A New Latin Rhythm: The Transformation of the Global Outsourcing Business kpmg.com

KPMG Outsourcing Report A New Latin Rhythm: The Transformation of the Global Outsourcing Business kpmg.com May 2014

KPMG Outsourcing Report 3 KPMG is pleased to present a report on the situation of the Shared Services and Outsourcing market in Latin America. Five years ago, in our opening edition of Nearshore Attraction, we assessed Latin America s attractiveness as a destination for outsourcing services. Since then, the market has significantly evolved and matured, and, in this edition, we take a detailed look at the region considering of these changes. The use of Shared Services and Outsourcing as a strategic tool for company leaders continues to grow rapidly, not only in Latin America, but globally. KPMG has continued to develop, improve, expand and enhance the practice to serve our clients and their unique market demands. In 2011, KPMG invested in the tool by acquiring the consulting company EquaTerra. Today, hundreds of Shared Services and Outsourcing practitioners from KPMG/ EquaTerra provide for clients around the world. Specifically, Brazil continues to lead the region in terms of outsourcing market size, but has been losing competitiveness in comparison to others, such as Mexico, Colombia, and Central America. One problem Brazil faces is its unfavourable labour regulations and its relatively high labour costs. However, offsetting this trend on some degree is the experience and creativity of the Brazilian delivery staff and management in supporting innovative technology platforms and services. In fact, innovation is high on the Brazilian outsourcing agenda, driven by the emergence of cloud computing and mobile/digital platforms, which influences delivery costs and universal and service accessibility. Moreover, due to globalization, the need for end-to-end service delivery integration in the region has never been more urgent and, together with mitigating labour costs, motivates companies to choose models of Global Business Services (GBS) that focus on integrating collectively shared internal services and outsourcing through occupations, business units and geographic obstacles. Most of the economies in Latin America continue to expand at a steady pace, although they have been increasingly affected by a general inaptitude to meet service demand. Despite this challenge, Latin America is still able to offer mass-market outsourcing services and will grow faster as an outsourcing location than the region as a whole. KPMG is committed to provide its clients with our full array of Advisory Services. We support our clients through the whole business life cycle, from Strategy, to Design, Implementation, and Optimization for business process outsourcing, IT outsourcing and global business services. David Brown SSOA Global Lead Partner Carlos Gatti Advisory Managing Partner, Latin America Rafael Coquis SSOA LATAM Director Fernando Aguirre Partner, Management Consulting, KPMG in Brazil

4 KPMG Outsourcing Report Foreword In our inaugural edition of Nearshore Attraction five years ago, we looked at Latin America s attractiveness as a destination for outsourcing services. Since then, there have clearly been important changes in this and other markets. In this edition, we take another look at the region in considering these changes. Brazil continues to lead the region in terms of market size, but has been losing competitiveness if compared to other locations such as Mexico, Colombia, and Central America. One problem is the country s labor regulations, which are very unfavorable, although the experience and creativity of Brazilian technicians are beneficial in providing technology and services that require innovation. In fact, innovation is high on the agenda driven by the emergence of new technologies, such as cloud computing, that bring a set of real possibilities of virtualization and universal access to certain technologies and ways of working. The need for global integration in the region has never been so urgent and, in addition to rising costs, this motivates companies to opt for models of Global Business Services (GBS), including shared internal services and outsourcing. The region s economy continues to expand at a steady pace, although it has been affected by a general shortage of talent. Despite this challenge, Central America is still able to offer mass-market services. Meanwhile, the same pressure that can inhibit investment in the region is driving companies that have never used outsourcing models before to do so for the first time. This more sophisticated and demanding market is comprised of clients from different locations and occupations. We hope that this report will provide insight into this subject and that we can support you in your business, whether as a client or a provider of BPO and ITO services in the region. Contents 5 Report Overview 6 Introduction 8 Case Study Digitex: Colombian Attraction 10 Key Findings 11 Improved economic conditions 12 Case Study Globant: Think globally, act locally 14 Pumping the talent pipeline 16 Case Study IBM: Focus on education 18 Cloud computing 19 Brazil for Brazil 20 Case Study Neoris: The Mexican Connection 22 Shared services and outsourcing 23 Government incentives 23 Chile 24 Colombia 25 Argentina 25 Mexico 26 Costa Rica & Panama 27 Brazil 28 Case Study Sonda: A Latin American IT Star 30 Challenges going forward 32 Case Study Sutherland: Rightsourcing in Latin America 34 Conclusion

