How Mexico-based Softtek’s Beni Lopez plays up local strengths to grow globally.
Mexico-based IT services firm Softtek is a formidable competitor to Indian rivals in the U.S. market, playing up its strengths in “near-shoring,” a term it coined. The 29-year-old firm has grown beyond Latin America to North America, Europe and Asia. According to Benigno (“Beni”) López, Softtek’s chief globalization officer, the company looks beyond cost arbitrage at clients' “total cost of engagement.” Proximity to and affinity with the U.S., coupled with a deep understanding of “near-shore” Latin American locations, sharpens its competitive edge, he told Universia [email protected] in an interview. López joined Softtek in 1989. In the early 1990s, he founded and developed Softtek’s object-oriented technology unit and business intelligence practices, which marked the company’s entrance into commercial applications outside the mainframe and midrange environment. López was actively involved in the organization’s globalization efforts in Peru, Argentina and Colombia. In 1995, he became managing partner of Softtek Brazil and led the software development team.
An edited version of the interview follows.
Universia [email protected]: You have an interesting job title. What does a chief globalization officer do?
Beni López: That's the fun part of it. I have to invent it every day as we go, because it's a new position we created. I am charged with essentially three things. One is using our top five global accounts as "the sandbox," if you will, to make sure that our internal processes -- in terms of how we deliver services as well as how we engage with our clients -- are so well aligned vertically that they can be the same regardless of where we service them, whether it's in the U.S., Canada, China, the U.K., Brazil or Argentina. We consider ourselves a global firm [and] this is like a stress test to make sure that we're behaving as one organization across the world. The second part would be to transition our business model based on regions to verticals. The third component is making sure we leverage the talent we have in every single corner of [the globe], wherever it may be, which we sometimes don't do because of the regional P&Ls [profit-and-loss accounts].
Universia [email protected]: Why is it better to look at business along verticals rather than across regions?
López: [It is] because of where we're seeing value in terms of what our clients are asking. We're very good on the process-driven [IT] services. And that goes beyond labor arbitrage, [which is] secondary. The next phase would be to have much deeper leverage of our industry experience. We have close to 40% of our business coming from the financial services and insurance sectors. Some 20% comes from software and high tech and 15% from energy, oil and gas. But they're in the different pockets, in different regions. We want to make sure we have this vertical structure so that we can not only leverage [our] process-driven strengths, but also [our] industry experience.
Universia [email protected]: Softtek has been a leading player in the near-shoring of IT and IT-enabled services. Could you explain how your strategy evolved, especially in relation to what is more commonly called the offshore model or the global distribution model?
López: Sure. We coined the term [near-shoring] 15 years ago. It was our flagship for entrance into the U.S. market. We had been successful as an IT services consulting organization in Latin America. We had made a couple of attempts to enter the U.S. before, but we lacked a true differentiator back then. We saw an opportunity because of the increase in demand in the mid- and late 1990s for offshoring. But we knew that, coming from Mexico mainly, the unit cost was higher than in India. So there was a disadvantage, to some extent, if you purely saw the unit cost. We knew we needed to play to our strengths, which had always been [in our] process-driven engineering approach. So we developed models with the help of our clients on [the] total cost of engagement. From Day One, we were competitive in fixed-price projects [and] managed services projects, where it really doesn't matter if you are going to be using 10, 20 or 100 people to deliver the service.
We were successful in delivering the services by playing to our strengths in process-driven and output-driven or deliverables-driven solutions. And because of proximity [to the U.S.], this differentiator also allowed for a higher degree of collaboration for those projects that needed [such] collaborations, [and] where you don't have the limitations of the offshore model in terms of time zone and distance. Also, the cultural alignment or affinity allows for a higher degree of collaboration. That allows for a more contextual understanding, if you will, of the projects, which can deliver higher yields in terms of productivity [and be] competitive with a labor arbitrage-based model.
