Think Outside the Indian Sourcing Box

Today's guest blog on outsourcing in Latin America comes from Melany Williams, Partner & Managing Director, TPI Innovation Center.

With a wave of buyers of outsourcing services looking to Latin America, the habit of moving your business 7,000 miles away needs evaluation.

The appreciation of the Indian rupee by more than 11 percent against the U.S. dollar this year and the rise of the Canadian dollar is causing many companies to consider diversifying their offshore portfolios. India is facing constraints such as wage inflation, talent attrition and infrastructure strains, and Latin America is increasingly becoming the alternative “go-to” location.

A number of factors support setting up a Latin America operation: most countries in the region have stable social and economic environments, the necessary infrastructure, intellectual property rights, and free trade agreements including NAFTA that make sharing data in core business applications across borders possible. These regions are more appealing now than a few years ago and successfully migrating IT and business service support functions requires a balanced view of risks and opportunities.

One of the most significant factors to North American buyers of outsourcing services is knowledge of English, particularly in Tier 2 cities where many providers are establishing operations. Language skills play a vital role in Mexico, a populace familiar with American customs, language and culture, as well as Argentina and Chile, both with large and increasing numbers of English speakers. The shared time zones also help, enabling communication during business hours and reduced travel time.

But all roads lead to cost considerations and interesting dynamics are at play here.

Many U.S.-based providers expanded their footprint in Latin America through partnerships or acquisitions. This not only benefits the U.S. provider via insight into the culture, work styles and customs, but the local provider by access to improved technology and process innovation.

The “human” factor can’t be neglected either. The Mexican government, for example, has offered attractive tax incentives to India heritage companies to establish operations in the country, affording them the opportunity to establish relationships with top engineering schools from where they recruit talent. And while India and The Philippines suffer from high attrition, Latin America has a resource talent pool capable of stepping up to U.S. demand while exhibiting low turnover and attrition rates.

But challenges do exist south of the U.S. border. Outsourcing contracts must address security of both the physical facilities as well as address business continuity planning, contingency planning and disaster recovery. Global service delivery contracts must comply with multiple, varying laws across nations and take into account inconsistent data privacy policies. Invoicing and taxation can be complex, and labor regulation, excessive bureaucracy and some infrastructure bottlenecks can pose routine constraints.

At the end of the day, technology pushes globalization, but access to markets and standardization do not create homogeneity. Success in outsourcing engagements results from understanding people, traditions and relationships, and companies need to take this into account during any project, irrespective of geography. Before turning to Latin America, companies need to understand the conditions from A to Z in order to position themselves to take advantage of the outsourcing opportunities that Latin America has to offer.

I would love to hear about your Latin American outsourcing experiences. Are there other factors that should be considered?

Comments

[Subir Dhar]

Hi,

It was an interesting read on Latin America as an offshoring destination.

Latin America is becoming an attractive destination - because of the similar time zones, language capabilities, specific client needs, attractive taxation policies etc.

You have mentioned that India is becoming unviable because of rupee appreciation, wage inflation, talent attrition and infrastructure strains.

On the rupee appreciation vis a vis Latin American economies - Its not just that the Indian currency alone has appreciated agaist the dollar. If you look closely, you will find that the Brazilian currency has appreciated more than that of Indian Rupee. So, we can say that its not just the appreciating currency that is making the firms look elsewhere. The reason is more on locational flexibility and client needs.

Now speaking of wage inflation: In India the official inflation rate figue is 7.67%, (so the actual figures is much more as faced by the population). So, if the salary hikes are about 10%, the real hikes are just about 2.5% - very similar to the developed nations like US or EU countries.

Talent Attrition:
The talent attrition is around 15% in Indian IT industry (in the IT services segment). Now, you may consider that the talent attrition as the problem, but you may also like to consider it as the symptom of some deeper issues.

To give you an example - one of my acquaintance works with a leading BPO firm (within the top 10 firms). At an entry level (for processing emails in the night shift) - he gets a salary of Rs.8000 per month (roughly 200 USD per month). Dont you think that if he gets a better deal from other firms in the same sector or any other emergig sector, he would consider to move up? In the coming months, Indian IT industry is going to face tremendous challenge from the growing sectors in Indian economy.

Infrastructure Constraints:
I agree that Infrastructure is a challenge, and firms be better advised to look at the Tier 2 and Tier 3 destinations. (Anyone will agree that for routine tasks, you may deliver from any smaller town for that matter).

One big aspect you have not mentioned is the issue of tax holidays coming to an end in 2010 - which will impact the IT firms in a significant manner. With the Latin American countries offering tax sops, those countries will be more attractive - till a time few more countries emerge which will offer some more sops.

Regards

Subir Dhar
Bangalore

[Melany Williams]

Thanks for your thoughts – you make some interesting points which we discussed at the Sourcing Interest Group's (SIG) conference last week. There were a lot of opinions and questions about Latin America, indicating that this is a region that many desire to understand better from a capability and financial perspective. The gist of our discussions centered around the point that clients (and providers) are looking for a balanced service delivery model, based on a number of economic, political and enterprise, or strategic reasons, and that the combination of many of these factors is leading companies to consider other geographies. Latin America is one such geography that we’re increasingly seeing more interest and commitment to, on the part of clients and providers. This will not replace India – there is no immediate threat of that, but even India is looking to Latin America to address the main points outlined in your comments. By no means is India becoming unviable; in fact, even India heritage enterprises are considering other locations across the Americas, Europe and Asia to complement and extend their service delivery capability. The extension of the tax holiday for one year till March 2010 effectively becomes a lesser threatening cloud at the present time, and this extension offers all parties a bit more time to assess the impact on their own organizations and make decisions accordingly.