While many multinational companies boast mature shared services centers established a decade ago, an increasing number of smaller Latin American firms have been setting up their own shared services operations in the last few years.
Given the significant differences between multinationals and local, second-tier businesses, the drivers that led them to adopt the shared services model are quite distinct – as are the challenges that they are now facing.
IBM is one of the more experienced multinationals with stable shared services operations in Latin America for over 10 years. Its main centers are in Brazil and Mexico but it also operates smaller centers in Argentina and Costa Rica, Jesus Michel, IBM’s global executive of shared services & supply chain, told Nearshore Americas.
The main factor that led IBM to open shared services centers was the availability of multi-lingual talent capable of growing and taking on additional business functions at significantly lower costs, Michel said. The biggest challenge for IBM was simply “project management and finding the right leadership to initiate projects like this,” he added. Project leaders have to be able to “bring the right resources onboard and learn from the processes and focus on a transition plan coordinated with the sending and receiving organizations,” Michel explained.
New Kids on the Block
While giants like IBM are nothing new to Latin American shared services, the industry is becoming increasingly divided between multinationals and smaller local or regional firms, according to shared services expert Otto Acuña. Of the latter group, “some are just starting with the same issues you could see 10 years ago on the now stable operations,” said Acuña, the managing director of EXYGE, a management consulting and analytics firm in Costa Rica.
“There are lots of examples of local, mid-level companies that have decided to implement shared services across Latin America,” said Esteban Carril, managing director of Latin America Chazey Partners, a practitioners-led global management advisory business specialising in shared services and outsourcing, technology enablement and business transformation. “For example, Gerdau is a Brazilian steel company that a couple of years ago implemented a shared services center in Mexico for their operations in Latin America. Mexican pharmacy Farmacias del Ahorro has implemented shared services for Mexico, and Belcrop, a Peruvian beauty company, has also implemented shared services for its operations in Latin America. Dos Pinos (Costa Rica), Alpina (Colombia), Grupo Positivo (Brazil), Coomeva (Colombia) are other examples of regional shared service centers in Latin America. There are several success stories of regional and local companies that implemented shared services especially in Mexico, Brazil and Colombia.”
“These companies are not into shared services necessarily for the cost reduction, because since they are consolidating from other operations in Central or Latin America, the cost difference is much less than [when moving operations] from the United States or Europe to Latin America,” Acuña explained. “Their drivers are somewhat different from the likes of PepsiCo. They do it to increase control, diminish risk and standardize or simplify business processes.”
Carril noted that “it is true that larger shared service operations supporting Europe or North America have been able to really push out the labor arbitrage benefits by locating many of their shared services operations in real low cost locations around the world such as Eastern Europe, India, Malaysia, the Philippines and, more recently, Latin America. However, there is still some labor arbitrage to be gained within Latin America, especially companies with operations in Brazil that decide to move those operations to another country in the region. We have also identified some labor arbitrage when companies are paying high cost fringes given the tenure of its existing workforce. Furthermore, it might also be possible for national and regional organizations to leverage some of the lower labor cost arbitrage benefits through some degree of selective outsourcing to ‘greenfield locations.’ Having said this, it would be fair to say that most of the benefits are coming from the standardization of business processes and economies of scale.”
Fresh Challenges
“There is a ‘new breed of problems’ which may have been irrelevant to what the big guys do and they present opportunities,” Acuña told Nearshore Americas. For instance, in the payables sector, “the issues and worries of an American company could be around expediting, controlling or measuring automatic transfers, since more than 95% of transactions could be completely electronically,” he explained. But, “for this ‘middle market’ their worries concern how to lower the amount of checks being used, how to minimize international money transfer costs (not for the last mile transaction, but for the funding of the local accounts where the checks are made from), how to minimize taxes associated to these transactions and sometimes – especially if you work in the Caribbean – how to use as few banks as possible, since many of the islands do have different branches available from island to island.”
Carril added that “one of the biggest challenges that local and regional companies face today is that they don’t really have the economies of scale to really gain efficiency through shared services. Scale does indeed matter in shared services, but really only to the extent that it is a relative term.” He explained that “technology, outsourcing and best practices have meant that the advantages that can be gained through shared services can accrue to even the smallest organizations. It is really a question of approach and scope. The wider the scope and the more ‘end-to-end’ the processes being considered for shared services the better. I have seen and heard from many great examples of success stories in “smaller” organizations. There are also a lot of intangible benefits to be gained by moving to shared services, like process consistency, higher quality of service and the improved control environment.
“Some of the local and regional companies started implementing shared services to support their regional operations, in some cases also offshore operations in Spain and Portugal, or the United States,” Carril added. “The main differences are in terms of the scope of services that most of the multinationals could consider in shared services, and what the smaller companies are currently doing. Most of the multinationals already have mature shared services centers, but they’ve started thinking about moving to hybrid models while the smaller local or regional companies are pretty much just operating captive shared centers.
Diversifying Operations
“Most of the multinationals already have mature shared services centers, but they’re realizing that they’ve already achieved most of the efficiencies from economies of scale and labor arbitrage and they are now concerned with optimization. So they’re trying to move forward in the value chain by bringing in new processes and becoming multifunctional,” Carril explained. “They are either evaluating a migration to BPO to increase productivity, or perhaps considering a hybrid partnership, expanding the scope of their operations or analyzing new technology investments. We’re also seeing a lot of single-function shared services start to embrace a multifunctional profile. There is also significant interest in the region in moving into a virtual type of organization, leveraging home workers or moving some transactional activities to low cost locations.”
Meanwhile, “the smaller local or regional companies are pretty much just operating captive shared centers … they’re currently working on traditional services like finance and HR. Maybe some of them are doing procurement, but most are currently working on the traditional services,” Carril said. “One trend that I have probably seen more with ‘regional or national’ shared services operations is that moving to new ‘greenfield’ locations is less likely than with big multinationals or BPOs. Moving to a brand new location away from existing operations is a “risky” business and involves lots of new capital. It is the larger organizations such as the General Electric’s and HP’s and indeed the BPO providers who have generally set up textbook ‘greenfield’ locations away from all existing locations.”
Add comment