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Pros and Cons of the Philippines as an Outsourcing Destination

Greg de la Cruz works at NCR Corp's R&D center in the Philippines. He is interested in economic history and current world financial affairs.

In this photo, you can see an aerial view of Cebu City, one of the Philippines' top IT outsourcing destinations. The country's IT-BPM industry contributes upwards of $27 billion annually, which is nearly 10% of GDP.

In this photo, you can see an aerial view of Cebu City, one of the Philippines' top IT outsourcing destinations. The country's IT-BPM industry contributes upwards of $27 billion annually, which is nearly 10% of GDP.

Outsourcing has remained popular since the 2010s as both a business strategy for multinationals and a lifeline for startups. Statista reports that from 2010 to 2019, the global market size of outsourced services has ranged from $76 billion to as much as $104 billion. The Philippines continues to be one of the hottest business process outsourcing (BPO) destinations in the world.

In economics, these are three factors of production—land, labor, and capital. And the availability and reality of these considerations vary depending on the country or state. Great as the Philippines might be for production, each good consideration has an accompanying downside.

Examining the “land” aspect of production, for example, you’ll see that while the country has a great mix of undeveloped, underdeveloped, and industrialized land, you can’t close your eyes to the fact that the Philippines is prone to natural disasters, especially typhoons (and super typhoons).

In 2013, Typhoon Haiyan, which was one of the most powerful tropical cyclones in recorded history, cost the Philippines over $2 billion, and in 2021, Typhoon Rai cost over $1 billion—wiping out electricity over most of the country’s business hub in Cebu for at least a month.

While there’s clear evidence that foreign investors are still highly confident about expanding work to the Philippines, every businessperson must take the bad that comes with the good. Here are five such considerations.

Five Considerations in Outsourcing to the Philippines

ConsiderationProsCons

Weather

Tropical, good for productivity

High frequency of typhoons

Labor

Relatively inexpensive and young labor force

Strict labor laws

Physical infrastructure

Low capital requirements, high demand

Behind Asian counterparts

Technology infrastructure

Growing foreign investment trend

Poor IT infrastructure, very slow internet

Regulation

Special economic zones and fiscal incentives

Bureaucracy, inefficiency, and corruption

Weather

What are the pros and cons of the weather in the Philippines?

Pros: Tropical, Good for Productivity

The Philippines experiences a tropical climate, which means its workers can enjoy sunny weather year-round. While hot weather has reportedly been linked to lower productivity because of either discomfort or distractions, a climate that doesn’t include drastic seasonal changes, such as a cold winter causing blizzards that block roads or affect well-being (cold weather can cause workers to slow down) means that you can rely on people to get work done in the same levels throughout the year.

Cons: High Frequency of Typhoons

The Philippines is visited by an average of 20 typhoons every year, and super typhoons have been more frequent than they should be due to climate change. To the immediate right of the Philippines’ Exclusive Economic Zone (EEZ) is the biggest body of water on earth, the Pacific Ocean. The latter’s close presence means that any storm that’s on its way to the country can only gain more power.

Typhoons frequently hit the country hard, costing millions to billions of dollars worth of damage almost every time. The country’s government scrambles to put resources for relief operations and recovery, while for business owners, there’s an extra layer of difficulty running operations during typhoon season.

Labor

What are the pros and cons of the workforce and labor in the Philippines?

Pros: Relatively Inexpensive and Young Labor Force

While the Philippines has a minimum wage law in place—and one that actually does its best to respond to inflation—the cost of labor in the Philippines is still relatively cheap. The country may have a higher minimum wage than either China or India, but is still seen as a strategic means for any Western company to save on staffing costs.

In terms of age, according to WorldData.info, almost 40% of the Philippines' population is under 20 years old, which is in stark contrast to countries like Japan, which has less than half, and just slightly more than India, which has 35%. Having enough young people to employ as workers in the population is key for any country and is seen as a competitive advantage for the Philippines.

Cons: Strict Labor Laws

Despite the clear advantages the Philippines has over many of its Asian counterparts in terms of numbers, the country is also known for the influence socialism has over its labor laws. While the Communist Party of the Philippines has been associated with terrorism in the country especially during the Duterte administration, social welfare laws are deeply embedded in its legal system, which means pro-labor ideologies are impossible to leave behind.

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BPOs have been known to circumvent a worker’s right to organize by perpetuating a high-attrition culture—effectively preventing the formation of unions—but other mandatory protections and reliefs also come in the form of social security, universal healthcare, worker’s compensation, 13th-month pay, etc.

Labor-only contracting (a scheme where a “manpower agency” serves as a middleman between an employer and the employee) continues to be an issue, but the trend that lawmakers and government officials are keen on cracking down on it means that there is some hope, albeit so little.

Physical Infrastructure

What are the pros and cons of the physical infrastructure in the Philippines?

Pros: Low Capital Requirements, High Demand

Low labor cost usually means low capital requirements, and this is another good reason to outsource in the Philippines. Expanding offices in the country of origin can appear costly at first, but once the company realizes that it’s cheaper to expand overseas (plus there could even be more space), then it’s easy to get motivated to build not just a team overseas, but entire offices.

There is high demand in terms of physical infrastructure, as 41% of the country’s land, according to the World Bank in 2018, still falls under agricultural land. There’s still room for industrialization and expansion, not including aggressive reclamation projects entered into by hasty local government chiefs.

More property development brings in more tax revenue, and more tax revenue generated by a locality means that it gets a bigger slice of the national government’s pie in the annual budget due to the country still being highly centralized.

