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Leveraging Latin America To Streamline Global It Delivery

Where Mexico Outperforms India: Leveraging Latin America To Streamline Global IT DeliveryBy Luke Bujarski

GLOBALDELIVERY REPORT

IMPETUSLatin America is very much in vogue within today’s IT outsourcing community. Among the many markets available

to foreign investors, Mexico has lead the way as a net exporter of services to the United States: Exports as a

percentage of total outsourcing revenues have increased from 26 to 40 percent over the last five years. According

to the Mexican Ministry of the Economy, the total outsourcing industry will likely reach $13 billion US by 2013. Given

these trends, we asked how and why Latin America and particularly Mexico is a complement - if not a better choice

- than India for various IT-related outsourcing activities.

OVERVIEWOur research shows that Latin American platforms can deliver unique capabilities in outsourced services across

various technologies, industry verticals, and specific business functions. For North American customers, these

“Mexico-friendly” areas include tasks requiring ‘real-time’ project management such as agile-driven software devel-

opment, consulting, mobile application development, remote infrastructure management and testing. Creative

services outsourcing (CSO) including multimedia, gaming and web 2.0 development are also among Latin

America’s strengths relative to India. In addition to unique advantages as an IT outsourcing platform, we also

clarify misconceptions that can blind customers to some of Latin America’s strengths in outsourcing, such as

relative cost savings, talent availability and overall market maturity.

NEARSHORE SPECIALTY OFFERINGSAll projects and processes delivered off-site by a third party will ultimately have unique managerial challenges –

whether those services are delivered one kilometer or ten thousand kilometers away. Cost savings are still a major

justification to outsource offshore, but the number of offshore locations available to end-users has multiplied in the

last ten years. In response, modern day global delivery best practice demands that location be considered in the

context of long-run operational excellence, and not just short-term cost advantage. Here we take a deeper look at

the functions uniquely suited for Mexico and Latin America:

Domain Knowledge and Consulting - Mexico shares a unique economic affinity with the United States in

contrast to countries like India and the Philippines. With participation in the North American Free Trade Agreement

(NAFTA), 80 percent of all Mexico exports ($230 billion USD) are now destined to the United States. As a market

for American products, Mexico is by far the largest recipient of U.S. imports ($147 billion USD), nearly double the

volume exported to China. This close economic relationship makes industry processes across banking, retail, and

manufacturing more congruous with their counterparts in North America, relative to other countries.


Leveraging Latin America To Streamline Global IT Delivery

According to Tata Consultancy Services (TCS), there is domain knowledge inherent to the Mexican workforce that

allows for higher-value consulting services to be delivered from their centers in Guadalajara. This business culture

affinity is well suited for change management, IT architecture, cloud advisory services, among other consulting

engagements. Furthermore, growing optimism over Mexico’s economic expansion will likely deepen this business

connection to the United States.

Agile Software Development - The growing adoption of Agile software and application development methods

have opened a unique opportunity to leverage nearshore IT delivery platforms. Agile integrates developers,

systems engineers, customer support, marketing and testing into an iterative and collaborative project manage-

ment approach that improves outcome quality and speed-to-market. Easier project management due to time zone

alignment and cultural affinity gives Latin American locales an inherent advantage when it comes to Agile.

Chris Snyder CIO of rail engineering firm Hulcher uses a Brazilian based firm to augment his Agile team in the

United States. “We tried Agile with India, but employee turnover got to the point of ridiculousness.” The reason

stems from the basic fact that implementing Agile between U.S. clients and Indian providers requires teams to work

outside of normal business hours. This creates an unfavorable working environment that leads to high turnover of

core team members, in turn disrupting the development and innovation process.

Forrester Research estimates that 38 percent of businesses small and large now use Agile methods in software

and application development. Small-to-medium enterprises and particularly internet-based companies currently

see the greatest value in Agile. According to Jimit Aurora of Everest Research, the largest brick-and-mortar multi-

nationals have been slower to adopt Agile, mainly because existing legacy systems and processes had been devel-

oped using sequential methods that break down tasks into a linear, less time-sensitive process.

