block and is likely to be valued around $1.2 billion. "The multiples are going to be pretty high here.

That means the buyers require to cough up anything up to $1.2 billion. Third party BPO firms in India are yet to have such deep pockets. Again, sinking large chunks of money upfront on a non-core cause may not be the right option for domestic IT services providers. That clearly leaves the game with big boys like IBM and monied PE guys who are willing to wait for ROI and capable of taking risk,'' says Pari Natarajan, CEO, Zinnov, a Silicon Valley-based offshore research and consulting firm.
For Genpact, the former captive unit of GE, this acquisition would reaffirm its leadership position in the country, while for WNS, acquiring Citigroup Global would give it a presence in the financial services sector. WNS, a legal service and financial services company, has made a few unsuccessful attempts to add financial services to its portfolio and is looking to make a splash by bagging this deal.First Source, on the other hand, is already a specialised player in the banking and insurance sector and the addition of the Citigroup's captive unit will bring them practices that banks usually don't outsource to third party players.

Half a Million Jobs

The Contact Center Association of the Philippines (CCAP) has a target: 500,000 gainfully employed in the industry by 2010. If this target is achieved, what will it do to the ecosystem that serves this industry? More Manila bars, open at noon, with dark curtains to shield the sun, so that graveyard shift workers can still feel like they're going out at night? More 7-11 and Ministop convenience stores with dine in facilities? More "We will give your accent an American twang" ESL (English as second language) centers? More healthcare workers trained to diagnose and treat "graveyard disease"?

Raffy David, CCAP director, said in a phone interview that industry estimates peg the total current industry workforce at around 200,000 workers.

Since call centers began setting up around the early part of the decade, the industry has been doubling its workforce annually but has tapered off in recent years due to concerns in the supply of skilled labor.

This is one of the perennial issues CCAP wants to address in an industry roadmap currently in development. CCAP plans to unveil this roadmap, basically detailing a strategy for the industry until 2010, in its annual conference this July.

"Since 2001, we've been trying to address perennial issues like HR, including poaching of agents, and promoting the Philippines abroad," said David, who also serves as CCAP director for membership.

Blackstone Flag to Fly in Philippines

A Reuters news story in the NYTimes website says Blackstone Group has bought Intelenet Global Services of India, teaming up with its management in an 80-20 venture. The buyout price was in the region of $200 million.

This marks the first foray in the industry for Blackstone. And such big boys with deep pockets don't usually stop at one deal. Rollup strategy, anyone?

The British bank Barclays and an Indian mortgage firm, the Housing Development Finance Corporation, said separately that they each were selling their holdings in Intelenet, without disclosing the price.

Intelenet plans to expand its operations in Britain and begin services out of the Philippines and Mauritius, said its chief executive, Susir Kumar.

Manila's Construction Boom

There was a time when property developers had to rely on a "build it, and they will come" strategy. Now the world has turned -- all the big boys with capital and spare land are being approached by BPOs, i.e. "we have come, please build it." The larger BPOs are ready, willing, and eager to take up entire buildings and sign long-term leases in their rush to expand. Which goes to show that the constraint for the Philippine economy's growth engine isn't the ability to sell its services abroad. BPOs with U.S.-facing businesses are so confident of demand that they are snapping up any sizeable office space that comes onto the market. What's holding back the boom are domestic capacity constraints, be it buildings with the right cabling, or qualified managers to manage the pell-mell growth. But have faith -- the capitalist system is responding to remove those constraints . . .

SM Investments Corporation, one of the Philippines’ largest conglomerates, broke ground on its latest built-to-suit project in Makati City.
The firm disclosed to the Philippine Stock Exchange (PSE) yesterday that the project, to be called SM Makati Cybezone, is a 4- storey building at Sen. Gil Puyat Avenue, due for completion in Q2 2008. Located at the heart of the Metro’s business district, SM Makati Cyberzone will have a gross floor area of 18,700 square meters and will be occupied by eTelecare Global Solutions, Inc.
"With the growing presence of the BPO industry comes also the growing need for spaces and integrated office facilities," said SMIC vice chairman Henry Sy, Jr.
He added that "the SM Group is more than prepared to answer those needs, as we have aligned with the market demands of this growing industry to provide well-planned and integrated office facilities to BPOs and Contact Centers in strategic locations.". . . .SMIC also broke ground for its second business process outsourcing (BPO) building for PeopleSupport at the SM Baguio Cyberzone recently.

RPO

We now live in the age of the derivative acronym. First there was BPO (business process outsourcing). Then there came KPO (knowledge process outsourcing). The new acronym popping up is RPO (recruitment process outsourcing), in which the person who interviews you is not even employed by the corporation that is hiring you.

Corporations have always used head hunters to find executive-level employees.
But now the search for lower-level workers has been outsourced as well. Companies are desperate for talent, and they can't always find it on their own. Staffing firms like Spherion (NYSE: SFN) and Korn/Ferry, along with consultancies like IBM and Accenture (NYSE: ACN), have all moved into the recruitment process outsourcing (RPO) business. They find candidates, root through résumés, do background checks and even conduct initial job interviews for jobs paying anywhere from $30,000 to $200,000 a year. And the candidates often don't even know that an outsourcer, rather than the company itself, is running the show. . . .According to research firm Gartner, the RPO business was worth $1.2 billion in 2006 and is growing about 8.6% a year. Some outsourcers, however, are seeing much faster growth. At staffing firm Spherion, the RPO business has tripled in the last 18 months and now tops $50 million annually. At 4-year-old firm The Right Thing business has been tripling every year. And the deals are getting bigger. Three years ago, the biggest recruitment process outsourcing contracts were worth $5 million, according to Jason Corsello, an analyst with the Yankee Group. Now, deals are often worth more than $30 million a year. That means someone at a call center in Manila might be interviewing you for your next job. Even if the recruiter is based in the U.S. or Canada, the entire process, until the final interview, may now be conducted over the phone and online. "Face time is not part of this business," says Lowell Williams, head of the human resources practice at EquaTerra, a firm that connects corporations with outsourcing partners. "You could definitely have a job interview with someone in India or China. It's going on all the time."

Boom

The first quarter GDP figures for the Philippine economy came in last week. And as the Philippines does every so often, the figures surprised everyone: GDP 6.9 percent higher in the first quarter versus the same period a year before. It was the fastest growth in 17 years, and no professional economist or business forecaster saw it coming. This is a country that some refer to as the "Sick Man of Asia"; most people you talk to believe in keeping a portion of their savings in dollars "in case there's a devaluation." Expectations are still low; just like any brand it will take awhile for "Philippines" to become synonymous with rapid growth. Well, with an economic engine revved up by BPOs expanding faster than you can say "English language proficiency," expect several more quarters of upside.

While the economists may have to ratchet up their forecasts, anyone on the ground can tell you that deals are getting done. The stock market is ahead of things, moving to record highs. As we've argued in this blog, this is a multi-year economic boom. Banks are shaking off their trepidation at lending. Capital is flowing into the economy. It's nowhere near a China frenzy: we are simply at the end of the beginning of a powerful expansion wave.

If Citi Can Do It, So Can HSBC

HSBC , according to this press report, will add a few thousand more jobs in the Philippines to serve its US and UK customers. As more and more financial bigwigs such as AIG and Citibank cluster their in-house operations in the Philippines, you can say the Philippines is becoming the center of backroom operations -- the contradictory terms intended.

...the visiting bank official said HSBC is committed to the country in terms of expanding its banking services and its support group by increasing its Business
Processing Outsourcing (BPO) operations.
A third BPO is scheduled to open this coming year, which will increase the total employees of the bank on a consolidated basis to roughly 11,000, disclosed HSBC Philippines Chief Executive Officer Mark Watkinson. Specifically, its banking operations employs a total of 2,500 and 5,500 for BPOs.
At present, the bank has a couple of BPOs, one in Ayala-Alabang and another in PBCom Tower at the heart of the Central Makati Business District. These two service HSBC’s clients in the United States and United Kingdom.
It was explained the Philippines has an edge to service the bank’s US and UK customer base because of the natural talent of locals to speak English as a second language.

