Nearshore Americas

Exclusive: Ovum Report Finds Central America is on the Right Track

Efforts to normalize transparency and increase stability in Central America are paying off, making the region an increasingly popular nearshore destination, say top analysts from Ovum.

“Language, proximity and price make the region an attractive nearshore option for the US and Spain,” the report notes, although investment promotion agencies must work more collaboratively and do more to dispel any lingering negative perceptions that still hinder Central America. In order to attract greater investment the region must also lobby for more accessible air routes, establish secondary delivery centers, guarantee data protection, concludes a new study authored by Ovum’s Principal Analyst Peter Ryan and Associate Analyst Margaret Goldberg.

Prior to the report’s publication, Ryan and Goldberg gave Nearshore Americas an exclusive preview of their findings.

Nearshore Americas: What do you consider to be the most significant findings of your report?

Peter Ryan: One of the most important things is that we’re now talking in 2014 about five or six countries that probably even five years ago we wouldn’t have considered. The fact that there’s been so much political and economic normalization within the region and willingness on the part of countries with tremendously different political philosophies to work together to try to encourage outsourcing investment – I think that’s a real good news story.

From the standpoint of a region working together, I think it might be the most proactive in the world. The variance in terms of maturity in the region is important to consider too, especially the variance in per capita income, transparency and how labor markets are managed. There’s still a lot of work that needs to be done to coordinate efforts, but I think the most important thing is that the impetus seems to be there and provided that there’s no major upheavals in any one or more countries I think they seem to be going down the right path.

NSAM: What are the most significant changes that have enabled Central America to reach the position it’s in now?

Ryan: Having covered this market for over a decade now I think the willingness to get out in front of enterprises and outsourcers in different parts of the world has been so important. There’s rarely a time now where you don’t attend some conference in any part of the globe where there’s not at least one Central American country present talking about what they’re doing and how they’re promoting their particular country or the region as a whole. And the willingness to back it up with pro-business incentives, the ability to lure prospective in-house or outsourcing investors into their particular jurisdiction with the right tax breaks and subsidies, with realistic programs that are not just designed to attract an investor, but also to keep them there for the long term – that’s what really stands out to me.

Margaret Goldberg: You really can’t overlook the role of investment agencies in Central America. There are definitely ones that we’ve seen do it a little better and some that have fallen off and are coming back stronger, but I really think that having that coordination and having those bodies really pushing that message and marketing (is important). We hear quite a bit about these conferences and there’s always something going on down there and they have the resources and the talent to really back it up.

NSAM: Which Central American country has improved the most as a nearshore destination?

Ryan: I don’t want to undermine the efforts of any of the countries down there because they’re all doing a great job, but the one that stands for me over the course of the last two or three years is Honduras. Honduras was not on my radar at all until about 2010, but having had the chance to go on a site visit that was sponsored by one of the private sector players in that country – it really opened my eyes to the fact that there were tremendous challenges to the country with regards to alleviating poverty. The emphasis that not just the government has placed on education, but individual families also place on educating their children to speak fluent English and have the ability to interact seamlessly with people from North America really stands out.

It’s a place where I think the private sector is really pushing the ability to develop the contact center space. If you look at what’s happened in San Pedro Sula in the past couple of years, attracting the likes of Stream, KM2, StarTek – these are all huge wins for a country that wasn’t even in consideration back in 2005. Right after I went they just had a coup and nobody was talking about (outsourcing) then, but there seems to be a will to compete and demonstrate that they can move forward. Testament to that is the fact that Tegucigalpa is coming on strong and the willingness for organizations to develop contact center operations or BPO facilities, such as the LL Contact Center, in the capital city seems to be more realistic than it was even in 2010.

NSAM: The report suggests that Central America needs to position itself distinctly from Colombia and Mexico. But what advantages does the region have over these two countries?

Ryan: There’s a couple of things. Number one: prices are an obvious point of differentiation – it’s significantly cheaper in Central America. Costa Rica might be the exception to that but the other countries are more advantageous in terms of price than tier-one or tier-two cities in Mexico or Colombia. And number two: when we’re talking about the North American market, the level of Americanization that you find in Central America is really off the charts. It’s significantly higher than I found in Colombia in my visits there and in many cases it might even be better than what you find in parts of southern Mexico too.

NSAM: How important do you think the Spanish market could become for Central America?

Goldberg: That’s a really interesting question. I think there are several angles we need to look at. When it comes to language it seems pretty obvious for Spain to be one of the target markets and when we did our research the business surveys showed that Spain regards Central America fairly highly. But Spain’s own economic issues, which could really go one way or the other, influence whether or not they outsource to Central America. Given they’re trying to keep work in the country but also reduce costs at the same time, there’s always a Catch 22 there.

