Outsourcing Buyers See Reason to Question Asia’s Dominance

It is one thing for investment agencies and Nearshore vendors to promote Latin America sourcing but when buyers start to become vocal champions, it’s a good idea to hear their rationale.  “People tend to have a myopic view about outsourcing, we only think about India,” said Anthony Porter, director of IT Vendor Management, Procurement, Legal and Strategy at U.S. health insurance provider Humana. “Driving awareness of [outsourcing to Latin America] is one of the things I’m doing with my management team and highlighting the success stories,” said Porter, who spoke on a panel last week at the Nearshore Nexus conference in Jersey City, NJ.

The Latin American outsourcing market is expected to grow between 11% and 15% annually over the next several years, according to panel moderator David Rutchik, a partner at consulting firm Pace Harmon.

Outsourcing to Latin America can help U.S. companies that have already offshored significant functions to Asia diversifying their supply and logistics chains to reduce geographic risk. “We’ve had some decent experiences with India but I think we’re overexposed from a risk perspective,” said Porter.

Operating in some parts of Latin American can be, for some activities, even less risky than carrying out the same activities in the U.S., said Francisco Alvarez-Demalde, a partner with Riverwood Capital Partners. “In Colombia, people only read about the kidnappings. But macroeconomically, for the last ten years, it has been much better than the U.S.,” said Alvarez-Demalde. “And look at Chile, look at the balance sheet—it has zero debt.”

In March, the U.S. federal budget deficit fell to less than $1 trillion for the first time in five years. But many economists believe the debt is still big enough to fuel inflation and interest rate spikes in the years ahead, which would make it costlier for American companies to expand domestically.

Rising Outsourcing Revenue in LatAm Countries

Economics aside, the panelists maintained that countries like Brazil, Mexico, Argentina, Costa Rica and other LATAM nations will see significant growth in outsourcing revenues given the headway they’ve made in establishing world-class infrastructures for Business Process and Information Technology Outsourcing (BPO and ITO). Add to that the fact that costs in Asia are rising as tight labor markets have skilled workers there seeking higher salaries. “There’s a premium to places like India,” said Rutchik.

“We need someone who is able to perform deep thinking in terms of program strategy, how do we deploy code, how do we control releases, etcetera. And we don’t need to pay a premium for a brand-name label as we understand there are capable players in Latin America” – Anthony Porter of Humana

For outsourcers in Latin America, meanwhile, “there is a lot of opportunity as an offshore provider to both U.S. and European companies, as well as a provider to the local marketplace, which is also growing,” said Rutchik. He noted that LATAM countries, given their strong representation in the American populace and common time zones, also “share a cultural affinity” for the U.S. market.

An added benefit: “If you’re in the same time zone, you can pick up the phone” if there’s a problem, said Porter.

Latin America, a region made up of more than 25 countries if Caribbean nations are included, can also offer greater flexibility in terms of languages, costs, and specializations than monoliths like India or China, said Rodrigo Slelatt, a principal at business consultants A.T. Kearney. “If you go to Latin America on of the things that customers want is flexibility. Not being tied to one location, being able to change contracts over a period of time, and shift services from one place to another,” said Slelatt.

In terms of choosing a vendor, the panelists agreed that finding the right outsourcer can often be more important than the particular country, whether in Latin America or Asia. “If you’re hiring an Indian firm that just opened an office in Argentina, I would not do that,” said Alvarez-Demalde. “At the same time, I wouldn’t hire an Argentinian company that just opened an office in India” to perform work on the sub-continent.

No Need to Pay Premium for Brand Name

Humana’s Porter said researching local vendors, who are familiar with local conditions, can be worth the effort. “We need someone who is able to perform deep thinking in terms of program strategy, how do we deploy code, how do we control releases, etcetera. And we don’t need to pay a premium for a brand-name label as we understand there are capable players” in Latin America.

Another question faced by U.S. businesses looking to source skilled labor in Latin America, for ITO or BPO, is whether to maintain ownership of the offshore operation, an arrangement known as a captive, or to outsource to a third party. Alvarez-Demalde said that while captives can be less risky when it comes to issues such as protecting intellectual property, third parties are generally more efficient and have access to a greater range of expertise.

“A captive for a multinational will always be the back office, whereas the delivery center for an outsourcer will always be the front office,” said Alvarez-Demalde. “That’s what they do for a living.” Following that logic, a number of financial and industrial giants have spun off captive operations in recent years. Schlumberger famously sold its IT operations to outsourcer Atos Origin for $1.5 billion in 2003. The use of captives versus non-captives “is one of those things that waxes and wanes,” said Rutchik.

Latin America’s growing advantages are translating into success for outsourcers operating in the region. While the total value of contracts awarded to outsourcers in the Americas in 2012 fell 3% compared to 2011, total contract value for outsourcers in the Latin American sub-region doubled over the same period, according to a market study by Information Services Group.

The panelists said they expect the growth to continue, thanks in large part to Latin America’s proximity to its biggest customer. “The U.S. is always going to be looking at this region,” said Slelatt.