Sourcing Guide Latin America

Global Business Services Process Perspective I The Hackett Group I 1© 2013 The Hackett Group, Inc.; All Rights Reserved. | 4000071

Global Business Services Process Perspective

Sourcing Location Guide

October 17, 2013

Sourcing Location Guide: Latin America

By Martijn Geerling, Vamsi Thota and Rupesh Kumar Nerella

Latin America: An OverviewLatin America is gaining in economic importance, evidenced by a number of years of increasing foreign direct investment (FDI) in the region. In 2012, FDI in Chile, Argentina, Dominican Republic, Peru and Colombia grew, but Brazil is the major beneficiary of investment in the region, attracting 46% of total FDI.

Executive Summary Latin America, with its proximity, time-zone and cultural similarities with North America, has a distinct advantage when it comes to marketing itself as a center for global and regional offshoring/nearshoring. Argentina, Brazil, Chile, Costa Rica and Mexico are the Latin American destinations most preferred by companies for Global Business Services (GBS) centers. These locations have always been on the radar of organizations looking to offshore business services, but with the exception of Costa Rica, they have yet to realize their true potential for a wide range of reasons.

According to research by The Hackett Group, the industries with the greatest offshore presence in Latin America are materials, software and related services, and capital goods. These three sectors make up a third of all service centers in the region. Costa Rica enjoys the lion's share of Latin America's business service centers. The countries sending the most work to Latin America are the United States, Switzerland and Germany.

CAPTIVE BPO

Top offshoring destinations in Latin America for captive and BPO centers

Source: The Hackett Group Global Research Center, 2013

MEXICO

GUATEMALA

COSTA RICA

COLOMBIA

BRAZILPERU

URUGUAYARGENTINA

<25

No. of centers

25-4040-5555-7070-85

CHILE


Latin America offers numerous attractive offshoring destinations for European businesses. It has a population of educated young workers with excellent language skills and with cultural similarities to Spain, the UK and Portugal. Latin America is particularly ideal for global organizations’ North American operations. But since 2012, Argentina and Brazil, the two largest countries in Latin America, have been facing strong headwinds due to challenges in their economic and political environments.

Latin America Sourcing Strategies Latin America can support both English and Spanish-speaking customers. Argentina, Mexico and Costa Rica have good English-language capabilities. Guatemalan and Colombian workers' lightly accented Spanish also makes them candidates for regional Spanish-language work in addition to providing services in English. Other countries gaining market share are Nicaragua, Peru and Uruguay.

Latin America can provide a sizable level of labor arbitrage, with savings of up to 20% compared to the US and Western Europe. Though the cost savings in Asia are greater, wages in Latin America are rising more slowly. US companies that set up service centers in Latin American locations save travel time and enjoy real-time support, since the region falls into the same or similar time zones. There is only a three-hour time difference between Rio de Janeiro and its most logical business partner, Portugal. Between Spain and Argentina, the difference is five hours, as opposed to six between Spain and the Philippines. Regional cultures are far more similar to the US or Europe than Asia, a significant further advantage.

South America’s repeated economic crises during the 1990s and 2000s has resulted in high ongoing unemployment rates, making the labor market extremely competitive. The need for economic revival has driven universities and other education facilities to invest in new, high-quality programs. Latin America is probably the only region in the world that offers the combination of Spanish language skills at scale plus cost savings. This works in favor of US markets due to the huge Spanish-speaking population in the US.