KPMG Outsourcing Report 5 Report Overview This report highlights the changes in Latin America s outsourcing industry. The first edition of this report (Nearshore Attraction: Latin America Beckons as a Global Outsourcing Destination, 2009) focused on the rise of Latin America as a nearshore destination and the incentives offered in different countries to attract outsourcing service providers. This edition revisits the region fives years on and asks: is Latin America still attractive as a global outsourcing destination? TThe intention of this report is two-fold: 1) provide readers with a general overview of the changes in Latin America s outsourcing industry; and 2) highlight specific tradeoffs when considering key locations for outsourcing in the region. First of all, the report examines the current trends in the outsourcing industry. These include: Continued strong growth of Latin America s market for Business Process Outsourcing (BPO) Growing domestic demand for BPO services from local companies and others with operations in the region The rise of cloud computing Increased client focus on the need for value-added services Competition and investment in human capital development Development of a hybrid model for shared services and outsourcing Case studies of selected companies with operations in the region IBM, Sonda, Neoris, Globant, Digitex and Sutherland demonstrate how BPO and IT service providers have adapted to these changes in different countries. The report also gives an overview of the incentives available in the region s top global services locations, including Chile, Argentina, Brazil, Colombia, Mexico, Costa Rica and Panama. Finally, the report summarizes the challenges Latin America s outsourcing industry faces in an uncertain global economic scenario and offers a vision on the future of outsourcing in the region.

6 KPMG Outsourcing Report Introduction Following the 2008 global financial crisis, Latin America emerged as a nearshore alternative to traditional outsourcing hubs like India, China and Malaysia. Although these hubs continue to show the highest growth rates in the industry, Latin America has consolidated its position as a top global outsourcing destination with a growing share of the global BPO market. With the global economy recovered, the outsourcing industry expanded as companies realized the advantages of outsourcing go far beyond cost-savings. But, today, Latin America is still a niche region for US companies to turn to for outsourcing services. Local companies or others already with operations in the LatAm region still primarily drive demand. Even as an emerging region for outsoucing for US companies, Latin America has many benefits as a nearshore destination. nearshore destination remain basically unchanged. These include: Close physical proximity to the US Similar time zone to the US Cultural affinity Modern infrastructure Tax incentives in many countries Favorable business environment Languages: Spanish and Portuguese, with English as a second language According to the 2011 AT Kearney Global Services Location Index, Latin America has eight countries in the top 50. These are: Mexico (6), Chile (10), Brazil (12), Costa Rica (19), Argentina (30), Panama (34), Uruguay (41) and Colombia (43).1 Mexico, which has moved ahead of Chile to top spot in the region, has harnessed its proximity to the United States, a weak peso and its large talent pool to provide BPO and IT services to Mexican firms like Cemex, but also to US firms that have established operations in the country. Central American countries such as Costa Rica and Panama have also attracted leading service providers like IBM and HP to set up service centers in their free trade zones. Elsewhere in Central America, Xerox recently opened a call center in Guatemala and several Indian companies have established operations to serve US clients in the same time zone. 1 AT Kearney Global Services Location Index 2011

KPMG Outsourcing Report 7 In South America, Chile continues to stand out in the high value-added area with Santiago-based companies such as Sonda and Telefónica offering IT services throughout the region. But it has lost some competitiveness recently due to an increase in costs. Colombia, on the other hand, has overcome is reputation for danger and become a safe and secure place to do business with a large talent pool. Brazil, for its part, ranks third in Latin America, with a huge market and modern infrastructure, but it also has some of the highest labor costs in the region. Combined with high import and service taxes, as well as the language barrier, this makes it difficult for companies to establish service centers. Yet despite the difficulties faced by companies in some countries, demand for BPO services in Latin America continues to grow. In response, a new wave of local service providers has emerged offering clients cloudbased solutions and innovative services. This has created competition for global service providers and given clients more options. But they are not just competing against other service providers in Latin America the IT technology revolution has turned outsourcing into a commodity with BPO services available in emerging markets from Asia to the Middle East and Africa. So is Latin America, where labor costs are often higher than in these regions, still attractive as an outsourcing destination? The answer is yes. Latin America s BPO market represents just 5% of global spending, or around US$7 billion, according to a report by research firm Gartner, but it is growing2. Gartner predicts annual growth in the market will average nearly 10% through 2017, up from 5.3% in 2013, led by Colombia, Mexico and Chile, which are all expected to grow at over 10% in that period. But although demand is rising, costs are also climbing. Rising prosperity in many countries has made low-paid work at contact centers less attractive for university graduates. At the same time, high employment levels have pushed up labor costs while competition for qualified graduates has intensified. Clients expectations have also changed. Although cost remains an important factor, increasingly globalized companies are looking to improve their efficiency with industry-specific value-added services in local markets. In this scenario, service providers have moved towards a hybrid shared services and outsourcing model with centers in various countries to support their clients needs. This strategy enables them to offer clients a mix of onshore and nearshore services, while leveraging their access to talent, tax incentives and infrastructure in different countries. Of course, this takes investment as well as close collaboration with local universities and economic development agencies. In this regard, countries like Costa Rica and Colombia, with a long-term plan for human capital development, are well positioned to attract service providers. Ultimately, the growth of the shared services and outsourcing industry in the region depends on the ability of service providers to navigate regulations and incentives in different countries. This is a complex task given the differences between countries in Latin America. But, as highlighted in this report, it is possible with the right mix of local knowledge and global vision. 2 Gartner Research, Forecast Analysis: Business Process Outsourcing, Worldwide, 4Q13 Update, February 2014

