Project No. 01.2467.7-001.

00 Small and Medium Enterprise Development for Sustainable Employment Program (SMEDSEP)

COOPERATION
Republic of the Philippines

Federal Republic of Germany

Subsector Analysis of the Information Technology Industry in Cebu

November 2004

Prepared/Written by: Marian Boquiren, SDCAsia, Inc. Consultant mb@sdcasia.ph | www.sdcasia.ph Published by: The Small and Medium Enterprise Development for Sustainable Employment Program (SMEDSEP) A DTI-TESDA-GTZ Program 10th Floor, German Development Center, PDCP Bank Centre Building, V.A. Rufino cor. L.P. Leviste Streets, Salcedo Village, Makati City www.smedsep.ph | smedsep@mozcom.com Ms. Martina Vahlhaus, Program Manager Printed on: November 2004 - Makati City, Philippines

Subsector Analysis of the Information Technology Industry in Cebu

November 2004

FOREWORD
The Philippines' recognition of Information Technology as a significant economic driver is very much embedded in such state policies as the Medium-Term Philippine Development Plan (MTPDP), the Department of Trade and Industry's (DTI) revenue streams, and the Technical Education and Skills Development Authority's (TESDA) priority sectors, among others. As such, the Subsector Analysis of the Information Technology Industry in Cebu, an outcome of the Small and Medium Enterprise Development for Sustainable Employment Program (SMEDSEP)*, is definitely a welcome addition to the publications on the current situation of the sector nationwide and/or in specific IT hubs. The study analyses the Information Technology (IT) sector in the province of Cebu in the Visayas including the software, IT-enabled services, internet caf, and hardware sub sectors focusing on the industry structure, value chains, constraints for development and possible interventions within the Program. With the findings of the study on hand, planners and managers of development, whether they come from the government, the private sector and/or the Program will now be in a much better position to identify and eventually implement, together with the IT sector players in Cebu, the relevant interventions that would contribute to enhancing the sector's competitiveness and capacity for employment generation. The Program would like to acknowledge the invaluable assistance extended by the Strategic Development Cooperation Asia (SDCAsia) consultants, in particular, Ms. Marian Boquiren, in the design, conduct and documentation of the sub-sector study that saw its completion stage in the production of this report. Acknowledgment is also due to the different IT players in Cebu representing the software, ITenabled services, internet cafs, and hardware sub-sectors, who unselfishly served as key informants and/or participants in the various focus group discussions and validation workshops conducted as part of the Program's sub-sector assessment initiative. Finally, the dedicated and hard-working Program counterparts in the regional and provincial DTI and TESDA offices are likewise acknowledged for their excellent cooperation and support. To each of these ones go our deep appreciation and thanks. SMEDSEP November 2004

*SMEDSEP is a technical cooperation program between the Republic of the Philippines and the Federal Republic of Germany being implemented jointly by the German Technical Cooperation (GTZ) for the German side and the Department of Trade and Industry (DTI) and the Technical Education and Skills Development Authority (TESDA) for the Philippine side. 3

The Philippines

Cebu

CONTENTS
FOREWORD ......................................................................................................................................... 3 ACRONYMS ......................................................................................................................................... 6 EXECUTIVE SUMMARY ....................................................................................................................... 9
A. THE CEBU IT SECTOR .............................................................................................................................................. 9 B. POLICY AND RELATED ISSUES ............................................................................................................................. 10 C. SOFTWARE SUBSECTOR ....................................................................................................................................... 10 D. IT-ENABLED SERVICES ........................................................................................................................................... 12 E. INTERNET CAFS ..................................................................................................................................................... 14 F. HARDWARE ............................................................................................................................................................... 15

CHAPTER 1: INTRODUCTION ............................................................................................................ 16

SECTION 1: OBJECTIVES OF THE STUDY ................................................................................................................. 16 SECTION 2: SCOPE AND METHODOLOGY ................................................................................................................ 16

CHAPTER 2: THE CEBU I.T. SECTOR ................................................................................................ 19

SECTION 1: SECTOR OVERVIEW ............................................................................................................................... 19 SECTION 2: INTERNATIONAL COMPETITORS .......................................................................................................... 22 SECTION 3: HUMAN RESOURCES .............................................................................................................................. 23 SECTION 4: INFRASTRUCTURE .................................................................................................................................. 27 SECTION 5: POLICY AND OTHER RELATED ISSUES ................................................................................................ 28

CHAPTER 3: THE SOFTWARE SUB-SECTOR .................................................................................... 33

SECTION 1: INDUSTRY STRUCTURE .......................................................................................................................... 33 SECTION 2: VALUE CHAIN .......................................................................................................................................... 37 SECTION 3: HUMAN RESOURCES .............................................................................................................................. 40 SECTION 4: CONSTRAINTS ........................................................................................................................................ 43 SECTION 5: PROPOSED BDS/TVET INTERVENTIONS .............................................................................................. 46 SECTION 6: PRIORITIZATION OF INTERVENTIONS NEEDED .................................................................................... 49

CHAPTER 4: THE IT-ENABLED SERVICES SUBSECTOR .................................................................. 51

SECTION 1: INDUSTRY STRUCTURE .......................................................................................................................... 51 SECTION 2: VALUE CHAIN .......................................................................................................................................... 55 SECTION 3: HUMAN RESOURCES .............................................................................................................................. 58 SECTION 4: CONSTRAINTS ........................................................................................................................................ 60 SECTION 5: PROPOSED BDS / TVET INTERVENTIONS ............................................................................................ 61 SECTION 6: PRIORITIZATION OF INTERVENTIONS NEEDED .................................................................................... 62

CHAPTER 5: INTERNET CAFE ............................................................................................................ 63

SECTION 1: INDUSTRY STRUCTURE .......................................................................................................................... 63 SECTION 2: VALUE CHAIN .......................................................................................................................................... 65 SECTION 3: HUMAN RESOURCES .............................................................................................................................. 66 SECTION 4: CONSTRAINTS ........................................................................................................................................ 66 SECTION 5: PROPOSED BDS/TVET INTERVENTIONS .............................................................................................. 68 SECTION 6: PRIORITIZATION OF INTERVENTIONS NEEDED .................................................................................... 69

CHAPTER 6: THE HARDWARE SUBSECTOR ..................................................................................... 70

SECTION 1: INDUSTRY STRUCTURE .......................................................................................................................... 70 SECTION 2: VALUE CHAIN .......................................................................................................................................... 72 SECTION 3: HUMAN RESOURCES .............................................................................................................................. 73 SECTION 4: CONSTRAINTS AND POTENTIAL INTERVENTIONS ............................................................................. 73 SECTION 5: PRIORITIZATION OF INTERVENTIONS NEEDED .................................................................................... 62

ANNEXES ............................................................................................................................................ 75
ANNEX A: IT SERVICES CATEGORIES ....................................................................................................................... 76 ANNEX B: BUSINESS PROCESS OUTSOURCING ....................................................................................................... 77 ANNEX C: CONTACT CENTER: TECHNOLOGICAL SYSTEMS ................................................................................ 78 ANNEX D: MEDICAL TRANSCRIPTION PROCESS .................................................................................................... 79 ANNEX E: BPO DESTINATION CRITICAL FACTORS ................................................................................................. 80 ANNEX F: KEY INFORMANTS ...................................................................................................................................... 81

REFERENCES ..................................................................................................................................... 82

ACRONYMS
ASP BSCS BSIM BSIT BAS BOI BDS BPO BPP CMM CMMI CMMS CEDF-IT CIPC CPVDC CITE CITEM CVISN CCNA CCNP CHED CPQI COPC DDTVET DOST DTQ ECCP EML FGD GOIT HR HTML ICT ITECC ITAP ITFP ITES Application Service Provider Bachelor of Science in Computer Science Bachelor of Science in Information Management Bachelor of Science in Information Technology Broadband Access Service Board of Investment Business Development Services Business Process Outsourcing Business Process Philippines Capability Maturity Model Capability Maturity Model Integrated Capability Maturity Model for Software Cebu Educational Development Foundation for Information Technology Cebu Investment Promotions Center Cebu Property Ventures and Development Corporation Center for Industrial and Technological Enterprise Center for International Trade Expositions and Missions Central Visayas Information Sharing Network Cisco Certified Network Associate Cisco Certified Network Professional Commission on Higher Education Continuous Productivity and Quality Improvement Customer Outsourcing Performance Center Demand-Driven Technical and Vocational Education and Training Department of Science and Technology Direct-to-Quality European Chamber of Commerce of the Philippines Extensible Markup Language Focus Group Discussions Government Organization for Information Technology Human Resource Hyper Text Markup Language Information and Communication Technology Information Technology and Electronic Commerce Council Information Technology Association of the Philippines Information Technology Foundation of the Philippines Information Technology-Enabled Services

IPO ISO JITSE MTA MOA MNC NCCFOO NICP OBM PAQTVET PC PCCI PEZA PREDGIN PSE PSIS RDC SMEDSEP SME SQL TVET TESDA UML USAID VC VCTIIT VOIP

Initial Public Offering International Organization for Standardization Japanese IT Standards Exam Medical Transcription Academy Inc. Memorandum of Agreement Multi-National Company National Computer Center Field Operations Office National ICT Certification Program Own Brand Manufacturing Philippine-Australia Quality Technology Vocational Education and Training Personal Computer Philippine Chamber of Commerce and Industry Philippine Economic Zone Authority Philippine Research Education and Government Information Network Philippine Stock Exchange Philippine Summit on the Information Society Regional Development Council Small Medium Enterprise Development for Sustainable Employment Program Small Medium Enterprises Structured Query Language Technical and Vocational Education and Training Technical Education and Skills Development Authority Unified Modeling Language United States Agency for International Development Venture Capital Virtual Center for Technology Innovation in Information Technology Voice-Over-Internet Protocol

EXECUTIVE SUMMARY
A. THE CEBU IT SECTOR
Cebu was declared as an Information Technology (IT) hub in December last year. It is currently being positioned to become the country's IT hub outside of Manila particularly for software and e-services. The following are the 4 dominant subsectors: a) software; b) IT-enabled services; c) internet caf; and d) hardware. To date, number of Filipino-owned IT companies is less than 100. The internet caf subsector has the highest population estimated at 500 enterprises consisting primarily of micro enterprises. There is limited synergy between the different subsectors except for the hardware industry, which provides the computer and other peripherals to Filipino-owned companies. The software companies are sometimes tapped by hardware companies to set-up the systems for their clients.
ESTIMATED NUMBER OF IT COMPANIES IN CEBU Industry Group Software IT-enabled services Hardware Internet Cafe Filipino Ow ned Companies 25 5 to 10 30 500 Multinationals / Joint Venture 6 15 to 20 2 Informal Businesses 50+ Warp zone outsourcers 100+

To date, statistics on employment of IT companies remain hazy. Basic problem is the lack of a comprehensive list of IT companies in Cebu. 53 companies covered in the Cebu Educational Development Foundation for Information Technology (CEDF-IT) survey reported employing a total 842 workers. 70% of the 842 are employed in 10 companies. The range in number of employees is wide --- from 2 to as many as 238 or an average of 16 per company. Direct employment of Cebu IT locators in the Philippine Economic Zone Authority (PEZA) is at 950 as of July 2004.
DIRECT EMPLOYMENT OF CEBU IT LOCATORS IN PEZA Period January to December 2003 January to July 2004 Average Direct Employment 307 950 Source: PEZA, 2004

A 19% increase in IT manpower is projected over the next two years --- with the 10 known biggest employers planning to increase by an average of 18%, and all the others by some 22%. Main problem of the industry is the lack or shrinking pool of qualified manpower. Surveys including the recently conducted human resource (HR) survey by CEDF-IT indicate that number of graduates of IT and allied courses is on an increasing trend. However, the problem that cuts across all subsectors is that many of the graduates do not have the necessary qualifications required by the industry.

EMPLOYMENT FORECAST IN CEBU IT SECTOR 2003 Categories B ase Software Development Engineering Design Services Other e-Services 1,000 800 8,000 20% 1,200 960 9,600 30% 1,560 1,248 12,480 40% 2,184 1,747 17,472 50% 3,276 2,621 26,208 50% 4,914 3,931 39,312 2004 2005 2006 2007 2008

Source: CEDF-IT ICT HR Survey

B. POLICY AND RELATED ISSUES

The regulatory environment does impact the ability of local entrepreneurs to establish companies and compete in the IT market. Likewise, policies also affect the region's ability to attract investors. Rated by the highest number of participants during the validation workshop to be the most important intervention is the review and enhancement of policies related to accessing capital. Among the policy measures being suggested to improve access to capital are the following: 1. Improving the listing conditions of the Philippine Stock Exchange (PSE) and extending trading hours. 2. Strict implementation of the Initial Public Offering (IPO) requirement for Board of Investment (BOI) registered IT initiatives. 3. Improving the venture capital (VC) and angel environment by developing an incubator network and providing incentives for VCs, such as Regional Headquarters incentives or government counterpart funds. 4. Create a special window for IT companies in government financial institutions

POLICY AND RELATED ISSUES Menu of Proposed Interventions: Policy and Related Issues Improving access to capital via improved policy measures Attracting new capital: incentives for investors Intellectual property rights Data protection and network security vendor/supplier concern Validity and enforceability of electronic transactions Number of Votes 'Most Relevant' 7 2

C. SOFTWARE SUBSECTOR
Per DTI records, there are 25 registered Filipino-owned software companies and of which 16 are members of the recently formed software association. These companies are usually family-owned enterprises. Majority of the local software houses are micro and small-scale enterprises. The multinational companies (MNCs), mostly US/Japan subsidiaries, are primarily off-shore development centers for their parent companies.

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The freelance programmers usually operate individually and would have 2 to 3 long term clients (maintenance). There is a high level of informality in this particular level, since entry barriers are very weak, either by the technological side or by the investment requirements. Vertical linkages and trust relationships in the subsector are quite strong especially between client and software houses. However, horizontal linkages are almost non-existent. Local companies rarely work with freelance programmers. Likewise, it is very rare for a multinational to subcontract part of the work to a local company. Three of the Filipino owned companies are moving into own brand "productized services" (products that are sold as services). Products are concentrated on business solutions and information/application software systems. Majority of the Filipino owned companies and freelance entities are concentrating on offering software customization and installation services. Only 2 out of the 25 Filipino owned companies cater to the export market. These are also the same companies who have set-up offices in Metro Manila and have clients in key cities in Mindanao and the Visayas. The remaining 23 companies are serving mainly the Cebu market. Local companies generally generate clients through direct marketing and referral. Cebu has yet to strengthen its image in the international market. Current thrust of the government promotion program is to invite foreign software companies to set-up in the Philippines. Some initiatives have also been made in promoting Cebu-based software companies in the international market via trade fair participation and selling missions. Export marketing initiatives at the company level include the following: a) quarterly visits to their main export market to establish and consolidate their presence as well as generate new client; b) strategic alliance/joint venture arrangement with 1st and 2nd tier distributors; c) trade fair participation; and d) website promotion. Industry players and analysts believe that the best way for companies to establish their presence in the international market is to setup a marketing office in the target market itself. The following are the main constraints of the subsector: 1. High cost to implement and acquire internationally recognized process and quality certification such as the Capability Maturity Model (CMM) and International Organization for Standardization (ISO). 2. Lack of enabling environment for start-up companies --- nurturing of technology ideas into commercial successes 3. Lack of cooperation culture among companies/ potential for work sharing not fully developed 4. Lack of entrepreneurial and management skills 5. Lack of awareness in local market on use and benefits of ICT (Price vis--vis perceived values - low willingness to invest) 6. Need for onshore presence to facilitate marketing 7. Lack of export market info/product-market knowledge 8. Lack of properly and technically equipped software professionals 9. Low supply of higher-level managers, e.g. project managers 10.Difficulties to retain employees/ problems on poaching 11. High cost involved in getting professional certification 12.Lack of venture capital/ Lack of access to low-cost capital

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The following are the menu of proposed BDS/DDTVET interventions for the software sector:
SOFTWARE SUBSECTOR Menu of Proposed BDS/DDTVET Interventions Venture capital linkage services Market development services Subcontractors and suppliers accreditation system Competency-based skills training via technical schools and other training providers Enterprise-based training Organizational development Incubator facility/Research and Development (R&D) Facility Capability Maturity Model Integration (CMMI) certification BDS/DDTVET awareness campaign 5 3 14 Number of Votes 'Most Relevant' 3 8

Competency based skills training via technical schools was voted or selected by the highest number of participants during the Validation Workshop to be most relevant and responsive to their needs. This was followed by market development services, CMMI certification, TVET/BDS awareness campaign, and venture capital linkage services. Given that there are ongoing programs aimed at addressing the gaps in the TVET IT supply, further analysis would have to be made on specific intervention niches for the program. Possible areas of intervention would be on: a) stimulation and strengthening of demand and purchase of vocational training through focused marketing campaigns; b) product development and/or revitalization with a focus on matching market requirements and standards; and c) development of delivery, payment, and financial sustainability schemes.

