Global Services Insights

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June 2009

Global Services Insights

Research Report

Changing demographics in the United States along with cost considerations and overheating of traditional offshore destinations have forced U.S. corporations to explore Latin America as an outsourcing destination for their back-office and contact center operations. While certain countries such as Mexico, Brazil and Costa Rica feature more prominently amongst corporations while evaluating their location strategy, there are a host of other countries in this region whose potential is either often overlooked or not clearly understood.

This paper assesses 18 countries in Latin America on their maturity and attractiveness as destinations for contact center outsourcing. These countries have been evaluated on key parameters such as financial attractiveness, human capital, language capability (English, Spanish, bi-lingual), business & living environment, and risks.

Latin America Contact

Center Landscape

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Introduction

In recent years, Latin America has gained prominence as a destination for contact center outsourcing. Several global service providers such as ACS, Genpact, IBM and Sitel have either set up their operations already or are in the process of expanding their geographic presence in the region. In addition, several U.S. corporations such as Dell and Citigroup operate shared-service centers to service their clients in Latin America. In 2008, the revenue generated from the contact center outsourcing market was approximately $6 billion, with exports accounting for $1.2 billion growing annually at over 20%. The domestic market accounted for the balance $4.8 billion, growing over 25% annually. This makes Latin America a large domestic market that contributes not only to the supply side by serving as a talent pool to recruit from, but also on the demand side by acting as a market that consumes services.

Though Latin America is sometimes placed in the same league as other major outsourcing destinations such as India and the Philippines, it is important to understand the differences (and similarities) that exist among various countries in Latin America.

This paper highlights countries that are at times overlooked in terms of either their potential or existing capability.

What Makes Latin America Attractive?

Latin America has become an important global sourcing destination due to its language capabilities, large labor pool, lower costs, and geographic proximity to the U.S. Changing demographics with the accompanying increase in the Hispanic population in the United States (estimated to be over 40 million in 2008) and the corresponding attractiveness of serving the needs of the Hispanic group is causing U.S. corporations to consider the opportunities of establishing contact centers in the Latin American regions to serve both their English-speaking and Spanish-speaking customers. Lower attrition levels and low-to-moderate salary inflation (less than 10% in most countries in this region) in most countries make Latin America a viable option from a financial perspective. Additionally, cost of contact center entry-level agents on average being one third of the U.S., makes the case for outsourcing to this region compelling. Most countries in this region are primarily Spanish-speaking (with the exception of Brazil where Portuguese is widely spoken) and many governments are actively working towards increasing and improving English language skills. Geographic proximity, cultural affinity, and similar time zone with the United States further bolster the case to outsource to this region. In summary, both, buyers and providers alike are looking at Latin America as a means of de-risking their geographic sourcing portfolio from the traditional supplier markets like India and the Philippines.

Approach Overview

The countries were evaluated on the maturity of English capability, Spanish capability as well as bilingual (English and Spanish) capability. Factors such as the number of agents employed in the

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contact center outsourcing industry in each country (serving primarily the U.S. and European markets), the quality of the language capabilities in its written and spoken form was compared against acceptable U.S. standard, as well as the presence and maturity of service providers and captive operations were considered. Additionally, employee costs were considered to evaluate the financial attractiveness of the country. Rating scores are based on a relative scale with countries covered in this report being compared against each other. neoIT used a combination of approaches for this assessment. Information was collected from trade and investment agencies in several countries in this region. Additionally, data was gathered through interviews with service providers operating in this region. Finally, neoIT leveraged its location database to capture information presented in this report.

