In Spanish, the word “servicial” is a high compliment. It describes a person who is always ready to lend a hand, who senses what others need before they even ask. Parents teach the concept to their children, in hopes that they will develop this behavior. Providing a service in Latin American culture is noble and prestigious—so how is it that it is not the business services engine of the world?
Nearly every provider of IT and Business Process services has wrestled with a Latin American Strategy. On one hand, it is a large, relatively prosperous market with a wealth of well-educated professionals. On the other, it is highly fragmented and diversely regulated; as a result, it has been difficult to scale. Another difficult choice for service providers is focus: are we building for the local market or to provide offshore/nearshore services? The two options require very different approaches, and therefore it is difficult to do both successfully at the same time.
Perhaps the biggest limitation to date has been the inability of the local industry to organize regionally. Individual Latin American countries lack the population to offer the scale that more established Asian offshoring destinations do. But viewed comprehensively as a region, it’s a formidable services population, with millions of qualified engineers, accountants, HR professionals, MBAs, doctors, lawyers, etc. and billions of dollars in demand for IT and IT-enabled services ($8 billion in Brazil alone). Latin America desperately needs, but probably will not get, a NASSCOM-like organizing body that will refocus the industry away from its current nationalistic tendency. It could start with the already commercially friendly Mercosul countries and perhaps expand northward as it proves its success.
Possibly the best-kept secret is the abundance of English language skill available in the region. For both voice and non-voice services, Latin America is competitive with, or superior to, most of the usual offshore back-office destinations when it comes to working in English. HfS Research toured a call center facility in Nicaragua not too long ago, and found over 120 representatives placing outbound calls in perfect, nearly unaccented urban American English. Over 80% of these young employees had lived in the United States at some point in their lives.
Of course, Latin America boasts some of the well-know near-shore advantages of similar time zones, quick, relatively cheap flights, and most importantly, cultural similarities with American and European clients. However, the outsourcing industry here is not as mature, relying on heroics and creativity more than process and discipline.
The strategic question for both providers and buyers: Is Latin America a destination of choice, or a destination of convenience?
Latin America as a destination of choice
Companies on either side of the services equation that see Latin America as a unique and differentiated proposition will seek to leverage the cultural familiarity bred by the outsize influence of the United States and Western Europe on Latin American Society. This has something to do with colonial history, economic power, political influence and aid, and shared Judeo-Christian foundations for legal and social structures (though the region is increasing in religious diversity quickly). But it has even more to do with a shared experience and popular culture. Latins who were teenagers in the 80s remember when “Video killed the Radio Star” inaugurated MTV broadcasting, at exactly the same time as in the US. Cable subscribers throughout the entire region have more foreign (and mostly American) channel choices than they do Spanish-language and local choices. While there is a vibrant independent film industry in nearly every Latin American country, Hollywood rules the cinemas. For all of Brazil’s compelling music, visit one of Sao Paulo’s famous “boites” and you are most likely to hear Euro-pop mixed by Europe’s top disc jockeys. Bottom line, Buenos Aires looks and feels a lot more like Boston than Bangalore.
Outsourcing is ultimately about providing services in a way that creates economic value for both parties. Cultural understanding can certainly grease the wheels of the relationship, but without an economic incentive, there is little reason to proceed. Latin America still does offer labor arbitrage for desirable skills, but it is fading just as quickly as anywhere else. On a pure labor rate basis, Latin America appears disadvantaged relative to India and the Philippines, for example. But on a total cost of ownership (TCO) basis, that disadvantage shrinks. HfS research estimates the difference in TCO at no more than 10-15% between most Latin America activity (whether IT or BPO related) and India-originated services.
Companies that see Latin America as a destination of choice will logically invest more heavily, and their strategies should reflect the following elements:
- Adopt a regional, networked approach, rather than a country-by-country approach. Make sure work is easily movable from one location to the other, and get skilled at capturing the right skills in the right cities.
- Make the cultural similarities and the physical proximity part of the differentiated advantage. Aggressively promote these advantages and how they translate into real business value.
- Carve out new niches that fit well—Application maintenance is mature and well supported by other regions. But GUI design, for example, has a cultural appeal element to it and is a strong niche for Latin American providers. Focusing on the services that are best provided from the region can only help.