Location attractiveness: Latin America

Dimension

Economicconsiderations

28 3.59

37 1.47

27 2.79

27 3.01

6 3.85

29 2.35

Business environment

Workforce

Infrastructure

Risks

Overall

Mexico

Rank Score

Dimension

26 3.69

35 1.49

10 3.57

21 3.14

4 3.99

25 2.51


Workforce

Infrastructure

Risks

Overall

Chile

Rank ScoreEconomicconsiderations

Dimension

18 3.98

9 1.87

21 3.08

18 3.29

33 2.87

31 2.25


Workforce

Infrastructure

Risks

Overall

Costa Rica

Rank Score

Dimension

23 3.76

39 1.44

39 1.99

30 2.96

41 2.73

39 1.83


Workforce

Infrastructure

Risks

Overall

Argentina

Rank Score

HIGHLY COMPETITIVE NOT COMPETITIVE5 4 3 2 1




Dimension

32 3.35

29 1.61

17 3.23

35 2.84

36 2.83

36 2.02


Workforce

Infrastructure

Risks

Overall

Brazil

Rank ScoreEconomicconsiderations

MEXICO

COSTA RICA

BRAZIL

ARGENTINA

CHILE


Updates to Hackett's location sourcing methodologyTo better reflect the decision criteria used by companies today to select a destination for establishing Global Business Services centers, The Hackett Group recently updated the location analysis methodology it has used since 2003. The revised methodology analyzes 42 sourcing countries based on more than 30 key indicators. Five principal dimensions are taken into consideration when calculating factors that may be used to determine location choice. These are:

1. Economic considerations: Location choice is primarily determined by labor arbitrage. In addition, office rent, telecom costs and other major cost components are considered.

2. Business environment: Ease of doing business, wage inflation, economic health, tax burden and quality of life.

3. Workforce quality: Availability and quality of the labor force in the context of factors such as the flexibility and business-friendliness of local labor laws and regulations

4. Infrastructure: Although greatly improved over the last decade, infrastructure quality (office, electricity, transport) may still inhibit location attractiveness when travel time is excessive, services are unreliable or costs are prohibitive. Though weighted to a lesser extent, this dimension is also taken into consideration.

5. Risk assessment: Factors that may be hurdles to reliability and costs, such as potential for fraud, risk of political and social unrest, weak protection of data and intellectual property.

Dimension Category Metric

Economic considerations(60%)

Labor cost Annual salary cost (fully loaded for selected finance, hr, it and procurement positions) in US$

Cost of office space Office rent for grade-A office space

Other cost Average cost of telecom charges, average flight cost to capital

Workforce quality(20%)

Workforce quality Quality of education, labor productivity index

Rigidity of labor law Index of ability to hire and fire personnel

Language availability and quality

Availability of language skills and mastering of skill

Infrastructure availability & quality(10%)

Availability of office infra-structure

Availability of office space

Availability of general infrastructure

General infrastructure, electricity supply, airport availability

Risk assessment(5%)

Fraud risk Corruption perception index

Political risk Political instability index

Data and intellectual property (IP) security risk

Intellectual property (IP) protection, electronic data protection

Foreign-exchange rate risk Index of exchange rate fluctuation (against US$)

Natural disaster risk Natural disaster risk index

Quality of judicial system Enforcing contracts index

Quality of business environment(5%)

General economical climate

Ease of doing business, wage rate inflation, economic health, tax burden

Politics and quality of life Freedom, quality of life index

Key factors considered in location rankings

Source: The Hackett Group, 2013


Costa RicaCosta Rica has become an important nearshore location for US companies as well as a strategic offshore location for outsourcing providers and European companies. According to The Hackett Group’s sourcing location index, Costa Rica is the top choice among Latin American countries for establishing a business services center.

The service sector in Latin America has experienced exceptional growth in the last 15 years. Costa Rica has the largest share, with approximately one-fifth of all captive facilities and BPO centers in Latin America. It offers high-quality bilingual support services at costs that are almost 40% lower than in the US, including wages, total benefit packages, taxes and operations. The country has the highest literacy rate in Latin America, at nearly 96%. With around 60,000 people joining the workforce each year and an unemployment rate of 7.8%, the active labor force numbers about 2 million. Costa Rica's capital city of San José, where most of the country’s universities are located, has a labor force of nearly one million.

Costa Rica sets the standard in the region for the services industry. It has good telecom-munications infrastructure, an educated workforce and favorable policies in support of the industry. The national investment agency, CINDE, is tasked with promoting the country abroad, offering a variety of different types of support to companies entering the Costa Rican market.

