gtz phils smedsep ssa it nov04

8/16/2019 Gtz Phils Smedsep Ssa It Nov04

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Project No. 01.2467.7-001.00

Small and Medium Enterprise Development for

Sustainable Employment Program

(SMEDSEP)

Subsector Analysis of the

Information Technology Industry

in Cebu

November 2004

COOPERATION

Federal Republicof

Germany

epublic of the Philippines


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Prepared Written by:

Consultant

Published by:

A DTI-TESDA-GTZ Program10th Floor, German Development Center,PDCP Bank Centre Building, V.A. Rufino cor. L.P. Leviste Streets,Salcedo Village, Makati City

|

Ms. Martina Vahlhaus, Program Manager

Printed on:

/Marian Boquiren, SDCAsia, Inc.

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

November 2004 - Makati City, Philippines

|[email protected] www.sdcasia.ph

[email protected]


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Subsector Analysis of the

Information Technology Industry

in Cebu

November 2004


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FOREWORD

*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 theGerman side and the Department of Trade and Industry (DTI) and the Technical Education and Skills

Development Authority (TESDA) for the Philippine side.

The Philippines' recognition of Information Technology as a significant economic driver is very muchembedded in such state policies as the Medium-Term Philippine Development Plan (MTPDP), theDepartment of Trade and Industry's (DTI) revenue streams, and the Technical Education and SkillsDevelopment 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)*, isdefinitely 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 inthe Visayas including the software, IT-enabled services, internet café, and hardware sub sectorsfocusing on the industry structure, value chains, constraints for development and possible interventionswithin 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 muchbetter position to identify and eventually implement, together with the IT sector players in Cebu, therelevant 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 StrategicDevelopment 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, IT-enabled services, internet cafés, and hardware sub-sectors, who unselfishly served as key informantsand/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 Programcounterparts 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.

SMEDSEPNovember 2004


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Cebu

The Philippines


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CONTENTSFOREWORD ......................................................................................................................................... 3

ACRONYMS ......................................................................................................................................... 6

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

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

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

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

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

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

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

CHAPTER 6: THE HARDWARE SUBSECTOR ..................................................................................... 70SECTION 1: INDUSTRY STRUCTURE .......................................................................................................................... 70SECTION 2: VALUE CHAIN .......................................................................................................................................... 72SECTION 3: HUMAN RESOURCES .............................................................................................................................. 73SECTION 4: CONSTRAINTS AND POTENTIAL INTERVENTIONS............................................................................. 73SECTION 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


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ACRONYMS ASP Application Service Provider

BSCS Bachelor of Science in Computer Science

BSIM Bachelor of Science in Information Management

BSIT Bachelor of Science in Information Technology

BAS Broadband Access Service

BOI Board of Investment

BDS Business Development Services

BPO Business Process Outsourcing

BPP Business Process Philippines

CMM Capability Maturity Model

CMMI Capability Maturity Model Integrated

CMMS Capability Maturity Model for Software

CEDF-IT Cebu Educational Development Foundation for Information Technology

CIPC Cebu Investment Promotions Center

CPVDC Cebu Property Ventures and Development Corporation

CITE Center for Industrial and Technological Enterprise

CITEM Center for International Trade Expositions and Missions

CVISN Central Visayas Information Sharing Network

CCNA Cisco Certified Network Associate

CCNP Cisco Certified Network Professional

CHED Commission on Higher Education

CPQI Continuous Productivity and Quality Improvement

COPC Customer Outsourcing Performance Center

DDTVET Demand-Driven Technical and Vocational Education and Training

DOST Department of Science and Technology

DTQ Direct-to-Quality

ECCP European Chamber of Commerce of the Philippines

EML Extensible Markup LanguageFGD Focus Group Discussions

GOIT Government Organization for Information Technology

HR Human Resource

HTML Hyper Text Markup Language

ICT Information and Communication Technology

ITECC Information Technology and Electronic Commerce Council

ITAP Information Technology Association of the Philippines

ITFP Information Technology Foundation of the Philippines

ITES Information Technology-Enabled Services


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IPO Initial Public Offering

ISO International Organization for Standardization

JITSE Japanese IT Standards Exam

MTA Medical Transcription Academy Inc.

