OUTSOURCING TO THE PHILIPPINES: WHY YOU NEED IT AND HOW TO DO IT
I. What is outsourcing
In general and in the traditional sense, outsourcing is a method by which a company identifies certain internal business activities that it deems best (for a variety of reasons but chief among which is cost) to either hire a person to be an internal employee to do that certain business activity, or to hire an external service provider (e.g. an independent contractor or consultant) to do that certain business activity.
For example, most business would need someone to do maintain its accounting and financial records, or to do its tax filing compliance. A company can then either hire a full time accountant as an employee, or to contract an accounting firm to do that same compliance activity. If it hires an accounting firm, then it can be said that the compliance activity is outsourced to that accounting firm.
II. History of global outsourcing
In the Philippines, outsourcing by foreign companies started in the late 1990s to the early 2000s. It was mostly companies based in the United States that started outsourcing in the Philippines, contracting with third party providers or setting up their own customer support centers (e.g. call centers) staffed by thousands of Filipino workers and staff who are English speaking and highly educated and trainable. These were later known as the BPOs or Business Process Outsourcing — where certain business processes, initially customer support services through call centers, were established in the Philippines. Although not as well known a term, but these can also be termed as “offshoring” since these companies had “in-house” teams but in offshore countries such as the Philippines. Compared to the term “outsourcing” which can mean outsourcing to a different company but within the same country (as in the example above), offshoring is specifically outsourcing but to another country where, principally, labor costs are significantly lower but the quality of workers are on par for the same administrative services.
III. Kinds of outsourcing
From its humble beginning in the early 2000s, the BPO industry has grown exponentially in the Philippines. There are now KPOs and even LPOs.
KPO mean Knowledge Process Outsourcing, which are business activities that require more knowledge and education from the offshore staff. Instead of simple call centers that are offshore, KPO activities usually involve higher value services. Examples are business activities such as information technology development and maintenance (e.g. maintaining database and servers), website and social media management (e.g. updating content), and software development for own company use (or if the company itself is a software developer, the offshore team assists the dev team in the home office).
With KPOs, a foreign company can hire teams of Filipino educated English speaking staff to do these accounting compliance, software development, website and social media management at a fraction of the cost but still maintain a high level of service, directly assisting their managers in the home office.
A special kind of outsourcing is offshoring certain legal work through Legal Process Outsourcing. Some of the biggest international law firms (such as White and Case and Baker McKenzie) have an offshore team in the Philippines – Filipino lawyers (whose law education is similar to US law schools) doing work related to sifting through voluminous documents during discovery, contract review, or just assisting lawyers in law firms in the United States.
White and Case:
With LPOs, a foreign law firm can have well educated Filipino lawyers assisting the lawyers in the home office without having to increase the cost to the clients.
IV. Why you need to do it
The value of outsourcing is just that – it has value by and in itself. Outsourcing or offshoring allows a foreign company to provide its customers and clients high value services but not increase its price by outsourcing/offshoring its administrative services to lower labor cost countries such as the Philippines, without sacrificing the high value services rendered by the staff at the head office. The staff providing the high value services can be supported by the company staff offshore where lower labor costs are located. Imagine hiring a staff of 3-5 well educated and English speaking Filipinos for the cost of 1 staff in your home country.
V. How to do it?
There are two (2) methods by which a foreign company can set up its back office in the Philippines.
First (and easy) method: incorporate a wholly owned Philippine stock corporation (which we call an “ordinary stock corporation” or “OSC”), which thereby becomes that foreign company’s wholly owned Philippine subsidiary. This Philippine subsidiary corporation can then hire the local Philippine staff.
Second (but more complicated) method: the foreign company itself can apply for a license to do business in the Philippines and open its Philippine Representative Office (which we call an “RO”). An RO is not a separate juridical entity as it is not a corporation; but rather it is simply the extension office of the head office of a foreign company (hence, the term “office” is used instead of a “corporation” or company). The RO can also then hire the local Philippine staff.
The requirements are in the attached write up on Modes of Outsourcing/Offshoring to the Philippines.
VI. Difference between an OSC and an RO
Aside from the requirements to register an OSC and an RO, the main difference are as follows:
The Representative Office model (“RO”) which is an extension office of the foreign company’s head office:
Pros: because it is simply a “back office” and a “cost center” it does not generate income in the Philippines, and thus, later on its on-going accounting and tax compliance are far simpler (this is really the advantage — simpler compliance later on).
Cons: takes a longer time to register (takes about 3-4 months), more costly to register, requires an initial paid up capital of US$30,000.
The standard Ordinary Stock Corporation (“OSC”) which is a standalone independent company:
Pros: easy to set up (usually 4 weeks for incorporation upon submission of complete documents), lesser costs to set up; far simpler documentation to prepare
Cons: usual accounting and tax compliance applies to standalone companies; because this is a standalone company, later on it will have to generate income by billing clients outside the Philippines (which can be the foreign parent company, i.e. the parent company becomes the “client” of this Philippine company so that it has the money to pay its operating expenses)
VII. How we can help
Our law firm has been assisting numerous clients set up their offshore operations in the Philippines for years. We have assisted companies from the United States, United Kingdom, Australia, Switzerland, Singapore, and Thailand. The first three mentioned countries have been taking advantage of the lower labor costs in the Philippines for decades but still having found that the local Filipino team’s service is on par with their home office counterparts. It just makes sense to outsource to the Philippines. We have even assisted a multinational Singapore-based law firm set up its back office in the Philippine where intends to hire both Filipino lawyers, paralegals, and support staff to support the lawyers in the other jurisdictions where this Singapore law firm operates. We are also assisting an Israeli owned software development company establish its back office in the Philippines. Once set up, they refer to the Philippine operations as their “back office” which is essentially just a cost center in support of their head office business processes.
Aside from that, we are adept at compliance matter later on post-registration, which includes:
- Company maintenance and compliance
- Labor compliance (important since the outsourcing is all about labor matters)
- Tax compliance (and we also work with our partner accounting firm so that we provide a more holistic compliance to the clients).