In terms of language there is an issue over the difference in accents in Spanish in Central America versus Spanish in Spain. But then again if you’re able to train out accents when you’re speaking in English then feasibly you could try to phase out similar accents in Spanish. Another issue that shouldn’t be overlooked that benefits Central America when serving the North American market more than Spain is the cultural issue. They’re so very much aligned to what we do in the US that there might be a bit of a learning curve when it comes to that cultural aspect in a European country like Spain.

Ryan: Another challenge that Central America is going to have is with air connections. In the report we outlined the amount of time it takes to travel from Madrid into Central America. I don’t believe that there is one single direct flight that we found from Madrid into the capital cities in Central America. If you’re an executive interested in doing some outsourcing and you’re looking at Central America as a possibility, spending 20 hours on an airplane and getting there through connections in various parts of the world might not be appealing, especially when you have pockets of Spanish in North Africa or Romania that you could easily leverage that might only be an hour or two hours away.

NSAM: The report suggests that Central American investment agencies need to come together and jointly promote their countries as a unified region in order to overcome any individual weaknesses or shortcomings – how feasible do you think this?

Ryan: Having known these agencies for many years, I think we now have the best chance we’ve ever had to see this occur. You’ve got governments that range from the very far right in terms of economics, such as that of Porfirio Lobo, who until recently was president of Honduras with, all the way to (Nicaraguan President) Daniel Ortega, who is a Sandinista with a quasi-Marxist background.  But one of the things that impressed me is that no matter where you go to visit these agencies, they always ask the same question: “What do we need to do to facilitate inward investment from North America?” So I think that political philosophies are not necessarily center stage in regards to determining what policy will be – it’s practicality and what’s going to work for the country. Let’s be frank, government’s change and we might find a situation where a new government comes in and says “we’re not interested, we want to abdicate form what’s going on,” – that’s always a possibility but up until recently we’ve seen very easy transitions of power from one side of the political spectrum to another in many of these countries and there’s been a consistent view of what inward investment around outsourcing can do. So I think that there’s a real opportunity here for Central America to work closer together, to try to harmonize taxation policies when it comes to inward investment and to harmonize free trade policies and labor market policies. The conference that was held in Managua a few months ago was a huge step in the right direction. I don’t think that can be overstated. I’d not been in any conference that was put on by more than one investment agency to highlight the region, as opposed to one particular country.

NSAM: What other important steps does Central America need to take in order to become a more attractive nearshore destination?

Ryan: Again, air connections really is a big one. Getting to most places in Central America – unless you’re at a major air hub like Miami or Houston – is going to require at least one connection. In Central America they’ve made great improvements in terms of air infrastructure in their individual countries and I think what they must try to do now is promote more connections into North America and Europe. Because if you’re flying from Chicago or San Francisco and you want to get to locations that probably shouldn’t take you a tremendous amount of time, but you’re finding that with connections you’re looking at eight or nine hours, that’s going to be something that you might not want to look at.

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The other thing they need to do is try to promote themselves to get away from the negative impressions people have of them from the past. The average North American or European thinks back to the 1980s and they think of the Contras versus the Sandinistas, or of drug running in Central America. This is not the reality, there are improvements that still need to be made in certain cases but the efforts that have been made in the last 15 to 20 years have paid dividends in so many different ways. So I think getting out there and showing that it’s a politically normal location that is stable economically and has close ties with the European Union and the United States would do wonders in terms of improving people’s viewpoint of that section of the world.

Goldberg: I think the biggest issue right now is that perception and branding issue. We travel to Latin America quite a bit and something that keeps coming up is concern around data protection. So when they already have these issues around their political and economic stability and public security, it’s just going to be compounded if they can’t come out and say “your data is going to be protected here, it’s going to remain private, there really isn’t a security issue you have to worry about.” So being able to address those data protection concerns are important.

Another angle we came across in our research is the lack of secondary delivery centers and this is somewhat compounded once again by the stability perception that a lot of countries might have of Central America. In most of these countries the industry is centered in one city, which can really be an issue when it comes to redundancy and when it comes to inflation and saturation etc. from a cost perspective, a stability perspective and even from a resource perspective

Ryan: They’re going to have to desperately move to develop the secondary cities within each country in order to make sure they have a viable offering. The various countries are going to have to identify secondary locations in which they can house contact center operations with bilingual capacity. Otherwise if everything gets centered in one particular city in each country they’re going to find they tap it up very quickly. The plans in Central America need to be realistic. We’re talking about a population of roughly 20 million people, which is a good size, but scalability is going to be a challenge over the long term. They can’t oversell themselves.

Duncan Tucker

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