Why call centers click in RP

Why call centers click
March 4, 2005

By Antonio S. Lopez

It was quite a coup for PeopleSupport (Philippines), Inc. President Rainero “Bong” Borja to convince President Gloria Macapagal Arroyo a fortnight ago (Feb. 24) to drop by the company's Makati headquarters at the Philamlife Tower to observe call center operations, listen to his spiel on the virtue of call centers, interact with call center employees and have lunch with PeopleSupport's executives at the Tower Club. That's more than two hours of exclusive presidential presence.
The night before, across town at the Philippine Plaza, the President had snubbed some 500 at a glittering gala dinner and ball of the Rotary Club of Manila marking the 100 years of Rotary in the world. Was she more interested in call centers than calling on do-gooding Rotarians?
Well, call centers seem to be the wave of the future. They are now the biggest source of jobs for office or white collar workers. President Arroyo wants to ramp up employment. She promised to create six to ten million jobs over the next six years. Call centers have short gestation periods. Get a contract overseas, rent an office, wire it with fiber optic, buy computers, set up tables all around, man them with English-speaking girls, and pronto, you have a call center.
This may explain why even inside Malacañang, the presidential palace, job fairs are conducted for call centers. Demand is big but the supply is small. Only five of every 100 applicants are taken. “In some places,” says Finance Secretary Cesar Purisima, “the takeup rate is as low as 2% -- two of every 100.”
Business has been good for the call centers. They chalked up revenues of $850 million last year, double the level in 2003 which itself was double that of 2002. That's an unrivalled growth of 100% per year over the past three years. No other business has had such an explosive growth. And no other business has been more hungry for workers than call centers.
Estimates are that by 2008, the business will be worth $3 billion. That's assuming the 100% per year growth rate will decline to just 50%.
The pay is so good at call centers that many offices are suffering the equivalent of a brain drain. Senator Manuel Araneta Roxas, who pioneered the call center concept in the Philippines back in 1998, recalls having lost some of his staff at the Department of Trade and Industry then to the call centers. “Coming fresh from college, these girls start drawing P18,000 to P20,000, that's incredible,” he says. “Call centers are actually the place where you can find a job based on merit,” he says. “You don't need recommendations, connections and knowing who. You come on your own skill.” The senator accompanied the President at PeopleSupport but didn't stay for lunch.
As DTI chief, Mar Roxas conducted road shows, in the US and Europe. “At that time, they never heard of the Philippines as a base for call centers,” he says.
And why did he focus on call centers? His reply: “With globalization, the opportunities for manufacturing were pretty fixed already. But this (call center) business leverages the skills of the Pinoy - English competency, education, US orientation, pop culture awareness. So they themselves (the call centers) are the best people and they are the ones we need to provide jobs for. So it was perfect fit.”
In manufacturing, you have a ceiling, explains Roxas, because of globalization. Intel's decision to produce x number of chips is a company decision, not a country decision, he says. Toshiba closed down in the US and Europe to come to the Philippines to produce laptops. Now, they in the process of moving out from the Philippines to go to China. In the call center business, it is the number of workers a country can supply. “Our English-speaking and labor cost advantage is large you don't have to give them a tax break. They will come,” says Roxas. But of course, the government gives the call centers a tax break. This is why it has been certifying Makati buildings as export or IT zones.
But the call center operators want more. Aside from tax breaks, Bong Borja asked President Arroyo if she could authorize the state-turn LRT to run 24 hours so call center employees can report for work late at night or go home early in the morning, before the crack of dawn. Restrictive labor laws that ban the employment of women at night also have to be liberalized.
For part, precisely because of the call centers, President Arroyo has ordered the use of English as a medium of instruction in all public schools. She also ordered the refocusing on math and science. In Marikina, Mayor Marides Fernando has begun to promote English speaking among residents of the town of shoe makers. So least, if the shoe makers lost their job making shoes because of globalization, they can possibly be hired at call centers.
“This business is all about human capital,” says Borja. “So what we are trying to do is to influence the quality of our graduates even before they get out of school. The true test of education is getting employed
Borja has been sending instructors to certain schools to teach English and learn a few IT skills specific to call centers and business process outsourcing .” The University of San Jose Recoletos and the University of the East are testing such programs.
If the students pass the short courses, the students are guaranteed employment. At the call centers. Because of the unusual working hours (late night to early morning - which is daytime in the US), turnover can be high in call centers. And one cannot just leave his seat because calls keep coming in.

