The use of global delivery models is now common practice within the business process outsourcing (BPO) market and Latin America is becoming an increasingly popular destination for IT services and BPO vendors who are looking to provide low-cost services to clients, reveals a new report by independent market analysis firm Datamonitor. 

The report, titled “Global Delivery Locations for BPO – Focus on Latin America”, looks at the factors driving this trend, discusses the main players currently active in the market and analyses possible strategies for including Latin America in a coherent global sourcing model. It also investigates the key BPO delivery locations within this region and the main business factors that will help companies choose the destination that best suits their needs.

“The last two years have seen a marked increase in the number of outsourcing vendors utilising Latin America as a low-cost delivery location”, says Ed Thomas, associate analyst for BPO at Datamonitor and author of the report. “Key examples include major players such as IBM, EDS, Tata Consultancy Services and ACS, all of which have significantly increased their presence in the region since 2006, while providers such as Infosys and Cognizant have opened centers in Latin America for the first time.”

Latin America has a competitive advantage due to proximity and linguistics

Due to its geographical proximity, Latin America can be used as a nearshore location to serve customers in the US. This enables client and vendor to maintain a close relationship, including more face-to-face meetings, and also means that problems can be solved in real-time, without the delays that inevitably occur when work from the US is offshored to more distant locations such as India or China.

Operating in Latin America gives clients access to a major pool of native Spanish and Portuguese speakers. Particularly in the case of customer-facing BPO functions, this offers the potential to provide better and more efficient services to the Hispanic community in the US, as well as opening up the Spanish and Portuguese markets in Southern Europe. Providing local language services also improves the quality of services offered to end users, increasing customer retention.

Many vendors are using Latin America as part of a multi-shore delivery model

Thomas points out that, in the past, IT services vendors tended to pick one offshore location, usually India, and deliver a range of services from there. “Now, more and more companies are adopting a multi-shoring strategy, whereby they set up centers in a number of countries in different geographic regions. This not only allows them to provide services from closer to the customer, but also reduces the risks associated with housing all their operations in one location.”

Many vendors have expressed to Datamonitor a fear of ‘putting all their eggs in one basket’, mindful of the chaos that could be caused should India’s economy crash or wage inflation in the country hit new peaks. In this context, Latin America is an attractive alternative location for vendors with an existing presence in India.

Skill shortages and concerns over stability will hinder the region’s growth

One of the main drivers behind the rise of India to its position as the pre-eminent global sourcing location was its vast reserve of skilled labor. Similarly, up-and-coming locations such as China and Russia offer large untapped labor pools, enabling vendors to scale up a delivery center quickly.

Customers may find that Latin American countries are unable to deliver the kind of scale available in these other, more populous regions. This is partly due to simple population size, but it is also the case that regions like India and Russia churn out more technical graduates than their counterparts in Latin America.

Latin American countries can circumvent this potential problem by offering highly skilled services in niche areas. Also, the region’s positioning as primarily a nearshore location necessitates a different operating model from the one utilised in India, for example, in which scale is of lesser importance.

Thomas notes that Latin America also still has some perception challenges to overcome in its development as a sourcing location. “Concerns about stability (both economic and political) and security continue to hang over many Latin American countries, including Brazil, Mexico and Colombia. This may cause vendors to think twice before setting up there.”

The recent activity in Latin America is set to continue

All of the vendors Datamonitor spoke to indicated that they expected the recent expansion of Latin America’s IT services and BPO sector to continue for the foreseeable future, with more vendors moving into the market.

The investment by international IT services and BPO providers has tended to focus around certain countries (most notably Mexico, Brazil and Argentina) and certain locations within those countries (including Mexico City, Monterrey and Guadalajara in Mexico, Sao Paulo and Rio de Janeiro in Brazil and Buenos Aires in Argentina). There are many other cities within those tier one countries which could be tapped, and also many other countries within Latin America which are still to be utilised to their full potential.

The second tier Latin American countries identified by Thomas in the report (including Chile, Colombia, Costa Rica, Panama and Uruguay) in some cases still represent relatively unknown quantities for many within the IT services and BPO industry. These locations each have their own unique set of strengths and weaknesses, but are all viable sourcing locations, many of which have yet to be fully exploited.