Latin American Countries – Market Overview

English Language Capability

As a region, Latin America (with a market share of 10% of the English contact center market) currently trails India (35% market share) and the Philippines (17% market share) as a destination for English language contact center outsourcing. The penetration level of English is fairly limited to about 10% in the predominantly Spanish speaking countries of Latin America. While the managerial level often studies in American and European universities and can communicate in English, this is not the population that is employed in contact centers. Many countries in the region are actively promoting the adoption of English in order to train the labor force to be employable in contact centers with bilingual capabilities. English is being institutionalized as either the second or third language at the school and university level in countries such as Chile, Guatemala and El Salvador. For instance, CORFO, in Chile has created a national register of English speakers where interested individuals are evaluated based on “Test of English for International Communication” (TOEIC) score, a test that measures the capabilities to perform in a bilingual working environment. Similarly, in Nicaragua, ProNicaragua has developed a strong database containing more than 5,000 bilingual candidates in order to assist staffing business process outsourcing operations.

Based on neoIT research, while most contact centers and investment agencies claim to have a sizeable labor pool serving English speaking customers, we have demarcated agent numbers based on labor pool that is specifically trained in English skills to serve only the English speaking markets. Although bilingual agents are also trained in Figure 1: English Capability

0 1 2 3 4 5 Uruguay Paraguay Honduras Ecuador Bolivia Venezuela Peru Colombia Chile Nicaragua Costa Rica Guatemala El Salvador Argentina Brazil Jamaica Panama Mexico

Scale: From 0 (Low) to 5 (High) Source: neoIT Inc.

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English this specific labor pool have been considered separately. Based on our analysis, Jamaica has amongst the largest English agent population with over 15,000 agents. Conversely, its bilingual agent population is lowest, as agents serve only English speaking customers. Jamaica has established itself as a leading low-cost, near-shore alternative to the U.S. that primarily serves U.S. and UK markets. ACS operates two facilities in Montego Bay with approximately 2,000 positions in its outsourcing centers providing services in data entry, processing, finance and payroll. e-Services Group International (e-SGI) is another large provider in Jamaica operating in Montego Bay and Kingston and offers services in customer care, help desk and inbound tele-services besides transaction processing.

From the perspective of English voice and written communication, Costa Rica, Guatemala and Panama are considered most similar to the U.S. amongst the countries surveyed. Costa Rica and Panama in particular have a mature contact center industry serving the U.S. market. Panama’s contact center industry employs approximately 5,000 agents in English, with another 5,000 agents having bilingual capability. The contact center industry in Costa Rica employs 16,000 agents with the top five captives accounting for over 50% of the agents. The limited labor pool size of Costa Rica (approximately 28,000 graduates annually) is resulting in saturation of the contact center market in this country. At present, approximately 2,000 agents provide English language services in Guatemala. Guatemala has a huge untapped potential for English and bilingual capabilities and can be leveraged by corporations to meet future demand.

Spanish Language Capability

The Latin American region has gained prominence in the recent past as a near-shore and off-shore outsourcing destination primarily because of the changing demographics in the U.S., the accompanying increase in the Hispanic population (Hispanic population projected to reach 60 million by 2015, and account for 40% of U.S. population growth between 2000 and 2010) and correspondingly growing influence and attractiveness of serving this market. Latin America is a large supply and demand market and several contact centers serve the regional market.

Although Mexico has taken the lead as the destination for Spanish language requirements, for serving as a near-shore destination for the United States as well as for serving the large domestic market within Mexico, increasing wage and real-estate costs are causing organizations to explore other countries within Latin America.

Argentina is emerging as a destination for both bilingual and Spanish contact center operations. At present, from an estimated 45,000 positions in the industry, about 5,500 positions serve the Spanish speaking export markets in Europe (primarily Spain) and the U.S. with an additionally 20,000 positions serving the bilingual Figure 2: Spanish Capability

0 1 2 3 4 5 Jamaica Venezuela Uruguay Paraguay Honduras Bolivia Panama Costa Rica El Salvador Nicaragua Ecuador Peru Guatemala Brazil Colombia Argentina Chile Mexico

Scale: From 0 (Low) to 5 (High)

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requirements. The cities of Buenos Aires and Cordoba account for over 80% of total agent positions. Companies such as TeleTech, Apex (a Sykes company) and Teleperformance are amongst the largest, serving the domestic as well as export markets. These companies provide services such as customer management, help desk, technical support, sales and database marketing services.

