Business Week recently unveiled sponsored benchmark of 2008 IT competitiveness Index, where the Philippines ranked higher than most of its counterparts such India, China, Vietnam, Indonesia and Russia. Suffice to say, Philippines has emerged as one of the major players in the global outsourcing industry specifically on the strength of the following indicators:

• Overall business environment: 0.10
• IT infrastructure: 0.20
• Human capital: 0.20
• Legal environment: 0.10
• R&D environment: 0.25
• Support for IT industry development: 0.15

With a score of 29.8, which is way below the score of this year’s still most competitive country, the United States with 74.6, the Philippines has so much catching up to do. However, no matter the ranking, the country is taking the proverbial baby steps towards the right direction, as the information technology—particularly in software development—and communication are some of the key areas where Philippines can compete with other global players.

Let’s see how the country fares in some of the criteria used by the magazine’s Economist Intelligence Unit.

Overall business environment

The country posted a very positive 7.5% GDP growth in 2007, and if not for the recent challenges in the global financial market, the country could have posted at least 5.5% growth in the economy; the Philippine economy has been growing by a positive 5% since 2001. From a low of $1,400 purchasing power parity at the start of the decade, the Philippines enjoys some $3,400 PPP as of 2007.

IT Infrastructure

Thanks to increasing demand from businesses and consumers, local telcos have aggressively pursued broadband development in the past two years. Some $800 million have been spent so far by the country’s leading telcos on improving the infrastructure, which also rides on the popularity of mobile communication in the country. Mobile use enjoys an overall subscriber base of 67% of the population.

Human Capital

The US-based consulting firm, Meta Group ranks the Philippines as the top player in knowledge-based jobs and workers worldwide. The country boasts of a huge army of software engineers, content developers, creative designers, and professionals in accounting and finance, legal, and health care. The Philippines’ emphasis on English as the official mode of instruction is finally paying off, as the Philippines has the third largest English-speaking population.

Support for IT Developments

The government is one of the biggest supporters of the IT industry, thanks to the possibilities that it can provide in creating jobs and making the country globally competitive in business process outsourcing. Last year, the government unveiled regional ITC centers outside Metro Manila, allowing further access to a vast talent pool and tax breaks for businesses that set up offices in assigned economic zones.

The Philippines shows so much promise in offshoring that even India-headquartered outsourcing companies, such as Tata Consulting and Infosys have opened offices in Manila. The local association of outsourcing businesses aims to increase its workforce size to one million and earn revenues of up to US$13 billion by 2010.

When it comes to the outsourcing industry in the Philippines, the first thing—if not the only—that comes to mind is the contact center sector. With nearly half a million Filipinos employed, the call center industry is so far the brightest sector in the Philippine economy.

Beyond contact centers, the Philippines is also making waves in IT, particularly software development. In recent years, the tech sector has also embraced a more robust IT consulting, which includes implementation, deployment, and administration of IT systems.

Analysts project that the total size of the Philippines’ ICT sector will increase from US$1.2 billion in 2005 to US$2.3 billion by the end of the decade. The Philippine government recently unveiled a five-year program, which it hopes to generate up to US$12.8 billion, from the combined contact center and IT services sectors. Out of the projected worth, it is not known how much software development will contribute. But with satellite development centers for leading technology firms opening on these shores, it is safe to say that the application development outsourcing industry is on a growth path.

Taking advantage of the large number of college-educated workforce, engineers, and application developers all over the country, the government has opened regional centers to provide low-cost labor to firms based in Europe, North America and Australasia. The tech sector eyes the financial services industry; locally, SMEs will spur the growth in IT.

There are a number of challenges, though, that the tech sector faces. For one, the local market is not yet ready to sustain growth in the IT industry due to lack of funds and business models that do not fully integrate automation, analysts say. Moreover, competition from the rest of the region poses a challenge to projected growth. The Philippines is fourth, behind India, China and Malaysia, in attracting offshore outsourcing deals. Political upheavals and lack in infrastructure development hinder further growth.

Junior and middle management still need to keep up with emerging practices in process methodologies and management practices. According to a McKinsey Group report, The Philippines’ Offshoring Opportunity (2005):

“… for all its potential, the Philippines faces enormous challenges in achieving this goal. MGI research shows that, although it boasts widespread English language skills, very low costs, and promising human resource capabilities, it lags behind India and many other potential offshoring locations on several of the key criteria companies examine when choosing an offshoring location. These include risk, infrastructure, the availability of vendors, and the supply of middle managers who are key to establishing large offshore operations quickly.

If the Philippines is to capitalize on the opportunities that are undoubtedly there for the taking, the government, together with the private sector, must work to strengthen the perceived attractiveness and reality of offshoring to the Philippines.”

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Offshore outsourcing is a brilliant business strategy for many businesses. Gartner analysts predict that offshore outsourcing will rise by 8.9% in 2008, and the trend will continue on to 2009. However, it is not (yet) a perfect solution to various business issues and requirements. Before engaging the services of vendors, whether by offshore or onshore outsourcing, it is important to know that outsourcing has its own sets of issues.

The bright side of the debate is that if a business understands the issues surrounding outsourcing, these “cons” can easily be turned into “pros” that will add up to profitability and result in better quality of products and services. Below are some of the risks that you must understand about outsourcing:

• You are putting parts of your business in someone else’s hands. Realize that you are inviting a third party into your own operations. Business matters that used to be kept within your company’s walls are being laid open to the scrutiny of the vendor, or as some say, consultant. While trust must be established between the company and the vendor, it is absolutely necessary to form security measures from contracts to security audits. And be hard-headed in the implementation of these contracts. In most security breaches, the weakest points are not the systems put in place to prevent data leaks, but humans, the staff themselves, who fail to understand the enormity of keeping corporate information secure.

• Business experts and visionaries are still a weak spot among outsourcing destination. Offshore outsourcing vendors can provide highly skilled workers who can perform volume tasks. However, management is often a weak spot among vendors. This means the lack of familiarity or knowledge of established processes by your company, lack of enough knowledge about your business or industry. In cases like these, it is important to know the people who will lead your outsourcing team. In many situations, middle- and junior managers receive months-long trainings on-shore before getting their feet wet with actual project delivery.

• Unfavorable business conditions in offshore destinations include economic and political factors. If you think that you are giving away control of parts of your businesses to companies located outside your country, consider how much less control you will have if you factor in the political and economic upheavals in that country.  Any upheavals at all poses risks of operational disruptions. You must make sure that there are business continuity measures put in place in case it is business unusual offshore.

• Businesses only consider outsourcing in terms of cost-savings instead of value to the company. This weakness happens on both ends of the outsourcing spectrum. Both business and vendor only see outsourcing as a way to cut costs instead of adding value to the company’s product, services, customer relationship, among other things. Instead of concentrating on the outsourcing relationship in terms of money savings alone, it is important to add long-term product or service innovation and process improvement in the mix. The money saved today can be reinvested into bigger endeavors tomorrow.