Historically, the top four criteria for selecting an IT outsourcing location include cost (both initial and ongoing), education and skill level of the local workforce, scalability (i.e., the ability of an IT outsourcing provider to handle growth), and political stability. The values placed on these criteria may vary based on the need of the company seeking to outsource its IT. As countries in Latin America become more developed they also become more attractive as potential IT outsourcing jurisdictions based on these four criteria.
2010 saw Latin America officially emerge as a new destination for IT outsourcing. Based on recent surveys Latin America is number three overall in jobs outsourced from the U.S. The strategy implemented by U.S. companies that outsource IT functions to Latin America is often referred to as “near-shoring.” This near-shoring trend is expected to continue as South and Central American economies have been growing steadily over the last decade and are poised to become business and IT outsourcing forces in 2011. We have seen local companies in these emerging markets quickly become multinationals, such as Politec Global IT Services (based in Brazil) and DBAccess (based in Venezuela). Even Indian outsourcing giant Tata has leveraged its presence in fourteen countries in Latin America with offshore centers in Brazil, Uruguay, Mexico and Chile to serve emerging organizations with local and global IT resources.
China and India continue to be the major players in the IT outsourcing market; however, Latin America is poised to take market share from both of these respective countries. In 2010, while China was able to gain market share from India in the global IT outsourcing business due to China’s strong IT infrastructure, the language barrier in China and the lack of adequate legal protection for intellectual property continue to hinder China when companies are selecting a jurisdiction to place outsourced IT operations. These issues are not as relevant in Latin America as the local workforce is generally proficient in both Spanish and English and a better atmosphere for protecting intellectual property.
Other important factors that may sway U.S. companies to choose Latin America over China or India include time zone similarities and geographic proximity. Time zone similarities may not affect 24/7 customer support (as these lines will be staffed at all times), but for general research and development outsourcing having employees that work in the same time zone is a definite benefit both for the main team and outsourced team. Similar to China and India, with the primary exception of Mexico and a few other countries, the political climate in Latin America is stable for the most part. Finally, although a minor factor, there are fewer cultural differences between the U.S. and Latin America versus the U.S. and China or India. These factors have paved the way for Latin American IT outsourcing service providers to shine.
In response to China and Latin America’s outsourcing growth, India has sought to establish a stronger infrastructure to facilitate IT contracts in Bangalore as well as other parts of the country in order to quell concerns that India may not have the technology or the ability to meet the growing demands of large U.S. companies. For some companies operating on a smaller scale, the issue of IT infrastructure may not be a top priority when choosing an IT outsourcing service provider. These companies may be uninterested in a stronger Indian IT infrastructure and may choose Latin America over India for other reasons. Regardless, with proper planning, high speed data centers and other IT functions can be moved rapidly to anyplace in the world with little impact on the bottom line.
India continues to be a major player in the IT outsourcing market due to the education and skill of its workforce as well as its politically stable government; however, the overall cost of outsourcing to India has been slowly rising as the country becomes more developed and the U.S. dollar continues to weaken against the Indian Rupee (since 2009 the Rupee has appreciated by approximately 9% against the U.S. dollar). China is not encountering these issues as costs remain low for IT outsourcing purposes and the Chinese Yuan has not appreciated against the U.S. dollar (as it is generally fixed to the U.S. dollar). Thus, from a cost perspective China remains attractive but is still subject to the previously discussed limitations with respect to language and IP protection. These cost considerations and other factors may push more companies towards Latin America over China and India when companies are looking to relocate their IT infrastructures.
In 2011, we can expect this trend to continue as new firms located throughout Latin America bring innovative, new IT and business-focused solutions to companies looking to outsource IT functions. Moreover, they are expected to do this all with a cheaper price tag than other traditional outsourcing powers such as China or India.
With the increasing cost of doing business in the U.S. from a both a regulatory and an overall tax perspective, more and more U.S .companies will continue to turn to IT outsourcing as a means to lower overall IT costs and increase global profitability. We can expect to see U.S. companies look to Latin America in the near future to satiate this demand for low cost and effective IT outsourcing solutions.
When it comes to outsourcing strategy however, company’s set of unique needs should be considered before selecting a country to place outsourced IT operations. In order to maximize the cost benefit of IT outsourcing, companies may want to consider seeking the help of qualified experts when selecting an IT outsourcing jurisdiction. These experts can assist the company in navigating regulatory and local customs of which the company may otherwise by unaware. The cost of good advice is arguably much less than the cost of relocating IT operations to a more favorable jurisdiction. Once a company has determined its IT outsourcing needs, it is crucial to address the possibilities that lie ahead.