MOA Memorandum of Agreement

MNC Multi-National Company

NCCFOO National Computer Center Field Operations Office

NICP National ICT Certification Program

OBM Own Brand Manufacturing

PAQTVET Philippine-Australia Quality Technology Vocational Education and Training

PC Personal Computer

PCCI Philippine Chamber of Commerce and Industry

PEZA Philippine Economic Zone Authority

PREDGIN Philippine Research Education and Government Information Network

PSE Philippine Stock Exchange

PSIS Philippine Summit on the Information Society

RDC Regional Development Council

SMEDSEP Small Medium Enterprise Development for Sustainable Employment Program

SME Small Medium Enterprises

SQL Structured Query Language

TVET Technical and Vocational Education and Training

TESDA Technical Education and Skills Development Authority

UML Unified Modeling Language

USAID United States Agency for International Development

VC Venture Capital

VCTIIT Virtual Center for Technology Innovation in Information Technology

VOIP Voice-Over-Internet Protocol


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EXECUTIVE SUMMARY

A. THE CEBU IT SECTORCebu was declared as an Information Technology (IT) hub in December last year. It is currently beingpositioned to become the country's IT hub outside of Manila particularly for software and e-services. Thefollowing are the 4 dominant subsectors: a) software; b) IT-enabled services; c) internet café; and d)hardware. To date, number of Filipino-owned IT companies is less than 100. The internet café subsector has the highest population estimated at 500 enterprises consisting primarily of micro enterprises. Thereis limited synergy between the different subsectors except for the hardware industry, which provides thecomputer and other peripherals to Filipino-owned companies. The software companies are sometimestapped by hardware companies to set-up the systems for their clients.

To date, statistics on employment of IT companies remain hazy. Basic problem is the lack of acomprehensive 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 10companies. The range in number of employees is wide --- from 2 to as many as 238 or an average of 16per company. Direct employment of Cebu IT locators in the Philippine Economic Zone Authority (PEZA)is at 950 as of July 2004.

A 19% increase in IT manpower is projected over the next two years --- with the 10 known biggestemployers 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 therecently conducted human resource (HR) survey by CEDF-IT indicate that number of graduates of IT andallied courses is on an increasing trend. However, the problem that cuts across all subsectors is thatmany of the graduates do not have the necessary qualifications required by the industry.

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B. POLICY AND RELATED ISSUES

The regulatory environment does impact the ability of local entrepreneurs to establish companies andcompete 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 interventionis the review and enhancement of policies related to accessing capital. Among the policy measuresbeing 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 andproviding incentives for VCs, such as Regional Headquarters incentives or government counterpartfunds.

4. Create a special window for IT companies in government financial institutions

C. SOFTWARE SUBSECTOR

Per DTI records, there are 25 registered Filipino-owned software companies and of which 16 aremembers of the recently formed software association. These companies are usually family-ownedenterprises. Majority of the local software houses are micro and small-scale enterprises. Themultinational 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 veryweak, either by the technological side or by the investment requirements.

Vertical linkages and trust relationships in the subsector are quite strong especially between client andsoftware 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 toa local company.

Three of the Filipino owned companies are moving into own brand "productized services" (products thatare sold as services). Products are concentrated on business solutions and information/applicationsoftware systems. Majority of the Filipino owned companies and freelance entities are concentrating onoffering software customization and installation services.

Only 2 out of the 25 Filipino owned companies cater to the export market. These are also the samecompanies who have set-up offices in Metro Manila and have clients in key cities in Mindanao and theVisayas. The remaining 23 companies are serving mainly the Cebu market.

Local companies generally generate clients through direct marketing and referral. Cebu has yet tostrengthen its image in the international market. Current thrust of the government promotion program isto invite foreign software companies to set-up in the Philippines.Some initiatives have also been made in promoting Cebu-based software companies in the internationalmarket via trade fair participation and selling missions. Export marketing initiatives at the company levelinclude 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 2ndtier distributors; c) trade fair participation; and d) website promotion. Industry players and analystsbelieve 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.

