U.S. companies pursuing IT outsourcing deals are looking to service providers in Latin America and South America. In addition to cost savings, these "nearshoring" destinations offer time zone alignment and geographic proximity, but also have a range of potential drawbacks to consider, including language barriers and lack of vendor maturity. Companies need to consider all of the IT outsourcing pros and cons when making a decision on...
In this second part of our look at IT outsourcing pros and cons (see part one on IT outsourcing in Asia), SearchCIO.com focused on IT outsourcing deals in Mexico, Brazil and Argentina, with the help of Frances Karamouzis, a research vice president at Stamford, Conn.-based consultancy Gartner Inc., and David Rutchik, a partner at Pace Harmon, which offers technology sourcing consulting services and recently published a report on the effects of foreign exchange rates on IT outsourcing deals.
Overview: Mexico has evolved as an IT services outsourcing provider largely due to proximity, cultural affinity and time-zone alignment for U.S. companies, as well as government support for the industry. But this alignment is a double-edged sword, as Mexico's economy and service industry hinges largely on the U.S. economy. You'll need to pay close attention to how the domestic situation affects IT work in Mexico.
Language. Due to its U.S. proximity, a specific advantage of Mexico is its combination of Spanish and English language skills, which is especially prominent in the IT sector. As the industry develops further, Mexico must endeavor to keep written and spoken English language skills strong, according to Gartner's recent report, "Gartner's 30 Leading Locations for Offshore Services."
Government support. The Mexican government has created many subsidies and grants for which outsourcers and clients can apply in order to jumpstart initiatives, as well as tax incentives and investment funding. "The government has made some really great investments – they're probably the most aggressive in terms of the government seeking to elevate the industry," Karamouzis said.
Few visa restrictions. Due to Mexico's involvement in the North American Free Trade Agreement (NAFTA), there are few if any visa restrictions for U.S. companies outsourcing IT work in Mexico, which often hampers arrangements in other countries.
Price. Compared to IT outsourcing locations such as India and China, the cost to outsource in Mexico is higher, Karamouzis said. However, it's up to U.S. clients to assess potential synergies and savings that can be achieved by outsourcing to Mexico's nearshore location.
Lack of vendor maturity. The total number of available vendors is smaller than in many other IT outsourcing locations. "It's still kind of in its adolescence in having a huge abundance of vendors," Karamouzis said. This makes it harder to accomplish some large-scale operations as easily as in China or India. The pace of vendor maturation, is accelerating, but Mexico "is not prepared to respond to a steep increase in demand for an IT services workforce," according to Gartner.
Dependence on U.S. economy. The Mexican economy and its service industry depend strongly on the state of the U.S. economy, so it is important to closely monitor the effect the economic recession might be having on particular Mexican IT outsourcing providers.
Overview: The largest country in South America, Brazil has established itself as a key global delivery center based upon its nearshore location and mass of sizable IT service providers. The company needs to align its educational system and governmental priorities to provide a more hospitable IT outsourcing environment, but that hasn't stopped a great deal of outsourcing activity from moving to this international hub.
Business know-how. Brazil's dynamic, global economy means that much of the IT service industry is accustomed to working with global partners, establishing best business practices and following through on tough requirements from these clients, according to Gartner.
Vendor selection. "If you're on the East Coast [of the U.S.], a typical company might feel compelled to have a New York address. If you're a Latin American economic power, you need to have an address in Brazil," Karamouzis said. As such, there is a "huge" domestic market with 20 to 25 vendors boasting 1000-plus full time employees (FTEs), she said.
Expanding labor pool. Brazil has more than 250,000 IT professionals, with approximately 23,000 new IT graduates entering the industry each year, Gartner says. As such, the larger IT service providers can select their staff from the country's best.
Cost. The local currency, the Real, "has been very strong against the dollar, which makes it not great from a cost perspective," Rutchik said. But blanket statements are difficult: Sao Paulo has the most expensive A-class office space in Latin and South America, but many of Brazil's up-and-coming cities maintain facilities at half that cost, according to Gartner.
Language. "Because there's a large internal economy, there's not a huge incentive for everybody to speak English, so it's harder to find there," Karamouzis said. English language courses are offered in private settings as well as in schools, but these are not affordable to all.
Compliance. Although Brazil has a large global economy, it's still important to monitor effective control and transparency, as IT outsourcing providers "may resort to informality rather than compliance with complex and bureaucratic legal requirements," according to Gartner.
Overview: After a sharp downturn in its economy earlier this decade, Argentina is emerging on the South American IT outsourcing scene. But Gartner advises U.S. clients to stay with established providers that have already attracted most of the country's highly skilled IT workers.
Price. The Argentine peso is weaker against the U.S. dollar than some other Latin and South American currencies, Rutchik said. Salaries have also declined year over year, according to Gartner, although it's likely that wages will rise again in the long term.
Education system. The literacy rate is higher than 97%, and "they're turning out a lot of computer science graduates," Rutchik said. Gartner warns, however, that government investment in education is declining.
Vendor maturity. Most outsourcing work is centered in Buenos Aires, and Karamouzis questions the country's ability to scale up for the demands of larger IT outsourcers or those looking to establish captive centers in the country. The government is passing laws to help grow its IT outsourcing business, but Gartner finds further support is necessary for these initiatives.
Intellectual property. While intellectual property protection in Argentina has improved in recent years, the adoption and application of these laws has been irregular, according to Gartner. Companies should therefore be careful when outsourcing sensitive data.