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Global Business Services Process Perspective I The Hackett Group I 1

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Global Business Services Process Perspective
Sourcing Location Guide
October 17, 2013
Sourcing Location Guide: Latin America
By Martijn Geerling, Vamsi Thota and Rupesh Kumar Nerella
Latin America: An Overview
Latin America is gaining in economic importance, evidenced by a number of years of
increasing foreign direct investment (FDI) in the region. In 2012, FDI in Chile, Argentina,
Dominican Republic, Peru and Colombia grew, but Brazil is the major beneficiary of
investment in the region, attracting 46% of total FDI.
Executive Summary
Latin America, with its proximity, time-zone and cultural similarities with North America,
has a distinct advantage when it comes to marketing itself as a center for global and
regional offshoring/nearshoring. Argentina, Brazil, Chile, Costa Rica and Mexico are the
Latin American destinations most preferred by companies for Global Business Services
(GBS) centers. These locations have always been on the radar of organizations looking to
offshore business services, but with the exception of Costa Rica, they have yet to realize
their true potential for a wide range of reasons.
According to research by The Hackett Group, the industries with the greatest offshore
presence in Latin America are materials, software and related services, and capital
goods. These three sectors make up a third of all service centers in the region. Costa
Rica enjoys the lion's share of Latin America's business service centers. The countries
sending the most work to Latin America are the United States, Switzerland and Germany.
CAPTIVE BPO
Top offshoring destinations in Latin America for captive and BPO centers
Source: The Hackett Group Global Research Center, 2013
MEXICO
GUATEMALA
COSTA RICA
COLOMBIA
BRAZIL
PERU
URUGUAY
ARGENTINA
<25
No. of centers
25-40
40-55
55-70
70-85
CHILE
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Latin America offers numerous attractive offshoring destinations for European
businesses. It has a population of educated young workers with excellent language skills
and with cultural similarities to Spain, the UK and Portugal. Latin America is particularly
ideal for global organizations’ North American operations. But since 2012, Argentina and
Brazil, the two largest countries in Latin America, have been facing strong headwinds
due to challenges in their economic and political environments.
Latin America Sourcing Strategies
Latin America can support both English and Spanish-speaking customers. Argentina,
Mexico and Costa Rica have good English-language capabilities. Guatemalan and
Colombian workers' lightly accented Spanish also makes them candidates for regional
Spanish-language work in addition to providing services in English. Other countries
gaining market share are Nicaragua, Peru and Uruguay.
Latin America can provide a sizable level of labor arbitrage, with savings of up to 20%
compared to the US and Western Europe. Though the cost savings in Asia are greater,
wages in Latin America are rising more slowly. US companies that set up service centers
in Latin American locations save travel time and enjoy real-time support, since the region
falls into the same or similar time zones. There is only a three-hour time difference
between Rio de Janeiro and its most logical business partner, Portugal. Between Spain
and Argentina, the difference is five hours, as opposed to six between Spain and the
Philippines. Regional cultures are far more similar to the US or Europe than Asia, a
significant further advantage.
South America’s repeated economic crises during the 1990s and 2000s has resulted in
high ongoing unemployment rates, making the labor market extremely competitive. The
need for economic revival has driven universities and other education facilities to invest
in new, high-quality programs. Latin America is probably the only region in the world that
offers the combination of Spanish language skills at scale plus cost savings. This works in
favor of US markets due to the huge Spanish-speaking population in the US.
Location attractiveness: Latin America
Dimension
Economic
considerations
28 3.59
37 1.47
27 2.79
27 3.01
6 3.85
29 2.35
Business environment
Workforce
Infrastructure
Risks
Overall
Mexico
Rank Score
Dimension
26 3.69
35 1.49
10 3.57
21 3.14
4 3.99
25 2.51
Business environment
Workforce
Infrastructure
Risks
Overall
Chile
Rank Score
Economic
considerations
Dimension
18 3.98
9 1.87
21 3.08
18 3.29
33 2.87
31 2.25
Business environment
Workforce
Infrastructure
Risks
Overall
Costa Rica
Rank Score
Dimension
23 3.76
39 1.44
39 1.99
30 2.96
41 2.73
39 1.83
Business environment
Workforce
Infrastructure
Risks
Overall
Argentina
Rank Score
HIGHLY COMPETITIVE NOT COMPETITIVE 5 4 3 2 1
Source: The Hackett Group Global Research Center, 2013
Economic
considerations
Economic
considerations
Dimension
32 3.35
29 1.61
17 3.23
35 2.84
36 2.83
36 2.02
Business environment
Workforce
Infrastructure
Risks
Overall
Brazil
Rank Score
Economic
considerations
MEXICO
COSTA RICA
BRAZIL
ARGENTINA
CHILE
Global Business Services Process Perspective I The Hackett Group I 3
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Updates to Hackett's location sourcing methodology
To better reflect the decision criteria used by companies today to select a destination for
establishing Global Business Services centers, The Hackett Group recently updated the
location analysis methodology it has used since 2003. The revised methodology analyzes
42 sourcing countries based on more than 30 key indicators. Five principal dimensions
are taken into consideration when calculating factors that may be used to determine
location choice. These are:
1. Economic considerations: Location choice is primarily determined by labor arbitrage.
In addition, office rent, telecom costs and other major cost components are considered.
2. Business environment: Ease of doing business, wage inflation, economic health, tax
burden and quality of life.
3. Workforce quality: Availability and quality of the labor force in the context of factors
such as the flexibility and business-friendliness of local labor laws and regulations
4. Infrastructure: Although greatly improved over the last decade, infrastructure quality
(office, electricity, transport) may still inhibit location attractiveness when travel time is
excessive, services are unreliable or costs are prohibitive. Though weighted to a lesser
extent, this dimension is also taken into consideration.
5. Risk assessment: Factors that may be hurdles to reliability and costs, such as
potential for fraud, risk of political and social unrest, weak protection of data and
intellectual property.
Dimension Category Metric
Economic
considerations
(60%)
Labor cost Annual salary cost (fully loaded for selected finance,
hr, it and procurement positions) in US$
Cost of office space Office rent for grade-A office space
Other cost Average cost of telecom charges, average flight cost
to capital
Workforce quality
(20%)
Workforce quality Quality of education, labor productivity index
Rigidity of labor law Index of ability to hire and fire personnel
Language availability and
quality
Availability of language skills and mastering of skill
Infrastructure
availability &
quality
(10%)
Availability of office infra-
structure
Availability of office space
Availability of general
infrastructure
General infrastructure, electricity supply, airport
availability
Risk assessment
(5%)
Fraud risk Corruption perception index
Political risk Political instability index
Data and intellectual
property (IP) security risk
Intellectual property (IP) protection, electronic data
protection
Foreign-exchange rate risk Index of exchange rate fluctuation (against US$)
Natural disaster risk Natural disaster risk index
Quality of judicial system Enforcing contracts index
Quality of business
environment
(5%)
General economical
climate
Ease of doing business, wage rate inflation, economic
health, tax burden
Politics and quality of life Freedom, quality of life index
Key factors considered in location rankings
Source: The Hackett Group, 2013
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Costa Rica
Costa Rica has become an important nearshore location for US companies as well as a
strategic offshore location for outsourcing providers and European companies. According
to The Hackett Group’s sourcing location index, Costa Rica is the top choice among Latin
American countries for establishing a business services center.
The service sector in Latin America has experienced exceptional growth in the last
15 years. Costa Rica has the largest share, with approximately one-fifth of all captive
facilities and BPO centers in Latin America. It offers high-quality bilingual support
services at costs that are almost 40% lower than in the US, including wages, total
benefit packages, taxes and operations. The country has the highest literacy rate in Latin
America, at nearly 96%. With around 60,000 people joining the workforce each year and
an unemployment rate of 7.8%, the active labor force numbers about 2 million. Costa
Rica's capital city of San José, where most of the country’s universities are located, has
a labor force of nearly one million.
Costa Rica sets the standard in the region for the services industry. It has good telecom-
munications infrastructure, an educated workforce and favorable policies in support of the
industry. The national investment agency, CINDE, is tasked with promoting the country
abroad, offering a variety of different types of support to companies entering the Costa
Rican market.
Success is breeding its own potential challenges however, as rising wages and inflation
are beginning to pose a threat to Costa Rica's business attractiveness. This has already
encouraged some companies relocate their call centers or shared services to other
countries in the region. Some have reported that Costa Rica is 20% more expensive
than any other Central American country. Companies that need skilled English-
speaking staff in Costa Rica face the highest costs. Overall, the size of the labor pool is
another concern. As more BPOs enter the market, competition for labor is heating up,
especially at the middle management level. The country is trying to attract better-paying,
knowledge-centric work to raise the value proposition for potential workers.
