Future of outsourcing and offshoring

(Published in Business World under the View from Taft column, June 18, 2009)

Amid the mixed forecasts on the global economic rebound, experts on the outsourcing and offshoring industry are consistently painting a rosy picture toward the end of the year. According to the 2009 edition of the Black Book of Outsourcing, more than half of companies polled say they expect their spending on outsourcing services to come back and return to pre-recession levels.

Similarly, a Business Processing Association of the Philippine (BPA/P) survey among industry players showed that 96% of respondents representing organizations that provide non-voice Business Process Outsourcing (BPO) services believe that 2009 prospects for their organizations are good, excellent, or outstanding. More than half of the respondents, 51%, said prospects are excellent.

All these forecasts bode well for the local industry, but more likely than not, the industry will never be the same after the global slump that we are experiencing. I forecast three major directions where the global as well as local outsourcing and offshoring industry is headed:

1. Governance will become a major criterion for outsourcing vendor selection and a competitive advantage among players

With Satyam’s CEO falsely boosting the company’s earnings numbers in January 2009, and the recent ban of Wipro in doing business with the World Bank, the corporate governance crisis in the outsourcing sector deepened. These incidences made clients think twice before contracting with vendors.

After the post-Indian governance crisis, clients all over will be taking a more stringent stance on making governance, especially corporate and operating governance, a major criterion in outsourcing provider selection. From the vendor’s side, a good governance practice will become a competitive advantage to close more outsourcing contracts. With these in mind, more established and governance-focused outsourcing vendors should prepare to capitalize on the rise of similarly governance-focused clients.

Local and medium-sized outsourcing providers will need to adopt stricter and more comprehensive governance structures and practices to compete with the bigger and more established players.

2. Strategic companies that focus on innovation will prosper

There has been much discussion in the BPO industry that companies that move up the outsourcing value chain are able to win and retain more clients and improve profitability. However, playing in this higher value chain, i.e., the knowledge process outsourcing (KPO) space, such as financial analysis or engineering outsourcing is not a guarantee for success. What is more critical is that BPO players need to continually innovate on all fronts.

In fact, a 2005 McKinsey Study strongly advised that the Indian IT-BPO sector can generate over US$10-15 billion of additional revenues by 2010-over and above its $60-billion export target — provided it makes innovation its chief growth catalyst. Moreover, a 2005 IDC survey among BPO clients in the US suggested that 35% of the respondents look for BPO providers to drive innovation.

Innovation among outsourcing providers may come from three fronts: business model innovation, which entails significantly changing the structure and/or financial model of the business; services/markets innovation, which entails creating new or significantly differentiated services or go-to-market; and operations innovation, which involves improving the effectiveness and efficiency of business processes.

The industry is replete with examples on award-winning innovative BPO players, from Evalueserve to Genpact As we witness a slowdown in outsourcing activities amid recession, innovative companies will take advantage of the slower pace and strengthen their business models, service deliveries, and operations through innovation.

Local BPO players will need to incorporate innovation initiatives in their strategic planning process. They will also need to develop a culture of innovation that rewards creative and innovative ideas.

3. Outsourcing providers will consolidate to take advantage of economies of scale and specialization

Stronger outsourcing customers will take advantage of the tougher marketplace and demand higher levels of service at a lower unit cost. Hence, vendors will be forced to consolidate through mergers and acquisitions. Weaker competitors, in order to survive, will get absorbed by strongers companies, while others will be forced out of the playing field.

As a result of the global financial crisis, a wave of consolidation is already taking place in the financial services and insurance BPO. Economies of scale and breath of service in specific vertical industry knowledge, e.g. insurance, will be the key drivers for consolidation. Large BPO players will absorb niche players to complete the full value chain in a vertical industry. Consolidation is also taking place on a horizontal level, e.g., contact center services and human resources outsourcing, to capitalize on specialization and economies of scale.

****
Reynaldo C. Lugtu Jr. teaches management and marketing courses in the MBA Program of the Graduate School of Business, De La Salle University. He may be e-mailed at rlugtu2002@yahoo.com or visit his blog at http://rlugtu.blogspot.com.

Smarter healthcare

(Published in Manila Standard Today under the Greenlight column, June 8, 2009)

The problems with our health care system are well-known and well-documented- and endlessly debated. What’s not so apparent is that many of them arise because the system isn’t, in fact, a system.

Connecting the system
Rising costs, limited access, high error rates, lack of coverage, poor response to chronic disease and the lengthy development cycle for new medicines- most of these could be improved if we could link diagnosis to drug discovery to health care are providers to insurers to employers to patients and communities. Today, these components, processes and participants that compromise the vast health care system aren’t connected. Duplication and hand offs are rampant. Deep wells of life-saving information are inaccessible.

Take for instance, in 2005, the Health Education Reform Order (HERO) reported that the total health care expenditure in the Philippines amounted to P165 billion, or about 3.5 percent of the GNP. Local health care spending has been focused on ‘sick care’, paying for products and services for patients to treat diseases when people have already developed them or are in the advanced stages. There is a clear need for improvement.

A smarter health care system starts with better connections, better data, and faster and more detailed analysis. It means integrating our data and centering it on the patient, so each person ‘owns’ his or her information and has access to a networked team of collaborative care. It means applying advanced analytics to vast amounts of data, to improve outcomes.

Using technology for smarter health care
Smarter health care is instrumented, so our health systems can automatically capture accurate, real-time information. IBM’s joint initiative with Google Health and the Continua Health Alliance enables individuals and stream data from medical devices. Implanet, a French orthopedics manufacturer, is using RFID technology to track surgical implants from manufacture until they’re inside patients. And health care providers in Denmark are using predictive health systems with advanced telemetry to monitor elderly patients in their homes, sharing data instantly.

Smarter health care is interconnected, so doctors, patients and insurers can all share information seamlessly and efficiently. Sainte-Justine, a research hospital in Quebec, is automating the gathering, managing and updating of critical research data, which is often spread across different departments. Then they’re applying analytics to speed childhood cancer research and improve patient care—while drastically lowering the cost of data acquisition and enhancing data quality. Servicio Extremeno de Salud, a public health care service in Spain, has built a regionally integrated system that lets patients go to many health centers within the region, knowing a doctor there can have the patients’ complete, up-to-date records for faster and more accurate treatment.

Replicating smart ideas
Smarter health care is intelligent, applying advanced analytics to improve research, diagnosis and treatment. Geisinger Health Systems is integrating clinical, financial, operational, claims, genomic and other information into an integrated environment of medical intelligence that help doctors deliver more decision s and deliver higher quality care, all because they can easily turn information into actionable knowledge. And IBM is helping some of the world’s top universities develop a global network of medical data, giving doctors diagnostic resources that were once unimaginable. These repositories currently hold millions of digital images.

Smarter health care systems like these hold promise beyond their particular communities, patients and diseases. The smart ideas from one can be replicated across an increasingly efficient, interconnected and intelligent system. This should result in lower costs, better-quality care and healthier people and communities. In other words, we’ll have a true health care system, with the focus where it belongs- on the patient. Let’s build a smarter planet.

****
Reynaldo C. Lugtu Jr. teaches management and marketing courses in the MBA Program of the Graduate School of Business, De La Salle University. He may be e-mailed at rlugtu2002@yahoo.com or visit his blog at http://rlugtu.blogspot.com.

Road to a brighter future–smarter transportation systems

(Published in Business Mirror under the Mirror Image column, June 3, 2009)

Traffic congestion is choking the air and economies of cities everywhere. Worldwide, cities are wrestling with the environmental, economic and social impact of increasing urban congestion, resulting from too many vehicles on roads built during the last century and demand simply exceeding capacity.

According to the US Department of Transportation, traffic congestion costs the United States $200 billion annually. Not only is this a huge waste of money, the Texas Transportation Institute reported that it also contributes to a loss of 7 billion hours stalled in traffic and $2.3 billion gallons of wasted fuel per year.

In the Philippines there are 3,000 passenger buses making a total 32,000 trips that go along Edsa daily, according to the Metro Manila Development Authority (MMDA). An average bus can accommodate 60 people. Occupancy rate of these buses is only 66 percent per vehicle. This means that on the average, public buses along Edsa have 640,000 empty slots available per day. A daily income ranging from P7,680,000 to 19,200,000 for these buses are lost due to poor transportation-management systems.

The problem is only getting worse as mass urbanization is increasing dramatically. By next year, 59 cities worldwide are forecast to have populations of 5 million or more, up nearly 50 percent since 2001.

Doing nothing is no longer an option. Building more roads isn’t the answer, either. We need to make better use of existing infrastructure—such as roads and rail tracks—while also building new, smarter transportation systems.

Cities that embrace new models and technologies across all transportation modes will be best positioned to address the impact of mass urbanization and thrive in an increasingly competitive global market.

New transportation solutions, such as congestion charging and real-time traffic prediction and management, are playing a significant role in helping cities to reduce congestion, improve their environments and, ultimately, enhance the quality of life of their citizens.

By creating smarter transportation systems, we’ll be able to predict the need for passenger transportation based on population trends, changes in where people live and work, as well as local events and the congestion at a given street intersection.

We’ll be able to recognize patterns and be able to rapidly adjust schedules, traffic routing, vehicle spacing, and speeds to changing conditions and for safety.

But these systems won’t be completely effective until they are instrumented, interconnected and intelligent, and this is starting to happen.

We’re already instrumenting vehicles in all modes of transportation, the infrastructure they move on, streets and traffic lights, aging bridges, high-speed railroad tracks and trains, airline baggage and aircraft parts, subway tunnels, ticket systems, and even the mobile devices carried by travelers so we can understand where they are going, when, how often and perhaps why.

Instrumentation is all about sensing what is happening right now, whether it is the temperature of a train wheel bearing, the location of a misplaced suitcase, metal fatigue in a bridge, or the number of cars on a highway at 6 a.m.

Within a single mode of transportation, collecting and sharing information across the operating ecosystem can yield dramatic capabilities. Extending this concept across modes of transportation exponentially increases the potential benefits.

For example, a high-speed passenger train is running at 350 kph from Beijing to Shanghai. Digital video surveillance and on-train sensors recognize that the train has slowed unexpectedly. Without human intervention, the system instantly relays this information to the train following four minutes behind, automatically slows the second locomotive at a safe rate of deceleration, and notifies the operator.

