Business in the Philippines: The bureaucracy barrier

Chris Moriarty's ongoing business adventures in The Philipines have encountered local bureaucracy, and it's not just government stodginess that is giving him grief: local business is also reluctant to deviate from its favorite ways of getting things done.

As much as the Philippines offers an incredible bounty in mineral wealth and human talent – it is not easy.

The biggest challenges are not the obvious challenges.

You quickly realise that the business culture is fundamentally different.

In Australia we are part of the greater ‘western’ business community. We believe in a handshake, a look in the eyes, contracts for the details, but understand that if a contract ever comes out of the bottom drawer the relationship is probably dead. We believe in process, making stuff as simple as possible, accuracy, transparency and accountability.

If you are the CEO of a bank, a tradie, a farmer or a car dealer the rules are basically the same. Yes, we don’t all follow all of them – but we know what the rules are.

The Philippines is fundamentally different. They don’t know the rules.

Handshakes are meaningless, few people look you in the eyes, contracts are complex and unwieldy documents written in ancient legalise open to endless interpretation. They confuse ‘procedure’ with process. Everything is complicated, accuracy is mostly accidental, confused internal systems mean zero transparency and no accountability.

Australians might confuse this for ‘tricky’ – “The invoice is always wrong, they are trying to rip me off”.

But in fact this is often not the case. Mostly, when you look inside their businesses, they are just so unwieldy and confused that they genuinely have no idea what they are doing.

Why are Filipino businesses so disorganised?

I think I have spotted two major reasons.

Paper-based

Good news... the lawyers rang and said we were registered with the BIR (Bureau of Internal Revenue – tax office) and we should come over and pick up our certificates.

Great, I thought, progress.

On arrival I was given a ‘present’ – a brown envelope. In it were four ledger books. One labelled ‘general ledger’, another ‘receivables. There was a ‘payables’ and one simply ‘journal’.

What is this?

Well, the BIR demands that you keep a ‘paper based’ accounting system. You have to sit there with an inkwell and feather quill and carefully fill out your tax-office-registered books.

Also, the tax office issues invoices and receipts. You apply for an invoice book (you submit your design for your invoice form) and they approve it and issue you with the invoice numbers. These are the invoices you use to issue to your customers.

Flat Planet already has a perfectly good cloud-based accounting system – but now we have to hire a junior to sit and duplicate a range of entries into a paper-based system.

If you think about it, many Filipino businesses must forgo the computer-based system and instead just rely on the mandatory paper-based system – we certainly get lots of handwritten or typed invoices.

Procedure not process

A process is designed to achieve an outcome by the most efficient path possible. The outcome is king – it has to be an accurate management report, a target cost-per-transaction... whatever. The point with a process is that ‘what you do’ is less important than ‘what you deliver’.... or... if you can deliver a better outcome by changing what you do, then you change what you do.

A procedure is a different beast. You have to do this, then this, then this, then this....

A procedure can be performed with no real insight into or understanding of the outcome.

Many Filipinos are procedure junkies – try explaining a ‘process’ to them and they just don’t get the difference.

This is a real problem when it comes to management reporting, transparency and accuracy.

The report or invoice might be wrong – but you can’t do anything about it as you have to follow your procedure.

We are in dispute with a successful Filipino business at the moment. A couple of months into the relationship we realised their invoicing system was unwieldy. A month later we realised it was inaccurate.

They are an important supplier so we approached the issue in a spirit of good faith. (Sort of, at times pure raw frustration did overflow.)

We undertook a major reconciliation project and built an entire new process for them complete with Excel spreadsheets coded with formula and macros. We met with their accountants and figured out that they were spending days agonising over each complicated invoice (they were sending several per month) – we reduced all this to a single simple monthly invoice that would have taken 30 minutes to produce and check. We would have full confidence in this invoice and pay it straight away.

But now, the most senior executive in the business doesn’t want to talk turkey. They have a procedure, they have policies, they can’t change things. Sure there are some inaccuracies, but if you know what the back story is to each one they kind of make sense...

Well, said I in exasperation, if your management report only makes sense if you have secret knowledge, it is not a management report; rather, it is a piece of fiction or at best just part of a code.

Hold on, time to bury the frustration and find a way to engage constructively!

The Filipino perspective is the reverse of the Australian one – they don’t have confidence in my simple monthly invoice because it has been generated via a process that ignores large chunks of their procedure. Because of their paper-based systems, they have large numbers of ‘pen pushers’ who, due to poor productivity, only ever work in one small part of any process. Where the inputs to their little piece come from, and where the outputs go to, is just a vast mystery. It is best to just stay focussed on their little piece.

A virtuous circle

Of course, playing into this is the very low cost of labour. Technology costs the same in the Philippines as it does in Australia. The productivity benefits of technology are compelling in Australia because labour is so incredibly expensive.

But why spend $20,000 putting in a basic accounting system when a team of three full-time accountants might cost less for a whole year?

And anyway... given the BIR’s attitude to electronic systems, what real ROI is there?

Western companies have the potential to play a very important role in regard to all this stuff.

First, increasing the demand for labour, western firms are pushing up wages. This increases the productivity argument re technology.

Second, western firms are run using western ideas in regard to process. Thousands if not millions of Filipinos are learning all about outcome-oriented process thinking on the job (including those unlucky people in our supplier’s business that I am badgering!). There is an emerging new class of knowledge workers – business analysts!

Finally, as is just starting to happen, the entrepreneurial class in the Philippines is beginning to leverage this new thinking to build businesses around more efficient and therefore more scaleable processes.

Bigger, more successful businesses built around higher productivity will create more jobs, more wealth, higher wages... and on it goes.

To steal a line from Adam Smith – it is a virtuous circle.

At the end of the day, while it is frustrating as hell, you have to keep in mind the bigger picture. By investing in the Philippines, business can leverage great competitive advantage back here in Australia. Also, by investing in the Philippines, businesses here can play a part in enabling this talented and hardworking nation of 100 million people to lift themselves out from under the on-going oppression of poverty. That also is a virtuous circle.

Chris Moriarty is the managing director of Flat Planet Pty Ltd and president of Flat Planet Philippines Inc. 

promoted stories