Yahoo! Global is an exception and has one of the largest Agile implementations in the world. According to Gabriele

Benefield of Yahoo!, “The adoption of Scrum and Agile practices has been steadily growing over the past two years,

and now encompasses more than 150 Yahoo! teams in the United States, Europe, and Asia-Pacific.” 1 Projects

range from new product development to heavy-duty infrastructure work on Yahoo! Mail.

Our research also suggests that Latin America’s small-to-medium IT service providers, servicing primarily SMEs,

stand to gain substantial market share as they couple their expertise with Agile. Large multinational vendors are

also waking up to the implications of Agile and will likely grow their capabilities by leveraging Latin America –

organically or through acquisition.

1 http://www.computer.org/comp/proceedings/hicss/2008/3075/00/30750461.pdf

Leveraging Latin America To Streamline Global It Delivery

Gaming, Multimedia & Design – Domestic demand and government initiatives in support of the ‘creative services’

industry are motivating Mexican IT companies to focus on gaming, multimedia and graphic design offerings. The

city of Guadalajara in particular is making a name for itself as an innovation hub and creative technology ecosys-

tem. Companies like Kaxan Games are building on their experience in applications for mobile devices and major

gaming consoles including the Nintendo Wii. Mexico’s Ministry of the Economy also plans to develop a

Guadalajara-based industrial park focused on creative industries. The Ciudad Creativa Digital

(Creative Digital City) will host local software companies and target international giants such as Viacom, Walt

Disney and Sony.

Guadalajara’s major value proposition for such companies is a relatively high concentration of technical and

creative talent, as well as wages one fifth of the equivalent rate in the United States. Furthermore, multimedia and

applied creativity is not only for niche gaming firms. BrainUp Systems is a Mexico City based CMMI certified IT

firm that integrates art and multimedia design with more traditional IT services such as systems maintenance and

software development.

Software and Application Testing – Enterprises increasingly outsource testing functions to keep up with the

growing volume of new web-based products and product enhancements launched across global operations and

global markets. Leveraging nearshore for testing services serves two unique functions: First, it allows for better

integration of testing into ‘live-time’ development methodologies such as Agile. Second, nearshore testing helps

improve ‘world readiness’ to ensure that multiple languages, scripts and cultural conventions are taken into

account, as multinational entities rollout operational and consumer-focused IT applications.

1. Leveraging nearshore testing for Agile development – Testing services have traditionally been

offered as a stand-alone service but are now being integrated into the entire application and development

process. Cliff¬ Schertz, CEO of Tiempo Development, a provider of software development and BPO

services to U.S. companies with development centers in Mexico, compares the maturity level of the testing

market in Mexico to that of a “teenager.” According to Schertz, there is a general movement away from

‘waterfall’ software development, where testing is performed separately from core development activities.

Schertz explained that some U.S. companies who outsource software development using the waterfall

method will send their core development activities to an overseas provider, but send the testing to a near-

shore provider. Software testing costs are also going down, particularly as the cloud and virtualization

reduce the need for redundant, capital intensive on-site IT infrastructure.





Furthermore, while wages in Mexico are on average higher than in India, cloud-driven testing applications

will help to close the total cost gap between these two markets, as automation reduces labor requirements.

2. Leveraging nearshore testing for global rollouts – Multinational enterprises that outsource testing

services look to partners with the capability to prepare and launch products globally. This requires product

customization according to local language, culture and the desired look-and-feel for the end user. Two

examples would be the global roll-out of a new mobile phone operating system and the global implementa-

tion of a new SAP module. Managing these complex projects requires well-established and rigorous testing

frameworks incorporated into a global network delivery model. In this context, leveraging nearshore for

testing is more about keeping up with demand in Spanish-speaking markets then it is about ‘real time’.