300? No 3,000

With money in the bank after selling shares to the public for the first time, eTelecare says it's busy adding capacity in the Philippines with plans to open a new 13,000 square meter site, its 13th office, in a few months. Triskaidekaphobians need not apply for any of the new jobs opening up, which will boost eTelecare's Philippine headcount past 10,000.

eTelecare Global Solutions, Inc. (NASDAQ:ETEL), a leading provider of business process outsourcing solutions, today announced it will invest in its sixth delivery center in the Philippines. The new center, located in the Annex@Shaw facility in Mandaluyong City, Metro Manila, will open in the third quarter of 2007 and employ more than 3,000 employees when fully deployed.
Funding for the new center comes from eTelecare’s recently completed initial public offering of American Depository Shares.
eTelecare is the first Philippine-incorporated business process outsourcing (BPO) company, and the second Filipino company overall, to trade on the NASDAQ stock exchange.
“Our successful U.S. IPO affirms that the Philippines is one of the top outsourcing delivery locations in the world, and that there is strong market demand for a high-quality multi-shore provider such as eTelecare,” says John Harris, eTelecare President and Chief Executive Officer.
“We plan to invest a significant portion of the proceeds from our IPO in further expansion in the Philippines,” added Fred Ayala, Chairman of eTelecare.

WaMu Chooses Cebu

Washington Mutual (stock symbol: WM) is putting in a captive operation in Cebu, the Philippines' second-largest metropolitan area.

Joel Mari Yu, Cebu Investment Promotions Center managing director, announced the entry of Washington Mutual Inc., one of US’ leading retailers of financial services catering to consumers and small business banks. He said WaMu will be among the locators of a 12-story building that will be constructed in the Asiatown IT Park (AITP).

While WaMu's entry into the Philippines will mean an addition of 1,500 jobs to the country's burgeoning BPO industry, what happens to PeopleSupport?

A Low Attrition Rate for BPO

Pop quiz. Genpact, which had US$613 million of revenue in 2006, had what attrition rate that year?

A. 15%
B. 24%
C. 32%
D. 43%
E. 55%
F. 61%

Before you answer, let's hear from Genpact, which is planning to sell shares to the public for the first time. Genpact's DNA comes from General Electric, the company that gave us Jack Welch and the mantra to either be No. 1 or No. 2 industry or get out, i.e. it was a "captive" serving the needs of GE Capital before becoming an independent company. Excerpts from its draft prospectus filed with U.S. regulators:

We have an experienced and cohesive leadership team and a culture that emphasizes teamwork, constant improvement of our processes and, most importantly, dedication to the client. Many members of our leadership team developed their management skills working within GE and many of them were involved in the founding of our business. As of March 31, 2007, we have more than 28,000 employees including over 5,500 Six Sigma trained green-belts, 300 Six Sigma trained black-belts and 60 Six Sigma trained master black-belts, as well as more than 4,500 Lean trained employees.

A key determinant of our success, especially as we continue to increase the scale of our business, is our ability to attract, train and retain employees in highly competitive labor markets. We manage this challenge through innovative human resources practices. These include broadening the employee pool by opening Delivery Centers in diverse locations, using creative recruiting techniques to attract the best talent, emphasizing ongoing training, instilling a vibrant and distinctive culture and providing well-defined long term career paths. We monitor and manage our attrition rate very closely, and believe our attrition rate is one of the lowest in the industry.

Ready?

The answer is C.

More info from Genpact:

Our attrition rate for all employees who have been employed by us for one day or more was 32% in 2006. A number of our competitors calculate employee attrition rates for their Indian employees who have been employed for six months or more. On this basis our Indian employee attrition rate for 2006 was approximately 21%, which we believe is relatively low for our industry based on statistics published by third parties such as NASSCOM. We attribute this low attrition rate to a number of factors including our effective recruiting measures, our extensive training and our strong culture.

Losing Half

If you drive around two of the Philippines' biggest metropolitan areas -- Manila and Cebu -- the burgeoning presence of the call-center industry readily makes itself apparent. Recruitment posters plaster anyplace that might harbor a budding customer service representatives and BPOs use billboards to build their brand as the recruiting war intensifies.

I recently talked to an employee of a U.S.-based call center. She is only a year out of college. Like many of her generation, she started her career with a local call center, earning her chops before transferring, in less than six months, to the American company where she almost doubled her pay.

Here's the shocker: in her training batch of 25 employees, in less than six months, more than half are no longer working for the company. Those fired were let go for frequent absences or committing too many mistakes. The voluntary resignees cited the growing workload and the stresses of the reversed lifestyle (working when the rest of the country is asleep) as the factors in giving up the good pay.

If you're an investor in any of the BPOs, make sure you pay rapt attention to their attrition rate.

New Growth Areas

Say you have a corporate lawyer friend, who is so successful at what he does that he is the go-to guy whenever some corporation needs his services. He is featured on the cover of business magazines. His law firm is the top in the field, charging the highest rates per hour -- with no shortage of clients.

What if one day he says he is looking for "new areas of growth" and that he will begin practicing medicine. Your head will snap from shock.

It's the same shock that comes with the announcement of San Miguel Corp., the Philippines' largest food and beverage company, that it will get into power generation.

In a preliminary information statement filed with the Securities and Exchange Commission, SMC said its board of directors has approved a plan authorizing the company to invest in new businesses such as power generation or transmission, water and other utilities, mining and infrastructure.
The recommendation to venture into new businesses was made by SMC's financial adviser, Goldman Sachs.
SMC's board said it was timely to "actively consider developing new engines of growth" to further augment the gains realized from nurturing its current core businesses. SMC is the market leader in the Philippine food, beverage and packaging sectors. Philippine Daily Inquirer sources estimated that SMC would need about $2 billion to be a formidable player in the power industry, which includes generation, distribution and transmission. The sources said SMC could raise this amount by reviving a hybrid debt issue that it earlier shelved, or by other capital-raising options it was currently studying.

Power generation may offer more lucrative returns than making snacks and drinks. And you may argue that a conglomerate such as San Miguel is already in far more businesses than just making good beer and tasty meats. There's the logistics side -- a trucking fleet to bring produce to the country's 7,101 islands; there's the information technology side to track its sprawling assets; there's property development to house its offices and suppliers; and there's even some connection to the power industry. Those sprawling plants consumer a lot of electricity, right, so why not get into the act?

Yet there's no escaping the whiplash when someone strays far from his competency.

Texas at Clark: Philippines Lands a Biggie

Texas Instruments chose the Philippines over China for a new 800,000 square foot (74,000 square meter) plant. The world's largest maker of chips for mobile phones will spend US$1 billion over 10 years to build out the factory. The plant will be located at Clark, a former U.S. airbase about an hour's drive north of the Philippine capital, and will employ 3,000 people by end of 2008.

"We have broken the myth of China here," said Ernie Santiago, executive director of the Semiconductor and Electronics Industry in the Philippines, Inc. (SEIPI). "It seemed before all roads are going to China, but we have made a point here that the Philippines is also a smart choice for investment. It will be a magnet, we expect other companies would follow," he said.
The Philippines supplies about 10 percent of the world's semiconductor manufacturing services, including mobile phone chips and microprocessors. Texas Instruments and Intel Corp are two of the biggest companies with manufacturing plants in the country.
Once the new TI plant comes onstream at the end of next year, Philippine electronics exports could jump by $3-4 billion per year, Santiago said.

The Bloomberg take was that human capital, and not cheap costs, was the deciding factor for TI choosing the Philippines over the perennial favorite China:

Texas Instruments in recent years has implemented a strategy of making about 80 percent of its chips and outsourcing the rest to reduce production quickly when demand weakens. The company's current management in the Philippines, where it has had a factory since 1979, gave that country the deciding edge over undisclosed locations in China, (TI's) Silcott said.
``We got a really experienced team, and we wanted to quickly bring up the factory,'' he said.

