Outsourcing Research by ValueNotes - Outsourcing In Latin America: Big Gains

Outsourcing In Latin America: Big Gains

Saturday, 20 January 2007

Cognizant (NASDAQ: CTSH) recently won a multi-million dollar contract with Kimberley Clark (NYSE: KMB) to co-manage Kimberly-Clark's captive operation at Argentina, while TCS signed a $140 million contract with Ecuador’s Banco Pichincha,

The TCS deal signed last week is one of the largest deals in Latin America – and includes core banking solutions, IT and business process outsourcing to Ecuador’s largest private bank. Last year, TCS acquired Comicrom, a BPO company in Chile and is now capitalizing on its investments in the region. On the other hand, Cognizant, a US-based technology and services company with about two-thirds of its workforce based in India, will provide IT and other software applications to Kimberley Clark’s global operations. In a separate announcement, Kimberley Clark also awarded TCS a contract for information technology infrastructure support.

Indian companies are rapidly strengthening their presence in Latin America. Indian investments totaled over $3 billion last year, while trade between the regions is at an all time high, led by automobile, steel, refinery and pharmaceutical companies. IT companies too are waking up to the time-zone advantage and the skilled labor that the region can offer. Besides, US-based competitors of Indian IT companies – such as IBM, Accenture, EDS – already have a base in the region.

For Indian outsourcing companies, there are many advantages:

The favorable time zone offers a new frontier to establish a presence closer to their clients in the United States. Most companies claim that a larger part of onsite work can be handled from a near-shore destination, compared to an offshore one. Moreover, Indian companies can diversify their risks and offer an alternative to clients who are unwilling to offshore to remote locations like India and the Philippines despite the lower costs.
The dearth of language skills remains a huge drawback for Indian companies. This is also the reason why vendors in Eastern Europe and Latin America have a competitive advantage. Establishing a base in Latin America allows Indian companies access to Spanish language skills, thereby opening up the Hispanic market in the US.
The region boasts of a large, qualified manpower base. Coupled with large-scale unemployment due to the economic crisis, countries such as Argentina and Brazil offer a ready workforce of engineers and graduates.
Free trade agreements with the US, flexible labor laws and policies on IPR protection make business relatively easy in the region.
Latin America presents a growing domestic outsourcing opportunity, which some estimates show to be in the range of $17 billion. TCS operates from Brazil and Uruguay and services over 40 clients including ABN AMRO and Transantiago. Satyam services Latin American clients from its center in Brazil, while Infosys from its center in Argentina.
The economic recession and devaluation has made valuations of Latin American companies very attractive. More acquisitions and investments can be expected before the currency begins to firm up again.

For Latin American economies emerging from the crisis, it is a win-win situation. Costs are low, and investments in sectors such as technology and outsourcing are being encouraged. For them, it is the more the merrier, as Indian companies setting up base will mean more employment opportunities for the local youth.

For Indian companies, however, it is not without its share of troubles. Indians are unfamiliar with the Latin American culture and managing operations poses geographical and communication challenges. That calls for careful planning and risk management to derive maximum benefits. Alliances and acquisitions have a greater role to play in companies’ strategies going forward, as they bring to the table local knowledge and expertise.

ValueNotes Outsourcing Watch: Insights for Investors is a unique news and analysis service from the ValueNotes Outsourcing Practice, focused entirely on outsourcing; This weekly publication analyses events in outsourcing, outsourcing companies, trends in the sector, impact of global competition from offshoring to established US companies, and emerging investment opportunities.

No responsibility is accepted for errors of fact or opinion. Neither the analyst nor ValueNotes has a position in the stocks covered above, or has received any payment in any form for this report. ValueNotes does not own or trade in the stocks of companies under coverage. ValueNotes does not provide investment banking services or investor relations' services to preserve the independence of its research. Neither ValueNotes nor the analyst incurs any liability arising out of use of the above information/ report. Reproduction in whole or in part without written permission is prohibited.

ValueNotes Outsourcing Watch articles are distributed through FinancialWire, an independent, proprietary news service of Investrend Information, www.investrend.com

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