Outsourcing: boon or bane? (1)

Outsourcing: boon or bane? (1)

Updated 10:41pm (Mla time) Oct 19, 2004
By Michael Tan
Inquirer News Service



Editor's Note: Published on page A15 of the October 20, 2004 issue of the Philippine Daily Inquirer.


ABOUT two or three years ago, I first wrote about the potentials of cashing in on the needs of US companies for software development, which they had started contracting out (thus the term "outsourcing") to Third World countries, mainly India, the Philippines and China.

While I knew outsourcing was going to grow rapidly, I didn't realize it would do so at such a rapid pace, and that besides software development, the explosion would cover areas such as call centers. Today, there are some 8,000 Filipino firms engaged in outsourcing activities.

No doubt, there are many potential benefits in outsourcing, but if we are to maximize the gains, we should understand how outsourcing came about in relation to global capitalism, its advantages and disadvantages, and where we are today in this global market. It's also important that we look at the situation soberly, separating the hype from realities.

To do this, I checked different Internet sites but I will be mainly using figures from the Internet site of Offshoring Digest, which examines trends and prospects in outsourcing.

Call centers and software development

Call centers account for the biggest chunk of outsourcing revenues in the Philippines. The call centers are actually customer service units, the "operators" responding to questions from consumers. Thus, someone living in the States who has encountered difficulties operating a new MP3 player from an American multinational can call a toll-free number to get advice. What the US-based customer may not know is that the customer service representative, speaking with a mild "foreign" accent, is actually based in Manila.

In 2003, there were 20,000 "seats" (job positions) generated by Philippine-based call center firms, and that number was projected to double in 2004. Total revenues were said to have reached some $200 million in 2003. Some P10 billion has been invested to set up over 60 call center firms.

I could not find revenue figures for the other outsourcing segments, but I suspect software development comes in a close second to call centers. Offshoring Digest says there are some 10,000 software developers in the country, about 10 percent of our total number of IT professionals. These developers work for some 200 firms.

Medical transcriptions and animation

Less known than call centers and software development is the market for medical transcriptions, which involves medical reports, discharge summaries, therapy and rehabilitation notes, chart notes and other clinical reports. Under US laws, a doctor or a medical institution will not be paid their fees unless they have filed full medical reports, mainly documenting doctor-patient interactions. Doctors routinely tape their observations, which then have to be transcribed.

There are about 20 medical transcription firms in the Philippines. I could not find total revenue figures for these firms, but Offshoring Digest says that one firm alone, Philippine IT Offshore Network, had a $2.5 million contract with Health Partners, a US health maintenance organization. Under the contract, Piton will provide some 100,000 lines of medical transcription per day, to increase to 250,000 to 350,000 lines within the first year of the contract.

What human resources are required here? Apparently, a good transcription worker can provide up to 1,000 lines per day at a 98 percent average accuracy rate. They need to be able to provide transcripts within 24 hours; for emergency cases, the output has to be delivered within three to six hours. It's intensive work, and requires a familiarity with English medical terms.

We move now to animation production, which involves a handful of firms. Filipinos mainly do two-dimensional (2D) animation, the more traditional drawing and painting such as what we see with many Walt Disney classics. We've started to compete for the market for 3D animation, which includes computer-generated images, but the high cost of software for such production has limited local firms from getting its share of the market.

Runaway factories

Outsourcing has many exciting potentials, but let's not forget that all these new industries only represent the latest phase in global capitalism.

Labor costs in the United States and other developed countries have always been much higher than in Third World countries, which is one reason we keep losing so many Filipinos seeking greener pastures in countries like the United States, Canada and Australia.

Business people are always looking for ways to maximize profits, mainly by keeping production costs, especially labor, as low as possible. Using cheap migrant labor still comes out expensive, so in the 1970s, we saw the phenomenon of "runaway factories," where American multinationals began setting up shop in Third World countries to take advantage of the lower labor costs. It started with factories across the United States' southern border, in Mexico, but eventually spread to other countries. The Philippines was one of the countries that hosted these factories, mainly those producing garments and electronic components.

The development of information technologies in the last 30 years introduced new opportunities for global capitalism. We plunged into an information revolution, with businesses discovering that profits were to be made not just in the production of material goods but also in the packaging and dissemination of knowledge and information.

Outsourcing was inevitable as the rapid and efficient flow of information and knowledge became more and more important. Note that some aspects of this flow of information and knowledge are part of a continuum of earlier global capitalism. The call centers, for example, are there to provide customer support for products that, although sold by an American multinational, were probably assembled in China, with parts from the Philippines, Mexico and Malaysia.

Note, too, that there's a whole "generic" field of business process outsourcing (BPO), where a US-based firm will contract a Third World group to handle all kinds of information and data tasks. Outsourcing Digest reports that there are 53 registered BPO operators in the Philippines handling "business data processing, database management, finance and accounting services, insurance claims processing, logistics management, human resource administration, and sales and marketing."

In so many words then, there's more to outsourcing than call centers, software development, animation and software development. On Friday, let's see how we can use all this information to maximize the benefits that we might want to reap from outsourcing.