Latin America will have lower attrition rates, wage inflation and currency risk than any other offshore destination for the next ten years, Toby Redshaw, former Global Chief Information Officer at American Express, declared in a discussion on the future of outsourcing at Nexus 2014.
In a rigorous, robust debate on “Driving Better Outsourcing Results Despite Finance, Risk and Compliance Obstacles,” the CXO panelists discussed the best means of minimizing currency risk, whether a win-win buyer-vendor relationship is desirable or even viable, and whether big companies will continue to dominate the IT outsourcing market in Latin America and the Caribbean.
Moderated by Redshaw, the CEO of Kevington Advisors and former Global CIO of American Express, the panel was comprised of Ankur Prakash, Vice President and Chief Operating Officer for TCS Latin American Operations; Robin Shahani, Chief Procurement Officer at TD Ameritrade; and Jose Carlos Lopez Alvear, CFO for IT at Citigroup’s Mexican subsidiary Banamex.
Offsetting Currency Risk
Shahani posited that domestic buyers with little experience in Latin America should aim to ensure that their providers are taking the foreign exchange risk, while making sure they fully understand the commercial implications of that risk. However, major global banks such as Citigroup should have sufficient knowledge and capabilities to take on some of that risk themselves without putting their operations in significant danger, Shahani suggested.
Another important consideration is the need to constantly reassess your business plan in light of changing market conditions, he added. “It’s important to look at the business case over time as well,” Shahani said. “I think people do the business case and then stick it in the cupboard with the contract and the problem with that of course is that three years ahead the business case may be underwater because the cost of living or inflation have gone a way that no one expected, and even with the best planning it may not work out, so it’s important to reassess.”
Prakash advocated a joint-responsibility approach to risk reduction in order ensure a win-win situation, while also minimizing risk by avoiding more volatile markets. “When it comes to currency risk we need to work together with the customer. You cannot have a situation where the financial risk is 100% taken by the buyer or 100% taken by the customer – we need to find a common ground,” Prakash said. “And for the win-win situation to continue and succeed we need to ensure that we abstain from choosing countries where hyper-inflation is a risk, like Venezuela, Argentina, etc.”
Is a Win-Win Partnership Viable?
Redshaw disagreed, arguing that buyers should only look out for themselves in most situations. “I think win-win is nonsense in the commercial world expect in the very few strategic areas where it really matters, like my middleware vendors – because if that stuff blows up it kills my whole company – or the people that run my supply-chain software or run my Cloud. Those are strategic and I want to do special things for them and make their life easier,” Redshaw argued. “But the rest of them I don’t care if they’re bleeding out of both ears financially. I want them to do what I tell them and I’ll switch them out at any given point. I have no desire for a win-win and I don’t care if it’s a win-lose – go and make it up off your other clients – and that’s just the brutal reality of having to run a business.”
Elaborating on the perils of foreign exchange risk in general, Redshaw added, “If you do a deal and the currency goes the wrong way then the reason for you doing the deal just went out of the window and I guarantee you your bosses won’t go ‘oh here’s some more budget, knock yourself out.’” As for minimizing that risk, Redshaw said, “If you’re lucky enough to be a global company that sells stuff in many different countries then your finance people are doing some sort of hedging. You’d have to be living in a cave not to do that. And you have to address one of the fundamental problems of IT which is that IT and finance people don’t communicate well. You have to go to finance and say ‘look, here are all my contracts, I’ve got this much currency risk, could you fold that into your hedging strategy?’ and they will and then you’re covered.
“But if you’re not lucky enough to be in a company like that you have to think of one more thing: not just the currency risk, but also the wage inflation. Because while the wage inflation may not show up in the bills that you get and it may not aggravate the contract you’ve got, what will happen is you’ll get lower quality people and the contract will get spread out because (your providers) are a business,” Redshaw continued.
“Now the beautiful thing about Latin America is that from a wage inflation perspective and a currency-versus-dollars perspective it’s the best place in the world for the next ten years on the macroeconomic forecast. Brazil used to be the only worry and used to have a really strong currency, but their economy is just a disaster and that currency is not going to be strong for another five to ten years. So I think you have a ten-year window where attrition rates, wage inflation and currency risk in Latin America are probably the best in the world, if you’re thinking in dollars.”
Will Big Players Dominate the ITO Space?
The panelists disagreed over the future of the ITO market, with Prakash arguing that will maintain its present plurality: “I don’t think the IT outsourcing market is going to be dominated by big companies. If you look specifically at Latin America at least 80% of the workforce in the IT sector is working in companies which are not considered big companies.”
Shahani, on the other hand, believes that as smaller competitors become more prominent they will simply be bought out by bigger rivals. “I do think that the large players will continue to dominate. The reason for that is that we’re seeing an uptake in mergers and acquisitions activity,” Shahani said. “It’s just like what’s happened with Oracle – the minute that I ever become dependent on a software solution, Oracle’s bought that company, or occasionally SAP has bought that company. In the outsourcing space we see the big players are highly inquisitive. So my sense is that as smaller firms come up and become more and more viable, they will be targets for takeovers.”
Redshaw sided with Shahani, predicting that the market will become a dog-eat-dog world as competition hots up. “I think there’s going to be a real war. The reality of the technology period we find ourselves is that companies emerge, become very competitive and then kill their competitors faster than they ever have before,” Redshaw said. “So I think you’re going to find that the large outsourcing companies that aren’t capable of being cannibals are at real risk … You’re going to have to eat your young at some point to stay effective so I think there’s going to be a really big conflict.”