A New Latin Rhythm: The Transformation Of The Global Outsourcing Business

KPMG is pleased to present a report on the situation of the Shared Services and Outsourcing market in Latin America. Five years ago, in our opening edition of "Nearshore Attraction", we assessed Latin America's attractiveness as a destination for outsourcing services. Since then, the market has significantly evolved and matured, and, in this edition, we take a detailed look at the region considering of these changes.

The use of Shared Services and Outsourcing as a strategic tool for company leaders continues to grow rapidly, not only in Latin America, but globally. KPMG has continued to develop, improve, expand and enhance the practice to serve our clients and their unique market demands. In 2011, KPMG invested in the tool by acquiring the consulting company EquaTerra. Today, hundreds of Shared Services and Outsourcing practitioners from KPMG/ EquaTerra provide for clients around the world.

Specifically, Brazil continues to lead the region in terms of outsourcing market size, but has been losing competitiveness in comparison to others, such as Mexico, Colombia, and Central America. One problem Brazil faces is its unfavourable labour regulations and its relatively high labour costs. However, offsetting this trend on some degree is the experience and creativity of the Brazilian delivery staff and management in supporting innovative technology platforms and services. In fact, innovation is high on the Brazilian outsourcing agenda, driven by the emergence of cloud computing and mobile/digital platforms, which influences delivery costs and universal and service accessibility. Moreover, due to globalization, the need for end-to-end service delivery integration in the region has never been more urgent and, together with mitigating labour costs, motivates companies to choose models of Global Business Services (GBS) that focus on integrating collectively shared internal services and outsourcing through occupations, business units and geographic obstacles.

Most of the economies in Latin America continue to expand at a steady pace, although they have been increasingly affected by a general inaptitude to meet service demand. Despite this challenge, Latin America is still able to offer mass-market outsourcing services and will grow faster as an outsourcing location than the region as a whole.

KPMG is committed to provide its clients with our full array of Advisory Services. We support our clients through the whole business life cycle, from Strategy, to Design, Implementation, and Optimization for business process outsourcing, IT outsourcing and global business services.

Foreword

In our inaugural edition of "Nearshore Attraction" five years ago, we looked at Latin America's attractiveness as a destination for outsourcing services. Since then, there have clearly been important changes in this and other markets. In this edition, we take another look at the region in considering these changes.

Brazil continues to lead the region in terms of market size, but has been losing competitiveness if compared to other locations such as Mexico, Colombia, and Central America. One problem is the country's labor regulations, which are very unfavorable, although the experience and creativity of Brazilian technicians are beneficial in providing technology and services that require innovation. In fact, innovation is high on the agenda driven by the emergence of new technologies, such as cloud computing, that bring a set of real possibilities of virtualization and universal access to certain technologies and ways of working. The need for global integration in the region has never been so urgent and, in addition to rising costs, this motivates companies to opt for models of Global Business Services (GBS), including shared internal services and outsourcing.

The region's economy continues to expand at a steady pace, although it has been affected by a general shortage of talent. Despite this challenge, Central America is still able to offer mass-market services. Meanwhile, the same pressure that can inhibit investment in the region is driving companies that have never used outsourcing models before to do so for the first time. This more sophisticated and demanding market is comprised of clients from different locations and occupations.

We hope that this report will provide insight into this subject and that we can support you in your business, whether as a client or a provider of BPO and ITO services in the region.

Report Overview

This report highlights the changes in Latin America's outsourcing industry. The first edition of this report (Nearshore Attraction: Latin America Beckons as a Global Outsourcing Destination, 2009) focused on the rise of Latin America as a nearshore destination and the incentives offered in different countries to attract outsourcing service providers. This edition revisits the region fives years on and asks: is Latin America still attractive as a global outsourcing destination?

The intention of this report is two-fold: 1) provide readers with a general overview of the changes in Latin America's outsourcing industry; and 2) highlight specific tradeoffs when considering key locations for outsourcing in the region.

First of all, the report examines the current trends in the outsourcing industry. These include:

Continued strong growth of Latin America's market for Business Process Outsourcing (BPO) Growing domestic demand for BPO services from local companies and others with operations in the region The rise of cloud computing Increased client focus on the need for value-added services Competition and investment in human capital development Development of a hybrid model for shared services and outsourcing Case studies of selected companies with operations in the region - IBM, Sonda, Neoris, Globant, Digitex and Sutherland - demonstrate how BPO and IT service providers have adapted to these changes in different countries. The report also gives an overview of the incentives available in the region's top global services locations, including Chile, Argentina, Brazil, Colombia, Mexico, Costa Rica and Panama.

Finally, the report summarizes the challenges Latin America's outsourcing industry faces in an uncertain global economic scenario and offers a vision on the future of outsourcing in the region.

Introduction

Following the 2008 global financial crisis, Latin America emerged as a nearshore alternative to traditional outsourcing hubs like India, China and Malaysia. Although these hubs continue to show the highest growth rates in the industry, Latin America has consolidated its position as a top global outsourcing destination with a growing share of the global BPO market.

With the global economy recovered, the outsourcing industry expanded as companies realized the advantages of outsourcing go far beyond cost-savings. But, today, Latin America is still a niche region for US companies to turn to for outsourcing services. Local companies or others already with operations in the LatAm region still primarily drive demand.

Even as an emerging region for outsoucing for US companies, Latin America has many benefits as a nearshore destination. nearshore destination remain basically unchanged. These include:

Close physical proximity to the US Similar time zone to the US Cultural affinity Modern infrastructure Tax incentives in many countries Favorable business environment Languages: Spanish and Portuguese, with English as a second language According to the 2011 AT Kearney Global Services Location Index, Latin America has eight countries in the top 50. These are: Mexico (6), Chile (10), Brazil (12), Costa Rica (19), Argentina (30), Panama (34), Uruguay (41) and Colombia (43).1

Mexico, which has moved ahead of Chile to top spot in the region, has harnessed its proximity to the United States, a weak peso and its large talent pool to provide BPO and IT services to Mexican firms like Cemex, but also to US firms that have established operations in the country.

Central American countries such as Costa Rica and Panama have also attracted leading service providers like IBM and HP to set up service centers in their free trade zones. Elsewhere in Central America, Xerox recently opened a call center in Guatemala and several Indian companies have established operations to serve US clients in the same time zone.

In South America, Chile continues to stand out in the high value-added area with Santiago-based companies such as Sonda and Telefónica offering IT services throughout the region. But it has lost some competitiveness recently due to an increase in costs. Colombia, on the other hand, has overcome is reputation for danger and become a safe and secure place to do business with a large talent pool.

Brazil, for its part, ranks third in Latin America, with a huge market and modern infrastructure, but it also has some of the highest labor costs in the region. Combined with high import and service taxes, as well as the language barrier, this makes it difficult for companies to establish service centers.

Yet despite the difficulties faced by companies in some countries, demand for BPO services in Latin America continues to grow. In response, a new wave of local service providers has emerged offering clients cloud- based solutions and innovative services. This has created competition for global service providers and given clients more options.

But they are not just competing against other service providers in Latin America - the IT technology revolution has turned outsourcing into a commodity with BPO services available in emerging markets from Asia to the Middle East and Africa. So is Latin America, where labor costs are often higher than in these regions, still attractive as an outsourcing destination?

The answer is yes. Latin America's BPO market represents just 5% of global spending, or around US$7 billion, according to a report by research firm Gartner, but it is growing2. Gartner predicts annual growth in the market will average...