The Latin America IT outsourcing market is set to almost double in value from US$38.08 billion in 2014 to US$65.76 billion by 2019, according to a new study by market research firm TechNavio.
The report, titled “IT Services Market in Latin America 2015-2019“, forecasts market growth to quicken from 9.74% in 2014 to 13.24% by 2019, equating to a healthy compound annual growth rate of 11.55%. This is “natural” and inevitable growth, as more companies in the region become aware of the benefits of IT outsourcing and realize that they do not have the personnel to take advantage of the latest technology themselves, the author of the report, Faizan Akhtar, told Nearshore Americas.
However, Guilherme Campos, IT Industry Analyst at Frost & Sullivan, challenged this prediction, stating that it is unlikely for the market to exceed one-digit growth in this period. “In countries like Colombia, Mexico and Peru there is an expectation for two-digit growth in the years to come,” he told Nearshore Americas, “but Brazil, which accounts for half of the market, is expected to experience one-digit growth of about 7% or 8%. Even considering that some smaller countries are growing by two digits, I think 11.5% is a bit too optimistic.” The IT services market usually grows at about three times the rate of GDP in Latin America, Campos explained. With recent studies forecasting GDP growth of about 2.5% for the next few years in Latin America, the IT services market will not experience two-digit growth, he concluded.
The TechNavio report shows that Brazil continues to dominate the Latin American IT services market with a 50.39% market share, followed by Mexico (15.1%), Argentina (6.43%), and Chile (4.48%), while the rest of Latin America combined accounts for the remaining 23.6%. Of the major players in the market, Campos noted that Brazil is currently losing market share, along with Argentina and Venezuela, while Mexico, Colombia, Peru and to a lesser extent Chile are all growing faster and gaining market share.
While the Latin American market is still “lagging behind other more mature markets like APAC (the Asia-Pacific region) and the United States,” Akhtar noted that businesses in the region have a greater appetite to try out new technologies. “When it comes to new technology like Cloud and mobility these guys are actually going and testing it out,” he said. Campos agreed that Latin American companies are early adopters and that the market makes a good laboratory for the testing of new technology such as cloud. “The main reason way companies turn to cloud is to reduce costs,” he said, noting that there is greater potential for savings in Latin America because the region is not as developed as some of the more mature markets. “I went to IBM’s main global cloud event and they said that some of the most complex cloud projects they have all around the world are in Latin America – in Mexico, Brazil or Argentina – because of the lack of infrastructure and the other challenges in the region,” Campos said.
TechNavio counts banking, financial services and insurance (BFSI); telecoms; the government and public sector; retail and logistics; and oil and gas as the key customer segments for IT services in Latin America. Of these, Akhtar said BFSI is likely to experience the most growth over the next five years. “It’s the one industry that is always at the forefront,” he explained. “They have to really lead when it comes to technology adoption from a business standpoint. There are other verticals that can be at the forefront, but BSFI always leads across any region, especially the banking sector.”
Drivers of Growth
The report states that the key drivers for growth in the region are the increased adoption of offshore business practices, increased broadband penetration, increased IT demand from the government sector, increased centralization of data centers and increased adoption of the latest IT initiatives. However, the author was keen to emphasize that above all “this is natural growth.” Akhtar explained that “as more and more organizations expand and venture into new product categories, they’re going to realize that they’re not fully competent in handling these functions. It’s just a matter of time before they decide to concentrate on their core businesses and ignore these other functions which need to be handled by experts. Yes, companies like to have full control and ownership over everything so they may get some satisfaction from that in the short-term but in the long-term they will feel the expenses and the hurts of managing something that is expected to continue to grow. So it’s just a matter of time before they realize the benefits that come with outsourcing IT services. It’s not a matter of whether it will happen, but when.”
A lack of tech-savvy workers among client organizations is also driving the increase in outsourcing, Akhtar said. New technologies such as cloud and mobility are so crucial to contemporary enterprises because they do not just support business functions but in many cases they’re becoming “one of the things that actually drive business revenue,” he explained. “The market is not prepared for this. It will not be a smooth transition. There are people at the lower level who are trained and used to IT support functions and they might be very good at what they’re doing now, but the market does not have enough skilled workers to handle this up-can-coming technology. That’s exactly why the organizations are turning to external service providers for help because they can provide those skills.” However, insufficient talent is also a problem for IT service providers in Latin America. “Even these companies are facing similar shortages when it comes to skill sets,” Akhtar added. “The market has not had time to prepare the resources to handle this kind of demand.”
Finding the Right Solution
Other challenges cited in the report include clients’ difficulty in choosing right solution and concerns over client satisfaction. With all of the marketing jargon that is thrown around today, the many clients that are new to IT outsourcing may struggle to determine which solutions best meet their needs. While their lack of knowledge of the market will mean some clients cannot understand why they should pay more or less for certain services, “they have to look beyond cost and choose from their options carefully to find what’s right for their business,” Akhtar said. Campos agreed that finding the right solution is problematic in today’s competitive market. “The challenge nowadays is that most IT providers have very similar portfolios. Everybody is focusing on analytics, cloud, mobility, security and social so it’s kind of hard to decide which solution would be better for your company,” he said. “It’s very complicated.”
The key buying criteria cited in the report are: cost-effectiveness, credibility and stability, scalability, scope, service and maintenance. Campos stated that, “as a buyer you need to have control and know that your information is secure so the IT provider needs to be reliable. After this you consider the need for the provider to have infrastructure, good connectivity and competitive prices. But if you just look at these factors it’s very difficult for a company to say one provider is more reliable than another, because they’re all huge. What’s the difference between IBM and Cisco and HP and Microsoft? It’s very hard, even for the big IT companies, to explain the difference between their solutions and those of their competitors.” Faced with this dilemma, most buyers typically make RFPs (requests for proposals) from three to five providers and base their decision primarily upon the prices they are offered rather than the solutions, Campos added.
Forward-thinking is crucial to making the right decision, Akhtar affirmed: “Cloud technology may not seem to make much sense to an organization at this point, but they must look long-term and think future-proof. What’s the point in saving a few dollars in the short-term with a solution that will became obsolete within a few years, or something that cannot be upgraded to the latest technology after a few years? Making that extra effort to find the right solution will pay off in the long term.”
Green IT Services
The report cites the increased adoption of green IT solutions as a key market trend, noting that “increased concerns over the global energy crisis and the focus on judicious use of energy have led the governments and corporates in Latin America to increase their investments in green IT. Currently, organizations are forced to adopt green IT initiatives to deal with certain issues such as increased carbon footprints, high energy bills, and other environmental concerns. As part of this initiative, organizations are seeking to use renewable raw materials, create awareness about water conservation and waste disposal, and increase energy efficiency.”
The paper explained that “the green IT initiative comprises three stages: assessment, planning, and implementation. It requires companies to create a baseline for energy usage and their carbon footprint, develop detailed roadmaps, and implement specific technologies to accomplish them. There is an increase in awareness about green IT among firms in Latin America, and many companies are expected to implement green IT investment plans in the near future.”
Campos disagreed with this assessment. “Green IT was a trend in 2010 and 2011. Everyone was talking about it but in the past two years I haven’t any providers trying to educate the market about it,” he said. “Due to the present economic conditions in Latin America I don’t think this is the moment for green IT to really grow,” he explained. “Green IT solutions typically cost 5% or 10% more and I speak weekly with CIOs and I really doubt that they would pay 10% more for green solutions while they are trying to reduce costs.”