8 KPMG Outsourcing Report Case Study Digitex: Colombian Attraction When Spanish outsourcing firm Digitex arrived in Colombia in 2005 it was a different country. Back then Colombia still suffered from a perception of danger related to drug trafficking and companies had yet to realize the potential of the country as an outsourcing destination. But today that has changed. Digitex originally established a BPO center in Bogotá to serve clients in Latin America. Today, it has 14,000 workers in the region and three lines of business: contact centers, BPO and information technology services. According to Martha Figueroa, BPO Business Development Manager for Digitex, the firm chose Colombia as its base in the region mainly because of the quality of its workforce and low labor costs. People in Colombia are very oriented towards customer service, she said. Digitex offers customer service solutions including virtual support and call centers. Most of Digitex s clients, including companies like Telefónica Chile, are in Latin America so 90% of its services are in Spanish, she said. The company employs 6,000 people in Colombia but competition for qualified candidates is heating up, especially in Bogotá and other large cities where turnover is a problem, said Figueroa. As a result, Digitex has established contact centers in smaller cities like Manizales and Ibague where there is less competition and turnover is lower. Bogotá is an expensive city, she said. It s easier to do business in other cities. Some clients prefer outsourcing service providers to be in the same city, which is why Digitex maintains a center in Bogotá, but having operations in different cities helps to improve flexibility and allows Digitex

KPMG Outsourcing Report 9 to take advantage of Free Trade Zones, she said. As for the security situation, which up until about a decade ago was still a real concern for companies, it is not an obstacle to outsourcing from small cities in Colombia. I ve worked in Mexico and that s more dangerous, said Figueroa. The devaluation of the Colombian peso is also positive for Digitex, which has income in dollars, she explained. The exchange rate favors us, she said. Colombia s location, a short plane ride from Spain but also to the rest of Latin America, is also a competitive advantage, she says. Bogotá is a hub for airlines like Avianca and part of Digitex s management is based in Colombia. Infrastructure in Colombia is also advantage. The recently introduced 4G network makes mobile communications fast and efficient, she said. And domestic flights are cheap and frequent. BPO contracts in Latin America tend to be long-term given the investment in technology and software so companies are careful to choose a service provider that can meet their needs going forward. You are married to the client for a long time, said Figueroa. In the future, Digitex is looking to expand in other countries like Mexico, Brazil and the United States, but replicating its success in Colombia will not be easy, admitted Figueroa. She said one option is to acquire contact centers that are already in operation in these countries. Meanwhile, Digitex is well positioned to meet the growing demand for BPO services in Colombia, especially given recent investments by Chilean companies in the retail sector. The dynamism in all sectors in Colombia is amazing, there are many opportunities to grow, concluded Figueroa. In the future, Digitex aims to diversify its client base (Telefónica currently accounts for 60% of is business) in the region but a challenge is overcoming cultural differences between countries. It s an issue of idiosyncrasies, you have to understand the culture in each country, she said. Another challenge is increasing competition. As contact centers have become more of a commodity in Colombia and elsewhere in the region, Digitex has had to innovate with new technologies and offer integrated end-to-end BPO services to attract and retain clients, said Figueroa.

10 KPMG Outsourcing Report Key Findings Continued growth in the LatAm BPO market Emergence of Mexico as the top LatAm services location Strong growth in domestic demand for BPO services in Latin America driven by economic growth Trend towards more value-added BPO services including innovation and cloud computing Investment in human capital development in LatAm and private partnerships with universities Development of hybrid shared service/ outsourcing centers, especially in Central America

KPMG Outsourcing Report 11 Improved economic conditions In general, Latin American countries weathered the 2008 global economic crisis relatively well. In fact, the crisis had the effect of jump-starting the BPO industry in the region by increasing demand for nearshore services, as companies aimed at cutting costs. Today, more than five years on, the gradual economic recovery in the United States and Western Europe has contributed to BPO demand in Latin America as businesses have more resources to spend on outsourcing. In addition, economic growth has led to a slew of mergers and acquisitions, often leading to consolidation and standardization of systems and processes, which, in turn, leads to outsourcing.3 The devaluation of currencies such as the Brazilian real and Argentine peso has also had a positive impact on the outsourcing industry by making labor cheaper for companies earning income in US dollars. Given the low cost of labor, Gartner sees development of BPO service delivery centers as a growth opportunity in this market.4 And this trend is set to continue as the US Federal Reserve continues to normalize its monetary policy and reduce stimulus, thereby boosting the value of the dollar. Going forward, slower economic growth in China, which is a major market for commodities from Latin America, is expected to limit the growth of some Latin American countries such as Chile and Peru. But, while this downturn could affect demand for outsourcing, the BPO market is expected to continue growing driven mainly by demand from clients based in the region and clients with operations there. 3 Gartner Research, Forecast Analysis: Business Process Outsourcing, Worldwide, 4Q13 Update, February 2014 4 Gartner Research, Forecast Analysis: Business Process Outsourcing, Worldwide, 4Q13 Update, February 2014

