When NSAM reported on the scramble to buy up India’s captives back in November of 2009, we didn’t expect to see the conversation come full circle to the Nearshore. We now look at Central America and its transition beyond single-function captive, toward a more mature Outsourcing industry.
In India, many of the smaller captives got a second lease on life as owners eager to convert these assets into cash sold out to third parties. But these “captive spin-offs” brought more than just the prospect of upward mobility for x-captive staff. With them also came global brand recognition, integration of services and breadth of capacity that could add value beyond basic IT and accounting. Is Central America ripe for a similar transition?
We interviewed Dwayne Prosko, KPMG Director in Shared Services and Outsourcing Advisory, to get his insight into the current maturity level of Central America’s outsourcing industry, and what might lay ahead for the region. According to Prosko, Central America continues to be dominated by smaller captive shared service centers – but things are steadily changing.
The region has also seen a steady shift, or at least aspiration on the part of these companies, toward greater capability and scale of services.
NSAM: Can you identify some broader trends occurring in Central America’s shared services market?
Prosko: The hard economy has pushed US-based multinationals to think more about what they can do to reduce costs. Pre-recession, mature companies were more content with keeping back office operations captive and onshore. Now they’re really feeling the pressure to do something about costs. With Offshoring as part of the broader strategy, Central America –particularly for captive operations– is the closer, more comfortable option for these companies.
The region has also seen a steady shift, or at least aspiration on the part of these companies, toward greater capability and scale of services. Companies are looking for opportunities to go beyond the 50-100 seat transactional processing delivery center. They want to move past accounts payable processing and into more sophisticated functions – despite the market noise that Central America is “sold out” in terms of available resources and talent.
NSAM: Can you talk more about broader strategy in Latin American and how Central American countries fit in?
Prosko: Bigger multinationals will typically factor in multiple delivery centers as part of their overall strategy in Latin America. Part of that includes servicing local demand, so market size will often dictate where they ultimately decide to locate. For example, companies will have one center dedicated to Brazil for Portuguese-language processing, and then perhaps one in Central America (e.g., Mexico, Panama, Guatemala, Costa Rica) that can take care of the remaining Spanish and English-language markets from one strategic location.
NSAM: Other than financial services, what other verticals are gaining traction in Central America?
Prosko: There is indeed a lot of movement in the financial services sector, but I’m also seeing more and more activity with the consumer products and the industrials sectors taking advantage of lower cost opportunities in Central America. In the past, these companies have been conservative less inclined to think about Outsourcing or Offshoring of processes, even standardized ones. Lately, we’ve definitely seen them more open to Offshoring, especially Nearshoring, in a “lift-and-shift” type of strategy focused on basic processes such as financial accounting, some basic IT functions, and a bit of HR in Central America.
NSAM: What about broader shared service challenges in Central America?
Prosko: The biggest problem is scalability. Central America doesn’t have a developed BPO presence like you see in India. Partly because it’s a newer market, but also partly because of a smaller labor pool to draw from. It’s something of a chicken-and-egg phenomenon. Lack of maturity and scale makes the market more attractive for smaller, basic-operation captive centers.
Captives tend to see higher turnover, since they offer less opportunity for career mobility. Higher turnover makes it difficult to move beyond basic functions, even if the client wants to. That’s why we advise our clients interested in Central America to think 3-5 years down the road. If they’re looking to build their own center, is there a desire to move beyond basic F&A processing and basic level 1 IT support? If so, then the strategy should reflect that from day one. If not, there is a risk that the captive delivery center will lose value over time. Thinking longer-term and beyond basic cost arbitrage can often shed light on whether Central America is the right location.
NSAM: When it comes to function – HR, IT, and Finance and Accounting – where are Central American countries struggling the most? Where do they excel?
Prosko: Most of the Nearshoring activity we see is basic finance and accounting, some IT support, and some exploration of HR processes. They excel at accounts payable on the SAP platform, and basic IT processing such as help desk, applications support, testing and documentation. They can struggle with going beyond basic accounting and IT. Also very little advanced finance functions like treasury operations or financial analysis like you may see in India. On the IT side, I don’t see big IT development teams, mostly basic level 1&2 support. There is some software development activity but this is usually part of a larger development team in the US.
NSAM: In general, are customers staying with the captive option or are they looking more toward third-party?
Prosko: As I mentioned, there are not a lot of third-party options in Central America. The propensity is toward smaller captive centers. Customers looking at Central America tend to be those that have, or at least feel they have, their processes standardized, so they essentially “lift-and-shift” from North America in Central America –Mexico, Panama, Guatemala and Costa Rica. There continues to be concern over scale and access to talent when it comes to building out bigger multifunctional delivery centers. This makes it more difficult to transfer the India-style BPO model into Central America – but things are changing. You’re starting to see the multinationals move in as well as centers purchased from captive clients begin to expand. While the captive model is still more prevalent, I’ve seen more and more workload and clients wanting to grow. Basically, it’s all about scale and talent.