Largely unnoticed by many site selection gurus, the offshore services industry in Canada has grown at a staggering rate over the last decade. According to Statistics Canada, between 1998 and 2006 the Canadian call center industry increased in revenue by 27% annually. But now the rise of new locations in Latin America and Eastern Europe as well as the recent economic recession may necessitate a change of strategy.
Analysts across the board are calling for a move into higher value services like IT – they say the current call center-focused model is just not profitable for the country anymore. But is Canada’s call center industry really on life support? We sat down with Peter Ryan, Lead Analyst for BPO and Contact Center Outsourcing at Ovum to find out.
Canada’s strengths as a call center destination have always been the strong infrastructure and fully bilingual workforce. But as other offshore locations ramp up their capabilities, that competitive advantage is ever diminishing – and it’s mainly due to high costs. Some factors that make Canada much more expensive than its competition:
- Strong Canadian dollar: The Canadian dollar is much too high for companies to take advantage of, and it has been for years now. As Ryan says, “When companies initially came in, the rate was 65 or 70 cents US to the Canadian dollar, and at that time there were huge cost savings. But now for an outsourcer, a margin that used to be around 20% is substantially less”. The Canadian dollar has steadily appreciated since 2003 and has been hovering slightly above parity with the US dollar for the last year.
- Natural resources: The Canadian economy is currently driven by the exploding natural resources industry, which is soaking up all the labor that used to feed the call centers. The large oil companies working out of Alberta can pay young workers much more than the CAD$ 12 to 15 per hour that they can expect from most call centers. Contact Center Canada (CCC), a government-funded coordinator of the call center industry’s HR initiatives, reported that 34% of facilities in Canada are unable to find the correct numbers of staff with the right skills.
- Lack of call center properties: Another contributor to growing costs is that call center properties are much more abundant in the US than in Canada. “Properties like unused malls or car dealerships that can be converted into call centers – we just don’t have many of those here”, says Ryan, who lives in Montreal. “But there are plenty in the US now, especially after the recession”.
Canada’s substantially higher costs are a strong argument for ‘onshoring’ in the US, a trend that has been gaining momentum in recent years. In fact, Ovum’s last study on Canada completed two years ago found that with all factors considered, the US is now a cheaper location than Canada to source work from.
Many of the companies closing operations in Canada are re-opening them in select locations in Latin America and the Caribbean, where English proficiency is high but overhead costs are not.
On the Ground
Although the call center industry in Canada still looks healthy, there are indications that resources are tight. Large scale layoffs and closures happen occasionally such as late last year when Convergys announced that it was axing its Winnipeg center – a reduction of 500 employees. BPO company Aditya Birla Minacs also closed its center in Nova Scotia earlier this year, laying off 200 people. Many of the companies closing operations in Canada are re-opening them in select locations in Latin America and the Caribbean, where English proficiency is high but overhead costs are not.
Part of the reason could be that Canada suffers from a visibility problem. Some analysts have remarked that the Canadian offshoring brand is just not out there. “It’s true, there’s never been a Brand Canada”, says Ryan. “Canada has always had a fractured approach to marketing, with Ontario selling itself or New Brunswick selling itself. It’s very province-based”. Investment incentives are also always specific to each province.
In spite of all this, it’s important to remember that there are contact centers thriving in Canada. Take Teleperformance Canada, which employs over 2000 workers and has offices in many of the major cities in the country including Toronto and Montreal. However it’s equally important to note that such a level of success is possible in Canada only with the amount of investment that Teleperformance can afford. Canada’s high costs make it difficult for smaller operations with limited capital to compete with firms in cheaper locations. But if you can get past that high investment, Canada can produce high returns.
“The advantage that Canada still has over other locations is a higher level of data protection, and laws governing piracy and IP rights”, says Ryan. Quality of work performance, and cultural affinity to the US are also important, especially in the call center industry.
So should the country deliberately move into higher value services like IT? A recent report by Statistics Canada stated that technology, research and higher education institutions were increasingly significant for the country’s offshore services industry. According to the report, “The Canadian telephone call center industry should move beyond the lowest labor cost phase of the industry life cycle. It is becoming important for call centers to offer higher value-added in terms of skills, both technical and linguistic, and technology”.
And would the profit margins increase if there was this country-wide move to value added services? “They definitely would, but the problem again is that your cost base is going to increase as well”, says Ryan. “These days it would be difficult to do a large scale IT service operation from Canada, because in India or Latin America you can find engineers just as qualified, at a lower price. But I think there is a move in Canada towards higher value”.