12 KPMG Outsourcing Report Case Study Globant: Think globally, act locally Google, Electronic Arts, NatGeo, LinkedIn and Coca Cola those are just a few of the clients of Globant, a software development and IT services company founded in Argentina in 2003 that has become one of the most successful and globalized IT firms in the region. We are an Argentine company but we think of ourselves as global, said Martín Umaran, co-founder and Chief of Corporate Development at Globant. The idea was to create a company to take advantage of the talent that exists in the region. The company employs around 3,000 people in Latin America and the US, including two thirds of them in Argentina. About half of those work in Globant s office in Buenos Aires and the rest in cities such as Cordoba, Rosario and La Plata. The company develops software and services, leveraging the power of emerging technologies and trends, such as mobile, cloud computing, Big Data, UX and gaming. Smartphones didn t exist five years ago so there has been a technological revolution, said Umaran. The majority, around 90%, of Globant s business is for clients outside the region, mainly in the United States. Demand for IT services has surged in Latin America in the last decade driven by the economic development of countries in the region. Globant, with its global presence, is well positioned to offer services to multinational clients in the region and abroad, said Umaran. The competitive advantages of Latin America in the IT sector include its similar time zone

KPMG Outsourcing Report 13 to North America, as well as its cultural similarity. Argentina in particular offers a large and well educated labor pool, a history of entrepreneurship in the IT area, good universities, tax incentives for IT exporters and a high level of English language proficiency, said Umaran. English is important, it s easier to find engineers who speak English in Buenos Aires than in other big cities, he said. By opening offices in cities such as Cordoba, Rosario and La Plata, Globant has managed to attract the best and brightest young university graduates, said Umaran. Millenials want to work where they live so we have to bring the work to them, he said. Globant s strategy of diversification in the region, including offices in Uruguay, Brazil, Colombia, Mexico and the United States, also allows it to take advantage of the talent pipeline in other countries. We find the best in each place, Umaran said. Despite the perception that Argentina has scared off investors through economic mismanagement, Umaran says this view ignores the fact that the country boasts some of the best universities and software engineers in the region. In fact, the devaluation of the Argentine Peso has benefitted Globant, which has its income in US dollars. But the benefit of the exchange rate is likely to be transitory, said Umaran, adding that Globant is focused on the long-term. Innovative Companies in Latin America in 2014. Innovation has to be in the DNA of the company, he said. We push our people to be creative. Other outsourcing hubs like Asia are cheaper than Argentina for certain IT services, but cost is not everything, Umaran pointed out. While the price is important, the ability to produce a good quality product on time is also key to success, he added. Globant s global presence has forced it to become more competitive and innovative, which helps to attract new clients, said Umaran. Clients don t pick us because we re in Latin America, they pick us because we have the quality they are looking for, he said. Looking to the future, Globant plans to continue to diversify its operations globally. Part of its growth strategy is to acquire local companies such as Brazil-based IT firm TerraForum, which Globant bought in 2012. It is true that global demand for IT services is still closely linked to the US economy and another economic downturn in that country could affect demand, but any hiccups are likely to be temporary. There will always be ups and downs in this business, but we are in it for the long haul, said Umaran. Given the importance of innovation to Globant s success, recruiting the best talent available is crucial, he said. The company was recently named by business magazine Fast Company as one of the 10 Most

14 KPMG Outsourcing Report Pumping the talent pipeline But growth requires talent. With the exception of Brazil, Latin American labor costs remain relatively low compared with other regions. On the other hand, with demand for BPO services growing across the region, particularly for more specialized services, so is demand for talent. In general, Latin America offers a pipeline of graduates from its universities and technical schools, but the cost of senior level managers with experience is rising. Some companies have solved the problem by working with universities to train potential employees in skills demanded in their industry. For example, IBM is working with the Costa Rican Investment Promotion Agency (CINDE) to broaden the talent pool in Costa Rica. The aim is to provide universities with technology, knowledge and access to specialized software to improve training and education, and to strengthen the curricula of IT programs. Universities have been very open about putting these skills in their programs, which has also increased our labor pool, said Alberto Mainieri, manager of IBM s Costa Rica Delivery Center. In Panama, the labor market is also hot. It is very hard to find technical talent locally, and wages are going up fast, said Rene Van Hoorde, general manager of IT outsourcing firm GBM. Managers are in particularly high demand. We are hiring people from South America and Spain to cope with the high demand of managed services, he said. Companies that offer competitive wages and good prospects for advancement have more success in attracting and retaining skilled workers. For example, Dell, which has a Shared Service Center in Panama that provides tech support and other services to its clients, has become the second largest employer in the country, partly by treating its employees well. As Panama keeps growing, the issue of training and human resource development is very important, said Gustavo Ripoll, an Argentine who manages Dell s Panama center. Like IBM, Dell has formed relationships with local universities to promote joint training programs. Panama is not a place where you can set up a center and find skilled human resources from one day to the next, said Ripoll. It has to be a gradual process. Mexico, which has a large pool of IT graduates familiar with US business culture, has an advantage in the race for talent. Companies like Neoris and IBM report that they have had no trouble hiring top quality graduates in cities like Monterrey and Guadalajara. Elsewhere in the region, competition for project managers is increasing particularly in large cities. In Colombia, Spanish BPO services provider Digitex has established contact centers in small cities like Manizales and Ibague where turnover is lower. Bogotá is an expensive city, said Martha Figueroa, Digitex s Manager of Business Developmnent. It s easier to do business in other cities. Argentina-based Globant has also found it easier to recruit talented Millennials in cities that are not as competitive as Buenos Aires. Globant has opened offices in cities like La Plata, Córdoba and Rosario, in addition to international offices in Brazil, Mexico, Colombia, Uruguay and the US among other countries. Not only does this increase access to talent, but it also helps to diversify the company s operations across the country and the region, says Globant s Chief of Corporate Development, Martin Umaran. Attracting the best talent available is crucial for innovation, which is important in the IT sector, said Umaran. Innovation has to be in the DNA of the company, he said. We push our people to be creative.

