By David Rutchik, Partner at Pace Harmon
While India continues to be the dominant offshore outsourcing location, “nearshoring” (nearshore outsourcing) to Mexico has become an attractive strategy for many major U.S.-based companies, including Microsoft, USAirways and Best Western International. However, the recent upswing in drug cartel-related violence has thrown the risk-reward calculus into question.
With its nearshoring origins stemming from “maquiladoras,” the export assembly plants built along the U.S.-Mexico border beginning in the 1960s, Mexico’s recent nearshoring growth has focused on IT outsourcing including application development and maintenance (ADM) and business process outsourcing. Mexican outsourcing has already reached a critical mass with 2,000+ IT companies, 550,000 trained IT professionals, and a growing labor pool. More than 64,000 IT professionals graduate annually from 121 technology-focused universities – more than any other Latin American country.
Mexico’s outsourcing benefits are numerous. Starting with substantial cost advantages, Nearshore Americas measured Mexico’s cost index (based on U.S. baseline of 100) for back office/call center operations at 46.6, R&D activities at 61.1 and software design at 68.3. Mexico’s other key benefits also provide the underpinnings to compete with popular global outsourcing locales—U.S. proximity, time zone alignment, a well-educated, bilingual workforce, U.S. cultural familiarity, and favorable trade agreements with the U.S. and within Latin America. Specifically, the North American Free Trade Agreement (NAFTA) has enabled U.S.-Mexico bilateral trade to increase to $300B+ today.
Despite this strong outsourcing foundation, the uptick in violence has begun to take a toll. Mexican President Calderón’s war on crime has precipitated a wave of government-cartel and inter-cartel violence throughout Mexico, with official estimates at 28,000+ fatalities since he took office in 2006.
At the same time, Mexico’s government is working to position the country as a strong competitor with India and other IT service providers, recently launching the Program for the Development of the Software Industry (Prosoft) and publicizing the country’s IT/BPO strengths. Major companies, including IBM and Oracle, have applauded these efforts and pledged to help develop Mexico’s IT industry. Mexico already has six resident software firms – Softtek, Itera, ABS-IBM, Hildebrando, Stefanini, Sigma Tao-EIDON – all of which have attained the Software Engineering Institute’s highest ranking for software development processes (Capability Maturity Model Level 5). Softtek, for example, has eight Global Delivery Centers with four in Mexico alone.
These local providers are joined by multi-national outsourcing providers such as IBM, Accenture, Genpact and HP. Genpact, which provides services to GE and Ceridian, expects to generate 2,000+ jobs in Mexico.
In response to recent safety concerns, Mexico’s outsourcing providers have increased security strategies in the more violent states: Distrito Federal, Baja California, Nuevo León and Chihuahua. This includes adding concrete barriers and posting armed personnel at offices and delivery centers; developing and testing more robust disaster recovery, heightening business continuity and evacuation procedures; and ensuring technology capabilities exist to shift work to alternate locations in the event of significant physical disruption.
Some companies, however, say that these concerns are overblown with violence having a greater impact on perceptions than on actual operations. Case in point: Mexico’s murder rate was 14 per 100,000 in 2009, which is lower than many other Latin American countries—it amounts to 70 per 100,000 in some areas. Brazil had a murder rate of 25 per 100,000 in 2009 but the country has been touted as a growing outsourcing hotspot.
Already though, some customers and potential buyers of nearshore outsourcing won’t allow their employees to visit Mexico’s violence-prone areas. Outsourcing providers will need to manage these risk concerns to secure long-term client relationships. If the bloodshed continues or escalates, the impacts on businesses will likely become long-term liabilities. The ripple effect could damage the risk-reward equation and, ultimately, Mexico’s nearshore outsourcing sector.
Companies considering a nearshoring engagement in Mexico, or any area with political volatility or violence, should invest time upfront with their provider to validate business continuity and disaster recovery plans and develop special termination clauses and detailed transition plans. Companies should also ensure that provider technologies can seamlessly move work to another delivery location and insist upon offsite, secure storage of critical company data. If a company’s outsourced relationship is gravely impacted by unforeseen instability or violence, it should consider moving to a different location with the existing provider, transitioning to a new location with a new provider, or bringing the operations in-house.
Mexico’s proven role as an established and credible nearshoring locale may be in serious jeopardy if the upswing in violence does not fade quickly. The country offers many of the most sought-after outsourcing benefits, but the risks of continued violence may eclipse the rewards if the government is not able to restore a safe environment.
Ashley Santiago contributed to this article.
David Rutchik is a partner with outsourcing advisory firm Pace Harmon. Ashley Santiago is an associate with the firm.