By Kevin Church
Latin America has received lots of buzz in recent years as a preferred location for shared services operations. An educated and affordable labor pool, business friendly climate, and the necessary infrastructure all make Nearshoring a very attractive option. At the same time, companies establishing new shared services centers have migrated directly to process-centric structures to maximize the benefits of their service-delivery model. One such process model, Purchase-to-Pay (P2P), can provide significant benefits to organizations if an integrated process is established and the appropriate technology is in place to support it. As such, the collaborative workforce and the high rate of technology adoption in Latin America make it an extremely attractive market for P2P solutions.
Companies are increasingly evaluating sourcing options in Latin America. In 2009 the outsourcing industry in Latin America grew by 11.3%, as shown in Nearshore Americas’ and PA Consulting’s “Executive Buyer’s Guide to Nearshore Outsourcing,” 2010. At the 2011 Shared Services and Outsourcing Week, Latin America ranked second as the “primary location of choice” for shared services and outsourcing, ahead of the United States, India, and Eastern Europe. Although India still reigns supreme in terms of cost, global businesses increasingly appreciate factors that are not necessarily captured in cost-to-do business. For instance, according to the Outsourcing-Center study: U.S. Companies Prefer “Farshore” to Nearshore Outsourcing, Send Higher Value Work Abroad, 2012, an increasing number of businesses consider location-specific advantages, such as time zone, when determining the location for their service center. Many Latin American countries also rank above their global competition in terms of overall competitiveness, as shown in Figure 1.
The shared services industry in Latin America is young, but the region has been quick to adopt new technologies. In Latin America, 95% of businesses have either implemented or have plans to implement cutting-edge, real-time strategies, which is significantly higher than the global average of 76%, as noted in Oxford Economics and SAP’s, “Real-time Business,” 2011. Moreover, as determined by the Shared Services in Latin America Survey, 2011, Latin American countries are more receptive to multi-functional shared services centers than the rest of the world, with 72% implementing multi-function versus 47% in other regions in the world. It is important to note that this figure is largely driven by companies planning to install such systems (69%), which gives an indication of the transformation that is happening in the region at this time. Indeed, all signs show that the Latin American shared services industry is rapidly maturing, as multi-national companies global operations centers are added to local and regional plays.
Unfortunately, negative perceptions regarding legal and statutory requirements for invoice processing have perhaps impacted the P2P growth in Latin America. Although there has been an increased amount of public and private collaboration in the region, there is still considerable confusion between a local process variance and a law. As organizations establish their shared services operations, distinguishing myth from fact in the regulatory and legal space is an effort they must approach in a methodical and thorough manner.
Even though there are aspects that position Latin America as a shared services center hub, there are other factors that may pose challenges. The workforce as a whole is not as proficient in languages as other parts of the world. Even though the literacy rate is good in most of Latin America, the educational system varies greatly from country to country, as seen in Figure 2 below. Security is a perennial issue in parts of Latin America. This is improving in some countries in the region (e.g., Colombia) while degrading in other parts (e.g., Mexico). Sometimes these challenges will restrict locating your service center in Latin America, while others can be overcome through careful strategy or extra investment.
The Deloitte survey also found that in Latin America, 90% of existing shared services operations include finance, while only a fraction of that (36%) include supply chain and purchasing. This presents a significant opportunity to establish P2P service centers, which marry the finance and purchasing operations into an integrated process model. The high adoption of technology in Latin America supports P2P structure and enables remote processing. The receptivity for multi-functional processing models provides a collaborative environment to implement the typically difficult P2P structure.
Organizations can take advantage of advances in leading practices, improved invoice processing laws, and new technologies to implement highly efficient P2P operations in Latin America.
Technology advancements have also enabled the deployment of P2P delivery models that would have been challenging to implement just three to five years ago. The adoption and acceptance of vendor catalogues, e-invoicing, and portals have permitted service centers to take advantage of leading practices and support tools to achieve dramatic improvements in shorter time frames. As a result, shared services organizations are able to take advantage of more remote and cheaper locations and still achieve high performance levels.
An often cited challenge to P2P service center implementation in Latin America is the regulations and how they vary across the region. In recent years, some Latin American countries have passed regulations to ease the constraints surrounding invoice processing, but a great deal of confusion still exists. Thus, how these regulations specifically impact P2P service centers can be open to multiple interpretations. Fortunately, by following a proven methodology, organizations can separate myth from fact when establishing a P2P service center.
In order to do so, organizations must review each process from end-to-end to evaluate local process variants and determine legitimate legal requirements. This involves asking key questions at each step in the process in order to understand invoice formats, electronic invoicing regulations, and payment methods. The evaluation also reviews key policies including documentation retention, signature requirements, and storage regulations and then compares them to local laws. Regulations will vary across the region, so this evaluation must be completed for each country that will interact with the service center.
The methodology helps organizations distinguish the validity of exceptions or variants from standard process models. Project teams review each step in the process and focus on the key questions that must be answered, as shown in Figure 3. Multiple iterations of review may need to be undertaken for more complex requirements, but it is typically only a small portion of the total effort. In these cases, variants will need to be evaluated by more knowledgeable resources before the final determination of its validity can be reached.
The approach escalates process variants to specific resource groups based on the complexity of the regulation. These levels include:
- Level 1 – Local in-country staff
- Level 2 – Country investment agencies
- Level 3 – Local or country auditors
The Level 1 review engages local in-country staff to review and validate the identified statutory requirements within their processing areas. Accounting and procurement resources experienced in completing these transactions are familiar with the local processing requirements. This group can help explain the need for the process exceptions and support the review of regulations to validate whether they are truly legal requirements. Including this group in the first level of review also has the benefit of building local buy-in on process decisions and improving the overall acceptance of the delivery model.
Process exceptions are escalated to Level 2 if the initial review fails to verify the validity of the variant. These reviews utilize country specific investment agencies to assist with independent research and evaluations. The complexity of regulations will vary by organization, but often only 1-2% of the exceptions will be escalated. Investment agencies provide access to local expertise to help clarify country laws and work with local authorities to help understand how they are enforced. Examples of agencies in Latin America that provide this support include:
Level 3 evaluations employ external auditors to provide more detailed evaluations of complex regulations or validate the output from Level 1 and Level 2 reviews. External auditors provide local legal and statutory expertise and can be excellent resources to complete final validations on key design decisions. Many auditors have offices across the region and can provide country-based resources to support the evaluation.
With each level using different sources of experience and expertise to determine the validity of process variants, the approach may generate multiple interpretations regarding how the local requirement is to be applied. As such, local authorities should be included to support the final decisions for more complex regulations. Engaging the local authorities early in the process ensures that the processes are compliant and establishes a good working relationship with the officials who will interact with the center once it is operational.
Latin America is well situated to host P2P service centers. Organizations can take advantage of advances in leading practices, improved invoice processing laws, and new technologies to implement highly efficient P2P operations in Latin America. However, companies must be prepared to undertake a complete and thorough analysis of their processes to separate myth from fact during their implementation. There will always be some local variants in the P2P process, but a relentless pursuit to minimize exceptions will maximize returns.
Kevin Church is a Director with ScottMadden, Inc. Church has over 15 years of experience with operations and organization transformations. He is also experienced in leading shared services deployment teams in conjunction with rollout of ERP systems and other leading technologies.