D. IT-ENABLED SERVICES
IT-enabled services (ITES) involve a business modality that is entirely dependent on the Internet and other information technologies for conducting the business, but which only requires basic knowledge about information technology itself. In other words, employees have to know how to use computers, but need not have an in-depth understanding on how they work. The number of call centers operating in Cebu has grown from zero in September 2003 to nine as of June 2004. Almost all of the multinational call centers located in Manila have either set up or are already in the process of setting up shop in Cebu. Some of them have even bypassed Manila entirely and have established operations in Cebu directly. Multinationals and foreign-owned companies dominate the Cebu ITES industry. There are only about 5 to 10 registered Filipino owned companies. There are also quite a big number of freelance and informal enterprises doing some business process outsourcing work, multimedia design, animation, etc. To date, there are no data available on the informal sector and it is quite difficult to track them. The structure for ITES is characterized by the following models: a. Informal sector Small foreign company client. These are usually home-based operators who have set up a few workstations in their homes and discreetly processing payroll and some accounting functions for some small companies in Japan or doing some medical transcription for a clinic in the United States. They keep a low profile; maintain lean and mean operations with very minimal 12

overhead costs. To date, there are no statistical data about this group. They are not registered and they do not pay taxes. Business transactions are made directly with the foreign client. b. Multinationals/Foreign Companies Brokers/Marketing subsidiary/Parent Company. Players in the Cebu ITES are mainly multinationals/foreign-owned companies with majority in the contact center business. These companies either have their mother companies in the US or wherever they seek business and/or are operating several marketing offices. c. Filipino-owned registered companies Broker/Agent. It is estimated that there are about 5 Filipino owned companies in Cebu with all of them in the medical transcription business. 2 are in the medium scale while the rest are micro enterprises. For Filipino companies and new entrants, the cost of maintaining an independent network of offices is typically not an option. This has given birth to an alternative outsourcing model - the third party broker. These "eServices solution providers" typically establish relationships with multiple offshore providers, and then channel work to these firms as they acquire business. These solution providers tend to have a deep knowledge of the outsourcing business, as well as extensive business networks that they utilize to secure new contracts. This model represents the most common ways in which Filipino owned ITES companies in Cebu entered into their outsourcing relationship. d. Cebu-based Business Process Outsourcing (BPO) company client. This represents the purest form of outsourcing in that the contractual relationship is between the foreign client and the provider with no intervening offices or third party firms. The outsourcing costs of this model are generally lower. However, this only happens for small transactions (between an informal enterprise and small foreign company) and among established multinationals. This is not a viable model for new entrants into the outsourcing field because of the element of trust as well as the remoteness of the providers from the markets. Most US companies enter into their outsourcing relationships through a US-based company. The following are the constraints identified by the industry players particularly the contact centers and medical transcription companies: 1. Informal operations of a large number of players 2. Need for onshore presence to facilitate marketing 3. Lack of export market info/product-market knowledge 4. Shortage of English proficient workforce (both oral and written) 5. Only limited number of participants to training courses due to perceived high costs Participants during the validation workshop indicated that strengthening of current training programs and review/enhancement of school curricula are the priority interventions needed by the industry in the short and medium-term perspectives. Below is the menu of proposed interventions:
IT ENABLED SERVICES Menu of proposed BDS / DDTVET interventions Awareness campaign on BPO job opportunities Strengthening of current training program initiatives School Curriculum Review and Re-Alignment Market development BDS 6 6 Number of Votes 'Most Relevant'

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E. INTERNET CAFS
There are about 500 internet caf operators in Cebu and of which 240 are members of the Internet Caf Association of Cebu. It is estimated that there are about 300,000 internet caf users in Cebu. About 80% to 90% of the clientele are students. As such, many of the internet cafes are located near the schools. When Internet cafs first started sprouting in 1996, the business was very successful and lucrative. But now, with so many cafes in existence in Cebu, about three Internet cafs close down every month. Demographically, Cebu has more Internet cafes than any other city by density. Compared to Metro Manila, it is littered far more with cyber-cafes per 100 people. Fierce competition, however, is working against the internet caf business as the situation continues to bring prices down. Thus, the tension in the market is creating a culture of commercial anxiety as stores lining the citys boulevards and alleys are always on guard worried that customers might switch to the neighboring shop at the slightest price drop. This, in effect, is making customer loyalty an alien term in Cebu. Internet caf users are only loyal to the shop that offers the lowest price. Competition is primarily based on price and location. A typical internet caf would have 10 to 15 computers with one or two attendants. Majority of the internet cafes are micro scale. Similar to other micro enterprises, the owner handles most of the tasks and is assisted by one or two attendants. Many of the internet caf operators had no previous computer and enterprise management background. Daily gross income ranges from PhP 1,500 to 3,000. Many of the so-called neighbourhood Internet cafes are mainly game centers, where majority of the computers are not Internet-connected but dedicated to running games. Internet cafes near the schools also offer desktop services such as printing and scanning. On the side, they also sell pre-paid phone and Internet cards. Others have expanded into selling of food and school supplies. Other internet cafes are also into the assembly of hardware and computer maintenance services. A few have offered simple training courses in collaboration with the government. Main constraints of the industry are the following: 1. The need to upgrade management skills as well as operations system efficiency 2. Lack of product differentiation 3. Difficulties to move up vertically/value-added services 4. The need to build a wider client base 5. Unfair competition from unregistered internet caf lower overhead costs/no taxes 6. Lack of technical skills for maintenance and troubleshooting tasks, network installation high maintenance costs 7. High cost of components and licensed software/ online games The industry also sees the opportunity to increase their income if they would be allowed to offer voice over internet protocol (VOIP) based services.

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Product development was voted to be the most important intervention for the internet caf group. This was followed by market development services. Below is the menu of proposed BDS/DDTVET interventions:
Number of Votes 'Most Relevant' 1 1 5 2

Menu of Proposed BDS/DDTVET Interventions Organizational development Technical and entrepreneurial capability buildup Product development Market development

F. HARDWARE
Computer hardware comprises: data processing equipment (computers), peripherals and networking products. It must be noted here that manufacture, in the context of the Cebu computer hardware industry, refers primarily to the following: Assembly of computers with imported components by Filipino owned companies and freelance technicians/assemblers Manufacture of peripherals by MNCs

The personal computer (PC) segment primarily consists of the following: Multinational brands (Dell, Compaq, Toshiba, etc.) Branded assemblers (Filipino companies) Unbranded assemblers (Informal sector; micro shops) Surplus computers from Korea and Japan

PCs sold to local clients are mainly assembled locally. There are about 30 Filipino companies in Cebu who are engaged in the assembly of computers. Almost all of them have their own retail outlets. Components are sourced out mainly from Manila-based importers. Horizontal linkages between MNCs and Filipino assemblers and retailers are almost non-existent. Likewise, locators in the Asiatown IT Park source their computers outside of Cebu. Distributors of HP, Epson, Intel, and other similar products provide marketing support to retailers such as: a) collateral materials; b) promotional activities; c) incentives for every unit sold (e.g., Intel) which retailer-assembler can use for own promotional activities of his/her choice. From time to time, distributors also conduct marketing seminars. Among the Filipino-owned companies, the major problem faced is the low profit margins from PCs and peripherals. Given that prices are fairly standardized, the only way for companies to improve profit margins is to avoid waste and/or reduce costs. Towards this end, the following are the proposed interventions:
Number of Votes 'Most Relevant' 2

Menu of Proposed BDS/DDTVET Interventions Continuous productivity and quality improvement (CPQI) Technical and technological competence build-up

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CHAPTER 1: INTRODUCTION
SECTION 1: OBJECTIVES OF THE STUDY
The SMEDSEP Program is an integrated approach for the development of the private sector in the Philippines with a regional focus on the Visayas. The program comprises of four components namely: 1. SME Policy/Enabling Environment for SMEs 2. Business Development Services (BDS) for SMEs 3. Access to Financial Services for SMEs 4. Demand-driven training programs for the workforce Using the Subsector Business Service (SBS) approach to enterprise development, SME stakeholders of Cebu identified Information Technology (IT) as the pilot subsector based on the assessment that it has the highest potentials for income and employment generation. The next step is the subsector analysis in order to gain a greater understanding of the market players, their roles, and interrelationships in the IT sector. The objectives of the subsector analysis are to: Identify final sales markets and market segments Identify market channels and trends within the IT subsector Identify the primary players of the IT subsector, their roles, and interrelationships Create the IT subsector maps/value chain that describes the above Identify constraints of the subsector and opportunities for growth of the sector Identify business services/DDTVET interventions that can address the IT sector constraints

SECTION 2: SCOPE AND METHODOLOGY

A. SCOPE OF WORK
The report has been prepared in close consultation with key players, both public and private, involve in the IT sector in Cebu. The research is qualitative rather than quantitative.

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A mission was conducted by Katja Legien sometime in May 2004 during which parameters of the subsector study were defined. The scope of work covered in this study includes: 1. An overview of the IT sector 2. A snapshot profile of the 4 subsectors in terms of: Industry structure Value chain Human resources 3. Identification per subsector of the following: Constraints Current initiatives to address constraints Potential solutions 4. Recommendations on BDS/DDTVET interventions per subsector based on analysis of constraints Beyond the scope of SDCAsia's assignment is an analysis of the recommendations vis--vis supply of BDS and TVET in the market. Likewise, the report does not cover quantitative analysis of demand as well as identification of specific features and contents of recommended BDS and TVET products. Also, given the small sample size as identified and determined by the SMEDSEP program, the report makes no claims of statistical relevance and relied mainly on available secondary data, which is hazy at the moment given the infant status of the sector. Terms of Reference is presented in Annex F.

B. METHODOLOGY
1. Data gathering and validation were conducted via the following activities: a. Interview of key informants consisting of the following:
CATEGORIES Software Hardware IT enabled services Internet cafe Chamber Training providers Government agencies Infrastructure providers NO. 5 2 5 2 1 3 3 3

b. Focus group discussions per subsector Unfortunately, there were only 2 ITES companies who participated in the FGD while only 1 company attend the Hardware FGD.

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c. Secondary data research This involved the gathering and/or review of the following: 2. Data analysis Constraints and interventions were identified and further elaborated based on iterative and inductive analysis of responses during the interviews and focus group discussions primarily from the following perspectives: Context of interviewees and focus group discussion participants Third-party observations (e.g., chambers, IT park developer, training providers, government agencies) were important for suggesting important issues to explore and for substantiating the results of the company interviews Experiences of other competitor countries such as India, Thailand, Malaysia, and Vietnam Trends in key IT markets Past assessment studies of the Philippine IT Sector Past and on-going studies on the IT sector (Philippines and competitor countries, key markets for the Philippines) Newspaper articles/press releases

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CHAPTER 2: THE CEBU I.T. SECTOR

SECTION 1: SECTOR OVERVIEW
A. CEBU AS AN IT HUB
Cebu was declared as an Information Technology (IT) hub in December last year. It is currently being positioned to become the country's IT hub outside of Manila particularly for software and e-services. It boasts of having more than 200 foreign direct investors, 13 of which are engaged in the IT business. In the recently conducted Human Resource survey by the Cebu Educational Development Foundation for Information Technology (CEDF-IT), industry players cited the following advantages of Cebu:
Advantages of Cebu as Perceived by IT Players Perceived Advantages of Cebu Conducive overall business environment Availability of Human Resources Good IT Schools/Programs Good Economy Government Support % No. of Respondents 94% 87% 39% 28% 19%

Cebu's pool of IT talent and its modern technology infrastructure make it the second largest IT outsourcing destination in the country. However, during the recent months, lack of qualified manpower threatens the Cebu's outsourcing industry. According to Mr. Rene Almendras, president of cyberpark developer Cebu Property Ventures and Development Corporation, Cebu has lost potential investors to Cyberjaya in Malaysia because there are not qualified human resources in the region. Lease rates in Cyberjaya, a 7,000 acre IT zone, are far more expensive than in Cebu but IT multinationals chose it over Cebu because of the available pool of Malaysian manpower. Cebu also recognizes the need to lower hiring costs and living costs vis--vis other IT hubs in Southeast Asia (Singapore, Kuala Lumpur, Manila, Bangkok, Penang, Jakarta, Bandung, and Ho Chi Minh City).

B. DOMINANT SUBSECTORS
The following are the 4 dominant subsectors: a) software; b) IT-enabled services; c) internet caf; and d) hardware. To date, number of Filipino-owned IT and IT enabled companies outside of internet cafes is less than 100. The internet caf industry has the highest population estimated at 500 enterprises consisting primarily of micro enterprises. There is limited synergy between the different subsectors except for the hardware industry, which provides the computer and other peripherals to Filipino-owned companies. The software companies are sometimes tapped by hardware companies to set-up the systems for their clients. 19

 In a competitiveness study of the IT industry in Cebu conducted by University of San Carlos research director, Victorina Zosa, she underlined Metro Cebu's immense potential for development in four areas, namely: computer graphics, software development, multimedia, and computer-aided design. The Cebu IT sector primarily consist of three categories: a) the informal sector or the freelancers; b) the registered Filipino owned companies, majority of which are micro and small scale enterprises; and c) the multinationals, which provide the greater percentage of the employment and, to date, the base of " Cebu as an IT hub". In general, multinationals have little or almost no transactions with the local companies. To date, only one Filipino company is known to have been tapped as a subcontractor to a foreign-owned company. From the interviews, it appears that there are more informal businesses than registered Filipino owned companies. Many of the players are loose alliances formed by people belonging to a network of freelance practitioners for specific projects. They find work via the Internet or through an informal network of friends and associates based in other countries. Payments are usually done through mechanisms used by overseas Filipino workers. Each of the subsectors except for the IT-enabled services, which primarily consist of foreign owned companies, has their own Cebu-based associations.
SNAPSHOT PROFILE OF THE SUBSECTORS SUBSECTOR Software # OF COMPANIES 25 registered Filipino owned companies 4 multinational corporations 50+ freelance programmers Hardware 30 assemblers with retail shops 100+ freelancers without shops IT-enabled services 10 call centers 5 medical transcription 2 animation companies Engineering design, (3 companies); BPO back office (2 companies), CAD/CAM, e-commerce (10 companies) Warp zone outsourcers (freelance) Internet Cafes About 500 internet cafes Majority are micro scale with 10 to 15 computers; the relatively big ones are Netopia franchise KEY CHARACTERISTICS Primarily domestic market with only two catering to export market; bias towards application software services over products Offshore development centers for parent companies Customized application software programming services for local clients Assembly and retail of computers and peripherals for Cebu market Home-based service technicians who do assembly and retail from time to time Foreign owned primarily US owned companies/MNCs Comprise bulk of registered BPOs in Cebu Filipino owned companies; 1 medium size and the rest are micro with 3-5 seats Foreign owned Many operate as home-based businesses catering to foreign clients Majority of the registered companies are foreign-owned.

