We commonly come across businesses that believe that the easiest and cheapest way to start operations in the Philippines is to lease their own space and set up their own wholly owned facility. Most often, these operations fail to deliver the outcomes the business is looking to achieve around cost savings, productivity and quality. The purpose of this article is to examine the reasons behind most failures.
The main reason most of these startups fail is due to lack of investment. In order to meet your regulatory and management obligations in a Filipino context, you are likely to need at least the following management staff:
- Office manager
- Finance manager/officer
- HR manager
- Office junior (to do all the daily lodgments and running around of which there is a lot)
The appointment of your local office “leader” will probably be your biggest challenge. The best way is to pay an Australian to move there and run your operations – but with the high cost of expat living and the lack of attraction of living in Manila, this is likely to require a package north of AUD$200k. The alternative is to employ a local Filipino but very often this leads to self-interested local decision making which can greatly increase the cost of everything from business purchases through to local salaries.
Access to local knowledge
As with any new venture into a new environment, understanding the lay of the land is a key piece of the puzzle. Access to experienced professional services providers is a key element of the process and it is important to find the right local law firm and accounting firm to work with you. Once you are happy, you then need to engage them on a monthly retainer, as this is the only way that the best local firms will undertake work for you.
Location, location, location!
In the Philippines, there are low and high-cost areas for offshoring, each with unique characteristics related to the specific access to talent they have. In our experience, it is important to be in one of the main business districts in order to attract the best talent and to ensure reliable infrastructure. In these locations, you are entering a lessor’s market and you will find some of the following interesting issues:
- Standard lease terms include 6 months rent in advance (that is by way of cash – no bank guarantees)
- You will need to also meet the full cost of the fit out without a contribution from the lessor.
- Premises are usually handed over as a bare shell (no flooring/ceiling/walls/cabling etc)
- Fit-out costs are about 75% of what they are in Australia (usually around AUD$650 – $800 PSM)
- Minimum lease terms are usually 3 years.
- Rent free/reduced rent periods are very unlikely.
Before you can even lease the premises for your offshoring facility, you will need to establish a local company and to successfully do that you will need a majority of Filipino directors, all of whom must also be shareholders in your company. Typically a company will take around 4 – 6 months to reach the incorporated stage. If your company is substantially owned by an Australian company you may fall under the controlled foreign corporation provisions of the Australian tax legislation and will be subject to increased costs of doing business in the Philippines. You will also need to be mindful of the Australian transfer pricing laws and the Privacy Principles.
In addition, there will be a range of local and National taxes you will be subject to including for business permits, VAT, income tax and withholding tax. Fail to get these right and to attend to your lodgements on time (which can be as frequent as monthly) and you will likely incur stiff penalties.
Having established a basic operation, now comes the hard part of working out how to best entice people to work for you and motivate and engage them. Cultural differences can be one of the hardest barriers to overcome. Get this right and you may develop a loyal long term productive workforce but get it wrong and you will be plagued by high staff turnover and low productivity.
In most cases, we find that organisations that do partner up with a provider intending to eventually establish their own facility, end up continuing to utilise their provider. They eventually realise that the cost of scoping, investigating, setting up and then maintaining and developing their offshore facility are far too great, both financially and time wise.
All in all, if you are planning to have less than 50 staff and are not committed to spending at least 3 years of investment to make your office work, then you will be far better off running with an existing offshoring provider to help you set up your team. Even beyond those numbers the benefits of establishing your own team may be questionable. An experienced offshore provider can:
- Assist you in setting up without having to think about office fit outs and legislative and accounting issues
- Provide you with cultural insight into how to manage and grow your team
- Scale up and down as per your business requirements
Remember the reasons you are considering offshoring is to achieve cost savings, increase efficiencies and improve service delivery (a few of the more common ones), a poorly considered and executed attempt to implement your own facility offshore will result in all of those base objectives being missed.