KEY FACTS: COSTA RICA
Capital: San José
Employable population: 2.2 million (2012)
Gross Domestic Product (PPP): $12,800
per capita (2012)
GDP growth rate: 5% (2012)
Inflation rate: 4.5% (2012)
Unemployment rate: 7.8% (2012)
Languages spoken: Spanish (official),
English
COSTA RICA
COLOMBIA
San José
Strengths Weaknesses
• Geographical and cultural proximity
to the US; location coincides with
the US's Central time zone
• Well-educated Spanish and English-
speaking workforce
• Location suits globalization and
de-risking plans of global shared
services and BPO companies
• Business-friendly; stable political
climate
• Limited labor pool may cause competitive-
ness to decline over time
• Lack of up-to-date office space and relatively
limited number of airline connections
• Rising wages and inflation
Costa Rica: Strengths and weaknesses
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Brazil
Brazil is an up-and-coming destination for the offshore and outsourcing market in Latin
America. Its principal limitations for international business are the use of Portuguese
as the national language and a lack of English-speaking skills among the populace; only
3.4% of the country's population speaks fluent English. With the intention to change this
scenario before the start of the 2014 World Cup and Olympics, the Tourism Ministry of
Brazil is promoting its new online English course, “Olá, Turista!” Curitiba, Rio de Janeiro
and Sao Paulo are among the 12 cities hosting the World Cup and are also preferred
destinations in Brazil for GBS operations.
Brazil, like China, is also a large market unto itself, and the majority of service centers
there provide support for local operations. High unemployment rates would seem to
encourage the development of a robust services industry, particularly if English and
Spanish-language skills improve. At present, most of the industry is located in São Paulo,
Rio de Janeiro and Itajaí.
Wages in Brazil are on par with those in other preferred Latin American countries such
as Mexico, although much higher compared with low-cost destinations in Asia and in
Brazil's neighbors to the south. In higher-cost locations like São Paulo, the difference is
even larger.
Good IT/telecom infrastructure in Brazil supports the launch of BPOs and knowledge-
based process outsourcing activities. The country is South America’s largest telecommu-
nications market. Many global BPOs have set up service centers here, but they struggle
to find workers with needed language and business skills to interact with customers.
KEY FACTS: BRAZIL
Capital: Brasília
Employable population: 107.1 million (2012)
Gross Domestic Product (PPP): $12,100
per capita (2012)
GDP growth rate: 0.9% (2012)
Inflation rate: 5.5% (2012))
Unemployment rate: 6.2% (2012)
Languages spoken: Portuguese (official);
less commonly spoken languages include
Spanish (border areas and schools),
German, Italian and English.
BRAZIL
URUGUAY
ARGENTINA
COLOMBIA
Brasília
Strengths Weaknesses
• Similar time zones and proximity to
US markets
• Good availability of technical skills
• Robust telecommunications
infrastructure
• Stable economy
• Limited English-speaking capabilities
• Higher salaries compared to China and India
• Lack of strong IP protection laws and rigid
labor laws
Brazil: Strengths and weaknesses
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Mexico
Mexico is a favorable option in Latin America for offshoring and outsourcing service
centers. US companies are attracted by Mexico’s geographical proximity and similar
or same time zone as many of the companies it serves. Improving infrastructure and a
business-friendly government are other attributes in Mexico's favor. Furthermore, the
government has provided tax incentives and investment funding to support the growth
of the services industry. A combination of a fast-growing pool of university graduates
and Spanish-language customer service capabilities are other market drivers for US and
European companies. The government offers grants to service providers that conduct
training in English and other disciplines. Offsetting these advantages are the population's
patchy English-language skills and a high crime rate.
Argentina
Argentina is growing as a nearshore services location for US companies and markets.
The country has an educated Spanish-speaking population and low operating costs.
While the US is its largest market due to its similar time zones and relative proximity,
Argentina’s linguistic and cultural connections with Europe also facilitate access to
Western European markets. Argentina has invested heavily in higher education and has
one of the best education systems in South America. The result is a labor pool of skilled
professionals specializing in technology and informatics. Argentina offers a generally
favorable business framework.
By law, foreign direct investments receive the same treatment as domestic investments.
There are no restrictions on foreign-currency wire transfers for the import of goods or
services and multinational companies are free to operate in any sector. However, political
risk is high. The government tends to make decisions that are viewed elsewhere as anti-
business. Confusing policy implementation guidelines facilitate corruption. Argentina’s
place among top countries in Latin America for establishing captive or BPO centers is
slightly misleading, as most FDI consists of reinvestments of revenues by foreign-owned
companies. The economic climate for new investments is much less favorable.