- Lobby local governments for less restrictive service export policies and tariffs—and reward the locations that embrace pro-business regulatory environments.
- Invest in local leadership.
- Compete vigorously in the local market and the global service delivery playing fields to mitigate risk and enhance economic benefit.
Latin America as a destination of convenience
While the regional, all-in approach may well be right for many providers and clients, but it isn’t for everyone. For some enterprises and their providers, a more opportunistic approach to Latin America is more appropriate. Simply put, some companies do not have the demand for services delivered from Latin America, because their customers and their business doesn’t require it. These companies will likely take advantage of niche expertise, and the ability to provide “localized” services when their limited presence in the region demands it. A few others might view Latin America purely as a diversification move, a nearshore minor site wih disaster recovery capabilities and a beachhead for potential future expansion should the situation change.
This is probably the more difficult strategy to execute, because it requires making riskier choices about location and focus. Amongst service buyers, the companies that can afford to follow a “convenience” strategy are the ones that do not have a large commercial presence in the region—they lack the language and culture-specific requirements of companies with large footprints in Latin America, and they are not large enough or “outsourced” enough to require the portfolio diversification. Service providers of any scale are unlikely to have no customers with local requirements, be they due to commercial need or geographic diversification. However, if the demand is not large, one or two medium sized delivery centers will suffice.
Latin American service strategies that are more opportunistic will probably emphasize the following elements:
- Site choices that reflect broad language and regional capability. Since there are likely to be less sites and a smaller footprint over a large expanse of the map, companies are more likely to choose areas like southern Brazil, where it is easier to recruit bi- and tri-lingual speakers. Where companies have a specific large market to be served, such as Mexico or Brazil, companies may choose sites or providers with local strength.
- Niche activities—certain kinds of application development, bi-lingual contact centers, KPO, and sports books, among others, are all reflected with relative strength in the region.
- Customer acquisition, in the case of providers. There are still a number of captive shared service centers in the region that could be sold to providers looking to win a new customer.
- Portfolio diversification/Disaster Recovery. Companies that find themselves too heavily invested in a single region may find it attractive to conduct some business activity in Latin America, taking advantage of its labor arbitrage while managing business risk.
- Marketing and Sales: Ultimately, service companies cannot call themselves global if they ignore 22 million square kilometers of the earth’s surface, with a population of 600 million. Establishing a presence in Latin America is critical to service providers and consumers that need to compete globally.
The Challenges of the Region
While there are many more reasons to invest in Latin America than there are reasons to avoid it, there are some challenges for business service providers and their customers in the region:
1.Politics: Led and funded by Hugo Chavez’s regime in Venezuela, leftist, anti-business and anti-American/European governments have been elected in places like Bolivia, Ecuador, Nicaragua, and Argentina. While the threat to foreign businesses is real, it is also overstated. All of these countries require foreign investment, and still actively pursue it in spite of the political rhetoric their leaders promote. Brazil has grown economically, grown its middle class, expanded capitalism and foreign investment, and gained more influence in the region and the world in the last eight years, ostensibly under the leftist leadership of the Worker’s Party, which was just re-elected to the presidency for another four-year term.
2.Brand: Colombia has some of the best professional talent in the world, available at reasonable wages and within a short flight from the United States. But Colombia has a terrible reputation as a violent, dangerous place that keeps a lot of foreign investment away. In truth, the security situation is far better than it has been, not just in Colombia but throughout the region. The concerns over security are, in HfS’ opinion, overblown. Philadelphia, Washington D.C. and Baltimore are just three of the cities in the United States with higher murder rates than Sao Paulo. Buenos Aires is safer than Dallas.
3.Population/Scale: The main problem with single-country strategies is that no one country in the region, with the possible exceptions of Brazil and Mexico, has a huge population, therefore limiting the actual and potential educated workforce capable of providing services. Costa Rica, which has the most educated population on the continent, has just four million inhabitants, 300,000 of them already working in the services-for-export industries. Chile, with a stable democracy, strong infrastructure, and the highest per-capita income in the Americas after the US and Canada, has just 16 million inhabitants. Both of the above have proven difficult places to recruit in for recent corporate multi-national arrivals.