The Wall Street Journal had a similar take, arguing that the overall cost of doing business in China, especially taking into account rapid increases in wages for skilled labor, are no longer as cheap as they used to be:

Texas Instruments' executives visiting Manila Thursday said the highly skilled workers at its existing chip plant in the Philippines persuaded the company to open a second plant there, despite intense competition to attract Texas Instruments' investment from other Asian nations.

While China continues to be a major draw for technology companies -- Intel Corp. in March said it was planning a $2.5 billion chip-wafer manufacturing facility there -- Texas Instruments' decision to build another semiconductor testing and assembly plant in the Philippines may also reflect how rising costs in China are encouraging investors to consider other locations.

On Thursday, Kevin Ritchie, Texas Instruments' senior vice president of technology, said the Philippines' pool of educated, English-speaking workers tipped the company's decision. The new plant is expected to provide jobs for around 3,000 people.

Powering the Expansion

For the Philippine economy to grow at the 7-8% clip, it needs to continue to attract investments in manufacturing, preferably in sunrise industries. The BPO engine, while significant, won't always be able to pull the wagon.

Here's one kind of industry -- manufacturing solar cells -- that the Philippines would do well to create a cluster around. The interesting portion of the article is the last line -- that as big-scale manufacturers discover the Philippines as a production site , they also discover it as a BPO destination.

Greg Reichow, SunPower Philippines Manufacturing Ltd plant manager, said in the report that the U.S.-based company's expansion was underway, with the first phase scheduled to be completed by Q3 of this year. He said that the capacity of the SunPower plant in the country would be increased from 110mW to 400mW worth of solar cells within the year, and that workforce will also increase from 1,400 to 3,400 by 2008.
The company's production plant in the Philippines serves as its "hub of high-tech manufacturing," with the solar cells produced in the facility exported to the U.S., Europe and Japan. Reichow said that the new plant will produce solar cells for the export market but may also produce for local market if there will be enough domestic demand.
The SunPower official explained that the company chose the archipelago as location
for its plant because of the investment climate and available workforce. He said that the country has a strong engineering industry infrastructure, manufacturing 20 percent of the world's semiconductors. Another factor is having a low-cost but highly educated labor pool. According to Reichow, most SunPower employees in the country are engineers or other degree-holders that is why the company hired Filipinos not only for its plant but also for its back-office functions and R&D.

Philippine-centered backroom operations for multinationals, called "captives" in the preferred jargon of the industry, arleady include such names as oil companies Chevron Texaco and Shell; financial heavyweights AIG, Citibank, Deutsche Bank, HSBC, Henkel and Manulife; techies AOL, Dell and Hewlett Packard; plus other biggies such as Proctor & Gamble, Fluor Daniel, and Watson Wyatt.

BPOing the HMOs

We've all heard about medical tourism -- rich country citizens traveling to poorer nations to have surgery, either critical or cosmetic, that they can't afford back home.
Here's the thought. If a consulting firm like Accenture can hire doctors in poor countries to shephard drugs through clinical trials, why can't it hire those same doctors to shephard rich-country patients to recovery?
In the U.S., HMOs were set up to deal with runaway health costs. Is the next stage in the battle against ever-rising medical costs offshoring the HMOs' work? As this online article suggests, the cost savings available to U.S. corporations with mounting health bills are just too huge to ignore:

In what could be the next big step in the outsourcing saga, big corporates in the US are planning to offshore their employee healthcare to India.
Wal-Mart hires over a million employees in the US – spending $8,000 on each employee's healthcare every year takes its total expenditure to a staggering $8 billion. What if Wal-Mart could save 90 per cent of that amount with help from us?
As health insurance gets painfully expensive in the US, huge cost advantages of medical procedures in countries like India are proving to be irresistible for companies there including those on the Fortune 500 list.
Mercer Health & Benefits Dr Arnold Milstein said, “We estimate that the price advantage for the most efficient Indian hospitals would be around 85 per cent to 90 per cent."
American companies are obviously feeling the heat. Many believe that unless they control the spiraling health expenditure their profits could start taking a serious hit by 2008.
A study suggests that outsourcing of health care can easily reduce the showroom price of a GM car by a thousand dollars – it's all very simple logic so what's the problem?

The First Gram is Always Free

There's a study out by Compact Management Consulting on how IT and BPO outsourcers deliver cost savings in the first year, and then ratchet up their prices in successive years, making them the costlier option for a company than if it kept the service in-house.

The research, based on an analysis of 240 deals worth more than £20m, found that outsourcing providers were pricing contracts to produce savings of up 18% compared with in-house costs in the first year. But costs then began to escalate, reaching 36% above comparable top quartile internal operations by year three. . . .

Simon Scarrott, head of business development and marketing at Compass, said: “With those figures, it is easy to see why the claim that all outsourcing will save money is a myth. There can be sound strategic reasons for outsourcing but saving money over the long term is not one of them.”

He added: “Outsourcing providers are not that different from an in-house operation. Indeed, they often use the same people as the in-house operation after the deal is signed and outsourcers cannot perform alchemy on a business process and turn an operation into gold.”

Hold on. There are significant savings involved if the business model is to arbitrage the labor costs between an expensive developed country's workers and the cheaper rates available in a developing country. So even if you are still using the same number of IT programmers, clerks, project managers, and customer representatives, there's no doubt the correct outsourcer can do it, cheaper.

Then again, even if you, the chief information officer of a fast-growing company, take the Compass study as gospel truth, you can always choose what Aviva has done -- get an outsourcer to build it for you so you can enjoy the first and second-year savings, and then take over the facility.

The previous month, Aviva transferred 1,600 employees in Bangalore from an outsourcing vendor, 24/7 Customer, to Aviva Global Services. It was the first move of its kind and size in the Indian business processing outsourcing industry, NASSCOM said.

When a vendor creates a call center for a company, runs it for a certain period of time, then hands the operation over to the company, it's called the build-operate-transfer (BOT) model. Typically, a company moving operations to India would build the operation from scratch, or subcontract the operation to an outsourcing vendor, or some combination of the two.

The BOT approach lets a company get going in India faster, Aviva executives said at the ceremony in Mumbai. That helps Aviva, and its Norwich Union insurance subsidiary, adapt to change, [Executive Director Patrick] Snowball said when he accepted the award.

"Our excellent operations in India are critical for us to ensure we maintain a competitive advantage," he said. Aviva has worked with three vendors under the BOT model: EXL, WNS and 24/7 Customer. Over the course of the year, 5,000 employees will be transferred from those vendors to Aviva's own offshore division. The Bangalore facility was just the first to be transferred. Later this year, the company will transfer facilities in Sri Lanka to its control, and in Pune.

73% Attrition

Can any business survive if three-fourths of its workers leave every year?

India's Economic Times has an article saying Wipro's worker attrition rate is 73% per year. Now the way Wipro calculates its "attrition rate" may inflate the headline number; the company includes persons the company had made a job offer but declined to join.

Even if the true figure is 25% a year, i.e. one out of every four jobs has a new face each year, it still speaks to the operational problems facing Wipro, and the rest of India's A-Team BPOs. Anyone care to be the HR director in an Indian BPO?

