For many out there, outsourcing seems to be defined largely by the above – people working for low compensation in locations such as India helping the client save significant monies. That is outsourcing to them.
However, the recent downturn and current client experience has upset many notions and models that have been in place for over a decade. What was considered to be the norm where outsourcing is concerned, is now in flux and so requires different responses. As global sourcing continues to grow, so does the interest in new locations. Companies are interested in new locations to not only diversify risk, but also to better serve their own diverse operations or distinct needs.
TRENDS
Trends: Location
Take for instance, the call center business. There was a time when India, and then later The Philippines, were the only markets given due consideration for setting up offshore call center operations. That notion has been dispelled by the rise of markets such as Colombia, Panama and Costa Rica for the provision of voice-based customer support services is concerned.
In similar manner, we see the rise of attractive alternate IT and engineering services delivery destinations, with local players such as Brazil, Mexico and Argentina, increasingly emerging as viable providers of these complex services. The above examples are just some of the many shifts and changes we are likely to continue to witness. In particular, they point towards an endeavor to be on the lookout for markets with newer skill sets, and not just go by established norms. In the same breath, it is vital that markets with access to equal or better technology processes are also identified. The situation is akin to the age old maxim wherein stock diversification is key to a healthy nest egg; depending on just one or more markets for all of one’s outsourcing needs is really not a very good idea. Increased attrition and competition for resources point to the need for geographic diversification.
Besides skill sets and technology, there are other reasons for which alternate markets should be actively considered. The attribute of time zone is good example. Many Latin American locations share the same time zones (within 3-4 hours) with each other and as well as the US. Another shared attribute is language. If we are to look at the large Spanish speaking population of the region and consider the equally large Hispanic population of the US, there are compelling opportunities to serve the higher cost markets with lower-cost, Spanish-fluent resources. We see the following clusters developing in Latin America:
Brazil: The domestic market is strong and local players are focused on serving Brazilian companies and the Brazil operations of multinationals. A few suppliers like Ci&T and Stefanini are bucking that norm and expanding rapidly into global markets. Other good firms like BRQ, Tivit and TCI continue to be largely focused domestically.
Leaders: The other locations that have significant maturity are Mexico, Chile, Costa Rica and Argentina. In these locations, one finds multiple multi-national captive centers and pan-regional suppliers of scale. Firms from Mexico such as Softtek and Neoris, Globant from Argentina and Sinapsis from Chile have become regional leaders and are also tapping into the global market.
Rising: The key rising locations are Colombia, Peru and Uruguay. While Uruguay has seen traction with IT, Colombia and Peru still need to show scale capabilities that are ready beyond call centers. TCS leverages Uruguay very effectively for its clients while Carvajal leverages its Colombia workforce to provide major BPO services to the government. But, most of the suppliers here are one-country focused susceptible to regional and global competition.
Central America: The key locations in this cluster are Costa Rica, Panama and Guatemala. Honduras, Nicaragua and El Salvador are slowly working on capitalizing on this opportunity too now. But, other than Costa Rica, which is a leading South American location for multifunction captive centers, such as for Experian, Invisalign, HP and Western Union, the rest are only prepared for and capitalizing upon call center competencies.
Trends: Sourcing Enabling Global Transformation
Historically, outsourcing was commonly pursued as a cost cutting exercise. The keywords now are in fact, transformation and time to market – and you outsource not (only) because another entity can do the job in question at a lower cost, but increasingly because of the opportunity to do the same work with more efficiency.
Again historically outsourcing is something ‘western’ businesses resorted to, usually to low cost and/or efficient destinations in the east. This is no longer true in its entirety. Take the case of Bancolombia, one of Colombia’s major banks. TCS and Infosys are assisting Bancolombia in helping transform its technology and infrastructure. Thus, as would clearly be apparent, outsourcing today can work across any geography and can be undertaken in virtually any direction – west to east or vice versa, as long as the primary goal of business value addition is achieved. So, we are seeing a trend of sourcing in the Latam region not just by multi-nationals but also by governments and large local and regional companies.