Success is breeding its own potential challenges however, as rising wages and inflation are beginning to pose a threat to Costa Rica's business attractiveness. This has already encouraged some companies relocate their call centers or shared services to other countries in the region. Some have reported that Costa Rica is 20% more expensive than any other Central American country. Companies that need skilled English-speaking staff in Costa Rica face the highest costs. Overall, the size of the labor pool is another concern. As more BPOs enter the market, competition for labor is heating up, especially at the middle management level. The country is trying to attract better-paying, knowledge-centric work to raise the value proposition for potential workers.

KEy fACTS: COSTA RiCA

Capital: San José

Employable population: 2.2 million (2012)

Gross Domestic Product (PPP): $12,800 per capita (2012)

GDP growth rate: 5% (2012)

Inflation rate: 4.5% (2012)

Unemployment rate: 7.8% (2012)

Languages spoken: Spanish (official), English

COSTA RICA

COLOMBIA

San José

Strengths Weaknesses

•Geographical and cultural proximity to the US; location coincides with the US's Central time zone

• Well-educated Spanish and English-speaking workforce

• Location suits globalization and de-risking plans of global shared services and BPO companies

• Business-friendly; stable political climate

• Limited labor pool may cause competitive-ness to decline over time

• Lack of up-to-date office space and relatively limited number of airline connections

•Rising wages and inflation

Costa Rica: Strengths and weaknesses


BrazilBrazil is an up-and-coming destination for the offshore and outsourcing market in Latin America. Its principal limitations for international business are the use of Portuguese as the national language and a lack of English-speaking skills among the populace; only 3.4% of the country's population speaks fluent English. With the intention to change this scenario before the start of the 2014 World Cup and Olympics, the Tourism Ministry of Brazil is promoting its new online English course, “Olá, Turista!” Curitiba, Rio de Janeiro and Sao Paulo are among the 12 cities hosting the World Cup and are also preferred destinations in Brazil for GBS operations.

Brazil, like China, is also a large market unto itself, and the majority of service centers there provide support for local operations. High unemployment rates would seem to encourage the development of a robust services industry, particularly if English and Spanish-language skills improve. At present, most of the industry is located in São Paulo, Rio de Janeiro and Itajaí.

Wages in Brazil are on par with those in other preferred Latin American countries such as Mexico, although much higher compared with low-cost destinations in Asia and in Brazil's neighbors to the south. In higher-cost locations like São Paulo, the difference is even larger.

Good IT/telecom infrastructure in Brazil supports the launch of BPOs and knowledge-based process outsourcing activities. The country is South America’s largest telecommu-nications market. Many global BPOs have set up service centers here, but they struggle to find workers with needed language and business skills to interact with customers.

KEy fACTS: BRAZiL

Capital: Brasília



GDP growth rate: 0.9% (2012)

Inflation rate: 5.5% (2012))


Languages spoken: Portuguese (official); less commonly spoken languages include Spanish (border areas and schools), German, Italian and English.

BRAZIL

URUGUAY

ARGENTINA

COLOMBIA

Brasília


•Similar time zones and proximity to US markets

•Good availability of technical skills

•Robust telecommunications infrastructure

•Stable economy

• Limited English-speaking capabilities

•Higher salaries compared to China and India

• Lack of strong IP protection laws and rigid labor laws

Brazil: Strengths and weaknesses


MexicoMexico is a favorable option in Latin America for offshoring and outsourcing service centers. US companies are attracted by Mexico’s geographical proximity and similar or same time zone as many of the companies it serves. Improving infrastructure and a business-friendly government are other attributes in Mexico's favor. Furthermore, the government has provided tax incentives and investment funding to support the growth of the services industry. A combination of a fast-growing pool of university graduates and Spanish-language customer service capabilities are other market drivers for US and European companies. The government offers grants to service providers that conduct training in English and other disciplines. Offsetting these advantages are the population's patchy English-language skills and a high crime rate.

ArgentinaArgentina is growing as a nearshore services location for US companies and markets. The country has an educated Spanish-speaking population and low operating costs. While the US is its largest market due to its similar time zones and relative proximity, Argentina’s linguistic and cultural connections with Europe also facilitate access to Western European markets. Argentina has invested heavily in higher education and has one of the best education systems in South America. The result is a labor pool of skilled professionals specializing in technology and informatics. Argentina offers a generally favorable business framework.