Universia [email protected]:If you look at the global IT services industry, the total size of the market has grown to about US$820 billion.
Universia [email protected]:How do locations in Latin America compare with, say, India, Singapore and the Philippines, in terms of business volume? Which are the fastest growing destinations in Latin America? And what is their competitive advantage?
López: The first thing is -- you're absolutely right -- you cannot treat Latin America as one entity. You need to understand the specific strengths of each major country. Definitely the three most attractive places are Mexico, Brazil and Argentina. We also deliver services from Costa Rica, but that's a niche area.
Mexico’s biggest advantage [is] being right next door to the biggest market. Of that US$820 billion, the biggest component is still the U.S. Mexico being right there is the most natural location to deliver those services.
Brazilhas a tremendous opportunity because it has a bigger [talent] pool than Mexico. But for historical reasons, it's always been a very enclosed country. The challenge we and everybody else face there is that you need to understand what specific domain area you want to pick from Brazil for a value-added export service. It cannot be for a commodity. There are two major challenges. One is the pull from the domestic market, which keeps growing. [It is] a challenge to consider going out to export services, if you continue to grow internally. The second element is you need to really understand the country and its strengths to see what you can pick, because it won't be based on the lowest cost. It has to be based on value.
Argentina has great talent, but of the three countries, it has the smallest talent pool. You need to understand the dynamics of the economics of an inflationary market to be able to leverage that. Costa Rica is interesting, but it has a small [talent] pool. We're looking forward to seeing how Colombia evolves. We have a presence in most of the capitals in Latin America, which gives us a good foothold [in] understanding what is going on. We leverage that on the export business when we do rollouts, especially for global clients.
Universia [email protected]:If you were to compare the kind of work being outsourced to Brazil to, say, Mexico, what are the differences and why?
López:Because of its natural advantages and proximity and affinity to the U.S., Mexico would be [suitable for] general, broad-based types of outsourcing. Brazil would have to play to probably three strengths. We are specifically betting on R&D for different reasons. There has been strong development of R&D [in Brazil], so there is very good talent in that space. Some of the firms have tried to leverage its financial services experience [for] the same reason. It used to be a hyper-inflationary economy. That created a lot of very innovative solutions to deal with that in financial services. Some companies are trying to leverage that experience to match a big pool of mainframe skill sets, for example. But this comes at a price. That's what you need to realize. The third component that we are exporting has to do with very specific domain expertise in manufacturing processes as well as oil and gas and aviation processes. [It is] very domain- and niche-specific [services] that we can roll out and export, where the unit cost is not relevant, but it's the actual value that you deliver.
Universia [email protected]:There have been some recent moves to set up an outsourcing commission, spearheaded by Brazilian congressman Laércio Oliveira, to regulate outsourcing work in that country. What impact do you think this will have on outsourced work being done in Brazil?
López:It's a little bit too soon for us to say. We pay very close attention to what's going to happen. But we need to be careful in understanding that this is a follow-up to very strong labor reforms they [implemented]. They have regulated the IT services labor industry for the past three years. That had an impact in understanding and adapting to that. In this next phase, we're waiting to see the actual impact. One area of concern I may have is how that is going to be matched to labor, or whether it's really to incentivize the industry. As a company, we're not that concerned with one or the other, because we focus on output-driven services. We don't really do staff augmentation [supplying outsourced labor services]. Those reforms could probably have an impact on staff augmentation firms. If you truly deliver a service as a product, you're probably not going to be as impacted.
Universia [email protected]:Unemployment in the U.S. is now more than 9%. What kind of political barriers does this create as you're trying to pitch outsourcing services? And how are you dealing with those challenges?
López:It has created some barriers. But the [IT services] industry has adopted the global delivery model so much that it's part of what you would expect from any service provider, [which is] to have [twin] capabilities. We have a development center in St. Louis, Missouri. Companies appreciate that because we can leverage … local talent. But those same companies [face demands from] their shareholders to continue to deliver value. You need to have both capabilities local as well as global. And you need to combine the advantages of both to deliver the best value to the client.
