Carlo's Think Pieces

Reflections of a Filipino in the Netherlands

Posts Tagged ‘efficiency’

Developing a Business “Ecosystem”

Posted by butalidnl on 16 June 2011

Here in the Netherlands (and I think, most OECD countries) there are a lot of companies in the “Business Services” sector. This sector includes services such as: payroll administration, janitorial, security guards, as well as Human Resources, warehousing, transport, internet, etc.  I would like to call this network of businesses as a “business ecosystem”. In effect, business functions are broken up, redistributed, and recombined in new ways; and all this, in the interest of lowering costs and increasing efficiency.

I believe the higher efficiency of businesses in these countries has a lot to do with business services, and less with the specific efficiency of individual workers. It is thus good to take a look at how this kind of ecosystem is built, and how we can learn what we can from this.

In the Philippines, there are some aspects of business services. There are security agencies (for security guards), IT, and even some warehouse services; but not too many others.  I believe that there are things that hinder the setting up of business services, and that this is keeping Philippine businesses from being more efficient and cost-effective.

Kinds of Services
Let us take a look at what kinds of services there can be. First, the general services:
Transport/Logistics. Transporting goods from one point to another does not need to be done by the main company. Especially when shipments are not that constant. Logistics services make better use of trucks and transport (even storage) infrastructure. Trucks don’t have to stay idle for days, or warehouses unused most of the time (or having too much extra capacity).

Payroll Administration. They not only compute the salaries (with all the deductions, allowances, refunds..) every month; they also pay out these salaries, and send the premiums to the specific agencies. Smaller companies don’t need to employ people specifically to do this task anymore. Even bigger companies use external payroll administration services.

Collections. The collecting of payment is often done by banks, in the form of “periodic payment orders”. Banks get authorized by people to make payments every month or so, for their rental, insurances, newspaper subscription, water, electricity, etc.  And, if the customer doesn’t pay on time, the company then hires another company to collect the overdue payments.

Human Resources, Recruitment. This would range from those that recruit people for temporary jobs, to those who “headhunt” for highly skilled people.  These bureaus advertise for qualified personnel, they do the intake interview, tests, etc. for the company. They then either turn over the employee to their client company, or simply “detach” them to work there (while they remain as employees of the HR/Temp company).

Facility Management. Does the setting up of everything in the office, from the dividing walls, to desks, computers, filing cabinets, etc.  This is an occasional task that actually is quite a hassle for the regular employees to do, so why not hire a specialist company to do this?

Waste Disposal. There are companies that “destroy” files (these need to be done correctly, for security reasons), dispose of waste oil from restaurants, or other special waste disposal needs.

Printing/Photocopying/Scanning. They do the often tedious task of producing your printed materials. Some even offer to do the layout for you.

And then, there are those business services which are specialized per sector.
“Fairs” for Retailers. For every kind of retailer, there is a regular “fair” which brings together all the suppliers for that sector (e.g. fashion accessories) so that buyers could simply place their orders at the fair. Through this system, all the retailers are assured of products from a wide selection of suppliers.

Special Stores for Businesses. For other sectors, there is a big store dedicated to the needs of the sector. There are big stores, for example, for restaurants and snack bars. Everything that operators of restaurants and snack bars could need is there: from various kinds of snacks, to waiter’s uniforms, napkins, utensils, etc.

Construction. The construction sector is really full of business services and subcontracting companies. It seems like a whole web of companies cooperate to make a single building.  First, there is a company that does the ground preparation, then another that does the structural work, then those which supply specific pre-fabricated units (e.g. re-bar frames, stairs, wall slabs, etc.), and cement is delivered by another company.  There is a company that leases out cranes, and another that supplies the crane operators. And then there are others who do the brickwork, painting, electrical wiring, flooring, etc. There are even specialist companies in the UK that sets-up the scaffolding.

It might look complicated, but it is indeed a very efficient way of doing the work. It is also more flexible than having a single contracting company doing everything. It is as if the project coordinator doesn’t have to pay individual workers, but that things are done by companies on a pakyaw basis.

“External” Conditions Needed
In order to have a fully developed business ecosystem, certain conditions are needed. First among this is that it should be easy to set up a business. And the operating costs of a business should be relatively low, so that the efficiency gain from subdividing the work is not lost because of high business operating costs.

In the Philippines, it takes a long time to start a business, and the process is tedious and expensive. Then, there are a lot of troublesome administration and tax requirements (e.g. a documentary stamp tax for each receipt). For some industries, though, especially those classified as “pioneering” or export-oriented, administrative and tax requirements are less tedious.

Second, there should be a level playing field for labor, work conditions, safety regulations, etc. In the Netherlands, salaries and labor conditions are regulated under national Collective Bargaining Agreements, which cover workers in a whole sector. For example, construction workers of various kinds pay the same salaries, and have the same safety standards.

Third, there should be a favorable bank and insurance system.