Trends: Regional sourcing
We are starting to see an interest in regional sourcing rather than an Asian centric approach. Multi-nationals and Pan-South American firms are looking to combine back office and other functions regionally rather than having them run in each country of operation. This will lead to consolidation of multi-country and multi-function operations and I expect Mexico, Colombia, Costa Rica, Chile and Brazil to be leading candidates. Regional conglomerates such as Carvajal, Avianca, Suramericana, Comcel and Multi-Nationals such as SAP and Henkel are looking to consolidate LatAm back office operations into fewer locations.
Trends: Outcome driven pricing and relationships
Further, irrespective of whether there is outsourcing or insourcing, we are likely to witness an evolution in the way relationships between clients and vendors are established, and subsequently defined. In the past, the focal point had generally been the resources that the vendor had at its disposal. Such a perspective is likely to change in favor of the Service Level Agreements (SLAs) being the new focal point. This will allow the whole service process and the service commitment being made by the vendor to be clearly stated to clients. Once established, it would be the responsibility of the vendor to make sure that the SLA is adhered to and fulfilled to the maxim; the client in such a case need not be very concerned about the number or quality of resources at the disposal of the vendor. In effect, the provider, in exchange for operational and human resource flexibility, assumes significant operational and financial risk. Thus, the shift of focus to the SLA signifies a much needed correction in perspectives. It also implies that niche outsourcing centers which could possibly do better quality work than their bigger counterparts now stand as much (or maybe even better) chances of winning quality assignments.
Pricing, one of the most important aspects of outsourcing, is also likely to witness a major change in the way it is determined. From broadlevel volume-based, or even hourly-based pricing mechanisms, there is likely to be a shift in favor of transaction based and outcome/gainshare pricing. Clients would like to assess the benefits of each outsourcing mandate, in terms of the number and quality of transactions it has been able to fulfill and eventually, how those transactions have resulted in actually adding value to their business.
Trap: Not investing in the ‘Retained Organization’
As companies outsource and significant parts of its functional organizations move to a partner in Latin America, we often see a lack of attention to the retained resources. These are the company resources that now are either serving a supervisory role or an expert role. Often, the new outsourcing arrangement requires them to perform tasks and have responsibility that they are not familiar with. For example, a lead engineer, now may have to manage a team that is offshore and culturally very different. There are additional issues related to time zones, distances and contracts.
Great companies invest in relooking at skill sets required and invest in re-skilling the retained organization. They also create new processes and new organizational structures to better integrate the partners and thus yield better outcomes. So, investing in program such as SEI-CMM, Six Sigma and eSCM should be a priority in the region.
These additional skills in process improvement, managing multi-country and multi-function operations are not easily available in South America and can cause quality issues and will also be a detriment to faster growth.
Trap: Lack of attention to Risk Management
Further, if we continue to think of the low cost nature of outsourcing, we find that a lot of the assumed low cost destinations are no more as low in their costs as was presumed to be. Again, take the case of Brazil. With a booming economy and jobs not too difficult to come by, salaries in the country have been continuously witnessing an upward spiral.
– Growth rates for the IT services industry indicate that 750,000 additional professionals will be needed in the country in the next 10 years (300,000 for the export market)
– Projections indicate that the number of college graduates in IT-related careers will reach approximately 48,000 in 2010 and 53,000 in 2013.Additionally, graduates from other areas, especially business areas, will also pursue careers in IT. Some of the new professionals will replace retiring professionals among the 600,000 in the IT labor pool (1.7 million, considering call centers). This scenario indicates a progressive shortage of IT professionals. As a result, enterprises in the IT industry undertake the responsibility of preparing the workforce, usually in partnership with local governments in second-tier cities.
– More than 60% of IT service companies’ labor pools are located in seven major cities — Sao Paulo, Rio de Janeiro, Curitiba, Belo Horizonte, Porto Alegre, Recife and the capital Brasilia. The biggest labor pool in the country is located in Sao Paulo, with a size of 225,000. However, the scarcity of resources is already becoming an issue, and companies are rapidly and successfully reaching out to Tier 2 cities with good universities (for example, Campinas, Hortolandia, Sao Carlos, Uberlandia, Londrina, Maringa, Florianopolis and many more)
Firms looking to outsource their business functionalities to leading and rising destinations like Brazil or Mexico need to be wary of such macroeconomic conditions. Else they stand to risk losing value rather than actually gaining, from the entire exercise.