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16 KPMG Outsourcing Report Case Study IBM: Focus on education The key to offering BPO services from Latin America is finding enough skilled project managers and IT engineers at a reasonable cost. At its Delivery Center in Costa Rica, IBM has discovered this is a lot easier to do if local universities know and teach the skills that it requires. IBM has had operations in Costa Rica since 2004, but in 2012 it opened a Delivery Center in the America Free Zone in Heredia, just outside of capital city San José. The US-based firm plans to invest US$300 million over 10 years and employs around 1,000 people in the country. The facility supports clients in the areas of IT security, data storage, payroll, business analytics, cloud computing, and other services. IBM s list of clients includes Procter & Gamble. Only a two and a half hour flight from Miami and on a similar time zone to the US East Coast, Costa Rica is ideally located as a strategic nearshore center for North America, said Alberto Maineri, manager of IBM s Costa Rica Delivery Center. In addition to its strategic location, Costa Rica offers a small but welleducated workforce. Labor costs are higher than Delivery Centers in India, China or the Philippines, but are still lower than in the US, he said. IBM used to offer customer relationship services from Costa Rica, but, last year, as part of a plan to focus on its higher margin business, IBM sold its global BPO division to Synnex Corporation. Today, IBM still offers some basic tech support services but is mainly focused on human resources outsourcing, said Maineri.

KPMG Outsourcing Report 17 That means it needs more certified project managers and IT experts. As Costa Rica shifts from a tourismbased economy to a high tech services center, demand for IT professionals at companies like IBM, HP and Intel is soaring, but IBM has so far managed to remain fully staffed. We ve had no problem recruiting the skills that we need anywhere from finance accountants with English to certified project managers, said Mainieri. We ve had challenges in specific areas but overall the labor pool has improved over the last year. Part of the reason is IBM s program to develop IT skills at local schools and universities. For example, IBM offers high school students internships in the company and then hires the top performers. This has been good to find the skills that we need such as level one tech support, said Mainieri. IBM is also working with the Costa Rican Investment Promotion Agency (CINDE) to promote skills at universities. The aim is to provide professors with technology, knowledge and access to specialized software, in order to improve training and education, and to strengthen the curricula of IT programs around four themes: cyber security, cloud computing, data storage and business analytics. For IBM, the program helps to develop knowledge, promote innovation and train IT professionals to ensure a pipeline of innovative talent. In this regard, the firm recently brought in experts to teach Costa Rican university professors about cloud technology. Not all universities in the region are willing to change their curriculum to fit the specific skills we need. Thanks to the education system, IBM s services from Costa Rica tend to be higher quality than services from other outsourcing locations like the Philippines or India. Better education means better quality, and customer satisfaction is our selling point over cost, said Mainieri. But there is room to improve, particularly in guiding high school students, says Mainieri. We need more systems engineers and software developers, not lawyers and doctors, he said. Bilingual engineers are especially in demand. Costa Rica has a relatively good level of English but more bilingual graduates are needed. For this reason, the government s plan to have all high school graduates fully bilingual by 2017 is good for IBM and other outsourcing companies. That will be an advantage for Costa Rica, said Mainieri. In the future, IBM expects growth in demand for IT services to be driven by Latin American countries. The company sees Costa Rica as a strategic site to provide services to companies in the region, as well as to clients in North America, said Mainieri. We see Costa Rica is serious about investment by outsourcing companies, which makes us think we re on the right track, he concluded. The universities have been very open about putting these skills in their programs, which has also increased our labor pool, he said.

