Honduras: Impact of Current Political Developments on Offshore Outsourcing Industry

Analyst viewpoint Honduras: Impact of Current Political Developments on Offshore Outsourcing Industry Sources: Global Equations, A.T.Kearney Honduras Background Honduras has long been considered the underdog in Central America and over-reliant on its agrarian and manufacturing sectors. However with recent profusion of outsourcing in Central and Latin America, it is emerging as a potential hotspot. Honduras possesses certain unique advantages compared to its neighbors in Central America. It has one of the most liberalized Telecom market in Central America with the lowest wholesale rates. But most importantly Honduras has one of the highest populations of true bilingual workers that are in increasing demand by US outsourcers. Being the second largest country in the region, Honduras has sufficient human resources to serve the BPO sector growth for several years without facing the kinds of saturation, attrition or cost escalation faced by Costa Rica and Panama recently. Honduras’ outsourcing sector is still in its infancy, with a handful of vendors focusing on providing contact center services to local, regional and some offshore clients. With relatively little vertical expertise, these vendors have not ventured beyond voice (Contact Center) processes, and they are still relatively small in size with the largest vendor having under 200 seats. Services provided by Honduran BPO vendors include Telesales, Telemarketing, helpdesk, client acquisition, collections, info-line, market research, and CRM services for on-shore, near shore and a few offshore customers. Honduras has one of the most liberalized Telecom markets in the region. Since the 1 government’s deregulation of the Telecom sector almost 30 Telecom service providers and operators have established operations in Honduras. Navega which is the leading carrier of carriers and one of the leading telecom service providers in Central America has built its infrastructure with enough capacity to cover all of the countries in the region, and it has a direct submarine link (3 cables) into the NAP of the Americas (Miami). With the construction of more than 2000 miles of fiber optic in redundant rings and SDH technology, Navega provides capacities of STM-1 to STM-64 deployed through an Ethernet and MPLS network in key cities. This provides adequate bandwidth, redundancy and low costs to contact center and IT firms. Navega and other regional Telecom and data services providers provide service-level agreements that guarantee sufficient uptime to meet global industry standards1 and also offer leased line connectivity to international markets. The major Multinational carriers include Milicom – Navega, Multidata, Digicel (Irish), Telecorp, Cablecolor and Telcel (Mexican – Claro) Due to the above factors, the telecom costs in Honduras are amongst the lowest in the region (about 40% lower than Costa Rica and Guatemala) and constitute a significant advantage to high volume users of voice and data bandwidth. Investors in the BPO space will require guarantees of better than 99.9% uptime. Physical Infrastructure, Fiscal Incentives Dedicated BPO Zones (Physical Infrastructure) To date, Honduras does not have a single business park or industrial development dedicated to IT or IT-enabled services (BPO). The only project that is currently under development which is Altia Business Park, when complete, will meet international BPO industry requirements for “plug and play” infrastructure, which is critical if Honduras is to effectively compete with its regional neighbors to attract BPO investment. The completion of Honduras first Technology Business Park in September 2009 will promote new investment into ICT and BPO sectors in this region. the site are designed for call center and other BPO services. Fiscal Incentives and Other Gov­ ernment Support Under Free Trade Zones law of Honduras, there is a legal and regulatory framework under which foreign investors could set up operations in Honduras. The Free Trade Zones law provides “BPO investment-ready” option that is comparable and sometimes even better than other regional and international locations. Figure 1:Summary of Fiscal Incentives under the Free Zones Law FISCAL INCENTIVE RATE Corporate Tax Sales Tax/Customs Duty Foreign Employment Repatriation of Profits 0% 0% Yes 100%  The Altia Business Park, located in San Pedro Sula near two of its premier technology universities, is the first designated Free Zone facility offering all the tax and customs duty benefits, tailored for IT and BPO firms. Its prime location in the main commercial and industrial city of Honduras with a captive population of over 1 million is a critical element for attracting and retaining quality human resources and managers. This Business park is being marketed as a destination for technology investment, and it is very well positioned in a high quality location within San Pedro Sula. The buildings, support facilities, telecom connectivity and infrastructure of Source: Global Equations Analysis Fiscal incentives: The law provides for a number of fiscal incentives and other advantages to registered companies.  Treatment of professional services: Free Zones legislation is usually intended for export producing goods and services. This legislation should also include professional services including consulting, IT and BPO activities, including finance and accounting, and higher Physical Infrastructure, Fiscal Incentives   end KPO processes like legal and research services. One Stop Shop: Directed at improving the business operating environment for investors, a dedicated “one-stop shop” can expedite company setup and registration processes and provide dedicated customs services for imported components. Flexible employment provisions for foreign workers: While BPO firms are most likely to seek access to Honduran workers, there should also be no restrictions on foreign workers in Free Zones. Expedited immigration procedures, employment residence entry permits, transit and business visas, and family residence visas are additional benefits that are essential. Labor Laws: The existing labor laws in Honduras are quite restrictive and burdensome for employers. Under the Free Zones law there should be additional freedom to hire part-time workers, do staff reduction, provide reasonable overtime and enable flexible work hours. These are all essential factors for investors in the IT and BPO sectors.   