By law, foreign direct investments receive the same treatment as domestic investments. There are no restrictions on foreign-currency wire transfers for the import of goods or services and multinational companies are free to operate in any sector. However, political risk is high. The government tends to make decisions that are viewed elsewhere as anti-business. Confusing policy implementation guidelines facilitate corruption. Argentina’s place among top countries in Latin America for establishing captive or BPO centers is slightly misleading, as most FDI consists of reinvestments of revenues by foreign-owned companies. The economic climate for new investments is much less favorable.

KEy fACTS: ARGENTiNA

Capital: Buenos Aires






Languages spoken: Spanish (official), Italian, English, German, French

ARGENTINA

URUGUAY

BRAZILPERU

Buenos Aires

KEy fACTS: MExiCO

Capital: Mexico City






Languages spoken: Spanish (official) and indigenous languages

MEXICO

COSTA RICA

GUATEMALAMexico City


•Good infrastructure and telecommunication facilities

•Spanish-speaking workforce with good business skills

•Same time zone as much of the US

•Good availability of talent, lower wage rate (half that of US wages)

•High attrition rates

• Lack of English language proficiency

•Higher costs than other options in the region

•High crime rate

Mexico: Strengths and weaknesses


•Similar time zones allow for service delivery to US and European markets

•Modern infrastructure and technology

• Large labor pool for call centers and basic services but also for value-added services such as technical support

•Costs of rent, electricity and telecommunications are low

• Low attrition rate compared to other destinations

•Scores low on economic and political stability compared to other Latin American countries

•High crime rate

•Power outages are common

Argentina: Strengths and weaknesses


ChileHistorically, Chile’s economy has been considered the most competitive in Latin America. The country has gained momentum from an aggressive government campaign to attract high-profile companies with high-tech outsourcing needs. Strengths include political and economic stability, an educated workforce and access to the rest of the world through free trade treaties and agreements to limit or prevent double taxation. These factors position Chile favorably for international companies looking for nearshore or offshore locations for service operations. The country also scores well on indicators such as transparency and quality of life.

On wages, Chile is more competitive than Brazil, Mexico, Costa Rica or Argentina. The main obstacles to becoming a nearshore destination of choice are the country's small population and even smaller number of English speakers. Knowledge-based process outsourcing made up 45% of Chile’s global services sector in 2012.

Strategic implicationsLatin America is an attractive location for companies looking for a nearshore location relative to the United States and Canada or as a regional hub for Latin America itself. Higher labor cost reduces the opportunity for labor arbitrage compared to Asia. Primary considerations for evaluation of Latin America as a location for a service center are its relative proximity to the US and Canada and the availability of English and Spanish- speaking workforces.

Broadly speaking, for companies considering establishing service centers in Latin America, there are three categories of countries to consider:

• Costa Rica, Mexico, Chile: Destinations offering less opportunity for labor arbitrage compared to India but a more established foundation of other business services cen-ters. While in previous years, Argentina was on this list as well, its current economic situation and political risk make the country an unattractive location for the time being.

• Brazil: Has a large domestic market, but as the only non-Spanish-speaking country in the region, Brazil should be evaluated as a destination for services that are less depen-dent on Spanish-language capabilities.

• Guatemala, Columbia, Peru, Uruguay: With smaller economies, these countries have attracted some business services offshoring but not as much as other destina-tions in Latin America. They may serve as an alternative, however, should other desti-nations become saturated. Other countries such as Panama offer the same tradeoffs between good economic conditions and English-language skills but smaller labor pools. Depending on a company’s business footprint in the region, these countries may well be candidates worth considering.

