Nearshore Americas

Gartner Analyst: Making Sense of a Troubled Territory

The chaotic transition to work-from-home models (WFH) in India and the Philippines have exposed flaws in the current services model. North American companies are more aware than ever of the risks and challenges of the offshore BPO sector. Now, many analysts are bullish on the prospects for the Nearshore region and argue it has a major new opportunity to sell as a reliable, cost-effective alternative.

TJ Singh, Vice President with Gartner Research

Tervinderjit (TJ) Singh is a Vice President with Gartner Research and has more than two decades experience in the information communication technology (ICT) industry. In an interview with Nearshore Americas, we asked him to share his thoughts on the coming changes to the global services landscape.

NSAM: How serious are the challenges to the BPO sector in India and the Philippines post Covid-19?

Singh: I think it is going to be quite significant, especially in the Philippines. When the lockdown in the Philippines began their approach was really to shut down all aspects of commerce and industry. People from the provinces had to move back to the provinces. The position of the Philippines as a contact center and language center hub has been undermined by that lockdown. A lot of companies are very wary of going back to the Philippines because things are just going to happen again. So there is a huge risk. Companies that have had up to 60,000 people based in the Philippines are seeing that drop to less than 5,000 people. That is quite significant.

India was a bit different. India has traditionally been more of a tech-centric location, focused on technical support and customer support. Certain segments are still operating. Maybe not at 100 percent capacity, probably closer to 50 percent capacity. However, they are still running. Because of that focus on technology and technological support services, India has the better spread of service offerings. We will see an impact on India. However, I think you will see technical support services and some of the IT services continue to exist in India because that is the only location where you can get that level of skill.

NSAM: Were companies leaving Asia as part of a diversification strategy anyway?

Singh: Yes, I think it started before Covid-19. I wrote a research note on how WFH and the gig economy was going to be the fourth supply pillar. You already have onshore, offshore and Nearshore. But WFH onshore was going to be the fourth. We were already seeing a gradual shift due to growing levels of protectionism. With the US trade spat we were seeing the risk of a 25 percent tariff on the Philippines for services, which would have increased the price point and brought it closer to Nearshore locations.

It is important to watch the onshore delivery model. I believe that greater protectionism is coming… Nearshore must be careful with the way they position themselves. I think they should be complementary, rather than in direct competition with onshore.

The Philippines cost around $16 per productive hour and with a tariff of 25 percent that would have risen to $20, which is closer to the Nearshore rate. That would have had a huge impact. So we were seeing companies rebalance as early as mid-last year. Companies were already talking about the shift to Nearshore and onshore. The pendulum was swinging away from offshore, and what Covid-19 did was really accelerate that process. For certain segments, like customer service and voice-based services, that was the case. But technical support services were still doing well in India.

NSAM: Is there a chance that India and the Philippines could upgrade their infrastructure and upskill the workforce?

Singh: India is moving along that path. Indian companies realized about seven years ago that they would not be able to play in the customer service segment for English language voice for the United States. Many North American companies moved their customer service capacity to the Philippines. India opted to focus on technical support services, chat functions and some of the more niche vertical processes. They decided to focus on the higher value and tech-centric work, which was the right thing to do. I believe that India will survive this predicament.

The Philippines will be harder hit. A lot of clients have realized that they don’t have any influence or control over the decision-making process in the Philippines. Large US brands do not really have influence, especially when you have a leader like President Rodrigo Duterte.

The climate in the Philippines poses a higher level of risk and companies have decided to stay out. I think it will be difficult to go back the Philippines. Having said that, you will see some volumes moving back. That is because of the price points. It depends on how the Philippine Peso survives this and to what extent we see those price points go down.

In India, work-from-home is pretty prevalent, and you have a better infrastructure across some of the metropolitan areas in India. In the Philippines, once you are out of Manila, you have significant challenges with regards to connectivity. India has come a long way and I think you will continue to see capacity moving back to India – maybe at 80 percent. But in the Philippines, I think we will probably see less than half of the capacity moving back.

NSAM: What impact could this have on Nearshore destinations like Costa Rica and Mexico?

Singh: I believe this will have a positive impact on Nearshore. If we were to split the market, we would see that offshore takes about 30 percent, and Nearshore takes another 30 percent, while the rest goes to onshore. Now, I expect we will see offshore reduced by nearly half. In a year or two, we will see it drop to about 15 percent of the toral volumes. The additional 15 percent will go to work-from-home, onshore and Nearshore services.

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NSAM: Could you outline the advantages of these Nearshore destinations when compared to Asian countries?

Singh: Proximity, the time zones and the ease of access for companies and executives are important factors. There is also more cultural affinity. Besides the Philippines, I don’t think there is any country in Asia that has the same level of cultural affinity to the United States that Central America does.

The other aspect is the risk profile. Spreading operations across four or five different countries within the Central American region is a natural hedge.

From a geopolitical perspective, the United States is also less inclined to impose significant trade sanctions on Central America because the geopolitical risks to the United States itself are different.

NSAM: Do you have anything else to add?

Singh: In December last year, I wrote a research paper where I estimated that WFH would account for about 35 percent of customer service engagements by 2023. Of course, we did not know about Covid-19 in December. By early March, that had already been blown out of the water.

I think WFH is going to grow and the gig model is going to grow. It is important to watch the onshore delivery model. I believe that greater protectionism is coming soon, especially with the climate of high employment. Nearshore must be careful with the way they position themselves. I think they should be complementary, rather than in direct competition with onshore.

Stephen Woodman

Stephen Woodman is an independent journalist based in the Mexican city of Guadalajara. He has six years’ experience covering business and culture in Latin America. Stephen has been published in numerous international media outlets, including The Financial Times, BBC News and Reuters. To share story ideas, drop him a note here

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