Santiago: Sustained vertical drive.

By Dan Berthiaume

Latin American nations make up about one-quarter of the 2012 list of Top 100 outsourcing locations compiled by global outsourcing research/advisory firm Tholons, and that is no accident. As Manuel Ravago, president for research at Tholons, explains, Latin America is an up-and-comer in the world of BPO. And more agile smaller countries might make the most of that.

“We view Latin America as the next important outsourcing destination globally,” says Ravago. “The world will soon realize Latin America can do more than speak Spanish.”

Latin America possesses several factors that give it an edge over more traditional BPO locations such as China and India, according to Ravago. “First of all, Latin America has Nearshore value due to things like time zone and general proximity, which India and China can’t compete with,” he says. “From an operational perspective those things can make a huge difference.”

Ravago also cites Latin America’s linguistic advantages, but not just in terms of Spanish. “There are a lot of other languages in Latin America,” he says. “There are pockets of many other populations, like Italian and German speakers.”

Furthermore, Ravago says outsourcing certain business processes to Latin America can help US firms better serve the rapidly expanding domestic Hispanic market, which represents the country’s fastest-growing minority group. “If a company is looking to offer Hispanic consumers customer support, can India provide it?” asks Ravago. “No. Can Latin America provide it? Yes.”

In addition, Ravago says China is still relatively focused on serving its domestic BPO market, with “nearshore” for China meaning other Asian nations such as South Korea and Japan. “Those are not markets Latin America has to compete with,” he states.

Latin American BPO Attracts India

According to Ravago, the BPO potential of Latin America is bright enough to attract the interest of many major Indian BPO providers. “A lot of Indian companies want to break into the US Hispanic market, and Latin America is a stepping stone,” he says.

There have already been a number of Indian BPO delivery centers established in Latin America, says Ravago. “They will see the wealth of skills available and move into higher-value services. The number of delivery centers and investments is set to expand in the near term.”

Costa Rica, Colombia: Strong Potential

Tholons’ report on the top Latin American global outsouring locations cites Costa Rica and Colombia in particular as showing strong growth potential. According to Tholons, Costa Rica will benefit from its skilled labor force as the global BPO market moves toward vertical-specific, high value services. Costa Rica is also trying to attract more investments in its creative services outsourcing industry.

Meanwhile, Colombia has enacted a program known as “Transformacion Productivia” which acknowledges IT-BPO as a key growth activity. This effort includes a widescale focus on more effective training and capacity-building programs for its KPO and ITO segments.

Tholons also calls out Santiago, Chile, in particular for a sustained drive to hone expertise in vertical-specific processes.

Brazil, Mexico, Argentina: Internal Risks

According to the Tholons report, three of the most established Latin American BPO provider nations – Brazil, Mexico, and Argentina, need to address internal social, economic and political risks, including inflation, to “regain lost momentum.” If these countries do not counteract internal risks, Tholons warns smaller “upstart” Latin American destinations such as Peru may capitalize on their lost market opportunity.

Ravago added further commentary on Brazil, noting that as an emerging market it offers economic opportunities on par with India and China, but saying Brazilian BPO providers must adopt a less provincial outlook. “A lot of Brazilian BPO providers are ‘eccentric in their outlook; they are not looking for Nearshore or offshore opportunities,” said Ravago.

By Patrick Haller

When making sourcing decisions, a lot of attention is paid to the pricing structure and qualifications of service providers, while their actual location is sometimes a secondary  consideration. However, when assessing a destination, it’s important to realize that what might be favorable today can morph into a nightmare scenario tomorrow. Don’t be caught unaware and unprepared for the ever-changing dynamics of  the Nearshore.

The best-shoring process goes beyond looking at the usual criteria like cost effectiveness, employee attrition and service capabilities, and examines issues such as the hidden aspects of hiring and firing, how non-performance claims are managed, a country’s political stability, propensity for natural disasters, nationalization of businesses, and concerns about infrastructure. It’s dangerous to give these critical factors short shrift when concentrating on which provider offers the best financial deal.

International management consulting firm A.T. Kearney advises that “the best-shoring evaluation process selects the most favorable location by applying a comprehensive set of criteria, which include not only current cost effectiveness and scenario analyses, but also an assessment of service and quality levels, as well as the question of warranty.”

“There are several items that are driving the trends towards best sourcing of solutions,” said Ed Fitzpatrick, director of Managed Services at Charles River Development, during a podcast about IT development, “The key thing is the competitive nature of the industry. Especially coming off the last couple of years in the worldwide financial situation, it’s about proving competitiveness, lowering costs, driving operational efficiencies, getting more value out of their investments in technology and systems, better aligning costs and values, and of course, reducing the strain on limited internal IT resources.”

Looking deeper than immediate cost savings, buyers should take into consideration driving factors, such as:

• Available Talent – How big is the current qualified labor pool? Will the operation be able to scale-up over the next five to ten years? Who are the competitors for the same talent? What are the strengths and weaknesses? Are wages expected to increase from year-to-year? Do the labor laws favor workers or employers?  For example, even though Brazil has the largest population in South America, can the country offer better software developers than Colombia? Can Colombia compete on the wage scale with Chile? Will Chile produce enough qualified candidates for contact center work over the long-term than Argentina? Will wage inflation and restrictive labor laws in Argentina have an adverse effect on the ability to continue operations there? Which nation is known for a strong work ethic as compared to the others?  When it comes to hiring and firing, every aspect of the country’s employment law should be examined carefully.

