Everest Group Expert Analysis: Colombia To Lead The Next Wave Of Global In-House Centers (GICs)

Global consulting and research firm Everest Group recently released its Global In-house Center (GIC) Landscape Annual Report 2015, in which it reported that the global services market reached US$150 billion in 2014 and GIC model contributed to 25 percent (US$35-40 billion) of this rapid growth. Latin America is growing as a destination for GIC services, and Everest Group believes Colombia will lead the next wave of Latin American expansion in GICs.

Finance Colombia invited Anurag Srivistava, member of the Global Sourcing research team at Everest Group, to recap Everest Group’s findings with particular emphasis on forecasts regarding Columbia’s emerging leadership in the GIC landscape.

The global GIC locations landscape is undergoing a major shift

The GIC market witnessed a revival in set-up of new centers in 2014 after sluggish activity over 2011-2013 (see chart below). This was led by improved macroeconomic sentiment in North America as well as Europe, especially in the second half of 2014.

The first quarter of 2015 continued that trend – with 24 new GICs set up across the world. What is also notable in the above chart is the changing mix of locations being leveraged for new GICs. While the Asia Pacific (APAC) region is still the largest destination, it is slowly losing share to other regions. In particular, Nearshore Europe and Latin America and Caribbean (LAC) now account for a considerable share of new center set-ups.

Most leading enterprise adopters of global sourcing already have large scale centers in traditional offshore destinations (e.g., India and Philippines) and are looking to diversify their footprint to other regions to address concentration risks, support niche work or work that requires a fair degree of cultural or regulatory understanding (e.g., product development, anti-money laundering), support work in multiple languages, or offer same-time support to business (e.g., for contact center services or agile development).

Additionally, some of these enterprises are also looking to expand their businesses into these nearshore markets (e.g., the LAC region offers a lucrative, untapped business opportunity to North American companies owing to being an emerging market with promising growth). In such cases, a GIC also serves as a foothold in untested markets to understand regulations and local culture; build connections with government, service providers, and academia; and establish local leadership that can lead the company’s business growth in the market.

Colombia is well-poised within the LAC region to become a GIC hub

Within the LAC region, Colombia is attractively poised to lead the next wave of growth for GICs. The chart below provides a landscape of some mature markets for GICs in the LAC region.

Following from the above chart, for companies looking to set up or expand in LAC to serve the region or North America, Colombia presents an interesting opportunity owing to it being the only viable option that presents substantial scalability across multiple functions at a reasonable unit cost and without the challenges of intense competition. Additionally, it offers the following:

• Large domestic market opportunity (third largest by population and fourth largest by GDP), poised for healthy growth
• Attractive maturity of domestic/regional services market across IT, business processes, contact center, knowledge services, and engineering/R&D
• Stable politics, economy, and regulatory/legal environment
• Third most business-friendly and the leading reforming country in Latin America according to Doing Business 2013[i]
• Proximity to North America (compared to options such as Argentina, Chile, or Uruguay)
• Good quality of life and safety/security in major cities

Key growth areas for Colombia GICs

In Everest Group’s view, Colombia will increasingly play one or more of the following roles in the GIC portfolios of companies:

Support local/domestic (Colombian) operations of (North American or European) multinationals

This is likely to be the most prominent area of growth for the GIC market in Colombia. As more companies expand their businesses into the country, lured by the large untapped market and high rate of growth, they will also need to support functions such as finance, HR, IT, and procurement locally. Since tier-2/3 Colombian cities offer attractive operating costs compared to other regional options, these enterprises are likely to prefer a Colombian GIC over supporting Colombia from another country in the region.

Regional delivery center to support Latin America operations

Colombia is also poised to see substantial growth from GICs supporting regional (LAC) operations of multinationals. The primary driver for this growth is that Colombian cities offer potential savings over many source markets in Latin America – including Mexico, Argentina, Peru, Chile, Ecuador, Venezuela, Central America, and Brazil. The other drivers of this trend include the attractive maturity of the Colombian IT and business process sector and the central location and good regional connectivity of most major cities in Colombia.

Multifunctional GICs supporting regional delivery will be spread across Bogota and tier-2/3 cities (e.g., Cali and Medellin), depending upon the mix of services and scale they aim to support.

Small-scale center for delivery to North America in English language

Colombian cities (especially Bogota and the ones in Northern Colombia – Bucaramanga, Barranquilla, and Cartagena) are also going to witness traction in English-language (or bilingual – English/Spanish) delivery of voice and non-voice business processes. This is driven by attractive cost structures, proficiency in English, and cultural affinity towards the U.S. in these cities. Given that the English proficiency of Colombian talent is typically lower than other options in the region, Colombian GICs supporting this segment are likely to be small-scale and not large hubs.

Spoke for larger hub locations in Latin America, serving regional (Latin America) demand

Companies will also eye Colombia as a secondary/spoke location supporting a larger primary/hub location in LAC to support regional/domestic demand. This model helps companies hedge environment and talent risks by diversification.

Challenges and key imperatives for stakeholders

Awareness of the business process services (BPS) sector as a career

The most significant challenge GICs are likely to face is the lack of awareness amongst students, academicians, and even government agencies of the opportunities and career paths that the BPS sector has to offer. This leads to most students (potential employees) equating a BPS sector job with a contact center career, and often finding it unattractive.

GICs along with the other stakeholders (government, academia) will need to come together to spread awareness among students and the population in general about the variety of careers in the IT-BPS sector and the rewards it can bring to society from rising employment and increasing spending power.

Incentives and Free Trade Zone (FTZ) regime

Colombia currently offers a differential taxation regime for the services sector, especially for services exports (FTZ regime) – depending on the mix of work that companies intend to support in Colombia, they could find the FTZ regime more or less attractive. The current process for determining the best route for investment and the associated qualification process is considered too complex.

At the same time, incentives schemes for investment into the services sector are relatively less attractive compared to those in other destinations in the region.

Governments at the central/federal, province, and city levels will need to re-evaluate the effectiveness of existing incentives and consider an overhaul of the current tax and incentives regimes keeping in view the demands of the IT-BPS sector and incentives offered by other countries in the region.

Proficiency in English language and orientation towards supporting North America

Most tier-2/3 cities in Colombia offer lower levels of English proficiency than key service delivery destinations in the LAC region. This is because, historically, Colombia has not been oriented towards supporting North America, and English has not been a prominent part of the educational system. For example, most higher education institutes in the smaller cities do not offer courses with English as the medium of instruction.

Although the industry and other stakeholders are already making efforts to impart English language training to interns or employees, this needs a significant nation-wide policy-level push.

[i] World Bank. 2013. Doing Business 2013: Smarter Regulations for Small and Medium-Size Enterprises. Washington, DC: World Bank Group. DOI: 10.1596/978-0-8213-9615-5. License: Creative Commons Attribution CC BY 3.0