In today’s competitive outsourcing market, many countries offer incentives to try and attract high value investments and jobs for their people from foreign firms. Especially in Latin America the similarity between neighbouring countries often leads them to try and differentiate themselves as much as possible, through aggressive tax exceptions, rental subsidies, advisory and legal services, and much more. If you’re a buyer of outsourced services, chances are that you’ve been tempted to ‘shop around’ in Latin America and take advantage of those incentives.
The truth is, many companies have done exactly that and have actually seen smaller returns than firms who commit to one location or vendor and stay put for the long term. In this post I’d like to talk about why that’s the case.
Developing a location
Switching your BPO or ITO location is not like moving money around in your bank account – there are many more factors in play than just the best interest rates. And like a good mutual fund, your rate of return increases over the long term. A large investment incentive can seem very attractive at the outset, but when you calculate the overheads for the location and take into account the human capital costs, you realize that a tax break here and there is tiny in comparison. If you’re considering a captive center especially, the initial investment will be substantial. The only way to have it pay off down the road is to consider long term factors like scalability, availability of technical talent in the workforce, wage rates, infrastructure, etc. Companies that chase short term monetary incentives without considering what will make their project sustainable, will not see a very high rate of return.
In terms of selling to the domestic markets in Latin America, using your captive center to develop or ‘warm-up’ the local market is a great strategy. Once you’ve developed a relationship and reputation locally, you can build out your delivery center to target the local market. This would only work after several years of operating in and getting to know that local market.
But there are still companies that shop for incentives, rather than real value-adding characteristics of a location. And since these companies are not interested in committing to a location and building it up over the long run, they will constantly be looking for the next attractive deal. LatAm countries are getting wise to this now. While earlier, in order to offer monetary incentives, governments used to simply require a minimum investment amount by a company, now many also ask for a minimum number of years of investment commitment.
Real vendor relationships
If you’re going with a third party vendor, a long term strategy also helps in strengthening that relationship. Both parties gain much more confidence and peace of mind knowing that the partnership is not just a one-project deal, and that returning business will be part of the equation. And when you work together over an extended period of time, each party knows what to expect from the other – there’s less unpredictability than in a new relationship.
A long term strategy also helps with contract negotiation. If you’re sitting down for the first time, the vendor will be more at ease and make more concessions knowing that he can count on your returning business. If it’s time to re-negotiate the contract, the vendor definitely wants keep you happy, knowing that you’re in the partnership for the long run.