It’s a well-established fact that Finance and Accounting Outsourcing (FAO) accelerates finance transformation. For today’s CFO, there are multiple offshore locations to consider for Finance & Accounting operations — each with a unique proposition that should be carefully evaluated to get the right location strategy.
The Latin America region is increasingly occupying a key position in the transformation agenda of CFOs, particularly those with growing Latam businesses.. This is amply reflected in a recent Everest Group report which indicates that FAO contributes to approximately 50% of the operations being outsourced to Latin America.
As a follow on to my previous blog, I would like to offer some key tips for CFOs to consider when growing or consolidating their business in Latin America based on the following market realities:
Capital investments in a volatile environment: In my conversations with CFOs, I have noticed a certain degree of wariness in making capital investments in Latin America. And rightly so. Latin America presents two faces, making it difficult for companies to invest in the region. The Atlantic-side (Argentina-Brazil-Venezuela) has seen higher economic growth, but is now challenged by high inflation and currency volatility — the Bolivar and Peso are among the most volatile currencies in the world. The Pacific-side (Chile-Colombia-Mexico-Peru) shows better future prospects led by free-trade policies and lower inflation. I recently read a Wall Street Journal article — ‘The Two Latin Americas’ that discusses this reality. Companies wanting to begin their operations in either side of Latam, must think about the market dynamics and costs involved. Companies wishing to consolidate across the whole region should focus on either the Pacific side or choose one of the more “neutral” Central American countries such as Guatemala or Costa Rica as a base for their Spanish speaking scope. Brazil is another matter and should be dealt with separately!
Taxation issues: Despite the economic growth rate the region has seen, the systems for tax collection are still archaic. Businesses end up paying the larger chunk of Income Tax. The Total Tax Rate in South America remains higher than the world average. The three main components being: profit taxes, labor taxes, and ‘other’ taxes, of which the ‘others’ tax is the largest component. For corporations operating in Latin America, classifying taxes becomes crucial. Inability to classify taxes is often deemed as ‘fraud’! Not adhering to local service taxes in Brazil for example can attract hefty fines.
Cultural divide: Unlike the highly evolved U.S. market, where there are similarities in approach and culture, Latin America is a world of contradictions! While you will be offered incentives to start/expand your operations in countries like Chile and Colombia, you will be surprised that some companies in El Salvador and Colombia still prefer providing invoices in person! Imagine the plight of your investment in a digitized invoice system in such a scenario.
Latin America is also vastly different across various regions culturally. Local businesses prefer outsourcing models that utilize ‘local’ resources. For a person based in Peru, working with an extended team in Guatemala or India is clearly a cultural shock and will take a reasonable investment in change management to stabilise. If you are thinking of creating a unified, single organization you will need to be mindful of the amount of localization that will be required to balance one sub-regional way of working with the other. You will need to push local teams in Latin America to open their eyes to the new ways of working.
Tips to Make Finance Transformation Successful in Latam
- Look for alternatives to overcome the barriers of making capital investments and blocking your capital in fixed assets. Instead of focusing on service, process, application and infrastructure separately, opt for a standardized approach that focuses on the solution stack as whole, and provides you a better visibility into costs, savings and business outcomes.
- The Cloud is a great alternative to fixed assets and provides multiple flexible options. Cloud-based pay-per-use back office options are increasingly becoming popular. If you thought the region wasn’t ready for the Cloud yet, read our survey report: Cloud adoption in Brazil.
- Partner with a BPO provider that has a thorough understanding of the tax regimes as well as the cultural differences across the Latam region and has experienced professionals and technology platforms to help you tackle change management and tax issues.
- A ‘one-size-fits-all’ approach does not work in Latin America. If you’ve followed a standard transformation approach in other geographies, for Latam, you will need to tweak that. Do not restrict your transformation agenda to finance operations only. Include other functions such as HR, procurement and back-office operations, to deal with the local and cultural issues. Make sure you engage a provider that understands the local cultures well and has a transformation methodology that covers multiple factors including location, process, technology, pricing, governance and competency.
The possibilities in Latin America are infinite. If you tread into this soil with the realities in mind, you will reap richer dividends. As they say in Latin America, “Nada hay más surreal que la realidad.” Nothing is as surreal as reality!