Intelligent transportation systems can play a key role in improving the quality of everyday life for urban citizens, reducing traffic congestion, improving air quality, and improving road access for public transportation and emergency vehicles.

In Stockholm, Sweden, a seven-month congestion-charging pilot saw traffic entering the city decrease by 25 percent, a 40-percent drop in greenhouse gases such as carbon dioxide and an increase of 6 percent in the number of travelers using public transport.

What we need is a smart transportation system equal to the needs of the 21st century—a system that reduces travel times and increases mobility, a system that reduces congestion and boosts productivity, a system that reduces destructive emissions and creates jobs.

The movement of people across town or across the globe is a critical factor affecting our economic vitality, the quality of our lives, access to work, energy consumption, carbon emissions and the climate. In the end, the people of the world depend on transportation for survival.

Cities, regions and nations need to use integrated approaches to provide smarter transportation systems that serve the needs of a growing world, which balance the merits of different modes of transportation while enhancing capacity, safety and efficiency.

Smarter transportation can drive economic growth and improve quality of life. We can’t allow poorly conceived transportation to destroy the neighborhoods we live in, or the planet we share.

****
“Mirror Image” is a rotating column featuring writers from the DLSU Professional Schools Inc.

Reynaldo C. Lugtu Jr. teaches management and marketing courses in the MBA Program of the Graduate School of Business, De La Salle University. He is country manager, communications sector of IBM Philippines. He may be e-mailed at rlugtu2002@yahoo.com or visit his blog at http://rlugtu.blogspot.com.

Communications for a smarter planet

(Published in Business Mirror under the Mirror Image column, May 12, 2009)

What’s the sound of a planet talking? A century ago, the answer was simple: people conversing in person or over wired networks.

Today it’s not just everyone, but also every thing talking to every other thing, in constant motion.

An estimated 2 billion people will be on the Web by 2011—and they’ll be doing more than talking. Video on demand, IP or Internet television and Internet TV will account for nearly 90 percent of consumer Internet traffic by 2012. When people talk, it will be to many more people—via social-networking sites, whose memberships will top 500 million in the next three years.

Consider that 10,000 security cameras in London are connected to the Web, feeding it video 24 hours a day. Or take the 300 connected sensors on a bridge in Minnesota; add the 800 monitoring another in Hong Kong—and multiply by the millions of roads, bridges and buildings in cities around the world. Now add billions of intelligent phones, cameras, cars and appliances, and millions of miles of smart power lines and roadways.

Is it any wonder that in just three years, Internet traffic is expected to total more than half a zettabyte? (A zettabyte is a trillion gigabytes—1 followed by 21 zeroes.)

A smarter planet will require a smarter communications infrastructure. High-speed broadband, as important as it may be, doesn’t make a network smart. We need the network to be multidirectional instead of point-to-point. Smart networks must be infused with advanced analytics and intelligence so they can identify connected, instrumented things and collect relevant data from them. They’ll have to be built on a foundation of standards and software that allow trillions of devices and objects to “talk.” And we’ll need next-generation digital platforms on which telecom providers can create and deliver all kinds of services.

Fortunately, smarter communications are at hand. India’s leading private telco is using IBM’s digital platform to deliver new services dynamically to hundreds of millions of people. A US hospital is applying a pervasive wireless infrastructure, bar coding and RFID (radio-frequency identification) to manage its assets and administer medications—helping to increase both patient safety and operational efficiency.

A network operator in Taiwan is offering customized advertising based on subscriber purchasing patterns—while individual subscribers of one Chinese telecom provider are collaborating directly with the company to create new services. And a university in California worked with a leading technology provider for the first wireless parking solution to be integrated with payment stations.

Closer to home, Smart Communications, in collaboration with IBM Philippines, has expanded its Load Connect service to other areas. This is an automated service that enables real-time reloading of airtime and Smart Money though a machine that accepts and recycles multiple bills.

A thinking, communicating planet will spur advances in everything from science and medicine, to business and technology—to possibilities not yet imagined—and will help billions of people join the global economy. When things communicate, systems connect. And when systems connect, the world gets smarter.

-------------------------------

“Mirror Image” is a rotating column featuring writers from the DLSU Professional Schools Inc.

Reynaldo C. Lugtu Jr. teaches management and marketing courses in the MBA Program of the Graduate School of Business, De La Salle University. He may be e-mailed at rlugtu2002@yahoo.comThis e-mail address is being protected from spambots. You need JavaScript enabled to view it , or visit his blog at http://rlugtu.blogspot.com.

Smart power

(Published in Manila Standard Today under the Greenlight column, Feb 23, 2009)

For most of the last century, the world’s electrical grids stood as an engineering marvel of the modern age and a global symbol of progress. The cheap, abundant power they brought changed the way the world worked — filling homes, streets, businesses, towns and cities with energy.

But today’s electrical grids reflect a time when energy was cheap, their impact on the natural environment wasn’t a priority and consumers weren’t even part of the equation.

Back then, the power system could be centralized, closely managed and supplied by a relatively small number of large power plants. It was designed to distribute power in one direction only — not to manage a dynamic global network of energy supply and demand.

As a result of inefficiencies in this system, the world’s grids are now incredibly wasteful. With little or no intelligence to balance loads or monitor power flows, they lose enough electricity annually to power India, Germany and Canada combined for an entire year.

Take for example, if the U.S. grid alone were just 5% more efficient, it would be like permanently eliminating the fuel and greenhouse gas emissions from 53 million cars. Billions of dollars are wasted every day generating energy that never reaches a single light bulb.

Fortunately, our energy can be made smart. It can be managed like the complex global system it is.

We can now instrument everything from the meter in the home to the turbines in the plants to the network itself. In fact, the intelligent utility system actually looks a lot more like the Internet than like a traditional grid. It can be linked to thousands of power sources – including climate-friendly ones like wind and solar. All of this instrumentation generates new data, which advanced analytics can turn into insight, so that better decisions can be made in real time, i.e. decisions by individuals and businesses on how they can consume differently, decisions by utility companies on how they can better manage loads, and decisions by governments and societies on how to preserve our environment. The whole system can become more efficient, reliable, adaptive...smart.

Smart grid projects are already helping consumers save 10% on their bills and reduce peak demand by 15%. Imagine the potential savings when this is scaled to include companies, government agencies and universities.

IBM scientists and industry experts are working on smart energy solutions like these around the world. We’re working with utility companies globally to accelerate the adoption of smart grids to help make them more reliable and give customers better usage of information. We’re working on seven of the world’s 10 largest automated meter management projects. We’re even exploring how to turn millions of future electric vehicles into a distributed storage system, so excess power can be harnessed and returned
to the system.

Our electrical grids can be a symbol of progress again — if we imbue the entire system with intelligence. And the good thing is — we can.
-------------------------------

Reynaldo C. Lugtu Jr. teaches management and marketing courses in the MBA Program of De La Salle Professional Schools. He is Country Manager, Utilities and Communications Sector of IBM Philippines. He may be e-mailed at rlugtu2002@yahoo.com, or visit his blog at http://rlugtu.blogspot.com.

Governance in offshoring and outsourcing

(Published in The Manila Times under the Managing for Society column, January 27, 2009)

When Ramalingam Raju, chairman and CEO of India’s fourth largest outsourcing vendor, Satyam Computer Services, admitted on January 7, 2009, that he had illegally boosted the company’s earnings numbers and created a fictitious cash balance of more than $1 billion, the corporate world was shocked by the weak, if not the lack of corporate governance in one of India’s most admired firms.

Like a prognostication coming true, the World Bank banned Satyam in 2008 from participating in its procurement contracts for eight years, when it discovered Satyam employees had accessed sensitive information in its database. In 2003, Satyam won a lucrative five-year “sole source” contract to design, write and maintain all of the World Bank’s information systems. The contract, which began at $10 million, had grown to over $100 million by 2007. In 2008, the contract was not renewed.

The Indian corporate governance crisis deepened recently when the World Bank decided to ban India’s third largest outsourcing group, Wipro, from dealing with the agency for four years. The agency’s decision was based on its findings that Wipro offered shares to World Bank employees when it floated stock in the US in 2000.

But what will strikingly emerge from these governance lapses from Indian outsourcing vendors is a razor-sharp focus on a more robust governance framework with two major pillars—corporate governance and operating governance.

Corporate governance (CG) framework spells out the various regulations, laws, practices, and benchmarks used to govern a corporation. This framework is directed toward fulfilling organizational obligations to its shareholders. Shareholders, board of directors, management and employees form the four-tier hierarchy impacted by the CG framework. Efficient coordination between the four tiers and smooth inter-tier operations form the basis of an effective CG policy.

Past governance problems in the corporate world, such as those at Enron, Global Crossings, Worldcom and others, have resulted in new legislation such as the Sarbanes-Oxley Act, stronger regulations and tightened supervisory framework which vary from country to country.

Particularly in India, the corporate governance crisis is a big blow to its local outsourcing industry, and may have a deep impact on the global outsourcing industry, in terms of regulatory, commercial and governance frameworks. We will see the Indian government reexamining its corporate governance framework aimed at strengthening it or ensuring that the existing frameworks are stringently implemented. Governments in other offshoring and outsourcing destinations such as those in the Philippines, should also evaluate their existing governance frameworks to protect the growing industry.

Operating governance (OG) framework, on the other hand, is directed towards the fulfillment of obligations between the outsourcing provider and client. It enables the outsourcing provider and client to mutually manage their relationship, expectations, contractual agreements and services. It includes management, control, measurement and assessment, with quantifiable measurement being a key component of OG. It is guided by a defined set of standard, documented processes and best practices. The alleged security breach in the information database of World Bank by Satyam employees is a breakdown in the control aspect of OG.

With a focus on the aforementioned governance frameworks amid the Indian governance crisis, clients all over will be taking a more stringent stance on making governance a major criterion in outsourcing provider selection. On the provider side, a good governance practice will become a competitive advantage among vendors to bag more outsourcing contracts.

That’s why we forecast that the more established and governance-focused outsourcing vendors, the likes of IBM, will win over the current and former clients of Satyam. These providers are also well-prepared to capitalize on the rise of the likewise governance-focused clients.

As with the local and medium-sized outsourcing providers, it is also critical for them to adopt stricter and more comprehensive governance structure and practice to compete with the bigger players.
---------------------
Reynaldo C. Lugtu Jr teaches management and marketing courses in the MBA Program of De La Salle University Ramon V. del Rosario Sr. Graduate School of Business. He may be e-mailed at rlugtu2002@yahoo.com or visit his blog at http://rlugtu.blogspot.com.

