The Advantages of Opening a Shared Service Center in Mexico
International companies expanding their business interests in the growing, and relatively underdeveloped, Latin American markets are increasingly looking for innovative solutions to help them manage the myriad currencies, trade policies and taxes of the region.
This need for inventive solutions to complex treasury issues, combined with the global business demand for centralized cash management strategies, often means that the best, and only, solution is one that they may already be using in NAFTA (North America Free Trade Area) member countries, Europe and Asia: the establishment of a shared service center.
A shared, central service center can deliver significant benefits to forward looking treasury operations with a strong global banking partner.
First and foremost, a shared service center can help a business standardize transaction-intensive treasury processes, allowing business units within a country, or across a region, to benefit from common interfaces.
The key benefits are economies of scale and the enhanced efficiencies and cost savings that often result. However, there are additional advantages, which include:
However, by re-engineering its processes to maximize efficiencies, the benefits of a shared service center can be much greater than simply enhanced efficiencies and cost savings. By eliminating redundant activity and simplifying communication, the establishment of a shared service center enables a corporate treasury organization to spend far less time managing the day-to-day functions of a multinational treasury and more time focusing its attention and resources on its core business, thereby benefiting the business as a whole.
In addition, by centralizing and outsourcing costly and cumbersome processes, companies often see improved service levels and fewer span-of-control issues. At the same time, they often gain a better control and understanding of their overall cost structure in the region.
There is a clear strategy behind establishing a shared service center: to centralize treasury and cash management operations in a country which offers the greatest number of financial and physical advantages, including a skilled and educated workforce, favorable trade and tax policies, and geographic proximity to its regional affiliates. A business-friendly environment is also important. For many companies, this criterion leads them to Mexico.
Mexico offers several advantages for multinationals that want to enter the region or expand their Latin American presence.
Since the mid-1980s, Mexico has undertaken great economic and legal reforms that overhauled its trade, investment and financial policies. These reforms have helped pave the way for macroeconomic stability and long-term, sustainable development.
Mexico’s trade liberalization measures and its network of free-trade partners and investment agreements have also made an important contribution to the country’s long-term economic development.
Few could have imagined a decade ago that Mexico would become the seventh leading trading nation in the world and the first in Latin America, with 46% of the region’s exports and 47% of its imports. In 2005, Mexico’s trade exports totaled more than US$213bn, while total imports approached US$224bn. The country’s GDP grew 3% in the same year.
Mexico has more free trade agreements than any other country in the region – 12 in all. NAFTA is having the widest impact on its economy. But the Mexico-European Union free trade agreement, the first free trade area between Europe and the American continent, is also having a profound effect. These, and other agreements, are a vital component of its economic strategy to improve global competitiveness and ensure long-term growth.
Trade liberalization has helped Mexico diversify its export base: the export of manufactured goods now surpasses that of oil and related products. The growth of a skilled, multi-lingual workforce, low labor costs and expanding high-tech infrastructure have similarly enabled the country to diversify its economy.
Oil and gas still comprise a significant share of GDP – and about one-third of government revenues – but the manufacture of automobiles and other durable goods, as well as pharmaceutical, retail, agriculture and financial services, are becoming an increasingly important component of the country’s economy.
The country’s financial sector is among the most developed in the region. Since the government lifted limitations on foreign investment in Mexico’s leading banks in the late 1990s, global banks have established a significant and growing presence.
Much still needs to be done in Mexico to make the country more attractive to multinational companies – introducing favorable financial and tax laws, for example. However, as a location for treasury operations in Latin America, Mexico is becoming much more attractive. Tax regulations are friendlier than they are in many other nations in the region. And in terms of infrastructure, communications and overall cost of doing business, Mexico is the only real competitor in the Latin American market.
Establishing a shared service center that consolidates a company’s Latin American treasury and cash management operations can bring numerous financial and physical benefits to a company.
However, in order to make the enterprise a success, a company needs to partner with a global bank that has the host-to-host networking capabilities needed to tie in to a company’s enterprise resource planning system, a well-established local presence and track record of doing business in Latin America, and extensive international cash management and trading experience.
Companies also require sophisticated communications capabilities that will enable them to deliver SWIFT messaging and advanced treasury services, such as real-time reporting, to corporate headquarters. The added efficiency, control and financial upside of consolidating operations are well worth the effort.