4.Regulation: Latin America has not helped itself with a consistent policy for services exports. While Brazil taxes them, Nicaragua offers a 15-year tax holiday. Panama offers similar holidays for some parts of the industry but not others. Most countries, even as they attempt to attract foreign investment, trip over their own bureaucracy. Fortunately they have all set up government-sponsored development agencies skilled in helping new entrants get established.
Service Provider Landscape: Approaches to the market
Different service providers have taken different approaches to Latin America, and even within a category, the strategies have differed
Traditional Western outsourcing providers such as Accenture and IBM have long had a presence serving the local market. Because of their country-specific organization structures though, it has only recently become possible for them to offer the services of their Latin American delivery centers to non-Latin American clients. CapGemini has perhaps the most aggressive investment program in the region and has backed it up with acquisitions, like the recent CPMBraxis transaction, and leadership to make it happen. All of these have local leaders running the operation, generally reporting to the home office in the US or Europe.
Contact Center Providers were early and heavy in the region, for reasons mentioned earlier. Sykes, for example, operates in Argentina, Brazil, Costa Rica, El Salvador, and Mexico. Sitel is in Brazil, Chile, Colombia, Nicaragua, and Panama. West is a relative laggard with just one large Mexico operation. Call Center management is a highly poached job category in the region, but because of their prevalence and experience, there are plenty of local managers running these contact centers.
The largest Indian ITES providers have all established a presence in Latin America, generally following an either build or buy strategy, but not both. Wipro has made some strategic investments in which it acquired both desirable assets and marquee customers. TCS moved early and has mostly built. Infosys has been characteristically cautious and opportunistic. HCL and Cognizant arrived late and do not have as large a presence as the others. Both WNS and Genpact have built and bought in the region. Those India-based providers that don’t already have a presence are talking about it, with commitment to getting established sooner rather than later. HfS has observed that the India-based firms are having difficulty engaging local clients, perhaps in part because they have largely failed to hire local leaders to run their shows. One senior executive from a large and successful provider recently remarked to HfS Research that “Portuguese/Spanish language skill and cultural understanding” were not that important to lead the Latin America business. This sounds a lot like the American globalization failures of the 1960s and 70s, in which US corporation dispatched ex-pats to run far-flung operations with little regard for local language, customs, preferences, culture and regulation.
Large local providers, like Softtek, Neoris and Politech, have established businesses in the US, but their penetration is small relative to the the brands mentioned previously. They have had the opposite problem of the India-based firms. They know and serve their home-market very well, but they have struggled with enterprise-level selling in the US and Europe. For obvious reasons, all of these firms have chosen a “destination of choice” strategy. They have a compelling near-shore value story to tell, but are far behind in awareness and market share. HfS Research sees the immediate challenge for these firms as sales and marketing, but longer term, they must also establish themselves as true global providers, meaning they too will have to come to places like India, The Philippines and China if they are going to be a full-service provider. They will also have to invest in BPO capabilities, as they are largely IT focused and HfS Research sees a slow but consistent swing towards bundled, end-to-end services over the next few years.
Yet another category of provider is the smaller, high-end Latin American software development outfit—companies like Hexcta, Avantica, and PSL, with deep expertise, smaller project based work as their main offering, and more midsize than enterprise-class clients. Their clients find working with them easy, for the nearshore advantages described elsewhere in this report, but they also tend to get a lot of personalized attention that executives of larger firms could not give them. More than any other constituency, this group of providers has an interest in promoting the region as a destination of choice, particularly for high-end software services.
The bottom line
Outsourcing in Latin America will continue to grow, in part because the region can serve many different types of demand. Cultural alignment is the strongest calling card for the companies wishing to provide services from the region, but they must resist the temptation to “sell against India.” The business services industry is, at this stage of globalization, much less a competition amongst countries than it is a competition amongst companies. Consumers of business services have a choice of locations and providers, and as they seek to both diversify risk and integrate services, Latin America will continue to be a key ingredient in the recipe. Whether the region plays a dominant or secondary role in the sourcing strategies of enterprises and providers, expect to see continued, paced, growth in both the local and export markets. And why not harness the energy of a culture that prides itself on providing a service?