Can outsourcing be stopped?

((Published in the BusinessMirror under the Mirror Image column, Nov 11, 2008)

Now that President-elect Barack Obama will be inaugurated on January 20, 2009, many are holding their breath, especially the business-process outsourcing companies in India, the Philippines and others, as to how he can turn around the outsourcing of jobs from the United States. In debates and on the road, Obama repeatedly said that if elected, he would discourage companies from “shipping jobs overseas” by taking away tax breaks, or by giving benefit to those corporations that keep jobs domestically.

“We can keep giving tax breaks to companies that ship jobs overseas, or we can give tax benefits to companies that invest right here in New Hampshire,” Senator Obama said at a joint appearance with Sen. Hillary Clinton in Unity, New Hampshire.

According to CIO magazine, economists and legal advisers contacted about those comments said they are unaware of any specific tax breaks aimed at offshoring or outsourcing tech jobs. Instead, they said, Obama may be targeting broader tax-deferment strategies, such as the ability of multinational firms to avoid taxes on profits by moving money overseas.

But can corporate tax policy alone really do much in stopping the offshoring of US jobs? Some analysts don’t believe so. “Any plans for a Tax Code change are like trying to plug a hole in a leaky dam with your finger—to believe the US government Tax Code promotes outsourcing is a major misconception of the fiery debate around outsourcing offshore,” according to Joe Greco, director of California State University-Fullerton’s Center for the Study of Emerging Markets. Also, according to a Computerworld report, Nielsen Co., the media company known for audience measurement, has given up tens of thousands of dollars in local tax breaks this year after signing up with an outsourcing provider based in India.

Back in 2004, John Kerry was, likewise, criticized for using the same tax-policy argument against offshoring. Factcheck.org, a political-analyst group, pointed out that taxes “are a very small part” of companies’ decisions to move jobs offshore. Those at a 2005 Brookings Institution summit on trade also said taxes had little to do with outsourcing. In addition, Joel Slemrod, a tax expert at the University of Michigan’s business school, said that, “For those who see [offshoring] as a problem, this is not a solution.”

And so US companies continue to outsource. One glaring reason is the huge cost differential between the United States and offshore providers. A programmer can be hired in China for $12 an hour while the same goes for $56 in the United States. Depending on the skill and location of the offshore vendor, the international wage ratio can reach 100:1 as corporations outsource to where they can reduce costs and maximize profits. Experts predict that the significant cost differential between the United States and other countries will continue for 30 years.

Although cost reduction is the major reason US companies do offshoring, there are a number of others why firms do it. According to a 2004 Outsourcing World Summit report, of the Western firms that do offshoring, 9 percent want to gain access to skills and 3 percent require innovation from the outsourcing vendor, and the number is growing. And why not? China and India graduate a combined half a million engineers and scientists a year, versus 60,000 in the United States; India and the Philippines are already recognized globally as the hotbed of information-technology innovation and creativity in the areas of programming, animation and design.

Many of the outsourcing professionals and executives in India and the Philippines are not bothered by the pronouncements of Obama during the campaign. Outsourcing will continue to flourish in the coming years as corporations find ways to stay competitive. As India’s Finance Minister P. Chidambaram commented, “Once Obama is in office, he will realize that it is an interconnected world, and countries have to work together.”

---------------
“Mirror Image” is a rotating column featuring writers from the DLSU Professional Schools Inc.

Reynaldo C. Lugtu Jr. teaches management and marketing courses in the MBA program of De La Salle Uiniversity Graduate School of Business. He may be e-mailed at rlugtu2002@yahoo.comThis e-mail address is being protected from spambots. You need JavaScript enabled to view it or visit his blog at http://rlugtu.blogspot.com.>

Challenges in the power sector

(Published in the Manila Standard Today inder the Greenlight column, Nov 3, 2008)

I recently attended the 17th Conference of the Electric Power Supply Industry held in Macau from Oct. 27 to 30, which was attended by the region's foremost leaders, experts, practitioners, professionals, academics, equipment suppliers and service providers in the electricity industry to meet and exchange knowledge and expertise.

The apt theme of the conference, "Power sector in the fast climate changing world," summarizes the urgency among industry players to be cognizant of the impact of power production and distribution on the environment.

Balancing act
As the Asian power sector is experiencing unprecedented rapid growth in electricity demand, environmental awareness is likewise on the increase. The challenge this pose is how industry players can do a balancing act between meeting demand and preserving the environment.

This issue is compounded by fuel price volatility, which has witnessed peaks and troughs these past years, aggravating concerns about the future availability of some energy supplies and over¬dependence on particular fuels in many countries.

The current financial crisis' has increased the strain among industry players, as large institutional as well as ordinary consumers of electricity may potentially reduce their usage. This may affect the structure and competitiveness of many national electricity markets, which will evolve at a greater or lesser pace. New investors are appearing as others leave the stage.

Uniting to tackle the challenges
The conference delegates, numbering a over a thousand from 17 member countries, recognized these issues and were all in unison to tackle the challenges that they face. These were further punctuated by Mr. Lau Si Lo, representative of Macau chief executive, in his opening remarks when he said, "We will employ cleaner fuels as well as actively explore the use of alternative fuels and renewable in Macau. We ~e keen to promote energy efficiency by enforcing demand-side management through public campaigns, enhanced price signals, energy management, new technologies and other methods."

Technology providers likewise demonstrated their solutions to address some of the issues. For instance, IBM has created and demonstrated the Intelligent Utility Network (IUN) solution to transform the way power is delivered and managed, analyzed and used.

One pillar of IUN is advanced meter management (AMM), which enables utilities to remotely collect usage data via sensors¬ eliminating manual meter readers in the field. Instead, smart meters automatically collect and transport the reads, at regular intervals or on demand. AMM analytics then extract meaningful knowledge from volumes of data, which enables informed decisions about operations during times of high demand.

Innovative solutions from the Philippines
The Philippines delegation, which included Manila Electric Co., National Transmission Corp., and National Power Corp., shared their expertise, innovation and experience to address many of the issues raised during the conference. In fact, it's laudable that the Philippine representatives, Meralco in particular, delivered the most technical paper presentations to a foreign audience, from a variety of topics-from business intelligence to improve operations to energy efficiency in the electricity industry. Many of the papers presented by the Philippine delegates were innovative solutions to technical, process, and people issues-a clear testament of the innovative talent of Filipinos.

It is also timely that the leadership in the local power sector was recognized by CNBC, the media company, when it nominated Meralco's chairman and chief executive, Manuel Lopez, for the 7th Annual Asia Business Leaders Awards. This is truly an honor for the country. Mr. Lopez is nominated together with a roster of accomplished business leaders in the region, including Mr. S Ramadorai, chief executive and managing director of Tata Consultancy Services Ltd. of India, Dr. Viroj Mavichak, managing director of Thai Oil PCL, among others.

The Philippine power sector, with the leadership of its executives and professionals is truly poised to face the challenges of the industry.

----------------------
Reynaldo C. Lugtu Jr. teaches management and marketing courses in the MBA Program of De La Salle University, Ramon V. del Rosario Sr. Graduate School of Business. He may be e-mailed at rlugtu2002@yahoo.com or visit his blog at http://rlugtu.blogspot.com.>

Meet the new breed of power customers

(Published in Business Mirror under the Mirror Image column, Sept 17, 2008)

Historically, the relationship between utilities and consumers has been rather lopsided—utilities had the power, both literally and figuratively. But the confluence of climate- change concerns, rising energy costs and technology advances leading to greater consumer involvement is now radically redefining that relationship.

IBM’s recent surveys of 1,900 energy consumers and nearly 100 industry executives across the globe reveal major changes under way—a more heterogeneous consumer base, evolving industry models and a stark departure from a decades-old value chain. We believe companies need to prepare now for a participatory network that enables customers to choose from a wide variety of suppliers, actively manage their consumption and even sell back surplus power they generate.

In decades past, as long as the energy flowed when and where required, residential and small commercial customers were satisfied, leaving all the decisions about their energy supply to their trusted providers, even if they were unhappy with the bill.

But times have changed. Growing reliability concerns, fear for the environment’s future and ever higher energy bills are making some consumers want to manage more of their energy-supply decisions themselves. If utilities and regulators allow them to be more active participants, these customers are willing to shoulder more responsibility.

Given this shift in consumer attitudes and the rapid advancement of new technologies, what will the industry look like in five to 10 years? How quickly will utilities and regulators respond to these emerging consumer needs? And how much control do consumers really want?

To help answer these questions, we surveyed 1,900 consumers in six countries—Australia, Germany, Japan, the Netherlands, the United Kingdom and the United States. In our “consumer” group, we included residential households and small commercial customers, but excluded large commercial and industrial companies. We also interviewed nearly 100 industry executives in Europe, North America and the Asia-Pacific region—one-third from large firms with revenues greater than $5 billion, and the remainder from smaller utilities.

Based on the insights from our consumer survey, interviews with utility executives and our own industry experience, we anticipate a steady progression toward a participatory network—a technology ecosystem comprising a wide variety of intelligent network-connected devices, distributed generation- and consumer-energy management tools. Although the precise time frame for reaching this end state is unknown, our research suggests a few major milestones. Within five years, the percentage of the world’s electric utilities that will be generating at least 10 percent of their power from renewable sources will have doubled. In that same time frame, we believe sufficient supplier choice will allow meaningful consumer switching to emerge in most major competitive markets. Also, based on both consumer and utility responses, we expect utility-demand management initiatives to expand dramatically and electric power generation by consumers to make tremendous inroads within 10 years.

The IBM report demonstrates an industry that is fast approaching a tipping point, where increasing consumer involvement, climate-change concerns and technology advances are converging to create a very different way for energy to be generated, distributed and managed. Each of these is fueling the others, and the entire combination is catalytic.

Consumer involvement
When energy providers are not willing or able to satisfy their needs, consumers will have an increasingly viable alternative—the means to generate their own electricity. According to the IBM consumer survey, one-half or more of the consumers were interested in self-generation if they could save 50 percent on energy costs, have 100-percent reliability at no additional cost or sell power back to the utility. Among the utility- industry executives surveyed, more than half believe that the availability of new technologies could move a significant percentage of residential and small commercial customers to self-generation within the next decade.

