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Main Barriers to Digital Transformation in the Philippines

Positive benefits of digital transformation or DX have been realized by many organizations but its adoption still remains in nascent stage in the Philippines attributed to barriers that are both human and technological.

Studies and reports in 2018 showed that lack of knowledge, of available talents, of investments, of readiness and vision, including inferior digital infrastructure, are among the top barriers to digital transformation in the Philippines.

In a recent study by analyst firm IDC, business leaders in the survey expect that digital transformation will ultimately benefit citizens in the Philippines. They foresee it to bring "potential increment to personal income through freelance and digital work; creation of more higher value jobs; and increased educational and training opportunities."

Respondents in the Philippines believe that 92 per cent of jobs will be transformed in the next three years due to digital transformation, and 65 per cent of the jobs in the market today will be redeployed to higher value roles or reskilled to meet the needs of the digital age.

But for the Philippines to realize such visions, there is a need to overcome these main barriers to digital transformation it is facing:

Lack of knowledge, investments

The lack of adequate knowledge on DX is one of the main barriers identified to its adoption which even hinders businesses and organizations to invest in it.

The Asian Institute of Management (AIM) explained that "knowledge factor" (in the context of digital competitiveness) is measured by the "know-how necessary to build and adopt new technologies". It is also composed of talent, training and education, and scientific concentration sub-factors.

Alon Rejano, market analyst and IT services lead at IDC Philippines, observed that majority of organizations in the Philippines are still classified as "digital resisters and digital explorers", which means that the country’s adoption of DX will still be slower than its regional peers.

In the 2018 World Digital Competitiveness Rankings of the Switzerland-based International Institute for Management Development (IMD), the Philippines dropped significantly finishing 56th out of 63 countries, dropping 10 places from 2017's 46th spot.

Rejano also noted sub-factors such as "low total expenditure on research and development, high pupil-to-teacher ratio, and unfriendly framework for starting businesses and enforcing contracts". However, the Philippines ranked 50th for the knowledge factor, up by three spots over last year's finish at the 53rd spot.

Lack of future readiness

Specifically in the local financial sector, the biggest barrier identified is the "low readiness quotient" of financial institutions which stems from the lack of knowledge, thus the lack also of willingness to invest in DX.

For AIM, the future-readiness factor "measures the level of preparedness of the country to exploit and adapt to digital transformation". It is made up of adaptive attitudes, business agility, and IT integration.

Based on the latest inclusive digital finance report by FINTQnologies Corp (FINTQ) dubbed “Are Philippine financial institutions ready for DX?”, it showed that 90 per cent of financial institution respondents do not have a digital or e-banking platform. The respondents referred mostly to thrift, rural, and cooperative banks.

"The biggest barrier to their adoption is their willingness to invest in digital technologies. This has profound consequences because as our report shows, the ‘readiness quotient’ heavily influences the bank’s level of ‘commitment quotient’ to bring its business towards a digital economy,” said FINTQ Managing Director Lito Villanueva. FINTQ is the fintech arm of PLDT-led Voyager Innovations.

In the FINTQ IDF Report Vol. 3, the dominant picture that emerged from the findings shows that 80 per cent of the financial institution respondents show "limited" or "minimal" capacity to digitalize their systems and processes – a challenging pattern that could impact the progress in expanding access to financial services to the 77 per cent of Filipino adults who are presently unbanked.

"This means that a typical respondent lacks a concrete DX roadmap and does not operate an e-banking platform. The average financial institution remains undecided in migrating to a new core banking system nor has not made thorough research on what solutions best fit their needs," FINTQ said in its statement.

Nevertheless, the Philippines in the previous year witnessed significant efforts made to promote the importance of having a DX framework, at least in the fintech space, via the collaboration between the newly-established Philippine Blockchain Association (PBA) and the Israeli Chamber of Commerce in the Philippines (ICCP).

Both groups target to share the best practices about the financial technology landscape in Israel and how the Philippines can improve its own.

PBA President and UnionBank Chairman Justo Ortiz urged different startups, fintech companies, and entrepreneurs to learn from one another. He believes that by learning from other principles-based regulation practices, blockchain companies and other startups can model their own ecosystem in the country.

Inferior tech infrastructure

Also included in the aforementioned 2018 world digital competitiveness ranking was how the Philippines experienced massive drops for the technology factor, landing 58th place as it dropped 7 places from last year's 51st-place finish.

The technology factor takes into account the "overall country setting that enables digital technologies to develop." Slow internet remains a big reason for the low rankings as well: out of 63 countries, the Philippines ranked 62nd in communications technology and 61st in internet bandwidth speed.

FINTQ reported that 57 per cent of its study's respondents are so-called “digital laggards” who show limited or scant capacity at this point, scoring 40 and below out of the perfect 100 in FinTQ’s CARA Index.

About 24 per cent are “pack followers” who scored 41 and 60, translating to “minimal” capacity for DX. Only 18 per cent of the respondents scored 61 and above, thus making them “pathbreakers” who show extensive or substantial readiness.

Meanwhile, in the education sector, the Philippines recorded only 27 per cent of schools connected to the Internet, which the Department of Education (DepEd) intends to change. In 2018, the target is to connect some 30,000 schools in eight pilot regions (CAR, 2, 8, 10, Caraga, ARMM, 4B). By 2019, the target is to connect all schools to the DepEd WAN. By 2022, all schools should be connected to the Internet.

The department also hopes to develop and create an Innovation Hub in high schools, or an ICT incubation hub in science high schools for research and development. These are envisioned to be centers for robotics and research and development and thus will be equipped with the latest technology, a computer lab, and an electronics lab.

With these hubs all over the country, they are expected to focus on local, community-level problems, while tertiary ICT programs are geared toward global competition and specialization.

Lack of talent

Focusing on the manufacturing sector, IDC noted the most pressing challenge is the need to recruit talent with skill sets that can drive change.

Shaping the workforce of the future is also a major issue because 85 per cent of jobs in manufacturing are expected to be transformed in the next three years. And almost 60 per cent will be redeployed to a new position and/or retrained for digital work.

In a separate research by the analyst firm, titled “Unlocking the Economic Impact of Digital Transformation in Asia Pacific”, it showed only 7 per cent of Philippine organizations are "Leaders" while the remaining 93 per cent are "Followers". The study involved 1,560 respondents in 15 markets.

About the leaders, at least a third of their businesses’ revenue is derived from digital products and services, and they have full or progressing digital transformation strategies. In fact, 48 per cent of Filipino leaders have implemented a full digital strategy.

As for the followers, revenues of such organizations comprise less than 20 per cent of their total revenue, and only 17 per cent of these businesses have a full digital strategy.

The research likewise indicated that leaders are currently experiencing double the aforementioned benefits of followers. This difference will only grow more pronounced by 2021, the report said.

The need for organizations to retrain individuals and organizations with future-ready skills was also brought up.

Jubert Alberto, country head of IDC Philippines, acknowledged that there would be “job redundancies along the way.” He also emphasized though, that technology would allow for the creation of new jobs, and business should invest in upskilling their workers for the modern digital business models.


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