How Will Rise of Rural Sourcing Impact LATAM Sourcing?

Recent activities suggest the pendulum is swinging back from gaining labor arbitrage advantage through offshore labor expansion for a variety of reasons, such as: Labor arbitrage advantage is …

Recent activities suggest the pendulum is swinging back from gaining labor arbitrage advantage through offshore labor expansion for a variety of reasons, such as:

  1. Labor arbitrage advantage is tapped out. Firms have been building out their low-cost labor centers globally for over a decade. Wages in traditional offshore locations have begun rising faster than inflation.
  2. The new trend calls for specialty skills expansion. Numerous technology firms point to skills shortages for topics such as analytics/data science and security while agile development methodologies accelerate in concert with attrition to the cloud.
  3. Narrowing global wage gaps. As labor rates rise in traditional offshore locations, the arbitrage gap narrows, compelling global firms to more closely scrutinize the hidden costs to global deployment. Process inefficiencies due to time zone differences, language differences and the like make a compelling argument for finding pockets of labor expertise closer to the customer engagement.

Coming Back Onshore

Skills shortages and the need for more localized low-cost labor seem to compel technology firms to recruit more aggressively within the U.S. at the university level. Universities in remote and low-cost geographies present a compelling win-win scenario for the pressure points articulated above. Newly minted college graduates who selected the university due to the rural lifestyle may find it attractive to stay in the area.

Proof points for this statement include the following:

  1. In 4Q13, Cognizant announced it would hire 10,000 U.S.-based employees over the next three years, including 750 in College Station, Texas, where the firm will move its operations headquarters. Cognizant will invest US$150,000 in STEM education grants over the next three years at Texas A&M University.
  2. IBM broke ground in 3Q13 on a service center in Baton Rouge, La., near Louisiana State University, to bring 800 jobs to the region, an example of targeted efforts by states such as Louisiana to build out high-skilled services jobs to boost the local economy.
  3. In 4Q13, Wipro committed US$2.8 million to Michigan State University for STEM programs focusing on Chicago public schools as a long-term expansion of its global recruiting and training initiatives in onshore delivery markets such as the U.S.
  4. HCLT announced in 3Q13 that it would add an additional 200 employees to its delivery center in Cary, N.C., in the heart of Research Triangle Park. The firm also continues to expand its delivery centers in Michigan, Washington and Puerto Rico in addition to higher-cost U.S. locations such as New Jersey and New York.

The Knock-On Effect

The implications to LATAM outsourcing operations could become acute. TBR research shows bifurcation in the offshoring trend to lower-cost transactional functions — or a pure labor arbitrage hiring component — and one for building scale in mission-critical skill sets in competency centers or Centers of Excellence. If the skills gap remains, firms will have a more compelling argument to pivot their attention to “near college” locations onshore at the low end of the domestic cost of living scales. This in turn, will choke off opportunities in low-cost hubs such as Brazil and India as the high-skilled jobs move onshore and the lower-skilled jobs fade due to services automation (similar to the way ATMs reduced the need for bank tellers).

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A substantial amount of research evaluates the shift in work/life balance priorities among millennials, or those now graduating college. The “always on” nature of their relationship with technology likewise blurs the lines with work/life balance. Where they live and how easily they can move between personal and professional tasks has far greater importance to them than it does to the aging baby boomers starting to exit the workforce in growing numbers. Millennials wanting to stay in the remote geographies of their universities will become key targets for technology companies with progressive human capital management strategies, collaborative research activities with the universities and the appropriate cultural viewpoints on work/life balance to appeal to the “post-Facebook” generation of workers.

How, then, do LATAM offshore service providers combat these trends to avoid losing share?

  1. Enhance workforce skills. The speed of transition to cloud and analytics in the technology industry caught many by surprise, and the need for those skills will be acute. Lowering utilization rates and increasing continuing education spend will be required to maintain a workforce with the requisite skills to meet customer demand.
  2. Invest in improved Unified Communication and Collaboration (UC&C) capabilities. The hidden cost of global collaboration will be given greater scrutiny. Inefficiencies related to global collaboration will become a far greater liability moving forward.
  3. Embrace the change. Establishing a presence in low-cost technical college communities can become the “tip of the arrow” to retain the business streams currently in place in the LATAM locations. Business and university partnerships can happen anywhere, and are increasingly happening between American Universities and foreign businesses. 
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