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C. MARKETS
Majority of the Filipino owned IT companies are oriented to the local market. The local market for IT includes government, financial and educational institutions, hotels, supermarkets and retail outlets, and multinational businesses. The Cebu market for IT services is not yet that well-developed. In general, there is still the problem of perceived value and benefits vis--vis cost which may be overcome by an extensive awareness and information campaign. The few Filipino owned companies with export market orientation work on outsourcing projects for Japan and the United States. Multinationals are geared to the international market. Foreign markets include: Japanese Market. Majority of companies with Japan as main market are Japanese subsidiaries. The subsidiaries are strongly controlled by their Japanese mother-companies and have just few local ties in the Cebu economy. They get their clients through their mother-company and/or marketing teams in Japan. U.S. Market. Many of the contact centers have the United States as their market. The software products and services that are produced for the U.S. market can predominantly be classified as advanced, and consist mostly of internet/multimedia and web-development. European Market. Only a very few of the IT companies in Cebu have business relations with the European clients, in the form of web development and internet/multimedia. This is due to the fact that the European market is still very unfamiliar with Philippine based IT companies, and vice versa. Export sales of Cebu IT PEZA locators
PERIOD January to December 2003 January to July 2004 EXPORT SALES IN US$ 5.014 million 5.242 million Source: PEZA, August 2004 data

CITEM's annual e-Services exhibit serves as an important venue for IT vendors interested to develop strategic partnerships with other service providers meet new prospects and develop new business relationships. This provides a great opportunity for companies to generate awareness of services and expertise among a very large group of key local and players. Attendance of international players, however, is still very limited. Filipino owned companies who have successfully penetrated the export market have invested in establishing a local presence in the overseas markets through quarterly visits, set-up of joint venture companies, and forging international alliances. Unfortunately, though, many of the Filipino owned companies would have difficulties in doing this on their own due to information and resource constraints. According to the chief technology officer of Zzubo, Joel Martinez, while it is true that prospective clients seek offshore IT vendors that offer cost effective quality services they prefer providers who have partners abroad that they can rely on and do business with. As such, by forging international alliances and establishing on-site offices, companies can build trust with existing and prospective customers much faster. Zzubo has expanded its business in the US and Hong Kong offering e-commerce Internet applications and medical transcription and technology support services. At present, the company employs over 200 IT professionals and has completed projects for such global corporations such as VineLand Online, IBM South America, Motorola, Dupont Specialty Chemicals, and SCD Hong Kong.

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D. EMPLOYMENT
To date, statistics on employment of IT companies remain hazy. Basic problem is the lack of a comprehensive list of IT companies in Cebu. 53 companies covered in the CEDF-IT survey reported employing a total 842 workers. 70% of the 842 are employed in 10 companies. The range in number of employees is wide --- from 2 to as many as 238 or an average of 16 per company. As per the same survey, staff level employees total 657, 84% of which are in positions requiring a BS degree. Direct employment of Cebu IT locators in PEZA
PERIOD January to December 2003 January to July 2004 AVERAGE DIRECT EMPLOYMENT 307 950 Source: PEZA, 2004

From the same CEDF-IT survey, over 50% of the companies plan to increase their IT staff in the next two years. Average projected increase per company is 38%. In totality, this translates to a 19% increase in IT manpower over the next two years --- with the 10 known biggest employers planning to increase by an average of 18%, and all the others by some 22%.
EMPLOYMENT FORECAST IN CEBU IT SECTOR 2003 Categories B ase Software Development Engineering Design Services Other e-Services 1,000 800 8,000 20% 1,200 960 9,600 30% 1,560 1,248 12,480 40% 2,184 1,747 17,472 50% 3,276 2,621 26,208 50% 4,914 3,931 39,312 2004 2005 2006 2007 2008

Source: CEDF-IT ICT HR Survey

SECTION 2: INTERNATIONAL COMPETITORS

There is an increasing competition among various countries as each one strive to position themselves to capture a bigger share of the global market for IT services. The following are the countries that multinational firms usually tap for their offshore outsourcing needs : China is fast becoming an important player in the IT global industry. Its large pool of well-trained and, most importantly, very low-wage work force is considered a threat to countries whose competitive edge is dependent mainly on labor cost. Physical infrastructure is still weak (i.e., low telephone density and unreliable lines) relative to its competitors and language barrier is also a major impediment. Ireland is the leading exporter of packaged software in the world. It boasts of a skilled, highly educated labor force, excellent supply infrastructure, cost competitive environment, and sophisticated telecommunications network. It has emerged as the leader in pan-European call centers and also has 22

established backoffice facilities to cater to the needs of firms from the US and Europe. Strong, highly specialized legions of indigenous software producers have emerged that provide software services such as program development, consultancy, and technical training. Israel is very strong in software development, localization, and research and development (R&D). It has a remarkably large pool of talented engineers and scientists. However, it is geographically distant from major markets in North America and Asia, and its economic integration with Europe is limited. The other types of e-services that they provide include database management software, systems management applications, etc. India is the Philippines' closest competitor in providing IT-enabled services to major markets such as the US, Europe, and Asia. It boasts of highly-skilled, English speaking work force and very low labor costs. Like the Philippines, India is strategically located with a 12-hour time zone difference with the United States. A number of Indian "netrepreneurs" who made it big in Silicon Valley are now bringing businesses back home thus contributing to the growth of the IT services sector in the country. Malaysia's competitive edge among its Asian neighbors is its Multimedia Super Corridor 5. Malaysia's niche areas include software development, multimedia/interactive communication development, web development and e-commerce applications, content management, and systems integration. Its small workforce is highly skilled but language remains a barrier. Singapore has the most advanced telecommunications infrastructure in the Asian region. Export of high value-added, knowledge-based services has now become Singapore's largest industry in terms of employment and foreign revenues. The country is focusing much of its efforts on new growth areas such as e-commerce application software and services (e.g. web applications, customization web design), content hosting and development, and embedded software in information appliances and smart devices. The island-state is fast approaching its goal of being an "intelligent island" by the year 2010. Singapore has highly-trained IT professionals but its relatively high wages threatens their competitive position from that of neighboring low wage countries.

SECTION 3: HUMAN RESOURCES

A. SUPPLY AND DEMAND
The worldwide market for IT services can be subdivided into two categories: a) IT Professional/ Technical services, which require hard core technical knowledge and skills, and b) IT-enabled services, which require skills that are not technology-heavy but rather entail the application of information technology. Please refer to Annex A for breakdown of the two categories. CEDF-IT data shows that from among the 18 schools with IT courses, over 7,000 have been graduated during the past years and with about 3,500 more expected to graduate this school year. Cebu schools graduated 1,920 bachelor courses on computer science and related fields in 2002, 1,551 graduates in 2003, and 2,217 graduates in 2004. The 2004 figure represents 43-percent growth over the baseline of 2001. In addition, there were 628 graduates of associates degree in 2002, 934 associates in 2003 and 1,278 associates in 2004. Among the bachelors degrees, the biggest component in 2004 were computer science (742 graduates), Computer Engineering (605 graduates) and IT (721 graduates). Surveys including the recently conducted HR survey by CEDF-IT indicate that number of graduates of IT and allied courses is on an increasing trend. However, the problem that cuts across all subsectors is that many of the graduates do not have the necessary qualifications required by the industry.

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For example, of the 2,200 estimated number of graduates in IT bachelor courses in 2004, only about 100 to 300 of the graduates (about 4.5% to 14%) were appropriately employed as software developers, with industry recognition that they need little or no additional training. Contact centers, like eTelecare, has an average employment rate ranging from 2% to 5% of those who apply. According to Pam Wu, human resource director of eTelecare, call centers hire people with aboveaverage communication, problem solving and decision-making skills. In general, they are very careful of hiring only the skilled and qualified ones. Call centers hire workers for different positions, like travel agents, customer care specialists and technical support. Based on the CEDF-IT ICT HR Survey, the following are the unmatched and most sought after IT skills:
UNMATCHED IT SKILLS .Net and other Microsoft Technologies Linux and Linux-based software SQL Database technologies Visual Basic HTML and General web pages Multi-media communications, Video C/C++ Network protocols & equipment Conferencing Messaging Solution Multi-media presentations Groupwares

A report prepared by the IWG indicates a similar nationwide situation with regards to the graduates of ICT TVET courses. Many of them are either unemployed or are employed in low-paying jobs in other sectors. It is estimated that about 51% of private technical institutions throughout the country offer IT and allied courses. Likewise, 80% of TVET enrollments are in ICT. Dominant TVET ICT offerings are in: a) office/user applications; b) programming; c) networking; and d) hardware. Consultations conducted by the IWG team with some of the major technical institutions revealed that design of training programs are determined by respective marketing departments rather than being based on an accurate assessment of the job and skill needs of the ICT industry in the local area. There is also an observed declining competency in English, Math, and Science among graduates. Teacher competencies in core subjects are low, e.g. about 8% for physics; 24% for chemistry; 40% for math; 60% for English. All subsectors are constrained by the low supply of higher-level managers, e.g. project or relationship managers, necessary for higher value-added services. Retention and poaching of employees are also among the problems faced by the industry. IT companies provide training to their employees. For many of the Filipino-owned companies, the usual practice is for new employees to undergo on-the-job training for 6 months. Two of the Filipino owned companies have their own training schools. Among multinationals, it is a combination of formal training via their human resource development (HRD) Units --- with the support of external consultants --- and apprenticeship. The challenge for Cebu-based academe and universities is to develop graduates with an adequate balance of "hard" and "soft" skills, while simultaneously maintaining a curriculum or program that will address current and future global IT skill set requirements.

B. CERTIFICATION
IT Certification is one area that Cebu and the Philippines, in general, are lagging behind. As of July 2002, there were only 1,588 Microsoft Certified Professionals nationwide. While the Cisco Certified

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Professionals throughout the country have so far reached only 666 as of October 2002. For the Japanese IT Standard Examination (JITSE), current track record shows that only 44 out of the 726 takers passed the test. JITSE has been recognized by the Philippine government as a national standard for the IT industry and is seen as having potential to be used as a certification tool for a wide range of IT skill areas. Until 2001, TESDA conducted its own competency assessment and certification programs in four IT occupations. However, this was discontinued in response to the concern raised by industry as to its quality and relevance especially that there exist already a range of industry recognized certification programs. With many of the TVET students coming from low and medium-low income families, the cost involved in acquiring a vendor certification is another constraint.

C. INITIATIVES TO ADDRESS HR GAPS

At the tertiary level of education, the Commission on Higher Education (CHED) issued the Revised Policies and Standards for Information Technology Education through CHED Memorandum Order No. 25 last July 2001. It laid down the requirements for facilities, faculty qualifications and the basic core and major subjects of the IT courses. It conferred three (3) degrees that might be pursued by college students. These are the Bachelors Degrees on Computer Science (BSCS), Information Technology (BSIT) and Information Management (BSIM). The Commission also developed the Medium-Term Higher Education Development and Investment Plan covering the period 2001-2004. It provides the policy framework and defines the programs that will enable the higher education subsector to fulfill its role in the development of the country's human resource in the context of globalization and the emerging knowledge-based economy. The 2002 Basic Education Curriculum was implemented starting School Year 2002-2003. It focuses on 5 major learning areas. English, Science, Mathematics and Filipino are given the most number of minutes per week. The goal of basic education is to provide the school age population and young adults with skills, knowledge, and values to become caring, self-reliant, productive and patriotic citizens. The Virtual Center for Technology Innovation in Information Technology (VCTI-IT) is a flagship project of the Department of Science and Technology leading in the development of the country's IT human resource. The project aims to elevate the levels of competency of IT professionals and educators. Consistent with the IT21 Agenda, specifically to turn the Philippines into an Asian hub of software development and training, the VCTI-IT: a. Conducts subsidized IT trainings in Java, XML, UML, MS-Visual Basic, MS-Windows 2000 Professional, Cisco, Software Engineering, Project Management and other IT Topics b. Helps individuals get certified in leading international IT certification programs c. Helps promote and implement internationally recognized IT standards such as the Capacity Maturity Method (CMM) and Japan Information Technology Standard Examination (JITSE) d. Conducts baseline studies on the Local Software Engineering Activities and on the IT manpower demand and supply in the country.

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 TESDA's major initiatives towards improving the quality and outreach of TVET IT offerings consist of the following: Conduct of an extensive HRD study to: a) determine priority T skills requirements; b) assess the quality of IT programs --- curricula, equipment, facilities, and faculty/trainor qualifications; c) assess the effectiveness of the IT program in terms of absorption of graduates; and d) determine schemes adopted by TVET institutions and extent of industry linkages to facilitate employment of graduates Exploration of use of web as an instructional medium for teaching TVET courses IT occupational mapping including the resultant career pathing and the portability of competencies Registration of training programs being offered by IT public and private training institutions to ensure quality graduates needed by the local and international IT labor markets. A study conducted by the IWG indicated that almost all IT programs submitted to TESDA provincial offices result in program registration being issued. TESDA's registration procedures do not require training providers to give evidence to local industry demand and support for programs submitted for registration. Capability build-up program for private institutions offering operator, craftsman, and technician training courses Purposive training program for IT trainors

TESDA, in partnership with Information Technology Foundation of the Philippines (ITFP), is currently implementing the Philippine Australia Quality Technology Vocational Education and Training (PAQTVET) project Phase II. ITFP is an umbrella organization of both the private and government sectors involved in the development of the Philippine IT industry. The project has three focus areas: a) establishment of industry partnership; b) drafting of the National Qualifications Framework; and c) development of the National Assessment and Curriculum Guides and Exemplars. Program activities are directed towards the following objectives: a) identification of industry skill requirements; b) assure availability of high quality TVET products; c) assure availability of high quality TVET processes; and d) develop a culture of commitment to meeting priorities and standards. One of the institutions that have been consistent in contributing to the vision of Cebu becoming a major IT hub for the last three years is CEDF-IT. The organization's mission is to recognize human resource as a key area of intervention in order to realize the abovementioned vision. Thus, it is focused on addressing issues like teachers training, curriculum standardization and industryacademe-government linkage. Launching of the National ICT Certification Program last May 2004 during the Philippine Summit on the Information Society (PSIS). A Memorandum of Agreement (MOA) was signed among the IT Association of the Philippines and the certification providers, namely: Sun Microsystems, Microsoft Philippines, Inc., Oracle Philippines, Cisco Systems, SAP Philippines, ePLDT, Japanese IT Standard Examination Philippines Foundation and Peoplesupport Philippines, Inc., in support of the NICP. Per the MOA, the certification providers will provide a discount on their Certification examinations. Meantime, government agencies, such as CHED and TESDA signed a Memorandum of Understanding with the private sector, namely: IT Foundation of the Philippines (ITFP), IT Association of the Philippines (ITAP), Philippine Chamber of Commerce and Industry (PCCI), and CEDF-IT to undertake the NICP. Many of activities to jumpstart the NICP are scheduled in September 2004. Among these include the conduct of the NICP plenary sessions, offering of certification exams at a discounted rate, 26

recognition of top successful examinees, commendation of the schools with the most number of successful examinees, and acknowledgment of the NICP partners. A Microsoft Laboratory for Cebu was formally opened to serve as the venue for various certification exams and numerous training events ensuring the professional competency of Information Technology (IT) graduates and practitioners. Microsoft, in cooperation with Philippine Business for Social Progress (PBSP), formally turned over to CEDF-IT the IT Teachers Laboratory, which is located at Asiatown I.T. Park in Lahug. Philippine Long Distance Telephone Company (PLDT) recently signed an agreement with CEDF-IT to pursue an extensive Research and Development (R and D) based curriculum among the schools offering I.T. related courses. It is hoped that educational institutions, via CEDF-IT, would take advantage of the PLDT Innovation Laboratory (Innolab) to explore R and D based IT curriculum to produce high quality graduates in the next few years. Another initiative from the private sector is the Cisco Networking Academy program aimed at training students and in-transition workers to design, build and maintain computer networks. Students are prepared for industry-standard certifications such as Cisco Certified Network Associate (CCNA), and Cisco Certified Network Professional (CCNP). The networking academy program was launched in 1998 in the Philippines. Today, there are now over 140 academies in the Philippines, with more than 22,000 students enrolled. All eight IT curricula have been rolled out across the country. The schools operate independently but are authorized to use Cisco-provided materials. Cisco assists in evaluating the results of the teaching. Cebu also gets institutional support from DOST-initiated projects such as the Central Visayas Information Sharing Network (CVISNET), Philippine Research, Education and Government Information Network (PREGINET), and E-Governance. CVISNET, an internet-based network of 100 government agencies, 20 NGOs and 12 colleges and universities in the region, provides a common network exchange point and develops websites and databases through the internet or intranet to its member agencies and institutions. The project was initiated by DOST, the Regional Development Council (RDC) and Government Organization for IT (GOIT) regional offices. PREGINET, meanwhile, is a nationwide broadband network for research and education institutions involved in the development and demonstration of new technology, services, and applications with connectivity to international research and education network. The network can also be used for other purposes such as videoconferencing, e-commerce, telemedicine, distance education, and disaster monitoring. E-governance, spearheaded by DOST's National Computer Center Field Operations Office (NCCFOO), has put in place systems to enable the region's local government units to improve their quality of public service through the use of IT resources.