Senator Roxas does his math: 4,000 employees earning P18,000 that's P72 million. Multiply that by 12 or 23 months and you have more than P900 million in payroll. “That's cash to buy clothes, shoes, cell phones - you can imagining the cascading effect on the economy.” The government, of course, withholds an average of 20% on a P18,000 monthly income. So it makes P180 million in income tax on a P900-million payroll. Indeed, things begin to cascade. In the Philippines and in America.
PeopleSupport itself expanded from 40 to 4,000 workers in just three years. Its revenues quadrupled to $44.5 million during the same period. In the red for three years, it reported a profit as soon as it completed its first year in the Philippines.
PeopleSupport Inc. of Los Angeles is one of the first US-headquartered call center operators using the Philippines as base to go public and succeed in doing so. Launched in LA and St. Louis in 1998, it was losing money consistently, until it moved its operations to the Philippines.
The company opened shop in Makati in 2000 with just 40 employees. “We found it so successful we decided to shut down our LA office,” recalls Bong Borja, president of PeopleSupport (Philippines), Inc. In 2003, it opened in Cebu. “We were so successful we decided to shut down our operations in St. Louis. So now, all our operations are in the Philippines.” The company has nearly 4,000 workers. “We are hiring at the rate of 6o to 120 people a week,” he relates.
Largely because of its profitable Philippine operations, PeopleSupport launched a successful IPO becoming the first US company with Philippine-based operation to list in the NASDAQ. Listed last October, the share initially was quoted at P7. It has reached $11 per share, a gain of 57% in less than a year. “First Makati, then Cebu, and now Wall Street,” gloats Borja. “This is an entirely Philippine play,” adds Senator Roxas, a Wharton-educated former investment banker.
The company has just completed its five-story PeopleSupport building at the corner of Ayala Avenue and Buendia. Each floor has an area of half a hectare. “It is the first full service e-services building, designed to run 24/7 with multiple power supplies from multiple power grids,k multiple back-up power, multiple telephone companies coming in,” Borja points out. In other words, the building is brownout-proof and trouble-free. The building is operational in July.
PeopleSupport says it is looking at countries like India, Malaysia, South Africa and the Caribbean for expansion. But the Philippines will probably remain its home base. That is why it keeps recruiting people. Pay is P18,000 to P22,000 a month. And it keeps looking at locations in the country - Baguio, Davao, Cagayan de Oro, Cebu, and Iloilo - any place where there is fiber optic cable that can transmit or handle telephone data many thousands more than an ordinary phone line.
From promoting call centers, PeopleSupport has also begun promoting other services, like medical transcription, animation, engineering design, says Borja, who also heads the two associations in charge of call centers and of business process outsourcing (BPO).

PeopleSupport posted a profit for the first time in 2003 -$8 million on revenues of $30 million. For 2004, it reported record revenues of $44.5 million, a 48% increase over 2003. Net income was $8.3 million, a slight gain from 2003, or 55 cents a share.
The last quarter ended Dec. 31, 2004 showed record revenues of $12.6 million, iup 47% over the same period in 2003 and 5% over the third quarter 2004. Fourth quarter income was $3.3 million, or 18 cents a share. “PeopleSupport delivered an excellent quarter and we are proud of our achievements through 2004,” enthused Lance Rosenzweiq, the company founder, chairman and CEO. He said fourth quarter revenues surpassed expectations due to recent client pilot programs and existing clients experiencing higher than expected volume increases.
Says Rosenzweig: “PeopleSupport's college-educated, fluent English-speaking eReps provide what we believe is a unique offering by upselling and cross-selling complementary products and services to end-customers.”
He cites analysts saying “the offshore outsourcing industry is gaining significant momentum and the transfer of professional services to offshore locations continues to accelerate.” “US-based companies have begun to realize the benefits offered by offshore providers are not limited to lower costs. Benefits also include lower attrition rates among employees and higher quality of service. While several offshore locations provide lower labor costs, few, if any, offer the high quality American English language skills found in the Philippines,” Rosenzweig points out.
That's the secret. Filipino workers may cost more. But they are better educated, more productive and speak better English. They are better qualified than Americans themselves. No wonder US jobs are moving to the Philippines where costs are a fourth to a third of those in America. Enhancing profitability has been the drastic cut in telecommunications cost between the Philippines and the US.


