Structure of Software Development Industry in the Philippines free essay sample

1. Industry Structure Outsourcing is contracting out some work or particular function to another company or person. This is done to save on cost and time since the third party provider or the service providers usually agrees to render services at lesser expense. During the economic boom in mid 1990s, outsourcing has increased because most of the economically advanced countries send work to businesses in other developing nations. The Offshore and Outsourcing (OO) industry in the Philippines first started in the 1990s, but really started growing in earnest at the start of this decade (http://www. sourcingline. om/). As late as 2004, the industry was only about $1. 5 billion, but grew at almost 50% for several years and is now estimated to be growing at about 30% annually. The OO industry is generally divided into four major segments: the Business Process Outsourcing (BPO), Information Technology Outsourcing (ITO), Engineering Services Outsourcing (ESO) and Knowledge Process Outsourcing (KPO). We will write a custom essay sample on Structure of Software Development Industry in the Philippines or any similar topic specifically for you Do Not WasteYour Time HIRE WRITER Only 13.90 / page The BPO companies comprise 76% of the total OO industry, while the ITO and ESO companies are about 19% and 5%, respectively. The figure below (Figure ) shows the percentage of each of the outsourcing segment except for KPO. The market composition of BPO is further detailed in the figure. Note: No data available for KPO. Source: BPAP The Philippines is a leading nation in the business process outsourcing (BPO) market, both in contact center services and the non-voice sector. In the past 7 years, BPO has been one of the fastest growing sectors in the Philippines. It is an emerging player in the IT services market (Web design, software development, application maintenance, etc. ) with companies focusing on niche segments such as animation. It is also a home to a USD $350 million offshore outsource software services sector (www1. american. edu/). The primary focus of the Philippines software development firms is on systems and application development and maintenance of legacy applications. Its command of English and cultural affinity for the US makes it easier to attract companies seeking to transition at their low-level maintenance work offshore. (http://www. awsys-i. com). The primary activity of Software Development segment is to undertake complex software development projects focused on the  development of customized, sophisticated software in areas requiring a tailored approach by teams of programmers located at offshore development centers or at the customer site (http://www. bsgr. com). Software Development Outsourcing is raising interest to more overseas IT companies due to various reasons. Outsourcing of software development offers a combination of reduced cost, better quality and faster time to the market services. Aside from cost, the methodology, ability and core competition are playing the key role in software outsourcing. Software Development Outsourcing has been famous in the past time, or as early as the 1776s. In 1990, Indian government followed this program of economic and was able to control all the systems through policies and regulations. The global Information Technology Services (ITS) exports by country in 2008 (Figure ) shows that the major providers of offshore software development are India, Philippines, China, Mexico, Russia and Brazil. Two of the biggest competitors of the Philippines outsourcing industries are its Asian neighbors – India and China. From the chart above, India dominates the global ITS markets by taking on 72% of global market shares. The Philippines takes 10% of that pie beating China at 4%. Compared to both countries, the country’s population is staggeringly lower. But key factors such as a closer affinity to western culture and the more affluent English-speaking skills of the Philippine workforce, places the country at par in the competition and in gaining market share. Sources: Locsin (2006), Cu (2006), NeoIT (2004), Deutsche Bank Research and NASSCOM (2005) as cited in Schaaf (2005), NASSCOM and McKinsey (2005) as cited in Nandy (2006). Comparing the country against India, the figures above show that by percentage, the country exceeds BPO employment in labor force. However, by large, India, as of the date of these projected values, dominates the Software and IT services niche. This could also be attributed to the core competencies described, in which the Philippines plays strongly in the contact center, transcriptions, animation and back-office operations. According to Maity (2011), Software Development Outsourcing can be categorized primarily into two: one is product engineering and the second is outsourced development work. Most of these can have 2 aspects which is the building something new and then the support and maintenance side of it. And then each of them also has several other parts where someone might just outsource, design, development, testing, documentation, and together they make up the each category. The difference between the two categories is that product engineering is RD related. These companies own the IT and they want part of it to be outsourced – that is the product engineering. The outsourced development work is basically for companies who use software for their operations. An example of this is a company who needs to build an HR system, or an airline who needs to build its reservation system. 