# **A. Substitution Effect**

In a global competitive environment, companies use different strategies to reduce costs. Unbundling activities and relocating them to countries that have lower labor costs has gained popularity in the past 10 years. In other words, there has been a substitution effect, moving activities from high cost locations to lower cost locations. This phenomenon has continued during the economic crisis. Indeed, some countries have seen acceleration in the offshore services industry.

According to the A.T.Kearney’s Global Services Location Index 2009, the economic slowdown may increase the number of clients that use offshoring services. In the search for cost reductions, many companies find offshore services an attractive alternative. The report also notes that new offshore operations tend to be more efficient because they are not constrained by the bureaucracy in place in onshore facilities (AT Kearney 2009).

A recent study related to human resources (HR) outsourcing published in February 2009 revels that HR departments will maintain their strategies towards outsourcing HR services despite the economic crisis. One-third of the companies surveyed indicated that they were more inclined to outsourcing compared to two years ago because of the reduction in costs and improving efficiencies. An earlier version of the same survey (2006) showed that the most important activity for HR managers was to “attract, retain, and grow talent, compared to the 2009 survey which reveals that the number one pressure refers to ‘reduce operating costs’ ” (Hewitt Associates, 2009). US consulting firm Deloitte, for example is planning to hire 15,000 people in India over the next three years. The company’s global chief executive, Jim Quigley, explains: “the global economic crisis is also an opportunity to expand and acquire assets at attractive valuations” (Current IT Market, 2009a).

A country case example of the substitution effect is the Philippines, which has continued growing despite the global financial crisis. The Philippines has seen accelerated growth in offshore services in the past three years. According to the Business Processing AssociationPhilippines (BPAP), the offshore services industry in 2006 generated approximately US$3.3 billion in revenues and employed more than 235,000 people. The Association estimates that by the end of 2010, the industry will reach US$13 billion and will employ close to 1 million people (Business Processing Association of the Philippines, 2007).<sup>6</sup> A key factor explaining this sustained growth is that the services being carried out in the Philippines are considered non-discretionary spending, that is, they are services that are essential to maintaining a company’s business operations (Nair, 2010). The country is now one of the leading destinations worldwide for call centers, as well as finance and accounting outsourcing. According to the Call Center Association of the Philippines, the call center industry generated US$ 5 billion in revenues in 2009 and employed over 275,000 people (Villafania, 2009). The capital city, Manila, has already become the world’s largest city destination for BPO activities (Vashistha & Nair, 2010). Its large workforce, low costs, and significant English-speaking

> 6 This estimates were prepared before the economic crisis.

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