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 Date:7/20/2009

 

World News
Outsourcing Moves
Jeffrey B. Andrews explains the outsourcing shift from India to Latin America.

The outsourcing of functions from the United States is shifting again – and a growing number of those jobs are returning to the Western Hemisphere. The emergence of a growing middle class in India, spurred in large part by the growth of the outsourcing industry, has meant that outsourcing providers are now rigorously competing with other service and technological industries for labor. Outsourcing providers in the subcontinent have been compelled to increase wages to attract and retain employees, and these profitability pressures are leading companies, including Indian-based providers, to establish service centers in Central American and South American countries.

In the past these Latin American service centers were typically established as part of a risk mitigation strategy to develop disaster recovery sites in geographies far removed from the hazards that could interrupt operations at customer-facing service locations. However, outsourcing providers are now expanding their presence in countries such as Costa Rica, Brazil, Argentina and Peru to provide customer-facing services. Locating service centers in Latin America affords many advantages to outsourcing providers, including:


  • The ability to staff call centers and contact centers with multi-lingual personnel who speak English, Spanish and even Portuguese to serve customers. This capability is key to serving clients in Hispanic regions as well as the United States market, particularly given the increase in the Spanish-speaking population in the U.S.;


  • A growing percentage of the population of Latin America is well-educated and technically proficient;


  • Many countries in Latin America are geographically closer to the United States than other offshore locations (such as India, China, the Philippines and Eastern Europe), giving service centers located in Latin America a proximity advantage compared to other offshore locations;


  • Latin America shares many of the same time zones with the U.S., allowing providers to offer same time zone support for its customers in the United States;


  • Latin America shares many cultural similarities with the United States; and


  • Competitive labor costs make these countries a low-cost alternative compared to other offshore locations.


Several Latin American governments are focusing on developing their markets as outsourcing destinations. Looking to the Indian example, these progressive governments are supporting this industry as a means to reap the same social and economic benefits that began in India nearly a decade ago. This strategy includes offering tax incentives to outsourcing providers through mechanisms such as free trade zones and free tax zones in technology parks, as well as tax breaks and facilities allowances for information technology infrastructure. Leveraging their ownership of national utilities, telecommunications networks and other infrastructure, Latin American governments are modernizing and improving these services to support outsourcing providers’ operations, and these initiatives also act to reduce the cost of these services to outsourcing providers.

As with any offshore outsourcing, the establishment of these functions in some Latin American locations carries risks. Careful selection of service locations is critical to avoid known hotspots of political unrest. Engaging knowledgeable local counsel to navigate local laws and regulations is essential, especially when applying for governmental tax incentives as well as to address the often complex and provincial labor issues. Validating infrastructure sufficiency is also essential, since the quality of these services varies not only from country to country, but within a country from region to region and from city to city.

Yet these risks are not deterring outsourcing providers. In recent years several outsourcing providers have expanded their presence in Latin America. IBM, Accenture and Tata Consultancy Services already have established service centers in Latin America (most notably in Brazil and Costa Rica), and other outsourcing providers are following suit. Earlier this year, Hewlett Packard opened a $73 million service center in Panama, and HP officials have indicated that the new facility will employ 1,000 workers within the next five years. Similarly, HCL Technologies opened a development center in the important industrial city of São Leopoldo in southern Brazil. HCL management predicts that the new facility will employ 3,000 workers within the next three years.

As outsourcing providers continue to expand their presence in Latin America, expect that the shift of these functions will be increasingly viewed as a viable addition to any global outsourcing strategy.

Jeff Andrews is a Partner in the Houston office of the global law firm of Thompson & Knight LLP. His practice focuses on structuring outsourcing transactions across a wide range of industries, including energy and energy services, financial services, consumer products, manufacturing, and telecommunications. He can be reached at 713.951.5890 or Jeff.Andrews@tklaw.com