Climate-change concerns
Utilities are making major investments and operational changes to respond to climate-change concerns and policies, the report observes. According to the IBM Institute for Business Value/Economist Intelligence Unit 2007 Utility Industry Executive Survey, within five years, the percentage of the world’s electric utilities that will be generating at least 10 percent of their power from renewable sources will have doubled. The IBM consumer survey found that, outside of the United States, one out of every four survey respondents had computed the climate-change impact of their energy usage. Among those who currently do not have the option of choosing renewable power sources, more than 60 percent expressed an interest in doing so.

Technologies driving industry change
IBM’s paper contends that, from a technology perspective, smart meters, network automation and analytics and distributed generation will drive the most industry change in the near term. Smart meters can provide motivated consumers with the actionable information they need to better manage consumption and energy costs. The movement toward an intelligent utility network that leverages network automation and analytics in conjunction with smart meters provides further benefits to both utilities and consumers, including fewer outages, faster restoration of service and lower greenhouse gas emissions.

Prepare for a participatory network
Leveraging the new technology ecosystem will help utilities harness innovation to meet key objectives in coming years, including:

-- Preparing for an environment in which customers are more active participants;

-- Capitalizing on new sources of real-time customer and operational information, and deciding which role(s) to play in the industry’s evolving value chain; and

-- Better understanding and serving an increasingly heterogeneous customer base.

The utility industry is advancing toward a stage where consumers can, and increasingly will, demand equal footing with their providers. Those utilities that are fully prepared to share responsibility with their customers and help them meet their specific energy goals will have a significant competitive advantage. Based on our research and analysis, we believe a full-fledged participatory network will ultimately emerge. Elements of such a network are already in place within several major markets. The question is not if a fully participatory environment will emerge, but when.

****

“Mirror Image” is a rotating column featuring writers from the DLSU Professional Schools Inc.

Reynaldo C. Lugtu Jr. teaches management and marketing courses in the MBA Program of De La Salle Professional Schools. He is country manager, Utilities and Communications Sector of IBM Philippines. He may be e-mailed at rlugtu2002@yahoo.com, or visit his blog at http://rlugtu.blogspot.com.

Nuclear renaissance

(Published in the Manila Standard Today under the Greenlight column, June 23, 2008)

The Philippine government has recently expressed to seriously study the option of opening the mothballed Bataan Nuclear Power Plant to bolster the country's energy supply. And why not? In this age of US$135 a barrel of petroleum, many economic planners in countries across the globe are prodded to consider nuclear energy as a more economical and efficient energy source.

In a recent article by Sam Knight in the Financial Times, he describes this transformation of the nuclear industry in the next 20 years as “renaissance” or rebirth. This is an apt description for a once dead industry.

Revival
So it was once dead. No new reactor has been built in the US since 1979, when an accident at the Three Mile Island power plant caused the reactor core to melt. The construction of nuclear power plants in the last 22 years since the Chernobyl incident was on a standstill, with the exception of Japan, South Korea, and France. No new nuclear reactor has been built in the US since the Three Mile Island accident in 1979, wherein the reactor core melted. In 1971, the ASEAN endorsed a nuclear-free zone concept with the creation of a “regional nuclear safety regime”. In the 1990’s, Italy and Germany which are the early developers of nuclear power assured that they will phase out their nuclear energy completely.

Now, in this era of nuclear rebirth, many nations have declared to initiate and scale up their nuclear programs to reduce their dependence on oil. Only recently, the Italian government declared its intention to restart construction of nuclear power plants by 2013, In 1987, after more than 20 years of being a nuclear-free country. The UK government expects the new generation of nuclear power to supply significantly more of the country's electricity than the 19 per cent the existing ones deliver, and in fact planned to maximize the contribution from nuclear sources in the next 10 to 15 years. Across Europe, politicians are reassessing nuclear policy, opting to extend the life of existing reactors like in Germany and Sweden, or built new reactor altogether like Russia.

Growth of nuclear power in Asia
East and Southeast Asia are the only regions in the world where nuclear power generation is growing significantly. According to the Nuclear Issues Briefing Paper published in 2007, the region boasts 109 operational nuclear power plants, with 18 more under construction and around 110 in the planning stage. Moreover, much of the startling growth is in China (10 units), Taiwan (6 units), India (15 units), Pakistan (2 units), Japan (55 units) and South Korea (20 units). Additionally, regional leaders at the 13th ASEAN Summit in Singapore in November 2007 issued a statement promoting civilian nuclear power, alongside renewable and alternative energy sources.

This nuclear renaissance, though controversial and politically incorrect to many, is an uncomfortable way to mitigate the energy crisis, apart from reducing the dependence on fossil fuels and therefore reduce greenhouse gases and global warming. It is one of the most efficient and cleanest alternatives to coal and gas-based electricity production, and it's responsible for only less than 20% of electricity production.

Continuing fear
But despite these, many fear and reject nuclear power due to possible safety breaches and accidents, such as Chernobyl and the Three Mile Island accidents, and the Kashiwazaki-Kariwa nuclear power plant leakage in Japan in 2007 due to an earthquake. But is our fear of nuclear power well-grounded?

A nuclear accident, such as those mentioned above, is a “black swan” or an outlier, an event that lies beyond the realm of normal expectations, as Nassim Taleb puts it in his self-same book. Key to reducing, if not, eliminating the fear of nuclear power is understanding the risk associated with it Why are we willing to risk our health, the environment, and our very existence with the use of fossil fuels over an improbable catastrophic nuclear meltdown of a reactor?

Taleb, in his book, says the focus of the investigation should not be on how to avoid any specific black swan, for we don't know where the next one is coming from. The focus should be on what general lessons can be learned from them.

Lessons learned
And indeed we learned. It is estimated that the probability for a plant to have a serious flaw has decreased from 0.1 to 0.01 during the developmental phase of the nuclear industry. At the same time the equivalent frequency of accidents has decreased from 0.04 per reactor year to 0.0004 per reactor year, and this is according to a study by Jussi vaurio in 1984!

Another positive development is through a player in this nuclear industry, Thorium Power based in Russia which currently qualifying its proprietary thorium (a silvery metal which is thought to be between three and four times more abundant) fuel designs for use in existing and future commercial nuclear reactors. These designs have three major benefits: no production of nuclear weapons-usable materials in spent fuel, reduced nuclear waste, and improved industry operating economics. The technology will be commercially available in 2013.

Operating the Bataan Nuclear Power Plant will definitely provide a huge breather to the oil crisis; and there are available technologies and best practices now to prevent nuclear accidents and make nuclear energy more efficient. But a potential flaw is execution. Our society is rife with examples of infrastructures fraught with corruption-laden contracts and sub-standard materials that undermine its very purpose. Political will would play a huge part.

-------------------------------
Reynaldo C. Lugtu, Jr. teaches management and marketing courses in the MBA Program of De La Salle Uiniversity, Graduate School of Business. He may be e-mailed at rlugtu2002@yahoo.com or visit his blog at http://rlugtu.blogspot.com..

Oil versus rice

(Published in Manila Standard Today on Jun 3, 2008, under the Greenlight column)

Like the proverbial oil and water, oil and rice shouldn’t mix as it will spell disaster. Increasing prices of oil and rice in the world markets have hit the Philippines hard which caused the prices of goods to climb. Inflation is forecasted to rise to a record high of 5.5. to 6.5 percent in May and might reach 9 percent in June. In this era of oil price of 120 dollars-a-barrel and tight rice supply, overall food prices already rose 12 percent, and the price of rice alone rose to nearly 25 percent from a year ago. As a result, poverty in this country may reach record highs – truly a disaster.

Indeed, oil and rice (or food for that matter) are two commodities that have a powerful impact on economies, countries, and its people. Individually, they have become threats to national security of countries the world over.

Nations’ dependence on oil and its shortage will pose greater risk on national, global, and energy security. Oil will become a geopolitical weapon used between the oil-producing and oil-consuming nations which will result to the possible explosion of Middle-East conflict. It has been reported that oil, among other factors and considerations, played a role in the Bush administration's decision to invade Iraq. With 70% of the oil reserves of the Organization of the Petroleum Exporting Countries (OPEC) residing in the Middle-East, the depletion of oil in the future will pose greater risk of large-scale conflict.

On the other hand, the alarming price increases of staple foods (e.g. rice and wheat), have brought riots in about a dozen countries – from Philippines to Haiti - threatening national and food securities. Early this month, five big Asian rice exporters - Burma, Cambodia, Laos, Vietnam, and lead by Thailand - agreed in principle to form a cartel to be known as the Organization of Rice Exporting Countries (OREC) that would manage rice price-fixing, akin to OPEC. Many lawmakers around the region have already expressed concern on this planned cartel, as it could control the staple food and price it beyond the reach for millions of people. Thailand eventually dropped its plan amid opposition.

Unlike oil and its organized OPEC which has a global control of petroleum, a possible OREC in Asia has only a regional dominance. Rice exporters do not have the capacity to establish cartel in the same magnitude as OPEC, as there are over 80 countries producing rice.

The security risks associated with oil and rice, seemingly are separate impacts that nations need to prepare for. But in combination, they may pose the greatest threat and risk ever known, because one is inextricably linked to the other.

For one, many experts agree that the rising price of rice is not due to its shortage but to the uneven distribution. There is enough rice in the world to feed its entire people. The problem lies in the distribution of rice from other rice producers (apart from the ASEAN exporters) to the rest of the countries that need it; and distribution and logistics require fuel, i.e. oil, to transfer goods from one place to another. The higher the price of oil, the higher the distribution cost, the higher price of goods transported.

Another link between oil and rice is the increasing production of biofuels. As a result of the Kyoto Protocol to reduce the world’s dependence on oil, the World Bank said that almost all of the increase in global corn production from 2004 to 2007 went to ethanol production in the United States, depleting supplies for other uses. Critics including the World Bank, are blaming that the rise of biofuel production as contributing to the soaring price of food (rice and wheat) around the world.

Oil and rice are two separate commodities that should be tackled in combination. Nations should still be reducing its dependence on oil by developing alternative sources of energy apart from biofuels such as solar and wind energy. But they should also be developing new technologies for producing higher-yield, disease-resistant grains.

Energy and food security are two issues that need to be figured out as one. And we have the biggest stake on this as the Philippines is a net importer of oil, and was the world’s biggest importer of rice last year.

