Of the three topics we discussed last time, Service Maturity may be the most important factor in today’s ITO market. And while there are many possible ways to measure the maturity of a location, a couple of factors repeatedly come up:
IP protection
It’s one thing to attract companies to your country, but does the government take care of them once they’re there? Intellectual property theft and data piracy are some of the biggest concerns that firms have with outsourcing locations, and no one region seems better than any other. As Overby says, “India’s IP laws are comparable to those in western nations, but enforcement remains challenging. China recently enacted IP laws, but security remains a top concern for outsourcing customers”.
The good news for Central America in this department is that they are required under the DR-CAFTA treaty with the US, to ramp up their IP protection standards – in both legislature and enforcement. But the jury is still out on to what extent they have complied, or how effective their efforts have been. Other sourcing players like Chile have been very determined in making US firms feel as comfortable as possible with their IP protection, while countries like Brazil and Peru still lag behind with high data piracy rates.
Investment climate
Currency risk – This is a double edged sword for many outsourcing destinations. On the one hand, a strong stable currency gives investors confidence in a location and its economic and political stability. But as a currency gets stronger, as is the case with India, clients find their profit margins decreasing and have to absorb those extra costs. China on the other hand, keeps its currency fixed, which stops appreciation but is not good for trade with the US.
Latin America by contrast brings a great mix to the table, with currencies that are mostly stable, but that also provide a good exchange rate for US clients looking for cheaper costs. Standard and Poor’s usually ranks LatAm currencies between BBB+ and BB-.
Bureaucracy – According to Overby, “India’s legal system is a familiar common law system with an independent judiciary. Critics warn that China’s civil law system is opaque, complex and inconsistently enforced”. India’s bureaucracy used to be impossible to navigate, and still is for some industries. Not so for IT. NASSCOM (the investment promo agency) has lobbied the government to such an extent that locating to India is quite simple.
Latin America is not a good performer in this category. Large market bureaucracies like Brazil and Argentina require lots of paperwork and time to get things moving, while small newer destinations like Honduras and Peru are still organizing themselves, with limited communication between government branches.
Investment incentives – It’s impossible to talk about Latin America as a region for this category. Countries like Chile and Costa Rica offer aggressive tax incentives, rental subsidies and advisory services to attract quality investment, while countries like Guatemala and Honduras have none to speak of, apart from the Free Trade Zones. Suffice to say, if you’re shopping around for monetary benefits in Latin Amerrica, you need to do your homework.
