Its the Time to Samba

For long, destinations like Mexico have
been amongst the favorite when it comes to outsourcing manufacturing processes.
Undoubtedly, their dominance in the automobile space has been significant.
Lately, many other Latin American countries (in addition to Brazil) have become
attractive destinations and are luring large corporations and global service
providers to set up shop. The year 2009 has truly been incredible.

The year saw a number of American and Indian service
providers set up delivery centers, not only in Brazil, but also other
destinations like Chile, Columbia, Costa Rica, Paraguay, and Argentina.

The current trends in Latin America are setting pace for an
aggressive growth in this region. Not only do analysts see this as a stepping
stone for standardization in the outsourcing industry, but also as an
opportunity for Latin American countries to attract foreign investment and
talent. According to Chris Nuttall, a member of PA Consultings management team
and a sourcing advisory expert, the rise in the number of credible options is
the biggest trend today. The whole region is going mainstream. From both the
demand-side and the buyers perspective, there are more credible options now than
ever before.

The appetite of the buyers too has increased to a much
broader range of countries. As for the suppliers, the trend is around building
capability and expanding services. This shows that the market is maturing.

All Indian offshore players, not surprisingly, have started
piling on in South America. A good example being TCS that has been in South
America since 2002, and now has eight delivery centers and employs thousands of
people in Latin America. This is a very interesting trend because they all
provide opportunities for local companies to partner with, or in some cases, get
acquired by Indian players. This will also provide much stronger competition to
players like IBM and Accenture and increase the competitiveness of the market.
That will lead to more efficient pricing and benefit the market in general.

These cities are the new hotspots in the global outsourcing map

Increasingly, more work is being outsourced from the US, of
all types and from different domains. Apart from a few examples of work coming
in-house, the next trend is of more work being outsourced to delivery centers in
Latin America.

Delivery centers in Latin America have now started having
dual focus. Global service providers are increasingly competing to service the
domestic demands of countries like Brazil, Argentina, Columbia and Chile, in
addition to addressing the needs of North American clients. There are increasing
opportunities in Latin America on the M&A front too.

On the supply side, the Latin American countries have
fragmented domestic IT and BPO industries. The companies are very small in the
local market, and hence, there are great opportunities for the bigger players.
Large multinationals like The Citi Group, Ford, Pfizer, and many others are
setting up captives in South America.

The rise of Brazil, Chile, and Columbia (to some degree) as
preferred destinations for services, and Puerto Rico emerging as the strongest
Latin American destination for the pharmaceutical industry, is adding icing to
the cake.

It is apparant that Brazil, Argentina, Columbia, and Chile
have evolved as strong players and have become a lot more aggressive in
promoting themselves. Costa Rica too has evolved over the years, yet has
comparatively smaller but highly skilled talent pool. WNS is one of the latest
to set up a delivery center in Costa Rica. According to Steve Reynolds, managing
director, North America, WNS, "As a location, Costa Rica provides a strong
combination of language skills and talent, while still providing a competitive
advantage for clients operating in the Americas. Language capability is a key
delivery component for those who are increasingly looking to benefit from global
delivery models."

Nuttall believes that though Costa Rica has a great talent
pool, it will be extremely difficult for most service providers to expand
exponentially there. He further adds, "...some of the vendors are struggling
now. For example, HP is struggling a bit to maintain service quality."

The Foreseeable Transformation

There is a unique way in which most global service providers are progressing
and transforming in Latin America. Most start with setting up a single delivery
center, build a specific expertise in that delivery center and then, expand to
different countries to set up centers with different specializations. Nuttall
adds, "A good example is Accenture, that started with its delivery center in
Brazil with just SAP support function, then it expanded with other capabilities,
and now manages a number of delivery centers as a network, where the right work
gets into the right delivery center, with flexibility around where the work
goes."

He further adds, "For the next year or two, the focus is
going to be on building delivery centers and really getting to the market; and
then, as each centers start to compete internally, we will see a lot more work
moving around. This is in line with what PA Consulting is advising its clients
(buyers), to build the right business rules, so that the work could be handled
more flexibly, and the clients do not get locked into any particular delivery
center."

The main advantages of nearshoring include proximity, similar
time-zone, better quality of labor, and optimized service quality which has
improved significantly over the last few years, excellent Spanish language
skills, strong IT capability, and similar culture across Latin American
countries.

The government in Brazil and Chile are offering incentives
and sweetness to foreign investors. Columbia has a free trade agreement with the
US. This is a key opportunity for the US and Canadian corporations.

Larger corporations and global services providers are bound
to shape the services outsourcing industry in Latin America within the next
decade. Local players will either get acquired or evolve into specilists
catering to a niche industry. The bigger companies are not very good at
customizing their offerings. With their desire to be highly profitable, there
will be a need for standardization and a different way to approach the market.
This gives the smaller players an opportunity to acquire niche projects, which
will be expensive or not worth the effort of larger corporations. Nuttall
expects a 40-50% market share to be held by local players in the days to come,
when the market further fragments over the next five years.

Ashwin Razdan/Global Services

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