-------------------------------

Reynaldo C. Lugtu, Jr. teaches management and marketing courses in the MBA Program of De La Salle Professional Schools. He may be e-mailed at rlugtu2002@yahoo.com or visit his blog at http://rlugtu.blogspot.com.

A future in content

(Published in Businessworld Online on April 3, 2008 under the Openhouse column of itmatters.com.ph, see link)

High growth in digital content offers significant opportunities for telecommunications service providers.

But their ability to capitalize on this potential is a point of contention and debate. Telcos clearly need upgraded networks and technology platforms to handle more sophisticated content and to extend their market.

And, equally important, they must begin delivering value beyond just access, providing a change in consumer experience and grabbing their share of emerging channel advertising revenue.

The market for digital content is growing rapidly and is forecasted to reach $135 billion by 2010. Naturally, the telecommunications industry is focused on gaining a sizeable share of this market, as voice telephony revenues decline. With digital convergence blurring the boundaries of telecom and media, service providers can now expand their market to include areas of media and advertising -- creating a new “telemedia” industry.

As cable companies, satellite broadcasters, ISPs and telecom providers fish in each others’ ponds, the convergence of formerly separate services is creating both new opportunities and risks for participants throughout the “telemedia” value chain.

Looming bandwidth crunch

The most promising areas of advanced content services are television and video.

However, delivering all but the most basic digital content services over networks is challenging. Even with higher compression technology like MPEG-4, delivering HDTV, multi-room TV and the like, as well as voice, gaming, Internet surfing and other communication services means that every home must have a bandwidth of 20 M/bits or more.

Delivering additional HD streams into the home will require even higher bandwidth which is not easy to deliver over an access network originally designed to carry narrowband voice.

As demand for high-definition television (HDTV), real-time video-on-demand (VoD) and other next-generation services increases, we are heading toward a bandwidth crunch in many countries with the possible exception of parts of south-east Asia including Singapore and Korea, where 95 -100 percent of households can obtain very high speed access.

To deliver bandwidth-intensive content services and the experience consumers’ demand, telecom providers will have to make major investments in upgrading their networks with returns that are highly uncertain and likely to be positive only in the long term.

IBM’s model of the economic implications for investing in the two alternatives to ADSL -- fiber-to-the-cabinet (FTTCab) and fiber-to-the-home (FTTH) -- shows that additional revenue from content is critical to the business case.

However, the investment case for upgrading existing networks is also critically dependent on achieving high penetration rates -- in the range of 30%-50%, depending on the option chosen.

Differentiation beyond access

Consumers are demanding more flexibility, choice and control. The young and technologically savvy, in particular, do not want to be passive consumers -- they want to control their own schedules, produce their own content and share it with their peers.

Thankfully, the telecom industry can address this demand for flexibility, choice and control.

One way is by extending scope of services which involves augmenting content services and create new interactive services that were previously not feasible. Examples include interactive multiplayer gaming, instant conferencing and even interactive television.

There is evidence that such interactive services increase loyalty, but more critically, they drive non-content revenues such as voice and messaging from which telecom providers derive significantly higher margins.

Another is by delivering a convenient user experience by making content accessible from any device (PC, handheld, television) across any network (wireless, wireline) at anytime and by anyone. This will require telecom providers to resolve the complexity of rights management, content portability and charges across platforms.

Crucially, it also involves delivering and managing end-to-end service quality and the consumer experience regardless of the device or network over which content is consumed.

Empowering individual users and communities involves stimulating the consumer experience in the “walled garden” of a telecom provider for both IPTV and mobile whilst enabling access to telecom services from applications in open distribution platforms such as MySpace or even Second Life.

In IBM’s most recent Media and Entertainment point-of-view, we identified four emerging media business models:

• traditional media of professionally produced content within a conditional access environment;
• new platform aggregators (e.g. YouTube, MySpace and Second Life) that rely substantially on user generated content in open distribution environments;
• walled communities that embrace user and community contributions but within a walled environment; and
• content hyper-syndication where professional content owners bypass traditional distributors and make content directly available to consumers in open distribution platforms.

Telecom providers will have to be careful to avoid becoming clones of traditional media distributors when incumbent media companies are themselves grappling with disruptions caused by new platform aggregators such as YouTube and Myspace.com.

Reinventing “walled garden” involves:

• leveraging capabilities such as presence and location to enhance collaboration among subscriber social networks;
• providing trusted and third party authentication among participants in a social network; and
• encouraging user and community content such as college sports and community programming over IPTV.

Telecom providers can also provide a “white label” content distribution service to third-parties to distribute branded content to their subscriber base without having to invest in building their own infrastructure. These virtual branded content distributors within a “walled garden” could become the digital content equivalents of Mobile Virtual Network Operators (MVNO) and could also bundle other telecom services (such as voice and broadband) in their offerings.

Telecom providers can also collaborate with new platform aggregators by enabling the integration of network capabilities such as location, presence, voice and conferencing in Web 2.0 and virtual world applications such as Second Life.

Finally, as professional content owners bypass traditional content distributors and deliver content directly to consumers, telecom providers can lower their entry costs by providing them with managed open content distribution platforms with end-to-end service quality and management and multi-channel capabilities.

In short, telcos must look to combine their investment in service delivery platforms and Information Management Systems (IMS) with new digital content services; invest in service quality management to enhance the end-to-end user experience across multiple networks and devices; and enable users to control their content experiences.

Advertising

As with traditional media, advertising will be a critical component of digital content revenues. But telecom providers still haven’t figured out how to attract ad share.

However, telecom providers have a number of unique capabilities that should make them attractive as an advertising channel, especially as the proliferation of digital channels and audience fragmentation impels advertisers to seek new ways to reach consumers.

Interactivity, presence, location, customer insight, control of more than two billion mobile devices and, in some cases, close relationships with local advertisers from the yellow pages heritage have the potential to make telecom IPTV and mobile attractive channels for a share of future advertising revenues.

The future

The digital content market offers traditional telecom operators significant opportunities for adding value, but it also carries perils -- not least of which are the scale of the capital expenditure required to deliver advanced video services.

Bundling rich content with combinational interactive services, delivering on the “4A” vision of content accessible, anywhere, anytime, on any device and by anyone and investing in end-to-end service quality management, offer opportunities for differentiation.

Advertising will be important, but above all, telecom providers will have to undergo organizational, cultural, technological, operational and business model transformation as they transition from being providers of network connectivity to enablers of the consumer’s digital experience.

The Future of Energy

(Published in BusinessWorld under the View from Taft column, January 24, 2008)

At the crack of the New Year, after much of the holiday jubilations, we were all greeted by the alarming newspaper headlines which read “world oil price hits $100 a barrel”. The price of oil has more than doubled over the last 12 months, and has been vacillating to near $100-a-barrel in November last year.

Although oil price is back to the 90-dollar-a-barrel levels nowadays, there is still much uncertainty on the future of this precious commodity and the future of energy in general is still uncertain because oil resources are fast being depleted.

According to the Energy Information Agency (EIA) of the U.S. government, world demand for oil is expected to increase by 54% in the first 25 years of the 21st century. About 40%, will come from Asia, mainly because of China and India because of their rapidly growing economies

But the supply cannot meet oil demand forever. The EIA predicts that the world will hit peak production between 2013 and 2037, after which production will fall by three per cent annually. At this point, oil prices will surely hit record highs unless governments around the globe discover new oil reserves or use alternative energy sources.

Our dependence on oil and its shortage in the future will bring forth new threats and risks to governments, public safety, and the environment. The lack of energy to fuel economic growth would have devastating effect on the general populace. The increase in energy use by nations will drive up the prices of oil, of oil-dependent products and services such as the manufacture drugs and other consumables, and transportation and other services.

In addition, oil will become a geopolitical weapon used between the oil-producing and oil-consuming nations which will result to the possible explosion of Middle-East conflict.
It has been reported that oil, among other factors and considerations, played a role in the Bush administration's decision to invade Iraq. With 70% of the oil reserves of the Organization of the Petroleum Exporting Countries (OPEC) residing in the Middle-East, the depletion of oil in the future will pose greater risk of large-scale conflict.

The increased use of oil will also accelerate global warming and pose greater risk to mankind’s the safety and health. Despite the framework set by the Kyoto Protocol to reduce the carbon dioxide emissions of industrialized nations to an average of 5.2% below 1990 levels by 2012, many observers see this as a remarkable failure. According to recent data released by the European Environmental Agency, 13 of the 15 original nations belonging to the European Union have actually increased their emissions over the past 16 years. In four years time, the EEA predicts that the 15 will exceed the target by 7%. And all these are happening because of the increasing use of oil and other fossil fuels.

Thus, it is imperative that we cut our dependence on oil and find new sources of renewable energy. James Canton, a futurist and author of “The Extreme Future” forecasts that new energy sources should be abundant, reliable, renewable, clean, affordable, and secure in order to reduce the world’s dependence on oil.

The most promising future source of energy that passes the criteria of Canton is hydrogen. It’s the most plentiful gas in the universe. It also has the highest content per unit of weight of any known fuel. It is renewable, reliable, clean (a hydrogen powered car gives out water as exhaust) and secure as it is available everywhere. More than $5 billion is being spent around the world by industry and governments alike for research and development on hydrogen as a potential energy resource.

What’s noteworthy is that Toyota has already made great strides in converting its automobiles into hydrogen-powered vehicles. Toyota has already launched a number of models in the US that runs a hybrid electric/hydrogen engine.

Wind power is another alternative source of energy that’s being developed all over. One local example that’s laudable is Smart Communication’s use of wind-powered cell site in Cebu. Not only did it utilize renewable energy, but also it significantly reduced fuel consumption and maintenance costs of the cell site.

Another alternative source of energy is biofuels. The Philippine Biofuels Act of 2006 is a commendable move by government to reduce its dependence on oil. It aims to require oil companies to blend biodiesel and ethanol into diesel and gasoline. Aside from generating huge savings for the country, this would also lead to the reduction of pollution caused by fossil fuels’ emissions.

These are just some of the alternative sources of energy that we can look forward to in the future. But we should all keep on developing and looking for other sources of renewable energy, because our survival depends on these.

-------------------------------
Reynaldo C. Lugtu, Jr. teaches management and marketing courses in the MBA Program of De La Salle Professional Schools. He may be e-mailed at rlugtu2002@yahoo.com or visit his blog at http://rlugtu.blogspot.com.