• Soundness of Infrastructure – Just because a country was known for having solid infrastructure in the past does not mean it will be true in the future. For instance, Chile was thought of us being relatively sound in this regard, but recently President Piñera warned executives that Chile would face an energy crisis during his administration due to an estimated annual demand increase of up to 7%. Other nations too might face energy crises, or an inability to keep up with the need for improved telecommunications technology and internet access. Safe roads and highways, efficient and adequate transportation systems, accessibility to international airports are also major considerations. El Dorado, the main international airport in Colombia’s capital city, Bogota, is being completely rebuilt in order to accommodate the heavily increased passenger traffic. However, observers have noted that by time the new facility is completely operational it will already be inadequate. Therefore, plans are under consideration to build a second airport.

• Natural Disasters – No country on earth is safeguarded from nature’s wrath. However, some are more prone to disasters than others. As charted by PreventionWeb, Chile is more prone to earthquakes than flooding, Colombia can suffer from flooding and earthquakes, Argentina is also susceptible to flooding whereas drought is the biggest threat to Brazil. Whatever the hazard, be sure redundant systems are in place and assess how quickly business can resume.

• Claims for Non-performance – Even though the contract might contain very specific clauses relating to non-performance issues, what jurisdiction will the contract be enforced in? If in the provider’s home country is there a enough of a history of similar cases in order to establish a precedence, and if so, who have they favored? If not, how would such a case be handled?

• Political Risk – Are foreign business entities welcome to operate freely within the selected country? Does the country have a history of nationalizing private enterprises, or are there indications to suggest this will start happening? Can the government close down an operation that is deemed contrary to their philosophy? Will a foreign entity, or a company hired by a foreign entity, be abruptly shut down? These are very real concerns, especially in Latin America where the political dynamics change rapidly in some nations. Closely examine the policies of countries such as Venezuela and Argentina who have been shown to be volatile environments, whereas Chile and Colombia stand as recent examples of political stability.

• Immigration Policies – Providers might need to hire employees from other countries, even on a temporary basis, in order to ensure they have the right individual in the right position. Also, companies that have shared services or captives most likely will want at least some high-level personnel from established business centers to oversee their operations. What countries are more welcoming to foreign workers? Where are the least restrictive immigration policies? Can foreign employees be arrested or deported without cause? Be sure to research these policies in-depth and gain an understanding of a particular country’s record, and pay attention to the “writing on the wall.”

Do not underestimate the importance of digging into these fundamental aspects of sourcing. Remember that the relationship is not only with your provider, but also with their country.

By Luke Bujarski

High employee turnover is something that sourcing managers have learned to put up with when offshoring IT and BPO tasks to India. But now the Philippines has also begun showing signs of overheating. Given Latin America’s relatively small labor pools, we worry that the region might follow suit and succumb to the same pressures that have pushed the Philippines to its limits. So far, rampant turnover has not been a major problem with LatAm markets. But just in case, we decided to take another look at some of the details around attrition and other symptoms of hot labor market conditions.

What we found is that while Latin American labor pools are fewer and often smaller, sound management practices at the company level, greater company loyalty, and slower, more organic industry growth have kept attrition rates lower than what has been seen in both India and the Philippines.

What’s Up with the Philippines? 

“BPO firms [in the Philippines] are experiencing difficulty in hiring and retaining “capable employees,” thus, resulting in higher attrition rates and an increase in hiring and retention costs,” noted global consulting firm Tholons in a recent report. Other sources suggest that up to 75 percent of the Philippine people speak good English, so it’s no surprise that the BPO industry (in revenues) has been growing at 20 percent annually. Market research firm XMG Global also expressed concern over the growing “talent problem” in the Philippines – not only with today’s labor force, but also with high dropout rates in the labor pipeline in primary and secondary school. As a result of this and other factors, labor costs are expected to go up by 25-60 percent over the next five years.

Despite these warning signs, the Business Process Outsourcing Association of the Philippines, in a joint report with Everest Research, anticipates the industry to almost double by 2016 to 900,000 employees. For those service providers already battling it out with runaway training and recruitment costs, wage inflation, disrupted project workflows, and inconsistency in service level quality, those projections may be a hard pill to swallow.

LatAm Sensitivity to Demand Pressures 

When it comes to contact centers and BPO, English-speaking labor pools in Latin America are relatively small and hence tend to be more susceptible to demand and supply misalignment. Central American countries are a case in point as is currently being witnessed in Guatemala, where a growing price war for bilingual agents is forcing companies like 24/7 Customer to diversify their coverage base into Nicaragua. Going forward, as even smaller markets like Belize and Honduras grow into the BPO industry, service providers should take care not to over promise and under deliver on total cost and service level agreements. Likewise, government officials should be careful not to ‘over promote’ their regions’ capabilities, without backing up their initiatives with matching training and education dollars.

Concern over employee churn also has a lot to do with the type of business that you’re in. According to Tony Mataya from Think Solutions, on the whole, Mexico’s IT services industry has not seen the type of attrition rates experienced in India. Chris Snyder CIO of Hulcher also said that it has a lot to do with the fact that just like Americans, “Indians don’t want to work the third shift if they don’t have to” – referring to the 12-hour time zone gab between the US and India. This is particularly true when dealing with agile, scrum and other live-time software development methodologies. “We tried agile with India, but turnover got to the point of ridiculousness.” Snyder also noted that they’ve had much better luck in Brazil, although they’ve found it increasingly difficult to retain and recruit talent since signing on with Stefanini Solutions three years ago.