KEY FACTS: ARGENTINA
Capital: Buenos Aires
Employable population: 17.0 million (2012)
Gross Domestic Product (PPP): $18,400
per capita (2012)
GDP growth rate: 1.9% (2012)
Inflation rate: 25.3% (2012)
Unemployment rate: 7.2% (2012)
Languages spoken: Spanish (official),
Italian, English, German, French
ARGENTINA
URUGUAY
BRAZIL
PERU
Buenos Aires
KEY FACTS: MEXICO
Capital: Mexico City
Employable population: 50.7 million (2012)
Gross Domestic Product (PPP): $15,600
per capita (2012)
GDP growth rate: 3.9% (2012)
Inflation rate: 3.6% (2012)
Unemployment rate: 5.0% (2012)
Languages spoken: Spanish (official) and
indigenous languages
MEXICO
COSTA RICA
GUATEMALA
Mexico City
Strengths Weaknesses
• Good infrastructure and
telecommunication facilities
• Spanish-speaking workforce with
good business skills
• Same time zone as much of the US
• Good availability of talent, lower
wage rate (half that of US wages)
• High attrition rates
• Lack of English language proficiency
• Higher costs than other options in the
region
• High crime rate
Mexico: Strengths and weaknesses
Strengths Weaknesses
• Similar time zones allow for service
delivery to US and European markets
• Modern infrastructure and technology
• Large labor pool for call centers and
basic services but also for value-added
services such as technical support
• Costs of rent, electricity and
telecommunications are low
• Low attrition rate compared to other
destinations
• Scores low on economic and political
stability compared to other Latin
American countries
• High crime rate
• Power outages are common
Argentina: Strengths and weaknesses
Global Business Services Process Perspective I The Hackett Group I 7
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Chile
Historically, Chile’s economy has been considered the most competitive in Latin America.
The country has gained momentum from an aggressive government campaign to attract
high-profile companies with high-tech outsourcing needs. Strengths include political and
economic stability, an educated workforce and access to the rest of the world through
free trade treaties and agreements to limit or prevent double taxation. These factors
position Chile favorably for international companies looking for nearshore or offshore
locations for service operations. The country also scores well on indicators such as
transparency and quality of life.
On wages, Chile is more competitive than Brazil, Mexico, Costa Rica or Argentina. The
main obstacles to becoming a nearshore destination of choice are the country's small
population and even smaller number of English speakers. Knowledge-based process
outsourcing made up 45% of Chile’s global services sector in 2012.
Strategic Implications
Latin America is an attractive location for companies looking for a nearshore location
relative to the United States and Canada or as a regional hub for Latin America itself.
Higher labor cost reduces the opportunity for labor arbitrage compared to Asia. Primary
considerations for evaluation of Latin America as a location for a service center are its
relative proximity to the US and Canada and the availability of English and Spanish-
speaking workforces.
Broadly speaking, for companies considering establishing service centers in Latin
America, there are three categories of countries to consider:
• Costa Rica, Mexico, Chile: Destinations offering less opportunity for labor arbitrage
compared to India but a more established foundation of other business services cen-
ters. While in previous years, Argentina was on this list as well, its current economic
situation and political risk make the country an unattractive location for the time being.
• Brazil: Has a large domestic market, but as the only non-Spanish-speaking country in
the region, Brazil should be evaluated as a destination for services that are less depen-
dent on Spanish-language capabilities.
• Guatemala, Columbia, Peru, Uruguay: With smaller economies, these countries
have attracted some business services offshoring but not as much as other destina-
tions in Latin America. They may serve as an alternative, however, should other desti-
nations become saturated. Other countries such as Panama offer the same tradeoffs
between good economic conditions and English-language skills but smaller labor
pools. Depending on a company’s business footprint in the region, these countries
may well be candidates worth considering.