The following are the main constraints of the subsector:

1. High cost to implement and acquire internationally recognized process and quality certification suchas 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 commercialsuccesses

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-à-vis perceived values - lowwillingness 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:

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 wasfollowed by market development services, CMMI certification, TVET/BDS awareness campaign, andventure capital linkage services. Given that there are ongoing programs aimed at addressing the gaps inthe TVET IT supply, further analysis would have to be made on specific intervention niches for theprogram. Possible areas of intervention would be on: a) stimulation and strengthening of demand andpurchase 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 andother information technologies for conducting the business, but which only requires basic knowledgeabout information technology itself. In other words, employees have to know how to use computers, butneed 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 inthe process of setting up shop in Cebu. Some of them have even bypassed Manila entirely and haveestablished operations in Cebu directly.

Multinationals and foreign-owned companies dominate the Cebu ITES industry. There are only about 5 to10 registered Filipino owned companies. There are also quite a big number of freelance and informalenterprises 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 haveset 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 theUnited States. They keep a low profile; maintain lean and mean operations with very minimal

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overhead costs. To date, there are no statistical data about this group. They are not registered andthey do not pay taxes. Business transactions are made directly with the foreign client.

b. Multinationals/Foreign Companies Brokers/Marketing subsidiary/Parent Company. Players in theCebu 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 Filipinoowned companies in Cebu with all of them in the medical transcription business. 2 are in the mediumscale 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 analternative outsourcing model - the third party broker. These "eServices solution providers" typicallyestablish relationships with multiple offshore providers, and then channel work to these firms as theyacquire business. These solution providers tend to have a deep knowledge of the outsourcingbusiness, as well as extensive business networks that they utilize to secure new contracts. Thismodel represents the most common ways in which Filipino owned ITES companies in Cebu enteredinto their outsourcing relationship.

d. Cebu-based Business Process Outsourcing (BPO) company client. This represents the purestform 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 generallylower. However, this only happens for small transactions (between an informal enterprise and smallforeign company) and among established multinationals. This is not a viable model for new entrantsinto the outsourcing field because of the element of trust as well as the remoteness of the providersfrom the markets. Most US companies enter into their outsourcing relationships through a US-basedcompany.

The following are the constraints identified by the industry players particularly the contact centers andmedical 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 andreview/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:

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E. INTERNET CAFÉS

There are about 500 internet café operators in Cebu and of which 240 are members of the Internet CaféAssociation of Cebu. It is estimated that there are about 300,000 internet café users in Cebu. About80% to 90% of the clientele are students. As such, many of the internet cafes are located near the

schools.

When Internet cafés first started sprouting in 1996, the business was very successful and lucrative. Butnow, with so many cafes in existence in Cebu, about three Internet cafés close down every month.Demographically, Cebu has more Internet cafes than any other city by density. Compared to MetroManila, it is littered far more with cyber-cafes per 100 people. Fierce competition, however, is workingagainst the internet café business as the situation continues to bring prices down. Thus, the tension inthe market is creating a culture of commercial anxiety as stores lining the city’s boulevards and alleysare always on guard —— worried that customers might switch to the neighboring shop at the slightestprice drop. This, in effect, is making customer loyalty an alien term in Cebu. Internet café users areonly loyal to the shop that offers the lowest price. Competition is primarily based on price and location.

A typical internet café would have 10 to 15 computers with one or two attendants. Majority of theinternet cafes are micro scale. Similar to other micro enterprises, the owner handles most of the tasksand is assisted by one or two attendants. Many of the internet café operators had no previous computerand 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 thecomputers are not Internet-connected but dedicated to running games. Internet cafes near the schoolsalso 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 cafesare also into the assembly of hardware and computer maintenance services. A few have offered simpletraining 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 café — 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 voiceover internet protocol (VOIP) based services.


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Product development was voted to be the most important intervention for the internet café group.This was followed by market development services. Below is the menu of proposed BDS/DDTVETinterventions:

F. HARDWARE

Computer hardware comprises: data processing equipment (computers), peripherals and networkingproducts. It must be noted here that “manufactur e,” in the context of the Cebu computer hardwareindustry, refers primarily to the following:

- Assembly of computers with imported components by Filipino owned companies and freelancetechnicians/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 Cebuwho 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 MNCsand Filipino assemblers and retailers are almost non-existent. Likewise, locators in the Asiatown ITPark source their computers outside of Cebu.

