In the horse race of the Western Hemisphere outsourcing destinations, the early leader, Canada, faded fast over the past few years allowing Latin America countries like Costa Rica, Guatemala, Mexico and Brazil to take the lead and land the jobs.
When leaders fail, its interesting to step back to see why they couldn’t keep pace and whether they might have done more to build and protect their advantage. Canada took its eye off the outsourcing industry over the past few years and has found that what was a growing engine of its knowledge-based economy is, in some regions, a fading memory.
Becoming an ‘Also Ran’
Due in some part to official neglect, some part to torrid competition from emerging economies with lower costs, and in a large part to its relatively strong and stable economy Canada turned from leader to also-ran in outsourcing.
Early in the decade, its cost advantage allowed easy entry into the contact center, BPO and IT outsourcing markets. Without much government encouragement, or even recognition, US outsourcers flocked to Canada and corporations established captive delivery and operations centers in all corners of the country. While contact centers formed the base of a large outsourcing industry, more sophisticated work, including software development and more advanced forms of knowledge process outsourcing, also thrived, but in small pockets.
With a highly educated population, good R&D tax credits, relatively high unemployment compared with the US, pro-business immigration policies, and the advantages of strong English language skills in the workforce and close proximity and easy access to the US, Canada was well positioned to meet the US demand for lower cost knowledge workers.
Today, with the dollars at par and with emerging nations competing aggressively for increasingly sophisticated types of work, Canada is generally an afterthought for most service providers. Lower costs elsewhere have drained the country of many of the largest providers, such as Convergys, which had previously been one of the largest multinational employers in the country. With the cost advantage gone, the highly skilled labor force remains as a strong attraction. along with language, proximity, and cultural homogeneity. But competition has changed.
The workforce skills gap with other countries has narrowed, as global quality of higher level technical education has improved rapidly and significantly. And the quality of Canada’s English speaking workforce has lost its luster, and as the need for Spanish speaking agents has grown steadily, outsourcers have tended to look south of the border more for bilingual and Spanish speaking workforces.
Governments Step Up
Even with political and economic instability, governments of Latin America offered significant training programs for workers to meet the needs of outsourcers, while supporting infrastructure approaches to provide low cost real estate and technology options that forced cost-sensitive outsourcers to pay attention. The governments of Costa Rica, Columbia, and Chile, and other Latin American countries know that outsourcing jobs are good for their economies.
Government and industry officials made concerted efforts to promote their programs to US companies and buyers. They’ve made inroads into the major global service providers who, themselves, were becoming more aware of the need for portfolio diversity in their delivery options.
For developing nations, the most basic form of BPO outsourcing, customer service contact centers, offers steady jobs for workers with a basic level of education, good language, interpersonal and office skills, and training in customer service. They serve as an entry point into the more desirable technical areas of IT services, which offer opportunities for skilled workers with college education and other experience.
For Canada, competition came from multiple directions and, was in many cases, cost-based, as skilled resources became more available around the world. Canada, which was willing to sacrifice the lower level contact center services to promote its more skilled offerings, found the exit line packed, with little coming in from the outside to replace the lost jobs.
With no targeted incentives for outsourcers, and with costs significantly higher than competing regions, Canada could do little to attract new, knowledge-based service providers. The companies that remained and grew in Canada were those that were serving Canadian companies with local mandates and perhaps a need for French language skills.
Canada had little history of government promotion of outsourcing. The Canadian outsourcing industry grew naturally, without significant government assistance, in the late 1990’s and early 2000’s because of the saturation of contact centers and outsourcing companies in key area of the United States such as Omaha, Phoenix, and Jacksonville. In those areas, the availability of relatively low-cost, well-educated, labor, including college students and military spouses, and communications capacity, enabled telemarketing, the first outsourcing application, to flourish.
The Canadian federal government, despite the significant role that outsourcing played in Ontario, Quebec, Nova Scotia, British Columbia, and other provinces, never focused on programs to attract and retain companies
In Canada, companies such as IBM, Hewlett Packard, American Express, Hewitt Associates, and many others, established both captive centers for their own shared services and commercial third party delivery centers. However, the government of Canada relied upon only general programs – such as its Scientific Research and Experimental Development (SRED) innovation tax credits incentives, and scattered, non-coordinated provincial programs, as well as the standard argument about an educated and trained workforce, to attract outsourcing providers.
In the beginning, with the Canadian Looney at a 30% discount to the US dollar, Canada was an instant savings. Many companies thought of Canada as the 51st state and already had operations and business in place there. These factors made the first “Nearshore” sourcing decisions easier.
Following the Y2K phenomenon and the rise of India as an outsourcing IT/BPO center, early adopting companies began to move certain types of customer contact activities there, with the encouragement of NASSCOM, the Indian association of IT-BPO companies. NASSCOM acts as the industry champion, India’s global outsourcing promoter, and the chamber of commerce for the industry.
NASSCOM helped make sense of the chaos in outsourcing’s early days. It has helped keep order in recent years, as labor saturation, rising wages, and increasing competition from other developing countries in Asia, Latin America, and even Africa, has created the third wave of outsourcing migration.
With the rise of outsourcing, governments from Asia, Latin America and even Africa, pinned their hopes on the development of an outsourcing industry in their countries. Countries from India to China, the Philippines, Malaysia, Brazil, Costa Rica, the Dominican Republic and even Mauritius, and many others, made it government policy to attract outsourcing companies, develop their workforces, and promote their countries as outsourcing destinations.
Still, the Canadian federal government, despite the significant role that outsourcing played in Ontario, Quebec, Nova Scotia, British Columbia, and other provinces, never focused on programs to attract and retain companies. There was no national voice of service providers, like NASSCOM, and no concerted efforts to develop outsourcing specialties and centers of excellence and lobby government for the economic incentives needed to keep up with more aggressive challengers.
Satisfied by the economic growth from oil exports and other natural resources, aware of its growing role as a center of new renewable energy technologies and its increasing position in global financial services industries, Canada never officially focused on the potential of outsourcing in its economy.
Today, Canada is no longer a competitive Nearshore sourcing location. The Everest Research Institute’s Q32010 Market Vista report doesn’t include a single Canadian location in its survey of the global offshoring and outsourcing market. But in Latin America, BPO and other outsourcing activities are flourishing. Guatemala, Nicaragua, the DR, Brazil, and other countries are active in promoting their countries to US providers as low cost, high quality, Nearshore alternatives. And their efforts are being rewarded with regular investments by industry leaders as outsourcing promises to help create new knowledge-based economies in those countries.
Eric Hochstein is Managing Director of Highstone Associates, Inc., a Barrington, IL-based business and economic development consulting firm, focused on strategy and business development, site selection, and marketing for public and private sector organizations involved in technology and knowledge-based commerce. Between 2003-2010, Highstone Associates represented the province of Ontario for investment attraction in the US in the business services and financial services sectors, including outsourcing.
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