Talk of Latin America emerging as a key offshoring location has grown significantly in the last few years. Multinationals and top outsourcing providers have set up delivery centers there, and countries in the region are making significant efforts to attract offshoring-related investment. Despite the efforts, the question remains as to how soon Latin America will become recognized as an established outsourcing region.
Latin America’s proximity to the U.S. consumer market has certainly served it well as a services hub. With a growing Spanish-speaking population in the United States and English proficiency rising in Latin America, customer service activities will naturally increase. But the region is aiming higher – just like India and the Philippines did over a decade ago. Latin America wants to become a global player in the BPO and ITO space. And for that it takes more than just language skills and proximity.
A.T. Kearney recently released the 2011 Global Services Location Index. The Index analyzes 39 measurements grouped into three categories — financial attractiveness, people and skills availability, and business environment — and ranks the top 50 countries worldwide for locating outsourcing activities.
Two Latin American countries, Chile and Mexico, ranked in the top 10, with the rest scattered across the Index. Clearly there is a wide gap with Asia, which boasts seven of the top 10 countries. To fully leverage its location advantage, Latin America needs to take several actions.
The output of graduates with technical skills needs to increase across the region. Despite Brazil and Mexico’s clear leadership in this area, the region still lags its Asian peers. Some local and state governments (like Nuevo Leon in Mexico) have successfully attracted more students to technical fields by securing agreements with employers and universities, thus both securing jobs for the students and ensuring a healthy flow of young talent to the service providers. But programs like this are not yet widespread, although huge benefits can be attained from emulating these practices across the region.
Second, governments need to improve efforts to attract outsourcing business and ease the day-to-day operations of companies established in the region. While some national, state, and local governments, such as Costa Rica and Chile, present a portfolio of incentives and communicate them well to prospects, others either don’t have clear rules on incentives or lack a cohesive approach to reach investors through their investment development agencies.
In addition, many service providers feel the region is not being aggressive enough in terms of incentives. Moreover, there are still some obstacles in place to protect established players that outsourcers have to overcome. Labor rules can change in countries where significant outsourcing activity is in place, such as Argentina, where unions took control of call center agents and increased term demands. And, taxes continue to be a burden. In several locations outsourcing of services is subject to high taxation. In Brazil, for example, exporting services even carries a higher levy.
These self-imposed hurdles represent an additional burden for companies that aim to set up centers to serve the whole region. Yet governments in the region tend to react slowly to demands of this dynamic, high-growth sector.
The Bright Side of Things
However, there has been significant progress. The sector has been growing steadily at about 20 percent per year for the last five years – noticeably higher than the global average. And just like the other regions, Latin America is diverse and is developing a character of its own, with each country rapidly specializing in different fields of outsourcing. (See the chart at bottom.)
Mexico (6th) is the highest ranked Latin American country in the Index. While strong in IT, it is becoming more of a BPO location — supporting the United States not only with Spanish but also English and now stands to benefit from increasing nearshoring sentiment. It boasts one of the highest numbers of Capability Maturity Model Integration Certified (CMMI) centers worldwide. (CMMI is a process improvement program created by the Software Engineering Institute of Carnegie Mellon University.) But the ongoing drug violence poses a serious concern to the sector in the long term. As its management schools improve in quality, Mexico could carve out an important space in the service sector.
Chile dropped to 10th place from 8th, largely because its economic contraction was less severe than elsewhere. The country’s infrastructure score also received a slight downgrade after the February 2010 earthquake exposed some vulnerabilities. Still, Chile needs to overcome its conundrum: While it has been a top-10 country for several years and has emerged as a niche destination for R&D and analytics, its wages remain relatively high. It will need to build scale and continue to grow its base of English speakers to become a world player.
Brazil ranks 12th for the second straight year. It excels in IT and is a strong platform location for software developers and systems integrators; it also showcases the largest contact center market in the region. While demand is mainly domestic, during the last three years it has seen revenue generation from offshore clients, mainly in IT. But its strengthening currency poses a challenge by hindering export growth, which together with record-high taxes creates an explosive combination. Brazil will have to be more creative at easing the way for its firms to export the top-quality services they mainly provide to domestic clientele.
Costa Rica (19th) moves up three spots thanks mainly to infrastructure modernization. It is now reaping the benefits of being a pioneer in the shared services and outsourcing sector. Despite some decline in cost competitiveness and lacking workforce scale, several players are buying existing capacity to set up shop there, and the services offered continue to move up the value chain. It is a promising example to follow.
Argentina (30th) falls five slots as inflation and rising demands among labor leaders for increased wages challenged its competitive position. Despite this, its outsourcing sector continues to grow. It is the second largest exporter of English voice services to the US (after Mexico) and several multinational outsourcers make it a main hub for their delivery centers. The government will have to get serious about supporting the sector through more clear and attractive incentives.
Colombia (43rd) enters the Index after performing particularly well in the people and skills category. Colombian Spanish is a neutral accent that allows Colombian call centers to serve throughout the Spanish-speaking world with relative ease. But the level of English among professionals is a major hurdle. As Colombia’s currency appreciates, the government will have to realize that it will not be able to compete as a low-cost destination and will have to look higher on the value chain for advanced services such as IT or finance. To achieve this shift, the English-improvement programs set by the government will have to succeed.
Other countries that are not yet among the Index’s 50 but are gaining ground are El Salvador and Guatemala. They both enjoy low-cost positions in the region and are smart to have marketed themselves as “low-cost destinations.” A few global outsourcers have selected these countries as secondary or tertiary hubs. If they make the right move, these hubs can constitute the breeding ground for a growing sector in the future.
The Latin America outsourcing market is growing steadily, but it has key challenges to overcome. In the end, what will be needed is the passionate entrepreneurship that has leveraged India’s qualities to create the outsourcing giant that it is today. The government can help, but the players have the ball, and that will define the game.
Rodrigo Slelatt is a principal in the New York office of management consulting firm A.T. Kearney.