Distributors of HP, Epson, Intel, and other similar products provide marketing support to retailers suchas: a) collateral materials; b) promotional activities; c) incentives for every unit sold (e.g., Intel) whichretailer-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 PCsand peripherals. Given that prices are fairly standardized, the only way for companies to improveprofit margins is to avoid waste and/or reduce costs. Towards this end, the following are theproposed interventions:


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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 thePhilippines 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 hasthe highest potentials for income and employment generation. The next step is the subsector analysisin order to gain a greater understanding of the market players, their roles, and interrelationships in the ITsector.

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 inthe 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 thesubsector 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-à-vis supply of

BDS and TVET in the market. Likewise, the report does not cover quantitative analysis of demand aswell 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 makesno claims of statistical relevance and relied mainly on available secondary data, which is hazy at themoment 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:

b. Focus group discussions per subsector

Unfortunately, there were only 2 ITES companies who participated in the FGD while only 1company attend the Hardware FGD.

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c. Secondary data research

This involved the gathering and/or review of the following:

• Past and on-going studies on the IT sector (Philippines and competitor countries,key markets for the Philippines)

• Newspaper articles/press releases

2. Data analysis

Constraints and interventions were identified and further elaborated based on iterative and inductiveanalysis of responses during the interviews and focus group discussions primarily from the followingperspectives:

• 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 substantiatingthe 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


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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 beingpositioned to become the country's IT hub outside of Manila particularly for software and e-services. Itboasts 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 DevelopmentFoundation for Information Technology (CEDF-IT), industry players cited the following advantages of Cebu:

• Cebu's pool of IT talent and its modern technology infrastructure make it the second largest IToutsourcing destination in the country. However, during the recent months, lack of qualifiedmanpower threatens the Cebu's outsourcing industry. According to Mr. Rene Almendras, president of cyberpark developer Cebu Property Ventures and Development Corporation, Cebu has lost potentialinvestors 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 ITmultinationals 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-à-vis other IT hubs inSoutheast Asia (Singapore, Kuala Lumpur, Manila, Bangkok, Penang, Jakarta, Bandung, and Ho ChiMinh City).

B. DOMINANT SUBSECTORS

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

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• In a competitiveness study of the IT industry in Cebu conducted by University of San Carlos researchdirector, 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, thebase of " Cebu as an IT hub". In general, multinationals have little or almost no transactions with thelocal companies. To date, only one Filipino company is known to have been tapped as asubcontractor to a foreign-owned company.

• From the interviews, it appears that there are more informal businesses than registered Filipinoowned companies. Many of the players are loose alliances formed by people belonging to a networkof freelance practitioners for specific projects. They find work via the Internet or through an informalnetwork of friends and associates based in other countries. Payments are usually done throughmechanisms 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.

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C. MARKETS

• Majority of the Filipino owned IT companies are oriented to the local market. The local market for ITincludes 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. Ingeneral, there is still the problem of perceived value and benefits vis-à-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. Thesubsidiaries are strongly controlled by their Japanese mother-companies and have just few local tiesin the Cebu economy. They get their clients through their mother-company and/or marketing teamsin Japan.

U.S. Market. Many of the contact centers have the United States as their market. The softwareproducts and services that are produced for the U.S. market can predominantly be classified asadvanced, 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 theEuropean clients, in the form of web development and internet/multimedia. This is due to the factthat the European market is still very unfamiliar with Philippine based IT companies, and vice versa.

• Export sales of Cebu IT PEZA locators

• CITEM's annual e-Services exhibit serves as an important venue for IT vendors interested to developstrategic partnerships with other service providers meet new prospects and develop new businessrelationships. This provides a great opportunity for companies to generate awareness of services andexpertise 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 venturecompanies, and forging international alliances. Unfortunately, though, many of the Filipino ownedcompanies would have difficulties in doing this on their own due to information and resourceconstraints.