The business processing unit of IT bellwether Wipro has seen an annualised attrition rate of 73 per cent for 2006-07, a top company executive said today. The attrition rate included those who were given the offer letter for a job but did not join the organisation, Wipro BPO's Chief Executive T K Kurien told reporters after Wipro announced its financial results here. The annualised figures were calculated on the basis of 16.9 per cent in the fourth quarter of the fiscal 2006-07. During the quarter, voluntary attrition rate was 15.7 per cent. "Though the attrition rate has slowed down, a lot is still needs to be done on this aspect," he said. Outlining the reasons for attrition, he said one-third of those who dropped out were because of offers by competitors while another one-third quit to pursue higher studies. "One-third of those who left were those who had quit the industry as a whole. Women form a large part of this segment," Kurien said. The late night shift was a possible reason for women dropping out, he added. He said the company has started several programmes, including one-on-one meetings with employees to reduce the attrition of employees. Commenting on the high figure of 73 per cent as compared to rival figures, Kurien said it was because the measurement of attrition varied from company to company. Wipro BPO considered attrition right after the offer letter was handed over to the individual quitting the job, he said.

Media KPO

Who will be the first in the Philippines to provide outsourcing for America's television industry? According to televisionpoint.com, which tracks the Indian TV industry, Infosys is about to tie up with India's TV18 group to do production work and provide the technology backbone to make it easier to get the digital content we all crave.

The Philippine broadcast industry has the same untapped capabilities -- it's a matter of marrying it with someone who will have enough credibility among TV titans in the U.S. so that those services will be bought.

Sources said the TV18 group was in advanced talks with Infosys BPO and was in the process of finalising the management team that would head this venture. The size of the deal is unavailable, but according to company sources, the deal will involve use of the TV18 brand name and the technology and delivery capabilities of Infosys BPO. This will include rolling out online initiatives and creating technology platforms for high-definition content, digital content and projects that involve editing media-related content.

According to infotech analysts, Infosys BPO is increasingly focusing on getting more knowledge process outsourcing work. According to PricewaterhouseCoopers, the global media-entertainment industry is estimated at $1.3 trillion (India's GDP in the region of $800 billion) is and is expected to grow to $1,7 trillion by the end of 2009. Infosys is India's second largest infotech software services exporter. TV18, with interests in television and Internet business, runs four television channels including news and entertainment and about a dozen Internet portals spanning technology to travel.

Infosys 300 Seats

Here's Infosys BPO on the record saying their Manila facility will be up and running within six months.

Driven by a strong customer demand, Infosys BPO is planning to scale up its presence in Manila by setting up its own delivery centre soon. Infosys BPO currently has a tie-up with Ventus, the call centre company of Philippine Long Distance Telephone Co's (PLDT) unit ePLDT Inc.

"We are looking at setting up a 300-seat facility in Manila over the next two quarters," said Mr Amitabh Chaudhry, CEO and Managing Director, Infosys BPO Ltd. "The partnership with Ventus has worked well for us and we plan to continue with it," Mr Chaudhry said.

Infosys BPO plans to use the Manila facility to serve the US clients in both voice and non-voice processes. Mr Chaudhry said clients are more comfortable with getting serviced from the Philippines because of the availability of better skill sets, especially in areas of F&A (finance and accounting), the familiarity with the US GAAP standards and in customer relationship management.

Moreover, the Philippines has emerged as an ideal offshore destination for BPO firms because of the English fluency and familiarity with American culture. The Manila facility would also double up as a business continuity centre for Infosys BPO, Mr Chaudhry said

Take note of that other phrase peculiar to the BPO industry: "business continuity." The majors are all building in redundancy and reducing the risk that a single event can undermine their ability to do business. In a post 9-11 world (and nuclear-armed Pakistan and India), it's essential to doing business.

Coming Soon: Bosses from Bangalore

When your backyard is crowded, you need to go someplace else. The success of India in making the awkward term BPO an acronym we now all know has led to homegrown problems. While India sorts it out, in the meantime the greener pasture is the Philippines. Competition for Manila's best workers who can speak straight English with an American accent is intensifying, though the labor surplus in the Philippines is still large, so the runaway bidding for qualified workers isn't there -- yet.

Expect a few announcements from major BPO players within the year, according to India's Financial Express.

The wheel has come a full circle for the Indian business process outsourcing (BPO) sector with runaway wage inflation driving the who’s who in the domestic BPO world to look for low cost destinations such as the Philippines to scale up operations.
Leading the pack is the Infosys BPO, which has already set up shop in the Philippines in association with a local partner. The company is said to be planning to ramp up its presence there through an acquisition or floating a new facility. Other BPO players such as HTMT, IBM Daksh and GenPact are also ramping up their Philippines operations, industry watchers say.
“The challenge is real. For a tier-II player who needs to grow to graduate to tier-I, Philippines are an extremely attractive base to expand into. In 2007, we expect four to five deals involving large Indian players who are moving to that country,” he said, adding, “most of the investments there would be towards setting up support operations for primary facilities based in India.” Many BPOs are eyeing tier-II locations outside Manila and Makati in the Philippines to set up disaster recovery centres for Indian facilities, sources said.

Lawson's Hiring

Ramp up. The phrase is insufficient to capture what some hiring managers face when they go from 100 to 900 employees in less than two years. Here's one company that's a microcosm of what's going on in the Philippines:

Lawson Philippine Solutions & Services Center (PSSC) Inc. last year opened its office in Fort Bonifacio Global City with less than a hundred employees. [Lawson Vice President James] Sanderson said they would be spending $5 million in payroll for their targeted 400 employees this year. [Lawson Philippines President John] Mulchrone said they have upped that number to 900 by May next year. Lawson currently employs 350 Filipino software engineers, quality engineers, and business process outsourcing staff for internal support.

In choosing between the Philippines and India, Lawson clearly prefers a nation of 90 million versus a sub-continent of 1 billion:

[Lawson's decision] to transfer operations in the Philippines is based on results of their investigation on the country’s cost advantage. Aside from tax incentives, Lawson said the “an intelligent workforce with high energy and good work ethics” can easily be tapped in the Philippines.

Mulchrone said the firm’s experience in India has much larger costs compared to the Philippines. “So for the past five years, we began transitioning our operations from India to the Philippines,” he said.

Shortage

Is there a global labor shortage? Some think so. But mention that at any of the recruitment agencies in Manila, where men and women line up in the hopes of landing that overseas job, and you would be laughed at. Perhaps the shortage has to do with qualified skilled workers. You may know how to balance a balance sheet or troubleshoot a troubled network, but if you can't speak English, you can't join the BPO workforce.

At first, the flood of three billion new workers into the global marketplace for labor was a boon to employers across the globe. But cost cutting strategies, like offshoring and outsourcing work to low-wage countries, are running out of gas far sooner than many expected.
The salaries of IT workers from Central Europe to India are rising by double-digits every year. In the past five years, Hewlett-Packard (HPQ), SAP (SAP), and even Morgan Stanley (MS) have set up shop in former Communist countries of Eastern Europe. There, a deep pool of highly qualified math and science graduates were supposed to be willing to work for a third of that paid their Western counterparts.
Yet today, IT directors in Poland can cost companies more than $100,000 a year. That approaches Silicon Valley levels. And the number of highly qualified workers is surprisingly low. Multinationals have reacted swiftly, moving operations to ever lower-cost centers. Nokia, which already employs nearly 5,000 people in Hungary, recently announced that it is building a new handset factory in Romania.
This is all rather unexpected. Five years ago companies never thought they would have to worry about human resources. China and India were supposed to have seemingly inexhaustible pools of cheap labor. Yet today, the #1 challenge for multinationals setting up operations abroad is finding and keeping good workers.

The Global Labor Shortage: "The Saudi Arabia of Outsourcing"
India accounts for 65% of all IT work performed offshore. This is largely thanks to its seemingly limitless supply of low-cost engineers and other professionals. Yet, not all is as it seems. India produces 400,000 engineering graduates a year (five times as many as the United States) and a stunning 2.5 million university graduates overall. Yet only about a quarter of India's college graduates are up to snuff. The odds at top Indian companies are even worse. Some 1.3 million people applied to tech-services giant Infosys last year. Fewer than 2% of those were employable.
Graduates of non-elite schools suffer from weak English skills. The quality of faculty and courses is sub-par. In-house training programs for new recruits at top Indian IT services firms such as Infosys (INFY), Genpact, and Tata Consultancy Services fill some of the gaps. But by 2010, India will have a shortfall of 150,000 IT engineers and 350,000 business-process staff.

