This Latin American country is becoming a great outsourcing destination. Here’s why…

Colombia: “The only risk is the risk of staying”

If you’ve recently seen CNN news in English or “Español”, or you’ve flown to Colombia, that`s probably a TV advertising tagline that you’ve already seen. It’s part of an effective strategy the Colombian government is promoting the nation worldwide, to help people realize how the country has changed. And it has.

Colombia is a hot dynamic economy, so hot that back in 2007 the cover of BusinessWeek magazine labeled this South American nation as one of the “Most Extreme” markets on Earth1.

Last year Michael Geoghegan, former CEO of HSBC, in his speech to the American Chamber of Commerce in Hong Kong, said: “The new BRICs are Colombia, Indonesia, Vietnam, Egypt, Turkey and South Africa (CIVETS). They are countries with major populations, dynamic, diverse economies, political stability and each of them has a brilliant future. Any company with global ambitions will have to take immediate action in these markets.”

Colombia is the only Latin America country in that CIVETS new club — a club with great economic potential (see graph below).

Last September, the cover of The Economist magazine depicted a map of the Latin America region “down-up” with this provocative title: “Nobody’s backyard, The rise of Latin America”. According to the article “marketing people are beginning to talk about a “Latin American decade”.

If the region can keep up the growth of the past few years, it will double its income per person by 2025, to an average of $22,000 a year at purchasing – power parity, Half a dozen Latin American countries may have achieved developed-country status, with an income equivalent to Spain´s today.

By the end of the first 10 years of the new millennium, Colombia´s GDP per capita head has doubled, actually almost tripled, annual Foreign Direct Investment net inflows have multiplied by four and Colombian exports have tripled. This great economic progress has made a social impact as well. Colombia poverty rate was reduced from 53 percent to 30.4 percent and Affiliates to health services grew from almost 24 million to more than 41 million.

During the same period, international visitors to Colombia doubled. While tourism in the world fell 4 percent, in Colombia it increased 10.2 percent in 2009, of which 23 percent are U.S. citizens (see table below).

COLOMBIA: MAIN INDICATORS

When it comes to outsourcing, Colombia also is enhancing its role in the Latin America Region and the outsourcing world. The country offers business opportunities and the chance to share success stories to the global business community.

Key multinational companies have chosen Colombia as their country of choice to set up BPO and IT services operations. IBM, Citi, SAP, Unisys, Sutherland, Teleperformance, Siemens, Sitel, Microsoft, General Electric, Avanza, Terremark, Convergys, and Indra are but a few. Genpact is going to open operations on the second semester of 2011.And even with its existing presence in Colombia, HP chose the country to develop one of its New Global Service Centers, designed to operate as the hub of multi-functional operations such as technology, business office and sales support in Medellin.

Colombia is now part of 2011 Gartner`s “30 Leading Locations for Offshore Services”. This indicates the progress the country is making, as well as the challenges ahead to stay on the list.

Different factors help Colombia serve as an attractive destination for outsourcing. A Public – Private Partnership to strengthen and build the BPO&IT “world class sectors”. For instance, the Chamber of BPO&IT at ANDI ( National Business Association of Colombia) leads the creation of the Colombia IAOP Chapter. The Chamber is co-organizing with IAOP and the support of the Proexport the Latin America Outsourcing Summit in Cartagena, May 26&27.

Geographic location with multiple direct daily flights to major cities in the U.S. and other parts of Latin America, including a time zone shared with the U.S. east coast, are drivers.

Human talent and scalability are important, too. According to the IMD World Competitiveness report, Colombia has the second most qualified labor available in the region and offers the best quality education in science and mathematics. It also has the best Labor Market Flexibility Index in Latin America and, according to the World Bank, it is the third most “Business Friendly” country in Latin America and top reformer in the region. It also ranked among the top countries for investor protection.

Moreover, Colombia’s credit rating recently was boosted to investment grade by Standard & Poor’s. The increase puts Colombia’s rating in line with that of Brazil and Peru. S&P’s decision will attract a new class of investors to Colombia, lowering government borrowing costs, spurring investment and supporting economic growth in Latin America’s fourth-largest petroleum producer.

In addition to this, the country offers an export platform: 11 free trade agreements (FTA) with 48 countries allowing preferential access to over 1,500 million consumers. In 2011, Colombia will negotiate 18 international investment agreements (IIA) and 16 double taxation agreements (DTA).

The country now offers great incentives to promote industry, such as a 125 percent income tax deduction for investments in scientific and technological developments and a 200 percent income tax deduction for salaries and social benefits paid to handicapped employees. It also offers one of the most competitive Free Trade Zones (FTZ) in Latin America, with a 15 percent income tax and a VAT exemption for goods sold from Colombia to the FTZ, among other benefits. Colombia currently has 91 Free Trade Zones.

Colombia offers scale and alternatives. With major cities such as Bogota, Medellin, Cali, Barranquilla, Ibague, Bucaramanga, Manizales and Pereira, multiple options are available for buyers and suppliers. Thirty cities have a population of 100,000 or more and Bogota produces 67,000 graduates every year, of which, 17,000 are technical graduates. Some of these cities are part of the 600 cities a recent report made by The McKinsey Institute identified that will contribute half of the world’s economic growth by 2025. At present, the combined workforce of IT and BPO industry in Bogota exceeds 50,000.

So, it’s not just an advertising slogan. Colombia truly is a great outsourcing destination and the only risk is the risk of staying.