SECTION 4: INFRASTRUCTURE
Cebu has one information technology park, the Asiatown IT Park. This is the only IT park outside Luzon. The cyberpark was developed by Cebu Holdings Inc., through its subsidiary Cebu Property Ventures and Development Corporation (CPVDC). To date, there are 5 locators in the park consisting of multinational companies. CPVDC has stepped up technical infrastructure at Asiatown to meet requirements for high-speed communication links, access control and optimum networking facilities. Five additional generating sets were also installed to ensure uninterrupted power supply at the park. 27

 Cebu has sufficient capacity in the domestic broadband network together with international connectivity. It is already linked to new high capacity fiber optic submarine cable systems in the Asia Pacific and Southeast Asian region with onward connection to bigger high capacity fiber optic systems to North America, Middle East and Western Europe. PLDT is focused on delivering hi-value broadband products and services in Cebu. In the last few months, the company has strengthened its DSL network within the city, adding more broadband capacity to meet the growing demands of Cebu businesses. GlobeQUEST has established an STM-4 fiber that can carry up to 622 Megabit per second (Mbps) of data to link the newly-established Cebu gateway and Nasugbu submarine cable landing station so that customers in the area can directly connect to major countries such as US, Japan, Hongkong, Singapore, Korea, China, and Taiwan. GlobeQuest also has equipped each gateway in Metro Manila and Cebu with Broadband Access Service (BAX). BAX uses the Dense Wavelength Division Multiplexing, a technology by which the frequencies of light carried on a single pair of optical fiber are subdivided into discrete wavelengths allowing for greater transmission of data. Another positive development is the declining cost of international leased lines. The cost of international leased lines to the U.S. has been declining significantly due to an over-supply situation across the Pacific. The declining cost is also due to the deployment of bigger capacity cables. With the big capacity cable, the minimum unit of investment has gone up from E-1 (2 Mbps) to STM1 (63 E-1 or 155 Mbps) at a much lower cost (wholesale). However, inspite of the rapid decline of the cost of the bandwidth in the new fiber optic system across the Pacific, the price in Cebu and in the Philippines, in general, may not go down as fast as compared to other developed countries. This is due to small bandwidth requirements of many small users and the averaging of the cost of investment over a long service period of several old and new fiber optic systems. Cebu has 30 internet service providers and five telecom providers.

SECTION 5: POLICY AND OTHER RELATED ISSUES

A. IMPROVING CAPITAL ACCESS THROUGH POLICY MEASURES
To improve access to capital, IT companies generally have two options: the Venture Capital (VC), which is a key success factor to the growth of the IT industry in other countries, and the capital market, which is the most prudent method of raising capital and distributing ownership in the widest possible manner. Unfortunately, venture capital is scarce in the Philippines and local IT firms seem to be not interested in the local exchange and listing elsewhere. Among the reasons cited are the uncompetitive Philippine Stock Exchange (PSE) conditions and incentives such as: 1. The required minimum capitalization is PhP 100 M vs. 0 in Singapore. The required ROE is 15% for each of the last three years, whereas Singapore only requires a 3-year operating record. Firm underwriting is required in the Philippines, whereas it is not required in Singapore. There is an annual fee of PhP 100,000-500,000, whereas in Singapore it is only 16,000 - 80,000.00. 2. Cost and Time: in Singapore one can register in one day with $3. In the Philippines, it takes 3 months and several thousands of pesos.

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Among the policy measures being suggested to improve access to capital are the following: 1. Improvement of listing conditions of the PSE and extension of trading hours. 2. Strict implementation of IPO requirement for BOI registered IT initiatives. 3. Improving the VC and angel environment by developing an incubator network and providing incentives for VCs, such as Regional Headquarters incentives or government counterpart funds. 4. Create a special window for IT companies in government financial institutions

B. INCENTIVES TO ATTRACT NEW CAPITAL

The existing package of investment incentives offered by PEZA still has a manufacturing bias, which is often inappropriate for "new economy" firms : 1. Under the rules, there is a minimum export sales requirement. But, ICT firms, regardless of where and to whom they sell, are by their nature, global competitors. Also, local sales allow them to build track records and expertise. 2. Existing ICT firms cannot avail of PEZA incentives unless they can demonstrate additional investment, demonstrated primarily by the purchase of new, often imported, machinery and equipment. But, ICT firms can easily increase capacity and capabilities without need of substantial investments. Their major input is information and new ideas. 3. "Branch" facilities of PEZA-registered ICT enterprises presently are not covered by incentives. But, ICT enterprises do not need to be physically located in only one location. The government also recognizes very clearly the need to attract more domestic and foreign investment in information technology. Towards this end, it has put together a package of incentives in a bid to entice investments in the sector. The Philippine Economic Zone Authority (PEZA) for example, lists the following benefits for IT projects locating in IT zones or cyberparks: Income tax holiday (4 to 6 years) Exemption from import duties on imported machinery, equipment, and raw materials Tax deductions in training expenses Local sales allowances Permanent residence status to foreign investors Employment of non resident aliens Among the IT activities that are covered or can avail of these benefits are: Software development and application IT-enabled services; e.g. call centers Content development for multi-media or internet purposes Knowledge-based and computer enabled support services Business process outsourcing IT research and development Fiscal incentives offered, however, cannot compete with that offered by other ASEAN countries particularly for the Business Process Outsourcing services. Amendments to the Omnibus Code have been proposed to Congress.

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Attracting new capital can further be facilitated through: 1. Continuously enhancing the package of fiscal incentives in relation to that being offered in competing destinations abroad. In line with the this, the following are proposed: a. Benchmark current incentives with that of India, Israel and others in order to identify "compensating incentives" while the amendments to the Omnibus Investments Code are being pursued. b. Legislative changes that would make the country's package of investments at par with that in other countries c. Evaluate the existing tax regime and propose tax policies on stock options and capital gains to encourage entrepreneurs and venture capitalists to invest in IT companies 2. Removing the foreign-ownership restrictions for IT firms and amending the BOO/BOT law to include IT. 3. Streamlining the basic regulatory functions like business registrations and permits.

C. INTELLECTUAL PROPERTY RIGHTS

Strengthening and enforcing Intellectual Property Rights (IPR) is critical because it impacts access to markets, credibility, and domestic capability to promote software development and other IT related services. The problem in the Philippines is not a lack of sophisticated intellectual property laws but on the enforcement of these laws. All forms of intellectual property are more than adequately protected by existing Philippine laws. However, there is a lack of conscientious implementation of the intellectual property rights. Some of the measures that can be taken to facilitate the implementation of the IP law are: 1. Strengthening the Intellectual Property Office 2. Capacity Building for the Judiciary in intellectual property protection 3. Executive Order mandating the migration of government systems to open source platforms for intellectual property rights and budgetary reasons. 4. Passage of laws, such as the Optical Media Bill, to protect against intellectual property piracy, and make search and seizure of pirated products easier and more effective.

D. DATA PROTECTION AND NETWORK SECURITY

Policy and laws on privacy and data protection are prerequisites to building consumer and business trust in the Philippine IT and IT-Enabled Services environment. These policies and laws on privacy are necessary to ensure that: 1. Government will not unjustifiably monitor communications and transactions between businesses and consumers 2. Data provided by consumers to merchants or government agencies will not be misused.

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Parallel to this, definition of a comprehensive policy for data protection and network security should balance the need to address and comply with requirements in the United States and Europe on the one hand, and the additional costs and resulting difficulties stringent regulations could pose especially for small IT companies. In crafting the policy on data protection and network security, the possibility of marshalling a common ASEAN policy position on this issue should also be explored to provide greater leverage in discussions with the United States and Europe. Concern has also been raised, regarding the confidentiality issues over the internet. New regulations in the future would make it mandatory for 128 bit encryption of patient records being transmitted over the Internet to uphold security. As per certain reports, legislation will soon be passed in the US that will require state-of-the-art security to be in place for all transmissions of medical records. US and Europe have already signed data protection laws and it may be imperative that such laws are introduced in the Philippines to maintain security and confidentiality. Finally, both the government and industry have a major stake in protecting critical information infrastructure. In line with this, there is a need for capacity building programs for law enforcement agencies, such as the IPO, NBI, PNP to enable them to respond effectively against cybervandals, cyberthieves and hackers.

E. VALIDITY AND ENFORCEABILITY OF ELECTRONIC TRANSACTIONS

The E-Commerce Act of 2000 explicitly recognizes the validity of digital documents and transactions as well as electronic signatures. But, the provisions that deal with electronic authentication are not selfexecutory. There is a need to strongly support ongoing efforts to draft and issue appropriate Implementing Rules and Regulations on electronic authentication.

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CHAPTER 3: THE SOFTWARE SUB-SECTOR

SECTION 1: INDUSTRY STRUCTURE
A. PLAYERS AND RELATIONS IN THE SUBSECTOR
Players in the subsector include the following:
SUBSECTOR PLAYERS Infrastracture Providers: PLDT/Globe ISP Providers: 30 companies Input Suppliers/ Support Services Distributors and resellers of software authoring tools IT training institutions Engineering and IT schools 25 registered Filipino-owned companies Software companies in C ebu 4 multinationals 2 joint venture companies Informal sector: 50+ freelance programmers Parent companies Value added reseller: A middle-man who combines products and services from different sources to construct a comprehensive computing plan or environment 2nd tier distributors/ outsourcers working directly with Philippinebased companies Independent Software Vendors: someone who makes software to run only on a specific piece or hardware or operating system. Systems Integrator: An individual or company that specializes in building complete computer systems by putting together components from different vendors. Unlike software developers, systems integrators typically do not produce any original code. Instead they enable a company to use off-the-shelf hardware and software packages to meet the company's computing need.

A start-up company in the software industry can be established with very little capital investment. Anyone with a computer and the know-how can begin writing software. As such, in the Cebu software industry, there are more home-based unregistered freelance programmers than duly registered companies. In the formal sector, there are two categories of companies based on ownership: a) Filipino owned software houses; and b) multinationals/subsidiaries. Per DTI records, there are 25 registered Filipino-owned software companies and of which 16 are members of the recently formed software association. These companies are usually family-owned enterprises. Majority of the local software houses are micro and small-scale enterprises.

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 The multinational companies, mostly US/Japan subsidiaries, are primarily off-shore development centers for their parent companies. For the multinationals and two export oriented Cebu-based companies, a very important requirement/support facility is high speed data communication link, with which software units can connect, communicate, and transfer their work to clients all over the world. The freelance programmers usually operate individually and would have 2 to 3 long term clients (maintenance). There is a high level of informality in this particular level, since entry barriers are very weak, either by the technological side or by the investments requirements. For big projects, they usually affiliate with a contractor and form part of the project team set-up for that particular tender. Vertical linkages and trust relationships in the subsector are quite strong especially between client and software houses. However, horizontal linkages are almost non-existent. Local companies rarely work with freelance programmers. Likewise, it is very rare for a multinational to subcontract part of the work to a local company. Local companies also do not work collectively in a project. Collective efforts are usually manifested only in trade fair participation and in undertakings directly related to the association. Headstrong Philippines, Inc., a Philippine-based information technology outsourcing firm, urged the local software industry to pursue more collaborative initiatives if it wants to compete in the global market. Software is a buyer-driven value chain as opposed to a producer-driven chain. The buyer at the apex of the chain plays the critical governing role. In most cases, the clients supply the specifications. In the past, these rules were largely concerned with meeting basic cost parameters and guaranteeing supply, but increasingly as the industry became more competitive, the critical success factors came to include what is known as "QPD" (quality, price, and delivery reliability). More recently, the "rules" of participation particularly in the export markets have increasingly come to include conformance to international standards such as ISO9000 (on quality), Capability Maturity Model Integration (CMMI), vendor certification for IT personnel, etc. Among the local software houses, only one company is ISO9000 certified. Constraint to certification is the high costs involved.

B. PRODUCTS/SERVICES
Three of the Filipino owned companies are moving into own brand "productized services" (products that are sold as services). Products are concentrated on business solutions and information/ application software systems. Majority of the Filipino owned companies are concentrating on offering software customization and installation services. Many of the local companies rely less on 'frameworks' but focus more on projects that improve their clients' basic functions (for example, the development of accounting systems for a client that is still to a degree enterprise dependent). In essence, they are still to a significant degree operating in a human resource augmentation mode. Generally, though, returns from services are more guaranteed than from products, which have potentially higher returns at higher risks. Likewise, local companies lack the resources for product and market development. To date, only one local Filipino-owned company is known to have the capabilities to offer engineering software services. It is also the same company which does both on-shore and off-shore development contracts (application development outsourcing) for system integrators in Japan. Multinational companies or the foreign subsidiaries are into both engineering and application/ information software development services.

C. MARKETS
Only 2 out of the 25 Filipino owned companies cater to the export market. These are also the same companies who have set-up offices in Metro Manila and have clients in key cities in Mindanao and the Visayas. The remaining 23 companies are serving mainly the Cebu market. Clients consist of government agencies and enterprises in the hotel, retail, banking, and manufacturing sectors. 34

 Local companies generally generate clients through direct marketing and referral. The bigger companies build their presence in the area through sponsorship of events. The annual trade fairs organized by the Cebu Chamber of Commerce and CITEM also provide the software companies opportunities to meet potential clients. The domestic market will need a shot in the arm. This will only occur if the IT user base is expanded especially among businesses. SMEs have difficulties in financing expensive IT purchases, though this may improve if cheaper enterprise applications are developed by domestic companies. Cebu has yet to strengthen its image in the internatonal market. Current thrust of the government promotion program is to invite foreign software companies to set-up in the Philippines. Some initiatives have also been made in promoting Cebu-based software companies in the international market via trade fair participation and selling missions. CITEM, a government agency under the Department of Trade and Industry, organizes trade fairs and trade missions, on a cost-share basis with Filipino-owned ITES companies. The agency acts as the marketing coordinator for these missions, working with the country's established export councils overseas to schedule these missions with prospective customers, and providing the appropriate marketing materials for promoting the country. Export marketing initiatives at the company level include the following: a) quarterly visits to their main export market to establish and consolidate their presence as well as generate new client; b) strategic alliance/joint venture arrangement with 1st and 2nd tier distributors; c) trade fair participation; and d) website promotion. Industry players and analysts believe that the best way for companies to establish their presence in the international market is to set-up a marketing office in the target market itself. Many of the India companies have now started to set-up offices abroad, hire employees abroad, and build management teams that will help get more business. Other Indian companies get their contracts from third parties. These contractors charge about $100 per hour. Estimated revenue from the Philippine software industry is expected to climb from US$115 M in 2001 to US$268 M in 2004. Cebu and the Philippines, as a whole, can excel in identified niche markets especially in the maintenance of legacy systems and in wireless applications. Market for the maintenance of legacy systems is expected to increase since India who is the major player in this kind of service provision is moving out of the legacy system. There are at least 52 firms nationwide currently listed with the Board of Investments and 24 PEZAregistered providing software development services. Of the 24 registered companies, 3 are located in Cebu.

