WorldCity Business Magazine

Outsourcing still in

by Joachim Bamrud

Outsourcing in Latin America is growing and will continue to grow, but don’t expect the region to challenge the supremacy of India or China

Lionel Carrasco, chief technology officer of Miami-based IT firm Neoris, has no doubt that outsourcing is here to stay, as companies continue to discover business processes that can be outsourced whether down the street or halfway around the globe to reduce costs. He gives one example of a business executive who, when preparing for presentations, sketches an outline of what he needs and then faxes it to a company in India, which, in a matter of hours, sends him back a slick, professional PowerPoint presentation.

While there is no question that India is still the undisputed king of outsourcing, the country will increasingly see more competition from China, according to Carrasco and other panelists at a recent WorldCity DHL Connections event, which addressed the theme Outsourcing in Latin America.

“China will become half the price of India the next few years,” Carrasco predicts.

Richard Kantor, a senior consultant and member of the global sourcing consulting practice at Hewitt Associates, based in Connecticut, also sees China coming on strong, noting that, while outsourcing to India is still booming, the growth is ebbing due to rising wages in that country.

So, how will that affect Latin America? Can the region compete with India and China?

“We don’t see Latin America as the next competitor to China,” says Carrasco, of Neoris, a company which grew out of the IT department of Mexican cement giant Cemex. “If we look at Latin America and India, there is no point in comparing. The educational system [in India] is more sophisticated, and on price Latin America can’t compete.” However, Latin American companies can provide outsourcing opportunities higher up the food chain and do so competitively, says Carrasco.

Kantor supports that thesis with some compelling statistics. Uruguay, he notes, is increasingly being called the “Bombay ofLatin America,” as companies like Procter & Gamble and Hewlett Packard use the country as an outsourcing base. Even Tata Consultancy Services, one of India’s largest IT outsourcing firms, has established a base in

Uruguay, finding that the South American country offers some services cheaper than India, according to Kantor. Uruguay is one of the promising locations that Hewitt has identified as the future outsourcing centers outside of India and China. The list also includes Argentina, Chile, Costa Rica and the Dominican Republic.

The market for outsourcing of IT services, alone, in Latin America surpassed $2 billion in 2003 or about nine percent of all IT expenditure in the region, according to Ricardo Villate, director of research at IDC Latin America. IDC expects the IT outsourcing market to grow at a compound annual growth rate of nearly 14 percent from 2003 to 2008.

The largest IT outsourcing markets in the region are Brazil, accounting for 44 percent of all spending, and Mexico (23 percent), followed by Colombia. However, Argentina is catching up to its natural third place, Villate said. The largest players in the business are EDS and IBM, as well as some local companies such as Neoris and Chilean IT firm Sonda.

However, both Carrasco and Kantor warn of the dangers of outsourcing as well. If a company outsources more than its helpdesk, it becomes vital to build a partnership with the outsourcing company which is based on a solid foundation of trust. And that means thoroughly investigating the partner’s credentials, references and local presence, he says.

Another key challenge is culture. “One of the biggest problems of outsourcing is culture. Forget language, that’s just the beginning,” says Carrasco.

Kantor agrees, pointing to the fact that GE had to take back some outsourcing duties from Indian customer service representatives that weren’t familiar with the products they were covering. “The lack of daily experience was apparent,” he says.

GE, a major practitioner of outsourcing, still believes in the benefits, though. According to one GE executive, says Kantor, the real benefit of outsourcing is finding the world’s best talent. “Global sourcing is not just about reducing cost. Increasingly, it is a talent play.”

A recent Hewitt survey among 500 CFOs and human resources managers of large companies shows that only 35 percent are currently outsourcing business processes, while 55 percent have no plans to do so. Says Kantor:

“Global sourcing is a lot like sex: A lot of talk, but not so much action.” But while outsourcing is controversial in the United States and perhaps not as pervasive as one might imagine given all the fuss, it will continue to grow for a simple reason. “There’s a talent shortage in the US,” explains Kantor. “We either export jobs or import workers.”