How Peru Won a New Captive IT Operation and Why Other Countries Missed Out

What made Cignium Technologies – a software-centric marketing information firm based in New Jersey –  choose Peru over bigger and better known Latin America nations for its new …

What made Cignium Technologies – a software-centric marketing information firm based in New Jersey –  choose Peru over bigger and better known Latin America nations for its new delivery center? And why did it go the captive route rather than with traditional third party providers? As Peru adds yet another name to its growing roster of brands, this may be evidence of the country pushing past its weaknesses to enter the higher-value sector of the sourcing market.

Jonathan Washburn,  chief executive officer of Cignium Technologies, reflected last week on nearly a years’ worth of due diligence  – including analysis and eventual dismissal of Brazil, Chile, Costa Rica and Argentina.

Peru: A Strange Choice?

A relatively small tech firm, Cignium provides enterprise SaaS solutions to help clients manage their products and operations.  For Cignium, drivers on site location have been around growth potential, and the “comfort level” . “There’s a reason Costa Rican vendors trying to scale up are heading to Peru, and Argentinean vendors trying to manage their political risk are doing the same,” he says. The new center in Lima went fully operational in September this year, and the plan is to add about 50 programmers over the next year and a half.”

Washburn hires only from the high-end of the labor market – gross salaries for developers with 5+ years of experience would be 5000 sols/month (approx. $1900 US). But entry level workers fresh out of school can be as cheap as 2000 sols/month (approx. $700 US). From a labor cost perspective, that’s extremely attractive, he says.

The usual Latin American concern of English capability continues to plague Peru. “The current capacity might work for some specialized sourcing companies, but investing in a large English-driven operation wouldn’t work here,” says Conrado Falco, Director at the Peruvian Commercial Office in New York. “It’s much better to start in Spanish and then slowly transition to English as the workforce matures.”

For Cignium’s relatively small operation, scalability is not an issue, but Washburn agrees that the Latin American champion for English is Costa Rica. “We loved Costa Rica, but the market size (and therefore cost) is what pushed us away,” he says. “But in Peru, we’ve hired ten people in two months, and we have very high English requirements. So we’re getting what we need.”

Another strange choice for a firm of Cignium’s size was the decision to set up a captive center, instead of hiring third party providers. This was partly due to Peru’s poor track record of intellectual property rights enforcement – something which Falco says is “improving very strongly through associations of software firms who have done a good job protecting themselves.” For Cignium, the issue is control. “We write software, and we want to own it,” says Washburn.

Peru’s Winning Streak

One of the fastest growing economies in Latin America (GDP grew 6.2% last year), Peru has been seeing large foreign investment in recent years. But much of these inflows are in its robust mining and energy industries. When it comes to high end IT sourcing, there is a large gap between expectations and reality.

Washburn is critical of Proinversion, the country’s investment agency. According to a presentation obtained by Nearshore Americas, the agency claims to provide macroeconomic data and tax and immigration assistance, helps with obtaining permits and licenses, facilitates legal stability agreements between the government and the business, and lots more.

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“No they don’t,” says Washburn. “We met with them twice and they were helpful in setting up meetings with attorneys, etc. But they didn’t do much more, and didn’t provide any investment incentives.”

What about the other countries he considered? “Costa Rica has by far the best government. The professionals at PROCOMER were fantastic to work with, but the market is small. Brazil is the best from a technical standpoint but is totally insular and inward-focused and very restrictive on tax and labor. And the cost is now on par with the US.”

How about further south? Chile is usually considered Latin America’s IT rock star. “Chile was the ultimate stereotype of poor Latin American timeliness. Nothing worked, and I was very uncomfortable with the way things ran. It’s sad because they have great incentives and infrastructure, and can quickly obtain visas to get people into the country. It’s a case of good policies being mismanaged.” And Argentina? “A political disaster,” says Washburn. “The people are great, but it’s a non-starter.”

Private Sector Promotion

In Peru, much of the heavy lifting on tech industry development is done by alliances of tech firms, such as APESOFT (Peruvian Association of Software Producers). Made up of the leading software developers in the country, APESOFT promotes Peruvian software exports, and pushes vendors hard to adopt quality accreditations like CMMI, ISO 9000, etc. “We also work to better the IP rights enforcement. It’s expensive, and there isn’t the political will behind it,” says Ruben Andaluz, President of APESOFT. “We work with the universities to improve the IT education here, and address the gap in what the industry needs.”

Peru’s weakness is its red tape. “Registration and banking is very frustrating. It took us three months to get access to our bank accounts,” says Washburn. “But everything else just worked in Peru. It was simple to come in and get started.”

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