Market Fundamentals: Mexico vs. India vs. the Philippines 

When looking at macro-level data there are a couple of things to be mindful of when analyzing labor markets. Consumer price inflation is perhaps the most indicative of rising wages, since employers typically need to adjust salaries annually in line with overall inflation. Below we see that the cost of living has more than doubled in India over the last five years, while Mexico and the Philippines have seen lower inflation year on year. GDP per capita is clearly much higher in Mexico, which puts a premium on wages. Likewise sheer market size in terms of population emphasizes India’s dominance as an offshore hub to both Mexico and the Philippines.

Attrition Boils Down to Economics, Management, Culture

Personal expectations and the promise of higher wages is what ultimately cause BPO employees to jump ship. However, work culture and company management style also has a lot to do with it. Eric Simonson Director of research at Everest pointed out that “the Indian work mentality is focused more heavily on ‘getting ahead’, rather than subject matter expertise. We’ve seen good things coming out of Poland lately partly because the work culture follows a more artisanal approach focused on mastery and domain expertise.” Mataya from Think Solutions also backed up this claim and mentioned that it is “not uncommon to see BPO workers in India move companies for ten cent raises”.

Prakash: Customers want "mobility, big data, business intelligence."

By Robert L. Scheier

Days after Tata Consultancy Services (TCS) announced a 14 percent growth in quarter-over-quarter revenue, Ankur Prakash, Vice President and COO for TCS-Latin America talked with our affiliate Global Delivery Report about prospects for the Nearshore amid continued economic uncertainty.

Prakash, who is ranked number 15 on the Nearshore Americas Power 50 list, lauded for being “a strong supporter of Latin American services,” does not see the slowdown in demand for outsourcing that some analysts are forecasting.

Some observers are predicting slower demand this year. Are you?

Prakash: I don’t see any sluggishness. We have seen good momentum in the last couple of years, and I do not see the momentum is going to decline over the next 12-18 months.

There’s also some talk that larger service providers are seeing stronger demand than smaller or mid-size firms. Your thoughts?

Prakash: In general, providers like TCS who can offer stability, certainty, and flexibility will always be in demand. That’s what I’ve seen over the last four to five years, not just the last few quarters.

Several analysts have recently said they see a trend toward customers doing smaller, less complex deals. Is that true for TCS?

Prakash: I think it’s relative. I have seen deals…ranging from $200,000 to more than $25 million.

Attrition is always a concern for customers. In the earnings call, TCS said attrition had fallen to 12.8 percent. Is that true across all the Nearshore geographies?

Prakash: Attrition for Latin America also fell to below rates in the overall Nearshore market. We were not as close to the TCS overall number, but [throughout Latin America] we were lower than market attrition… [which is] in the range of 16 to 17 percent.

In the recent earnings call, the company also said “Latin America showed significant momentum followed by India and Asia-Pacific.” Was this demand from the domestic market or for global services provided by Latin America service centers?

Prakash: Almost 70-75 % [of the demand came from] the local market, the remainder in global services. All the markets showed consistent growth, within a few percentage points [of each other].

Specifically in Latin America, how quickly are you growing revenue for testing, remote infrastructure management, and agile application development?

Prakash: We’re growing quite fast in infrastructure services, followed by assurance services such as testing. Another area where there’s a lot of momentum and growth is in enterprise solutions such as ERP [where we are doing] application maintenance and management, implementation, hosting, and remote management

What is top of mind for customers these days?

Prakash: They are asking for innovation, and things like mobility, big data, and business intelligence, more often than they have asked in the past.

TCS has also said that pricing is stable and its pipeline is strong. What could change that? What danger signals are you watching out for?

Prakash: [Laughs] I always get this question. I believe a business has to be run with the same fundamentals [all the] time, not because today there is no crisis, so we can expand everything, or tomorrow, there is a crisis, so there [will be no] investment. The basic fundamentals of a business cannot be drastically changed [without], some way or another, choking the business.

< Watch our interview with Prakash here. >

By Reshaad Durgahee

Lima, Peru: Surprisingly emerging.

In the period 2003 through 2010, Europe and Asia were the largest recipient regions of foreign investment projects in shared services and BPO activities, accounting for 46% and 29% respectively. Meanwhile, interest in Latin America has clearly been growing. The number of shared services and BPO foreign investment projects in Latin America rose year on year until 2010, when the total number of projects entering the region decreased by 15%.

However, in terms of jobs created by these investment projects in shared services and BPO, 2010 saw the highest number in the Nearshore region since 2006, increasing by almost 10% over 2009.

After the Asia-Pacific region, Latin America is now seeing the largest-size centers being set up, and indeed, the region continues to be characterized by a number of labor-intensive shared-services projects, with on average 350 announced jobs per center in 2010.

General trends in announced shared services jobs by world region, 2003-2010

Typical destinations for shared-services establishments in Latin America, such as Colombia and Costa Rica, continued to lead the rankings in 2010, representing 22% and 14% of regional shared-services job announcements. Brazil and Argentina – as dominant markets in the region – also continue to attract their share of investments.

Top ranking SSC/BPO destinations in Latin America & the Caribbean by estimated jobs, 2003-2010

However, it is the emergence of newcomers in the rankings, such as Nicaragua and Peru, that piques the interest of the observer of the outsourcing industry. These two countries attracted large-scale investments in shared services, demonstrating the widening of investor confidence across the region. Companies are now seeing the potential of previously untapped labor markets. Countries such as Nicaragua and Peru offer companies that are willing to take risks a first-mover advantage in terms of potentially lower labor costs, lower levels of competition from similar operations, and the opportunity to become the major player in a new market.