Enthused with the results in the Philippines, PeopleSupport's Rosenzweig has told President Arroyo it would invest $50 million in the Philippines.
Enhancing profitability has been the drastic cut in telecommunications cost between the Philippines and the US.
The Philippine government has been quick to provide tax incentives to call center and BPO operators. For locators to enjoy tax perks, it now declares entire buildings as industrial or IT zones even though these are located in Makati or Libis and not outside Manila.
“In March 2002, we restructured our operations to relocate our existing outsourcing centers to the Philippines,” PeopleSupport said in a report to the US Securities and Exchange Commission last year.
“Through our operations in the Philippines, we believe we provide significant value to our clients by offering services at a substantially lower cost than US outsourcing centers and at a quality level that is often higher than other offshore locations,” the company said.
The prospect of profitable operation enabled PeopleSupport to launch an $86.3-million IPO (initial public offering) in May 2004. From $7 a share in recent months, the price has risen to $11, a 57% gain in less than a year.
The value of worldwide business process outsourcing business will reach $24 billion by 2007, according to the research firm Gartner Inc.
Sen. Manuel A. Roxas II estimates that there are six million call center employees in the US. Most of those jobs will be relocated offshore eventually because of rising costs.
“We are one of the largest outsourced service providers in the Philippines based on the size of our workforce, which consists of over 3,100 college-educated, fluent English-speaking Philippine personnel. From our Philippine facilities, we provide customer management services for US-based clients who wish to outsource this function to a high quality, lower cost provider,” PeopleSupport said in its filing with the US Securities and Exchange Commission in late September 2004.
The company said “the Philippines has the third largest English-speaking population in the world and a large pool of college graduates who are attuned to US culture and speak fluent English with minimal accents. We believe this offers significant advantages over other offshore outsourcing locations, particularly for providing services that require complex voice interaction.”
The company currently services 32 US-based clients in a variety of industries, including travel and hospitality, technology, telecommunications, retail, consumer products and financial services.
Primary services include inbound customer management services, which include handling calls and e-mails from clients' customers to order goods and services, making and changing travel reservations, addressing billing questions, submission of warranty claims and obtaining technical support.
“We manage over a million customer communications per month, including inbound calls, e-mails and web chats,” PeopleSupport said.
The company's largest clients in 2003 were Expedia, Network Solutions and EarthLink, which accounted for 88% of 2003 revenues.
These clients and another client, StarNumber (a subsidiary of InPhonic), have been PeopleSupport's largest clients in 2004 and accounted for 83% of revenues for the six months ended June 30, 2004.
Expedia, the firm's largest client, and EarthLink, second largest, together accounted for 62% of revenues for the six months ended June 30, 2004.
In July 2003, PeopleSupport began providing accounts receivable management services using specially trained Philippine personnel to collect overdue consumer receivables from US debtors.”
Also, “our telecommunications network and information systems enable us to provide seamless voice, e-mail and web-based interaction between customers in the United States and our personnel in the Philippines, and can be expanded to meet increases in demand,” it said.
PeopleSupport was initially funded by venture capitalists Rustic Canyon Ventures in Los Angeles, Meritech Capital Partners in Palo Alto, California, Clearstone Venture Partners in Santa Monica, Calif., Octane Capital Management LLC in Mountain View, Calif., Accel Partners in Palo Alto and Benchmark Capital in Menlo Park, Calif.
Other PeopleSupport investors include technology giants Hewlett-Packard Co. in Palo Alto, Novell Inc. of Waltham, Mass., and Siebel Systems Inc. of San Mateo, Calif. PeopleSupport is said to have raised raised $75 million between 1998 and 2000 to jump-start its operations.
“It's the hottest space in the IT services area and it's just getting started,” California's The Deal quoted Martin Wolf, president of information technology mergers and acquisitions advisory firm Martin Wolf Securities.
Wolf expects more call center companies to make share offerings.
Wolf has worked with a number of outsourcing firms in India. He estimates gross margins for outsourcing companies are roughly 10% to 12% higher than traditional IT services companies, while profitability is five times greater.
Market research firm Gartner Inc. estimates that worldwide spending on business process outsourcing services will grow to $24 billion by 2007 from an estimated $3 billion in 2004.
Founded in 1998, PeopleSupport got its start offering US-based call center services, but joined the trend of going offshore after losing money in the mainland.
Many large US companies have acquired offshore call center operators. New York-based Citigroup Inc., the world's largest financial services company, has acquired majority of e-Serve International Ltd., a Mumbai, India-based software and transactions processing company, for $125.4 million.
IBM Corp. has bought New Delhi-headquartered call center company Daksh e-Services Pvt. Ltd. for a reported $170 million.
India and the Philippines are among the preferred locations for the back-office operations of the world's large companies. Building on their proven software skills and low-cost, English-speaking labor, global and local businesses alike are establishing facilities to offer information technology services, help-desk support and transactions processing - all delivered remotely through increasingly cheaper, high-speed telecom links.
In its filing, PeopleSupport said it would use the net proceeds from the IPO to finance estimated costs of $6.4 million for leasehold improvements, telecommunications equipment and furniture and fixtures for a new facility in Manila in 2005.
In addition, the new funding will be deployed to expand the capacity of its current operations by establishing new outsourcing centers in the Philippines or elsewhere, and pursue possible acquisitions of complementary businesses, technologies or products.
Seeing trends, PeopleSupport said that “to attain high quality outsourced services at a lower cost, many companies are moving selected front and back office processes to providers with offshore delivery capabilities.”
India currently accounts for the largest share of the offshore outsourcing market. However, offshore capacity is expanding beyond India to countries such as China, Russia and the Philippines.
“The Philippine outsourcing market is relatively new and we believe that our early leadership position will provide us with an opportunity for continued growth and competitive strength,” PeopleSupport said.