By Pablo Velasco, Director, CIO Services, TPI; and Scott Furlong, Partner, TPI
Never before have so many services, talented professionals and modern shared services centers been available in Latin America. This new concentration of resources continues to improve the shared services value proposition for many companies in the region.
On average, a new outsourcing shared services center (SSC) or client captive operation has opened about every two weeks in a Latin American country since 2006. So far, this increased supply of SSCs has not stimulated local demand. Most Latin American companies still do not outsource, and very few seek business process outsourcing (BPO) services. Although some barriers to outsourcing remain, most Latin American companies can still benefit from taking advantage of the SSC boom in their own backyard.
Advantages of Consistency
An SSC consolidates one or more back-office activities — such as information technology, human resources, finance or other business processes — into a shared operation that serves multiple divisions of the same company. Various SSC models can help companies eliminate redundant activities to lower costs, increase efficiency, and improve service levels.
One of the most common benefits of using an SSC is the consistency it creates. By centralizing certain functions and managing them with a focus on best practices, companies can eliminate inconsistencies in how things are done from country to country or department to department, which leads to improved service and lower costs. Companies can also reduce costs by gaining economies of scale. For these reasons, SSCs are often very beneficial for companies undergoing mergers, acquisitions, or rapid growth.
Although labor costs may not be reduced by transferring work to a shared services center, companies often find that their service levels and operational performance are measurably improved.
Many U.S. executives are well aware of the advantages of outsourcing — particularly to service providers in Latin America. A 2010 Executive Outsourcing Survey of U.S. Fortune 1000 executives by Capgemini found that Latin America ranks third, behind India and China, as a favorite outsourcing location. Executives reported that their top reasons for outsourcing in Latin America include cost of labor, economic stability, availability of skilled labor, and technology and infrastructure capabilities.
Latin America’s own executives often refrain from outsourcing because they do not believe their company will save money or improve performance. Today this view is only partially accurate. It’s true that, unlike their U.S. and European counterparts, Latin American companies cannot save significant money by outsourcing to another Latin American country. The difference in service worker wages between high-cost and low-cost countries in the region is simply not enough to justify outsourcing based on cost savings alone. Even when the labor cost gap is significant, taxes can negate it. Businesses may pay taxes as high as 35 percent when they transfer work to other countries. The North American Free Trade Agreement (NAFTA) makes it relatively easy for U.S. and Canadian companies to transfer work to Mexico, but no equivalent trade agreement exists among Latin American countries. As a result, it can be complex and costly to send work across borders.
Latin American companies also face political and public pressure. If they are well known and highly respected in their home countries, companies do not want to risk damaging their reputations by sending jobs elsewhere. This concern is reinforced by the widely held belief among Latin American companies that they can run their own operations better than anyone else.
The Local Advantage
The belief that a company can best run its own business isn’t always accurate, especially with the growing number of world-class SSCs now operating in Latin America. Outsourcing service providers ACS, Genpact, Infosys, Sitel, Tata Consultancy Services, and Wipro have all come to Latin America in recent years, joining well-established leaders such as Accenture, HP, and IBM. Plus, some local captive centers that were established primarily to support operations in the U.S. and Europe are maturing, so now could be an advantageous time to begin providing service to the parent company’s business units throughout Latin America.
Although labor costs may not be reduced by transferring work to a shared services center, companies often find that their service levels and operational performance are measurably improved. They can also benefit from economies of scale and efficiencies, and these resulting service and performance improvements can be significant enough to justify outsourcing.
It is much easier for Latin American companies to benefit from outsourcing when an appropriate service center is available in their own country. They can then take advantage of the modern facilities and best practices without the costs or implications related to sending jobs out of the country.
We have seen companies successfully use this strategy in Mexico to improve payroll processing efficiency. Several requirements unique to Mexico mean that service providers must have local expertise, so it doesn’t make sense to outsource payroll processing to another country. Service providers have developed specialized services to meet the unique challenges of the Mexican market, and businesses are beginning to see the benefit of transferring the complex payroll task to local experts.
We expect more of these examples of successful outsourcing among Latin American countries to develop as the many SSCs that have opened throughout the region continue to mature. In light of the increased availability and maturity of efficient SSCs in Latin America, companies should reassess whether it still makes sense to keep all of their IT and business processes in-house — or whether they should take advantage of the many emerging resources close to home.
Pablo Velasco, a director with TPI, has more than 35 years of experience in outsourcing and the IT services industry. He has helped numerous clients throughout Latin America to develop outsourcing strategy, assess operations, develop statements of work, create and negotiate contracts, assess performance and develop governance processes.
Scott Furling, a partner with TPI, has extensive experience assisting clients in transforming their general and administrative functions through shared services, offshoring and business process outsourcing (BPO). He has helped clients design, implement or improve more than 30 shared services centers around the globe.
For more information on maximizing the value of shared services for your company, contact firstname.lastname@example.org. To learn more about TPI, visit www.tpi.net.