Fourth, a lot of things need to be standardized. Business forms and formats need to be standard throughout the economy, or at least the particular business sector. Even the specifications for things like window sizes or paint color need to be universal.

Why Efficient?
Dividing up the work into definite tasks for specialized companies, if done properly, greatly improves the efficiency of production. Take the case of the prefabricated concrete stairs. This has a lot of advantages. The company specializing in producing them makes use of the efficiencies of producing in scale, since it makes lots of prefabricated concrete stairs. Employees are fully utilized – and their skills in making prefab concrete stairs  improve with scale. They are able to save on materials cost and on equipment. This all adds up to a lower cost for producing the prefab concrete stairs. Now, multiply this for all the components that go into the final product (2x per floor of a building), and you will come up with a tremendous cost savings.

The other point of efficiency is that competition – through competitive bidding – means that the most efficient companies win out. And that, if outside sourcing of certain components or services do not result in lower costs, then the company could decide to do the task themselves.

In the Philippines?
Setting up integrated industries and a whole business ecosystem across industrial branches is not something only for advanced countries. The Philippines could also do it; it needs to work hard towards it.

The fact that the country is divided into many islands sets limits on the extent of business specialization, especially in the case of the smaller islands. There would simply be not enough scale for specialized companies to be set up in smaller islands. And, in dividing up the work, companies face large expenses in placing their workers in many job sites. But these limitations are not present for those businesses that operate in and around Metro Manila.

The electronics industry is well on its way to operating as a business ecosystem, with its many specialized companies making components for each other. And the government goes out of its way to simplify their administrative requirements.

The government should stimulate the development of business ecosystems, first for specific industries, and then to the overall economy. It should reduce the costs of setting up and running businesses, by reducing tax regulation and reporting requirements. At the same time, it should be stricter in enforcing technical, labor and safety standards.


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Philippine wages are too low

Posted by butalidnl on 28 December 2009

Philippine wage policy has been based on the principle of making the Philippines competitive by keeping wages as low as possible. With low wages, products made in the country will be cheaper and more competitive, and companies would want to base their manufacturing plants in the Philippines. The logic indeed seems impeccable. Unless, of course, we note the practice of the last few decades.

Foreign investors, even Philippine businesses, set up companies in the Philippines not mainly because of low wages. What counts more are things like productivity, infrastructure, location near markets or transport hubs, availability of specific skills, etc. The industries that are really labor-intensive have based elsewhere – thus, we see textile manufacturing in Bangladesh, small manufactures in China, etc. In short, the Philippines low-wage policy has not done much in terms of attracting foreign investors to the country. So, why bother with a low-wage policy? For one, low wages mean that profit margins are a bit higher; thus, businessmen will be the last to propose raising wages. Also, low wages makes it possible to employ more people to do the job than otherwise – notice how many salespeople crowd you when you enter some stores? Thus, it seems, the low wage policy is pro-employment, and pro-growth.

But we can try to look at things the other way. The low wage policy could be seen as hindering productivity growth and the overall growth of the economy. Since it is easier just to employ more people, the incentive of companies to become more efficient – and the workers more productive – is much less. With all the employees companies have, they have an incentive to have a revolving workforce, replacing one batch of temporary workers with another, in a bid to avoid employing them permanently and incurring higher wage costs. This hinders profitability in the long run, since stagnation in productivity growth will hamper competitiveness.

Another problem with low wages manifests itself at the level of the overall economy.  Workers’ wages are the main source of funds for consumption – the higher the overall wages in an economy, the higher the consumption capacity of that market. Minimizing wages may benefit individual companies, but the overall effect is that lesser products will get sold. This couldn’t be good for the economy.

How about foreign investors? Well, foreign companies do not really see the Philippines as a low-wage country.  Thus, wage levels are secondary for their basing decision.  It would be better if the country concentrated on the other, non-wage, measures e.g. improving infrastructure,  making the market efficient, ensuring an adequate pool of skilled labor, etc.  In addition, the country will be more attractive for foreign investors if they see that the domestic market is growing. Thus, if the total consumption capacity of the population is seen to be continually growing, this would be a plus point for investors – especially those which also wants to aim for the local market.

Low wages also mean that Filipinos will continuously be going abroad for employment. But, if wages increase continuously in the Philippines, at a certain point, they will be high enough to retain more workers.  Studies in Europe show that wages abroad have to be four times local wages for the flow of workers abroad to continue. Thus, if teachers earn Php 16,000 in the Philippines, they will be attracted by $400 wages as domestics in Hongkong. If they earn Php 20,000 they will stay in the country.

I propose that it would be best for the economy if wages are consciously made to increase every year.  The rate of increase should be just about 1 or 2 percent higher than inflation. This would at least keep it in pace with productivity growth, which we hope is improving every year. Actually, productivity is also a function of higher wages, because the prospect of increasing wages every year would push employers to increase the productivity of their employees.

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