Nearshore Americas

Brazil, Mexico Remain LatAm’s Main Contenders on Global Services Location Index

Mexico has moved up two places to rank 11th on AT Kearney’s 2019 Global Services Location Index (GSLI), while Brazil remains the only Latin American country in the top ten, but which has slid four places to ninth since the last edition of the index in 2017.

Colombia is ranked 13th, having slipped three places, while Peru climbed one place to 19th and Chile leapt 13 places to 22nd.

The top four positions – India, China, Malaysia and Indonesia – remain unchanged since 2017, while the highest climber into the top ten is the US, leaping 16 places since the previous index.

The 2019 GSLI confirms a trend forecast in the previous report, that the information technology outsourcing (ITO) and business process outsourcing (BPO) industry has faced significant disruption from digital transformation, with the strongest impact from automation and heightened cybersecurity concerns.

However, a country slipping down the index is not necessarily an indication of it performing poorly, but rather it being overtaken by other countries, Johan Gott, a principal at global strategy and management consultant at AT Kearney, and co-author of the GSLI, told Nearshore Americas.

“Mexico and Brazil have been in the top ten before and are the main contenders in Latin America, but Brazil is less cost-competitive, although it compensates for that by being large scale, and due to the sophistication of the labor force,” he said.

“The UK and the US have catapulted up, which is not a reflection on Brazil’s weaker performance, but is comparative. It is not Brazil deteriorating, but other countries moving up and pushing it down.”

Brazil’s four-place slide on the 2019 GSLI is also attributed to poor performance on the digital resonance index, a measure implemented for the first time in this year’s index, while Mexico’s climb is a result of its sharp increase in the business environment score, having shown considerable improvements in country environment, while its second-tier cities are showing strength, such as Aguascalientes, where US software testing services provider QA Source has opened a delivery center, and where software developer iTexico opened its second office in the country last year.

Colombia’s poorer performance on the index is attributed to a decline in its IT/BPO experience and skills, as well as a poor digital resonance score. But the country remains attractive, with Amazon opening its first customer service center in Colombia with 600 employees, and Accenture having opened a technology center in Medellín, which it expects to expand to employ more than 1,000 people over the next three years.

“It’s not a bad score for Colombia, or a negative change,” Gott said.

Peru, which climbed one place despite having the second-lowest digital resonance score, was buoyed by enjoying the largest increase in the country environment component. One of the country’s strengths is its highly educated, multilingual population, according to the report.

Johan Gott, a principal at global strategy and management consultant at AT Kearney, and co-author of the GSLI

“Colombia is an interesting case,” Gott said. “It has been up and coming, with a consistent rise, and it was in 10th place three years ago. I still consider it a top contender, and Latin America is doing well as a region,” he said.

“The top ten is relatively stable, and we could see Mexico and Colombia come back in. The stability reflects the fundamentals, the index is not very volatile, we don’t see very large swings, and especially the countries in the top ten,” Gott said.

“The top ten has been reasonably consistent over time, with the top three not having changed since the index began in 2004,” he added.

The 2019 GSLI observes that low-cost countries are losing jobs due to increased automation in the sector, while new, more highly skilled jobs are being created in certain countries to manage the demands from automation, with countries seeing their labor forces shifting rapidly, and significant attention toward fast-growing automation start-ups that are driving this disruption.

More automation, more cyberattacks

At the same time, increased automation is heightening the need for cybersecurity, the report warns.

“As heightened automation disrupts labor patterns globally, it brings with it an equally disruptive threat of cyberattacks from malicious agents that feed on the vulnerabilities created from increased reliance on outsourcing and digitization,” the report states.

“Companies are outsourcing vital functions and sharing sensitive information with their service providers, but they do not have enough awareness and visibility to the very same vendors who have access to their client-sensitive data.”

The report finds that the incidence of cyberattacks on organizations is accelerating, with increasing vulnerabilities through third parties, highlighting outsourcing operations’ exposure to cyberattacks, particularly as automation intensifies.

“Companies seeking to outsource must pay attention to the cyber risk profile of countries in which their service providers are located, in addition to assessing the risk profile of the providers themselves,” the report states.

Interestingly, it is the highest ranking countries, such as India, China and Indonesia, that are only at the nascent stage of expenditure on cybersecurity, as well as other countries inside the top ten, such as the Philippines, Vietnam and Thailand, in addition to Brazil and Mexico.

Measuring digital resonance

The 2019 GSLI’s digital resonance category takes into account the digital skills of the labor force, legal adaptability – meaning the extent to which the legal framework takes digital business models into account, including cybersecurity protections – and the amount of corporate activity, defined as the amount of capital invested in startups and the number of deals by venture capitals in 2018.

In addition, it measures digital outputs, including creative outputs, as well as knowledge and technology outputs, and all of these factors explain the US leaping so high in this year’s index.

“If you look at what’s happening on the ground in terms of automation coming online, that does eliminate a lot of jobs, and more jobs on a percentage basis in low-cost countries, which are the easiest to automate because they are typically lower skilled,” Gott said.

“And then there’s an influx of new jobs to manage that automation, to set up the right algorithms and bots, and those need to be close to the business, you need business knowledge, in nearshore and onshore.”

Latin American countries ranked in the bottom half in the digital resonance category, as its incorporation into the methodology had a negative impact on countries such as Argentina. Although it moved up six places in the rankings this year to 29th due to falling costs, its progress was held back by its poor digital resonance ranking, the report reveals.

Argentina’s capital Buenos Aires ranked as the highest Latin American city on AT Kearney’s Global Cities Index 2018.

“It is a warning sign for countries in the region that have successfully established strong industries and specialized niches in the global services value chains,” the report states. “A lack of focus on development of digital skills threatens to leave these countries behind.”

Panama is the highest ranked Latin American country on the 50-nation digital resonance index, at 31, followed by Mexico, ranked 36th, and Costa Rica, Chile and Colombia, at 38, 39 and 40 respectively.

“Costa Rica does really well with regards to digital skills, but there is also the legal adaptability element, making sure laws and regulations are in place, and then there is cyber security, and in the latter Costa Rica is doing very poorly,” Gott said.

“But this is something that the government can do something about.”

Adam Critchley

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