During 2011 the world has seen significant changes in social, political and economic dynamics. The Arab Spring, violence in Mexico, a deepening financial crisis and the Occupy movement all have risen to influence business conditions and investment flows. As the year nears its close, we checked in with advisory firm ThinkSolutions to understand how the tumultuous events of 2011 will influence what happens in the Nearshoring sector in 2012.
Tony Mataya, Managing Partner, ThinkSolutions, observed that events like the Arab Spring which cause the rapid change of societies have caused a reevaluation of India’s risk profile. “If you have services and depend on stability, you need to keep tabs on events,” he said. In the Nearshore there is more stability, with the exception of Venezuela and some crime issues with Mexico. Lead Nearshoring Analyst, Kate Shearer, also of ThinkSolutions, pointed out that the Occupy movement, and student protests recently seen in Chile and Colombia are good indications that economies are growing and people, in general, are more aware and less content with economic disparity. Consequently, she said, there will be a more intelligent workforce in the Nearshore.
“I think the Occupy movement is happening in different parts of the world,” added Mataya, “and the biggest driver is the economy in general. Chile was seen as the most stable country in Latin America to do business in and it was a shock to see upheaval there. There is still a stigma around outsourcing to India and we see Rural Sourcing coming up more; those trends will continue.”
Nearshoring Trends for 2012
1. India’s total cost of outsourcing (TCO) continues to increase and the advantage gap over Nearshoring continues to close especially due to inflation and attrition differences.
Most companies look to India for financial reasons and as the gap erodes it makes people reconsider Nearshore. Indian firms need to do more collaborative development, especially in the IT space, like agile. Time zone differences, declining service levels and difficulty understanding Indian accents are issues that buyers have also expressed concern over during 2011. “Indian firms will say ‘Yes we can do it,’ and the problem is that when you get to the due date they say will get ten more people to finish the job, whereas in Latin America they take that commitment very seriously in general,” commented Mataya.
2. Remote sourcing from LatAm, such as remote monitoring, will increase as technology continues to support it and India TCO rises.
More companies will adopt these technologies in 2012 as the tools and infrastructure is better developed. Providers are also implementing a combination of remote and physical support. Latin America usually has a best shoring concept with some people on the ground and using remote tools.
3. There will be an added impact of the recent Free Trade Agreements (FTA) that improve upon the WTO’s General Agreement for Trade in Services, especially in Colombia.
The US is trying to promote telecom trade with Colombia and the FTA will allow Colombian companies to provide services at a higher quality. “Colombia now has most favored nation status along with other Andean nations,” stated Shearer. Higher levels of Intellectual Property protection will also be implemented that will be applicable to every kind of services, but particularly on the IT side and some BPO services.
4. Brazil will struggle to increase export of services due to internal demand from domestic growth as well as attention in preparation for the Olympics and other events.
Brazil is no longer a low cost supplier for the international market, partly due to an increased domestic demand. Despite this, Brazil will remain attractive for large projects because they have larger pools of human resources than other Latin American nations.
5. Colombia will have an increased profile, a growing economy, free trade, improving security and stability.
The Minister of Technology has increased education and innovation to stimulate the economy. Colombia is also doing more with free trade zones to help stimulate the tech industry in addition to developing call center campuses and complexes. “The government is very proactive,” said Mataya, “and security is getting better. The cooperation of the government and private sector to stimulate work is being seen more in Latin America – they are pretty smart about how they are doing that.”
6. Crime in Mexico will stabilize due to increased government pressure and US attention but will remain problematic in localized areas.
Violent crime has had a huge impact on tourism and the country’s risk profile, and the government is becoming more aggressive with tackling the problem. Although certain areas are more dangerous than others, ThinkSolutions looked at homicides as a common denominator across regions and there are certain places where crime is localized. Cities like Guadalajara and Monterrey are very proactive about keeping such violent crime away, even though it is a challenge.
7. Small and mid-size US companies will exploit the advantages of Nearshoring.
A lot of the growth in the US is coming from SMEs that find it easier to work with similar providers in Latin American. For example, Silicon Valley startups are getting services such as website development and IT support from Costa Rica and Mexico, and more US companies are investigating what options Latin America can provide. Additionally, there has been an increase in the number of Latin American companies that are opening US offices, or hiring a US marketing and sales representative.
8. There will be a trend towards consolidation of smaller LatAm IT firms into medium and larger firms to meet the needs of US based clients.
In many cases the marketplace is fractured where there is, for example, 20 companies of 80 people each. Currently these companies have alliances between each other to provide different niche services, or to help fill in the gap of staffing needs. Mataya advised that there is a tendency of companies to merge so they have access to resources internally and to handle larger projects.
9. More firms will seek out LatAm for shared service centers as an alternative to offshore locations.
Companies that are interested in opening shared services centers will take advantage of lower cost and they will look to LatAm as an option. “You just can’t look at the cost factor. There has to be a balance; access to skills, talents, educated workforce in balance with economic. Costa Rica and Colombia offer a strong infrastructure,” said Mataya.
10. Indian firms will continue to expand into the LatAm region as global IT delivery strategies more frequently include Latin America.
Over the last 12 to 18 months, most major Indian players established offices in LatAm so they can deliver services from the region, even though fulfillment is most likely done at an office in India. These firms are still in an exploratory phase and it is unclear as to how much actual business they are getting. “I don’t know if it is defensive or offensive move,” Mataya said, “but they haven’t effectively broken into the marketplace. It is kind of hard to see what will happen and what the ramifications will be.” That said, this is an important development that bears watching, in addition to the possibility that Indian firms will begin to acquire small to mid-sized Latin American service providers.