The death of Venezuelan president Hugo Chavez is likely to encourage nearshore outsourcing pundits to promote the possibility of Venezuela as the next big thing in terms of service delivery. We are not as optimistic about Venezuela’s immediate potential, however, given the legacy of Chavez’s rule, which has left the country facing some significant challenges related to stability and infrastructure. In addition, with a plethora of outsourcing locations in the Latin American region available to vendors and their clients, Chavez’s successor will have to make serious efforts not just to turn the ship of state around, but also to court foreign investment.
To use a boxing analogy, Venezuela’s tale-of-the-tape is unlikely to immediately pique the interest of IT services or BPO executives looking for new sites in the Latin American region. Since coming to power over 10 years ago, Chavez and his various administrations allowed Venezuela’s inflation levels to soar: they are currently at about 30% annually, and the IMF says this level is not forecast to change between now and 2017.
For any outsourcer looking to take advantage of a lower-cost location with stable costs, Venezuela could not be reasonably considered. The ability to do business efficiently in Venezuela is limited at best. This is quantified most notably by Transparency International’s 2012 Global Corruption Perceptions Index, which ranked Venezuela 165th (tied with Haiti and Chad) out of 174 countries. In addition, The World Bank’s Ease of Doing Business Ranking is sobering reading for outsourcers and their clients, rating Venezuela very low in terms of infrastructure quality, payment of taxes, and investor protection. Clearly, as it stands, Chavez or not, this is not a country that IT service or BPO players can currently take seriously in terms of housing delivery centers.
Change in Direction
We feel that to be considered by outsourcing executives, Venezuela must experience a massive and sudden shift in how the country is run. While the permanent successor to Chavez is uncertain at the time of writing, outsourcers will need to look for several signals. For one, a full-scale crackdown on corruption is necessary to give prospective investors greater transparency (which will in turn have a positive net impact on costs). Also crucial will be investments in the transportation and electricity grids to enable world-class outsourcing delivery. An economic policy designed to lower the current (and forecast) rate of inflation will help ensure a stable cost base for investors. Finally, outsourcers need to watch for signs of friendliness towards foreign investment and ongoing free and fair elections. Such changes could yield positive results, such as those seen in Nicaragua, Chile, and El Salvador, all of which have normalized their political and economic systems and made their locations havens for burgeoning outsourcing sectors.
Other LatAm Locations
For the immediate future, outsourcers seeking delivery options in Latin America would be better served by focusing on established locations. These include (but are not limited to) Nicaragua, Chile, El Salvador, Mexico, Brazil, Colombia, and Honduras. In our view, Venezuela needs considerable time to put in place the economic and infrastructure grounding needed to make it attractive for the delivery of IT services and BPO. Nevertheless, Latin America is one of the fastest-growing regions in terms of outsourcing growth, so it is important to keep an eye on Venezuela for the long term. If it sends the right messages to foreign investors and emphasizes spending on human and capital infrastructure, it may develop into a location worthy of outsourcing consideration.
Peter Ryan is a leading analyst with Ovum and contributes regularly to Nearshore Americas. This article is reprinted upon permission of the author.