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A Closer Call

Mexico is looking to grab a slice of the pie as US firms look closer to home for offshore outsourcing partners. The country’s strong domestic IT talent is thus a natural pull for firms interested in ‘nearshoring.’

India remains the world’s major offshore outsourcing, or “offshoring” destination, yet Mexico is becoming more attractive for US firms seeking geographically and culturally closer partners south of the border. Mexico is now poised to take advantage of its IT talent base to gain a foothold in the burgeoning “nearshoring” industry. While a wide range of US companies outsource call center and data operations to Mexico, including US Airways and Best Western International, Microsoft leads substantial numbers of IT firms in blazing the trail into the country’s nearshoring market. Following the example of export assembly plants, or “maquiladoras” built along the US border in the 1960s, nearshoring in the IT sector has developed as an industry tied to US demand. Operations include application development and maintenance (ADM) and business process outsourcing (BPO), with the sector already bulging. There are an estimated 2,000 IT companies in the country, including 550,000 trained IT professionals that emerge from over 120 technology-focused universities, with around 65,000 graduating each year. These figures put Mexico at the forefront in Latin America in terms of IT, ahead of Brazil with a comparatively low pool of only 250,000 IT professionals, followed by Argentina and Chile, with 70,000 and 20,000 IT professionals, respectively.

According to Nearshore Americas, the major advantage of outsourcing to Mexico is its cost advantage. Based on a US baseline of 100, according to KPMG, Mexico’s index is 46.6 for back office/call center operations, 61.1 for R&D operations, and 68.3 for software design. Furthermore, US time zone alignment as well as cultural affinity also make Mexico more attractive, in addition to the benefits of doing business inside the North American Free Trade Agreement (NAFTA), which ensures intellectual property rights, as well as the approximate 300 flights per day between the countries.

Competing with India, however, won’t be easy. “Mexico’s natural limit is its language. Although there are a lot of English-speaking people here, to be able to compete with India would be difficult,” Alejandro Reynal, CEO of Atento, told TBY. However, a backlash against the level of service provided by Indian operators could present a significant opportunity. “I believe that we can take advantage of the fact many business process outsourcing [BPO] centers previously located in India have been re-shored back to the US, due to an explosion of growth negatively affecting quality,” Reynal added. Mexico, then, “may be able to acquire the volumes that are headed to India if we can emphasize our quality,” he emphasized.

According to Carlos Funes, CEO of Softtek, a large player in Mexico’s IT industry, “the top consumers of IT services are the financial and government sectors,” while “other important sectors are the actual software companies, as well as IT companies, telecommunications, manufacturing, commerce, and consumer goods.” Atento’s Reynal reinforced the fact, stating, “the majority of business comes from the telecommunications and finance sectors,” while also adding that the company had “acquired clients in the airline sector that use our technology extensively, [and] we have also entered agreements with energy and consumer product companies.”

Softtek is a leading IT and nearshore BPO services provider, and operates nine global delivery centers located in Mexico, China, Brazil, Argentina, and Spain, although 80% of its services are delivered from Mexico. On an upward curve, the company grew 20% in 2012 and employs around 7,000 people. Neoris is another provider of nearshore BPO services in Mexico, Argentina, and elsewhere around the world, and has also reported growth as demand for services in the US market expands. Over the last four years, the company has grown at around 35%, with predictions that the US market will continue to grow in years to come, boosting hopes that the sector will continue to swell. Atento, another BPO provider, employs over 150,000 people and has lavished much attention on its Mexican operations. “Mexico is our third-largest market after Brazil and Spain. We have seen the economies evolving in Latin America, and we believe that Mexico has a very stable economy and good growth,” Reynal concluded.

While nearshoring is a growing area, the government has not been left sitting on its laurels. Launching the Program for the Development of the Software Industry (Prosoft), it hopes to not only strengthen the BPO sector, but also the IT sector in general. Efforts are certainly paying off as companies such as IBM and Oracle have lauded efforts to stimulate the sector’s development. In addition to Softtek, Itera, ABS-IBM, Hildebrando, Stefanini, and Sigma Tao-EIDON are all local firms that have attained the Software Engineering Institute’s highest ranking for software development processes. Local software providers are joined by multinationals, including IBM, Accenture, HP, and Genpact, which works with GE and Ceridian and generates thousands of jobs in the country.

Despite security concerns, nearshoring looks set to continue as a growth industry in the country, yet growth will be somewhat limited unless Mexico can shake off negative perceptions of the security situation, especially in the northern states, where BPO providers are clustered.