This would be in contrast to already well established shared-services locations in the region, which offer a more experienced labor pool and potentially higher-quality level of infrastructure, but are also starting to experience side effects such as increased levels of competition and elevated attrition rates.

The Rise of the Second Tier

In 2010, leading agglomerations in Latin America in terms of job creation through foreign investment in shared services and BPO included Bogota, Lima, San José, Guadalajara, Managua, and Medellin, the first four of which make the Global Top 20 ranking. Examples of new investments include Sitel, which announced 450 jobs at its new contact center in Managua; National Instruments, which has announced the establishment of a shared service center in San José creating 200 jobs in CRM, finance, IT, and sales; and Convergys, which has established a bilingual contact center and back-office support site in Bogota, creating up to 1,000 jobs.

The appearance of Bogota and San José, as now-seasoned shared services destinations comes perhaps as no surprise. The Mexican city of Guadalajara and Colombia’s second city Medellin highlight the potential of such second-tier cities in the region to operate shared services at lower cost than their capital cities, whilst still maintaining suitable operating environments desired by investing companies. Recent investments include West Customer Management’s bilingual contact center in Guadalajara and HP in Medellin.

Function-wise, investment in this sector into Latin America has been focused on contact centers (primarily to serve the local market and Spain, but also increasingly bilingual centers to serve the United States). In addition, in recent years, more and more companies have seen the potential for more value-added shared services operations in the region’s more mature locations, where there are now multiple finance and IT shared services, for example.

Sources of Investment

By far and away the largest source country of foreign investment in shared services operations in Latin America is the United States, which between 2003 and 2010 accounted for more than half of the jobs created in the region in this activity, generating almost 70,000 positions. Although Europe and Asia remain the most popular regions for US companies setting up shared services and BPO operations, Latin America remains a key market, in particular for nearshoring activities due to factors including timezone advantages and natural availability of Spanish language skills.

Between 2003 and 2009 Spanish companies (such as Telefonica and Banco Santander) accounted for about 20% of jobs created in shared services and BPO in the region, solidifying Spain’s position as the second largest investing country in this sector in Latin America.

Top source countries for SSC/BPO foreign investment into Latin America & the Caribbean, 2003-2010

Much has been written on the rise and dominance of India as a destination for shared services and BPO, but it is also interesting to note the rise of India as a source of such activities. Globally, Indian companies created over 15,000 jobs in this sector in 2010, continuing the year-on-year growth witnessed since 2005, accounting for 12% of all jobs created worldwide by foreign investors in this sector. From a Latin American perspective, in 2010, Indian companies such as Wipro, Genpact, and 24/7 Customer created just over 10% of shared services and BPO-related jobs announced by foreign investors in the region – a 60% increase from the previous year. It all represents a move to get closer to customers in a new market, highlighting the rise of India as an outward investor in shared services and BPO activities.

Profusion of Possibilities

Latin America continues to succeed at offering attractive options for companies wishing to establish shared services and BPO activities, as demonstrated by the increasing number of jobs created in the sector from foreign companies in recent years. These options come not only in the form of mature, well-established destinations, but also up-and-coming locations that companies are now finding worth investigating for outsourcing activities.

That is not to say that the mature shared services locations of the region are in decline. On the contrary, mature locations such as Costa Rica, Colombia, Argentina, and Brazil continue to attract their fair share of investment. In today’s economic climate, many companies have become increasingly risk-averse, and are content with opting for tried-and-tested options in the region, where costs may be slightly higher but where there is an availability of highly experienced shared-services profiles to recruit from. On the other hand, emerging Nearshore destinations offer those companies willing to be pioneers the opportunity to tap into new sources of talent and at a lower cost base, resulting in these locations now appearing next to traditional shared services locations in our global rankings.

Latin America’s profusion of location possibilities – both mature and emerging – means that it continues to develop as a strategic region that companies are considering for their shared services and BPO operations. Be it North American firms using the region as a nearshoring solution, Spanish companies cementing their presence in countries with similar linguistic and cultural affinities, or companies from emerging countries such as India wishing to extend their global footprint and gain a foothold in a new market, Latin America is sure to remain “on radar” for companies for the foreseeable future.

Reshaad Durgahee is a Senior Consultant at IBM Global Business Services’ Plant Location International (PLI) division. More analysis of location trends is available by download here.

By Daniel Berthiaume

A crucial aspect of many IT outsourcing and BPO initiatives is internal staff reduction. Despite the cost savings and more efficient operations that might result, few managers look forward to determining who stays and who goes when a department outsources certain functions. But properly evaluating employees in the event jobs need to be terminated is absolutely critical to BPO success.

Michael D. Brown, a corporate speaker, coach, and trainer who specializes in personal and professional development, has a few tips for managers trying to successfully execute an outsourcing-related staff reduction.

Think of the Customer

Although reducing staff is an internal process, Brown advises managers to begin with an external focus. “Define the experience you want to create for your customer, and then assess whether you have the right skills to deliver it, to be competitive, and to stay fresh and take it to the next level,” he says. “If you have some folks who can’t deliver this kind of customer experience, that’s your first filter.”

Doing the Job Is Not Enough

Brown also advises managers to be leery of employees who are willing to “do the job,” but little or nothing else. “Let go of people who never went above and beyond their job and never proactively went outside the job’s parameters to take things to the next level,” he says. “You want people who seek personal growth and have a hunger for more. People lacking these qualities or who are myopically focused on their jobs, you can do without.”