35

INDICATORS FOR SUITABILITY FOR OUTSOURCING GARTNER 2003 ISRAEL PHILIPPINES IRELAND CANADA CHINA RUSSIA THAILAND

INDICATORS

INDIA

Government Support

Labor P ool

Infrastructure

Educational System

C o st

Process Quality

Cultural Compatibility (US)

Overall Climate

Legend:
HIGH MEDIUM LOW

36

SECTION 2: VALUE CHAIN

A. DESCRIPTION
Software development spans a set of tasks including conception, design, specification, code development, testing, and documentation. In the past decade, most software outsourcing projects have focused primarily on development and testing from clearly-defined and well-specified requirements provided by the outsourcing organization. In the more cutting-edge outsourcing endeavors, which have begun appearing more regularly in recent years, all parties to the project are involved with all stages, including the design, since it necessarily evolves iteratively with development, and is therefore much less amenable to formal specification. Software R&D culminates in a finished program or system. In the global value chain structure, the bottom layer is outsourcing, above it is software development, on top of that is technology development and higher up is networking services and, finally, IT consulting. Cebu companies especially majority of the Filipino owned firms and freelance software practitioners are very much providers of professional software services where customization, installation, and maintenance are primary functions. Pricing is usually cost-based (time and materials) as opposed to value-based. One of the methods adopted by the bigger Cebu-based Filipino owned companies for providing competitive advantages to their clients is through offshore software development. It involves the use of high speed data communication links which enables clients to monitor the software development on a minute-by minute basis, ensure quality checks and communicate with the programmers. Software is a knowledge industry. It relies on use of ideas and application of technology rather than physical abilities and the transformation of raw materials or the exploitation of cheap labor. Upgrading Cebu IT educational infrastructure is critical to success. In India, it is claimed that the software industry relied on engineering education rather than on computer science. Many multinational companies are getting their strategic products developed at their R&D centers in Cebu and elsewhere in the Philippines. Cebu-based Filipino companies, however, lag far behind in R&D due to lack of resources and, in many cases also, due to little importance given to product development activities. Huge opportunities lie in such areas as e-commerce, Web-based technologies, convergence technologies, mobile Internet devices, and application service providers. To take advantage of these opportunities, the Cebu IT industry must focus continuously on upgrading skills and further development of services, especially in project execution and management and high-quality, rapid delivery. Offshore development requires tight control and metrics. In other words, quality control and standardization of processes are essential. In many of the smaller software houses, there is a need to formally define and establish standards and processes. It is also important for companies to benchmark their processes against international standards. To date, only one Filipino owned company has an ISO certification. a focus on quality is a competitive necessity as opposed to a strategic advantage. Compliance with CMM or ISO would be a step in the right direction accompanied by a change in the business mind-set.

37

38

 One potential catalyst for the industry's growth clearly would be the low cost advantage. This advantage, however, must be sustained through continued productivity and infrastructure improvement. The rising cost of salaries and the cost of attrition seem to be weakening the cost advantage. Other important issues include development of brand and viable market positioning, improvement of the quality of training, and the creation of an ideal regulatory framework.

B. THREAT OF NEW ENTRY

One barrier to entry that exists in some industries, which is not present in the software industry, is that of capital requirement. A start-up company in the software industry can be established with very little capital investment. Because of this low barrier to entry and the potential for quick success, competition tends to be intense. This also explains the proliferation of freelance programmers or the informal sector. Another common barrier to entry is access to distribution channels. Start-up companies can overcome this barrier by using alternative methods, such as distributing their product via the Internet or working with value added resellers (VARs) to combine their product with other software applications to be sold as a combined product. Experiences of Cebu-based software companies, however, indicate that distribution via internet is not that effective. Assistance in the effective use of the internet as a marketing tool may be timely and relevant. Economies of scale exist in the software industry. The development of the initial product is the most expensive part of the process. A significant amount is spent on the development of the first version of software. This expense is not limited to development only, but also to marketing, and technical support of the infrastructure needed for this first version. Once a program has been written, the cost to manufacture it is very low. Subsequent products based on this version are also cheaper to develop, since the technical infrastructure is already in place. This means that a local software company who intends to launch its own brand products is competing against established firms that are already in the "low cost" stage. Product differentiation is another barrier that is present in the software industry. Customers often have loyalty to products developed by established firms. They feel comfortable purchasing products with established well known brands because of the expectations that the firms would be around in the future to assist with problems, to provide updates and to develop complementary products. Startups must overcome this customer loyalty to be successful, which could involve expensive marketing efforts. One way start-ups in other countries have dealt with this barrier has been to offer their product as "freeware" in an effort to obtain brand recognition.

C. INTENSITY OF RIVALRY AMONG FIRMS

Another important basic competitive force in the software industry is the rivalry among existing firms. For example, in mature markets such as business applications, several major players already dominate the market and attempts to compete against them would be difficult. Offering competitive benefits and compensation is a critical factor in recruiting and retaining the type and quality of labor necessary to develop new products. With the explosive growth of the industry comes the need for more technical talent.

D. THREAT OF SUBSTITUTE PRODUCTS OR SERVICES

With technological advances being developed at a fast pace, the software developer has to be updated and well-informed about products and services being offered in the software and hardware industries. This will allow the developer to be in a position to respond to new technologies and, therefore, remain competitive. Current situation indicates that there is a lack of access to information and to services that would facilitate knowledge and skills upgrading. 39

 The most significant substitutions for the traditional packaged software are occurring with Application Service Providers (ASPs). ASPs provide a service to deploy, host, manage and rent access to software from a centrally managed facility. This market is expected to grow dramatically in the next few years.

SECTION 3: HUMAN RESOURCES

A. Human Resource Management
The software industry is based on recruiting qualified and well-trained skilled manpower. Nowadays, it is becoming more and more difficult for both multinationals and Filipino companies to find well-trained and reliable professionals. Companies spend considerable resources in training new employees. Likewise, there is a high attrition rate and incidence of poaching. The entry of multinational IT companies has pushed salaries up, which is to the detriment of the resource constraint local companies. On the positive side, though, the competition has prompted the more progressive local companies to come up with creative mechanisms, like stock options for their employees, training and scholarship benefits, etc. in order to recruit and retain better people. Many of the local companies would require external support in the development of innovative ways to offer attractive contracts to their employees. Specifically, majority would benefit greatly from a systemic organizational development process, with human resource development and management as one of the foci. Although it is becoming difficult to find qualified fresh entrants with 0-2 years experience, there is a wider gap in the availability of manpower with experience in the range of 2 to 5 years, making it harder to recruit project leaders and managers at the middle-level. STI, the largest computer school in the Philippines, takes in some 60,000 new students every year. But few become programmers. Many end up as data-entry processors. In all, the Philippines turns out only about 10,000 computer programmers a year. A fifth leaves for the U.S., Hong Kong, Malaysia and Singapore, where they command up to five times what they get in the Philippines. Most companies run in-house training programs for their employees both on hard and soft skills (technical subjects, project management, Japanese language, etc.)

B. Skills Competencies
Based on interviews and secondary data review, there are different skills necessary in the software business The skills assessment presented is indicative and based on key informant interviews. No actual testing has been conducted. The table also illustrates the typical work/projects implemented and which type of skills are expected to be necessary. Interviews indicate that in many of the Filipino owned companies only a small percentage of their employees possess advance business and technology skills. Likewise, among local companies, only one software house is known to have the capability to handle engineering software projects. Higher business and technology skills are needed for future growth of the industry especially if it aims to be more innovative and to have greater control over intellectual property and its development. As can also be seen from the table, project management skills are generally weak to moderate. The lack of project management skills or 'the missing middle layer' has serious implications on Cebu's capacity to move up the value chain. Likewise, freelance programmers generally have good technical skills but lack the soft and entrepreneurial skills.

40

Types of Skills Relevant to the Industry Skills Product Development Skills Basic technical skills Description Skills needed to develop a softw are product Coding and programming languages Learned in codified form but application requires experience (learning by doing). New skills have to be continually learned over time (e.g., new programming language or authoring tools) Fresh graduates generally not updated on new programming language or authoring tools - can be attributed also to lack of classroom facilities Project management, requirements analysis, and systems analysis Pertain to the ability to break down complex systems and coding tasks into discrete components General source of skills: experience Mathematical abilities and other fundamental (scientific) knowledge used in product development activities These are the creative, interdisciplinary and other technical abilities needed for new product innovation. These skills and knowledge are not only required to undertake engineering concept work, but also to understand whether a new conceptual idea is feasible from a technical point of view. Skills needed to grow and manage a softw are business Management, marketing, and networking skills to efficiently and effectively grow the company New products requirements analysis, knowledge of market and customer needs, innovative and creative abilities These are skills related to the "big picture" as opposed to technical conceptualization skills, which focus on the detailing and validation of the big picture

Systems skills

Advanced or high end technical skills Innovative technical skills

Business Development Skills Entrepreneurial skills Conceptual skills

Indicative Skills Competency Assessment: Cebu Softw are Companies Type of Skills Type of Work SA/BS ODC OBD ODC OBD SA/BS (skills needed) ODC OBD SA/BS ODC OBD ODC OBD Sufficiency of Skills in Cebu Industry Sources of Skills Universities Training institutions Certification In-house training Experience Experience In-house training From MNCs/ vendors From clients Experience Training institutions Experience From MNCs From clients

Basic technical

Moderate to strong

Systems skills

Weak to moderate

Advanced technical skills

Weak to moderate

Entrepreneurial skills Conceptual skills (both business and technical)

Moderate

Weak to moderate

41

Type of Work Type Staff Augmentation / Body Shopping On-off shore Development Contract Own brand development Acronym SA/BS Description Essentially only requiring technical skills, although some with advanced knowledge Firm acts as contractor to an established software producer. The equivalent to ODC in the manufacturing industry is the "original equipment manufacture (OEM)" category. Unlike BS, this requires fairly advanced systems skills, an increasing degree of knowledge of the customer and the ability to undertake more sophisticated analysis of the customer's requirements The equivalent term in the manufacturing industry is "own brand manufacturing (OBM)". This requires innovative and independent thinking.

ODC

OBD

The table also shows that firms and customers particularly foreign software producers, systems integrators, value added resellers, etc. are critical in providing additional or advanced skills and knowledge. Given the limitations of advanced training institutions and constraints of universities, knowledge of advanced software technologies, products, and platforms can be gained from working or close collaboration with MNCs and foreign software firms (1st and 2nd tier distributors). Business development knowledge particularly with regards to the export market may require constant interaction or locating close to the dominant end-user market. International advisors and venture capitalists can also provide advice on strategy. As part of the move of the Information Technology and Electronic Commerce Council (ITECC) to further strengthen the ability of Philippine Software Houses to do outsourcing business, a certification program for Capability Maturity Model (CMM) is being carried out together with some assistance from the United States Agency for International Development (USAID).

42

SECTION 4: CONSTRAINTS
A. ORGANIZATION / MANAGEMENT
CONSTRAINTS High cost to implement and acquire internationally recognized process and quality certification (CMM, ISO, etc.) CURRENT INITIATIVES Certification program for Capability Maturity Model (CMM) is being carried out by ITECC with some assistance from the United States Agency for International Development (USAID) POTENTIAL SOLUTIONS Develop indigenous capacity as well as innovative support schemes to facilitate manufacturers' compliance to these standards. Facilitate linkage with organizations/funding agencies that provide support for CMMI/ISO compliance Incentives (from government) to promote compliance. Lack of enabling environment for start-up companies - nurturing of technology ideas into commercial successes Cooperation culture among companies/ potential for work sharing not fully developed (for international expansion) Lack of entrepreneurial and management skills Establishment of IT park, which facilitates start-up. However, there is a question of affordability for Filipino-owned software houses Set-up of association Incubation center including matchmaking with other businesses and funding sources Promotion of venture capital Strengthening of association: organizational development 3rd party to broker/facilitate agreements Customization of entrepreneurial and management courses to software business Continuous Quality and Productivity Improvement Organizational development

43

B. MARKET ACCESS/MARKETING
CONSTRAINTS Lack of awareness in local market on use and benefits of ICT Price vis--vis perceived values low willingness to invest CURRENT INITIATIVES Company sponsorship of events Local and national trade fair participation POTENTIAL SOLUTIONS Unified campaign on IT use and benefits among local/domestic companiess --- campaign on IT-led business operations and strategy Incentives to firms of all sizes to implement standard enterprise software infrastructure Need for onshore presence to facilitate marketing Improvement of international presence Quarterly visits to main export market Set-up of joint venture companies Collective promotion and marketing anchored on a specific set of product differentiation factors that the region can sustain as a marketing proposal. Facilitate business linkages between domestic and international software companies/distributors Lack of export market info/productmarket knowledge - requirements, contacts/trade leads, etc. Internet Info sharing among peers Forum for overseas and domestic companies to explore potentials for joint ventures, strategic and marketing alliance, outsourcing opportunities, etc. Business seminars in topics such as marketing techniques, business laws and legal tips, IPR protection, new market opportunities, etc. Opportunities/market information services

C. FINANCE
CONSTRAINTS Lack of venture capital/ Lack of access to low-cost capital CURRENT INITIATIVES POTENTIAL SOLUTIONS Promotion of local companies to a large industry of foreign-based angel funds and venture capital.

44

D. HUMAN RESOURCES
CONSTRAINTS Lack of properly and technically equipped software professionals. Technical training courses are to some extent divorced from industry needs and of varying standards. Lack of professionals/labor force with high-end software skill sets. High costs/investments for skills upgrading --- both company and employees CURRENT INITIATIVES In-house training Establishment of CEDF-IT TESDA: HR mapping, registration of IT courses, etc. PAQTVET II initiatives Upgrading of software technologies and engineering courses focusing on practical and hands-on training and leading to technology specific professional certificates. Accelerate the promotion of vendor specific education in technical schools Quality assurance - IT courses and TVET offering Incentives on training initiatives undertaken by companies including those located outside of IT park Awareness campaign re: need for continuous upgrading and its benefits Exploration on how to make skills upgrading courses affordable and accessible to majority Low supply of higher-level managers, e.g. project managers, necessary for higher value-added services In-house training Scholarships from companies Project management courses similar to IBM Management Dev. Training with hands-on training in MNCs (academe - MNC tie-up) Integration of advanced marketing and management courses in TVET IT courses and in IT degree courses Difficulties to retain employees/ problems on poaching Scholarship scheme Stock option (but not widely practiced) HRM provider to assist companies in finding innovative contract and benefit schemes to employees, team building, OD, etc. Total Quality Management Program High cost involved in getting professional certification NICP initiatives Exploration of schemes to make certification affordable and accessible (in addition to discounts) POTENTIAL SOLUTIONS Development and delivery of skills upgrading courses aligned to market requirements. Close collaboration with software companies/market leaders and training providers + possible apprenticeship tie-ups.

45

SECTION 5: PROPOSED BDS/TVET INTERVENTIONS

A. VENTURE CAPITAL LINKAGE SERVICES
Since Cebu's local software houses are mainly small and medium enterprises whose resources are limited, one of the ways to strengthen them is to broaden their access to appropriate financing. Local companies lack the resources to conduct R and D activities as well as pursue product development and commercialization/marketing activities. Likewise, financial constraints also prevent companies from acquiring the necessary certification. The lack of funds to finance a new business/product idea may be addressed through venture capital. Unfortunately, though, the concept of venture capital has not developed yet in Cebu. As such, it is proposed that program supports the following: 1. Development of existing and new providers to facilitate venture capital negotiations and transactions 2. Development of service content, delivery mechanism, and financial sustainability schemes 3. Stimulation of demand for venture capital linkage services among software companies in Cebu Range of services under the Venture Capital Linkage BDS may include the following: 1. Establishment of promotional partnerships with venture capital firms both in the Philippines and abroad. 2. Evaluation of firms for possible investment including set-up of information and rating/classification system accessible to potential financiers abroad. 3. Set-up of database of software houses qualified for possible debt or equity financing by private institutions and the dissemination of this registry to potential angel investors/venture capitalists 4. Organization and coordination of seminars and workshops by various types of financing institutions to suitable software firms 5. Hosting of investor roadshows to promote pre-qualified ICT firms

B. MARKET DEVELOPMENT SERVICES

It is proposed that program intervention be directed towards strengthening the capability and capacity of existing marketing companies and intermediaries to deliver the following range of services: 1. Promotion, development and management of database of software firms and freelance programmers that may be tapped for outsourcing activities. This should be tied up closely with software firms and freelance accreditation system (see letter C) 2. Off-shore presence to broker services of small and medium software enterprises. Important in this set-up is the willingness of Cebu firms to work collectively in projects to promote economies of scale and the accreditation system. 3. Organization of trade and selling missions 4. Facilitate collective participation in international trade fairs

46

5. Coordination and organization of unified marketing campaigns in target export markets anchored on specific product differentiation factors that Cebu software firms can promote and sustain as a marketing proposal. 6. Gathering and monitoring of developments, trends, and needs of the global software market and making these information available to local software firms 7. Coordination and mobilization of Filipino entrepreneurs abroad particularly those who made it in Silicon Valley to serve as conduits for marketing local software firms and forging business relationships with leading foreign software producers and distributors. 8. Organization of forums for overseas and domestic companies to explore potentials for joint ventures, strategic and marketing alliance, outsourcing opportunities, etc. 9. Information and awareness campaign on the use and benefits of software systems/IT including promotion of local software houses

C. SUBCONTRACTORS AND SUPPLIERS ACCREDITATION SYSTEM

This BDS product aims to address the need to develop a more responsive supplier chain and strengthen supply capabilities. Likewise, this may help strengthen horizontal linkages among local firms and between firms and freelance programmers. Criteria for accreditation should be tied-up with training programs intended for subcontractors and suppliers. The accreditation system uses the marketplace as a motivation for suppliers to improve and upgrade operations. For the system to work, matchmaking activities should be confined to accredited suppliers and subcontractors. Likewise, export and domestic software houses should be encouraged to work with accredited suppliers.

