Given its close proximity to the mainland and ample bilingual workforce, Puerto Rico should stand out as an ideal Nearshore platform for call centers and BPO operators – right?
Not so fast: Cost arbitrage aside – a lack of coordinated planning around a knowledge economy may have also set Puerto Rico back a long way behind similar Caribbean and Central American (CCA) markets, particularly for knowledge-intensive services. Here, lessons can be drawn from the successes Costa Rica has had in attracting technology-enabled captive operations. And, given the right global market environment, Puerto Rico could see expansion beyond the current 5,000 or so contact center seats. However, with a premium on wages and a solid base of human capital, planning and promotional authorities might be better off looking higher up on the global services value chain.
BPO Market Overview
As a commonwealth of the US, Puerto Ricans are US citizens, which means that this island nation must abide by the same federal minimum wage laws that apply on the mainland. From a pure cost-play perspective, this immediately puts Puerto Rico at a disadvantage to other CCA (and much of the developing world) markets such as the Dominican Republic, Jamaica, and Belize. However, this has not stopped companies like Atento, American Airlines, AT&T and the US federal government (the IRS and the Social Security Administration) from servicing Puerto Rico’s relatively large domestic market, in addition to utilizing its bilingual and bicultural workforce as a platform to service the Americas.
Research and advisory firm Zagada Markets put the 2011 contact center market in Puerto Rico at approximately 5,500 seats and $110 million in revenues. Where Puerto Rico loses out on wage rates, it gains some ground on telecommunications costs. According to Philip Peters from Zagada, “Puerto Rico has one of the most efficient and lowest-cost communications systems in the Caribbean.”
The country has other strengths which have attracted interest in the contact center industry. Estimates from standardized test scores suggest that nearly a quarter of the total population (approximately four million) is completely fluent in both English and Spanish. Likewise, Puerto Rico has a solid education infrastructure relative to other CCA markets. Universities graduate 30,000 students per year, and literacy rates are comparable to US standards.
A focus on manufacturing and failure to position itself in line with knowledge-enabled services such as network management, applications development, IT consulting and software R&D has, for the most part, left Puerto Rico out of the global services equation
Quick Stats on Puerto Rico’s Economy
– Total Population: 3.99 million
– Major Population Center: San Juan – Population: 2.73 million
– GDP per capita: $19,600
– Currency: US Dollar
– GDP real growth: 2010: -5.8 %; 2009: -3.7 %; 2008: -2.8 %
– Literacy Rate: 94.6 %
– Unemployment: 16.5 %
Competitive as a US Location, but Not Ideally Suited for Global Services
The country transitioned from agriculture into manufacturing during the 1950s in an effort to create jobs for this densely populated island. Known as Operation Bootstrap, the US government invested millions to promote the sector, which eventually moved the manufacturing base to more capital-intensive production in pharmaceuticals, chemicals, machinery and electronics. However, growing global competition continues to strain Puerto Rico’s manufacturing base leaving the latest unemployment rate at 16.5 percent. Additional public sector layoffs are expected as Puerto Rico’s economy struggles to regain its footing from the global financial crisis (see GDP growth above). Construction, retail, and the financial sector have also seen significant job cuts over the last two years.
Likewise, a focus on manufacturing and failure to position itself in line with knowledge-enabled services such as network management, applications development, IT consulting and software R&D has, for the most part, left Puerto Rico out of the global services equation. Furthermore, emerging BPO players in the CCA region including Jamaica, Belize, Nicaragua, Guatemala, and Honduras offer cheaper alternatives for contact center operators like Convergys, which recently announced plans to open a 1,000-seat center in Montego Bay, Jamaica.
Puerto Rico Could Learn A Lot From Costa Rica
A heavy focus on manufacturing and a lack of strategic planning around IT and knowledge-driven sectors may have permanently set Puerto Rico behind places like Costa Rica. Costa Rica has a similar-sized market in terms of population and education, but continues to attract technology services operations from companies like IBM and Dell, as well as niche design and digital marketing firms like Possible Worldwide, which currently staffs over two hundred programmers and application developers in their offices in San Juan. Costa Rica has remained competitive in this space despite a relatively small labor pool and rising wages. And when asked whether there is a shortage of IT talent, Possible Worldwide Country Director Yvette Pascua explained quite the contrary. “Many of our most talented designers had previously worked for the big technology companies and come to us trained with a solid knowledge base in IT.”
Costa Rica has managed to create this ecosystem and institutional base around IT services, despite high wages compared to other CCA countries. But developing a culture and infrastructure for IT services takes time, and with a historic commitment to education by the government and investment promotion agencies like CINDE, Costa Rica has steadily built a reputation as a center of excellence in IT-enabled services.
Dating back to 1948 and Operation Bootstrap, Puerto Rico continues to focus its efforts on attracting manufacturing firms, particularly in the pharmaceuticals space – although one would not know it from looking at the country’s premier economic development agency website. Furniture, textiles, and needlework are among the handful of sectors targeted for growth by the Puerto Rico Industrial Development Company (PRIDCO). Ultimately, a stronger long-term vision and coordination at the national level will be needed to pitch global service providers on Puerto Rico and this country’s relatively strong base of human capital. “While the numbers [graduation rates] may be strong, the outcomes have not produced many local firms or have attracted the kind of attention Costa Rica has,” explained Peters from Zagada.
External Factors Will Likely Decide Puerto Rico’s Fate
The future of Puerto Rico’s place in the global services sector will depend heavily on what happens outside its borders. The upcoming 2012 election in the United States has some worried about legislative action set to discourage offshore outsourcing outright, via tax reforms pitted against firms that choose to offshore. While unlikely, this scenario could be a boon for Puerto Rico in the outsourcing space, given its commonwealth status and marginal cost competitiveness over markets on the mainland.
And while Puerto Rico continues to be at a cost disadvantage to other CCA markets, the wage gap could close faster than expected. Unscrupulous contact center operators in countries like Guatemala and Jamaica have been notorious for artificially inflating wage rates in their attempts to maximize short-term profits. If wages continue to go up in these markets, it could make Puerto Rico’s generous tax breaks and duty-free access to the US market much more attractive to multinationals.