18 KPMG Outsourcing Report Cloud computing In the age of the cloud and the smartphone, high-speed broadband connections and mobile networks are crucial for IT service providers. And, with demand for mobile and big data applications rising, countries with modern telecommunications infrastructure, trained workers and flexible intellectual property regulations have an advantage. The Latin American market for cloud-based contact center solutions is still in an early stage, but the market is growing as early adopters emerge. Hosted and cloud models are gaining acceptance in the region, especially in Chile, Peru, Argentina, Mexico and Brazil.5 But developing cloud-based solutions requires trained staff. In Costa Rica, CINDE has been proactive in promoting educational exchanges. In March, a group of students and teachers from Costa Rica completed a twomonth internship in India through a cooperation program between Indian company Infosys and the Costa Rican government. The participants, who won a scholarship to participate, learned about new tools and developed skills in cloud computing in Java and Microsoft. Cloud computing also requires robust telecommunications infrastructure. This is the case in most of the region with the exception of some parts of Brazil and Uruguay. According to the World Economic Forum s Networked Readiness Index 20136 Chile ranked first in Latin America and 34th out of 144 countries, well ahead of Uruguay (54th), Brazil (60th) and Mexico (63rd). However, in general, faster connection speeds are needed in the region to allow IT companies to develop innovative cloud-based solutions. In Costa Rica, for example, a faster broadband connection is needed to provide the connection speeds that companies like IBM require, said IBM s Alberto Mainieri. Broadband has a limitation in Costa Rica, which limits our capacity, he said. As cloud computing catches on in the region, the security of intellectual property and data is also an important issue for companies and governments alike. While intellectual property protection, including patents and copyrights, is usually included in free trade agreements, the level of enforcement is not equal in all countries. Countries such as Costa Rica, Colombia and Brazil have significantly improved their efforts to better protect intellectual property. Chile, which remains with Argentina and Venezuela on the USTR Priority Watch List of countries that do not protect intellectual property adequately,7 has also made recent improvements. But there is still work to do. 5 Frost & Sullivan, Analysis of the Hosted and Cloud Solutions for Contact Centers Market in Latin America 6 World Economic Forum, http://www3.weforum.org/docs/gitr/2013/gitr_overallrankings_2013.pdf 7 USTR Special 301 Report, 2013 http://www.ustr.gov/sites/default/files/05012013%202013%20special%20301%20report.pdf

KPMG Outsourcing Report 19 Brazil for Brazil Brazil has the largest economy in the region and a population of around 202 million8. Many of the world s largest corporations are present in this country, which offers a large pool of IT professionals and a similar time zone to the US East Coast. And, despite the country s stalling economy, the BPO market continues to grow as companies look for ways to improve efficiency and reduce costs. A number of outsourcing companies have established offices in Brazil to serve the Brazilian market and their clients operations globally. Genpact, an India-based financial and accounting outsourcing company founded as a spin-off from GE, is one such company. It established an office in Brazil in 2009 to serve its global clients including GE and AstraZeneca. Our number of global clients with a presence is Brazil is growing and it is easier for us to service them here, said Affonso Nina, Brazil Manager for Genpact. complicated tax structure at the federal, state and municipal levels mean that Genpact s clients prefer to receive financial services locally, said Nina. You need to have local knowledge of the legislation, it s not like the US or other English-speaking countries where you can do the work from India, he said. São Paulo, Brazil s largest city, is expensive and overcrowded. Genpact recently opened a services center in Uberlândia in the state of Minas Gerais, which is just a 1-hour flight from Sao Paolo. Genpact s Uberlândia center will hire 200 to 300 new professionals, with plans to grow the workforce to up to 1,000 in the future. The reason we are opening there is the availability of talent, the qualified workforce we need for our services, and lower costs compared to São Paulo, said Nina. Another reason is taxes. The municipal services tax (ISS) in São Paulo is 5%, but Uberlândia offers a lower tax rate and a better lifestyle than in São Paulo, he said. Genpact complements its center in Brazil with Spanish-speaking delivery centers in Guatemala, Mexico, and Colombia, in addition to its English-speaking center in India. By outsourcing, [companies] can leverage the footprint they have outside of Brazil, said Nina. But it doesn t always make sense to take work outside of Brazil. For Brazil-based clients, Genpact performs specialized services within the country. This enables them to avoid the high tax rate for imported services, which can reach up to 50%, said Nina. Overall, companies like Genpact have found it makes strategic sense to serve clients domestically from Brazil, but that does not necessarily mean having centers in São Paulo or Rio de Janeiro. Other cities and states in Brazil offer lower costs and a greater talent pool for outsourcing and shared services. Brazil s official language (Portuguese) combined with a very 8 CIA World Factbook, https://www.cia.gov/library/publications/the-world-factbook/wfbext/ region_soa.html