Latin America really is emerging as a nearshore powerhouse for both IT services and BPO, and analyst firm Horses for Sources takes a close-up look at the region.

The study’s six key findings:

Global IT delivery strategies more frequently include Latin America: The power of a well-crafted global delivery strategy lies beyond labor arbitrage and low-cost offshoring from India. Although most projects featuring a global delivery strategy stick to application development work, there are opportunities for more advanced relationships beyond staff augmentation and software engineering services. New remote infrastructure management offerings and service offerings that focus on niche areas of application expertise now see global delivery locations spread beyond India into Latin America. The region is vast and offers the ingredients to make any nearshore move successful: it has a thriving technology economy, it brings competitive software development rates, it can demonstrate industry innovation, and with vast human capital it has the potential to scale.

Latin American strategies underpin global delivery with increasingly mature services: Firms investigating service delivery from the region like the cultural familiarity bred by the influence of the US and Europe. Customer interviews reveal how distance and time-zone repeatedly offer real-time collaboration opportunities and reduce the burden of oversight and resourcing through physical proximity and better resource alignment. The region continues to offer coding, testing and other IT support but this paper uncovers US firms sourcing niche application services for specific industries (e-banking/gaming), analytics (retail), and bilingual back office support services (finance and accounting). Buyer choice continues to grow as a diverse set of providers continue to invest in new locations in Latin America and customers find more opportunity to realize value as client/vendor relationships develop over time.  HfS has developed a location scorecard tool to help buyers assess each country in Latin America as a global delivery destination.

The region offers buyers three routes to value:

• 1. Specific skills at lower costs than onshore in the US or Europe. The region still offers labor arbitrage for desirable skills.
• 2. Reducing the risk for immature processes. Portfolios of applications that demand more interactions between onsite and offshore teams or that have highly interactive methodologies in play require more oversight especially if their internal processes are weak.
• 3. Supporting a broader market move into the region. Engaging with local providers and using local resources demonstrates a broader commitment to the region.
• 4. Calculate the true TCO and measure risk.

This report finds that rate cards for services don’t tell the whole story. Although the region offers labor arbitrage for desirable skills, it’s fading just as quickly as anywhere else. Pure labor rate comparisons must factor in costs for staffing levels (onsite, offshore, nearshore) during different phases of the relationship, such as knowledge transfer and transition. Clients attest to lower attrition levels and fewer site visits, and when they were required, these site visits as part of the governance were much easier to do—these and other soft factors impact the total cost of ownership. Taking work to Latin America does not guarantee success or drive instant savings however—any move nearshore needs careful consideration against the type of work that needs to be done, the maturity of the internal processes and the challenges it creates for corporate culture.

By Mark Atterby, Senior Writer

There are a number of reports and indexes produced each year highlighting the top countries as outsourcing destinations for IT and BPO. As one would expect India tops all of these lists. The runner-ups tend to include China, Malaysia and Philippines. In fact Asia Pacific countries, where even North Korea has been trying to get in on the act, dominate most of the lists.

After that there are quite a number of countries jostling for their position in the sun. Some such as Egypt and Pakistan, who were positioned as threats to India, have to tended to fade off the outsourcing radar due to instability.

In its report 10 Leading Locations for Offshore Services in Asia Pacific and Japan for 2010, Gartner analysed countries as offshore services locations using criteria such as language, infrastructure, education, cost, cultural compatibility, legal maturity, and security. The ranking of each country in the AT Kearney Global Services Location Index (GSLI) is composed of a weighted combination of relative scores on 43 measurements, which are grouped into three categories: financial attractiveness, people skills and availability, and business environment.

Sourcingline scores each country across dozens of key statistics that fall into three broad areas of Cost Competiveness, Resources & Skills, and Business & Economic Environment. India continues to grow its IT services exports, but its share of the worldwide total has declined, and wage pressures, geopolitical troubles and financial scandals are creating opportunities for other countries.

The Americas and Europe are the largest customers for the Indian outsourcing industry and account for 60% and 31% respectively of IT and BPO exports. The largest vertical sectors are financial services (41%), high-tech/telecom (20%), manufacturing (17%) and retail (8%). In 2009, the IT and BPO export industries employed about 2.2 million people.

Over the last few years, numerous locations have emerged in South America, Africa, Eastern Europe and the Middle East to challenge India’s dominance. Countries like Brazil, Egypt, and Vietnam have emerged as viable destinations. For a while, Egypt was touted as a new India. In 2009, Egypt was ranked fourth by the AT Kearney list before the troubles began. The recent government overthrow has certainly put the clamps down on the level of outsourcing opportunity.

Lead analyst at Ovum, Peter Ryan, said the unrest is putting the country’s outsourcing credentials at risk. “Following recent border violence in Mexico and the 2009 terror attacks in Mumbai, the events in Egypt are certain to make outsourcers and their clients much more risk-averse than any time in recent memory, and are likely to push many companies to choose the more secure, albeit costlier, option of keeping third-party work onshore”.

The Middle East and North Africa have emerged as major off shoring locations due to their large, well-educated population and their closeness to Europe. Likewise countries such as Bulgaria, Hungary and Serbia provide low cost centres for West European enterprises. There are also onshoring trends to lower cost cities within the US, UK, France and Germany — big western democracies facing political pressure to keep jobs at home.

Countries in Latin America and the Caribbean continue to capitalise on their closeness to the United States as nearshore destinations. In addition to cost savings, Latin America offers US companies time zone alignment and geographic proximity, though there are some drawbacks to consider, including language barriers and lack of vendor maturity.