Out-Doing the Outsourcers

Business Process Outsourcing is the current jargon of choice to encompass an industry helping the Indian and Philippine economies modernize. Do you date yourself when you say the term should just be simplified to "supplier"? After all, does not Toyota Motors, the world's most valuable automaker, rely on outsiders to provide key parts for its machines? Nowhere in their lexicon do they refer to it as BPO/KPO. In the electronics industry, the term is contract manufacturing, such as Microsoft leaving it up to Flextronics to manufacture the hardware for its Xbox.

Now when you hear the name Accenture, the first thing that comes to mind is "consulting." Here's an interesting piece from BusinessWeek. You would not normally associate the name Accenture with the "d-word".

To see how Accenture is offering hard-to-match services, take a look inside the company's Life Sciences Center of Excellence in Bangalore. The sprawling office building houses dozens of medical doctors, PhDs, pharmacists, math whizzes, and statisticians. They work alongside biology grads to prepare clinical trial reports for the world's top drug companies.These high-skill employees—all of them Indian—coordinate closely with business consultants who are on site with clients around the world. Accenture consultants help clients revamp the way they handle the trials essential to getting new drugs approved by regulators. Once those processes are sharpened, Accenture software programmers in Bangalore design databases and algorithms for storing and analyzing clinical data. Accenture people distribute electronic forms to physicians who conduct the trials. Accenture's physicians review the data to spot errors and, when necessary, get on the phone with doctors conducting the trials. When all the data are collected, they analyze them for safety and effectiveness and write reports. All told, Accenture has cut the average time to prepare reports from six months to a few weeks. Each day saved is worth about $1 million to a drug company.

But just as important, one client, Wyeth Pharmaceuticals Inc. (WYE ), says it has been able to hand off huge chunks of work to a partner that can perform them even better than it can. "We are launching drugs that otherwise would have been held up by our inability to handle the work," says Robert R. Ruffalo Jr., Wyeth's president of research and development.

Of course, few businesses like to refer themselves as "suppliers" because of the connotation that what they are providing is a commodity. But anytime a business changes its value proposition to the customer from "doing things cheaper" to "doing things you could not do," that supplier becomes a powerful force -- and then the buyer wouldn't care what term is used.

C'mon, Aussie, C'mon

It's somewhat hilarious what some people will say as they face stiff competition for business. Some resort to FUD (fear, uncertainty, doubt) attacks. Australia's Sunday Telegraph writes about medical records for transcription being sent to India, Pakistan and the Philippines, where costs are half those in Aussie Land.

Lyndie Arkell, chief executive of the wholly Australian transcription service OzeScribe, described the quality of overseas transcriptions as "absolutely terrible".

"There is a large industry sending work to India because there are doctors who want cheaper transcriptions," she said.

"But they are violating privacy laws and disrespecting their patients' privacy. I don't think patients go to their doctors thinking their records are going to end up in India."

Mistakes and mix-ups in medical terminology are common among overseas transcribers who cannot understand Australian accents, she warned.

Examples included confusion between "hypo" and "hyper" and "perineum" and "peritoneum".

And so mate, only Aussies can understand bloody Aussie accents. No Sanjit or Rajiv or Jose could ever hope to understand the inscrutable Down Under Droll. Crikey.

Using Your Accent With Accenture

Accenture is opening its seventh office in the Philippines in a massive expansion that will see capacity jump by about 50%, and employment by 36%, according to Philippine press reports. It's all good for those with the proper accents to man the call centers or the skills to do global accounting and programming, not to mention the ability to be productive in a time zone not of your own.

Note to managers: if your lease on office space with excellent telecommunications facilities is expiring soon, make sure you renew and lock in your rates. Landlords are seeing strong demand for prime space.

All Headline News gives us the Accenture capacity figure:

Accenture currently operates seven facilities in the Philippines, with a total of more than 10,000 contact center seats. Its latest and biggest facility is housed at the Robinsons Cybergate Tower II in Mandaluyong City, which has 5,000 contact center seats. Accenture is looking to end its fiscal year with a total of 15,000 seats, including the planned Cebu center, which will initially house 500 seats but will be ramped gradually.

While Inquirer says this about its headcount:

The company expects to have a total of around 15,000 employees in the country by the end of its current fiscal year in August.

Basilio Rueda, senior managing director of Accenture's Global Delivery Network, said that in the Philippines, call center operations exhibit the biggest growth in terms of employee count. In terms of revenue, application development contributes the highest at about 40 percent.

Here's the rub. If you assume a generous yield of one successful hire for every 10 applicants interviewed, that means Accenture has to churn through 40,000 people to get its workforce up from the current 11,000 -- by August.

The Shot Heard in Illinois

How much ammunition is left in the PLDT arsenal? They certainly have not been keeping their powder dry.

SPI, the wholly owned subsidiary of ePLDT Inc., which in turn is the wholly owned subsidiary of PLDT, said today it is spending at least US$44 million to buy Springfield Service Corp., a BPO assisting doctors in sending out bills and getting paid. Illinois-based Springfield adds 383 employees to SPI's headcount. Valuation is at 1.5 times forecasted revenue of $30 million in the year ahead. Last year, SPI spent $35 million for medical transcription company CyMed Inc. of Virginia, which had 2005 revenue of $19.6 million.

"The inclusion of Springfield's service offerings in our healthcare portfolio allows us to further strengthen our relationships with the more than 400 hospitals, multi specialty clinics and physician practices that we currently serve," said SPI CEO & President Ernest Cu.

You'll have to hand it to the SPI folks. They sold themselves for $135 million, and in less than a year have convinced their new master to open the checkbook for $79 million of additional spending. (No disclosure on the contingent liabilities building up on ePLDT's and SPI's balance sheets with respect to future payments. To eager bankers, take a number if you want to lend to the subsidiary of the subsidiary of the subsidiary. . . just make sure the loan guarantee you ask the parent is bulletproof.)

As the saying goes, "the time to strike is when the iron is hot," or as my Uncle Chot quipped: the purse strings are looser when the honeymoon is not yet over. Regardless of the envy competitors might feel of SPI's ability to use the balance sheet of mother PLDT (the Philippines' most valuable company with a market cap of $9.4 billion) to borrow and pay for its acquisitions, the BPO playing field is rapidly changing.

Buy, Buy, Buy

It may someday be common for a Filipino to have an Indian boss, as common as Indians reporting to American bosses. And as the BPO industry evolves in both countries, it will become common too for Americans to be reporting to Filipino or Indian bosses. In the race to grow, the homegrown champions of each country will be buying what they can't develop on their own, causing office workers in the India, the Philippines, and the U.S. will experience first hand what the phrase "flat world" means.

EXL is busy scouting for companies it can scoop up to bulk up, says India's Business Standard. Some are already on the acquisition trail: in 2006 ePLDT's SPI bought an American medical transcription company, while LiveIt, a unit of PLDT's cross-town rival Ayala Corp., bought Affinity Express of Chicago for $28 million.

EXL Service Holdings, an IT services provider, is on the lookout to acquire companies in Eastern Europe, the Philippines, South Africa and China. The company is looking to mitigate its risks by diversifying into delivery and support centres in other cheaper destinations and also offer capabilities to service clients from markets other than the US.

The acquisitions, in each of the geographies, could be in the range of $25-50 million in revenue and will add capabilities in the verticals such as research and analytics where EXL is already fast gaining ground. “We have almost $85 million in cash with the company and the ability to use stock options also lend us flexibility to do at least two of the acquisitions this financial year,” said Rohit Kapoor, president and chief financial officer of EXL.

For adding the voice-based services and clients, the company will look to the Philippines and in South Africa, EXL is on the look out for adding diverse business verticals to its BPO business. The company is also eyeing to service the domestic market. “Although the size of domestic BPO-ITeS market is nothing to boast about, but our international clients who have business in India have been talking to us to set up centres that will service the domestic markets.”

