Nearshore Americas

The Disruptors: Guatemala and Costa Rica Providers Well Positioned to Threaten Established Players

As Guatemala and Costa Rica transition from frontier to emerging hubs in the outsourcing community, TBR believes pioneering IT services vendors in these countries will establish captive centers for clients, pairing 300- to 500-person staffs with automation in services and nearshore proximity to U.S. clients. These captive centers —wholly owned subsidiaries of the end-customer company that provide IT services to the end customer from typically low-cost destinations, bypassing traditional outsourcers — could impact substantially price competitiveness in outsourcing (i.e., delivery of IT services by a third party from a remote, typically low-cost location).

Traditional Outsourcing is Stable and Growing, but it is Under Pressure

In recent months, TBR has researched outsourcing in four nearshore countries, focusing on how a few particularly active IT services vendors have landed, ramped up and developed their operations. Overall, the results confirm or update relatively well-known and accepted assessments, particularly for Costa Rica and Guatemala: These countries are still in the start-up phase, initial investments come directly from engagements with U.S. (not regional) clients and business process outsourcing (BPO) provides the majority of revenues (see chart). TBR expects vendors established in these two countries will expand over the next four to five years, even as automation reduces the number of professionals needed to deliver services. As one IT services vendor in Costa Rica noted, “After implementation of automation we can conserve our resources and can use professionals’ time in some other tasks. In addition, the speed of our work has increased, and it is very cost effective as well.”

While automation increases, IT services vendors will still rely on low-cost leverage to improve profitability and continue to seek low-cost locations to either establish or deepen their nearshore presence. Hubs such as Guatemala and Costa Rica are increasingly attractive as traditional low-cost hubs, such as India, are becoming over competitive, with salaries gradually climbing, especially in Tier 1 cities such as Bangalore and Hyderabad. In nearshore U.S. operations, BPO will remain the key revenue service line; however, we expect vendors will seek to diversify portfolio offerings as clients scout more low-cost, secure IT infrastructure management services.

Security and IP Will Drive Clients to Seek Captive Centers

Captive centers have the potential to disrupt substantially this traditional outsourcing development story. The increased development of services-specific intellectual property (IP) — partly due to a shift in development of digitally enabled solutions with embedded analytics — and the required security that comes with IP, all married to cloud delivery, enable clients to rebalance their IT budgets and seek alternative IT service delivery by opening captive offshore or nearshore offices.

While captive centers may not be a direct threat to the outsourcing industry in the near term, TBR believes Guatemala and Costa Rica will become opportunity destinations for clients to establish such captive centers in the next four to five years. IT services vendors have invested in training programs to develop the talent pool required to meet client engagements, preparing a workforce that will seek to climb the value chain within the next decade; managing professional development is a critical differentiating factor for IT services vendors.

A trained talent pool in a captive center, paired with automation in services and nearshore proximity to the U.S., will be attractive to clients that want to eliminate the traditional element of outsourcing, largely due to security concerns around IP development. In conversations with chief information officers and IT directors, TBR consistently hears the message that nothing is more worrisome than security. If captive centers can deliver low-cost IT services from a secure — and close — environment, customers may demand a shift in services from those provided to anyone and everyone to those providing top talent for select clients.

revenue-distribution

Globally, many clients continue to maintain and blend legacy, on-premises IT infrastructure with cloud service delivery, creating a hybrid IT service delivery model. Also, traditional IT outsourcing still offers an attractive pricing model that many clients prefer. The threat to India-centric outsourcers or any company that offers IT outsourcing services will remain relatively small, as captive centers typically recruit a minuscule number of people compared with what a large application development and maintenance or IT outsourcing project/contract would require. However, a test bed in Costa Rica could be scaled up in Mexico or even Canada as IT services vendors adapt to pressures from cloud, security and pricing.

Far-Sighted Public Policy Leads to Long-Term Growth

As TBR noted previously, public policy plays a substantial role, influencing commercial decisions that ripple through an entire economy: “Governments will not change on their own, so companies need to pick clear, definitive policies and tackle them; educate governments on the real costs; and make suggested changes that do not introduce new risks or result in fewer net jobs.” In the Guatemala and Costa Rica captive centers context, maintaining attractiveness for even a small part of the outsourcing market remains essential as economic and technological trends push IT services vendors to seek the best environments to expand their footprints, grow margins and secure clients for the long term.

Patrick Heffernan

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