KEy fACTS: CHiLE

Capital: Santiago






Languages spoken: Spanish (official), Mapudungun (indigenous), German, English

ARGENTINA

URUGUAY

BRAZILPERU

CHILE

Santiago


•Quality talent for niche work in specialized domains

• Infrastructure is among the best in the region

•Politically stable with a growing economy

•Competitive wage rates and lower operating costs compared with other countries in Latin America

•Strong macroeconomic indicators: low interest rates, healthy and sustainable GDP growth, healthy reserves and low inflation

• Limited size of labor pool

• Lack of English fluency

• Intellectual property protection is less than robust

Chile: Strengths and weaknesses


Top destinations in Latin America – Strengths and weaknesses

HIGHLY COMPETITIVE NOT COMPETITIVE5 4 3 2 1


MEXICO

COSTA RICA

BRAZIL

ARGENTINACHILE

Dimension

+ Tax burden 2 4.98

36 1.89

15 4.68

33 1.76

+ Wage rate inflation

– Quality of education

– Unemployment rate

Mexico

Rank ScoreDimension

+ Political risk 1 5.00

37 1.01

6 3.78

40 1.12

+ Quality of education

– Total workforce avail.

– Natural disaster risk

Costa Rica

Rank ScoreDimension

+ Tax burden 13

37

20

41

4.50

1.78

3.91

1.22

+ Natural disaster risk

– Quality of education

– Avail. of airport infrastructure

Brazil

Rank Score

Dimension

+ Telecom cost 22 4.18

38 1.35

15 4.14

42 1.00

+ Natural disaster risk

– Rigidity of labor law

– Wage rate inflation

Argentina

Rank ScoreDimension

+ Cost of office space 19 4.43

28 1.04

13 4.50

41 1.09

+ Tax burden

– University-educated workforce avail.

– Avail. of office space

Chile

Rank Score

Geographies served: global (mainly US)Type of service: captives (all services),ITO (all services), BPO (all services)

Comparison of top locations in Latin America


0 5 10 15 20

Costa Rica

Global rank Unweighted scores Weighted scores

18 3.29

3.20

3.14

3.05

3.01

3.00

2.96

2.96

2.84

20

21

26

27

28

30

32

35

ECONOMIC CONSIDERATIONS

WORKFORCE QUALITY INFRASTRUCTURE RISK ASSESSMENT

QUALITY OF BUSINESS ENVIRONMENT 0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5

3.35

3.65

3.76

3.88

3.59

3.70

3.69

3.98

2.83

3.79

2.73

2.74

3.85

3.27

3.99

2.87

1.61

1.33

1.44

1.33

1.47

1.17

1.49

1.87

2.02

1.83

1.83

2.04

2.35

2.87

2.51

2.25

3.23

2.55

1.99

1.33

2.79

2.84

3.57

3.89 3.52 1.72 2.16 2.66

3.08

Brazil

Peru

Argentina

Nicaragua

Mexico

Panama

Chile

Colombia

© 2013 The Hackett Group, Inc.; All Rights Reserved. | 4000071

This publication has been prepared for general guidance on the matters addressed herein. It does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice.

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About the Advisors

Martijn Geerling

Senior Director, Global Business Services Advisory Program, EMEA and Asia

Mr. Geerling has 15 years of consulting experience in strategy development, business process redesign and implementing sourcing strategy, both shared services and outsourcing. During this time he has worked with business services organizations of leading global companies across various industries. Prior to joining The Hackett Group, he worked at KPMG Consulting assisting clients in Europe and Asia with

finance-function transformation, business process redesign, and risk and compliance management.

Vamsi Thota

Director, Globalization Research

Mr. Thota manages The Hackett Group’s research activities involving outsourcing and location analysis. Prior to joining The Hackett Group, he worked the Consumer Business Practice of Deloitte’s Research & Development organization. Previously, Mr. Thota served in various capacities and research roles for companies in primary and secondary market research and analytics.

Rupesh Kumar Nerella

Senior Analyst, Global Business Services

Mr. Nerella conducts research and responds to GBS Advisory Program member inquires in addition to researching sourcing-location trends. Prior to joining The Hackett Group, Mr. Nerella was associated with companies including market research firm Progressive Digital Media and Cygnus Consulting, an India-focused business consulting firm.

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Sourcing Guide Latin America

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