Outsourcing: boon or bane?

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.

Outsourcing is, after all, only the latest phase in the development of global capitalism. In the 1970s, as multinationals faced rising factory labor costs in their home countries, many moved their production facilities overseas (sometimes called runaway shops) to use cheap Third World labor. In this 21st century, with the explosion of information technologies, the multinationals are looking into the use of these technologies to outsource customer servicing, office accounting and other routine office procedures to the Third World.

How do we stand to gain, or lose, from all outsourcing?

Global coolies

It helps to start by looking back at our experiences with the "runaway factories," mainly garments and electronics firms that now form the backbone of several of our export processing and industrial zones.

Yes, the products of these multinational firms are now among our leading export items. And yes, we did see, and continue to see, the creation of jobs, often paying fairly good salaries based on local standards. Just to give one example, electronics firms in Laguna province can offer something like P10,000 a month to a factory worker. For the many young women from rural Southern Tagalog provinces who flock to Laguna, that is a windfall, enough to support parents and younger siblings.

But there's another side to this. These factories have in a sense stifled local industries. Local textile and garments firms, for example, have been practically wiped out, unable to compete with the multinationals, unless they themselves become subcontractors.

In the area of electronics, I always have mixed feelings seeing some gadget sold in an American or Japanese store
labeled "Assembled in the Philippines." Note "Assembled," rather than "Made in." Unlike Taiwan, South Korea and now, China and India, we've always been content to be global coolies, doing the menial jobs of assembling different components, many produced in other Third World countries, into a finished product.

We welcomed these firms thinking of the jobs they'd create, but forget that capital moves into areas where the skills that are needed are cheapest and most docile. We're vulnerable, as the multinationals move out of the Philippines to countries like China and Vietnam.

Hype versus realities

Never mind, we tell ourselves, we have a stable niche with call centers, because, together with India, we have the English proficiency and fairly high levels of formal educational attainment needed to deliver many of the required outputs.

But there's a danger here that we become complacent, believing the hype in the mass media and in the local grapevine about the opportunities in outsourcing. Last month, I met someone I'll call Ana, an ambitious young woman who had come to Manila from Polomolok town in the southern province of, South Cotabato, lured by the prospects of becoming a call center operator. Ana was setting aside two years of college courses in engineering and a six-month caregiver course after hearing about the wonders of the call center world, with salaries supposedly running up to $800 a month. Why work overseas when you could earn that much here?

Manila proved frustrating for Ana, with one rejection coming after another. Ana hadn't realized, as with many other call center hopefuls, that last year there were only about 20,000 "seats" (job positions) available. Even with projections of 40,000 seats this year, this is miniscule compared with the number of jobseekers. Outsourcing Digest cites a recent study by the Contact Federation of the Philippines finding that only two or three out of 100 applicants qualified for call center jobs. The reason? You need not just proficiency in English but the potential to get "accent training" so you can be understood by American clients. It's not surprising most of those accepted come from the University of the Philippines, Ateneo de Manila University and other upper-class private schools.

And the salaries? P12,500 to P17,000 a month is a more realistic starting salary, overtime included. Sure, that's about what an instructor gets at the University of the Philippines, but certainly a long way off from the $800 figure being bandied around.

Learning from India

My fear is that we will again remain content as global coolies, deploying University of the Philippines graduates to handle menial jobs. Call centers moved to the Third World not just because our labor was cheaper but also because Americans and British young people were leaving their jobs after a few weeks, totally bored by the routine.

We might want to learn from the Indians, who see outsourcing as part of a larger industrial development plan. Whether call centers or software development, many of these outsourcing firms are situated in Bangalore, India's "Silicon Valley," where they become part of a larger plan to develop India's own information technology sector.

Not surprisingly, the Indians have developed homegrown technologies for local needs, from hand-held equipment to be used by farmers to computer technologies that electronically canvassed some 400 million ballots during their last elections within a few days. Call centers, the Indians know, generate loose change compared with software development. Last year, their software exports raked in $9.6 billion.

The Indians have a National Association of Software and Service Companies (Nasscom) that is able to negotiate on the global market. When American politicians began grumbling about how outsourcing was taking away jobs at home, Nasscom warned them that without outsourcing, the US economy would be in even more dire straits.

Nasscom conducts studies of the world outsourcing market, trying to figure out what niches are available for India. Rather than feeling threatened, for example, by China, a major competitor for software development, they're talking about joint ventures. Similarly, the Philippines is seen less as a threat than an opportunity, with at least one Indian human resource company, Daksh, already investing in the Philippines' call center industry.

Why the difference in approaches? India has always adopted a nationalistic but pragmatic stand in relation to industrial development, bringing in the multinationals but negotiating with them with domestic priorities in mind. We lacked that foresight many years ago when we invited in the runaway factories. It may not be too late yet when it comes to outsourcing.