Cons: Behind Asian Counterparts

Despite the high demand, cheap construction labor, and even in spite of the Build, Build, Build ideology brought in by the recent administration, the Philippines is still lagging with its Asian counterparts in terms of physical infrastructure.

According to the World Economic Forum, the Philippines’ overall 2017-2018 score for infrastructure belongs to the bottom three, at 3.40, just slightly edging out Laos (3.30). For the same period, Singapore, which was the top-ranked ASEAN country, had near-twice the Philippines’ score.

And in terms of roads, the Philippines was dead last. For railroads, it was middle of the pack; in terms of ports, it was second-worst, and in air transport infrastructure, it was once again dead-last.

Technology Infrastructure

What are the pros and cons of the technology infrastructure in the Philippines?

Pros: Growing Foreign Investment Trend

Foreign Direct Investments (FDIs) have been relatively high during the Duterte administration, with the latter developing economic relations with China and continuing cooperation with usual economic partners Japan and the United States.

Cons: Poor IT Infrastructure, Very Slow Internet

Despite the legislation and all the executive direction, the Philippines is still very much one of the worst (even just in Asia) in terms of IT infrastructure. The latter may be seen as improving, but the country’s unique challenge of being divided into over 7,000 islands has continued to challenge telco providers in establishing a long-term solution to the country’s ridiculously slow internet speed.

In 2017, the Philippines ranked 94th out of 133 countries in terms of fixed broadband internet speed and 100th out of 122 in terms of mobile internet. It may have jumped to 62nd in 2021, but this still means that it barely reached the top half of the world in terms of internet speed.

The government has tried what it can to bring in more competition to improve service, but the country continues to have one of the worst internet services relative to its Asian counterparts, despite being more expensive.

Regulation

What are the pros and cons of regulations in the Philippines?

Pros: Special Economic Zones and Fiscal Incentives

Like many developing countries, the Philippines does what it can to lure more investors by creating and developing special economic zones. Whether these economic zones are solely initiated by local property development powerhouses, through a consortium, or via a highly interested foreign partner, the regulatory environment finds a way to make it work.

Fiscal incentives through the Philippine Economic Zone Authority (PEZA) and the Bureau of Investments (BOI) attract foreign investors from a variety of countries—the Americas, European countries, Japan, even Saudi Arabia. The incentive scheme by registering a business enterprise with PEZA, for example, means that the business would enjoy an income tax-free operation for its first few years while never paying a single dime on VAT.

Cons: Bureaucracy, Inefficiency, and Corruption

Red tape is still pretty much the culture with the Philippines, with piles of documentation, permits to pay for and comply, and “stiff” officials who favor some businesses over others.

The government systems have not really changed much since the 1990s, and inefficiency continues to plague certain agencies, especially those with ageing workforce members and innovation-resistant leadership. Corruption in the government is also a norm, with high-ranking government officials embroiled in overpricing scandals and billions in “missing” money.

Bureaucracy, inefficiency, and corruption are issues that are not unique to the Philippines—it just so happens that these are so rampant and “expected” to happen that they’re no longer surprising to the general public. And what does this mean for BPOs and other outsourcing operations?

It means that the taxes being paid by BPO employers and employees may just be going nowhere. Sure, there are always new roads, bridges, and subsidies to show for every so often, but the question always becomes—could things have even been better off had there been a more efficient and accountable government?

If you are thinking of outsourcing your business operations into the Philippines, it’s normal for you to expect a regulatory landscape mired by bureaucratic officials, inefficient systems, and a culture of corruption.

Summary

  • Weather: In terms of weather, worker output from the Philippines may be expected to remain stable throughout the year, but you should also expect typhoons to constantly hammer the country all year—not to mention the more devastating superstorms, which are harder to recover from.
  • Labor: When it comes to labor, the Philippines is one of the better choices because of relatively low wages (though slightly higher than China or India) and has a large percentage (40%) of its population below 20 years old. That said, it has strict labor laws in place that have a tinge of socialism.
  • Physical infrastructure: Building office space and investing in physical infrastructure in the Philippines is relatively cheap, but there’s so much room for improvement, as the country is one of the worst-ranked even in Southeast Asia in terms of infrastructure.
  • Technology infrastructure: Foreign investment in technology is seen to continue growing because of enterprise-friendly legislation, but as with physical infrastructure, the Philippines has one of the worst IT infrastructures as indicated by poor internet speed and worsened by its unique 7,000-island geography.
  • Regulation: Special economic zones and fiscal incentives through PEZA and BOI are able to attract businesses, but the regulatory environment is still plagued by bureaucracy, inefficiency, and corruption.

Is the Philippines Still Worth It as an Outsourcing Destination?

What’s not covered here—and is easy to miss out when assessing a country for its favorability in being an outsourcing hub—is a country’s unique citizenry. It’s easy to label Filipinos as “hospitable,” “sociable,” or “hardworking,” but these characteristics easily apply to any group of people that’s happy to receive jobs coming from outsiders. Foreign investment has a way of helping people get out of poverty, and outsourcing is just one of the many ways that a surplus of jobs is created.

Having said all that, the Philippines is still very much worth it for outsourcing. There’s clearly a lot of ground to make up in terms of infrastructure and regulatory climate, but businesses continue to outsource their operations here. This shows that for businesses, it’s not all about the labor, land, and capital—there’s something intangible about the Philippines as an outsourcing hub, its own secret sauce.

This article is accurate and true to the best of the author’s knowledge. Content is for informational or entertainment purposes only and does not substitute for personal counsel or professional advice in business, financial, legal, or technical matters.

© 2022 Greg de la Cruz

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