Growing consumer markets in Latin America have incentivized global vendors like TCS to expand their pres-

ence in Mexico.

GLOBAL BUSINESS TRENDS AFFECTING NEARSHORE OUTSOURCINGToday’s outsourcing buyers expect sourcing partners to deliver more innovation, process efficiency and vertical-

market expertise - in addition to cost savings. Often times this involves platform-based applications that integrate

clients into the ‘cloud’ and global consumer markets. Vendors have responded by amplifying their global coverage

to markets in Latin America. Below are additional trends likely to shape the long-run outcome of the region’s IT

outsourcing market:

Focus on right-sourcing and business optimization - The days of ‘lift-and-shift’ outsourcing and simple offset-

ting of responsibility to remote vendors are waning. According to advisory firm Everest Group, the wave of offshore

outsourcing to India has now crested. More than fifty percent of new facilities that opened in 2011 were in near-

shore locations either in Latin America (for North America) or Eastern Europe (for European customers). The last

five years have also seen multinational vendors expanding their global footprint into Latin America. With over 8,000

employees across the region, TCS estimates that 30 percent of their Latin American activity is now dedicated to

services exports to the United States. As a latecomer to the global delivery equation, Mexico’s large domestic

vendors feel pressure to deliver higher value beyond cost arbitrage.

More outsourcing projects will be managed virtually - A recent survey of the top 10 Indian outsourcers

indicates that more projects will likely be managed offshore instead of onsite at the client’s location. Video confer-

encing, chat, and other modes of communication are making it easier for customers and outsourcers to work virtu-

ally, reducing the need for expensive travel and visa processing. According to the survey conducted by the

Economic Times, the portion of work performed onsite could fall by five percent in 2012 alone.



If virtual on-ramping becomes standard practice, time zone alignment with the United States could make Mexico a

more suitable platform for transitioning existing outsourcing contracts, ERP systems integration, consulting, and

other project-based work. Whether projects actually stay in Mexico or are transferred to other locations after the

initial ramp-up depends on service agreements and vendor capability.

However, time zone advantage alone is not enough to incentivize companies to transfer existing operations from

offshore to nearshore. Arie Lewin, Duke’s Fuqua School of Business professor of strategy pointed out that, “Relo-

cating to a nearshore location or back to the U.S. is not cost free. It requires planning, management effort, possible

disruption to operations [and other] transition costs.” Likewise, “Companies have actually learned to manage these

remote relationships.”

Growing Domestic Demand for Outsourced Services in Latin America - Latin America is coming out of the

global recession as something of an economic success story. Foreign investment and global demand for exports,

among other variables, are empowering the middle class and enterprise growth throughout the region. According

to the IMF, real GDP growth across Latin America (including the Caribbean) averaged 5.3 percent between 2010

and 2011. Forecasts through 2013 are also favorable compared to slower than expected growth in developed

economies. IT outsourcers both domestic and multinational are expanding their capabilities in the region to meet

this demand. As multinationals look to grow their business across banking, health care, retail, manufacturing,

energy and other industry verticals, Mexico’s large population and economy will remain a strategic market in Latin

America.

Latin American Outsourcing MisconceptionsThe Latin America outsourcing market is relatively novel within the broader context of global sourcing, hence

vulnerable to misconceptions that can skew investor perceptions. This section summarizes five of what we found

to be the most prevalent distortions of how Latin America fits into a customer’s delivery framework:

Misconception One: Latin America is One Market- Latin America is a diverse and often complex marketplace

when it comes to sourcing professional services. Each country and region has a unique value proposition as well

as risk profile for IT services, but also for back office and customer relationship management functions. Many addi-

tional misconceptions are born from a lack of information on the differences between these markets.



