By Dan Berthiaume
Although nearshoring, or the outsourcing of business and IT functions by North American firms to providers based in Latin America, is on the rise, China is still generally seen as a superior source for BPO service delivery. However, a detailed comparison of the relative advantages and disadvantages of nearshoring versus offshoring to China shows that Latin America is a far more viable seat of BPO services than is commonly believed. In fact, results of this comparison demonstrate Latin America can effectively compete with China as a BPO hub, and in many instances may even prove the superior choice.
Following is a brief comparison of how Latin America and China stack up as BPO providers in 10 key areas.
Time Zone: There is not much argument here. Some parts of Latin America actually run on the same time zones as the Western US, and in no part of Latin America is the difference anywhere near as great as the 12 hours which separate US Eastern Daylight Time and Chinese time (China operates on a single time zone and does not have Daylight Savings Time). This makes communication during normal working hours much easier, which is especially vital for more complex outsourcing projects which may require frequent interfacing between client and service provider.
Culture/Language: As with time zone, Latin America comes out the clear winner when it comes to potential culture/language barriers. Although English proficiency varies across different Latin American nations, it is generally superior to the proficiency found in China. In addition, a fairly high degree of Spanish proficiency exists in the US, particularly in the Southwest and on the West Coast, while Chinese proficiency is generally low. And while Latin America has a distinct culture which differs from that of the US, the region still has many more cultural similarities with the US than China does.
Human Capital: One important BPO area where China has a decided edge is human capital. Although IT proficiency alone is not a benchmark of a region’s BPO potential, it is a good general indicator of the educational and talent level that is available, and IT proficiency is a vital BPO skill. With this in mind, China was ranked second overall in the world for quality of its human capital in the 2011 Business Software Alliance IT Competitiveness Index, due to the sheer size of its IT workforce (estimated at more than 5 million) and large number of students enrolled in science programs and in higher education in general.
In contrast, the human capital scores of major Latin American centers of BPO such as Brazil and Mexico (tied for 47th) and Chile (35th) are far behind China’s score, although they receive credit for making improvements in the quality and accessibility of higher education.
In terms of employee turnover, the two regions appear to be roughly tied. According to research conducted by Pragmatic Outsourcing, turnover at major Chinese BPO provider tends to be less than 25%, while Mike Barrett is the CEO and co-founder of Unosquare LLC, a nearshore provider of consulting, software development, and testing services from Guadalajara and Honduras, says that attrition is below 10% in Latin America, but higher among team leaders and tech leaders.
Technology Infrastructure: China advanced three spots in the 2011 Business Software Alliance IT Competitiveness Index compared to 2011, to come in at number 48. China has the world’s largest number of internet users and significantly growing penetration of broadband access and PC and mobile device ownership, although network security is cited a continuing weakness.
Meanwhile, Mexico ties with China in 48th place, while Peru lags in 54th place. However, Chile substantially outperforms China with a 35th place ranking based on high rates of mobile penetration and domestic spending on hardware, software and IT services, although broadband penetration has only recently surpassed 10%. Brazil also beats China with a 43rd place ranking and generally similar conditions to Chile.
Since China beats Latin America on broadband penetration and other factors vary by which country in Latin America you are doing business, we will declare technology infrastructure a tie between the two offshore outsourcing destinations.
Ease of Doing Business: A recent report from Everest Group, “Global Locations Compass: China,” commends China’s government for making significant investments in education and incentives to develop the services industry, and also cites national initiatives which are further supported by incentives at the provincial and city level.
However, China is only ranked 35th for its overall business environment in the 2011 A.T. Kearney Global Services Location Index, well behind Latin American leader Chile (17th), and also lagging other Latin American nations such as Costa Rica (25th) Panama (26th) Mexico (28th) and Brazil (30th). While government support and incentives are probably stronger in China, Latin America gets the nod here due to a lower level of government interference and favoritism.
Bringing Offshore Employees Onsite: Using offshore BPO services based in Mexico eliminates many visa hassles for US firms who as part of the agreement may want to bring offshore employees to the US for extended periods of time. Provisions of the North America Free Trade Agreement (NAFTA) allows workers based in Mexico to obtain TN temporary visas, which are not restricted in number and typically take one to two weeks to get. Otherwise, workers based in the rest of Latin America and in China are in roughly the same legal situation in terms of getting clearance to come to the US, so we will also declare a tie in this category, with the caveat that NAFTA makes Mexico a special consideration.
Stability: Although China’s autocratic government holds a tight grip on power through surveillance, harsh punishment of dissidents and pervasive censorship, social unrest has been growing in recent years as citizens react to a lack of freedom and widespread public corruption. This month, the Wall Street Journal has reported on frequent uprisings against local governments by rural Chinese citizens who complain of real estate-related corruption, and a series of anti-government protests called the “Jasmine Revolution” occurred earlier this year in response to the “Arab Spring” uprisings in the Middle East.
In Latin America, stability varies by country. With the notable exception of Venezuela, which operates a near-dictatorship under a socialist government, Latin American governments are freely elected democracies and have made great progress in terms of human rights and electoral fairness in the last 20 years. However, while countries such as Brazil and Chile offer a high degree of socioeconomic stability, others such as Colombia and Mexico face significant internal unrest due to factors such as narcotics and antigovernment rebels. Once again, China and Latin America will be awarded a tie.
Cost: The Everest Group credits China for having IT and business process services costs 60 to 70% lower than major US cities. However, China is undergoing serious wage inflation, as evidenced by an October 2011 report from Boston Consulting Group predicting a return of 2 to 3 million outsourced manufacturing jobs from China to the US by 2015 due to rising labor costs.
Meanwhile, Latin America is experiencing stable wage inflation. In addition, it is much cheaper and time-intensive to travel to Latin America than to China. Latin America gets the edge in terms of outsourcing cost.
IP: Protection of intellectual property (IP) rights is an area where China traditionally performs poorly. The IT Industry Competitveness Index notes China remains on the US Trade Representative’s Special 301 Priority Watch List due to lack of effective IP protection, although the USTR, among others, takes note of domestic efforts to improve enforcement. In contrast, Mexico has recently stiffened its IP protection laws and Chile gets commendation for having particularly strong IP enforcement, although Brazil is also on the USTR watch list. Latin America is probably somewhat ahead of China in this area, although IP protection is always a concern when doing business in a developing nation.
Established Business: Along with human capital, the outsourcing category where China has the most sizable advantage over Latin America is in terms of having established outsourcing businesses and relationships. China has long been a preferred BPO provider for US companies, and Everest Group reports that in the past year, US-based multinational service providers such as IBM and Accenture have invested in China, and US companies including Chevron, Marriott and Bank of America have set up captive service centers in China.
In contrast, Latin America is still seen (incorrectly) by many US companies as only suitable for handling low-level functions such as call center, and is still in the early growth phases as a provider of higher-level BPO functions. So although Latin America is a legitimate choice for outsourcing more than basic customer service or programming projects, China still has a much more established BPO industry.
Out of 10 BPO categories, Latin America comes out ahead in five, China comes out ahead in two and three result in a tie. These results hardly suggest that China is not a valid or high-quality provider of BPO services, but do indicate that Latin America should be seen as a legitimate rival to China for even highly complex BPO contracts, and that US companies should consider providers in Latin America as well as China when putting contracts out to bid.