Published: January 01, 2000
In the last ten years, Latin America has become an increasingly popular location for multinational corporations looking to set up shared service centres – predominantly, but not exclusively, those based in the US and Europe. And while cost has long been the main driver for companies setting up shared service centres, more recently other strategic drivers have come to the fore, including the ability to manage and process information across the organisation in a standardised way, improve compliance and reduce operational risk.
Companies may choose to set up shared service centres on a regional or global basis. By centralising activities and processes into a shared service centre, companies can benefit from economies of scale, standardised processes and the use of common systems. Shared service centres are not just used for treasury and finance functions, they also can help streamline and simplify other types of activity, including human resources, procurement, customer service and technical support.
Once a company decides to open a shared service centre, one of the most important decisions is location and this will be based on many different factors, including the company’s existing geographical footprint, the country’s political stability, tax system and cultural practices, as well as the quality of its workforce and the time zones in which it operates. In some cases, however, a company may choose to locate its service centre in a country in which it does not have a physical presence, particularly if the cost of doing business is lower.
Historically, the Latin America region was viewed as lacking the economic and political stability needed to make it an attractive destination for outside investment. Although this still applies to some individual countries within the region, there has been a shift over the last few years which has resulted in many overseas companies setting up shop in Latin America.
A number of factors make Latin America attractive as a shared service centre destination, including its economic and political stability and lower cost of doing business – not to mention the region’s proximity to, and cultural affinity with, the US. That said, conditions within different countries of Latin America vary considerably and companies will need to take into account a variety of factors when choosing to operate a shared service centre in Latin America.
Companies that lack the necessary infrastructure to support a shared service centre will find that over the last ten years, major outsourcing companies have been investing in the region and supplying and supporting technology here. Their presence in Latin American countries has made it possible to equip shared service centres with the necessary IT and communications systems.
Since cost is a key consideration when it comes to choosing a location, real estate, salary and infrastructure in most countries in Latin America are significantly lower than in the US and in some cases lower than in parts of Eastern Europe and Asia.
Another important factor is the country’s proximity to other markets. While companies from around the globe are investing in Latin America, a large proportion of investment is coming from the US and for those companies in particular, Latin America offers some unique benefits.
One of these is the region’s time zones, which are either the same as those in the US or just an hour or two apart. As a result, companies basing their support operations in Latin America avoid the need to run a nightshift, which is typically required for Asia-based operations, and which carries with it a higher attrition rate, as well as increased salary costs.
The close proximity to the US also has benefits in terms of travel costs: travelling to the region is faster and cheaper. In addition, it does away with the difficulties associated with long-haul travel between east and west and the need to adjust to a different time zone, allowing executives to travel during the day or overnight and be ready for work the next day.
Proximity to the United States, in and of itself, is not enough. Companies also require high caliber English-speaking staff with the right skills and education. It is very common for people in Latin America to speak English as their second language. In addition, there tends to be a greater familiarity between the Latin America and US cultures as compared to some of the more distant regions that are typically regarded as suitable locations for shared service centres.
Because of this cultural affinity, employees in Latin America are often able to communicate much more effectively with counterparts in the US as opposed to those based in other regions. This, together with the large expatriate community, makes it a popular relocation choice for executives from outside the region.
Companies with shared service centres in the region may have set them up not only for their Latin American operations but also for their US operations. They will often have additional shared service centres in Asia or Europe working in parallel with the Latin America centre. In a few cases, the Latin America shared service centre is supporting the company’s entire global operations.
Services provided by the shared service centre may include accounting and finance, accounts payable and salary payments, as well as FX and liquidity. Accounts receivable tend to be difficult to centralise, so they are less likely to be handled by shared service centres. Companies that have tried to do so have not always been successful. While this may improve in the future, the challenge with Latin America is that each country has its own payment systems, thus collections tend to operate differently in each country with even the instruments that are used for collections varying across the region.[[[PAGE]]]
Once the decision to set up a shared service centre in Latin America has been made, the next consideration is to determine where it will be based. If the company operates in a number of countries, it makes sense to site its service centre in one of those locations. However, the countries of Latin America vary significantly in terms of their regulatory climates– as well as other attributes – and a number of different factors should be taken into account when choosing a location.
For companies with a presence across the region, it is not unusual to find that up to 80% of their volumes come from the two major markets, Brazil and Mexico. For this reason Brazil is one of the most popular shared service centre locations, although it presents a number of obstacles when it comes to tax and regulations as well as relatively high costs when compared to other Latin America countries.
Despite its small size, Costa Rica is another popular location for shared service centres and this is due, to a large extent, to its reputation as a very open country with few restrictions. Traditionally, Costa Rica has been able to offer everything that companies need to consider in terms of stability, human capital, proximity to major markets and very low costs. It has always been considered to be a very stable country and as a result, companies are continuing to locate shared service centers there.
Another country that is considered suitable due to its continued stability over the years is Chile. An investment-grade country, Chile has regularly been viewed favourably even when the region as a whole was not popular. Additionally, Peru, Colombia and the countries of Central America are beginning to emerge as attractive locations as they are increasingly offering most of the qualities necessary for investment.
Many countries within the region are regarded as suitable destinations for shared service centres – while others are perceived to be less than ideal. These include Venezuela, Argentina, Ecuador and Bolivia. These countries are struggling with political and economic issues, while regulations and controls make it very hard to leverage these locations for any kind of shared service activity. When choosing a country, companies should take the time to gain a full understanding of the markets under consideration and the associated benefits and pitfalls in order to build the structure best suited to their needs.
For many reasons, Latin America is becoming a top location for shared service centres – both for companies with operations in Latin America, and for those outside the region. Although the primary purpose in setting up a shared service centre may be to centralise operations within the region, it can also make sense to centralise global operations there – and in some cases to move structures from the US to Latin America.
Latin America has experienced tremendous GDP growth during the last few years: the region emerged from the financial crisis not only in very good shape economically, but also without any of the main countries having suffered destabilisation. As a result, a great deal of investment is coming into the region, which is likely to continue to offer higher growth than the US and Europe in the coming years.
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