Brown warns that employees who strictly adhere to the official boundaries of their jobs don’t provide the necessary bandwidth for a company to grow. “You can’t pay for every piece of an employee’s contribution. Something has to come from passion and loyalty,” he says. “You want to keep people who say, ‘I know this isn’t my job but I really like what I’m doing,’ and develop their own skill-set on the job that they can also use in other areas of life.”

Be Honest and Open

Frequently, companies will shroud staff reductions in a veil of secrecy, leaving employees who will potentially be affected nervous and prone to gossip and innuendo. Brown says by maintaining an honest and open approach, managers can minimize disruption in the workplace.

“Be transparent early, quickly, and frequently,” Brown says. “Don’t let people hear things someplace else. If there are things you aren’t in a position to reveal, inform your employees, ‘I can’t tell you everything now.’”

Brown also recommends that managers help keep control of the inevitable office rumor mill by maintaining an open door, which can include making information available online or via a phone hotline. He further advises managers to provide transparency by holding meetings with individual departments or small groups of employees, in addition to large corporate meetings.

“Some people won’t want to ask questions in a big group setting,” he says. “People can deal with change but they cannot deal with uncertainty.”

Treat Everyone with Dignity

While Brown is clear about which employees should be the first targeted for a staff reduction, he is just as adamant that everyone, especially those whose jobs are terminated, be treated with dignity and respect throughout the process. “Don’t damage your brand with layoffs,” he says.

“The people you let go will eventually become your customers or have influence on your customers. They understand things happen and will get over it [if reductions are handled correctly], but with the effect of comments on social media like Twitter and Facebook, brand damage from disgruntled former employees can cost you more money trying to undo than the cost of creating a dignified process with features like help lines, extended benefits, retirement planning seminars, and resume workshops that help employees have a smooth exit.”

Move Forward

After reducing staff, managers must then act to assuage any fears or concerns remaining employees might have. “Reinforce why your business strategy required layoffs,” Brown says. “Don’t get into reasons why individual employees were terminated. Instead, explain why the employees who kept their jobs were chosen and how they can make themselves more competitive.”

And finally, Brown says managers should provide a direct answer to any questions about possible future staff reductions: “If people ask whether this will happen again, you need to be honest. Say, ‘We’re in a dynamic and changing marketplace and will respond accordingly.’ You can’t promise it won’t happen again.”

This article was originally published on BPO Outcomes

By Stephanie Moore

When Forrester published its first Indian vendor consulting Wave in 2005, Indian vendors were just starting their journey into management consulting. At the time, none of these vendors could compete with traditional management consultants – such as Accenture and Deloitte – from a scale, brand, or experience perspective. Given the rapid growth that these vendors achieved in the pure IT services space, however, it seemed only a matter of time before they would challenge vendors such as Accenture in the IT management consulting arena. Six years have gone by and these ambitious Indian IT service providers are still trailing the traditional management consultants.

Much like 2005, Indian vendors are still trying to move up the value chain into management or business process consulting in order to stave off commoditization, secure executive-level relationships and endorsements, and increase deal value and margin through preliminary strategy consulting.

Meteoric Rise

Is this lackluster growth fueled by a lack of desire? Although several of the vendors profiled in 2005 know where they’d like their consulting organizations to go, none has achieved its desired end state yet. The top-tier Indian vendors were relatively small and unknown at the beginning of the century, but today they are multibillion dollar IT and business process outsourcing (BPO) powerhouses that dictate the way in which all vendors — including the likes of Accenture, Computer Sciences Corporation (CSC), and IBM — deliver IT services.

Given their meteoric rise to power in the areas of IT and business process services, it seems strange — at least at first glance — that they have not been able to make similar inroads into management consulting. Certainly, Cognizant, Infosys, and Wipro have all grown their consulting groups; however, pure management-consulting-partner–caliber staff still number in the hundreds as opposed to the thousands. When you consider the fact that these vendors employ 118,000, 133,000 and 120,000 people respectively, it’s easy to see the disconnect between what a vendor says about its consulting capabilities and the actual commitment to the model.

True Value

Management consulting and technology service delivery require very different business models. The Indian offshore outsourcing model has been predicated on an extremely high margin available to the vendor through labor arbitrage and industrialized delivery. Although in the early days executives thought that the value of Indian vendors performing management consulting was in saving money, it quickly became clear that management consulting had to be done by local consultants, largely on-site.

For sure, tasks such as research and prep work can be performed in lower-cost locations, but that project team distribution looks quite different from an applications maintenance project team distribution. Factors that discourage vendors from investing in management consulting include high startup costs, low margins and volumes, and lack of urgency: Indian vendor growth rates continue to outpace the rest of the IT industry, even during recent economic recessions, so the idea that management consulting is required to feed the huge implementation engines back in India is not yet an immediate concern.

Ultimately, to compete with global multinational corporations (MNCs) such as Accenture, Deloitte, and IBM, the India-centric vendors must have full-fledged management consulting capability in all the verticals they serve. Absent that, they will end up playing the role of technology subcontractors to the management consultants or to internal vendor/demand management organizations — in an increasingly commoditized world. Some vendors, such as Cognizant, Infosys, and Wipro, are well on their way to achieving their vision. Still, given the investments and time required to build up the capability, there is the risk that these publicly traded companies will lose their conviction and go for the short-term gains as opposed to preparing for the future.