20 KPMG Outsourcing Report Case Study Neoris: The Mexican Connection Global IT outsourcing company Neoris was founded on Mexican concrete. Created in 2000 as a spin-off of Mexican cement maker Cemex s IT department, it is one of the few cases where a company derived from the spin-off of the IT department of a large company has become successful as an independent player in the market. In addition, Neoris has repaid the favor. In 2013, Cemex announced it had reached a multi-year strategic partnership with Neoris to provide long-term IT services around the globe. As part of the agreement, Neoris will provide IT services such as software engineering and application development for multiple projects. Neoris is the largest IT consulting and systems integration company in Mexico. Headquartered in Miami, Neoris has operations in the US, Europe, Latin America, Africa, and the Middle East. About 75% of Neoris nearshore business is in the United States and the rest is in Latin America and Europe, said Carlos Diaz, nearshore director at Neoris. In Mexico, Neoris has offices in Monterrey, Culiacan, Mexico City, and is starting operations in Queretaro. Mexico s large pool of bilingual workers, its proximity to the US, and its participation in the NAFTA free trade agreement make it an ideal location to provide nearshore IT services to North America, said Diaz. In fact, according to the AT Kearney Global Service Locations Index 2011, Mexico has become the top global services location in Latin America thanks to its large talent pool, currency depreciation and proximity to the United States. Monterrey, for example, is just an 80-minute flight from Houston or Dallas. We are close to both coasts of the US, which allows for prompt face-to-face visits when needed, said Diaz. While some IT services can be contracted at lower cost from Asia, he added, systems implementation and application outsourcing services

KPMG Outsourcing Report 21 can meet expectations at a reduced cost when using a service provider in a similar time zone, he said. Customers don t have to start their meetings very early or finish very late, he said, adding that for this reason some Indian outsourcing firms have set up operations in Latin America. It helps that the NAFTA agreement allows Mexican professionals to obtain renewable work visas for the US. Although English is more widely spoken in Asia, US clients understand Mexicans better on the phone and by email, usually getting on very well due to a similar business culture, said Diaz. Neoris gets a lot of questions about security since Mexico has a history of drug-related violence especially in border areas. While it is true that drug violence in cities like Monterrey occasionally claims the lives of bystanders, it has not affected the IT business directly and, in fact, the level of violent crime is lower or equal to large US cities, said Diaz. Another advantage for firms like Neoris is government support and tax benefits for IT companies. For example, the Mexican government s Program for the Development of the Software Industry (PROSOFT) offers subsidies up to 50% of infrastructure for IT firms. The ease of doing business, government support, infrastructure and talent have helped to create an appropriate work environment, said Diaz. Bilingual IT graduates are relatively easy to find in Mexico s big cities like Monterrey and communications infrastructure, including mobile broadband, is very good, which allows Neoris to stay connected and meet its customer s needs, he said. But there are challenges for IT service providers. The demand for project managers and some IT experts has continued to rise, thereby increasing their cost. The way to balance this and keep costs down is to have the right mix of consultants, said Diaz. However, customers are not always willing to pay a higher rate for senior project managers, which can be a challenge for companies like Neoris. Another problem in the IT outsourcing space is that some US clients expect value added services from companies like Neoris but their contracts are restricted by cost, said Diaz. In the US, the proposal process is very formal and cold most of the time it is very oriented towards price, he said. Such contracts end up with little service flexibility, limiting their scope and service levels. This may be convenient for larger companies with large outsourcing volumes, but smaller and medium-size clients need more flexibility in terms of services, especially given the fastchanging nature of the IT industry, he said. The world of outsourcing is changing towards contracts that allow the client and partner to balance a mix of services according to changing needs, said Diaz. The IT revolution including data analytics, social networking and cloud computing, has created plenty of opportunities in the IT area. But competition from Asia and other regions is increasing. The key, says Diaz, is convincing potential clients to give up some control to outsourcing companies that offer economies of scale and software expertise, and above all to free up the valuable time of in-house IT staff to focus on more strategic initiatives. I m very optimistic, there is a lot of potential in the region, he said. At the same time, US clients are becoming more demanding. IT application outsourcing contracts are now commonly signed for three or five years, but some companies want exit clauses after six months, said Diaz. That gives them more confidence because they are not tied down for a long time.

22 KPMG Outsourcing Report Shared services and outsourcing Globally, the trend is moving towards a hybrid model known as Global Business Services, which includes shared services and outsourcing as part of an end-toend global process focusing on cost optimization and value delivery. Traditional outsourcing destinations like India and China have already made this shift. India s dominance in the global Shared Services and Outsourcing (SSO) market has been the result of its ability to capture global offshore demand, but this now includes a focus on developing the domestic market to capture the growth of Indian companies.9 A similar trend is observed in China, where outsourcing companies are targeting the huge domestic market.10 This shift has been slower in Latin America, which is still primarily a nearshore destination, but it is happening gradually as service providers move up the value chain. As demand for outsourcing services grows, global companies with operations in the region are evaluating shared services centers. These are on the rise in Latin America and there are several countries that are seen as shared services hotspots, including Costa Rica, Panama and Colombia. Companies such as Dell and Intel have established shared services centers in Central America to serve their own operations in the region and beyond. However, a shared service center can also be run jointly with an outsourcing service provider to not only reduce costs but also improve efficiency and quality of service. This hybrid model, whereby employees from both companies work together at the same site, is becoming increasingly common in Latin America. In Colombia, for example, Genpact recently set up a Shared Services Center in Bogotá for UK-based beverage maker Diageo. 9 Inside the Dragon 2013: Outsourcing Destinations in China, KPMG, 2013 10 Inside the Dragon 2013: Outsourcing Destinations in China, KPMG, 2013