Misconception Two: Latin America is the New India - India is still a dominant force in BPO, IT, and KPO outsourc-

ing. Nearly 50 percent of 2012 global IT/BPO revenues (approximately $175 Billion USD) will originate from India 2.

A recent study by Duke University’s Fuqua School of Business also revealed that global enterprises continue to

send increasing volumes of IT infrastructure and application development and maintenance (ADM) work to India,

the Philippines and China.

Yet, as enterprises look to outsource new and more complex business functions, we see continued growth in

mobile application development, applications integration and web development tasks out of Latin America. In a

recent survey of Mexican service providers, 75 percent noted these three functions as having the greatest growth

potential over the next three years. As global vendors look to capitalize on local (Latin American) demand for IT

and BPO services, this will also create a deeper specialization across service offerings and industry verticals.

Latin America is not the “next India” with very large numbers of skilled workers who can provide a wide variety of

services at uniformly low wage rates. But it does provide compelling value for customers looking to reduce the total

cost of ownership for work that can best be done by a work force that shares time zone, language and cultural com-

patibility with the North American market.

Misconception Three: Latin America is Expensive - Wages are currently higher in most Latin American countries

relative to India. However, when total costs including real estate, operating expenses, training, recruitment, reten-

tion, inflation and travel are factored, the actual price billed to the client can be comparable to India, particularly for

BPO-related functions. This also depends heavily on the Latin American country, and which functions are being

outsourced.

Furthermore, core inflation rates in India are much higher than in Mexico which means that the wage gap continues

to close. Data from the IMF suggest that consumer prices have gone up by almost 60 percent over the last five

years. Recent trends in exchange rates and a devaluated peso relative to the dollar has also made Mexico, for

example, a more favorable global services destination.

2 Data Source: NASSCOM


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Misconception Four: Latin America is New to Outsourcing – India has a long history servicing foreign markets

dating back to the early 1980s. Even today, outsourced services exports make up 80 percent of total Indian IT

industry revenues 3. However, Latin America has an established, competent and growing outsourcing industry that,

until recently, has had a low profile because it has largely consisted of domestic vendors serving local customers.

Local vendors have been operating in Mexico for as long as 20 years. Furthermore, exports as a percentage of

Mexico’s total IT/BPO revenue have grown from 25 to 41 percent since 2006 (see figure III). As nearshore markets

shift to exporting services, this has opened opportunities to leverage expertise across technology platforms,

service offerings, and vertical domains.

3 Data Source: NASSCOM

Figure One

Mexico’s Cost Savings to the

United States & Canada

(percentage terms)

Data Source: KPMG

Figure Two

Macroeconomic Indicators

Including Core Inflation Rates

Data Source: International

Monetery Fund


Page 7


Misconception Five: Latin America is Short on Talent – This depends on the location and application. Brazil for

example lays claim to having the largest number of Java programmers in the world. But rapid domestic growth has

put a premium on English-speaking skilled labor, particularly for IT specialists. Scaling large development shops

and application support centers servicing the U.S. market from Brazil is beginning to make less and less sense in

the global scheme of things. On the other hand, Mexico has gained ground in areas like software testing, applica-

tion development and support, and multimedia development with increasing bandwidth to scale operations. How-

ever, 2012 and beyond is projected to be a strong year for the Mexican economy. How this will affect its capacity

in global delivery is uncertain, but lessons can be drawn from other markets like Brazil.

GOING FORWARDIndia will continue to be the global outsourcing giant, especially where scale and skill in legacy development

environments are key requirements. But the time zone, economic and cultural affinities of the nearshore with North

America give it unique advantages in emerging, high-growth areas such as mobile, Agile and social application

development, as well as in project management for IT and business process outsourcing. Latin America’s ongoing

economic expansion will also push global enterprises deeper into the region, obligating vendors to expand their

nearshore service offering as part of their global delivery portfolios.

Figure Three

Mexico’s IT/BPO Industry (Billions

of US Dollars)


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