Build On What They Have

If the India-centric providers can build up their vertical business consulting capability, they will be very strong candidates for business transformation consulting work. Their deep technology roots, combined with savvy industry and business process expertise, will undoubtedly help companies through innovation, transformation, and optimization cycles as well or better than the traditional management consultants. Using one vendor to develop and implement a business transformation strategy could drastically reduce the value leakage that occurs when a pure technology vendor is engaged to implement a strategy or solution developed by a pure business consulting vendor.

For now, however, evaluate the management consulting capabilities of their providers on a case-by-case basis. Some of the management consulting capabilities we predicted in 2005 have not come to fruition, but the Indian players are making strong progress, enough to merit consideration by clients seeking to integrate IT strategy with IT implementation.

For compliance and regulatory and tax-related activities, which may be only peripherally connected to technology solutions or only technology-enabled, companies are likely still better off working with their traditional business-focused management consultants and then perhaps implementing solutions recommended using the more technology-focused India-centric providers where required. Vendors such as Wipro are aware of the opportunities in this area and are also building up the capability to qualify for this type of work. In the short term, however — and especially in heavily regulated industries — it may be less risky to use a vendor with a history of performance here.

Stephanie Moore is a vice president and principal analyst at Forrester Research, where she serves Sourcing & Vendor Management Professionals.

By Patrick Haller 

Forrester's Lutz Peichert recommends "a holistic view" of a supplier.

Effective vendor management requires more than monitoring service level agreements and keeping a watchful eye on things after the contract has been signed. Buyers can save themselves a lot of grief by examining certain criteria in advance that might not currently be part of their due diligence process.

Many companies seem to be aware of the fact that they need to improve their vendor management processes. In the latest Forrester’s Forrsights Business Decision-Makers Survey, Q4 2010, 48% of the respondents indicated that they will expand their vendor management capabilities.

And 56% plan to have a special innovation council in place within the next 12 months. In most cases, this council will include internal employees and external suppliers and a strong role for the most strategic suppliers within the organization.

The Forrester report suggests a variety of things a vendor manager should to to guarantee a productive, cost-effective relationship with a provider:

• Examining the vendor’s financial stability
• Soliciting feedback from the vendor’s current and former customers
• Acquiring information on the vendor’s wins/losses
• Monitoring the vendor’s product strategy
• Understanding the vendor’s industry/geographic focus
• Gauging the supplier’s flexibility and willingness/ability to be a partner

Nearshore Americas discussed details of the report’s findings with Lutz Peichert, Forrester Research Vice President and Principal Analyst.

NSAM: What is the most important thing that customers should be watchful for when managing vendors? 

Lutz Peichert: In general there are two things to observe: the delivery performance of the vendor and establishing a good relationship with the account manager. Delivery performance is being monitored anyway as part of the vendor management duties. And not only monitoring the performance to ensure “what we get is what we pay for,” but analyzing performance consistency and stability over time gives an indication of the vendor’s stability in the area we source. And a good relationship with the account manager or the account team will provide an information channel that can add a lot of insights when used in the right way. Through this channel a client may receive information about management moves and changes, product strategy changes, and other information.

NSAM: Do you recommended not using new vendors and only those with a track record?

LP: Not at all! For sure new vendors can’t provide a long-standing financial track record. But not using them would sacrifice any innovation, as new vendors fuel the market with innovative ideas and solutions. Financial stability in respect to the research I have published does not mean that we will not utilize “new kids on the block.” We will simply have a closer look at those vendors – i.e., the time between the financial analyses of those vendors would be shorter than the frequency in which we check “established” vendors. When Forrester supports clients in vendor selection activities we propose to ask for a three-year financial track record. But if there is a vendor in the market that is not in business for that period but the solution will help to better do business – we would take this into account when defining the risk mitigation strategy.

NSAM: How many customers should be consulted in order to get a good picture and understanding of the vendor? 

LP: This can vary heavily. In most cases – for the large vendors – the professional network of the sourcing and vendor management (SVM) manager will provide sufficient information through regular meetings. Other than that most vendors provide “user groups” or “customer advisory boards” as well, enabling the SVM professional to get in touch with peer clients of those vendors. Having a good relationship with three to five other clients shall be enough if the other sources are not sufficient. But it is important that those clients are selected by the SVM professional – not by the vendor.

NSAM: How do clients find information on the vendor’s wins and losses? 

LP: SVM professionals will need to tap into various sources. Press, Internet, or analyst firms will provide such information. A good relationship with the account team can be used as a source as well. And the relationships through customer advisory boards, user groups or other professional networks will help.

NSAM: Is it more important to ensure the vendor can provide the products needed by the client as opposed to understanding the product strategy? 

LP: For me as a client it is most important that there is a stable product strategy in place for the goods and services I purchase as my ability to deliver relies on those solutions. If the vendor’s strategy changes, this may have a negative impact on his delivery performance for the products I use. And understanding and monitoring the product strategy will allow a client to discuss any contingency plans with the vendor early enough – if the vendor doesn’t automatically inform the client about upcoming changes.

NSAM: Should it be required that the provider advise the client well in advance of changes in its industry/geographic focus? 

LP: Sure – in an ideal world, yes. But broadly forming strategic relationships is new to the market. When a real relationship is formed – all of those discussions may go away as there is a trust level between both parties. Or all of the mentioned information is provided by the vendor and openly discussed as part of the relationship. But until this level of trust is established, the SVM professional is the responsible person for vendor analysis. And it is his sole job to monitor and manage the external supply.

