Thursday, 06 August 2015 12:48
As stated last week, any business process outsourcing (BPO) conference in the Philippines is eventually reduced to a discussion on the middle management skills gap. The consensus is that there is a big hole in the workforce; there are not enough middle managers to fill the necessary decisions.At the broadest level, there are two possible causes for this gap. First is the Philippine Problem: That there is some fundamental ‘weakness’ in the Filipino employment market which is preventing these middle managers from emerging. Second is the BPO Problem: That there is some fundamental ‘weakness’ in the BPO industry which is preventing these middle managers from emerging.
I argue ‘prevent from emerging’ as there is one indisputable fact – that there are a LOT of Filipinos. By various estimates there are around 100 m, the average age is around 20 and workforce participation is probably only around 40%.
Therefore, there is no lack of human beings with the potential to be fantastic middle managers. There must be millions with the potential.
In this second article, I am going to argue that it is a BPO industry problem.
Price-Driven Business Model
Let’s talk about the commodity-driven BPO business model and its impact on the workforce.
Commodity-Driven BPO Model
In October 2013 at the IBPAP conference at the Makati Shangri-la, there was a senior delegation of BPO executives from India.
One got up and gave a keynote speech, the essence of which was that if the Philippines wants to keep growing as a BPO centre, it has to change its business model. Instead of charging for people, it has to charge only for units of output. Furthermore, those units of output have to be reduced down to the smallest possible chunks, and then sold for the lowest possible price.
For example, instead of providing an accounts payable headcount, a BPO should sell a unit of production such as ‘invoice processed’… or better still… ‘line item processed’.
He argued passionately that the Filipino industry needed to ‘commoditize’ its service offerings.
In a future blog, I will argue that this is a complete load of rubbish and that, if this is the position of the Indian BPO industry, then its global leadership of the industry is at risk of fading.
However, the conference sucked it up and thought he was terrific.
That to one side, it has to be noted that if you are selling ‘units of production’… you are not selling people. And if you are not selling people, then your senior management team is not focused on them. In such a model, people become a ‘resource’, a completely dehumanised line item on a spreadsheet – where the imperative is to drive any production unit's input costs down over time.
This is the prevailing model of the BPO industry.
A Logan’s Run Employment Market
Flat Planet has developed the above model that explains our view on how the BPO industry works.
The key is the intersection between productivity (RHS) and wage / wage expectations (LHS).
It is also important to note wage pressure. We suggest that after about 5 years or so in the workforce, many young Filipinos find themselves in the family way and come under domestic pressure to earn more income.
As seen earlier, units of productivity are simple units. They might be handling an inbound phone call, processing a line item off an invoice or managing a certain number of web chat sessions against certain simple outcomes.
A graduate is entry level. They are not that productive, but are also low cost. However, a graduate has huge potential. Note the productivity curve accelerates ahead of wages. This is because wages remain low while proficiency at performing the task accelerates.
However, the curve reverts after about three years of experience. Remember, these tasks are quite simple and repetitive, meaning that after a couple of years a worker has reached the top of the curve. It is very difficult to see any meaningful performance improvement once you have completely mastered a task.
From this point (about 3-4 years’ experience) pressure will slowly build. Either the employer has to grant on-going wage rises despite little or no productivity improvements, or the worker just has to knuckle under and accept they have reached the end of the wage curve and either join the ranks of the working poor or start to look for another job.
However, there is another dynamic at play in the high-value zone.
The BPO actually receives a significant upside when it takes on a graduate and rides them up the productivity curve over their first 3 years. For most of this time, the productivity is significantly higher than the wages, meaning the cost per unit of output is reduced.
Therefore, there is considerable incentive for the BPO to release its experienced workers back into the market and replace them with fresh graduates. Any science fiction buffs might remember a book called Logan's Run, a dystopian future where people are killed at age thirty to prevent over-population and conserve resources.
Of course, there is a relationship between the complexity of the task at hand, and the time it takes to reach the flip point. However, as discussed earlier, the BPO industry is focused on simplifying its production units as much as possible, thereby pushing the flip point lower and lower.
While it is true that a small number of staff would remain for a few years as team leaders, the competitive structures of the BPO business model mandates that most staff must be ‘let go’ after only a few short years.
If you believe, as I do, that middle managers require solid experience, some kind of post-graduate study, and time to mature as individuals, then companies that are full of 18-22 year olds are unlikely to produce that many.
Therefore, if the BPO industry wants Filipino middle managers, it has to look to recruit from outside and bring them in.... which is what it does.