D. COMPETENCY BASED SKILLS TRAINING VIA TECHNICAL SCHOOLS AND TRAINING PROVIDERS
While Cebu workforce is considered among the most competent in the country, there remains an issue of producing software professionals who are not industry qualified or certified. In order to have the critical mass of skilled and certified pool of software professionals, there is a need to focus on competencybased skills training and vendor-specific education that would lead to technology specific professional certification. Four-year courses in educational institutions are unable to match the speed at which technology is evolving and which employers are demanding a highly skilled workforce. Through short term training and education of technical skills (for initial list of needed skills, refer to discussion on human resources), Cebu would be provided with a short-term answer in filling gaps in the software labor force. To the extent possible, curriculum should also include the teaching of a broad set of soft skills. These soft skills include communication strength, teamwork, ability to engage in continuous learning and analytical skills, and project management. Program interventions may include the following: 1. Promotion of specific skills training and vendor-specific education in technical schools 2. Facilitate linkages between technical schools - training providers - vendors - certification bodies

47

3. Enhance capability of technical schools and their trainors to deliver training services at par with international standards including regular monitoring and review of curricula/programs to ensure that these reflect the needs of the IT industry. It is proposed to do the latter in collaboration with CEDF-IT. 4. Facilitate the inclusion of entrepreneurship and project management skills as a requirement for the Unified TVET Program Registration and Accreditation certification. 5. Support the institutionalization of globally recognized Certification programs for teachers, trainors, and graduates. 6. Development of delivery and payment schemes to make TVET training and Certification accessible and affordable to workers and companies

E. ENTERPRISE BASED TRAINING

Given a very dynamic economic environment caused by rapid changes in technology (e.g., new versions of software authoring tools being produced in shorter cycle times) requires up-to-date skills set which are constantly being upgraded. The most efficient and quickest way for universities and technical schools to maintain the global standard is through the establishment of industry - academe/technical school linkages parallel to strengthening the dual training system and OJT programs. Program support towards this end may consist of the following: 1. Facilitation of the formalization of on-the-job training programs with leading software companies 2. Establishment of exchange programs between universities/technical school and software companies for specific skills training 3. Advocacy for incentives to software companies which share their resources (i.e., personnel, course materials, laboratories, etc.) with IT schools and those which would co-implement a Dual Training System Some industry players, however, are wary on whether companies would be willing to open up their facilities and operations to competitors. This would require an extensive social marketing campaign.

F. ORGANIZATIONAL DEVELOPMENT
This would involve supporting existing organizational development providers in the customization of organizational development tools to the needs and context of software firms.

G. R&D FACILITIES / INCUBATOR

With the lack of software R&D facilities, it is proposed that program support the development of an incubator facility preferably within the Asiatown IT Park. The incubator facility would help nurture technology ideas into commercial successes. Salient points in the incubation process may include the following: 1. Training and mentoring on business plan preparation 2. Technical assistance in the development of business concept 3. Mentoring and coaching from senior staff/directors in software businesses 4. Practical courses on project management, marketing techniques, legal and business practices, software process improvement overview, etc. 48

5. Access to marketing and promotion services 6. Matchmaking with other businesses and funding sources

H. CMMI CERTIFICATION
Cebu must adopt accepted world class certification standards for software organizations, if it is to be competitive in the global marketplace. As such, it is proposed that the program support the widespread adoption of ISO and CMMI certification standard through the following interventions: 1. Training for CMMI lead assessors 2. Facilitate linkages with ISO providers and certifying agencies 3. Exploration of innovative and affordable payment schemes for ISO and CMMI certification 4. Linkage with other CMMI-focused Asian nations 5. Conduct on awareness and technical seminars on CMMI and ISO 6. Advocacy for fiscal incentives to promote compliance

I. BDS/TVET AWARENESS CAMPAIGN

It is proposed that the program supports the conduct of a consumer awareness program which would provide potential users the information to select a training institute or training provider conforming to industry minimum standards. Typically such consumer awareness program may provide knowledge of selection criteria such as: Internationally recognized curriculum International vendor certification program Existence of a computer lab/Ratio of computer to students Internship programs List of faculty and their qualifications Establishment of quality standards criteria and conduct of awareness campaign may be done in collaboration with CEDF-IT.

SECTION 6: PRIORITIZATION OF INTERVENTIONS NEEDED

Competency based skills training via technical schools was voted or selected by the highest number of participants during the Validation Workshop to be most relevant and responsive to their needs. This was followed by market development services, CMMI certification, TVET/BDS awareness campaign, and venture capital linkage services.

49

 Given that there are ongoing programs aimed at addressing the gaps in the TVET IT supply, further analysis would have to be made on specific intervention niches for the program. Possible areas of intervention would be on the stimulation and strengthening of demand and purchase of vocational training through focused marketing campaigns and assistance in development of delivery, payment, and financial sustainability schemes.
MENU OF PROPOSED BDS/DDTVET INTERVENTIONS NUMBER OF VOTES 'MOST RELEVANT' 3 8

Venture capital linkage services Market development services Subcontractors and suppliers accreditation system Competency-based skills training via technical schools and other training providers Enterprise-based training Organizational development Incubator facility/R&D Facility CMMI certification BDS/DDTVET awareness campaign

14

5 3

50

CHAPTER 4: THE IT-ENABLED SERVICES SUBSECTOR

SECTION 1: INDUSTRY STRUCTURE
A. PLAYERS AND RELATIONS IN THE SUBSECTOR
IT-enabled services involve a business modality that is entirely dependent on the Internet and other information technologies for conducting the business, but which only require basic knowledge about information technology itself. In other words, employees need to know how to use computers, but need not have an in-depth understanding on how they work. The different service categories are presented in Annex B. The number of call centers operating in Cebu has grown from zero in September 2003 to nine as of June 2004. Almost all of the multinational call centers located in Manila have either set up or are already in the process of setting up shop in Cebu. Some of them have even bypassed Manila entirely and have established operations here directly. Western Wats, Teradyne, Page Computer and 88 Floor are among the companies operating in Cebu but have no presence in Manila or anywhere else in the country. Input suppliers of an ITES company would include providers of telecom facilities, internet and other online information support infrastructure, IT park and other infrastructure, software and hardware vendors, labor pool/work force, etc. For the call center technology, some of the suppliers are the following: Hardware: Aspect, Clarify, Brightware, Cisco (webline)Convergys, Corepoint, Dialogic, e-Gain, eShare, Genesysd, Kana (including Silknet), Lucent, Nortel, Quintus, Rockwell, ServiceSoft, Siemens etc. Software: AnswerSoft, Brooktrout, Edify, eFusion, Genesys Labs, Geotel, IBM/Lotus, Intecom, KnowledgeX, Microsoft, Multilink, Nabnasset, Netcentric, Netphone, NetSpeak, Oracle, Paresc, Scopus, Sitel Corporation, SpanLink, Sun, Teloquent, Vantive, Venturian, Voicetek, Webline etc. CosmoCom, the leading provider of Contact Center On-Demand infrastructure, in collaboration with ePLDT, the information and communications technology company of the Philippine Long Distance Telephone Company, has launched a service to provide businesses with a network-based alternative to conventional premises-based call center technology. The service, the first of its kind in the Philippines, provides ePLDT with a new source of revenue and gives ePLDT customers access to the latest in next generation multi-media contact center technology. Because the service is delivered ondemand from the ePLDT network, customers do not need to invest in capital equipment, embark on costly integration adventures, or maintain large IT staffs to manage the technology. The main components for setting up a Medical Transcription unit include: a) premises/office space; b) servers; c) computers (with audio capabilities) and pedal machines; d) networking; e) specialized software; f) medical transcription programs; g) telecom connectivity; and h) transcriptionists. 51

52

 The Cebu ITES industry is dominated by multinationals and foreign-owned companies. There are only about 5 to 10 registered Filipino owned companies. There are also quite a big number of freelance and informal enterprises doing some business process outsourcing work, multimedia design, animation, etc. To date, there are no data available on the informal sector and it is quite difficult to track them. The structure for ITES is characterized by the following models: a. Informal sector Small foreign company client. These are usually home-based operators who have set up a few workstations in their homes and discreetly processing payroll and some accounting functions for some small companies in Japan or doing some medical transcription for a clinic in the United States. They keep a low profile, maintain lean and mean operations with very minimal overhead costs. To date, there are no statistical data about this group. They are not registered and they do not pay taxes. Business transactions are made directly with the foreign client. b. Multinationals/Foreign Companies Brokers/Marketing subsidiary/Parent Company. Players in the Cebu ITES are mainly multinationals/foreign-owned companies with majority in the contact center business. These companies either have their mother companies in the US or wherever they seek business and/or are operating several marketing offices. For example,Tata Consultancy Services, one of the big five Indian firms, has offices in 42 US cities, 27European cities, 11 Asian cities, and 4 Latin American cities. c. Filipino-owned registered companies Broker/Agent. It is estimated that there are about 5 Filipino owned companies in Cebu with all of them in the medical transcription business. 2 are in the medium scale while the rest are micro enterprises. For Filipino companies and new entrants, the cost of maintaining an independent network of offices is typically not an option. This has given birth to an alternative outsourcing model - the third party broker. These "eServices solution providers" typically establish relationships with multiple offshore providers, and then channel work to these firms as they acquire business. These solution providers tend to have a deep knowledge of the outsourcing business, as well as extensive business networks that they utilize to secure new contracts. This model represents the most common ways in which Filipino owned ITES companies in Cebu entered into their outsourcing relationship. Outsourcing Advisers, also known as Outsourcing Consultants or Transition Managers are middlemen, like wholesalers in trade, who accept offshoring jobs from the outsourcers to sub-contract to the BPO service providers in one or multiple (global) destinations. Such advisers negotiate the fee with the former and the prices with the latter. Very often they have their own delivery models and provide quality controllers, who are stationed at the service providers, to ensure consistent quality of service. This segment of the market is dominated by major players like Cap Gemini, Accenture, Exult, EDS, H.P, ACS, IBM, AD Marketing, among others. d. Cebu-based BPO client. This represents the purest form of outsourcing in that the contractual relationship is between the foreign client and the provider with no intervening offices or third party firms. The outsourcing costs of this model are generally lower. However, this only happens for small transactions (between an informal enterprise and small foreign company) and among established multinationals. This is not a viable model for new entrants into the outsourcing field because of the element of trust as well as the remoteness of the providers from the markets. Most US companies enter into their outsourcing relationships through a US-based company. Medical transcription business by its very nature involved transcribing medical advice of various types. Therefore, its user base is largely confined to individual doctors, hospitals, special test / examination clinics, state owned medical centres, medical databases, etc.

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 Customer industries for call centers are essentially those industries which require customer interface and transactions success is based entirely on information availability. These industries include: airlines, financial institutions, telecom services, IT product companies, tourism and hotel, and other service industries. Clients for the animation companies include companies in film, web, advertising, and education. In Cebu, there are two foreign-owned animation companies. Horizontal linkages are almost non-existent and subcontracting is rarely practiced. Last year, players in the local BPO industry nationwide formed Business Process Philippines (BPP). BPP gathers players in the industry into one umbrella group so that foreign companies planning to outsource in the Philippines will just have to talk to one group who can answer all their questions. BPP is a comprehensive group with members from the various foreign business councils and chambers of commerce as well as the government. Even schools, represented by the Philippine Association of Private Schools, Colleges, Universities, are part of BPP. BPP has asked them to offer additional courses on the English language especially designed for the needs of future BPO companies.

B. MARKETS
The global BPO market is estimated to grow from US$ 127 bn in 2001 to US$ 234 bn in 2005 and US$ 310 bn in 2008. Demand has more than doubled in 5 years. The US remains as the largest market for BPO accounting for more than 50% of the market. Europe is the second largest market.

Contact Federation Philippines, the umbrella organization of the IT and e-services sectors, has estimated that more than 80% of the clients of Philippine contact centers are based in the US. The rest are distributed across Europe (primarily the United Kingdom), Australia, and Singapore. Among the biggest markets for animation are the United States, Japan, South Korea, Australia, Canada, and France. These markets are for animation films.

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 "The demand for MT is also large, similar to that of contact centers, but the key there is an MT company should have contact with hospitals in the U.S.," said Cebu Investment Promotions Center (CIPC) deputy center head Alberto Gumarao. The worldwide ITES-BPO spending by segment of different categories of BPO services in US$ million in 2001 and 2006 forecast is as follows:
2001-2006 GROWTH RATE % 1.0 19.8 0.7 9.8 10.8 15.1 5.1 15.6 5.1 16.9 100.0 % 246.6 119.4 130.4 77.5 41.3 54.3 45.7 47.4 78.4 42.9 68.4

2001 SEGMENT US$ million Human Resources Logistics Purchasing Engineering/R&D Marketing Sales Administration Legal Finance/Accounting Other TOTAL 7,373 140,700 5,288 69,798 76,666 107,412 36,644 111,273 36,356 120,635 712,145 % 2.1 25.7 1.0 10.3 9.0 13.8 4.5 13.7 5.4 14.4 100.0 US$ million

2006

25,555 308,651 12,185 123,882 108,340 165,736 53,396 163,962 64,872 172,329 1,198,908

Source: IDC / NASSCOM

From the table, it can be noted that logistic accounted for more that 25% of world ITES-BPO spending in 2001. While this segment is expected to continue attract the highest spending in 2006, its dominance is projected to fall but still attract nearly 20% of the total in 2006. The human resources segment is expected to grow by more than 245% though its share falls from 2% in 2001 to 1% in 2006.

SECTION 2: VALUE CHAIN

A. CONTACT CENTER
Contact centers are defined as physical locations where calls are placed or received in high volume for specific customer activities and are used for number of customer related functions like marketing, selling, information dispensing, advice, technical support etc. It operates to provide round the clock and year round service. These centers combine the use of highly effective and empowered company representatives with a service framework that relies heavily on state-of-the-art communications and information technologies. The size of a call center's operation is measured in terms of the number of seats. A seat is comprised of a workstation with two or three people alternating in shifts to provide 24-hour a day, seven-day a week multilingual and multimedia-supported customer service. 55

 The major cost for a firm, outside of labor, is Internet connectivity, so any measure to reduce connectivity charges will provide a huge boost to companies seeking to establish a presence in this market. Other measure include: reducing duties on computer equipment imports, reducing the business tax rate, and improving basic infrastructure such as electricity.
60% Labor 30% Telecom 10% Others (training, recruitment, utilities, rental costs) P12,000 to P14,000 or roughly US$1.05-1.22/hour compared to US labor cost of US$10 to US$14/hour US$10,000 - 12,000

OPERATING COSTS

LABOR BANDWIDTH

NO. OF SEATS COUNTRIES 2003 Australia India Philippines New Zealand Thailand Singapore Hong Kong 135,000 96,000 38,000 20,000 12,000 10,000 10,000 2004 146,000 158,000 54,000 40,000 13,500 10,100 10,700

COST PER TRANSACTION ($) 2+ 0.29 0.52 0.37 2+ 1.15 2.03

Source: Callcentres.net, Australia

Most of the recent trends in this industry pertain to the technology behind the call routing and distribution function. Some of these trends that are projected to continue and influence the operations of call centers are the following : a. Shift from proprietary to open architectural platforms is rapidly gaining acceptance as is exemplified by vendors' frequent introductions of PC-based routing and call management software. b. A shift toward the "complete package" or "turnkey" solution is boosted by this trend to open platforms which allows for easier integration with existing systems. The growth in turnkey solutions is also driven by a high level of customer demand. c. In addition to the formal call center setup, demand for this industry-standards based, open architecture is seen by those types of call centers operating in more "non-traditional" environments. For example: SOHO, virtual call centers, telecommuting, etc. d. Price decline for products perceived as commodities (due to level of technology and knowledge sharing). Besides the above developments, call center technologies are making a rapid shift from mere stringing together of boxes and wires to, more intelligent and manageable solution. For example, select companies in India have already developed extremely competitive and technologically advanced call center solutions based entirely on PC technologies and platforms, and IP technologies. This helps to reduce the cost of the system and reduces changeover or upgrading costs for the new technologies as a major portion of technology is derived from software. These are highly automated call centers.