NSAM: What is reasonable to expect when it comes to supplier flexibility? A client could make too many changes or demands that the vendor is unable or unwilling to comply with. 

LP: Yes – but as said in my research document – it is the holistic view on the vendor’s behavior. And professional SVM managers do know the line between “reasonable” change requests and a demand that will require an addendum to an existing contract or even new contract negotiations. The intent of this measure is not to ask the vendor for all we need for free. And I am not saying we want it all for free. Flexibility can mean as well that the vendor moves first and the client and the vendor will find a mutual agreement after solving the issue. Rather than the vendor asking for a contract before moving at all. The notion of all of this is a level of partnership that needs to be established. And a partnership requires investments from both sides.

It is important to mention that all of the above points have to be seen in a holistic approach. The main reason for performing those activities is to enable clients to get indications if something changes on the vendor side. So a single indicator may not tell a big story – but comparing it with other facts and analyzing the information in relationship will provide a holistic picture. And will enable the client to take actions before something happens. Or at least be warned to react fast if something happens.

By Patrick Haller

Shanker: India has a better grasp of "the training concept."

The prospect of managing multiple locations in the US, India, Mexico and Japan can be daunting for many people. But Ravi Shanker, Sales Director for HCL America, Inc., has been doing it for years. His experience overseeing IT development projects began with Polaris Software in the early 2000s, then with HCL. As an insider, he has been directly involved in a market that has shifted from Indian-centric software development to new destinations like Brazil and Mexico. We asked Shanker about the current state of outsourcing, the trend toward onshoring, and what countries need to do to remain relevant or become more competitive.

NSAM: What is the main challenge of coordinating delivery centers in different countries?

Ravi Shanker: For customers, getting delivery from four different locations is a challenge. Things like time zone differences and communication are the main issues. There is a 12-hour difference between North America and India, and communication continues to be a challenge especially for Mexico and India. Language is secondary, what is primary is what they [the delivery center] mean when they say something – especially in India. They can have only a third of the work done, and the client will ask if they can deliver the next day and they will say yes.

NSAM: How do you manage this?

RS: The coordination is done by program managers within the organization that deal with the issues. They make the customer aware of the status; these people have been onsite for a number of years and have about ten years experience of dealing with customers.

NSAM: Where is the most IT activity happening now?

RS: There was an incentive for IT managers to go to Mexico for testing, including mobile testing and content management, which is being done from Mexico and India. There is a lot of BPO coming out of North Carolina.

NSAM: What regions or segments are providing the best advantages or seeing the most action right now?

RS: Middle-market companies with revenues of $250 million or less are not getting enough attention from the major players and they spend $3 to $5 million dollars annually on IT services. When comparing costs, in China I can probably get four or five FTEs, and two to three in India, for the cost of one FTE in New York City. The East European locations like Hungary and Poland are getting some traction. And Nearshore locations, especially Brazil and Mexico, maybe Colombia, are getting a lot of traction.

NSAM: What will be the next hot spot?

RS: There are three criteria to measure this: majority, expertise, and scale. Getting the majority will take time to develop in Nearshore locations. India has been in the space for many years and they are in the majority, most of the developers are on level five. In China they are at level one, two, and three. Scalability in Mexico is not comparable to India and China. In China, India, and Mexico the attrition rate is 10% to 16% annually.

It depends on how much focus Nearshore providers are willing to put into the three criteria. When you compare the resources, how well can these markets perform? There is a lot of emphasis on training in India. Someone like Infosys will hire 25,000 people each year, 80% could be fresh out of college or even high school and 20% could be from the market. They will undergo an intense 60- to 90-day training program and enter the workforce with strong capabilities. The new grads will be able to do most tasks at a low wage, and the more complex programming will be given to the experienced programmers who earn three times more. Even though in India the annual salary increases 15%, FTE costs have not really gone up because of the influx of fresh graduates.

I am not sure that firms in Mexico and Brazil understand the training concept as they do in India, and they need to establish strong training programs for new graduates.

NSAM: Will there be a growing move toward US onshoring in 2012?

RS: Yes, absolutely. States are coming up with incentive plans for companies to establish locations and hire locals. North Carolina is an example where we got a good incentive to create 500 jobs there. Onshore capabilities are being developed mostly by Indian players who are building in various states. Accenture and IBM are building facilities as well.

NSAM: Does this create internal competition?

RS: There are certain capabilities available onshore which are not available offshore. For example, mainframe operations are not easy to get in India, so they are delivered from onshore.

NSAM: What is the attrition rate in the US?

RS: In the US attrition is around 3%.

NSAM: How will competition for good candidates increase if onshoring continues to grow?

RS: Competition for experienced workers will increase, but not for fresh grads. The ability for organizations to train grads in IT systems is really great; there are so many tasks that can be performed by high-school grads. It is not necessary to have computer majors or people with experience in IT to work for an IT company because the company provides specialized training.

Five years ago, 90% of the employees would be coming from offshore to work at onshore facilities. Now it is reversed. A company needs to have the ability to train fresh graduates, putting them into 60- to 90-day training programs. Use training as a tool to create scalability.

