Complex Interactions Define Next Wave of Latin America IT Services

While Latin America has always existed as the southern neighbor of the US, according to Raul Rivera, Founding Chairman of Chilean innovation consulting firm Foro Innovacion, it has only been in recent years that the US has discovered the region’s potential as a provider of IT services.“The US discovered Latin America exists in the last ten years and is capitalizing on it,” said Rivera. “Latin America offers incredible advantages (in providing IT services) over other options such as Russia as the product becomes more complex and sophisticated.”

Interactions Become More Complex

Rivera said the requirements of initial Latin American IT services contracts were well-specified, functional specifications. A provider used to work on a project for three months straight and then turn it in to the client. “This is still happening,” he said, “but US companies and Latin American IT service providers are having more complex interactions and developing processes with fractional spec changes. Doing that at 4:00 a.m. is cumbersome.”

According to Rivera, Latin America has an advantage serving the US in two realms: time zone alignment (which helps with more value-added and complex projects), and a willingness to help smaller companies with smaller projects. “Many companies in the US are not doing huge offshore projects and don’t receive top priority from big IT service providers in other regions,” he observed.

Latin America Relevance

Latin America generates more than $12 billion in annual global IT service business, led by Argentina, Brazil and Mexico which produce close to that number when combined, Rivera estimates.

“The region is becoming a relevant IT services player,” he said. “Indian IT services companies are taking positions in Latin America. For example, (multinational IT services provider) Evalueserve started in India ten years ago and then went global, focused on offshoring high-level processes for financial services companies such as financial analysis, trend analysis and trend modeling. They now have a service center in Chile with more than 200 people from all over world working there.”

The Importance of Segmentation

Rivera cautions that companies looking to outsource IT functions to Latin American providers need to segment those functions to specific offshore locations. “If you try to do the wrong things in the wrong place, it will not be competitive,” he said. “For example, if you put a call center in a big city like Santiago or Buenos Aires, it will be very expensive. Putting a call center in a secondary city brings your costs down by 30%. The labor conditions are far more attractive. Companies not doing segmentation right are disappointed with the costs and advantages of Latin American IT outsourcing.”

Latin America – Not Just for Call Centers Anymore

Rivera makes it clear that Latin America has moved well beyond its traditional role as a hub of managed call center services. “People say providing call center services is just for poorer countries where people speak English, and that would appear perfect for Latin America,” he said. “However, I disagree.”

While Latin American countries have an average low cost of labor and generally have good English fluency, the overall picture is distorted by averaging extreme highs and lows. Most Latin American countries are made-up of sophisticated capital cities with high labor costs, and backward secondary urban markets that range from 200,000 to one million people, where there is not a lot happening. “People have been migrating to the capitals for decades and are not looking to take pay cuts to stay home,” he said.

Commodity Prices Will Not Crush IT Services Market

Rivera also poked a hole into the conventional wisdom that the global economic crisis will hurt Latin America as prices for commodities like minerals tumble and throw the region into the kind of turmoil it has seen before because Latin American countries have been generally managing their economies like the US and Europe used to by doing the things that make countries powerful.

Rivera cited Chile as an example of a thriving Latin American economy which is an international creditor with low inflation and Social Security payments only totaling 6% of GDP. “The US and Europe behave like we used to, and the results are predictable,” he noted. “Government debt is out of control, foreign debt is an issue. However, the US will hold on pretty good.”

And even if local currency devalues as a result of the global crisis, Rivera said there is a “silver lining” in the economic cloud. “It will be quite a while before the US or European labor market adjusts to become competitive to the Latin American labor market,” he said. “No matter how hard the US is hit, Latin America will still be cost efficient.”