Universia [email protected]:What do you see as the main risks in outsourcing work to Latin America? What is being done to hedge those risks?
López:It varies by country. If we think of Brazil, for one, the risk is in not understanding the underlying costs associated with doing business in Brazil, both in terms of tariffs -- although they don't call it tariffs -- [and] in terms of the cost of doing business. In Argentina, it's understanding and being able to manage the inflationary pressures. Last year, inflation was more than 30%. And the exchange rate to the dollar only moved about 5% or 7%. So there was a direct impact on the dollar cost, if you will. [With] Mexico, as we all know, thanks to the media, one of the risks is how the perception of [security] in the country could translate into preventing some companies from leveraging what you can do. That's where local understanding of the market plays a very important role. So far, [crime has been limited to] some specific regions and cities. It's criminals fighting criminals, and obviously, the public forces. But the level of investment hasn't changed. In fact, it has grown. The risk is that this perception [of crime] could have an impact. So far, it hasn't.
Universia [email protected]:Softtek competes against global outsourcing firms like IBM, Accenture and Genpact, on the one hand. On the other hand, there are also local software firms like Hildebrando. How do you position Softtek in this universe? And what's your growth strategy?
López:Let me talk about the growth strategy first, and then I'll address how we position it. The model at Softtek is not [that of] an offshore firm. Softtek has solutions that are local, regional and global. We have global capabilities, but we also want to make sure we always have a local understanding of the markets where we operate. In the 14 countries where we are, we always serve the domestic market. Even in China, we have a component for the domestic market….
We have regional solutions, such as near-shore and regional rollouts. And we consolidate regional centers for clients. But we [also] have global capabilities. We have nine – going to 10 -- global delivery centers in Mexico, Argentina, Brazil, China, Spain and most recently India. We have the whole network of seamlessly integrated global delivery centers. That combination is unique.
Let's say we have a global retailer that has a centralized set of operations and a centralized set of applications that they want to make sure they leverage wherever they go globally. At the same time, they need to have [an] understanding of local regulations -- tax, labor and any other type of business regulation. We are an aligned partner for those types of firms. We understand how to deliver services in the U.S. But we also understand the specific characteristics of the markets wherever they operate. That is very different from our competition, especially the local [firms], because they understand the [local] market, but they don't understand necessarily the global [market] and they lack global capabilities. [As for] the global ones, it varies by industry and by which global [company] you're talking about.
We get invited to the party because we present that alternative model where we say we are more agile than a lot of those global firms that also have a footprint locally. We're not a pure offshore firm that is pulled all the time by a single delivery model based out of India, mainly.
Universia [email protected]:I understand you plan in making acquisitions. How does that form part of the strategy that you have just described?
López:There are four lines in our strategy. Number One is we want to continue to invest in growing markets. That doesn't mean just Latin America. A lot of them are in Latin America, but not all of them. Another component of our strategy has to do with continuing to embrace the global delivery model … [and] making sure we strengthen our network of global delivery centers. The third part has to do with investments in enhancing [our] process-driven approach to the individual level. The fourth component has to do with [intellectual property].
Universia [email protected]:If you were to look at Softtek, say, five years from now, with your strategy of investing in growth markets, how will the company be different from what it is today?
López:Not just in size, but I think the mix of revenues would probably vary a little. For example, today our largest market is the U.S. But it's 40%. Our second-largest market is Brazil. Our third largest is Mexico, then the rest of South America, then Europe, [and] then China’s domestic [market]. That mix is going to change. The U.S. will still be the largest. But the mix we have in the rest of the countries is going to vary.
Republished with permission from http://www.knowledge.wharton.upenn.edu -- the online research and business analysis journal of the Wharton School of the University of Pennsylvania