Chile offers good opportunities for servicing the Latin American market. Almost 8,000 agent positions serve the Spanish language market and an additional 2,000 positions with bilingual capabilities. Many multinationals have established their regional headquarters in Chile for servicing the Latin and Caribbean markets. Delta Airlines handles bookings from its contact center and serves thirteen countries across Spanish speaking Latin America. Hewlett-Packard consolidated its Latin America help-desk centers and chose Santiago, Chile to serve its home and home-office customers.

Colombia and Guatemala are considered to have amongst the ‘cleanest’ Spanish accents. Colombia is home to some of the largest contact center providers in the region such as Atento (subsidiary of the Spanish conglomerate Telefonica) with over 6,000 agents, Sitel, Digitex as well as captives of IBM, Unisys, Hewlett Packard and Citi Group.

Peru, a late entrant in the contact center industry is a destination suited for serving the Spanish market. Although the Peruvian contact center industry is highly fragmented, some of the notable companies include Atento, Siemens and Amadeus. The Peruvian contact center industry is estimated to employ over 6,000 positions with over 80% for Spanish requirements at present.

Bilingual Capability (English and Spanish)

Bilingual capability of a country is perhaps amongst the most important criteria while evaluating options for establishing contact centers to serve the U.S. market. An agent is considered to be bilingual in English and Spanish, when the agent has undergone training in both English and Spanish for accent neutrality and is able to communicate (written and spoken form) in both these languages.

Service providers and U.S. companies have well established contact center operations in countries such as Mexico and Costa Rica. However, labor costs in Mexico (the most expensive in the region) and supply-side constraints from a labor availability perspective in Costa Rica are reasons why U.S. corporations are increasingly turning to alternative Latam destinations. Countries have realized the tremendous potential and are actively taking steps to train their workforce to capitalize on this opportunity.

Although Brazil scores high in terms of the number of agents, this has to be placed in the context of the size of its contact center industry (the largest in the region). As a percentage of the total contact center population, approximately only 5% is bilingual.

Argentina has witnessed strong growth in the BPO Figure 3: Bilingual Capability

0 1 2 3 4 5 Venezuela Uruguay Peru Paraguay Nicaragua Jamaica Honduras El Salvador Ecuador Bolivia Panama Guatemala Colombia Chile Argentina Costa Rica Brazil Mexico

Scale: From 0 (Low) to 5 (High)

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industry over the last couple of years. At present, over 20,000 bilingual agents are employed in the industry. Argentina has one of the highest literacy rates in the region and English is the most common ‘second language’ taught in universities. Although salary inflation has been high at approximately 10%, the country still offers very attractive labor arbitrage opportunities.

Panama’s historic relationship with the United States has worked in its favor – a large section of Panamanian society is bilingual. Also, the presence of well-developed information technology infrastructure, stable political environment and government support has contributed to growth of the industry. Approximately 5,000 bilingual agents are employed. Companies operating contact centers in this country include Dell, National Asset Recovery Services (NARS) and service providers such as Sitel. In October 2007, Hewlett Packard (HP) announced plans to build a global delivery center in Panama City. The Panama City operations will provide call-center and infrastructure services and employ more than 1,000 people by 2009. A key challenge for this small country of 3 million people will be to ensure adequate supply of employable labor in the coming years.

Guatemala with over 2,500 bilingual agents presently, offers potential for new market entrants. Its labor pool of 4.3 million people is much larger than that of either Costa Rica or Panama. Prominent companies operating in Guatemala include ACS, Atento, Digitel, Transactel and 24/7 Customer. In 2008, Genpact acquired a delivery center in Guatemala City to manage business operations in finance & accounting for its global clients; the center will reportedly have over 1,000 positions.