KPMG Outsourcing Report 23 Government incentives A few years ago, tax incentives weighed heavily in a company s decision on where to outsource services in the region. Today, although such incentives are still important, tax breaks for outsourcing companies have become more common throughout the region and are often considered a prerequisite for investment. At the same time, other factors such as the talent pool, language abilities, geographic location and time zone have become more important. Nevertheless, countries have a range of options to attract investment that is not limited to tax incentives. Here is an overview of what some countries in the region offer: Chile Chile has emerged as an important services platform in Latin America, despite its small size and physical remoteness. It has excellent infrastructure, political stability, a skilled workforce and its capital city Santiago offers a quality of life that is amongst the highest in the region. In addition, Chile continues to score highly in international rankings. According to the World Bank s most recent Ease of Doing Business survey of 189 countries, Chile ranked top in the region (34th), followed by Peru (42nd), Colombia (43rd) and Mexico (53rd).11 Through the InvestChile program run by the Foreign Investment Committee (Comision de Inversión Extranjera), the Chilean Economic Development Agency (CORFO by its Spanish initials), provides various incentives for investment in high technology fields. These include: Co-funding of pre-investment studies, start-up expenses, R&D and investments in fixed assets. Grants for human resources development A reduction in income tax of up to 35% for investment in R&D. Chile also has numerous free trade agreements with countries including the US, Canada, Australia and China. Chile was recently invited to join the US Visa Waiver Program, the first country in South America to receive such an invitation, which allows Chileans to travel without a visa to the US for up to 90 days. In addition, a double taxation avoidance agreement with the US has been signed and is awaiting approval in both countries. Chile has numerous public and private universities, but finding qualified talent can be a challenge for service providers as IT graduates have more opportunities than in the past. The unemployment rate in Chile recently reached as low as 6.1% in February, and service providers complain that English-speaking IT professionals are in very short supply. Even so, the quality of Chile s workforce is internationally recognized. Chile ranked 31st out of 60 economies in the Heidrick & Struggles Global Talent Index 2011-2015 used by the Economist Intelligence Unit (EIU) to measure support for talent and entrepreneurship.12 Some of the large IT companies present in the country include Sonda, Atos, Origin, EDS, TCS, IBM and Accenture. 11 Ease of Doing Business Ranking 2014, World Bank 12 Global Talent Index 2011-2015, http://www. economistinsights.com/sites/default/files/ downloads/gti%20final%20report%20 5.4.11.pdf

24 KPMG Outsourcing Report Colombia Although Colombia still fights against the perception of risk, it has made important progress in the past decade and is now one of the safest and stable democracies in the region. According to the World Bank s Doing Business Report 2014, Colombia ranks second in Latin America - after Chile - for Ease of Doing Business (43rd in the world).13 According to a 2013 ranking by Chile s América Economia, Bogota is considered one of the top ten cities to do business in the region14. Not only does it offer a high quality of life, but also has a large talent pool, good infrastructure and a reputation for excellent customer service. As a result, companies like ADA and Digitex have chosen Colombia as their base for BPO services in Latin America. Incentives for investors in Colombia include the following: Free Trade Zones that can be established in Colombia subject to a 15% income tax rate plus CREE Tax (Income Tax for Equity, which replaces certain wage-based welfare contributions). The tax rate for the CREE Tax is 9% during 2013-2015, and 8% after 2016.15 No customs taxes or duties are charged on merchandise introduced to the Free Trade Zone from abroad. Exports made from Free Trade Zones to foreign countries, may apply the benefits of international trade agreements signed by Colombia. In 2012, according to the Colombian Association of Contact Centers and BPO (ACDCB) and the National Association of Entrepreneurs (ANDI), operating revenues in the sector were US$ 2.5 billion; this represented an increase of 78% over 2010. BPO exports grew 77% between 2010 and 2012.16 In 2012, the main sectors include telecommunications, banking and financial services, government and insurance, among others. Through the Productive Transformation Program, the government has designed a plan to strengthen the industry by providing an emphasis on high valueadded activities through human capital development, including business matchmaking forums and sectorial studies that can help in the development of strategies. According to Cesar Echeverry, manager of the local IT and BPO services company ADA, which provides services in cities throughout Colombia, human talent is available and there are opportunities in the IT sector. Infrastructure is adequate, there is good broadband Internet penetration, but it could be improved, said Echeverry. Overall, there are a lot of opportunities for BPO, especially given the arrival of multinational companies in recent years, he said. 13 World Bank: Doing Business Report 2014, http://www.doingbusiness.org 14 AméricaEconomia, 2013 ranking 15 Invest In Colombia, http://www.investincolombia.com.co/investment-incentives.html 16 Invest In Colombia, http://www.investincolombia.com.co/sectors/services/bpo.html