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Onshoring in the Southwest: Can Arizona, New Mexico and Texas Compete with Offshoring?

Onshoring in the Southwest: Can Arizona, New Mexico and Texas Compete with Offshoring?
Texas Governor Perry puts a high priority on IT-investment message

A couple of states determined to not be left ‘in the dust’ of globalization

By Tarun George

A week ago, Texas governor Rick Perry told a convention of businessmen, education leaders and private investors that his state can be the nation’s next high-tech hub. Speaking at the Governor’s Technology and Economic Development Forum hosted by the Austin Chamber of Commerce, Perry said that this would require “the teamwork and dedication of professors, researchers, administrators and legislators along with the private sector, working toward a common goal.” Does Texas have that kind of determination? Maybe. But a concerted move to high tech will definitely be a first for a US state.

Can states like Arizona, New Mexico and Texas meet the tech demand of Silicon Valley firms? And more importantly, will the costs be too high to justify?

State-level incentives

When we think of onshoring, we usually think of states like Ohio and Michigan that have made a name for themselves through savvy marketing and attracting large providers. But the southwest US states are now also offering strong incentives for companies, some by modifying previous incentives programs, and others by creating entirely new benefits for the IT sector. New Mexico for example, offers firms a tax credit on R&D expenditures of 4% (8% in rural areas), and a Manufacturer’s Investment tax credit of 5% of the value of qualified equipment and other property used in their operation. The state also provides a High Wage Jobs tax credit equal to 10% of the combined salary and benefits for each new high paying job, up to a minimum of $12,000 per year, per job.

Other states like Arizona combine incentives with the betterment of the public skill level. The Arizona Job Training Program allows any employer creating new jobs to apply for a grant to receive 75% of their eligible training expenses reimbursed. Also, any employer looking to increase the skill level of current employees or supplement their current training plan may receive a reimbursement of 50% of their training expenses.

And in Texas, Governor Perry has made tech innovation one of his main priorities through the Texas Emerging Technology Fund. The money, awarded to R&D initiatives, helps firms take new innovations and technologies from development to the marketplace. According to the state government, it has “allocated more than $193.7 million in funds to 131 companies, and nearly $173 million in grant matching and research superiority funds to Texas universities.”

While these incentives and others may not be the deal-maker for IT sourcing firms, they do demonstrate the clear commitment of these states to advancing business opportunities and improving the investment climate for companies.

Labor arbitrage

 

The cost of US workers – The big draw for onshoring clients is that there are no barriers to communication (language, culture, or otherwise) with their vendor or its workers. Especially for highly iterative processes, that communication is key, and clients don’t mind paying extra for it. And onshore providers pass this off by saying, “Yes the labor costs are higher than offshore, but the productivity gains balance it out when you consider the total cost of outsourcing.” However this is not necessarily the case. John Dragisic, who last year sold his contact center company to iPacesetters, shows in this Nearshore Americas article how small changes in wages result in large changes on a company’s balance sheet. For a labor cost increase of 10-20%, “this will be equivalent to a total cost increase of 5-10% because labor and benefits represent 50% of total costs for the typical telemarketing company,” he says. For an IT operation, that percentage is usually higher.

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We asked Imre Szenttornyay, President of Senate Technologies, an IT firm based in Texas, what he’s paying his programmers. “$50,000 a year is the average package we give developers, and that’s only in the small towns. In the larger cities it goes up about 30%,” he says. “I’ve been able to offer senior Sharepoint developers to my clients at $55-60 per hour.” His company does have delivery centers in Mexico, Costa Rica and Argentina – “I can deliver from the Nearshore, and it’s definitely cheaper. But many of our clients prefer to have the workers here.”

US onshoring does hold a strong value proposition for BPO and voice-based services. Leveraging the rural sourcing concept, providers are able to create a ‘virtual workforce’ in which many employees work from home, greatly reducing the overhead costs of traditional brick-and-mortar centers. That approach will not work for value added tech or software development functions however.

Availability of talent – We’ve all heard the dire predictions about American universities not graduating enough technical talent. It’s an issue especially in Texas, and is one of the main improvements Governor Perry outlined. Szenttornyay agrees that it’s tough to find local talent. “I’ve worked with Texas Tech, and the biggest issue with that university is that they’re only graduating about 50 computer engineers a year. That’s tiny. Large cities like Houston, Dallas and Austin are producing software engineers, but not at the rate needed. As another example, Texas A&M used to produce about 8000 grads per year in all their engineering disciplines. Now it’s dropped to 1500.”

Statistically speaking, less and less Americans are graduating in the hard sciences, and the US is becoming less competitive as a nation in terms of software development. The amount of technically skilled employees is enough for small to mid-market operations, but nothing larger. The difference in Latin America is that many governments have made the tech industry their priority and have implemented programs to boost the public skill level. Szenttornyay says, “I’ve been hiring folks from Mexico, and bringing them into Houston on TN visas to work for us. It’s cheaper, and they’re very well qualified.”

About Tarun George

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