One Citi's Loss is Another's Gain

Citibank, the financial colossus with 327,000 employees scattered around the world, says it will eliminate 17,000 jobs and move 9,500 to lower-cost countries.

Citibank's Philippine operations (4,100 employees) already does the accounting backroom for the bank titan's Asian operations. What will Manila gain at the expense of New York? Here's how many Citibank employees in the Big Apple will get pink slips, according to the NYTimes:

Some of the biggest body blows in the cost-cutting effort will be felt in New York, where Citigroup is the largest private employer. About 1,600 jobs will be eliminated in the city, where Citigroup has 27,000 employees and its headquarters.

An additional 200 jobs will be lost in New York State, about 75 jobs will be cut in Connecticut, and a handful will be shed in New Jersey. The first pink slips have already been handed out.

Over all, roughly 8 percent of Citigroup’s 327,000 workers worldwide, from entry-level consumer bankers to senior executives in the investment bank, will be affected.

This from Citibank Philippines:

Citigroup Business Process Solutions provides BPO, Call Center and other IT and IT-enabled services to various Citigroup consumer group operations around the region supporting 3 key domains: Citiphone Banking, Credit Operations and Transaction Services.

In addition, three regional operations are located in the Philippines: Citigroup Business Services, the global financial and management reporting center and global payment services center supporting over 60 countries in Asia, Europe, Middle East and Africa; Citigroup Information Technology and Infrastructure Philippines; and a satellite office of the Asia Pacific Banking Institute.

Singapore vs Philippines

Sometimes, you can compare the housing markets and the level of sophistication of the banking industry by the products they offer.

If you are a Singapore office worker, you can borrow for a home loan, and you'll know what the interest rate will be for two years. Beyond that, you wouldn't know for certain, because the loan becomes variable. If you are an office worker in the Philippines, you could fix the interest rates that you will pay on your home loan for the next 25 years.

In Singapore, OCBC offers the following package fixed-rate loan:

Year 1 3.75% p.a. (fixed)
Year 2 4.00% p.a. (fixed)
Thereafter VALUE RATE Less 0.75% (variable)


In Philippines, BDO offers these rates:

9.00% fixed for 1 year
9.25% fixed for 2 years
9.75% fixed for 3 years
9.95% fixed for 4 to 5 years
11.00% fixed for 10 years
11.50% fixed for 15 and 25 years

Of course, anyone would rather borrow at 3.75% than at 11%. But having a First World economy does not always mean you are ahead of everyone.

More Choices for Punters

Like a supermarket shelf that seems to proliferate with more and more brands to choose from, the financial market will soon offer us a surfeit of BPO companies in which to invest our retirement money.

Sutherland and Genpact, both from India, are among those queuing to sell shares to the public for the first time. They will join the battle for investors' capital, a fight already being fought by publicly traded companies PeopleSupport and eTelecare. As some in the Philippines like to quip, "the more, the many-er."

After the bumper debut by EXLService Holdings and WNS on Nasdaq and NYSE, respectively, Rochester, New York-headquartered third party BPO service provider Sutherland Global Services, is eyeing a US listing to raise close to $250 million. At the same time, it is also learnt that Genpact, one of the country’s largest BPO firms, is mulling a US listing through an IPO to raise over $600 million for the company and its promoters.

The company, previously part of US-based General Electric, is planning to offload about 15% equity through a public float on either Nasdaq or New York Stock Exchange later this year, sources said. The company’s major shareholders — GE and US-based private equity giants Oakhill Capital and General Atlantic — are likely to sell part of their holding through this IPO, which could value the company at around $4 billion.

Genpact has appointed three US-based investment banks — Morgan Stanley, JPMorgan and Citigroup — for the IPO and it may file the regulatory prospectus in the next few weeks, the sources said.

When BPO Demands, The Ecosystem Responds

Office workers working in the expanding BPO industry need offices to work, right? The beneficiaries of the BPO boom include property developers busy adding supply to meet demand. Manila's skyline is changing, as surely as Bangalore's. Maybe the pace is not as fast as Shanghai's, but the change is illustrative of how one industry can be the economic engine for the rest of the country.

Real estate developer Megaworld Corporation is riding mightily on the fast-growing business process outsourcing (BPO) sector and is investing P1.5 billion ($31.2 million) in a new office building exclusively aimed at BPO operators.
Megaworld expects to finish the construction of the 27-storey Global One Center, which will house BPO players, by early 2009. The new building, which will offer 42,000 square meters of office space, follows in the heels of other Megaworld properties catering mostly to IT and BPO companies.
The country's BPO sector - which includes call centers, outsourced accounting, and transcription firms, among others - is expected to grow 20 to 30 pecent annually, putting pressure on property developers, like Megaworld, to keep up.
Jericho Go, Megaworld's first vice president for business development and leasing, said they are set to build at least 500,000 square meters of office space aimed at the IT and BPO markets in the next five years, when demand is expected to peak.
Megaworld owns the Eastwood City Cyberpark, the country's first information and communications technology (ICT) park accredited by the Philippine Economic Zone Authority (PEZA), where IBM Philippines is the developer's biggest tenant. The Cyberpark is currently home to about 60 firms, half of which belong to the IT and BPO sectors.

Lowering Costs for eCost

Another welcome mat to unfurl. PFSWeb , which had about 1,200 employees at the end of 2006, mostly in the U.S., opened up a customer contact center at the Tycoon Center Building in the Philippines' Ortigas business district. Capacity is 108 seats, according to TMCnet.

Their press release here:

PFSweb, Inc. (Nasdaq: PFSW) a global provider of integrated business process outsourcing (BPO) and web commerce solutions, today announced it is expanding
its Customer Care Services operations with a new 6,500 square foot customer call
center in the Philippines.
The new facility, located in downtown Manila, will initially house the customer service department for eCOST.com, PFSweb's wholly owned subsidiary. Additionally, certain support functions for eCOST.com, including an expanded web development team, will be relocated to the facility. On a case-by-case basis, PFSweb will evaluate offering this location's services to other PFSweb service fee clients. Cindy Almond, PFSweb's Vice President of Client Services, will be overseeing the Manila operations, and Mary Jennifer Nubla will be the facility's on-site General Manager.
"The Philippines offers exciting new opportunities for us to advance our growth strategy and expand our service capabilities, while maintaining high levels of customer service at a reduced cost," said Ms. Almond. "Many clients view our international presence as a key differentiator, enabling speed to market in expansion strategies. We consider this new facility to be yet another avenue to extend our market reach, reduce cost and deliver the highest level of service to our clients and their customers."

For context, PFSweb has a Canadian facility in Eastern Toronto with 22,000 square feet of space. It also has 480 seats at two facilities in Memphis, Tennessee and Plano, Texas (40,000 square feet) . Guess where most of its capacity (and jobs) will go once the Philippine facility proves itself.

As The Blue Marble Turns

If you want to view the history of the world for the past 50 years, in a way that combines hard statistical data with pleasing graphics, see this from the TED conference. You'll think twice about using "Third World" and "Developed World" after viewing it. And it will reinforce a theme that NYTimes columnist Thomas Friedman has been writing about: the world is flat.

Welcome Perot

Few businesses in the Philippines can create hundreds of jobs in a single year. But when it's a business serving a global marketplace, it becomes commonplace.

Perot Systems(stock symbol: PER), which had $2.3 billion of revenue in 2006, recently opened shop in the Philippines. The story from Manila Bulletin forecasts their end-2007 headcount at 400.

Perot Systems, a US-based major player in business process outsourcing (BPO) and Information Technology (IT) services has started operations in the Philippines.

The company, which serves half of the global business in healthcare, over 250 hospitals in the US alone, has set up a BPO operation in Makati for the requirements of one client, Tenet Healthcare, the second biggest healthcare firm in America.