Neo and The Matrix are emblematic of the next-gen environment of KPO

BPO’s sexy cousin shows little momentum in the region

By Luke Bujarski

A recent NASSCOM study on Knowledge Process Outsourcing (KPO) bares a sobering reminder of Asia’s continued dominance in the global services arena. While small compared to the opportunities still available through the back office, BPO’s sexier and more sophisticated cousin is quickly gaining ground both in terms of market size, and as a competitive differentiator between full-service outsourcing providers. Now with 70 percent of the KPO business marching over to India and another 20 over to the Philippines (and don’t forget about Central/Eastern Europe), Latin America’s homegrown BPO firms could have a tough time catching up to the Indians on offerings such as data analytics and financial research, not to mention Legal Process Outsourcing (LPO), which is pretty much a “no-go” here given the language barriers and incompatible legal systems.

So, perhaps the real question is how this growing gap in services coverage will shape Latin America’s longer-term competitiveness as a global services player.

The KPO Revolution is Here to Stay

The rise of KPO as the next phase in the evolution of outsourcing conjures up scenes from the 1999 sci-fi classic, The Matrix: In the future, business will be conducted irrespective of geography, across vast global information networks through concentrated nodes of highly-skilled professionals.

In markets like Mexico and Brazil, firms are still working to prove to the world that the Nearshore is a viable platform for non-core operations, not to mention higher-end professional services

Yet, here we are twelve years later and according to Ed Thomas, Senior Analyst at market research company Ovum, this dream is starting to really coming true. In places like India, the Philippines, and even Sri Lanka, call centers and IT help desks are giving rise to teams of experts that can crunch data and frame big legal cases, just about as well as the guy next door – and for a lot cheaper, of course.

KPO is no longer the stuff of dreams, NASSCOM confirms. In their latest forecast, the global market has already more than doubled since 2006 from $1.2 billion to $2.9 billion. In India alone, rising client adoption has generated employment for 70,000 people in over 100 firms. Going forward, NASSCOM anticipates exponential growth through 2015 as global demand is expected to soar to $7.9 billion.

NASSCOM also notes that KPO is being utilized by the same verticals that gave birth to the offshore outsourcing industry. Namely, banking, financial services, insurance, health care and telecoms represent the lion’s share of today’s demand for KPO services. Likewise, much of this demand is being met by India’s veteran BPO providers – i.e. Infosys, Genpact, 24/7 Customer and TCS.

Below is a breakdown of the KPO market by service line, as percentage of total revenue for the India market in 2010:

Given the rapid rate of adoption and shifting landscape toward KPO, Latin America needs to start looking higher up along the value chain sooner, rather than later.

Labor Demand Outstrips Supply in Latin America, Once Again

For niche KPO providers like EvalueServe, Irevna and Amba Research, the region has proved to be a somewhat harsh environment to grow in. In a recent discussion with Mohit Srivastava, Country Manager for EvalueServe Chile, said that while “we have successfully grown our office to 250 employees since opening in 2006, many of our competitors here [LatAm] have struggled to build up a staff of more than 100 people.” The central problem is that labor demand across all verticals is growing faster than supply. “We need high-speed people and target candidates for higher-level positions with Master’s degrees and PhDs in economics, statistics, engineers, math sciences, and other technical fields.” Despite a higher degree of job satisfaction in KPO as opposed to BPO, strong economic growth has created many other avenues for professional growth.

Another central challenge in Latin America is that the outsourcing industry is still relatively new there. “With KPO, it takes time to build the kinds of relationships and trust needed to support higher value-add functions,” explained Thomas. In other words, reputation and a solid customer track record become more important as the service provider moves up the value chain of outsourcing services. But in markets like Mexico and Brazil, firms are still working to prove to the world that the Nearshore is a viable platform for non-core operations, not to mention higher-end professional services.

Srivastava also noted that opportunities for expansion in new markets are limited because there are few, if any opportunities for M&A. This makes it difficult to enter into new markets since starting a KPO business from scratch requires a much heavier investment in time, personnel and management, than would a similar-sized BPO operation.

Indian Domination, or Bottom-Up expansion?

Assuming that NASSCOM’s 2015 prediction comes true, the big Indian BPO firms swooping down on Latin America could gain the upper hand, as they leverage their value-adding expertise in KPO to secure contracts with the multinationals. This will put serious pressure on the homegrown players like Neoris, Softtek, and Hildebrando to enhance their “knowledge” service offering. In a scenario where the big firms fight it out for turnkey contracts, the impact on local markets could be significant or marginal. This will completely depend on whether projects are serviced out of their development centers in LatAm, or are channeled back to India or other locales out east.

An alternative, more bottom-up scenario could see a gradual rise in boutique KPO providers fulfilling highly specialized needs in financial research, engineering, and clinical trial management for the pharmaceuticals industry. Over time, these niche firms could very well spring up in some unlikely places. For example, Nicaragua’s underdeveloped economy could prove to be a rich source of technically and linguistically proven professionals. Managua has a strong contact center industry and it’s not uncommon to see engineers and lawyers working as customer service agents there. Likewise, places like Cali, Colombia and Sao Jose dos Santos in Brazil (headquarters for Embrear) with their strong universities and experience in the life sciences and aerospace could attract some lucrative foreign contracts.

Getting By On Back-Office Won’t Be Enough

The doomsday scenario would exclude many of Latin America’s markets out of the KPO business all together. This could tarnish the region’s reputation as a full-service delivery platform, as well as stunt its growth and participation in a knowledge-driven, global economy. Furthermore, getting by on back-office and contact center contracts from the US is likely unsustainable in the long-run. Primarily because the region’s cost competitiveness will not last forever.

Other emerging markets – perhaps in Africa – will inevitably come on the scene and/or “reshoring” will eventually bring this business back to developed countries. From an economics perspective, Latin America needs to think and plan hard about how they will move up the global services value chain.