According to the chief technology officer of Zzubo, Joel Martinez, while it is true that prospective clientsseek offshore IT vendors that offer cost effective quality services they prefer providers who have partnersabroad that they can rely on and do business with. As such, by forging international alliances andestablishing on-site offices, companies can build trust with existing and prospective customers muchfaster. Zzubo has expanded its business in the US and Hong Kong offering e-commerce Internetapplications and medical transcription and technology support services. At present, the companyemploys 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 acomprehensive 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 as238 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

• From the same CEDF-IT survey, over 50% of the companies plan to increase their IT staff in the nexttwo 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 10known biggest employers planning to increase by an average of 18%, and all the others by some 22%.

SECTION 2:

INTERNATIONAL COMPETITORSThere is an increasing competition among various countries as each one strive to position themselves tocapture a bigger share of the global market for IT services. The following are the countries thatmultinational 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 edgeis dependent mainly on labor cost. Physical infrastructure is still weak (i.e., low telephone density andunreliable 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 educatedlabor force, excellent supply infrastructure, cost competitive environment, and sophisticatedtelecommunications network. It has emerged as the leader in pan-European call centers and also has

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established backoffice facilities to cater to the needs of firms from the US and Europe. Strong, highlyspecialized legions of indigenous software producers have emerged that provide software services suchas program development, consultancy, and technical training.

Israel is very strong in software development, localization, and research and development (R&D). It hasa 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 managementapplications, etc.

India is the Philippines' closest competitor in providing IT-enabled services to major markets such asthe 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 theUnited States. A number of Indian "netrepreneurs" who made it big in Silicon Valley are now bringingbusinesses 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'sniche areas include software development, multimedia/interactive communication development, web

development and e-commerce applications, content management, and systems integration. Its smallworkforce 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 suchas 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. Singaporehas highly-trained IT professionals but its relatively high wages threatens their competitive position fromthat 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-enabledservices, 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 beengraduated 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 growthover the baseline of 2001. In addition, there were 628 graduates of associates degree in 2002, 934associates in 2003 and 1,278 associates in 2004. Among the bachelors degrees, the biggestcomponent 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 subsectorsis 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 about100 to 300 of the graduates (about 4.5% to 14%) were appropriately employed as softwaredevelopers, 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 above-average 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 travelagents, customer care specialists and technical support.

• Based on the CEDF-IT ICT HR Survey, the following are the unmatched and most sought after ITskills:

• 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 andallied 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 conductedby 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 anaccurate 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 relationshipmanagers, necessary for higher value-added services. Retention and poaching of employees are alsoamong 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 Filipinoowned 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 externalconsultants --- and apprenticeship.

• The challenge for Cebu-based academe and universities is to develop graduates with an adequatebalance of "hard" and "soft" skills, while simultaneously maintaining a curriculum or program that willaddress 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 July2002, 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 theJapanese IT Standard Examination (JITSE), current track record shows that only 44 out of the 726takers passed the test.

• JITSE has been recognized by the Philippine government as a national standard for the IT industryand 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 IToccupations. However, this was discontinued in response to the concern raised by industry as to itsquality and relevance especially that there exist already a range of industry recognized certificationprograms.

• With many of the TVET students coming from low and medium-low income families, the cost involvedin 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 RevisedPolicies 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 coreand major subjects of the IT courses. It conferred three (3) degrees that might be pursued by collegestudents. These are the Bachelors Degrees on Computer Science (BSCS), Information Technology(BSIT) and Information Management (BSIM). The Commission also developed the Medium-TermHigher Education Development and Investment Plan covering the period 2001-2004. It provides thepolicy framework and defines the programs that will enable the higher education subsector to fulfill itsrole in the development of the country's human resource in the context of globalization and theemerging knowledge-based economy.

• The 2002 Basic Education Curriculum was implemented starting School Year 2002-2003. It focuseson 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 youngadults with skills, knowledge, and values to become caring, self-reliant, productive and patrioticcitizens.