Tenet hauls in $ 8.5 billion annual revenues, covers 66 hospitals in California, Texas, Florida and Southeast US, averaging 564,000 hospital surgical patient admissions per year and 4.2 million annual outpatient visitors.

By the end of 2007, we will be employing 400 workers in Manila, 350 of them in business process operations and healthcare functions and 50 in infrastructure solutions," announced Perot Systems Global Director for Corporate Communications Joe McNamara.

Hither They Will Come

PeopleSupport's annual report has this to say as to why its profits rose in 2006:

Excluding the income tax benefits, the increase in net income was primarily attributable to growth in our customer management business, which enabled us to build revenues, and our move to the Philippines, which allowed us to reduce our operating costs, improve our margins and offer cost savings to our clients.

The point isn't that PeopleSupport will continue to be a profitable entity. It's that the relentless pursuit of it by companies in the U.S. makes it impossible for them to ignore the significant savings available, if only they locate in lower-cost countries like the Philippines. The hundreds of thousands of corporations seeking better bottom lines will continue to turn to companies such as PeopleSupport, eTelecare, Convergys, etc.

And when BPO companies sell customer-care services to a Fortune 500 company, and achieve 40% gross margins doing it, powerful incentives are created for even more people to enter the business. In that vortex of searching-for-savings will blossom the Philippines' sunrise industry.

Another BPO Stunner

Twice this month investors buying the BPO-growth story experienced heart attacks. In early March, PeopleSupport said it would not meet Wall Street expectations and disclosed that client Vonage would not renew a contract. Then on the last Friday of the month, ICT Group warned that earnings per share for the first quarter of 2007 would be a tenth of what they originally forecast.

Both stocks now sport charts showing steep cliffs where their prices plummted.

Here are the few paragraphs from ICT that prompted the tumble:

ICT GROUP, INC. (NASDAQ:ICTG), a leading global provider of customer management and business process outsourcing (BPO) solutions, today announced that the Company currently anticipates first quarter 2007 revenue of approximately $115 million and diluted earnings per share to be in the range of $0.02 to $0.04. This estimate compares with the Company's previous expectation of revenue in the
range of $116 to $118 million and earnings per diluted share in the range of $0.20 to $0.23.
The earnings revisions were primarily caused by capacity-related issues with two clients, both of whom are serviced exclusively from North American customer care centers.
John J. Brennan, Chairman and Chief Executive Officer, stated, "The volume of work associated with two of our clients exceeded what we had originally projected. As a result, ICT GROUP incurred significantly higher training and staffing costs as well as certain penalties that reduced revenue, all of which impacted profitability for the period."

While ICT Group maintained that 2007 revenue would exceed $500 million, Wall Street quickly abandoned the stock. One piece of bad news always elicits the Cockroach Theory -- you never find just one cockroach in your kitchen.

40 Million Jobs Up for Grabs

Alan Blinder, Princeton economics professor and former vice-chairman of the U.S. Federal Reserve, has provided updated estimates of how many of the 140 million jobs in the world's largest economy could be offshored.

Hold your chair -- his new estimate is that between 30-40 million jobs (22-29 percent) could move outside of the country, versus about 1 percent of U.S. jobs today. Blinder is not saying that that many jobs will go to poorer countries; the actual figure will for sure be lower. But it shows the potential bonanza awaiting developing countries, and the massive disruption that could hit the American labor force.

In a recent paper (Blinder, 2006), I argued that the migration of service sector jobs from the United States and other rich countries to other (mostly poorer) nations, while a minor phenomenon to date, is likely to become a major one in the coming decades—perhaps extensive enough to constitute a “new industrial revolution.” While the movement of manufacturing jobs abroad is a decades-old story, the phenomenon of service sector offshoring is a relatively new wrinkle that has been enabled by two majordevelopments of fairly recent vintage: stunning advances in computerized telecommunications technology (e.g., the Internet), and the entry of several “new” countries (principally India and China) into the global economy since the 1990s, and especially in this decade.

We've already seen what has happened in China, which has become the workshop of the world because its manufacturing costs are a fraction of those in the U.S. or Europe. In the process whole industries have been hollowed out.

Blinder points out in an earlier paper that the potential for American service jobs moving abroad is greater. The same cost differential that drove manufacturers to locate in China will drive service companies to locate in developing Asia; just look at this example: U.S. minimum wage of US$5.15 an hour is what a worker in the Philippines earns in a day. In other words, the migration of service jobs out of the U.S. to the rest of the world is just beginning.

But I believe that service-sector offshoring will eventually exceed manufacturing-sector offshoring by a hefty margin—for three main reasons. The first is simple arithmetic: There are vastly more service jobs than manufacturing jobs in the United States (and in other rich countries). Second, the technological advances that have made service-sector offshoring possible will continue and accelerate, so the range of services that can be moved offshore will increase ineluctably. Third, the number of, e.g., Indian and Chinese workers capableof performing service jobs offshore seems certain to grow, perhaps exponentially.

The scarier part for Americans is this: Binder has argued in this paper that education will not be the bullwark against a job going to a lower-cost place.

For example, it is easy to offshore working in a call center, typing transcripts, writing computer code, and reading X-rays. The first two require little education; the last two require quite a lot. On the other hand, it is either impossible or very difficult to offshore janitorial services, working in a fast-food restaurant, college teaching, and open-heart surgery. Again, the first two occupations require little or no education, while the last two require a great deal. There seems to be little or no correlation between educational requirements (the old concern) and how “offshorable” jobs are (the new one).

Support for PeopleSupport

Is it time to buy PeopleSupport, now that concerns about its loss of client Vonage ($14 million of revenue in 2006) led to a steep drop in its stock price? Or is it time to hang up on Chairman, CEO, and President Lance Rosenzweig?

Tasha Subedar's posting on Seeking Alpha has this:

Further, PeopleSupport sports a pristine Balance Sheet with $140.5 million in cash / securities (~5.75 per share) and no long term debt. This provides the Company with the much needed gun-powder to make investments in infrastructure as well as to make opportunistic acquisitions to broaden and complement its current capabilities and service offerings.

With its 38% drop, I believe that expectations have reset, and this results in the potential for tremendous upside. Note, also, that PeopleSupport would make a very attractive acquisition candidate for some of the larger BPO / Contact Center players, especially after last Friday's drop.

Fundamentally the long-term growth story has not changed a bit since PeopleSupport priced its secondary offering at $20 per share in November, 2006. BPO is here to stay and PeopleSupport represents one of the brightest prospects to continue to ride this strong secular growth theme.

Over at the Motley Fool, Rich Smith has this:

I must admit -- after reading those comments, I'm starting to get interested in PeopleSupport myself. Despite disappointing analysts with its fourth-quarter earnings and Q1 2007 guidance, the firm is growing its revenues rapidly, already
generates free cash flow, and has 41% of its market cap backed up with cash in the bank. Combine these strong fundamentals with a business sitting squarely in the middle of a long-term trend towards outsourcing in an increasingly "flat" world, and PeopleSupport looks like a strong contrarian pick to this Fool.

And finally, here's Frank Lara at 24/7 Wall Street:

Cry-babying aside, outsourcing is going to keep happening, so it's time for us to make some money off of the companies raking in the cash. PeopleSupport is a Business Process Outsourcing (BPO) provider - they reduce costs, improve performance and increase revenues for their customers with the majority of their services being performed in the Philippines. They brought in $62M in revenue for 2005 and $110M in 2006. PSPT is making a nice little profit, $22.8M in net income for 2005 and $14M. Their stock is trading near its 52-week low at under $12 a share and just fell from the $20's a few weeks ago.

Read PSPT's discussion on its latest quarterly earnings here.

ETEL Makes the Call

eTelecare Global had a decent debut on the U.S. stock market, climbing from its IPO price .