El Salvador, Honduras and Nicaragua are minnows in comparison with the well established contact center markets in this region. Although these countries have less than 1000 bilingual agents each, they present opportunities for companies looking to gain a first mover advantage and tap a virgin market.

Dell (captive operations), Sykes and Teleperformance are the most prominent companies operating in El Salvador. The International Services Law was recently approved by the Salvadoran Government, in order to promote foreign investment in strategic services including contact centers, BPO and software development. This law provides several fiscal incentives including income tax exemption during the period of operations and full exemption of VAT for the purchase of goods and services necessary to render these services.

In Honduras, Mercury Communications is the largest company operating a contact center and has successfully taken advantage of the nascent market. Mercury handles customer support, technical support, pre-sales, order-taking and payment processing from its facility.

Although there are some challenges in doing business in Nicaragua, this country has made strides in positioning itself as a destination for contact center operations. Companies operating out of this region include Press Two which serves customers in U.S., Canada, Spain and England providing B2B and B2C sales, telemarketing, in-bound support and customer service. Almori was the first company to set up operations in Nicaragua in 2003. It serves the U.S. market and specializes in back office services, data entry, customer services, marketing, and business intelligence and has recently entered into software development. Almori currently has over 200 agents. Other companies include Pentafon, Atento, Intelligent Outsourcing and Connect International.

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Financial Attractiveness

Cost is a critical factor and Latin America presents significant arbitrage opportunities when compared to Western Europe and the United States. Median gross salary for a junior (0 – 2 years experience), bilingual (English/Spanish) agent has been considered for this study.

In terms of labor costs for bilingual agents, Chile, Mexico and Brazil are the highest in the region. Annual salaries range from $11,000 to $13,500 per year. In general, while salaries for bilingual agents are higher than for an English or Spanish-speaking agent across the region, it is worthy to note that the salary for bilingual (English/Spanish) agents in Brazil can be almost at a premium of 50% – 80% than for an English or Spanish speaking agent. This is attributed to the small population of bilingual agents in Brazil and the considerable premium placed for these skills. Despite the wage differential, it is evident that setting up operations or outsourcing to these countries offers an opportunity for considerable cost savings.

Near-saturation in Costa Rica is resulting in inflationary pressures and salaries have been moving upwards at double-digit rates (between 10 – 15%) annually.

In countries such as El Salvador and Honduras, salaries for entry-level bilingual agents range from $5,500 to $8,000 per year. However, companies may face challenges in attempting to rapidly grow in these markets. Also, salaries at higher experience (2 to 4 years) levels can be almost 50-70% higher in these countries.

An important factor that companies evaluating wage costs in Latin America should take cognizance of are the ‘fully-loaded costs’ including benefits, employer’s contribution and cost heads related to social security, severance and vacation pay. In Costa Rica, Nicaragua and Panama, employers need to contribute what is known as ‘thirteenth month pay’ which is the Christmas bonus. Similarly in Honduras, the base salary includes thirteenth and fourteenth month pay which is 8.33% for each month. Figure 4: Financial Attractiveness

0 1 2 3 4 5 Brazil Mexico Argentina Chile Colombia Costa Rica Venezuela Uruguay Panama Peru Nicaragua Guatemala El Salvador Jamaica Honduras Paraguay Ecuador Bolivia

Scale: From 0 (Low) to 5 (High) Source: neoIT Inc.

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Business & Living Environment and Risks

The importance of the business and living environment in a new country is not to be underestimated. During transition to either a service provider or while setting up captive operations, weeks, if not months may be required to be spent in the country during initial ramp-up, transition and possibly also during initial stages of on-going operations. This is important if expatriates are required to live and work in a foreign country as well as the ease with which the corporate culture can be retained in the captive operations or the ease of forging business relationships with the outsourcers.

An interesting point to note is that countries with higher scores on the living environment and risk (higher scores imply lower risk) dimension score lower on the financial attractiveness dimension as exemplified by Brazil, Chile, Costa Rica and Mexico. This can be explained by the fact that more mature countries have lower risks with respect to their labor market, government support or infrastructure. However, lower risks and a better living and business environment comes at a cost.

