By Duncan Tucker ,Nearshore Americas
The study (available here) by the Dallas, Texas-based global
management consulting firm focuses on non-voice BPO services in general and
administrative functions, such as finance and accounting (F&A), human resources
(HR) and procurement, for organizations with a presence in Latin America. While
F&A accounts for 47% of the regional GAO market, which is worth $700 to
$800 million, HR accounts for 23% and procurement makes up the remaining 20%.
Based on assessment of over 400 contracts with 40+ global
service providers in the region, the report found that Brazil dominates the
Latin American market. It is the source of up to 55% of GAO activity and also
delivers 40% of services.
Brazil also has the strongest case for arbitrage opportunity
because of the high labor costs there, but Everest Group notes that – unlike in
the global market – cost arbitrage is not the key value proposition, because of
the low labor costs across most of Latin America.
The key drivers of GAO activity in Latin America are speed-to-market and access
to best practices and technology, according to Abhishek Menon and Saurabh
Gupta, two of the authors of the report.
Nearshore Americas: Why is the GAO market in Latin America is
growing at 1.5 times the rate of the global market?
Abhishek Menon & Saurabh Gupta: Firstly, most large global
organizations have leveraged some form of outsourcing or shared services for
their U.S. and European operations. Now they are aggressively looking at
different sourcing models to both expand and optimize their operations in
emerging markets such as Latin America and the Asian Pacific. Secondly,
domestic Latin American companies faced with increasing competition also need
access to global best practices and technologies. And thirdly, there is the
denominator effect. Growth on a small base is always magnified – it’s important
to keep in mind that Latin American GAO accounts for around 5% of the global
GAO market.
NSAM: In the report you observe that growth in Latin America’s GAO
market is primarily driven by new contracts – not renewals or extensions. Why
is that?
Menon & Gupta: It’s the natural progression for any market.
Since Latin America is an emerging market,
the growth in driven more by new demand, meaning new contracts, compared to
renewals or extensions. In more mature geographies such as the United States or
Europe, there is already a significant base of GAO contracts that were signed
three, five or seven years ago that are now coming up for renewal. That kind of
install base does not exist in Latin America (yet!) and hence new contracts are
fueling the growth.
NSAM: The report also notes that the average size of GAO contracts
in Latin America is 35% smaller than the global average. Why is that?
Menon & Gupta: Since GAO is still emerging in Latin America,
clients are taking a risk-averse approach. We call it the “phased approach”
where they start small and then expand as the relationship matures. Such a
phased adoption is a practical way to go about transformation but it is
important to build a strategic roadmap or guiding principles since business
context will change dramatically over time.
NSAM: Why is Brazil so prominent in terms of both the source and
delivery of GAO in the region? Is it partly because Brazil is one of the only
countries in the region with arbitrage potential?
Menon & Gupta: There is a strong correlation between the
market size for GAO and the overall size of the economy. In Latin
America, Brazil is the largest economy and also a leading country in
terms of economic development. As a result Brazil is the largest adopter of
GAO. While the theoretical arbitrage potential from Brazil exists, it is
difficult to offshore work from Brazil given tax, legal and language issues –
Brazil speaks Portuguese while the rest of Latin America speaks Spanish. So
most of the work originating in Brazil is also delivered from Brazil – that is
the reason why Brazil is the largest delivery location also in Latin America.
NSAM: Why are large clients more prominent in Latin America’s GAO
market, with fewer small or medium enterprise (SME) clients than in the global
market?
Menon & Gupta: Both push and pull for SMEs is currently low
but we expect it to change over the time. Historically the GAO market adoption
has been led by the large clients and then as the market matures the SMEs
follow. Since the GAO market is relatively nascent in Latin America it is being
pioneered by the large clients and as the market matures we can expect more participation
from the SMEs. But initially service providers will go after larger
opportunities and then start looking at smaller opportunities when the market
matures and some of the larger opportunities are hard to come by.
NSAM: Why is it that you consider speed-to-market and access to
the latest technology and global best practices to be the drivers for GAO in
Latin America?
Menon & Gupta: Global multinational corporations are
expanding their operations in the fast-growing Latin America region and third-party
outsourcing is a vehicle for them to do this quickly. Domestic Latin American
companies faced with increasing competition also need access to global best
practices and technologies, and last but not the least, arbitrage potential is
low and offshoring is hard. So the business case has to be built on
standardization, efficiency, automation, and speed.