1. 1. Firms in the Industry In 2006, Philippines has 516 firms providing offshore and outsourcing services that increased in number to about 620 in 2007. At present, there are about 400+ SEC-registered companies in the Philippines specific for software industry but not all are operational (Maity, 2011). There are approximately 80,000 software developers in the country. The pyramid of a typical company shows that 85% of the workforces are programmers while Admin comprise 5% (www. tholons. com). The Philippine Software Industry Association (PSIA), founded by ten Filipino-owned companies in 1988, has 120 members composed of leading multinational firms and local small-to-medium local enterprises (SMEs). The members list is shown at Appendix 1 (www. psia. org). These member-companies make up 90% of the industry revenues. About 300 more companies that are outside PSIA mostly are start-up or SMEs. Thus, software development industry in the Philippines is dominated by small players and very few large companies like Accenture and IBM. In the global arena, the major players in Software Development Outsourcing are the following: Accenture, Capgmini, Cognizant Technology Solutions, CSC, EDS, HCL, IBM, Infosys Technologies, Patni Computer Systems, Sapient, Satyam, Syntel, and Wipro. In a recent study, the PSIA has classified software development outsourcing companies to be able to figure out the needs of the market. There is basically what we call large global technology companies: Accenture, HP – segmented as those with about 1000 employees (Maity, 2011). There is also what is termed as captives – generally those with 500 employees. Maity (2011) further explains, â€Å"The difference between the global tech companies and captives, captives do not do business of IT. They do IT for their own IT needs like JP Morgan Chase Bank and similar to that. So JP Morgan Chase falls into this category, large captive. . The small companies would be like 120-110 people who are like Travelocity. Travelocity is one of the brands, on ticketing and reservations. These companies in size are about 100 people or so. Basically they do not sell IT service, they do IT internally (Maity, 2011). In the local scene, there are large local and what we call micro-SME (Maity, 20 11). Micro-SMEs are those focusing on the Philippines market, purely like catering to the banks and others, and outsourcing markets. And then, there are few in the product and has an IT of their own. Manila and Cebu ranked No. and 9, respectively, in a study conducted by Tholons’ (2010) â€Å"Top 100 Cities in the World for Outsourcing† (Figure 3). At present, approximately 20% of the IT-BPO companies are located outside the main metropolitan areas of Manila and Cebu and this trend is expected to continue. The country is currently witnessing the impact of the IT-BPO industry on rural communities, as other cities outside Metro Manila emerge as new IT-BPO hubs or the Next Wave Cities (http://www. welive2care. com/). Included in the list of Tholons’ are the cities of Davao No. 69, Sta. Rosa (Laguna) No. 88, Iloilo No. 8 and Bacolod No. 100. The provincial government is also establishing the Negros First CyberPark, a mixed-used complex consisting of more than 12 ,000 square meters of space for BPO services at a three-story building to be built at the Paglaum Sports Complex, which will provide more than 1,000 jobs. (http://www. welive2care. com/). The Global ranking of Tholons for the country is reinforced by the qualifications of many Filipino IT professionals having international certifications credited and given by top software vendors and platforms such as the following: * Microsoft Certified Professionals (MCP) CISCO Certified Network Associates * Computer Associates Certification * SUN Certified Programmer for JAVA2 * IBM Certification * Network+ 1. 2. Profits of the Industry The profit of software development outsourcing industry is hard to determine (Maity, 2011). For the past years, the large global technology companies practice what they call â€Å"transfer pricing†. Out of 45,000 companies, around 20,000 to 25,000 companies do transfer pricing. This means that the company just pass the prices to its mother company thus, end ing up the year with technically zero profits. They are not for profit anyway, they are suppose to cater to the mother companys needs (Maity, 2011). But still, if you look at the profit and loss, its in profits. The average revenue of outsourcing roughly is in the range of $17,000 per year. In reality, thats not a sustainable weight because from our understanding if someone offers global outsourcing work, even to break even, probably the cost is roughly about $15, meaning, $15 is the equivalent if you pay $15/hr times 150 hours a month, times twelve months, thats only $27,0000. After which, management cost to the share of facilities and utilities and other costs are to be added on it which makes transfer pricing cheaper. Market pricing at 20-25% or the average market rate should be $36,000 to $45,000. The average profitability of the company is probably somewhere between 20-25% (Maity, 2011). The Software and ITO accounts for 8% of Philippines’ OO revenue (Figure _ and has a cumulative average growth rate (CAGR) of 33% (Figure )according to Business Processing Association Philippines (BPA/P). The information technology – business process outsourcing (IT-BPO) industry in the Philippines is growing by about 25% a year. The investors see the country as the next â€Å"Asian Dragon, if this growth is sustained (Uy, 2011). Many of the world’s largest companies operate the biggest services centers in the Philippines, which is why the IT-BPO industry continues to grow. As of last year, the industry employed about 525,000 people and had generated more than US$9. 