• The Virtual Center for Technology Innovation in Information Technology (VCTI-IT) is a flagship projectof the Department of Science and Technology leading in the development of the country's IT humanresource. 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 softwaredevelopment and training, the VCTI-IT:

a. Conducts subsidized IT trainings in Java, XML, UML, MS-Visual Basic, MS-Windows 2000Professional, 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 CapacityMaturity Method (CMM) and Japan Information Technology Standard Examination (JITSE)

d. Conducts baseline studies on the Local Software Engineering Activities and on the ITmanpower 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) assessthe 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 industrylinkages 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 traininginstitutions to ensure quality graduates needed by the local and international ITlabor markets. A study conducted by the IWG indicated that almost all IT programssubmitted to TESDA provincial offices result in program registration being

issued. TESDA's registration procedures do not require training providers to giveevidence to local industry demand and support for programs submitted for registration.

- Capability build-up program for private institutions offering operator, craftsman, andtechnician training courses

- Purposive training program for IT trainors

• TESDA, in partnership with Information Technology Foundation of the Philippines (ITFP), is currentlyimplementing the Philippine Australia Quality Technology Vocational Education and Training(PAQTVET) project Phase II. ITFP is an umbrella organization of both the private and governmentsectors involved in the development of the Philippine IT industry.

The project has three focus areas: a) establishment of industry partnership; b) drafting of the NationalQualifications Framework; and c) development of the National Assessment and Curriculum Guidesand 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 availabilityof high quality TVET processes; and d) develop a culture of commitment to meeting priorities andstandards.

• One of the institutions that have been consistent in contributing to the vision of Cebu becoming amajor IT hub for the last three years is CEDF-IT. The organization's mission is to recognize humanresource as a key area of intervention in order to realize the abovementioned vision. Thus, it isfocused on addressing issues like teachers training, curriculum standardization and industry-

academe-government linkage.

• Launching of the National ICT Certification Program last May 2004 during the Philippine Summit onthe Information Society (PSIS). A Memorandum of Agreement (MOA) was signed among the IT Association of the Philippines and the certification providers, namely: Sun Microsystems, MicrosoftPhilippines, Inc., Oracle Philippines, Cisco Systems, SAP Philippines, ePLDT, Japanese IT StandardExamination 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 Associationof the Philippines (ITAP), Philippine Chamber of Commerce and Industry (PCCI), and CEDF-IT toundertake the NICP.

Many of activities to jumpstart the NICP are scheduled in September 2004. Among these include theconduct of the NICP plenary sessions, offering of certification exams at a discounted rate,


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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 certificationexams and numerous training events ensuring the professional competency of InformationTechnology (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 islocated at Asiatown I.T. Park in Lahug.

• Philippine Long Distance Telephone Company (PLDT) recently signed an agreement with CEDF-IT topursue an extensive Research and Development (R and D) based curriculum among the schoolsoffering I.T. related courses. It is hoped that educational institutions, via CEDF-IT, would takeadvantage of the PLDT Innovation Laboratory (Innolab) to explore R and D based IT curriculum toproduce high quality graduates in the next few years.

• Another initiative from the private sector is the Cisco Networking Academy program aimed attraining 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 waslaunched in 1998 in the Philippines. Today, there are now over 140 academies in the Philippines, withmore 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 assistsin evaluating the results of the teaching.

• Cebu also gets institutional support from DOST-initiated projects such as the Central VisayasInformation Sharing Network (CVISNET), Philippine Research, Education and GovernmentInformation Network (PREGINET), and E-Governance.

CVISNET, an internet-based network of 100 government agencies, 20 NGOs and 12 colleges anduniversities in the region, provides a common network exchange point and develops websites anddatabases 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 institutionsinvolved in the development and demonstration of new technology, services, and applications withconnectivity 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 (NCC-FOO), has put in place systems to enable the region's local government units to improve their qualityof 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 outsideLuzon. The cyberpark was developed by Cebu Holdings Inc., through its subsidiary Cebu PropertyVentures and Development Corporation (CPVDC). To date, there are 5 locators in the park consistingof 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 generatingsets were also installed to ensure uninterrupted power supply at the park.


