Outsourcing Outlook: Latin America

With an estimated population of 559 million, a growing percentage of which is multi-lingual and well-educated, Latin America has become increasingly attractive for all types of business. Its IT services sector has grown rapidly—nearly doubling in the past five years. In Brazil alone, IT has become a more than $9 billion per year market. While such growth rates may not be sustainable during the current global economic crisis, Latin America is a logical place for IT to flourish, especially as the services industry scrambles to recover and regroup following the disastrous terrorist attacks and financial scandals in India.

A former boss used to describe how, as a business school student in the early 1990s, he participated in an international program where he was teamed with other MBA students from Europe, the United States and Latin America. As they worked together on cases, he found that the main area of concern varied, usually depending on the students’ origins. North Americans tended to focus on such aspects as pricing, marketing, and benchmarking; whereas Europeans concentrated on sustainability, environmental and social impacts, and unions. Latin Americans’ main concern was survival ability.

Last year, I found a significant change in the mindset of Latin American MBA students at two Latin American conferences of the Harvard Business School and the London Business School. At both events, the primary topics were innovation, globalization, and vast possibilities for growth. Countries such as Colombia and Peru had experienced unprecedented growth and were seen as offering great potential—much like Brazil, which had achieved a more elevated status as the first (at least in the acronym) of the fast-growing developing BRIC economies, Brazil, Russia, India and China.

Speakers, who included successful entrepreneurs, private equity investors, investment bankers, and former heads of state, concluded that, despite the economic slowdown of the United States, growth opportunities seemed unlimited for most Latin American countries. This optimism was driven in part by high oil prices and a huge demand for commodities, which seemed endless way back then in the first quarter of 2008.

Forum experts said the notable exclusions to continue with this economic expansion bonanza were: Venezuela, for obvious reasons; Mexico, for its strong dependency on the already-struggling U.S. economy; and Argentina, for its erratic economic policies and high risk of defaulting on its foreign debt obligations. (Also read The 25 Most Dangerous Cities for Offshore Outsourcing.)

Last September, a few days before the Lehman Brothers’ collapse, a colleague in Buenos Aires said their operation would survive the pending financial meltdown, because “facing crisis is like a modus vivendi for us, our status quo.”

This ability to weather adverse economic conditions and newly acquired globalization skills should encourage business throughout the world to look at this region with a new set of eyes.

Now, in all fairness, when it comes to global services outsourcing, Latin America should be considered as playing a complementary—not replacement—role to mitigate what a leading analyst calls “India fatigue.” Each Latin-American country presents different opportunities for buyers, and none can meet all needs. The region is fragmented in terms of language skills, talent pool, legal framework, macroeconomic perspectives, and the availability of indigenous providers—all of which vary widely among countries. In addition, there is no such thing as the “other India.” In terms of demographics alone, the region cannot create the next Bangalore or Hyderabad. But we see great potential for smaller regional centers that can evolve and grow the talent base into pools of maybe 5,000 to 10,000 resources—not tens of thousands, like India.

Since many organizations and analyst firms—some much more reliable than others—have assessed the capabilities in Latin America and created country-by-country evaluations, I will not discuss the details of the assets. But I think that it is important to briefly mention Mexico, Brazil, Argentina, and Chile, which are the most frequently cited countries in the region.

Mexico is the only true nearshore. No other two countries in the world have a higher exchange of goods, services, and air traffic than the United States and Mexico. As a result, the international commerce infrastructure is strong. Only Mexico offers the combination of cost, scale, and proximity, and consequently, several prominent U.S. and Indian companies located their nearshore centers in the country. Furthermore, a large number of local Mexican providers have the capability to export services.

Efforts have been made to position Argentina, Brazil, and Chile and their companies as nearshore alternatives. In my opinion, these endeavors tend to miss the big picture, leaving those countries in a very debatable position. For example, a New York-based analyst told me last year: “It takes a 12-hour flight to get to Santiago. Poland is closer.” Yet, by taking the “nearness factor” out of the equation, these countries can present a very attractive proposition for global sourcing.

In the region, Brazil has the unique characteristic of scale. With a 2007 GDP of $1.3 trillion, according to the U.S. State Department statistics, Brazil has the largest domestic market for IT services in Latin America, and therefore the largest talent pool. While Brazil’s workforce is not enough to meet the increasing demand in a growing market, the situation will change in a slow economy, thus freeing up resources for export services. The country has well-qualified capabilities for ERP systems, particularly SAP, as well as mainframe skills, due to the large scale of the financial services sector.

Argentina has a smaller yet highly qualified talent pool that is very suitable for a center-of-excellence approach, particularly involving technologies such as Java, those related to Web 2.0 and SAP. Argentina certainly is on the verge of some difficult economic times, which also creates an opportunity for cost-competitiveness.

Chile is probably the one Latin American country best equipped to face the global recession. Its scale is even smaller than that of Argentina, with 90 percent of its IT service companies having fewer than 50 employees. Despite that, Chile is becoming an attractive place for research and development due to a very IT-savvy workforce and an economy supported by strong fundamentals.

I expect organizations will increasingly look at Latin America as a way to cut their risks and potential losses in India. In the process, I believe they will benefit from the innate ability of Latin America’s people to weather difficult times and come out stronger. As a result, the region will embark on a vibrant new era in IT.

Let’s see how it goes.

Alejandro Camino, vice president of marketing and communications for Softtek, has nearly 20 years of experience working for global IT solutions providers. Softtek is a global provider of IT and business process solutions with operations in North America, Latin America, Europe and Asia.