1 billion in export revenues. From less than US$100 million in total revenues in 2001, the Philippines increased IT-BPO and GIC revenues to $3. billion in 2006, effectively doubling revenue every year. This high rate of growth has persisted even as the industry has grown beyond its initially small base. Between 2004 and 2006, the industry grew 49% per year. As a result of this growth, the Philippines is the acknowledge global leader in voice IT-BPO and GIC, and it is number two in complex, non-voice services in a wide range of sectors and functions (http://www. welive2care. com/). At the end of 2008, there were a total of 618 BPO companies in the Philippines. The contact center sector represents 31 percent of the industry, with 191 companies. The contact center sector is consist of inbound and outbound voice operation services for sales, customer service and technical support, among others. Data transcription services (135 companies, 22%), and information technology services and software development (119 companies, 19%) were also well? represented. There were 81 companies offering back office services (sometimes referred to as knowledge process outsourcing or KPO), which refers to services related to finance, accounting and human resource administration, representing a 13 percent share. From only around 100,000 full? time employees in 2004, the BPO industry expanded rapidly to nearly 372,000 employees at the end of 2008. The bulk of BPO jobs are in the contact center sector, which employed around 227,000 people in 2008. The second largest sector in terms of employment in 2008 was the back office/KPO sector with nearly 69,000 employees. Total BPO employment grew by 24 percent between 2007 and 2008, whereas total employment in the country grew by only 1. 6 percent during the same period. Source: BPAP From the data above and in terms of revenues, the BPO industry has also shown resiliency and steady growth amid the recent financial crisis. It is estimated that the industry generated around US$6 billion in export revenues in 2008 from around only US$1. 5 billion in 2004. Contact centers had the biggest impact, bringing in S$4. 1 billion, while back office services generated US$827 million in revenue. Preliminary industry estimates further indicate that revenues grew by 20 percent in 2009. 1. 3. Industry Requirements According to Maity (2011), the industry has different needs for different kinds. When it comes to hiring needs, the big ones have 100 per year, but the small ones needs only 10 or so per year. The college output and quality output improvement is a concern of the bigger ones. The cost for the larger companies is higher, it still survive, and will restrict its operational growth. Global branding, trade show etc, are mostly for the smaller ones. Micro-SMEs (as termed by PSIA) have an average of 13 heads per company. Thus, in terms of things like needs, global branding and all is needed for the smaller companies. The big ones dont care because they dont sell, they have their own arm to sell (Maity, 2011). Local companies are more the ones more interested in IT innovation and trade group, but foreign companies does seem to care. Funding is not a major requirement for the SME sector except for those who are into product and those services who wants to try to grow (Maity, 2011). Certifications and all like CMMI are only needed by the big ones (Maity, 2011). The small ones do not really see much benefit on these certifications and would only incur additional cost for them. Business collaboration, like pooling up resources, bidding together and global business partnering appeal to the interest of some small to medium sales companies (Maity, 2011). Management development, capability, project management, financial management, marketing, offshore client management, software development thats primarily SME (Maity, 2011). The rest have already enough management capability on that (Maity, 2011). Furthermore, information on global trends and finding out whats in demand and not, is also a requirement of the industry. The Philippines is in a good position to supply emerging demand for mobile applications and Cloud Computing. It is among the leaders in developing programs for mobile communications and similar technologies where demand is projected to explode as the number of users and the primacy of this type of communication increases worldwide. Source: BOI 2010 From the figures above, Investors and businessmen who are looking for more bang for their buck will find the Philippines as a necessary stop for their business operations with labor cost that is competitive and the quality of work which is unassailable.