Human Resource Human Resources A discussion of human resources in the context of a BPO market study must essentially focus on two aspects of the labor market, both of which are critical indicators to prospective investors. These include the Availability and Cost of qualified manpower. The supply of Honduran labor is examined through each of these lenses below. ices usually come from the pool of Science or Engineering graduates. Turning to the question of whether the Honduran labor pool is sufficiently qualified to attract BPO investment, the response necessarily becomes more nuanced. The macroeconomic indicators are favorable for Honduran workers. Educational enrollment per capita surpasses a number of regional competitors, and with services making up more than 50% of Honduras’ economic output Hondurans are clearly oriented toward a services economy. Hondurans would also appear to be technology savvy, with higher fixed/ mobile line penetration and internet usage penetration per capita than their regional counterparts. The Honduran workforce has a well established reputation as hard-working and productive. By all accounts, the Honduran Spanish accent is relatively neutral, a factor likely to be attractive to BPO investors seeking to serve regional markets and Hispanic populations in US and European markets. Additionally Honduras has the largest number of English speaking schools in the region (over 400) and hence has a relatively large population of true bi-lingual workers. This makes it especially attractive for the US market. Honduras may well be the most favorable destination for bilingual skills sets in the region in terms of quality and size. Availability of Qualified Manpower A discussion of the availability of qualified manpower in Honduras immediately begs two questions:  Are there sufficient numbers of potential employees available to prospective investors in the BPO space?  Are the available workers sufficiently qualified to serve as a viable labor pool? If one looks at the absolute number of graduates from universities in Honduras, the answer to the first question is an unqualified “yes.” Honduras’ universities graduated nearly 39,000 across a variety of disciplines in 2008. With steady population growth and an even faster growth in college graduation rates over the preceding few years, that figure will continue to expand. Moreover, with unofficial unemployment rates approaching 38% in Honduras, all too many of these graduates are not currently finding meaningful employment. The primary labor pool for contact center services comes from Arts and Math & Science graduates, while labor for technical help desk serv Honduras Political Situation On March 23, 2009, President José Manuel Zelaya Rosales, and his Cabinet, meeting as Council of Ministers (Consejo de Ministros) issued executive order PCM‐005‐2009, in which he ordered the National Institute of Statistics to conduct a “popular consult” on June 28, 2009. The popular consult would ask Honduran citizens whether they wanted to add a fourth voting station at the national presidential, municipal, and congressional elections to decide whether a national constitutional assembly should be convened. A national constitutional assembly consists of a special meeting of representatives who would dissolve the current constitution and draft a new constitution. The Constitution of the Republic of Honduras, in effect since 1982, only contains three types of articles that may not be modified by the normal legislative process: those dealing with the boundaries of the national territory; those referring to the republican form of government; and the temporal limits of the presidential term. Despite the manifested declarations of the poll’s illegality, the President and his Ministers continued their actions in furtherance of the poll. These actions resulted in widespread protests and open confrontation between the different government institutions. Meanwhile, the Office of the Prosecutor and the Supreme Electoral Tribunal began to confiscate the poll material, in compliance with the orders of Judge Danery Antonio Medal Raudales of the Administrative Law Tribunal. However, the President defied the confiscation, and leading a mob of people, entered the warehouses of the Honduran Air Force, where the material had been confiscated, and seized it by force to proceed with the poll. The Supreme Court of Justice held that Zelaya had commited various crimes as a result of the poll and issued an order for his detention by the Armed Forces. Pursuant to this order, the Armed Forces arrested Zelaya on the morning of June 28, 2009. The President was escorted to a plane, and left the country towards Costa Rica. During this time, the Office of the Prosecutor gathered evidence at the multiple poll centers to proceed with criminal accusations against the poll organizer, for crimes ranging from treason, disobedience, and malfeasance with regard to public funds.llation of the national constitutional assembly. Today Honduras still remains to close this chapter and make it part of our history. Our capital city has been the center of the political unrest and most of the manifestations (pro and against deposed president Zelaya). San Pedro Sula and the surrounding cities have remained in watch of what trascends in the international news in Tegucigalpa The new Honduran government in good faith of a peaceful resolution has appointed a group of top officials to meet with international leaders and organizations in the U.S. as a very important step to end this political crisis. We have seen several manifestations in favor of peace and democracy in many cities of Honduras which the vast majority of hondurans favor. Conclusions A glance at the global market for BPO services is enough to paint a bright picture of the global opportunity to address it. Even in the face of a worldwide recession, global spending on BPO services is expected to continue growing at an average rate of more than 10 percent annually, reaching USD 168 billion by 2012. In the Latin America, growth rates are more characteristic of a burgeoning market, reaching 20 and even 30 percent in some countries, with regional spending on BPO reaching USD 4-6 billion in the same period. American firms are aggressively seeking nearshore options in Central and Latin America to serve a growing Hispanic market and also to diversify from offshore locations that may have become less attractive due to diminishing cost advantage and labor attrition. The bilingual skills, proximity and tax benefits provided by Honduras provide an attractive value proposition to American firms. However the lack of Honduran brand and absence of major players in the country pose hurdles Honduras is also credited primarily with 2 advantages: low labor rates, and low real estate. While all these factors may work well to attract investments in the BPO space, it is the lack of awareness among potential investors that can prove to be a stumbling block. In recent years there have been several developments within the outsourcing sector in Honduras. Correct the Perception of Telecom and Infrastructure lag in Honduras Although Honduras has very good Telecom infrastructure and very low rates, the perception among the other Central American countries is not the case. In some cases when Costa Rica in 2007 and 2008 was debating (and still is) the privatization of ICE/RACSA many loomed at comparing what was being planned for Costa Rica (a slow transition from state owned monopoly to free market) as a repeat of the Honduras Telecom privatization, where the carriers that first privatized Hondutel were given a grace period far too advantageous to allow the Telecom market to develop appropriately as it did in other central American markets Political Situation Honduras has had a long history of peace and democracy; this was the only Central American country (besides Costa Rica) that did not suffer political and social confrontations. Just like other countries in the world that have experienced similar political situations, this has not deterred the BPO industry to develop and grow. The recent political developments will have an impact on the short term, but new business models such as sheltering or joint ventures will emerge as a good alternative for international companies establish operations in Honduras.