The Nearshore Gains More Ground in Total Cost Comparison to India, Says New HfS Report

Report cites scalability concerns but recognizes Latin America’s IT skills and maturity of services

By Dennis Barker

A new report on Latin America IT outsourcing affirms what many providers and buyers have been telling us for the past year or so: The region should be part of your global sourcing strategy.

“How Latin America Powers Global IT Delivery,” an industry report released this week by HfS Research (the folks at Horses for Sources), finds that while Nearshoring is no guarantee of success or savings, the region offers “a thriving technology economy; competitive software development rates; industry innovation; and the potential to scale in several countries.”

We asked Euan Davis, HfS research director, if he discovered anything during his investigation that surprised him about what we call the Nearshore.

“I suppose the one thing that surprised me is how mature Latin America is in terms of services,” he said, “and I was surprised at the number of indigenous vendors supplying those services. India of course has a thriving local vendor landscape, which you don’t find in the Philippines or China at that scale. But Latin America has several providers who can scale up to serve Nearshore delivery.”

We hear a lot about concerns over scalability and whether Latin America, with the possible exceptions of Brazil and Mexico, will be able to effectively handle the expected increase in outsourcing coming their way. This is one reason many on the buy side advocate a multi-nation approach. As the HfS report points out by way of two examples:

“Costa Rica, which has the most educated population on the continent, has just four million inhabitants, 300,000 of them already working in the services-for-export industries. Chile, with a stable democracy, strong infrastructure, and the highest per-capita income in the Americas after the US and Canada, has just 16 million inhabitants. Both have proven difficult places to recruit in for recent corporate multi-national arrivals. This quote from one interview summed up perceptions about the region: ‘We like our supplier in Argentina …can they scale? I am not so sure, but for now it works.’”

Targeting Brazil and Mexico

The report explores differences between the countries but focuses most heavily on the two majors, Brazil and Mexico, with a good section on Argentina as well. The summaries of each country are concise but dense with caveats, tips, and other useful info. HfS has developed a tool to measure the “offshore readiness” of each country, which produces some interesting-looking graphs. The charted data doesn’t always agree with what we’ve been hearing—for example, Chile lacks enough English speakers to meet demand, and yet its language ranking in the report is about the same as Mexico, where we rarely hear complaints about finding enough English-speaking workers.

Davis noted that while employee attrition is not as much a problem in Latin America as it is in India, replacing workers in Latin America can take longer because “there’s not that conveyor belt of new workers. People tend to stick around.”

The Cost Factor

Attrition has to be factored into the total cost equation, Davis said, as well as “soft factors” and overhead costs, like travel, time spent managing an offshore team, telecommunications, and personnel required for quality control. Add those things up and India’s current cost advantage is not that big of an advantage. “HfS research estimates the difference in TCO at around 10-15% between most Latin America activity (whether IT or BPO related) and India-originated services and this figure was borne out by our interviews,” the report says.

That 10-15% might seem low to some observers, but the ultimate point is that the India cost advantage is fleeting.

“Labor arbitrage is a three-year love affair,” Davis said.

One of the highlights of the report, but also mildly disappointing: Davis and colleagues have collected quotes from real live participants in the day-to-day world of outsourcing. (Anyone who has tried to get buyers to speak on the record knows this is not easy.) These verbatims have the weight of authenticity but also for the most part provide valuable insight succinctly.

However, mildly disappointing because as a neutral observer, one hopes for an occasional good, juicy, critical comment to liven things up a bit. (People in the Nearshore community tend to be exceptionally discreet and polite. Which is admirable, but doesn’t make for dramatic tension or exciting copy.) Alas, there is nothing reported here that’s likely to cause sparks to fly.

The report is available for free download at: www.nearshore.com