Outsourced Operations Dodge Philippine Turmoil

By Maria Trombly | Securities Industry News | March 13, 2006

The recent state of emergency in the Philippines did not affect the Wall Street firms with operations in the island nation, including Morgan Stanley, JP Morgan Chase & Co. and Merrill Lynch & Co. But the securities industry's interest in the country as an outsourcing destination may decline slightly as a result.

On Feb. 24, Philippine president Gloria Macapagal Arroyo declared a state of emergency to counter what she said was an alliance of communist rebels and "military adventurists" trying to topple her administration. After extending the initial declaration, she lifted the emergency on March 3.

American Data Exchange Corp. (Adec), an outsourcing vendor with about 3,000 employees in the Philippines, where it has operated since 1996, said its operations were unaffected. The privately held, Rowlett, Texas-based company says it gets about 20 percent of its business from U.S. brokerage companies.

Adec president and CEO James Donovan believes the political instability isn't likely to affect outsourcing prospects. "Perhaps the country isn't run very well," he says. "But that doesn't mean that business isn't run very well." The political situation is a concern, he adds, but not a serious problem.

Other observers of the market are a bit more worried. "Short-term business impact will be business contracts suspended or cancelled in light of the negative sentiment," says a manager, who requested anonymity, from the market research firm XMG Asia Pacific, a unit of XMG of Victoria, British Columbia. Outsourcing agreements will bear the brunt of this, but barring extreme political unrest, the situation should stabilize within a year, he says.

In fact, the Philippines will continue to grow as one of the top IT offshoring destinations, says the manager. The country's popularity has increased as many companies look beyond India to reduce costs and locate additional skills and language expertise. For example, a large portion of the Philippines population, whose native language is Tagalog, speaks American-accented English, which makes the country especially attractive for U.S. companies' call centers. Other functions have been outsourced there: Adec offers financing, accounting and bookkeeping, administration and human resources functions.

Matt Sullivan, a practice leader for the risk management and regulatory compliance practice of Rosemont, Ill. outsourcing firm Kanbay International, says that the recent crisis sends a cautionary message. "As a result of this [political turmoil]," Sullivan says, "people will sit up and take notice that there is a risk of doing business there."

Wall Street firms are acutely aware of geopolitical risks in outsourcing, which leads them to diversify among multiple locations--which will continue to favor the Philippines, among other nations. "There will be more processing done in the Philippines," says Sullivan. "It's an emerging trend."

Wendy Yu contributed to this report.