IT outsourcing, according to most accounts, has helped businesses accomplish the prime objective of lowering costs. But what about other expectations? Is outsourcing helping with all the other things that have been laid upon the shoulders of the CIO? And does it depend on where you outsource?
According to a new study by Horses for Sources, outsourcing is not yet doing much toward accomplishing harder objectives like improving business processes, acquiring new skills, or implementing new technologies.
But as companies explore outsourcing options beyond India and discover Latin America — an undeniably growing trend — there's a good chance they'll eventually find those more intangible benefits there. At a webinar today, Horses for Sources highlighted some of the findings of another recent survey: this one to gauge the "sourcing landscape" in Latin America.
Some of their key take-aways:
Latin America has become a big part of the growth of global services delivery. Companies are turning their attention to not just driving down costs but also "becoming much more effective globally," said Phil Fersht, founder and CEO of HfS Research. "Latin America has really come to prominence as a destination for high-quality ITO."
Esteban Herrera, senior VP of research for HfS, said some companies are turning to Latin America as part of an "opportunistic strategy": looking for specific expertise, like choosing Mexico for a call center because they need Spanish speakers. But he said others are following a "deliberate strategy," whereby they "see Latin America as a region. Rather than 400 people in this country and 800 in this country, it's more about building a large operation and standardizing across the region."
Beni Lopez, chief globalization officer for Softtek, said many companies are developing a LatAm regional diversification strategy but, to make that succeed, you have to look at the "pros and cons of each country. You need to address the specifics of what's driving your sourcing strategy, and then map that to each country. Risk mitigation is also a big driver of a regional approach, he said — avoiding all-your-eggs-in-one-basket syndrome.
"Labor arbitrage is losing steam," Lopez said, so companies are turning to Latin America for other reasons. Fortune 1000 firms with a presence in the region, for example, need a local partner who understands the territory and the culture. They're also looking for bottom-line improvements. He recalled the case of one large US retailer. Softtek was able to revamp their processes and at the same time lowered costs by 20%. "That success had a lot to do with cultural alignment," he said.
Herrera also mentioned culture. You have to "leverage cultural similarities in order to lower TCO," he said. Based on its survey, HfS says "cultural alignment [with the U.S.] is the single biggest attraction" of Latin America IT providers for customers in North America.
Herrera noted that most foreign companies setting up sourcing operations in LatAm are hiring local managers and not "transplants" from the home country.
(Sandeep Kalra, vice president for LatAm and Canada for Indian provider HCL, recently told Sourcing Brazil the same thing. “We have to bring in our best practices, but through local people... Our C-level people are Brazilian. We train them, send them to India. Our local team today is very well integrated into our global culture.”)
One of the most interesting things their research revealed, Herrera said, is that the cost difference between LatAm and India is now less than 10%. "The premium for Latin America has gotten into the single digits," he said.
Expect to continue to see lower rates out of India and Malaysia, he said, but keep in mind that there's a case to be made that "it takes less effort to get work out of Latin America."
The challenges of sourcing to Latin America remain scalability, currently at the top of the list; taxation, especially in Brazil, which heavily taxes service exports; and regulations, which vary from country to country in their degree of complexity and business-unfriendliness. Indications are that situation is starting to change, even possibly in Brazil.
One question that came up during the webinar, and comes up often when people are first thinking about sourcing to Latin America: Is it safe? You know, all that news about drug gangs and murders. An audience member asked if there is any good research into the personal security issues.
Lopez, whose company is headquartered in Monterrey, mentioned a report by the U.S. Chamber of Commerce that recognizes safety concerns but says security measures are not driving up costs for customers. But here's another reference: Nearshore Americas conducted a study earlier this year and found that while people are very concerned about personal security in the region, their concerns are often based on outdated information or "media-generated generalizations." Safety attitudes, no matter what they're based on, play a crucial role in site selection, the study found.
Despite what's on the nightly news, Lopez said, an increase in investment in Mexico continues, and "confidence continues."
The HfS research backs up an optimistic attitude. As its Latin America report summarizes: "The region is vast and offers the ingredients to make a nearshore move successful: it has a thriving technology economy; it brings competitive software development rates; can demonstrate industry innovation and with vast human capital has the potential to scale."
