Global professional services firm KPMG has come out with a report, State of the Outsourcing Industry 2013, which shows strong demand growth for both BPO and IT Outsourcing in Latin America. The report is one of the largest studies ever conducted, and is based on a survey of 1,355 stakeholders ranging from service providers, enterprise buyers, and consultancies. “The pace has picked up in the past 12 months,” KPMG’s Dave Brown tells Nearshore Americas, specifically referencing the ongoing interest in outsourcing administrative business processes. “The scope of these efforts is expanding beyond just transactional administrative activities into more strategic and value-added areas such as analytics, planning, support for market expansion, M&A, etc.”
From a regional perspective, the report confirmed that Latin America is a small part of the global market, at 5%. However, that still represents $44 billion out of $952 billion, with the region actively participating in global trends.
“We believe this is the beginning of a multi-year upswing as buyers are starting to develop mature sourcing strategies in their delivery models,” says Brown, who acts as Principal, Advisory, at KPMG. “Constructing a true global business service strategy needs to include sourcing strategies that encompass outsourcing and in-sourcing with centralized and integrated end-to-end processes.”
Highlights of the report include a finding that in 2013 half of all enterprises plan to increase the volume of application development and maintenance outsourcing, with 40% looking specifically at increasing finance and accounting outsourcing. As service providers leverage across a broader client and industry base they are building long-term insight and experience.
“This is also a contributing factor in their ability to attract and retain scarce talent to build economies of scale across regions, topical areas, and industries,” says Brown. “These scarce resources are looking for opportunities to grow and to build careers, and service providers tend to have more functional opportunity due to their size and focus on a specialized skill.”
The numbers for Latin America in the KPMG study were encouraging. The five year (2012-2017) compound annual growth rate (CAGR) for the BPO service market in Latin America is 7.4%
From a strategic perspective, this trend can advantage mid-market enterprises, which the survey found were more motivated than larger organizations to leverage outsourcing for access to better talent, to gain access to technology, and to improve analytical capabilities. Overall, however, three-quarters of respondents said that the primary motivation behind IT and business operations outsourcing was cost reduction, greater scalability of operations, and process standardization.
The Nearshore Challenge
The numbers for Latin America in the KPMG study were encouraging. The five year (2012-2017) compound annual growth rate (CAGR) for the BPO service market in Latin America is 7.4%. This compares to 5.3% in North America and 6.35 in EMEA, with the highest growth seen in Asia Pacific (excluding Japan) at 8.1%, and Japan bringing up the rear at 4.4%.
“There are factors beyond cost, quality, language, scale and proximity that are important and in some cases overlooked or under-addressed in many nearshore markets,” says Brown. “These are related to taxes, tariffs, trade agreements, trade promotion and other factors that impact the cost and ease of doing business in local markets. Many nearshore markets, while more open than in the past, are still relatively ‘closed’ compared to more mature markets such as India.”
But Latin America is making strides here. If we look at the global IT Services market for the five year period, the region is the clear growth leader, with a CAGR of 8.7%. This is followed by Asia Pacific (without Japan) at 7%, North America at 5.3%, and EMEA at 3.3%, with Japan again lagging at 2.9%. To maintain this growth, Portuguese and Spanish-speaking countries will have to address language and cultural issues, a benefit that might accrue slightly to former British colonies in the Caribbean basin.
“Definitely factors such as language, culture and local time zone play an important part for some finance functions when considering outsourcing,” says Brown. “These can become a differentiator when considering nearshore options although cost, quality and scalability are still high on the list.”
And though cultural similarity is a benefit, along with language skills – particularly if the work being performed is collaborative and interactive with the home market – Brown says this affinity can also be very important with regard to legal, regulatory, and accreditation knowledge.
“While this is less important for relatively straightforward rules-based transactional activities, such as process accounts payable or receivables, it is more important for more strategic services such as analytics, planning and forecasting, supporting regulatory compliance efforts, and audit services.”
LATAM Needs to Focus on Cost Reduction
Overall, the study found that it was in strategic areas such as analytical capabilities, access to talent and achieving innovation, where service providers are falling short. Cost reduction was a given, with BPO engagements clearly outperforming IT Outsourcing engagements here as well as in process standardization, process transformation, and improving analytics.
“Other elements such as proximity and language are differentiators but won’t win the business without a compelling cost model,” says Brown, speaking directly to the nearshore market. “Other factors to be considered include local market incentives, for example around tax abatements and free trade zones, the availability and relevant appeal of trade agreements, labor mobility within the market, and overall taxation levels.”
There is definitely room for growth. When looking at business processes, only 23% of respondents used outsourcing as the predominant model for accounts payable, with 19% outsourcing purchasing and accounts receivables, and 11% relying on a provider for recruiting and staffing. Building out that market means educating buyers on how best to leverage the right blend of delivery models.
“Larger firms in general have an advantage when the services are performed from their main centers or in traditional offshore locations,” says Brown. “When large buyers or providers expand into nearshore locations, initially they may lose some of their ability to scale as they ramp up their services and build their teams. In some smaller nearshore locations it also becomes a challenge to attract and retain resources as the supply is limited.”
Brown argues that these markets need to focus on offering services that are differentiated and reflect local market capabilities, as opposed to trying to compete in areas more purely driven by economies of scale.
“Organizations should view service delivery locations as a continuum – onshore, nearshore and offshore – and work to identify what are the best locations for different service elements,” he says. “It is not just location and geographic proximity, but also about other factors and attributes such as language, skill-sets, access to local markets, and diversification.”
The big takeaway appears to be that trends are evolving that support nearshore as playing a bigger role for most firms in their global business services portfolios. This includes highly collaborative work that benefits teams operating in the same or similar time zones. However, it all has to tie together, and organizations shouldn’t approach or view nearshore efforts as separate or distinct from other geographic services components.