National innovation strategy

(Published in the Manila Standard Today under the “Greenlight” column, December 10, 2007)

“Filipinnovation” is the catchword of the recently held Philippine National Innovation Summit, which was organized by the Department of Science and Technology (DOST), IBM, Asian Institute of Management’s Policy Center and the Intellectual Property Office, in cooperation with other private organizations and government agencies. Not only does the new word show the natural innovativeness of Filipinos in wordplay, but more importantly it captures the soul of the Philippines’ national innovation strategy – that we Filipinos need to embrace innovation as a way of life in order to stay competitive in the global economy.

Presenting a framework for focusing energies
The summit is laudable as it was able to cover three major aspects of the national innovation strategy - human capital, industry and public policy - each one having specific directives. This will serve as a road map for the stakeholders in the Philippines’ National Innovation System. A national innovation system (NIS) is the flow of technology and information among people, enterprises and institutions that are crucial to achieve an effective innovative process on the national level.

In the human capital aspect, the agenda includes technology forecasting, academic capabilities, and addressing “brain drain” or the exodus of skilled workers from the Philippines to other countries. The industry aspect covers private sector partnership, best practices comparison and public management. Under the public policy aspect, areas that need to be addressed are sharing of experiences and expertise in government offices, and performance assessment and certifications.

Such elements in the NIS serve as a framework for which to focus our energies on as a country in drawing up implementing guidelines and tactics to truly realize the vision of Filipinnovation.

Hence, a follow through of the innovation summit is requisite. But the key questions that need to be asked and answered are: In what areas do we innovate, products and/or services or process? Do we focus on radical innovations or incremental ones? In what industries or sectors do we focus?

Approaching innovation differently
Such questions are relevant because, as a developing country, we need to approach innovation unlike developed economies. This is the thesis put forward by Professor Charles Edquist of Linköping University, Sweden for the UNIDO World Industrial Development Report in 2001.

Take the aspect of product and/or service versus process innovation. Product innovations may be goods or services - it is a matter of what is being produced. On the other hand, process innovations may be technological or organizational and it concerns how goods and services are produced. As an example, an industrial robot is a product when it is produced and a part of the process when it is utilized in production.

Edquist argues that product or service innovations are more important for developing countries because these are the main mechanism behind changes in the production structure. In other words, the vision and creation of a new product or service will ultimately lead to changing the mode of creating the product. Therefore, a developing country will benefit from the domestic and international consumption of a new product as well as from the new ways of producing these products, which may lead to productivity and efficiency gains; thus, a doubly positive impact to the firm.

One good example is the Filipino innovation – the electronic load. This service, pioneered by Smart Communications, is a way of “loading” one’s cellphone with credits via texting a purchased code to the telco service provider. This service has revolutionized the way a telco service is produced and distributed, eliminating costly physical distribution infrastructure because it is fully electronic.

Another approach that our country can adopt is to focus on incremental innovations rather than radical/breakthrough innovations. The incremental mode involves a step-wise approach of gradually improving existing products or processes. This is a much easier path for developing countries because it entails relatively less investment and faster turnaround of “improved” products.

In the electronic load example, this service has been used by telco service providers in the country to develop other services such as those in money transfers, mobile commerce, and the like.

Another aspect that needs to be considered on a country level is in what industries or sectors do we focus our innovation efforts. This is relevant because no single country provides the optimal mode of innovative competitiveness in every industry. Furthermore, there are differences in the relative innovative capabilities between industries, as this is function of the distinctive technological capability of each industry.

This is exemplified by the strong innovation systems of Japan in automobiles, the United Sates and other countries in information technology, and India in the business process outsourcing sector.

Focusing on our strength
So in what sectors do we, as a country focus? One obvious strength of Filipinos is in the creative industries. Our country is well known globally in many creative industries such as music, arts and dance, crafts, and design. Filipinos are naturally creative as evidenced by the Ifugaos’ widely known Rice Terraces and the “I love you” computer virus created by a Filipino programmer.

A growing industry that uses the creative talent of Filipinos is the information and communication technology industry. We have witnessed the growth of sectors in the ICT such as animation, gaming and content development and software development. Related to these is our country’s strength in the business process outsourcing sector wherein players can develop “innovative” service offerings to foreign clients that harness our natural creative talents. These include illustrations, editing, photography, screenwriting, creative writing, proofreading, cover design, journalistic writing, graphic design, storyboarding, video editing, instructional design, and music composition.

Underlying all these considerations in the implementation of a national innovation strategy is the importance of the participation of the private sector. Firms are the main drivers of innovation as they are the ones that produce products and services.

But firms do not innovate in isolation. That is why collaboration among various groups – among firms, with customers, suppliers, the government and academic institutions – is crucial to ensure the success of any innovation strategy.

-------------------------------
Reynaldo C. Lugtu, Jr. teaches management and marketing courses in the MBA Program of De La Salle Professional Schools. He may be e-mailed at rlugtu2002@yahoo.com or visit his blog at http://rlugtu.blogspot.com/.

Ethical Issues in BPO

(Published in the "Business Mirror" under the Mirror Image column, Oct 10, 2007)
.
The Philippines emerges as one of the favorite destinations for the estimated $150-billion business-process outsourcing (BPO) industry, according to a recent global study by Diamond Management and Technology Consultants. The consulting firm projects the local BPO sector to grow 50 percent in the next three to five years.

In this hypergrowth BPO sector, similar to other fast-growing industries like the telecommunications- industry growth in the late ’90s, firms focus their time, resources and energy on hiring and building up of operations. In this break-neck pace, what many companies neglect are the ethical norms and standards that they need to uphold.

One ethical issue that BPO firms need to contend with involves ensuring employee safety, health and welfare. The irregular working hours of BPO employees, specifically call-center agents, is taking a huge toll on their health, resulting in a condition known as shift-work-sleep disorder. This occurs when an employee’s work schedule requires him or her to work when the body wants to sleep, and then try to sleep when the body expects to be awake. The symptoms of this disorder are tiredness, difficulty in sleeping, and reduced level of alertness according to sleepeducation.com web site.

Likewise, medical experts like Dr. Lim Li Ling, deputy director, sleep disorders unit, Singapore General Hospital, warn that ageing would set in very early for sleep-deprived youth working continuously on night shifts in BPO firms. Also, their overall performance could be affected due to lack of proper sleep.

Apart from health effects, sleep disorders can also affect the social and family life of many BPO employees, according to Dr Prithakachari, a neurology specialist. Catching up on sleep during the day or during free time can cause one to be irritable, which can hurt one’s relationships with others.

A 2006 issue of Contact News Magazine, a local publication for contact centers, cited a number of anecdotes on the ill effects of working at night among call-center agents, such as illicit office affairs and rampant pregnancies, which many agents blame on the long working hours that naturally bring people together.

Another ethical issue is the hiring practices of some BPO firms here and abroad. Considering that human-resources (HR) consultants are handsomely paid by BPOs—to the tune of P5,000 to P15,000 for every candidate selected—ethics have been cast aside for monetary benefits.

One example is India-based EXL Service, which was the victim of such an unethical HR practice. To their consternation, the company discovered that rival BPO companies could go to any length to procure the list of employees. A rival BPO tried to bribe EXL’s transport vendor, since this vendor had the company’s complete list of employees and their addresses.

EXL Service vice president (HR) Deepak Dhawan said, “Ever since the incident occurred, we’ve taken adequate security measures to see that this sort of a breach won’t happen again.”

The huge incentive to successfully hire BPO employees has led to poaching. This worldwide problem of the BPO industry has resulted in higher attrition rates and higher cost of hiring.

The stiff competition for talent also results in laxity in hiring practices, which has been disastrous in many respects. A rude wake-up call in the Indian BPO sector happened in 2006 when a handful of BPO employees was arrested for illegally transferring funds from customer accounts. In this case, the ethical responsibility of BPO firms to ensure that information is tightly secured for their clients was compromised.

One industry move that’s worth emulating is that of the BPO organization in India. Recognizing the need to establish and uphold ethical standards in the BPO industry, the National Association of Software and Service Companies (NASSCOM), the BPO trade body in India which is credited for the growth in the Indian BPO, recently launched the “Best Practices in Ethics’ Framework” for the BPO industry.

This has been designed around the following principles to which all the member-companies will voluntarily adhere: employee-friendly policies; safety and security of employees; code of ethics in hiring; corporate social responsibility; and industry initiatives. The ultimate aim of this initiative is to create a set of guidelines which will help in attracting and retaining talent and solving the issue of attrition.

It is commendable that our local lawmakers are stepping up to address some of the issues. Sen. Mar Roxas II has filed Senate Bill 2071 that seeks to amend three provisions in the Labor Code to help BPO workers. He is pushing for free transportation and free medical assistance for call-center agents and other night workers to ensure safety and fitness to work.

Additionally, the proposed bill also suggests that call-center employees be allowed to work under compressed or flexible time arrangement.

It is, likewise, laudable that many BPO firms are providing welfare facilities for their workers. But they should also provide health and safety training, apart from sleeping quarters and transportation.

It is also imperative that there be an agreement among BPO firms to formulate a code of ethics in hiring to minimize, if not eliminate, poaching among industry players.

Best practices and methodologies in hiring are, likewise, necessary to prevent “bad” hiring of BPO employees that may compromise the security of information provided by BPO clients.

Upholding the ethical responsibilities of BPO firms to their employees, clients, and even competitors and peers will reap benefits by ultimately reducing attrition and improving client satisfaction. Recognizing the need for effective manpower development is key to the growth of the BPO sector.

****
“Mirror Image” is a rotating column featuring writers from the DLSU Professional Schools Inc. Reynaldo C. Lugtu Jr. teaches management and marketing courses in the MBA Program of De La Salle Professional Schools. He may be e-mailed at rlugtu2002@yahoo.com or visit his blog at http://rlugtu.blogspot.com/ (link to the Business Mirror article, link to other citations)

Innovation in BPO

(Published in the Business Mirror under the Mirror Image Column, Sept 12, 2007)

The BPO sector has grown by spectacular levels, providing employment to more than 200,000 BPO professionals. It is projected to grow on the average 38 percent until 2010, contributing more than $12 billion in revenue.

Similar to the experience of India, much of the growth in the Philippine BPO sector has been driven by relatively lower labor costs. This has been the salient characteristic of the first phase of global BPO development which took place in the 90’s through the early 2000’s, where clients and providers alike placed emphasis on cost, efficiency and productivity. As clients in the US and Europe searched for ways to bring down cost further, they turned to providers in India, Philippines, and others to provide low labor costs to perform customer care, HR, and accounting BPO services.

