beyondbrics

What happens when a low-cost outsourcing country finds itself undercut by an even lower-cost outsourcing country?

It outsources to its competitor, that’s what. Having seen the Philippines emerge as a rival, India’s huge outsourcing industry is moving some basic call centre and back office services out east. On Thursday, Tata Consultancy Services, India’s biggest software company, launched its first call centre in the Philippines – and others seem sure to do the same.

Does this mean the beginning of the end for India’s most successful sector of the last 20 years and the inexorable rise of the Philippines. Not really. Indian companies plan to move up the value chain. But the progress of the Philippines shows how quickly this pretty mobile industry can move around. If call centre operators are not obliged to be based in the North American or European home markets that many serve, they aren’t obliged to be based in India either. Globalisation doesn’t stop here.

Business process outsourcing (BPO) revenues in the Philippines have been growing 46 per cent a year since 2004 and are foreseen to hit $9bn this year, making it the second-largest market after India, which generates about $12bn in revenues annual, according to the Filipino and Indian industry lobbies.

However, according to Everest Global research, the Philippines’ BPO industry should overtake India’s by 2012, as it expects the Filipino sector to grow an annual 30 per cent up to 2016, against a growth of 12 per cent of the Indian market.

The Philippines has developed a particular strength in voice-based BPO services, which include customer services operations. In this segment, the Philippines are already ahead of India wirth a predicted revenue of nearly $6bn this year, more than India’s $5.5bn, according to Everest.

So, with its English-speaking population and close ties with the US, the biggest single market, the Philippines is turning into the new BPO capital of the globe. But that excludes the much bigger and more sophisticated business of software outsourcing, which generates nearly $50bn in annual export revenues for Indian IT groups.

What Indian IT software and BPO companies are doing is changing ther mix: they are increasing their focus on higher margin software services and cutting their back on basic call centre operations.

“Indian companies are moving a lot of their basic back office operations outside India and they are focusing on delivering more sophisticated software-based outsourcing products,” said Sudin Apte, principle IT analyst at Offshore Insight. “Among the countries picking up a lot of the businesses that was traditionally done in India, the Philippines is the one growing the fastest.”

And rather than fight the future, the top Indian companies will try to take advantage of the Philippines’ success, as TCS is doing by investing in the country. TCS and it two biggest Indian rivals Infosys and Wipro all long had a global delivery network, with operations in Asia, Europe, and the Americas.