Thus, as would be amply clear, risk management and risk mitigation would definitely begin to play an even greater role as increased amount of operations are outsourced. Any destination, which is being looked at as a prospect for outsourcing, would be assessed at multiple levels. Broadly, these levels could be summed up as Country-level risks, City-level risks, and Provider-level risks. Within these risk levels would be a broad range of sub-levels at which risks would in turn be further assessed. Financial risk would of course be common to each of the above three risk levels. Further, at the country and city levels, aspects such as human resource risks, infrastructure risks as well as geopolitical risks would become paramount and would be thoroughly scrutinized and assessed before any definitive outsourcing mandate is finalized and also for ongoing monitoring. In the same breath, if we are to narrow down to the risks at the provider level, we could be looking at risks such as strategy risks, service capability risks as well as risks arising out of the complex client and service mix that the provider holds.
Opportunity: Creation of clusters
A key success of locations has been tied to investment promotion activity and government support or lack of interference. In Latin America, we see organizations like CINDE in Costa Rica, MexicoIT in Mexico, Corfo in Chile and ANDI in Colombia lead the way in enabling buyers and suppliers to effectively promote and deliver on promises. Long term success will come from development of outsourcing eco-systems such as those created in Bangalore where other professional services such as recruiting, legal, tax, training and transportation are easily available. In addition, local industries have supplemented this by providing vertical expertise.
Opportunity: Knowledge Management
Across all outsourcing initiatives, knowledge management will always play a vital role. The ‘drill down’ approach of the past, where the clients retained the brains and the vendors merely acted as pawns in their hands – swaying to their tunes in whatever direction they were asked to, be very likely to be passé. Instead, the emphasis will be on collaboration and mutual value addition.
A term which is likely to witness increasingly higher usage would be ‘collective intelligence’, whereby clients and vendors come together to apply their minds and thoughts in a collaborative manner towards the mutual goal of addressing their respective business needs. Innovation would very likely play a bigger role than has been witnessed so far; everyday processes which have often been established as the ‘norm’ for doing things – just because they have always been done that way – perhaps from the very beginning, will start getting questioned more and more, with the client and provider working together to leverage its respective experiences and knowledge to find better solutions. Additionally as Latin American firms take on global markets and/or global clients, they will desire and expect their suppliers to help them support that expansion. This support hinges on codifying and sharing the knowledge gained from prior experiences.
Future Opportunities
We see Latin America being a hotbed of activity in both Information Technology and Business Processes with high double-digit growth for the foreseeable future. While call centers dominate, there will be increased attention to leveraging regional players for IT resources. This should greatly benefit many of the regional leaders such as Softtek, Stefanini, Globant, Sinapsis, Neoris, Ci&T and even Indra from Spain. It is important to note that the demand will be driven by four sets of buyers: Large national firms, Regional conglomerates, Latin American operations of Multi-Nationals and US firms. The group that has the highest profitability and is the hardest to serve is the Multi-Nationals and US firms. This group expects quality and process expertise that is lacking in most suppliers in the region. Some of the key players that will also benefit from this market are firms such as Accenture, IBM, TCS, Infosys, Genpact, Cognizant and Wipro.
From a country perspective, the governments and investment promotion agencies need to establish a differentiation strategy and invest in preparing the workforce. Of course, in many locations the workforce is prepared for working in call centers, but is greatly lacking in skills to effectively work in IT and BPO operations. Also, in many of these locations too many efforts are being spent in internal competition such as competing chamber of commerce or multiple trade associations. Brand building will require a shared vision and greater collaboration. Also, this brand building needs to focused both internally and externally. Internally focused to attract right talent to the outsourcing profession and externally to differentiate the talent and offerings.
Thus in summation, we can conclude that outsourcing and Latin America as a destination is likely to witness a series of changes – in the way it is perceived as well as practiced. Eventually, these changes may well be our guiding light and only hope for better business practices, as outsourcing matures and the world globalizes even more to and in Latin America.