A short-term pullback by investors is expected to hit the Philippine business process outsourcing (BPO) industry that could result in a nominal to flat growth this year, according to an industry expert.
“I do not think that it is unrealistic to expect a short-term pullback by investors. Those who have invested before will have the confidence to move ahead with in-flight or new projects while those entering the country for the first time, may pause and reassess,” stated Mono Bhattacharya, a partner at RKCA Investment Banking, in a Q & A for the “Shaping the New Reality” publication of the IT-Business Process Association of the Philippines (IBPAP).
According to Bhattacharya, BPO companies with high exposure to the Travel and Leisure sector have been adversely impacted by the global economic meltdown. Many companies in the industry have pivoted to maintaining a semblance of normalcy or business as usual by shifting employees to work from home.
As such, he said, “the BPO industry in the Philippines is expected to experience nominal to flat growth this year.”
Amid this situation, he stressed that the fundamental thesis for investing in the Philippines has not changed such as the relatively young population and high English language proficiency. Thus, he expects investment flow will continue although there may be a slight decline over the next 12 to 14 months.
Foreign direct investments, he said, may stabilize by 2022 yet based upon the current assumption around the availability of vaccines and therapeutics.
The IBPAP reported that from only 50 percent productive capacity at the beginning of the lockdown, the sector was able to improve its productive capacity to 73 percent as restrictions started to ease. This figure gradually went up to 90 percent once lockdown guidelines became more flexible and less rigid.
With the unceasing support of the national government, the determination shown by industry leaders and the unparalleled resilience and tenacity of the workforce, the sector is now performing close to pre-COVID levels through a blended service delivery model.
There are no official 2020 figures yet as to the industry performance last year, but based on IBPAP commissioned study with third party The Everest Group to recalibrate the sectors trajectory up to 2022, it showed that revenue growth could slow from 7.1 percent in 2019 to -0.5 percent in 2020. The study further pointed out that revenues will slip to $26.2 billion from $26.3 billion in 2019. Hiring growth meanwhile is seen to flatten out, but the good news here is the IT-BPM sector is projected to lose zero jobs in spite of the COVID-19 pandemic.
In 2019, despite challenges brought about by geo-political developments, changes in government policies and widespread digitalization, the industry recorded revenues amounting to $26.3 billion or a 7.1 percent jump from the previous year. Meanwhile, the number of full-time employees (FTEs) in the country registered a 5.8 percent growth compared to 2018. This brought the sector’s total headcount to 1.3 million Filipinos.
The study conducted by the Everest Group, a global consulting and research firm, also showed that the sector has the potential to achieve revenue growth of 5.5 percent and headcount growth of 5 percent per annum from 2021 to 2022.
While the BPO industry in the Philippines may not experience the growth that it has been accustomed to in the past, he believes the growth to return as the vaccines are distributed and administered throughout 2021.
Bhattacharya also added that the economic slowdown will also give rise to good mergers and acquisitions (M&As) in the BPO sector as prospects are still good. He said there are buyers who have the financial wherewithal close transactions at pre-COVID-19 valuation multiples noting that while the threshold to complete transactions within strategics may have shifted, private equity and strategics backed by private equity are active in the M&A market.
The most common obstacle for deal flow in 2021 is the availability of quality acquisition targets. On the other hand, if a company is looking at acquiring other companies, then the opportunities will continue to present themselves. M&A is the execution arm of strategy and if a company has been deliberate about formulating their company strategy and, by extension, their acquisition strategy, the opportunity to acquire companies that are constructive to the acquirer will definitely be there in 2021.
He, however, stressed that the longer the pandemic lasts, the higher the number of distressed assets across industries to come to market. “Time is of the essence in distressed deals and if you are going to participate in distressed transactions, I would recommend lining up necessary advisors and financing sources that would allow you to complete due diligence and fund the transaction in a compressed timeline,” added Bhattacharya, who primarily works with private middle-market companies and specializes in the BPO/Business Services and Software industries.
“Provided that the acquirer is on a solid operational and financial footing, M&A can accelerate growth - revenue, clients, capabilities – compared to relying solely on organic growth. If you are looking to acquire companies in the near future, start your planning process to highlight your acquisition criteria, process design, ideal deal structure, integration planning. While the process may be complicated and cumbersome, you can de-risk the common pitfalls with planning and deliberate execution,” he added.
The type of M&As has observed are the ones that have impact to the debt markets as a result of the pandemic as the equity checks as a proportion to debt in deals has increased. Just like the 2008 financial crisis, he also saw a lot of companies – both public and private – reassessed their core business and divested non-core assets.
“As a result, I expect to see corporate carve-outs on the rise again. The long-term impact of the crisis to businesses is evolving and will continue to do so until a large part of the country has been vaccinated and therapeutics developed and available to combat what is hopefully a once-in-a-lifetime event,” he added.
The pandemic has also definitely accelerated trends already underway in the Philippines as far as the BPO industry is concerned with the prevalence now of working from home and social distancing. As a result, company investments in hardware allow employees to connect to the internet along with investments in tools that track productivity, foster team building, and community are on the rise.