Pursuing new lower cost sourcing destinations is a prudent move for outsourcing customers trying to beat back recent currency volatility and continue exploiting cost arbitrage, advises an Everest Research Institute analyst.
“As companies are starting to expand, we’re seeing interest in areas beyond India and the Philippines,” says Anand Ramesh, a research analyst at Everest Research, who notes that on the global stage, places like Egypt, Kenya and Colombia are more frequently popping up on the radar as emerging destinations as companies diversify their sourcing portfolios to manage currency risks.
In Latin America, some of the countries that are seen as emerging – and increasingly popular – lower-cost options include Nicaragua, Honduras, El Salvador, Peru and Colombia.
The global recession threw currencies around the world into unusual trending patterns, causing some markets to look more attractive – while others, because of currency appreciation, became less appealing from a cost arbitrage perspective. Currency movements in fact are a bigger deal to customers whose bases are in Latin American than those in India, Ramesh argues.
He figures that LATAM offers customers a savings of about 40% (over prevailing costs in the home country), versus a savings of about 60% generally in India. The cushion is therefore wider in India, which permits customers to better absorb currency changes in a way that doesn’t immediately impede their ability to sustain operating surpluses. “If you have a change in the currency in Latin America and it drops the cost savings to around 20 to 25%, then the whole business case is put into question, based in part on cost of management overhead,” says Ramesh, who recently published an Everest Report on the topic: “What is the True Impact of Currency Changes on Offshore Cost Arbitrage.”
The Mexican peso and the Brazilian real have shown increasing stability recently. The one currency that does stand out as a potentially a beacon of stability in the region would be in El Salvador – where the currency is pegged to the U.S. dollar, making it “easier for U.S. customers to interpret,” says Ramesh.
He advised customers who are already in major cities to seek out talent in second or third-tier locations within that country and re-locate them into the higher cost geographies.
“At the end of the day, how currency behaves is anyone’s guess,” says Ramesh. But being vigilant about lowering the full scope of operating costs is especially important in this era where more countries rise up to become sourcing hopefuls.