As established BPO providers are besieged by new entrants from China, Latin America, and other relatively lower cost countries, new sources of service differentiation become crucial to maintain and get more clients. This is when the second phase of BPO development took place starting in the early 2000, which is characterized by the focus on quality.

Adoption of quality standards is the direction of local BPO players now through the implementation of quality standards and practices such as Six Sigma, Total Quality Management, ISO 9000, and Capability Maturity Model. To survive in the long run, it is a must for BPOs to adopt any or a combination of these quality programs.

But these advantages in cost and quality are fast eroding as BPO services become commoditized and the sector reaches maturity. In fact, the global business process outsourcing sector is likely to see only a modest growth of 2 percent in 2007, after a continuous average growth of 14 percent annually during the last five years, according to Technology Partners International, a sourcing advisory firm.

It is now imperative that BPO providers set the stage for their next phase of evolution and momentum - the third phase of BPO development which focuses on innovation. In fact, a 2005 IDC survey among BPO clients in the US suggested that 35 percent of the respondents look for BPO providers to drive innovation.

Moreover, a 2005 McKinsey Study makes a strong case for innovation by suggesting that the Indian IT-BPO sector can generate over US$ 10-15 billion of additional revenues by 2010—over and above its US$ 60 billion export target—provided it makes innovation its chief growth catalyst.

This is the reason why the National Association of Software and Service Companies (NASSCOM), the BPO trade body in India which is credited for the growth in the Indian BPO, established the NASSCOM Innovation Forum to build innovation as the key differentiator for the Indian IT and BPO industry.

Corollary to this, it also instituted the NASSCOM Innovation Awards in 2004 to promote and recognize Indian IT and BPO companies who have instilled innovation into existing competence and have created new ideas, products, processes or technologies that drive businesses to achieve higher profits.

Innovation in BPO may come from three fronts: business model innovation which entails significantly changing the structure and/or financial model of the business; services/markets innovation which entails creating new or significantly differentiated services or go-to-market; and operations innovation which involves improving the effectiveness and efficiency of business processes.

One Indian BPO that bagged the Innovation Award in the area of business model innovation is Kale Consultants which created `a platform-based BPO business model' for the travel and transportation industry.

Explaining the difference between a BPO and a platform-based BPO, Mr Vipul Jain, CEO and Managing Director, Kale Consultants, said that in the former, the customer had the infrastructure and process manual in place where payment is settled on hourly basis. "In a platform-based BPO model, we run the customer's revenue accounting system on our "platform" in our premises with the data shared by him. We actually transform from the customers software to run the process on our platform” said Mr. Jain.

Another Innovation Awardee is Evalueserve, the global research and analytics firm, has been recognized for its business intelligence services, customized reports and value-added research for clients in different industry verticals. Evalueserve is a pioneer in services innovation and has created the new business segment called KPO (Knowledge Process Outsourcing). The company is one of the first KPO providers of research and analytics services from India serving the global market. Evalueserve has been successful in differentiating itself from the traditional offshoring models.

An Innovation Award finalist in the area of operations innovation is Genpact, a global BPO player based in India with 19,000 employees. which developed a model to curb BPO employee attrition. This eventually helped the company reduce its direct cost by 12 percent amounting to about $3.3 million, thereby improving operational efficiency.

The list of innovative BPO companies in India goes on, which is testament to the focus of the Indian BPO sector in innovation as a differentiator. Our local BPO players can likewise take the innovation route to differentiate its services and compete against the emerging low-cost countries.

Local BPO players can incorporate innovation initiatives in the strategic planning process to provide focus in this area. A culture of innovation should likewise be promoted by management, and creative and innovative ideas should be rewarded.

Government and industry bodies alike should emulate the NASSCOM Innovation Forum and Innovation Awards to promote and recognize innovation in the BPO sector, so as to sustain its growth in the future.
-------------------------------
Reynaldo C. Lugtu, Jr. teaches management and marketing courses in the MBA Program of De La Salle Professional Schools. He may be e-mailed at rlugtu2002@yahoo.com or visit his blog at http://rlugtu.blogspot.com/
See other citations on this article: BPOs evolution from cost-saving to innovation
and Innovations by Indian BPOs

Sustaining growth in the BPO sector

(Published under "The View from Taft" column, BusinessWorld, July 12, 2007)

The global business process outsourcing sector is likely to see only a modest growth of 2 percent in 2007, after a continuous average growth of 14 percent annually during the last five years, according to Technology Partners International, a sourcing advisory firm. TPI said the first quarter of 2007 saw the lowest number of BPO contracts signed in the global context since the first quarter of 2003. The contract value was also the lowest since the third quarter of 2002.

Despite this gloomy backdrop in the BPO global landscape, the global BPO market is projected to reach 173 billion dollars by 2007 – a huge market considering that the Philippines only garnered $3.45 billion dollars in 2006.

According to estimates of the Business Processing Association of the Philippines, the BPO sector’s revenues are expected to grow almost threefold to $12.1 billion by 2010 from the end-2006 level of $3.45 billion. Leading this growth is the call center subsector revenues which will reach $5.29 billion in 2010, a significant 97-percent growth over three years.

How can such growth in the local BPO sector be achieved despite the slowdown in the global market? The answer lies in the transfer of BPO business from maturing markets to emerging ones like the Philippines.

According to research firm Evalueserve COO Ashish Gupta , “as BPO has got commoditized [in India], the very low end work will soon shift to destinations like Bangladesh and the Philippines”.

India’s low-end BPO such as call centers and transcription services are already shifting some of its operations to the Philippines, with the recent setting up or ramping up of operations of companies such as Infosys, HTMT, IBM Daksh, and Genpact.

Despite these, it’s still arguable that the Philippine BPO sector will soon slow down, become commoditized, and reach maturity just like what’s happening now in the global market and in India.

So how can the country sustain the growth in the sector in five to ten years? Key to sustaining the BPO revenue growth is to understand how to renew our country’s sources competitive advantage.

Our country has clinched a small piece of the global BPO pie, through a number of competitive advantages such as relatively lower wages, and good supply English-speaking resource pool in with business and finance backgrounds. However, these advantages are eroding fast as new emerging low-cost countries are stepping up to capitalize on the BPO opportunities, such as Bangladesh, Pakistan, and Latin American countries.

To sustain a major revenue and employment source for our country, it’s urgent now for our country to invest in and develop new sources of advantages to sustain a major revenue and employment source for our country. But what do we develop? What do we invest in?

TPI predicts that the softening of growth in BPO globally will be offset by the potential of knowledge process outsourcing or KPO. KPO refers to the outsourcing of high-value complex tasks and processes to specialized service providers. As compared to traditional BPO, KPO delivers ‘knowledge’ or content expertise that demand advanced analytical and/or technical skills and some decision-making or decision-support processes; rather than process expertise that simply involves executing standardized processes. Some examples of KPO are market research services, data search, integration and analysis, research and development services.

Our country has been engaged in KPO areas such as animation, engineering design, software development, and digital content, but they comprise only 12 percent of the total BPO revenue. We need to develop these subsectors and increase their share in the overall BPO revenue. Government and industry can help achieve these by developing a good supply of resource pool of animators, developers, and engineering, and helping BPO and start up firms to offer these services to client abroad.

Another approach with bigger impact to sustainability is developing and transforming the current BPO offering i.e. call center, back office and transcription services to KPO services. For example, call centers that we know now i.e. inbound and outbound calls, may evolve to higher-value KPO activities such as those involving complex technical support and data analysis for product development and marketing. This would involve upgrading the skills of call center agents with its attendant technologies, and upselling and marketing the service to existing and potential clients.

According to estimates by research firm, Evalueserve, revenues from the KPO market will grow globally from US$1.29 billion in FY 2003, to US$17 billion by FY 2010. This implies compounded annual growth rate of 46 percent, for the global KPO market. Given our talented human resources backed by government and industry support, we should be able to capture some of this market.

------------------------------
Reynaldo C. Lugtu, Jr. teaches management and marketing courses in the MBA Program of De La Salle Professional Schools. He may be e-mailed at rlugtu2002@yahoo or visit his blog at http://rlugtu.blogspot.com/.

Cost-effective niche marketing through alternative media

(Interview with Prof. Rey Lugtu by JOSEPHINE B. VALLE Researcher, BusinessWorld, for the Best Practices Forum series, published in BusinessWorld, June 27, 2007)

After designing a product or service around a specific target market, a company will have to communicate its message to its audience. For this, it has an array of media to choose from. On one end, there is the traditional television (TV), print and radio, and on the other are the more non-traditional or alternative means.

Perhaps the most utilized alternative media is the Internet through tools such as E-mail, online advertisements, Web sites and Web buttons, among others.

Value-for-money real estate developer Phinma Property Holdings Corp., for example, maintains a Web site that showcases its projects with features such as virtual tours to further educate its prospective buyers of its offerings. It also maintains a mailing list through which it Emails details of projects to prospective buyers.

Although TV and print still comprise bulk of Phinma Property’s promotions, Phinma Property’s Associate Vice-President for marketing and design Grant Orbeta related that the company sees a growing trend in alternative media such as those provided
by the Internet.

For Level Up, a company engaged in the delivery of content consumed by virtual gaming communities, the Internet serves not only as a medium for communicating but is the product itself.

“When we communicate with our market using online media, they are already in a setting where they can readily consume the product,” said Jose Carlo Medina, director for new media of the online gaming firm.

“Think of it as doing product sampling of a shampoo brand for a group of 10,000 individuals who are inside one gigantic bathroom,” the Level Up executive added.

The edge of online media, Mr. Medina said, is that it is so captivating such that the market will be leaning forward to consume your message as opposed to listening to the radio or watching TV, which could be very passive.

“We also get to reach more target users and get real-time data on user behavior,” said Mr. Medina.

The Internet also facilitates inquiries and actual transactions, what we now call as e-commerce.

“Digitization technologies have lowered the cost of production, thus, allowing lower cost of marketing products and services to niche markets,” said Reynaldo Lugtu, Jr., De La Salle University Professional Schools professor of management and marketing.

A classic example cited by the De La Salle professor is the online music store of iPod, iTunes.

“iTunes has more than five million songs compared with atypical music store of 55,000 tracks... iTunes distributes all sorts of music to even the esoteric music lovers,” noted Mr. Lugtu.