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 Operation of a Call Center revolves around serving an existing and potential customer base. This need translates into providing satisfying and well informed responses to a customer query, or in case of a potential customer, meeting his expectations with regard to quality and quantity of service. The difference in services can be made through a number of factors. Some of them are discussed as below: Process Integration: The call center service flow should be closely integrated with the process of the customer for whom this service is being rendered. This translates into easy access to and presentation of updated information. Customer Satisfaction: Defined as Direct-to-Quality (DTQ), this is akin to ability to satisfying the customer's (caller's) query the first time. Response Time: Goal is to minimize to the extent possible the waiting period and response time for a query. Contact centers should benchmark performance against some of the best call center operations in the world. Quality: Contact centers should aim to achieve quality certification such as ISO 9000 or other certification applicable to this industry. This includes full COPC-2000 Certification (COPC - Customer Outsourcing Performance Center). This distinction means that the facility has met the requirements of all 32 areas described in the COPC-2000 Standard. It thus helps to validate call center's quality and continuous improvement initiatives. The quality of service rendered by an outsourced call centers should be equal to or exceed service levels already achieved by the client's in-house call center. Human Resource Development and Management: Call Center staff should be trained on the client's business, the role of the call center, nature of potential callers, and service expectations of the client. There is also a certification for call agents. Likewise, the staff should be constantly trained to help improve accent and diction capabilities, especially for region being served.

B. MEDICAL TRANSCRIPTION
A medical transcription is a permanent, legal document that formally states the result of a medical investigation. It facilitates communication and supports the insurance claims. There are three main processes involved in Medical Transcription. These include: Process I. Hospitals are signed up. Doctors are trained in the process and then he/she dictates into a pre-set toll free 800 number in the US. The sound is then stored in the server at the other end of the 800 number. Process II. The sound is digitized and sent to the offshore outsourcing service centre as a WAVE file via satellite link. The digitized data is converted back to sound. The trained transcriptionists listen to the dictation and transcribes. Process III. Transcribed files are sent out to quality control persons, who listen to the dictation and check the transcription. Corrections are made if required. Then the transcribed report is transmitted back to the US as word file. For detailed description of the process, please see Annex D. In the beginning, start-ups may find it difficult to directly market their services to hospitals, clinics, etc. In many instances, Filpino companies work with a broker or forge a tie-up with foreign medical transcription companies. In India, venture promoters tie up with a larger medical transcription company in the capacity of an affiliate during the incubation stage. Likewise, there are big foreign companies like Healthscribe or Heartland who not only subcontract orders but also help to develop a venture into a self-sustaining affiliate by providing training and advisory services. These services are offered for a nominal fee. 57

India companies also open offices in major markets, such as USA or Europe, to provide business promotion coverage to certain regions / states. An aggressive marketing and sales team / network is a must in the US, either by having a tie-up with an American Transcription company or setting up one's own network focusing on cost savings and better turnaround times to clients. One can form a marketing consortium, also. To ensure quality it is imperative to have ISO approved systems. The future looks bright for Medical Transcription as the medical practitioners profession continues to grow and offer opportunities for growth. However, due to increasing maturity and decreasing differentiation between service providers, the companies in countries like India are now aiming to provide value differentiation by developing special features within constant cost bracket. It has been constantly said that medical transcription is threatened by speech recognition technology and formatted electronic records. Though at present, voice recognition software has not developed to the extent that it is in wide usage in any industry, but as this technology matures, transcriptionists would be able to use it to increase their personal productivity, rather than considering it as a threat.

C. ANIMATION
The animation company interviewed offers services such as pre-production on storyboard, character design, background design, entertainment/games animation and design, website development, multimedia marketing, distance learning, and education modules. Traditional or 2D animation is hand-drawn with paper and pencil. Computers are used to scan each frame, which produces a series of movements when played. 3D animation is a computer generated imagery. Per minute, two-dimensional animation is cheaper in the Philippines; 3D - 25 to 30% cheaper compared with the costs in America. Marketing requires onsite presence in target markets.

SECTION 3: HUMAN RESOURCES

An unquantifiable attribute of the Filipino labor force is what has been termed its "cultural affinity" with the United States. As a former protectorate of the U.S. for over forty years, the Filipino culture is permeated with American attributes - such as language (including colloquialism), entertainment, and consumer goods and tastes. One skill that businesses involving customer interaction require is language proficiency. Call centers, on-line support, and even transcription services (e.g. for medical notes that are written in poor handwriting and, thus, require some degree of familiarity with different American scripts to decipher) all involve differing degrees of language mastery. Call centers are the most demanding in that in addition to language fluency, employees in this business must speak with an accent that can be easily understood and that conveys a positive image of the company they are representing. To date, many of the contact centers in Cebu are experiencing difficulties in recruiting English-proficient workers. While English is the primary language in demand, outsourcing is growing in Europe and Asia as well, requiring proficiency in languages such as German and Japanese. In response to the shortage of English proficient labor pool, four educational institutions in Cebu have formed a consortium in collaboration with Contact Center Foundation of the Philippines and agreed to integrate contact center training in their curriculum. These are the University of Southern Philippines, University of the Visayas, University of San Carlos, and Cebu Institute of Technology. The target is to 58

meet the annual industry requirement and produce annually at least 4,000 graduates with excellent communication skills starting March 2005. The consortium is also raising funds to implement a 'study-now-pay-later' plan to attract more students to the course. This is also in response to the training affordability issue raised by students and parents. The Cebu City government pledged PhP 1 Million to the consortium. On top of the integrated course, the consortium also offers other non-formal courses. USP now offers a 96-hour non-formal course on advanced communication for international e-business, where homemakers, retirees, and professionals looking for a career shift learn effective communication skills, telephony skills and etiquette, US history and culture, effective selling skills, and basic technical skills. Also integrated into the non-formal and integrated courses is psychological preparedness and counseling to minimize risks of job burnout. The course costs PhP 9,500 but USP is looking at reducing the number of hours to lower the cost to PhP 5,500, thus, attract more trainees. Contact Centers have their in-house training specifically for orientation of new employees and skills upgrading of existing employees. Main problem is on the recruitment of a workforce that meets at least the basic requirements. Cebu has one MT school. One module costs around PhP 20,000. A trainee, who needs to complete all three modules, would need to spend between PhP 60,000 and PhP 70,000. The training fee would be lesser if the student has taken up courses in medicine, nursing, and other allied fields as there would be no need to take all the three modules. Feedback is that the training fees are not affordable. Since MT school also runs an MT business, scholarships are being offered to potential medical transcriptionists linked to employment contracts. Eugenio Gonzales, president of Medical Transcription Academy, Inc. (MTC) --- a Manila-based transcription school, said very few graduates are familiar with the medical transcription industry. He further added that many graduates still favor going to a call center company. According to him, the MT industry needs to do a major awareness grogram. Gonzales noted that among the reasons graduates stay away from the MT industry is the misconception that MT firms only hire people with medical backgrounds, such as nurses or biology graduates. Many of the MT courses have integrated basic subjects on medicine to accommodate enrollees with zero background on medicine. MTC is eyeing Cebu as another location for one its facilities. The company is focusing on a franchising scheme for its expansion program. Aside from having a good understanding of medical terminology and proficiency in English grammar, a medical transcriptionist should also learn how to operate transcribing equipment, handle mail, complete insurance forms, process billing, file materials, operate machines, and make appointments.

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SECTION 4: CONSTRAINTS
A. ORGANIZATION/MANAGEMENT
CONSTRAINTS Informal operations CURRENT INITIATIVES POTENTIAL SOLUTIONS Information campaign on the easy registration procedures as well as benefits of being a registered entity

B. MARKET ACCESS/MARKETING
CONSTRAINTS Need for onshore presence to facilitate marketing Improvement of international presence CURRENT INITIATIVES Marketing via brokers Affiliation with American providers POTENTIAL SOLUTIONS Collective marketing and representation by a firm located in target market Facilitate business linkages between Filipino firms and outsourcing agents Internet Info sharing among peers Opportunities/Market Info services Forum for overseas and domestic companies to explore potentials for joint ventures, strategic and marketing alliance, outsourcing opportunities, etc. Business seminars in topics such as marketing techniques, business laws and legal tips, new market opportunities, etc.

Lack of export market info/productmarket knowledge - requirements, contacts/trade leads, etc.

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C. HUMAN RESOURCES
CONSTRAINTS Shortage of English proficient workforce (both oral and written) CURRENT INITIATIVES Training courses offered by consortium POTENTIAL SOLUTIONS Specialized training courses (e.g., call agents, medical transcription and higher end BPO) in collaboration with known training centers for the certificate delivered to be internationally recognized Strengthen capability of consortium to deliver integrated courses. Facilitate linkages with known training centers to ensure certification recognized internationally. Pursue re-alignment of school curricula --- build-up English proficiency from the very start Only limited number of participants to training courses due to perceived high costs Study now pay later plan Scholarship from company Pre-operations training incentives for companies Awareness campaign of BPO job opportunities

SECTION 5: PROPOSED BDS / TVET INTERVENTIONS

A. AWARENESS CAMPAIGN ON BPO JOB OPPORTUNITIES
To address shortage of skilled workforce particularly for contact centers and medical transcription as well as overcome problems on training valuation, an awareness campaign on the job opportunities offered by the BPO industry is recommended. 1. Road shows in secondary schools and universities to inform students about the potential career paths in the BPO sectors. 2. Open days in BPO companies for both potential employees and their parents to demystify the BPO industry 3. Consumer awareness campaign which would provide potential users the information to select a training institute or training provider conforming to international standards

B. STRENGTHENING OF CURRENT TRAINING PROGRAM INITIATIVES

It is recommended that program facilitates the linkages and collaboration of existing providers (e.g., consortium) with known training centers (in Manila and abroad) to ensure that training courses (e.g. for call agents) are of international standards and for the certificates to be delivered to be internationally recognized. To significantly increase outreach, it is proposed that technical schools be tapped to conduct dual training programs for contact center agents and similar positions in collaboration with known training centers. In many of the contact center destinations, courses for contact center agents follow the dual approach and consist of about 60% practical work. 61

 Skills upgrading for trainors Likewise, all formal and non-formal courses should be designed and implemented in collaboration with the BPO players.

C. REVIEW/RE-ALIGNMENT OF SCHOOL CURRICULUM

A long-term intervention would be to provide assistance in collaboration with the government and the education sector in the review and re-design of school curriculum Improvement of teachers' capability particularly in math, science, and English --- strengthening and support to ongoing CEDF-IT program.

C. MARKET DEVELOPMENT BDS

Market development BDS proposed in the software subsector would also be relevant for this industry provided that there is already a critical mass of Filipino owned companies. Multinationals have their own marketing network and would not require external support in this aspect.

SECTION 6: PRIORITIZATION OF INTERVENTIONS NEEDED

Participants during the validation workshop indicated that strengthening of current training programs and review/enhancement of school curricula are the priority interventions needed by the industry in the short and medium-term perspectives.
MENU OF PROPOSED BDS/DDTVET INTERVENTIONS NUMBER OF VOTES 'MOST RELEVANT'

Awareness campaign on BPO job opportunities Strengthening of current training program initiatives School Curriculum Review and Re-Alignment Market development BDS Other Interventions suggested by the sector Com m on strategy for the sector Safety and Security of em ployees Establishm ent of "no nonsense" technical pool Tracking of Skilled M anpower Strengthening the role of the cham ber Loan facility for trainees (m ay be tied up with em ployers) C o st o f d o i n g b u si n e ss Taxes on support services also raise cost of doing business Certification of IT Professionals 6 6

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CHAPTER 5: INTERNET CAFE

SECTION 1: INDUSTRY STRUCTURE

A. PLAYERS AND RELATIONS IN THE SUBSECTOR
To make the Internet more accessible to the ordinary citizen, the idea of telecentres, more popularly known as Internet cafes (though very few actually serve coffee), was born. The Internet cafe would take care of the hardware and connectivity requirements and a user needed only to pay a per-minute charge for access to the Internet. Typically, in Cebu, this would range from P15 to P60 per hour depending on the location.

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 In areas farther from the city, the internet caf operator is considered as the "computer or IT expert" in the community. There are about 500 internet caf operators and of which 240 are members of the association. It is estimated that there are about 300,000 internet caf users in Cebu. About 80% to 90% of the clientele are students. As such, many of the internet cafes are located near the schools. About a year or two, a law was passed banning the operations of internet centers within 50 meters from the school. This was vehemently opposed by the operators. Through advocacy, the implementation of the law was suspended. Daily gross income ranges from PhP 1,500 to 3,000. About a year ago, some initiatives were made to come up with uniform rates but this did not gain the support of the operators. When Internet cafs first started sprouting in 1996, the business was very successful and lucrative. But now, with so many cafes in existence, in Cebu, about three Internet cafs close down every month.Demographically, Cebu has more Internet cafes than any other city by density. Compared to Metro Manila, it is littered far more with cyber-cafes per 100 people. In the Talamban area, where the science and engineering courses of the University of San Carlos (USC) are offered, the block adjacent to the school has 20 cyber-cafes pitted one next to the other. Fierce competition, however, is working against the internet caf business as the situation continues to bring prices down to the bottom-most levels. Thus, the tension in the market is creating a culture of commercial anxiety as stores lining the city's boulevards and alleys are always on guard - worried that customers might switch to the neighboring shop at the slightest drop. That, in effect, is making customer loyalty an alien term in Cebu. Hobbyists are only loyal to the lowest bidder. Competition is primarily based on price and location. A typical internet caf would have 10 to 15 computers with one or two attendants. Majority of the internet cafes are micro scale. Similar to other micro enterprises, owner handles most of the tasks and is assisted by one or two attendants. Many of the internet caf operators had no previous computer and enterprise management background.

B. PRODUCTS/SERVICES
Many of the so-called neighbourhood Internet cafes are mainly game centers, where majority of the computers are not Internet-connected but dedicated to running games. In many cafes, the computers are often segregated; one side (or one room, in the larger cafes) dedicated to computers running games and another side (or room, usually the smaller one) for Internet-connected computers. Games are more lucrative than internet access. Internet cafes near the schools also offer desktop services such as printing and scanning. On the side, they also sell pre-paid phone and internet cards. Others have expanded into selling of food and school supplies. Other internet cafes are also into the assembly of hardware and computer maintenance services. A few have offered simple training courses in collaboration with the government. Last year, there was a plan from TESDA to use the internet cafes and their facilities in conducting the e-learning program.

C. THE ASSOCIATION
The Internet Caf Association of Cebu is a non-profit organization. Main objective of the association is to ensure that caf operators conduct their business based on best practices and agreed set of

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standards based on city ordinance(e.g., no porno, etc.). The association works hand in hand with the Local Government in ensuring compliance of members to city ordinance. In the past, association organized training for their members on PC security and assembly. The training costs were taken from the membership dues. Participation of members to training activities was on a declining trend starting this year. As such, the organization decided to temporarily stop their training sessions. However, they still continue to conduct orientation for new members. Association also tried to become the 'middlemen' for the online games. However, it was later found out that their pricing scheme was uncompetitive vis--vis distributors' prices. They are also now in the process of negotiating with Microsoft for possible distributor arrangement. The association would also like to pursue hardware assembly and retail selling. Association conducts annually the online jamboree as their contribution to promoting the use and benefits of information technology among school children.

SECTION 2: VALUE CHAIN

INBOUND LOGISTICS FIRM INFRAS TR U C TU R E HUMAN RESOURCE MANAGEMENT OPERATIONS MARKETING SERVICES

POS System, Simple Financial System, Customer Satisfaction Training for attendants - basic requirement is that they can be trusted and has some basic math know-how (calculation of fees) ; follow wage laws; owner - oftentimes, no fix salary and performs various tasks Regular upgrading of computers Updated in games and software releases Connectivity technology Product development Simple market research Lowest price; repair and maintenance schedules Installation and setup/ maintenance Check-up and testing of software and hardware Operations of equipment Customer assistance Monitoring of usage Billboards and signages Discounted rates/ Extended hours promo Word of mouth/ referral

TECHNOLOGY R&D

PROCUREMENT

Main Activities

Customer relations Advance info on promos to regular customers

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SECTION 3: HUMAN RESOURCES

Skills necessary to run an internet caf can be classified as follows:
Basic computer skills TECHNICAL SKILLS Basic troubleshooting PC security Enterprise Management Customer Relations and Management BUSINESS DEVELOPMENT SKILLS Marketing Strategic Planning Financial Management Personnel Development and Management

Many of owners have no previous experience in managing a business nor in information/ computer technology. Generally, they lack the soft skills Majority of the attendants are former housemaids. Owners provide training in customer relations, operations of POS, simple calculations, and some basic know-how on customer operations.