The Filipino BPO industry is an industry that is, on balance, run by foreigners. It is run by Americans, Australians, Indians and some Europeans. Even the largest Filipino-owned firm, SPI Global (20% owned by PLDT, 80% by private equity) is run by the very suave Indian executive Maulik Parekh (no criticism here, SPI is a world-beater).
There are some mid-tier Filipino-owned and managed BPOs, especially in the provinces.
This means that when a large group of BPO leaders gathers, many in the room are foreigners. Within such a group it becomes easy to buy into the idea that the BPO industry is ‘saving’ the Philippines by creating a new middle class and helping eradicate poverty.
It is possible that the BPO industry is overplaying its hand with this attitude, especially when it comes to middle managers.
Entry Level Talent Vacuum
The Philippines has a huge population bubble in the young population. The population has increased exponentially from the end of World War 2.
At the end of World War 2 the population was just under 20 million. Today it is probably well over 100 million. More than 10 million have been added just since 2007. (Greater Manila has grown from around 6m in 1980 to just over 20m today.)
As a result, there is a very significant oversupply of young people looking for entry level jobs – and the BPO industry has been only too keen to dig into this surplus.
It should be said upfront that the BPO industry has achieved some fantastic outcomes for the Philippines, first by bringing opportunities to all these young people (up to around 1 million workers in the BPO industry today); second by offsetting somewhat the need for other workers to join the Overseas Foreign Worker (OFW) industry (maids, construction workers, nurses, engineers and others working in other nations such as Saudi Arabia and sending their money home).
The BPO industry has been fantastic for the Filipino nation and economy.
However, the Philippines has always had something of a middle class. Maybe relatively small by Western-standards at only a few percent of the total population, it is still millions strong.
The Philippines has also a number of very strong indigenous multi-billion-dollar corporations such as Ayala, San Miguel and others.
So, if you are a young, well-educated, 30-year-old Filipino with leadership potential looking for a chance to prove yourself in middle management, where do you go? Do you go to a foreign company or a proudly Filipino company?
Note that many Filipino companies pay globally competitive salaries, so much so that Filipino telco Globe has successfully headhunted at least one Australian executive away from Telstra.
The BPO industry needs to be mindful that when it comes to competent and ambitious young middle managers, it is no longer doing anyone a favor. Highly educated and ambitious young professionals are in high demand everywhere and competition is tough.
Head Office Syndrome
Head office is also a potential issue. Imagine being a bright young professional and you end up working for a company that has its head office overseas. Imagine the only person you deal with is an accountant who pushes you to keep the pressure on costs, but you get no input at all into the direction of the company, the marketing and so on.
The BPO industry can be very rigid at a cultural level.
For example, many firms have a strict English only policy throughout the entire firm – even in the lunch room staff must talk in English. Remember, Filipinos can speak English, but their native language is Tagalog (or Visayan or one of the other local languages depending on where you are).
You might say who cares, but think about it. This policy is only the tip of the iceberg. Within many BPOs there is a sense that the foreign culture (Australian, American, Indian, English….) is more desirable than Filipino Culture.
If you link in this idea of cultural desirability into other observations around poverty, corruption and the bad traffic, then some BPOs can extend the idea of cultural desirability into the idea of cultural superiority.
It is a genuine trap that many firms can fall into, and it is very unattractive to proud young professional middle class Filipinos.
Worst Case Perspective on the BPO Industry
So let’s pull these threads together and start to think about the worst possible perspective you could build around the BPO industry.
If you take this ultra-bleak picture, it is little wonder the BPO industry perceives that there is a skills gap!
A Dose of Reality
Of course, the above view is overly bleak. The BPO industry does do a lot of good for the Philippines.
At the human level, it does give many young people the opportunity to get a start in life that they otherwise would not have.
And also, over time, the value proposition will have to change as higher-value jobs start to accrete in the Philippines (this is why I think the Indian commodity model is so wrong-headed).
Also, the BPO industry could argue that it can hardly be held accountable for many of the other issues that are so persistent in the wider Filipino community – not least the general lack of opportunity.
Finally, the BPO industry is bringing in close to US$20b in foreign earnings that underpins the massive investment boom that is driving the profits of all those indigenous corporations that it competes with for middle management talent – so those firms can hardly begrudge a bit of poaching of their middle managers.
For all the reasons listed above, there is a strong case that the BPO industry itself has to take responsibility for solving the middle management skills gap.
Next week, I will talk about how some members of the BPO community are already resolving the Middle Management skills gap with great success, and in doing so I hope I can impart some really good tips that can help you also develop your own middle management team.
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