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• Cebu has sufficient capacity in the domestic broadband network together with internationalconnectivity. It is already linked to new high capacity fiber optic submarine cable systems in the AsiaPacific and Southeast Asian region with onward connection to bigger high capacity fiber opticsystems 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 broadbandcapacity 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 sothat 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 AccessService (BAX). BAX uses the Dense Wavelength Division Multiplexing, a technology by which thefrequencies of light carried on a single pair of optical fiber are subdivided into discrete wavelengthsallowing 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 situationacross 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 STM-1 (63 E-1 or 155 Mbps) at a much lower cost (wholesale). However, inspite of the rapid decline of thecost of the bandwidth in the new fiber optic system across the Pacific, the price in Cebu and in thePhilippines, in general, may not go down as fast as compared to other developed countries. This isdue 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), whichis 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 inthe local exchange and listing elsewhere. Among the reasons cited are the uncompetitive PhilippineStock 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. Firmunderwriting is required in the Philippines, whereas it is not required in Singapore. There is an annualfee 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 3months 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 incentivesfor 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 isoften 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 buildtrack records and expertise.

2. Existing ICT firms cannot avail of PEZA incentives unless they can demonstrate additionalinvestment, demonstrated primarily by the purchase of new, often imported, machinery andequipment. But, ICT firms can easily increase capacity and capabilities without need of substantialinvestments. 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 investmentin information technology. Towards this end, it has put together a package of incentives in a bid to enticeinvestments in the sector. The Philippine Economic Zone Authority (PEZA) for example, lists thefollowing 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 countriesparticularly for the Business Process Outsourcing services. Amendments to the Omnibus Code havebeen 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 competingdestinations 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 arebeing 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 gainsto 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 includeIT.

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 tomarkets, credibility, and domestic capability to promote software development and other IT relatedservices. The problem in the Philippines is not a lack of sophisticated intellectual property laws but onthe enforcement of these laws. All forms of intellectual property are more than adequately protected byexisting Philippine laws. However, there is a lack of conscientious implementation of the intellectualproperty 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, andmake 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 businesstrust in the Philippine IT and IT-Enabled Services environment. These policies and laws on privacy arenecessary to ensure that:

1. Government will not unjustifiably monitor communications and transactions between businesses andconsumers

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 shouldbalance the need to address and comply with requirements in the United States and Europe on the onehand, 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 inthe future would make it mandatory for 128 bit encryption of patient records being transmitted over theInternet to uphold security. As per certain reports, legislation will soon be passed in the US that willrequire state-of-the-art security to be in place for all transmissions of medical records. US and Europehave already signed data protection laws and it may be imperative that such laws are introduced in thePhilippines to maintain security and confidentiality.

Finally, both the government and industry have a major stake in protecting critical informationinfrastructure. In line with this, there is a need for capacity building programs for law enforcementagencies, 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 aswell as electronic signatures. But, the provisions that deal with electronic authentication are not self-executory. There is a need to strongly support ongoing efforts to draft and issue appropriateImplementing 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:

• 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 softwareindustry, there are more home-based unregistered freelance programmers than duly registeredcompanies. 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 aremembers 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 developmentcenters for their parent companies. For the multinationals and two export oriented Cebu-basedcompanies, a very important requirement/support facility is high speed data communication link, withwhich 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 veryweak, either by the technological side or by the investments requirements. For big projects, theyusually 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 clientand software houses. However, horizontal linkages are almost non-existent. Local companies rarelywork 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 manifestedonly in trade fair participation and in undertakings directly related to the association. HeadstrongPhilippines, 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. Inthe past, these rules were largely concerned with meeting basic cost parameters and guaranteeingsupply, but increasingly as the industry became more competitive, the critical success factors cameto 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 tointernational 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 isISO9000 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" (productsthat 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 andinstallation services. Many of the local companies rely less on 'frameworks' but focus more onprojects that improve their clients' basic functions (for example, the development of accountingsystems for a client that is still to a degree enterprise dependent). In essence, they are still to asignificant degree operating in a human resource augmentation mode. Generally, though, returnsfrom 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 engineeringsoftware services. It is also the same company which does both on-shore and off-shore developmentcontracts (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 andthe 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.


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• 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 thesoftware 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 expandedespecially among businesses. SMEs have difficulties in financing expensive IT purchases, thoughthis 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 governmentpromotion program is to

gtz phils smedsep ssa it nov04

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