MANILA, Philippines – Open source and the concept of "software as service" could provide the country's best chances in keeping up with outsourcing leaders India and China, industry analyst Ovum said.

David Mitchell, United Kingdom-based Ovum's senior vice president for IT research, said the Philippines needs to focus on niche areas where it can compete better in terms of higher-value services.

"Smaller economies in emerging markets need to have focus and avoid competing with larger economies on cost alone," Mitchell said in e-mail reply to questions by INQUIRER.net.

Mitchell added: "The reason for the exhortation that the Philippines needs to focus is two-fold. Firstly, the country is not large enough to compete against India and China on the basis of scale, and so the country needs carefully to select its battles."

"Secondly, focus brings the ability to charge premium rates, for skills that are rarer. This means the Philippines can avoid being dragged into a low-wage, low-investment spiral," he added.

Currently, Mitchell noted one focus area is software as a service (SaaS) businesses, citing companies such as Morph Labs. Open source is also set to be another area of focus, he added, citing plans to set up new IT parks focusing on developing businesses around open source technology.

"However, the key will be to ensure that the open source businesses that are created develop high-value assets rather than developing low-value services businesses," Mitchell said.

This needs to happen to ensure that the Philippine businesses have a greater ability to scale; [which is] something that will be crucial given the labor shortfall," he said.

He added: "There is a danger that too many areas of focus emerge in the Philippine ICT economy, meaning that it will become difficult to gain the depth of skills required to develop globally competitive business that can sustain premium rates -- as opposed to the low-rate economy associated with much outsourcing and BPO activity."

The country would likewise need to spend for more than just basic education if it wants to go into more of these high-value services. This area remains one of the biggest challenges for the Philippines, Mitchell said.

"For all of the outsourcing activities there are skill requirements for language, IT, management and customer service – and the various elements of the Philippine education system need to respond positively here," he said.

"However, the more specialist skills, and the sheer number of different specialist skills that will be needed, are likely to be more difficult to produce without significant support and investment from government in secondary, tertiary and vocational education" he said.

According to Mitchell, the creation of a Department on Information and Communication Technology (DICT) will readily provide support including policy-making to improve the educational system.