The implications of these results are straight forward – clients will have to make a trade-off between risks and rewards and balance their need for cost savings vis-à-vis their risk appetite. For example, while establishing operations or outsourcing to a more mature destination such as Mexico may entail lower risks, the costs will be higher (see figure 6). This framework helps organizations compare countries and identify the basket of locations that best fit their preferences. Figure 5: Business & Living Environment

and Risks 0 1 2 3 4 5 Honduras Guatemala Venezuela Bolivia Ecuador Nicaragua Paraguay Argentina Colombia Brazil Jamaica Peru El Salvador Panama Mexico Uruguay Costa Rica Chile

Scale: From 0 (Low) to 5 (High) Higher score implies lower risk Source: neoIT Inc.

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Market Maturity

As demand for offshore/near-shore contact center services increases, both clients and service providers are looking to expand their geographic footprint in order to best optimize customer requirements. A whole host of countries in the region are waking up to the opportunities the contact center industry provides in terms of employment, export revenue and higher standards of living for the younger generation. Through aggressive marketing efforts and/or financial incentives, countries are reaching out to attract investment.

Initial contact center investments were focused on the larger economies of the region such as Mexico, Brazil and Chile for reasons related to the strong domestic market opportunities, large qualified labor pool and good communications infrastructure. As these countries evolve and diversify to more complex back-office processes, new comers are targeting to fill the space. Additionally, cost considerations, diversification and geographic risk mitigation strategies are causing clients and service providers to explore nascent markets. Countries such as El Salvador, Guatemala and Peru (amongst others) are attractive from a cost and diversification perspective. Lower labor costs, an educated (although smaller labor pool) and an evolving ecosystem which includes a couple of market players and support from the government will result in increasing investments in these countries.

Source: neoIT Inc.

Low High Low High Degree of Risk F in a n c ia l A tt ra c ti v e n e s s Bolivia Ecuador Honduras Paraguay Jamaica El Salvador

Peru Nicaragua Guatemala Uruguay Panama

Costa Rica _Colombia Venezuela Chile

Argentina

Brazil Mexico

Figure 6: Country Comparison – Financial Attractiveness vs. Risk Attractiveness

Source: neoIT Inc.

Argentina

Brazil Mexico

Figure 6: Country Comparison – Financial Attractiveness vs. Risk Attractiveness

Argentina

Brazil Mexico

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Conclusion

Latin America is an attractive destination for contact center outsourcing. U.S. multi-national corporations should explore various opportunities that exist across the region for setting up operations to either serve their U.S. clients or for serving the domestic markets in this region. Although while some countries such as Brazil, Chile, Costa Rica and Mexico have already established themselves in the outsourcing market, a host of countries are emerging to attract business through aggressive marketing efforts or by offering financial incentives. Global corporations will be well served to explore all available options and evaluate countries based on their business needs; whether it is for first-mover advantage, cost savings, skills availability or quality of language capability.

L o w M e d iu m H ig h $5,000

Median Gross Annual Salary for a Bilingual Agent

C a ll C e n te r M a rk e t M a tu ri ty 1 Mexico Argentina Brazil Uruguay Peru Venezuela Jamaica Guatemala Bolivia Honduras El Salvador Paraguay Nicaragua Costa Rica Panama

Source: neoIT Inc.

Ecuador

Colombia

BPO Exports in US$

> 200 M

> 50 – 200M

< 50M

$10,000 $15,000

1: Only captives of multi-national companies and service providers serving export markets considered Figure 7: Country Comparison – Market Maturity

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Page 11 of 11 Latin America Contact Center Landscape

More information about the outsourcing industry can be found within neoIT’s research center at www.neoIT.com. For more details about neoIT’s offshore advisory and management services, please contact:

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Contributors

Govind Maheshwari Director

Editors

Atul Vashistha Chairman