Latin America’s general and administrative outsourcing (GAO) sector accounts for less than 5% of the global market but is growing at 1.5 times the rate of the global market, according to a February 2014 report by Everest Group.
The study (available here) by the Dallas, Texas-based global management consulting firm focuses on non-voice BPO services in general and administrative functions, such as finance and accounting (F&A), human resources (HR) and procurement, for organizations with a presence in Latin America. While F&A accounts for 47% of the regional GAO market, which is worth $700 to $800 million, HR accounts for 23% and procurement makes up the remaining 20%.
Based on assessment of over 400 contracts with 40+ global service providers in the region, the report found that Brazil dominates the Latin American market. It is the source of up to 55% of GAO activity and also delivers 40% of services.
Brazil also has the strongest case for arbitrage opportunity because of the high labor costs there, but Everest Group notes that – unlike in the global market – cost arbitrage is not the key value proposition, because of the low labor costs across most of Latin America. The key drivers of GAO activity in Latin America are speed-to-market and access to best practices and technology, according to Abhishek Menon and Saurabh Gupta, two of the authors of the report.
Nearshore Americas: Why is the GAO market in Latin America is growing at 1.5 times the rate of the global market?
Abhishek Menon & Saurabh Gupta: Firstly, most large global organizations have leveraged some form of outsourcing or shared services for their U.S. and European operations. Now they are aggressively looking at different sourcing models to both expand and optimize their operations in emerging markets such as Latin America and the Asian Pacific. Secondly, domestic Latin American companies faced with increasing competition also need access to global best practices and technologies. And thirdly, there is the denominator effect. Growth on a small base is always magnified – it’s important to keep in mind that Latin American GAO accounts for around 5% of the global GAO market.
NSAM: In the report you observe that growth in Latin America’s GAO market is primarily driven by new contracts – not renewals or extensions. Why is that?
Menon & Gupta: It’s the natural progression for any market. Since Latin America is an emerging market, the growth in driven more by new demand, meaning new contracts, compared to renewals or extensions. In more mature geographies such as the United States or Europe, there is already a significant base of GAO contracts that were signed three, five or seven years ago that are now coming up for renewal. That kind of install base does not exist in Latin America (yet!) and hence new contracts are fueling the growth.
NSAM: The report also notes that the average size of GAO contracts in Latin America is 35% smaller than the global average. Why is that?
Menon & Gupta: Since GAO is still emerging in Latin America, clients are taking a risk-averse approach. We call it the “phased approach” where they start small and then expand as the relationship matures. Such a phased adoption is a practical way to go about transformation but it is important to build a strategic roadmap or guiding principles since business context will change dramatically over time.
NSAM: Why is Brazil so prominent in terms of both the source and delivery of GAO in the region? Is it partly because Brazil is one of the only countries in the region with arbitrage potential?
Menon & Gupta: There is a strong correlation between the market size for GAO and the overall size of the economy. In Latin America, Brazil is the largest economy and also a leading country in terms of economic development. As a result Brazil is the largest adopter of GAO. While the theoretical arbitrage potential from Brazil exists, it is difficult to offshore work from Brazil given tax, legal and language issues – Brazil speaks Portuguese while the rest of Latin America speaks Spanish. So most of the work originating in Brazil is also delivered from Brazil – that is the reason why Brazil is the largest delivery location also in Latin America.
NSAM: Why are large clients more prominent in Latin America’s GAO market, with fewer small or medium enterprise (SME) clients than in the global market?
Menon & Gupta: Both push and pull for SMEs is currently low but we expect it to change over the time. Historically the GAO market adoption has been led by the large clients and then as the market matures the SMEs follow. Since the GAO market is relatively nascent in Latin America it is being pioneered by the large clients and as the market matures we can expect more participation from the SMEs. But initially service providers will go after larger opportunities and then start looking at smaller opportunities when the market matures and some of the larger opportunities are hard to come by.
NSAM: Why is it that you consider speed-to-market and access to the latest technology and global best practices to be the drivers for GAO in Latin America?
Menon & Gupta: Global multinational corporations are expanding their operations in the fast-growing Latin America region and third-party outsourcing is a vehicle for them to do this quickly. Domestic Latin American companies faced with increasing competition also need access to global best practices and technologies, and last but not the least, arbitrage potential is low and offshoring is hard. So the business case has to be built on standardization, efficiency, automation, and speed.