The Real Goal of Infrastructure Outsourcing Should be to Increase Efficiency

tascoBy Bruno Tasco, Frost and Sullivan

The Information &Technology market in Latin America that includes hardware, software and services, is expected to grow 7% per year until 2014. From an economic perspective, with most countries in the region growing less than 3%, IT investments are becoming a key factor to drive up GDP.

Investments in IT are not only increasing but changing to help companies position themselves in the market as value added services providers. The market is facing a new business model era where data or information is not enough to differentiate companies from one another. What makes the difference is how to develop insights that can guarantee the companies a competitive advantage in the market. The market is now driven by Business Technology and not by Information Technology.

Following this change, the CIO’s agenda has as primary initiatives to outsource technology processes, application and infrastructure, as well as understand how company can benefit from cloud computing. It shows a clear path on the new role of the IT executive that needs nowadaysto be more strategic and aligned with the company’s business, without focusing most of his time working on infrastructure issues.

To achieve this goal, Latin American companies are willing to outsource their infrastructure driven not only by cost reduction but also by efficiency and productivity.

There are three main drivers for outsourcing in Latin America. The first one is related to financial advantages to turn CAPEX into OPEX since internal costs of maintaining IT infrastructure are increasing due to the complexity.  Secondly, companies are willing to focus on the core business and faster time to market in order to leverage revenues, new opportunities and increasecustomer value.In the third place, the region is experiencing a very positive business climate as it is receiving great investments from companies opening Datacenters in Latin America or buying local enterprises to enter the market.

The Top Three Obstacles

However, the market has also faced restraints that were related to concerns regarding security over data and not precisely due to low expertise or capacity from player to provide the services. This is changing as the demand and the offer are getting more mature. The top three obstacles in the Latin American market are associated to compliance and regulation from specific verticals like Banking and Finance, to Telecom infrastructure issues to guarantee connectivity availability, and finally to the perception of high complexity and risk to outsource the infrastructure to a third party provider.

Thanks to this scenario, the Datacenter Services Market in Latin America, that only accounts for Colocation, Disaster Recovery, Storage and Dedicated Hosting services,will continue to grow even with the economy not following the same track and even considering that it is already a billionaire market with some commoditize services like Colocation. The total Datacenter Services Market in Latin America in 2012 reached a total of USD 2.3 billion and is forecast to grow 9.6% per year until 2017, by then the total market will represent USD 3.6 billion. Brazil is the leading market in the region with 58.5% market share for Datacenter Services in 2012 and is forecast to reach 59% until 2017.

The market will not encounter a significant change in market participation as Brazil’s market share will remain steady because of maturity in terms of the regular Datacenter services considered in the analysis – Colocation, Disaster Recovery, Storage and Dedicated Hosting. Also, other Latin American countries’ public policies will attract investments for Datacenters, which will push companies to developtheir infrastructure out of Brazil.

Nonetheless, Brazil is still the market to watch as it remains the destination for manyinternational companies willing to invest in Datacentersand foreseeingnew opportunities related to Cloud Computing, Big Data and Mobility.

Indeed, foreign investments have increased considerably in Brazil. In 2009,within the Brazilian Datacenter market, five out of the top 10 companies were domestic-owned firms, representing 20.8 per cent of the total market revenue. While today, only three are Brazilian enterprises that are in addition built on a combination of national and foreign investments, accounting for 12.6 per cent of the total market revenue.

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As a conclusion, it is crucial to keep in mind that Datacenter investments impulse countries not only in the improvement of their IT infrastructure but also in the development of new skilled employeesthat support this framework. The conjunction of these elements is therefore very relevant for the progression of the Latin American economy.

Bruno Tasco is an IT Research Analyst with international research firm Frost & Sullivan. Tasco is based in Brazil and he keeps an eye on information technology industry in Latin America. This is his first column on Nearshore Americas.