So Much Labor, So Little Skills

It's a common refrain from those locating backroom offices in the Philippines. Lots of college graduates, not enough qualified. WNS , whose clients include T-Mobile, Intercontinental Hotels and SITA, complains that its hit rate in hiring is 10%.
That "skills gap" will disappear. The BPO industry is growing at such a rate and to such a critical mass that its gravitational pull will bring more and more of Philippines into its orbit; schools and society will respond. But maybe not as fast as employers wish.

Keshav R. Murugesh, group chief executive officer of BPO firm WNS Philippines Inc., told reporters in a briefing on Friday the employability rate in the country needs to be improved.

"In our case, we get only one out of 10 applicants," he said.

Mr. Murugesh said his office has been closely coordinating with the Business Processing Association of the Philippines (BPAP) to conduct training and special courses.

"However, the challenge is to produce skilled graduates who are employable once they apply for the job. It should be that when there are 10 applicants, all 10 get accepted," he said.

Dispersing to the Periphery

One thousand new jobs in a city of 12 million may not be too exciting. One thousand jobs in a city of half a million is something to write home about. In the Philippines' Visayas region, Iloilo is fast becoming a favored destination. It's no surprise that a city with six universities and thousands of fresh graduates a year would become a viable location for outsourcing companies. Other wannabee cities looking to boost development need remember that besides the available labor pool, another ingredient is necessary -- reliable telecommunication links to the rest of the world -- before they prepare the powerpoint presentations to lure companies to their neck of the woods.

Transcom, touted to be Europe's largest business process outsourcing (BPO) firm, will open a call center in Iloilo in 2009, and will hire from 1,000 to 2,000 employees.

The investment is expected to cement the city's place among the top new wave international BPO sites.

Iloilo City Mayor Jerry Treñas said Transcom has set the hiring of around 1,060 employees in October. It is planning to double its work force after it starts its operations, according to Treñas.

Transcom has 75 sites in 29 countries worldwide and has expertise in various industries including telecommunications, the financial industry, travel and leisure, utilities and retail/consumer goods. It has around 20,000 employees serving over 120 major clients in more than 30 languages.

The investment has also affirmed the city as among the top new BPO investment sites in the world.

The city already hosts nine BPOs with more than 4,000 workers. These include Teletech, ePLDT Ventus, Callbox Customer Contact Center, Global Mega Communications Inc., Techno Call Corp., Interactive Voice Call Center, Medlink Trans Services, Eversun Software Philippines Corp., and Savant Technologies.

BPO Slowdown

The red-hot BPO industry is declaring that 2009 will be a slower growth year after the torrid expansion in the past few years. The blame is put not just on the global recession but the rising protectionist sentiment in the U.S., the Philippines' largest market.

Half-full-glass analysts will tell you this is the welcome pause that refreshes. No industry can sustain big jumps in production without bumping up against constraints. And for the longest time, the constraint has not been external demand. The problem has been mostly internal: the country's ability to provide labor. Or rather, we should say labor is not a problem, as any recruiting agency will tell you; it's the limited supply of labor with the right skills that has limited growth.

Now that external demand is slackening, the industry can turn more attention to those internal problems, those what managers will call "variables we can control." There's nothing we can do to influence the U.S. recession; there's everything we can do to make sure Philippine schools are turning out qualified graduates, training seminars are truly training employees, and programs to upgrade technical skills are implemented.

CICT Commissioner Monchito Ibrahim said that despite the setback, the industry is still expecting 30-percent growth this year to some $8 billion, and plans to increase the number of new jobs by a fifth or 75,000 jobs. He said the BPO industry ended 2008 with 372,000 jobs.

The revenue projection was taken from the Business Processing Association of the Philippines (Bpap) Roadmap 2010, a three-year plan that aims to double the country’s worldwide market share and achieve $13 billion in revenues, as well as provide direct employment to 1 million people.

Ibrahim said the slowdown was due to a number of factors, including the global financial crisis which has hurt the US, the country’s only major partner in the BPO industry. The lack of workers with necessary skills was also a key constraint.

Changing Meralco's Leadership

It's one of the biggest business stories of the year. Family of the nation's largest power distributor gives up controlling stake to nation's largest telecommunications company. Tectonic shifts in the Philippines' corporate firmament of this magnitude happen once in a generation.

