The New Latin America Outsourcing Dynamic: Domestic, Global or a Bit of Both?

Distinguishing between domestic and export driven business is becoming increasingly important to vendors operating in LatAm. How are Brazilian banks outsourcing their back office? Why is Mexico’s manufacturing industry rebounding and what technology solutions are producers looking for? Is Colombia’s telecoms market the next big opportunity? Likewise, multinational enterprises will be looking for those service providers best suited to support their specific industry, as they invest in these oft complex markets.

The Latin America outsourcing model poses a new dynamic relative to India where exports still comprise 80 percent of total sales. Across LatAm exports are more to the tune of 30 percent. In a recent interview with our sister affiliate Global Delivery Report, TCS revealed that 70 percent of their Latin American presence (nine thousand heads) focuses purely on domestic consumption. As Brazil, Mexico, Colombia, and Peru blaze forward economically, we surmise that in-region deals will eat up an even bigger portion of that pie. Furthermore, while Mexican exports continue to grow rapidly, so too is its domestic outsourcing market.

Data Source: Mexico’s Ministry of the Economy

The Discussion Will Shift Toward In-Country Sourcing

As Latin American economies pick up steam and push labor markets to their limits, the Nearshore model will be put to the test. We already see this happening in Brazil and in Chile where increasing labor costs are making it less practical to export services. Multinational vendors are shifting certain BPO projects from location to location, transferring operations from high cost to low cost countries, from Chile to Guatemala, from Brazil to Argentina, from Mexico to Colombia.

As this game of ‘hot potato’ plays out, the global sourcing conversation will likely shift in different directions as it relates to domestic markets: How can we service Portuguese clients out of Colombia? Should Mexico’s public sector be a priority for us? How will the Colombia-US Free Trade Agreement impact local demand? Are we ‘vertical’ enough to break into Mexico’s manufacturing sector?

David Shpilberg of CPM Braxis touched on the ‘domestic’ issue, during an interview at Nearshore Nexus last week, when reflecting on the relevance of the US market to Brazil-based vendors – in light of the huge in-country workload. He responded by saying that “it has become difficult to distinguish between what is local and what is global.” Outsourcing mega deals involve numerous end-user and service provider locations across countries and continents. “To be a global player, you must show clients that you can manage nearshore contracts.” Keith Jones from advisory firm Pace Harmon also confirmed that “when entering into uncharted markets, multinationals [enterprises] want service providers that have experience working on projects in the United States.”

So as enterprises move in, Nearshore contracts can play as the ‘hook’ that catches more work on Brazil’s domestic front.

Mexican Manufacturing Will Drive more IT/BPO Deals

Vertical expertise could also be a game-changer for LatAm domestic markets. Jimit Arora of Everest Group sees the “verticalization” of IT application development and maintenance (ADM) as a major paradigm shift in today’s global services marketplace. “Clients are reassured when vendors can speak their language whether it’s financial services, hospitality, manufacturing, or health care.”

Mexico is the largest trading partner with the United States second only to China. 2010 was a record year for goods exports totaling $230 billion US dollars 

Accenture is credited as the pioneer of the ‘vertical’ approach, but most outsourcers now market their offerings based on specific vertical expertise. Nearshore Americas surveyed the top IT services vendors operating in Mexico and identified the following verticals to keep a close eye on:

Data Source: Nearshore Americas supplier survey

Manufacturing in Mexico is a good example of how vertical know-how could help IT/BPO outsourcers grow their domestic business. According to the Offshore Group, rising costs in China are a boon to Mexican manufacturing. The sector suffered in the late 1980s as producers packed up and began moving production overseas, but the last five years have seen a rebirth of even more advanced manufacturing, particularly in aerospace. In 2004 aerospace companies operating in Mexico exported a total of $146 million US dollars worth of products; that number rose to $3.5 billion US dollars by 2010. Of particular interest to the big outsourcers might be the multinational packaged goods and automotive clients (see chart).

 Data Source: Instituto Nacional de Estatistica y Geografia

Mexico is the largest trading partner with the United States second only to China. 2010 was a record year for goods exports totaling $230 billion US dollars (US Census Data). Indian product exports to the US barely scratched $30 billion US dollars in 2011. Nissan’s recent decision to locate a $2 billion US dollar facility in Aguascalientes gave the industry an additional boost as well as a recent survey by the IMF, showing that Mexico’s rapid economic recovery (as the US rebounds) shows strong fundamentals particularly in manufacturing.

Verticals and Co-Location – The Way Forward?

As multinationals bring manufacturing back to Mexico, vertical expertise will be a ‘hook’ for both IT and BPO contracts. Homegrown technology services providers like Neoris – Latin America’s only SAP Global Partner – will likely see a bright future in that vertical. These homegrown players are expanding their sales force in the United States undoubtedly pitching global goods manufacturers – among others. BPO providers with proven expertise in manufacturing could also see a bright future. “Co-location is always beneficial because it removes another layer of complexity,” explained Keith Jones of Pace Harmon. “If you’re manufacturing in Mexico, does it make sense to send your back office to India?”