The Hindu Business Line : Viv@!

Latin America has emerged as a major destination for software companies setting up offshore development centres. In recent months, several Indian vendors, including Polaris Software, Tata Consultancy Services (one of the largest players in the region with over 7,000 employees), Patni, Genpact and the US-based Cognizant, which has large offshore centres in India, have announced major plans for Latin America.

With proximity to the US, which is the world’s largest market for software services, Latin America also enjoys a vibrant local economy. This, coupled with stability in the region and availability of quality workforce, is enough to attract IT investment. eWorld finds out what prompted companies to set up shop in this region.

Emerging opportunity

The outsourcing wave that started 15 years ago in the US is peaking in countries such as Mexico and Brazil. Many large projects are likely to come from Latin America in the next two years, said Gabriel Rozman, Executive Vice-President and Head of Emerging Markets Business Unit, TCS.

The region presents a significant opportunity for Indian majors as well as multinational vendors such as Accenture, IBM and CSC, as costs may be 30-40 per cent lower than in the US. There is a general shift to emerging economies with their inexpensive, yet well-educated labour and local clients (some estimate Brazil’s IT market at over $20 billion), says Eugene V. Zakharov, Director, Professional Services Business Quarterly, Technology Business Research Inc.

Buzzing with activity

Over the past two years, several IT companies have made announcements/acquisitions/expansions in this region. For example, ACS bought Group Multivoice and eServices. Similarly, CSC purchased BearingPoint Brazil, while IBM has been expanding its presence and partnerships with venture capitalists in Brazil. Indian vendors, especially Tata Consultancy Services, have also been active here in the last few months, he says.

Latin America is cheap, but not as cheap as India. In 2008, the average salary for an “entry-level” IT worker in Brazil was about $9,000, while in China and India it was about $5,500. Obviously, there is impact from foreign exchange and the attractiveness of India/ China/Brazil fluctuate, he says.

K.R. Lakshminarayana, Chief Strategy Officer IT Business, Wipro Technologies, feels that over the medium term, Latin America is a strategic geography from delivery as well as market perspective. Its relative nearness to the US makes it an interesting near-shore option for clients, while the good growth rates of these economies make it an interesting market over the long term.

Spanish-language work

The Indian market has greater maturity in project management, as also market depth compared with Mexico. Having said that, Mexico is good for certain types of work, such as Spanish language work, which cannot be done out of India, says Phaneesh Murthy, CEO, iGATE. Some of the work is done onsite for certain customers, especially when it’s needed near customer location and in that time zone. Mexico is a cheaper option for this. Also, as part of NAFTA (North Atlantic Free Trade Agreement), Mexico is more cost-effective than India for some kinds of work, says Murthy.

Government support

“There is increased support from governments around LatAm to promote the IT industry,” says Cristian Arguello, Country Manager, Argentina, Cognizant. For example, in Argentina, IT has been declared a strategic sector for industrial growth, providing several benefits for firms involved in it, he says.

Customers are keen to tap talent wherever it is available. When setting up development centres, Cognizant seeks to find out how best it can serve multinational clients. “We say, ‘Let us leverage the best talent in the world, be it from Argentina, Brazil, China or India.’ We are a team; we make sure our global centres collaborate with each other. Our clients do not have a team that is only in Argentina. We leverage people all over the world, and in that way, clients have the best knowledge available,” Arguello says.

Preferential access

The Latin American region’s proximity to both the Americas, including Mexico, which is the world’s 13th largest economy with a local IT market of $5 billion, will allow for seamless interaction on projects, easier management of customer relationships and efficient project tracking. This will reduce engagement costs while accelerating time-to-market, says Naresh K. Lakhanpal, President, Patni Americas Inc.

Patni selected Queretaro, Mexico, for reasons that included the burgeoning talent pool from 37 area universities, its proximity to Mexico City, quality of life and low cost of living. As the region continues to develop, the focus will turn to servicing domestic IT needs rather than export strategies. In the short term, major IT services companies entering the domestic markets will focus on near-shore business opportunities, says Lakhanpal. Research company Gartner forecasts the IT outsourcing services market in Latin America and Canada to be $50 billion. Bilingual support is a key factor too. The Spanish-speaking population in the US is estimated at 40 million, prompting US companies to provide Spanish-language support services, Lakhanpal says.

Local market

Citing the region’s stable economic and political conditions, coupled with high growth in recent years, Shami Khorana, President, HCL America, says several of HCL’s clients have a local presence. According to the research company IDC, IT services spend in Latin America will exceed $20 billion in 2009 and grow to $25 billion in 2012. This presents an attractive market opportunity, besides allowing HCL to use some of these Latin American countries for developing near-shore operations for the US.

Incentives and rules

Pointing out that different countries offer different incentives for companies establishing operations and generating employment, Khorana, however, accords greater importance to factors such as availability of talent, low attrition rates, cost of living, accessibility of major airports and similar time zones. Latin America is a complex market, especially with respect to labour laws, accounting policies and service taxes. There is definitely a need to make some of these regulations friendlier for foreign companies looking to set up base, he says.

Kumar Parakala, Head, IT advisory services, KPMG India, says countries in the large and diverse Latin American region are offering a range of incentives to promote industry.

Argentina, for instance, has a software industry promotion law offering software companies big tax breaks. Similarly, Brazil has Rio Tecnologia, a programme to attract software investment in Rio through tax breaks and financial incentives for incubators, technology parks and businesses in the region. The Economic Development Authority in Chile provides a range of incentives including pre-investment studies and grants for HR development to high-tech companies.

TCS footprint

TCS has been in Latin America since 2002. Apart from one acquisition in the region, it has grown organically with eight delivery centres and employing over 7,500 people in places such as Brazil, Mexico, Uruguay, Chile, Colombia and Argentina.

“Our strategy is to continue to be the dominant Indian force in LatAm providing solutions and offshoring from multiple locations, using our global delivery network model... providing same time-zone work is one of the pillars of our strategy,” Rozman of TCS has said. It also has interests in new areas such as BPO and infrastructure. Large customers in the US either have something small in Latin America or look for something in the region to complement their India strategy. India will, of course, continue to be the larger destination.

“We do not compete with India, we complement the India operations,” Rozman has said.

Threat to India?

Despite its proximity to the US, Latin America will not pose any competition to India for the outsourcing pie, says Parakala of KPMG. The addressable market for outsourcing (IT and BPO) was estimated to be $500 billion in 2008, but the global sourcing industry was about $90 billion in 2008. Obviously the addressable market is large enough. India has about 50 per cent of the market share.

Latin American countries are trying to attract Indian software companies to enhance the attractiveness of the region, and are, therefore, open to providing Indian companies with good business opportunities. For example, Uruguay is positioning itself as a regional technology centre, Parakala says.

Over time, however, Latin America will be a key outsourcing destination and this is one reason why Indian players are opening centres there. Whether or not it eats into India’s share of the outsourcing pie, it will be seen to provide a way to diversify delivery and risks, says Zakharov.

raja@thehindu.co.in