Shares of eTelecare Global Solutions Inc. (Ticker symbol: ETEL), a Philippines-based outsourcing firm, rose as much as 16 percent in their U.S. stock market debut on Wednesday, bolstered by prospects for continued growth for the offshore business process outsourcing industry.

Despite a declining broader market dampened by tensions with Iran and concern about the U.S. housing market, the company's American depositary shares opened up 2 percent at $13.75 before climbing to $15.75 in late-morning trading on the Nasdaq. Shares later returned some of the early gains, slipping to $14.80.

"This is a major business with big clients," said Francis Gaskins, president of IPO Desktop, an independent research firm based in Los Angeles. "Two other companies already opened the door for IPOs in the outsourcing business and this one is trading at a discount compared to its competitors."

While less spectacular than the 2006 IPOs of Indian competitors, it was good given the state of the U.S. markets, as one observer noted.

The company on Wednesday priced 5.5 million American depositary shares at $13.50 a share, raising $72 million with underwriters Morgan Stanley, Deutsche Bank Securities and Robert W. Baird.

The IPO opened at $13.75 and rose about 8% to end its first day of trades at $14.55.
"eTelcare is trading very nicely after a small initial premium," said Scott Sweet of IPO Boutique. "This is especially notable given the overall weakness in all the markets, and the geopolitical events that are contributing some anxiety to the traders."

Several BPOs have grown by acquiring other shops (i.e. ePLDT's SPI) in a bid to bulk up fast. Now that it has a new form of currency to exchange for other companies, what will ETEL be buying?

PeopleSupport, Take 2

PeopleSupport (PSPT) is busy adding capacity, after a stellar year when the BPO led many of its competitors in the growth league. This March, though, its stock was hit hard after it lost a major customer, Vonage.


Here's the number of seats they plan to have by the end of the year (the 3rd country option not yet finalized).

Location______2006_____2007______ Change
Manila________3,450_____ 4,050______ +600
Cebu_________1,700______2,300 ______+600
Baguio___________0______1,000_____+1,000
Costa Rica______400________400_________0
3rd Country_______0_______500______+500
Total_________5,500_____8,250_____+2,750


Download the presentation here.

For the hundreds of thousands of graduates from Philippine colleges who speak English well, it's all good news.

Managing Employees

Where would you rather be a manager: in the U.S. or the Philippines? See this tidbit from Investor's Business Daily on the upcoming IPO of eTelecare (ticker symbol: ETEL).

Like other BPOs, eTelecare suffers from a high employee attrition rate. Among workers who completed the training program, 6.7% leave every month in the U.S. branch and 1.7% in the Philippines. The ability to attract and retain qualified people is especially crucial for eTelecare since the quality of service is its main selling point.

The BPO business is highly competitive, and new players continue to spring up. Since cost-cutting is the main reason for their existence, there's always pressure on margins. The competition also extends to the search for workers, who are in a position to demand higher wages as their number of potential employers goes up.

The article suggests ETEL will do well:

Last year two BPOs, WNS Holdings (WNS) and ExlService, (EXLS) pulled off successful initial public offerings. Both of them are Indian. ETelecare will test Wall Street's interest in a slightly different model, based on offering higher-end, more sophisticated telephone services. The firm does this not only through its choice of country, but through its approach to training, managing and quantifying employee performance.
"Although business processing outsourcing is not a new concept, eTelecare Global Solutions . . . has changed the methodology and dynamics of this type of business," wrote Scott Sweet, principal researcher in IPO Boutique, in a report on the company.

Just don't mind the error in the description of Alfredo Ayala, which confuses him with Jaime Zobel de Ayala:

THE MANAGEMENT
Alfredo Ayala, Chairman
He's been chairman since 2000 and was CEO from 2004 to 2006. Currently, he heads Ayala Corp., a holding company with investments in various businesses, and is CEO of Ayala Corp. subsidiary LiveIt Solutions. He holds an MBA from Harvard Business School.

Text CC Engine, Take 2

Economists at the Asian Development Bank nuanced their view on the Philippines.

"The Philippines has to learn how to walk on two legs," ADB economist Jesus Felipe told a briefing to release the bank's Asian Development Outlook 2007, referring to the need for the country to build a strong industrial base to support the economy.

He said while the services sector has been a major driver of economic growth in recent years, the Philippines cannot simply bypass industrialization. He noted that countries such as China and South Korea grew quickly because they increased industry's share of economic output and employment.

"It is highly unlikely that the advent of BPO services signals a paradigm shift that will put the Philippine economy on a higher trajectory," the ADB said.

Most revenue in the Philippine BPO sector comes from call center operations, with only 13% coming from information technology-related work, compared to 70% in India.

PeopleSupport

Here's what's happening on the microeconomic front. PeopleSupport (Nasdaq symbol: PSPT), one of the BPO stalwarts driving the economic expansion, has 7,500 employees in the Philippines. How fast is its business growing? Check out their 2006 earnings report:

For the full year 2006, PeopleSupport reported record revenues of $110.1 million, an increase of 77% from $62.1 million reported for the full year 2005.

The fourth quarter of 2006 was its best ever:

Revenue in the fourth quarter of 2006 was a record $31.0 million, an increase of 82% from the $17.0 million reported in the fourth quarter of 2005.

Of course, such rapid growth can't be sustained. The company expects its growth rate to moderate to about 27%-31% in 2007 (full-year revenue of $140 million to $144.5 million).

Here's the thing that other industries would kill for. The growth constraint on PeopleSupport, like all the other BPOs in the country, isn't its product line up or the presence of fierce competitors. It's simply not being able to find enough qualified personnel. That's the kind of situation many managers, and business owners, would like: growth held back not by market demand, but by operations.

Text CC Engine

The Asian Development Bank released recently its annual opus on the region's economic outlook. For the Philippines, the ADB expects GDP growth to accelerate to 5.7% in 2008, from a forecast of 5.4% in 2007 and the actual 5.4% achieved in 2006.

One line to note. The ADB says that for 2006:

Transport and communications, finance, and private services, including business process outsourcing and other information technology-enabled services, led the way in the services sector, which grew by 6.3% and accounted for 3 percentage points of total GDP growth.

Let's translate that. What the economists are saying is that the engine of the current economic expansion is "Text-CC" combine: the vibrant domestic telecommunications industry that's made the Philippines the text capital of the world, and those call centers sprouting like mushrooms in every major city.

What's holding back the economy from doing "Eight in o-Eight?"

Inadequate investment is the main factor that has curtailed growth and employment. The medium-term targets, for example, were based on investment picking up at double-digit annual rates in 2006–2010 to reach 28% of GDP by 2010, almost twice the current level.

In agriculture, which accounts for 36% of employment, investment has been weak because of factors that include farmers’ poor access to credit and support services, expensive inputs, high costs of transport, and the incomplete land reform program.

In manufacturing, sampled firms in a 2003 survey of the investment climate cited as the major constraints: macroeconomic instability (at that time) and uncertainty in economic policies; inadequate infrastructure services, especially of power and transport; and corruption and the costs of complying with regulations, especially related to customs, trade, and labor markets.

The Hotel Indicator

Have you noticed that it's getting harder to get good rates at the good hotels, not just in Manila but in Southeast Asia's other capitals, such as Singapore, Bangkok, and Kuala Lumpur?

Here's Ayala putting up more hotels in the country's main business district. It's about time.

Property giant Ayala Land Inc. of the Philippines signed a joint venture agreement with Kingdom Hotel Investments of Saudi Arabia to develop a $153 million luxury hotel complex in the financial district of Makati City in the Philippines.

In a disclosure to the Philippine Stock Exchange, ALI said the project involves the construction of a 330-room Fairmont Hotel, a 30-suite Raffles Hotel and 189 Raffles-branded private residences in a 7,377-square-meter property in Makati.

Kingdom Hotel is a hotel and resort investment company chaired by Saudi Prince Alwaleed bin Talal Abdulaziz Alsaud. The prince also has the majority controlling stake in the company.