What does the main daily reduce it to? A family squabble.

Despite statements that all is well and that the family is still as tight-knit as ever, the Lopez family saga over the sale of most of the family’s shares in power distributor Manila Electric Co. (Meralco) to the Philippine Long Distance Telephone Co. (PLDT) group continues.

For the first time, Mike Lopez, son of Meralco chairman and chief executive Manuel Lopez, lashed back at people who say his father had known about the decision to sell down the family’s Meralco stake from day one.

“We were not privy at all to the negotiations from day one. Saying that we were, is a grave injustice to my dad’s name,” he told the Philippine Daily Inquirer in a telephone interview Wednesday.

Retiring the PSPT Ticker

So People Support, after seeing its stock drop to $8 in July, agreed to be bought by Aegis BPO, for $12.25 a share. The $250 million transaction is supposed to close this October, when the Philippine-based company becomes another part of India's sprawling Essar Group, which is into such businesses as steel, oil, and mobile phones.

Whatever happened to creating "shareholder value" when PSPT rejected the $15 per share offer of IPVG?

ACt 2: PeopleSupport

The dance has entered its next phase. After PeopleSupport (PSPT) rejected a bid by IPVG for $15 a share, it is now on the receiving end of a revised $17 all-cash counter offer. PSPT can no longer treat this bid in the same way it treated the first -- a brush off with a curt letter.

A copy of the IPVG (IP) letter to Mr. Rosenzweig available here.

It is unfortunate that the Board of Directors of the Company has not engaged us in serious discussions despite repeated attempts to have confidential dialogues regarding our proposal. We are also disappointed that the directors do not see the merit of our proposal despite the fact that it is directly beneficial to the shareholders of the Company.

However, upon careful deliberation of the recent initiatives, revised earnings guidance, and new strategic planning the Company announced in its statement of December 12, 2007, we are prepared to make a revised proposal to acquire the Company at a purchase price of $17.00/share. This new proposal represents approximately 34.81% premium to the Company’s 60-day weighted average closing price of $12.61/share including the close of market yesterday, January 10, 2008.

As the major shareholder of PSPT, much rests on how Chairman & CEO Lance Rosenzweig wants to finish this. If he is truly ready to give up PSPT, then he merely needs to extract as much cash as possible, and the best way to maximize the final price is to get another dance partner.

If he wants to hang on, he'll need to bring lots more ammunition vs IPVG, rather than just PowerPoints and press releases about how rosy the picture is for PSPT remaining an independent company. Many PSPT shareholders with lawyers on speed dial won't hesitate to sue if he gives up this opportunity to cash out. No need to bet what Galleon (24% owners of PSPT) are advising Lance to do.

It's been more than a month since IPVG made its first unsolicited offer, ample time for any other interested party to emerge from the woodworks. Our call: we are coming close to a final price.

Medical Fallout

There's always a downside. Here's one view of the human cost not carried on the balance sheets of India's mighty BPO industry.

There's mounting medical evidence that if people are forced to stay up night after night their biorhythms are disrupted and they are liable to pay a cost in terms of both physical and psychological health. Elevated pay isn't sufficient compensation for a heart attack brought on at 30. We can't drive young people into the BPO industry by painting a superficially alluring image of its rewards, then shrug and turn away when they face serious health issues. Experts are concerned that the brewing crisis could undermine India's economic boom, which has been driven to a large extent by the services sector. A study by the Indian Council for Research on International Economic Relations estimated that heart diseases, strokes and diabetes cost India $9 billion in lost productivity in 2005. They forecast this figure to grow to a whopping $200 billion in the next decade, with the IT sector predicted to be among the hardest-hit.

I won't be a pied piper singing the praises of the capitalism system, but the long-term view argues for us to have faith. When an industry's health woes become a big enough problem, the solutions will come. If entrepreneurs have set up bars catering to the graveyard shift workers -- blackened windows to simulate night even though it's noontime -- why can't a whole city be transformed? Interiors of buildings are now made to follow the daylight hours of countries halfway around the globe; why can't the district where the building belongs also follow those same hours? If the human body can't evolve to cope with altered circadian rhythms, why the environment will have to be reshaped. If we all live on borrowed time, why can't we advance that clock +12 hours?

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.