SECTION 4: CONSTRAINTS
A. ORGANIZATION/MANAGEMENT
CONSTRAINTS The need to upgrade management skills as well as operations system efficiency CURRENT INITIATIVES Access to POS systems POTENTIAL SOLUTIONS Training and mentoring services including benchmarking activities on: a) administrative and operations system; b) customer service; c) product development; d) financial management systems; e) continuous quality and productivity system; and f) marketing.

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B. MARKET ACCESS/MARKETING
CONSTRAINTS Competition based primarily on price and location Lack of product differentiation Difficulties to move up vertically/value-added services CURRENT INITIATIVES Add-on services --- sale of snacks, etc. Promotions/discounted prices Build up of capability to develop market niche/differentiation factors Facilitate linkages with other providers and organizations that may be able to effectively use internet cafes as point of delivery for services/products. Explore possibilities of moving up the value chain The need to build a wider client b a se Unfair competition from unregistered internet caf --- lower overhead costs/no taxes Online jamboree --- but primarily still targeted to students Collective marketing campaign targeting SMEs on use of internet/ICT for business Advocacy spearheaded by association Campaign on registration and its benefits POTENTIAL SOLUTIONS Market research/info on consumer preferences --- Product and market dev services

C. HUMAN RESOURCES
CONSTRAINTS Lack of technical skills for maintenance and troubleshooting tasks, network installation - high maintenance costs CURRENT INITIATIVES Some training conducted by association POTENTIAL SOLUTIONS Short-term basic and advanced courses on network installation, computer maintenance, and troubleshooting customized to IC needs

D. INPUTS
CONSTRAINTS Opportunity to offer VOIP based services High cost of components and licensed software/ online games Ongoing negotiations with Microsoft for association to be a reseller CURRENT INITIATIVES POTENTIAL SOLUTIONS Advocacy to be spearheaded by association Bulk buying/collective purchase

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SECTION 5: PROPOSED BDS/TVET INTERVENTIONS

A. ORGANIZATIONAL DEVELOPMENT
This would involve supporting existing organizational development providers in the customization of organizational development tools and the continuous productivity and quality improvement program to the needs and context of internet cafes.

B. TECHNICAL AND ENTREPRENEURIAL CAPABILITY BUILD-UP

Range of training topics would include the following:
Basic computer skills Basic troubleshooting TECHNICAL SKILLS Network installation PC security Enterprise Management Customer Relations and Management BUSINESS DEVELOPMENT SKILLS Marketing Strategic Planning Financial Management Personnel Development and Management

Aside from development of training modules customized to the needs of the internet caf operators, it is also proposed that the program supports the development of training modality harnessing the strength of e-learning and group mentoring. This would involve the development of CD-based or internet-based coursewares on the above topics. However, to facilitate application of knowledge gained from the courseware, the training modality should also include group mentoring.

C. PRODUCT DEVELOPMENT
1. Program support may be directed towards the following: 2. Facilitation of linkages with other providers and organizations that may be able to effectively use internet cafes as point of delivery for services/products 3. Assistance in the development of new products 4. Market promotion and development for new products

D. MARKET DEVELOPMENT
This would involve the conduct of awareness campaign targeted to micro and small enterprises without internet access at their homes or office on the use of internet cafes for their business transactions. 68

SECTION 6: PRIORITIZATION OF INTERVENTIONS NEEDED

Product development was voted to be the most important intervention for the internet caf group. This was followed by market development services.
MENU OF PROPOSED BDS/DDTVET INTERVENTIONS NUMBER OF VOTES 'MOST RELEVANT' 1 1 5 2

Organizational development Technical and entrepreneurial capability buildup Product development Market development OTHER SUGGESTED INTERVENTIONS Im plem entation of existing ordinance (#1901) Involvem ent of the LGU Level (equal) playing field in the sector

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CHAPTER 6: THE HARDWARE SUBSECTOR

SECTION 1: INDUSTRY STRUCTURE
A. PLAYERS AND RELATIONS
Computer hardware comprises: data processing equipment (computers), peripherals and networking products. It must be noted here that "manufacture," in the context of the Cebu computer hardware industry, refers primarily to the following: Assembly of computers with imported components by Filipino owned companies and freelance technicians/assemblers Manufacture of peripherals by MNCs

The PC segment primarily consists of the following: Multinational brands (Dell, Compaq, Toshiba, etc.) Branded assemblers (Filipino companies) Unbranded assemblers (Informal sector; micro shops) Surplus computers from Korea and Japan

PCs sold to local clients are mainly assembled locally. There are about 30 Filipino companies in Cebu who are engaged in the assembly of computers. Almost all of them have their own retail outlets. Horizontal linkages between MNCs and Filipino assemblers and retailers almost non-existent. Locators in the Asiatown IT Park source their computers outside of Cebu. The growth of the assembled PC market has been spurred by the high cost of complete systems, which has led to import of components being cheaper than complete systems. The assemblers are, therefore, able to provide the PCs at a lower price to the consumer. Growth of the organized sector is being determined therefore purely on the basis of cost. Filipino assemblers and retailers though indicated that margins are low. Sourcing of components is done individually by the companies. The informal enterprises usually source out their components from the various retail outlets and surplus stores. Distributors of HP, Epson, Intel, and other similar products provide marketing support to retailers such as: a) collateral materials; b) promotional activities; c) incentives for every unit sold (e.g., Intel) which retailer-assembler can use for own promotional activities of his/her choice. From time to time, marketing seminars are also conducted by distributors.

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B. PRODUCTS/SERVICES
Aside from assembly and sale of computers, peripherals, and similar products, many of the Filipino companies also provide installation and repair services.

C. MARKETS
Markets consist both of individual buyers and institutional clients. For many of the small Filipino companies, institutional clients are the more important segments. Retail sales provide them with the daily cash flow. Aside from fierce competition among Cebu-based companies, they also consider Manila-based retailers as their competitors.

SECTION 2: VALUE CHAIN

ASSEMBLER - RETAILER Financial Management In-house Quality Standards Customer Relations Inventory control and tracking Just-in-time delivery Recruitment - referral, posting On-the-job training Compensation as per Philippine Laws and prevailing market rates Supplier Led Regular updating on PC/component/peripherals trends Pre-packaged assembly/ innovations done by technicians Lowest price - good terms - good quality Has regular suppliers Long term relationship with distributors governed by legal agreements Receipt of goods/legal documents preparation Visual inspection and testing Inventory entries/coding Storage and warehousing INBOUND LOGISTICS Assembly Packaging Display Selling Installation Display in stores/Pick-up from store Deliveries to clients Own retail outlet Brochure/info materials Own brand/label Direct marketing Bidding/tender participation Advertisement MARKETING Service/parts warranty

FIRM INFRASTRUCTURE

HUMAN RESOURCE MANAGEMENT TECHNOLOGY DEVELOPMENT / R&D PROCUREMENT

MAIN ACTIVITIES

OPERATIONS

OUTBOUND

AFTER SALES SERVICE

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SECTION 3: HUMAN RESOURCES

Employees in a Filipino assembly-retail company would be composed mainly of technicians and salespersons. Technicians are generally vocational graduates or at least 2nd year college students of computer courses. Skills and know-how are upgraded via on the job training provided by company and their distributors. When specialized skills are needed (e.g., network installation), the companies have a ready pool of external technical people they can readily tap. Companies are relatively satisfied with their workforce. Don Bosco/CITE has forged apprenticeship arrangements with selected MNCs in Cebu.

SECTION 4: CONSTRAINTS AND POTENTIAL INTERVENTIONS

A. CONTINUOUS PRODUCTIVITY AND QUALITY IMPROVEMENT
Among the Filipino-owned companies, the major problem faced is the low profit margins from PCs and peripherals. Given that prices are fairly standardized, the only way for companies to improve profit margins is to avoid waste and/or reduce costs. Towards this end, it is proposed that SMEDSEP support be directed to the following: a) customization of the Continuous Productivity and Quality Improvement services to the needs of the hardware subsector; b) capability build-up of existing providers; c) development of payment and delivery schemes attractive to both providers and enterprises; and d) market development campaign Continuous Productivity ad Quality Improvement aims to encourage entrepreneurs to seek opportunities to increase efficiency, effectiveness, and quality. It involves pro-active efforts to seek, identify, and eliminate barriers to improvement and for more efficient operations. Specific objectives of this BDS are: 1. To facilitate improvements in organizational abilities in one or various function areas within the enterprise that will enable it to significantly increase its productivity as well as transform orientation from inspector-based to individual worker-based quality control improvements 2. To introduce and facilitate adoption of quality management elements and socially responsible practices under the ISO and SA8000 standards 3. To facilitate the adoption and implementation of environmental management systems in the context of business growth and profitability

B. TECHNICAL AND TECHNOLOGICAL COMPETENCE BUILD-UP

This would involve strengthening existing enterprise-led non-formal dualized technical skills training for existing and potential workers in the hardware industry in terms of training content, certification, and outreach. Proposed features to be given emphasis are: a) dual training: in-center and in-shop, preferably with MNCs; b) modular approach to enable workers to register only in courses they need; c) close monitoring system to ensure that in-center learning are aligned to in-shop tasks and that learning is translated into performance in practical work situation; d) course contents developed in close collaboration with the industry; and e) certification testing internationally recognized.

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SECTION 5: PRIORITIZATION OF INTERVENTIONS NEEDED

From the interviews and the focus group discussions, it appears that the hardware subsector generally feels that their industry is performing quite well. Nevertheless, industry leaders chose the Continuous Productivity and Quality Improvement chose to be the more relevant intervention for their subsector.
MENU OF PROPOSED BDS/DDTVET INTERVENTIONS NUMBER OF VOTES 'MOST RELEVANT' 2

Continuous productivity and quality improvement (CPQI) Technical and technological competence build-up OTHER SUGGESTED I NTERVENTI ONS Bonding am ong key players Strengthening and intensifying sharing / networking Inability of som e clients to pay (overextended period) Tap volunteer experts to address concerns on productivity, training, etc.

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ANNEXES

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ANNEX A: IT SERVICES CATEGORIES

IT PROFESSIONAL / TECHNICAL SERVICES IT Project Management Application Systems Development Applications Services Provider Web Development and Management Database design and development Computer Networking and Data Communications Software Development ICT Facilities IT-ENABLED SERVICES Business Process Outsourcing Call Centers Engineering and Design Animation and Content Creation Knowledge Management Market Research Finance and Accounting Services Human Resource Services and Other Administrative Services

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ANNEX B: BUSINESS PROCESS OUTSOURCING

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ANNEX C: CONTACT CENTER: TECHNOLOGICAL SYSTEMS

The technological systems choices of a call center include: a. Entry options ranging from traditional voice, e-mail, internet forms, web triggered calls, fax and video b. Desktop tools including knowledge based systems (AI), electronic documentation, new contact management applications and screen based telephony c. Resource locations ranging from home agents to centralized or decentralized centers d. Service options ranging from self-help or assisted services via Internet, voice response units, fax back systems, and electronic technical support forums. Introducing the right technology will benefit every component of a call centre including training, staffing, scripting, customer relations, tracking and reporting etc.

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ANNEX D: MEDICAL TRANSCRIPTION PROCESS

The typical process of Medical Transcription begins with receiving dictation by tape, digital system or voice data file. Conventionally, recorded advice was sent through physical means (i.e. a magnetic media). However, there is steady emergence of a new practice. Using a toll free telephone line, doctors can call up a designated number and dictate the message which is converted and recorded into a dedicated server on a real time basis. This helps to save shipping costs and improves productivity manifold. The transcribing company connects to this server through a high speed data link (preferably Internet or ISDN link of 128 kbps or above) and download any fresh dictations left by customer organizations/ doctors. The transcriber company (if different) can start to immediately retrieve messages and transcribe them. Using ear phones and a foot pedal for start-stop control, transcriptionists are able to hear and control the speed of audio messages. These messages can be transcribed with the help of a suitable word processing program/application. A variety of word processing programs may be used as different forms of transcription/messages may require specific features. An outsourced or outlocated medical transcription center then sends back these transcribed messages to the hub of medical transcription network from where it is routed to the concerned doctor/hospital. Most of the words processing programs used in medical transcription process typically are accompanied by libraries/dictionaries of medical terminology. These libraries may also be categorised based on various disciplines. Several dictionaries are necessary: Medical definitions, medications, medical terms by specialty, laboratory terms, surgical terms and abbrevations. Specialized word lists are also helpful, and journals and computer networking are helpful for current information about new medications and terms. Transcription is done more efficiently with the use of a medical spell checker and an abbreviation system such as PRD or Smartype, etc.

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ANNEX E: BPO DESTINATION CRITICAL FACTORS

A.T. Kearny Consulting conducted a country analysis of offshore BPO destinations. The criteria and weights in the country analysis used were: Costs (40%) - cost of labour and infrastructure, taxation Environment (30%) - political and economic risk, cultural compatibility, geographic location, country infrastructure People (30%) - education level, size of labour market, language barriers, retention rate

The score of countries studied on the above criteria of costs, environment and people is summarized in the table below.
SCORE OF SELECTED OFFSHORE BPO DESTINATION ACCORDING TO A.T. KEARNY COUNTRY India Canada Brazil Mexico Philippines Hungary SCORE 7.3 6.2 6.1 6.2 5.7 5.8 COUNTRY Ireland Australia Czech Republic Russia China SCORE 5.8 5.7 5.7 5.6 5.2

The choice of location of a call centre by overseas MNC's is based on a number of factors and include: a. Laws and Regulations. b. Telecommunication Infrastructure, Technology & Tariffs - India is perceived as technologically savy but with keen desire to emerge as a country with sound telecommunication infrastructure. Therefore, technology is an important deciding factor in location decision. Similarly, tariff is another significant factor. There are also issues of connectivity (to PSTN etc.) that need to be addressed by the government quickly. c. Workforce - Companies look to countries that can provide them with work force that is proficient in English (and possibly other languages); cost effective with disciplined work culture. d. Real Estate, Availability and cost of office space. e. Economic Incentives - These may take the form of grants or tax exemptions, repatriation of profits, corporate tax on profits generated by call centres, tax treaties etc. f. Feel-good factor- Companies look for countries where the people are positive, service minded and friendly.

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ANNEX F: KEY INFORMANTS

SUBSECTOR Esprint Software Alliance Internet Software Company Software Primary Software NEC BP Solutions eTelecare Boom Interactive/JAMP IT Enabled Services Northern Medical Transcription Red Apple Design Studio Peoples Support Internet Caf Association Internet Cafe 2 Internet Caf Operators (Officers of Association) President of Hardware Retailers Association Hardware Ng Khai Development Corporation CITE Providers CEDF-IT International School of Medical Transcription Department of Trade and Industry Government CVISNET TESDA Chamber Cebu Chamber of Commerce and Industry Asiatown IT Park Infrastructure P LD T Mozcom COMPANY

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PROGRAM MANAGEMENT Martina Vahlhaus, Program Manager H 10th Floor, German Development Center, PDCP Bank Centre Building, V.A. Rufino corner L.P. Leviste Streets, Salcedo Village, Makati City ( +63 2 8123165 (local 46) * SMEDSEP c/o GTZ-Office Manila, P.O. Box 2218 MCPO Makati City, Philippines 8 smedsep@mozcom.com Training Services Christian Widmann H 4th Floor, TESDA Central Office, East Service Road, Taguig, Metro Manila ( +63 2 8938297, 8405035, 8179095 (fax) 8 tesdagtz@mozcom.com Business and Financial Services Markus Ehmann, Business Development Services Harald Neimeier, Financial Services H 38 Acacia Street, Lahug, Cebu City, 6000 ( +63 32 4122256, 2344494 (telefax) 8 masmedsep@globelines.com.ph

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