“The Internet has allowed marketers to reach various niches more cost-effectively,” said the professor.

Mobile telecommunications, particularly text messaging, is another venue for communication brought about by the advent of new technology.

Phinma Property’s Mr. Orbeta related, “We’re thinking of a way that will make it easier for buyers to get information by text because text is becoming a commonplace item.”

The Phinma Property executive disclosed that the company is in the process of evaluating some software that would automate the processes of getting inquiries through text as well as sending promo information through text broadcast.

Another powerful alternative tool for communicating with the market is what marketing gurus call “buzz” or word of mouth.

For one, health care company Intercare Healthcare Systems, Inc., whose niche is the integration of traditional and alternative medicine, recognizes the importance of “buzz” as a marketing method.

“We did a study before; every person we treat had on the average six referrals,” said Jose Jesus Roces, director of shared services of Intercare and professor of marketing
at the Asian Institute of Management (AIM).

“So in terms of marketing, we ensure that part of our efforts is that we provide what we call the Intercare experience,” added Mr. Roces.

Likewise, Phinma Property’s Mr. Orbeta related that many of the company’s new buyers are, in fact, referrals by previous buyers of its other property developments.

As such, public relations and customer relations play important roles in the marketing efforts of the company. Corollary to this, corporate social responsibility is also a thrust of the company.

While both traditional and alternative media educate the market about what a company has to offer, alternative means provide more flexibility with regard to zeroing in on more specific market segments.

This does not, however, put one medium above the other. In fact, it is not necessarily the medium that is key to niche marketing but the method of communicating.

AIM’s Mr. Roces said, “Forget broadcasting... when you are in niche marketing, you are ‘narrowcasting,’ focused communication.

“It’s not about not utilizing the media but about utilizing what is appropriate at a specific time.”

At Intercare, for example, when the company advertises in broadsheets, it still targets specific areas. When Intercare gets television exposure, it is through various talk show appearances by Intercare’s Director of clinical services Martin Camara.

In terms of radio, Intercare engages in radio advertising through alliances for certain events like sports tournaments.

Through all these traditional media exposure, the approach is still non-traditional, it is still narrowcasting.

“If you keep doing what everybody else is doing, you will not be heard above the noise,” Mr. Roces explained of the company’s methods.

Meanwhile, Phinma Properties employs television and print ads but carefully designs its ads around its target market.

“We can’t do those conceptual types with a nice picture and one nice sentence because those are more catered to the high-end buyers,” related Phinma Property’s Mr. Orbeta.

In the end, there is truly no one specific formula for what medium will work for a certain company or industry, explained Mr. Roces.

“The application is that you have to have a value proposition, identify who you are valuable to and then communicate to that segment.”

For Phinma Property’s marketing executive, the most effective communication would be a combination or mix of means tailored fit to one’s target market.

Niche marketing: Targeting the unserved markets

(Interview with Prof. Rey Lugtu by Ernesto Calucag, Senior Researcher, BusinessWorld, for the Best Practices Forum series, published in BusinessWorld, June 27, 2007)

Many entrepreneurs think that selling to the widest possible market is the likeliest path to success. But given the cutthroat competition that prevails in today’s business environment, the “take all comers” approach has not been very effective, most especially for small businesses competing headon with the bigger players.

Thus, one exceptional business strategy has emerged, and that is for small businesses establishing themselves in a niche market. Because no matter how hard they try, no large company can be all things to all people. There will always be segments of the population whose needs for particular products and services are going to be unmet — leaving room for small businesses to succeed by meeting those needs.

A niche, in marketing terminology, is a small market consisting of an individual customer or a small group of customers with similar characteristics or needs. It could be similar interests, hobbies, age group, gender, social background, ethnicity, religion, lifestyle, and educational background, among others.

“Market segments are large identifiable groups within a market, such as the rich segment, the middle class segment, and the masa segment,” said Reynaldo Lugtu, Jr., marketing professor at De La Salle University Professional Schools. “A niche, in contrast, is a more narrowly defined group within the segment, which may seek a special combination of benefits, such as the class AAA niche within the rich segment, for jaguar cars or upscale condominium markets,” he explained.

Niche marketing is, therefore, targeting this small market that is not being readily served by mainstream products or services. A niche product could be a totally unique offering or a variation of a common product that is not produced and marketed by main marketing firms. And while there are many niche possibilities to explore, Mr. Lugtu noted that local companies, similar to pursuing a market segment, are still guided by the market feasibility rules of profitability, growth potential and sustainability.

Jose Jesus Roces, marketing guru from the Asian Institute of Management, added that niche marketing could also be described as “looking for that special place where you can leverage your competencies in a very competitive situation.” That is, as a strategy, niche marketing is all about positioning, until a firm finds itself valuable to a significant number of its clients.

Mr. Roces said that contrary to common notion, niche marketing is not exclusive to small companies. The bigger market players also exercise the strategy, as a way to widen their revenue base.

“Everyone should develop their niches, whether big or small. The ‘big company, big spender’ attitude is not a common trait these days,” he said.

An example is Johnson & Johnson which has more that 170 affiliates or business units that pursue niche markets — from diabetes care products to eye-care products. Another example is the offering of Smart Communications, Inc. called Smart Link that provides communication services to Filipino seafarers.

Mr. Lugtu explained that these big firms utilize what is called a “market or top-down approach” where a large market is broken down into smaller pieces or segments.

The segments are further broken down into niches that are defined by a specific group of people or consumers, and then the company finds a product or service to address the specific needs of this niche.

Another method is the “product or bottom-up approach” where the marketer starts from the needs of a few customers, produces the specialized product, and gradually builds up a larger customer base.

Mr. Lugtu mentioned that a prime example of this approach is the entry of virgin coconut oil, which started to address the desire of consumers for a natural and effective way of promoting health and treating illness. The product has grown such that it is now a multimillion dollar industry here and abroad.

Local beverage companies also used the same concept when they launched flavored water and blended colas, a growing niche product intended for young and sports-savvy customers.

SUCCESSFUL NICHE MARKETERS
In a crowded marketplace of health care practice, Intercare Healthcare Systems, Inc. successfully found a niche when it decided to offer a unified integrated approach towards health care.

Combining the best of what both traditional and alternative health care methods have to offer, Intercare’s winning niche is its treatment programs that are “complete, comprehensive, powerful and effective.”

Intercare is a health, wellness, fitness, and vitality center. Aside from its holistic wellness programs, the company’s team of clinicians further allow it to maintain a significant and growing number of clients in its niche market. It is quite known as an authority in chiropractic medicine in the country.

One of its founders and clinicians is Martin Camara, an internationally known chiropractic specialist, who regularly gets invited to major sports events, such as the Olympics and Asian Games.

Notably, Mr. Camara was the only Asian to serve at the last Winter Olympics in Torino, Italy.

Intercare’s team of clinicians also includes experts in acupuncture, rehabilitative medicine, and stress management.

In the property sector, Phinma Property Holdings is considered a niche developer, as it concentrates in making affordable medium- rise housing in the capital.

Grant Orbeta, Associate Vice- President for marketing and design at Phinma, said niche marketing is built in the product line itself.

“I believe no other developer that comes close to us as far as pricing is concerned. So we really don’t have to do any extra effort as far as niche marketing is concerned because it’s inherent in our business plan,” Mr. Orbeta said.

To maintain its niche market, the company targets a specific income level and from this, develops its own buyers profile, its main tool in growing its potential market.

“We have a buyers profile all the way back to our projects in 1996. We keep maintaining that and we try to monitor trends on buyers’ income, civil status, size of the family, where they originally resided and what made them decide to buy that particular property,” he added.

Finding a niche among OFWs entails understanding traits unique to segment

(Interview with Prof. Rey Lugtu by JOSEPHINE B. VALLE Researcher, BusinessWorld, for the Best Practices Forum series, published in BusinessWorld, June 27, 2007)

Of the many market segments in the Philippines, the overseas Filipino workers (OFW) segment seems to have the x-factor, attracting companies from different sorts of industries be it banking, real estate or cars.

Real estate developer Phinma Property Holdings Corp. known for its “best-value-for-money” homes, for one, acknowledges the growing allure of this market segment.

“Because of the affordability of our units and the locations, we’ve really been catering to local end-users where the market is still strong in that segment. But, we cannot discount the fact that the OFW market is really growing,” said Phinma Properties assistant vice-president for marketing and design Grant Orbeta.

Mr. Orbeta recalls the OFW market started getting attention around 2001. Since then, it has been expanding and companies pursuing this segment have likewise grown.

“Perhaps in the next three or five years, it will continue to grow more,” said the Phinma Properties executive.

Demand for jobs overseas has been improving, now with more employment opportunities for professionals. With this, the salary range of OFWs has also widened compared with a few years back.

However, targeting the OFW segment has its challenges said Phinma Properties’ Mr. Orbeta. “OFW marketing is a science,” he said.

As with targeting any market segment, one has to carefully understand his target — where they come from, where they are, their salary range, and many other details to draw a good profile of his market.

The added challenge to this usual market profiling, however, is the characteristics unique to overseas Filipinos which companies have to consider.

The Phinma Properties executive said as an example, “We found out that OFWs tend to buy [properties] in their original places of residence... this is a way of showing off.”

At the same time, these overseas Filipinos are exposed to different market practices in the countries they are located, thus approaches would also have to be tailored fit to these differences.

On the other hand, the good thing with the overseas market segment is that information on them is readily available from different government agencies. Thus, companies planning to target this segment would not have a hard time obtaining the necessary information for them to make a marketing plan.

Another hurdle for a company targeting the OFW market is the obvious distance of the client from the product. Compared with local buyers, communication with OFWs could take more time, so too could decision making.

Fortunately, the Internet and other technological advancements have extended the reach of the domestic players to a wider audience, even to farther places.

“One good example is Pinoydelikasi.com, an e-commerce site that markets and sells various Filipino food products including danggit, dried pusit, dried mangoes, canned Filipino specialties and other items,” said De La Salle University Professional Schools professor of management and marketing Reynaldo Lugtu, Jr.

For Phinma properties, Mr. Orbeta explained that the company tries to provide virtual tours in its website to bring the properties in a way closer to the market. He disclosed that the company is also even contemplating putting up live webcams at its project sites for those outside the Philippines to see the developments at the project sites in real time.

It is this match of technology, information, improving OFW conditions and the opportunities in the local scene that makes the OFW market very attractive to most companies.