In addition to the thawing of the market and the increased momentum provided by the economic recovery, 2010 is becoming a very significant year in outsourcing. Buyers across the globe will spend in excess of US$100 billion annually on IT, business process sand knowledge process services provided from offshore locations. This is the first year that the global services sourcing market will cross the $100 billion mark. While Latin America currently accounts for less than a tenth of the market, there is a lot of promise.
Early this year, Everest conducted a survey of the market to gauge what plans buyers and service providers had in store for locations across the globe. A total of 366 respondents shared their current scale of offshoring, how they planned to change the scale and across which locations.
More than 20 percent of those who plan to expand in India also plan to grow their scale in Mexico and/or Brazil.
Buyers Build Bigger Footprint
Across all segments of buyers, we saw plans of expanding offshore scale. While the extent of expansion differed, in aggregate more than 75 percent of buyers will expand their scale of offshoring. Large adopters, which have already reaped the benefit of offshoring and anticipate a surge in demand, plan to significantly grow offshoring. More than 90 percent of respondents in this group plan to grow by over 500 FTEs. This also represents an improvement in the business sentiment and many organizations believe that the worst of the economic crisis is now behind them.
A similar trend is visible among service providers, although with a notable emphasis on rapidly growing scale. The smaller, more regional or niche service providers reported planned increases of <500 FTE in the next two years. However, the larger service providers who also tend to be multi-geography reported planned increases in excess of 5,000 FTE in the next two years. In general, service providers reported a scaling plan which was approximately 1.5-2.0X that reported by buyers.
Brazil and Mexico Expansion
Approximately 25 percent of our respondents said they currently sourced services from Latin America. When this is lower when compared to India (75 percent), it is much closer to Philippines (40 percent) than expected. This suggests that many companies are already leveraging Latin America delivery in some form – although it is at a much smaller scale than Philippines. This pre-existing foothold is important, because companies (especially buyers) are much more comfortable and aggressive in expanding in a geography they already source services from and less so in terms of entering new geographies.
The most interesting trend relates to the locations that buyers picked as key expansion geographies: Brazil and Mexico. More than 20 percent of buyers indicated that they planned to expand in one or both of these countries. Further, most of those who planned to expand in Brazil or Mexico were large organizations, which suggests that a combination of supporting local operations and leveraging this platform to support North American or European businesses is the likely operating model.
Latin America and India Synergy
Most organizations plan to continue using India as a key delivery location and plan to expand their presence. This is not surprising, given the legacy experience that buyers in particular have, the credible scale and experience of service providers from India, and the overall value proposition. However, contrary to impressions, the expansion in India is not impacting expansion in other geographies. In fact, more than half of companies who plan to expand in India will also expand in at least one other country. The top five geographies of expansion for companies growing their presence in India are: Philippines, China, Malaysia, Mexico and Brazil. More than 20 percent of those who plan to expand in India also plan to grow their scale in Mexico and/or Brazil.
The mode in which this expansion will happen is interesting. Less than half of those who plan to expand in Brazil currently leverage the country as a delivery location. A significant portion of the growth in Brazil, therefore, will be driven by buyers who have not leveraged the country previously and are entering the market. This may mean that the initial volumes are small, but the significant number of new entrants creates a large opportunity for service providers. In contrast, only those buyers who currently source services from Mexico plan to increase their scale in the country.
Concerns related to the security environment in Mexico have persisted. While services delivery operations (service providers or captives) have not been impacted at all, and the violence is restricted to a few locations, the sensitivity to this aspect is at a sustained high. Service providers based in Mexico and the government need to more proactively manage these perceptions. Especially for service providers, this may create an impediment to being able to penetrate new companies.
- Demand for offshore services will grow in the next two years as buyers reinvigorate and accelerate plans for expansion. Most organizations will expand offshoring, with large adopters being much more aggressive than other segments
- In addition to growing in India, most organizations plan to growth in other geographies. A portion of this growth will be in Latin America, mainly in Brazil and Mexico. Brazil will see several new entrants in the next two years, while growth in Mexico will mainly be driven by companies who are already in the country
- Service providers based in Latin America have a unique opportunity to position themselves for this wave of offshore expansion and interest in Latin America. However, they will carefully need to manage perceptions and positioning to maximize gain from this opportunity
Anand Ramesh is Research Director for Global Sourcing at Everest Group and a member of the 2010 Nearshore Americas Power Rankings.