KEY FACTS: CHILE
Capital: Santiago
Employable population: 8.2 million (2012)
Gross Domestic Product (PPP): $18,700
per capita (2012)
GDP growth rate: 5.5% (2012)
Inflation rate: 2.8% (2012)
Unemployment rate: 6.4% (2012)
Languages spoken: Spanish (official),
Mapudungun (indigenous), German,
English
ARGENTINA
URUGUAY
BRAZIL
PERU
CHILE
Santiago
Strengths Weaknesses
• Quality talent for niche work in specialized
domains
• Infrastructure is among the best in the region
• Politically stable with a growing economy
• Competitive wage rates and lower operating
costs compared with other countries in Latin
America
• Strong macroeconomic indicators: low interest
rates, healthy and sustainable GDP growth,
healthy reserves and low inflation
• Limited size of labor pool
• Lack of English fluency
• Intellectual property protection is
less than robust
Chile: Strengths and weaknesses
Global Business Services Process Perspective I The Hackett Group I 8
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Top destinations in Latin America – Strengths and weaknesses
HIGHLY COMPETITIVE NOT COMPETITIVE 5 4 3 2 1
Source: The Hackett Group Global Research Center, 2013
MEXICO
COSTA RICA
BRAZIL
ARGENTINA
CHILE
Dimension
+ Tax burden 2 4.98
36 1.89
15 4.68
33 1.76
+ Wage rate inflation
– Quality of education
– Unemployment rate
Mexico
Rank Score
Dimension
+ Political risk 1 5.00
37 1.01
6 3.78
40 1.12
+ Quality of education
– Total workforce avail.
– Natural disaster risk
Costa Rica
Rank Score
Dimension
+ Tax burden 13
37
20
41
4.50
1.78
3.91
1.22
+ Natural disaster risk
– Quality of education
– Avail. of airport
infrastructure
Brazil
Rank Score
Dimension
+ Telecom cost 22 4.18
38 1.35
15 4.14
42 1.00
+ Natural disaster risk
– Rigidity of labor law
– Wage rate inflation
Argentina
Rank Score
Dimension
+ Cost of office space 19 4.43
28 1.04
13 4.50
41 1.09
+ Tax burden
– University-educated
workforce avail.
– Avail. of office space
Chile
Rank Score
Geographies served: global (mainly US)
Type of service: captives (all services),
ITO (all services), BPO (all services)
Comparison of top locations in Latin America
Source: The Hackett Group Global Research Center, 2013
0 5 10 15 20
Costa Rica
Global rank
Unweighted scores Weighted scores
18 3.29
3.20
3.14
3.05
3.01
3.00
2.96
2.96
2.84
20
21
26
27
28
30
32
35
ECONOMIC CONSIDERATIONS
WORKFORCE QUALITY INFRASTRUCTURE RISK ASSESSMENT
QUALITY OF BUSINESS ENVIRONMENT 0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5
3.35
3.65
3.76
3.88
3.59
3.70
3.69
3.98
2.83
3.79
2.73
2.74
3.85
3.27
3.99
2.87
1.61
1.33
1.44
1.33
1.47
1.17
1.49
1.87
2.02
1.83
1.83
2.04
2.35
2.87
2.51
2.25
3.23
2.55
1.99
1.33
2.79
2.84
3.57
3.89 3.52 1.72 2.16 2.66
3.08
Brazil
Peru
Argentina
Nicaragua
Mexico
Panama
Chile
Colombia
© 2013 The Hackett Group, Inc.; All Rights Reserved. | 4000071
This publication has been prepared for general guidance on the matters addressed herein. It does not constitute professional advice.
You should not act upon the information contained in this publication without obtaining specific professional advice.
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About the Advisors
Martijn Geerling
Senior Director, Global Business Services Advisory Program, EMEA and Asia
Mr. Geerling has 15 years of consulting experience in strategy
development, business process redesign and implementing sourcing
strategy, both shared services and outsourcing. During this time he
has worked with business services organizations of leading global
companies across various industries. Prior to joining The Hackett Group,
he worked at KPMG Consulting assisting clients in Europe and Asia with
finance-function transformation, business process redesign, and risk and compliance
management.
Vamsi Thota
Director, Globalization Research
Mr. Thota manages The Hackett Group’s research activities involving
outsourcing and location analysis. Prior to joining The Hackett Group,
he worked the Consumer Business Practice of Deloitte’s Research
& Development organization. Previously, Mr. Thota served in various
capacities and research roles for companies in primary and secondary
market research and analytics.
Rupesh Kumar Nerella
Senior Analyst, Global Business Services
Mr. Nerella conducts research and responds to GBS Advisory Program
member inquires in addition to researching sourcing-location trends. Prior
to joining The Hackett Group, Mr. Nerella was associated with companies
including market research firm Progressive Digital Media and Cygnus
Consulting, an India-focused business consulting firm.
The Hackett Group, a global strategic
business advisory, operations consulting
and finance strategy firm, is a leader
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