COUNTRY PROFILE: Ecuador Strives for a Role in Global Software

Ecuador may not be the first country that comes to mind when considering global outsourcing destinations. However, in recent years Quito, the nation’s capital with a population of …

Ecuador may not be the first country that comes to mind when considering global outsourcing destinations. However, in recent years Quito, the nation’s capital with a population of 2 million people, has begun to make a name for itself in the global market.

Quito peaked economically during the 1980s when it was considered an important financial center and also had a niche for software technologies. Then in 1999 a severe financial crisis left Ecuador nearly bankrupt and with far fewer local businesses. Ecuador had no choice but to search for business abroad in countries with similar markets including Peru, Venezuela, and Colombia.

Today Ecuador has stabilized from an economic perspective, but recent relations with the US have taken a hit. In April of 2011 the US Ambassador to Ecuador, Heather Hodges, was expelled for allegations she made regarding corruption of the Ecuadorian head chief of police and the direct involvement of Ecuadorian President, Rafael Correa Delgado. The US responded by expelling the Ecuadorian Ambassador to the US, Luis Benigno Gallegos Chiriboga. Although strained relations may be a setback for Quito in gaining new business from the US, the city continues to make small but significant progress in evolving as an outsourcing destination within Latin America.

Since the year 2000, Ecuador’s economy has grown an average of more than 4% each year, and just the first quarter of 2011 has seen growth of 8.6%.

Quito Today

In 2007 the Ecuadorian government established “technology: hardware and software” as a strategic cross-sector. Ecuador is working with about 90% of micro, small, and medium-size enterprises throughout the country to certify their processes using the standards of the European Foundation for Quality Management (EFQM), an international certification designed to improve operational efficiency and quality of services.

In 2010 Ecuador had 430 companies specializing in IT services. This year, that number has already grown to 500 companies, 400 of which are located in Quito. One of the largest tech companies in the city is TCS Ecuador, a branch of the Indian BPO giant. Indian firms are ramping up their investment in Ecuador and hoping to form partnerships with local technology providers.

Outsourcing Potential

Quito is in transition from being a long-time producer of raw materials to production of software, alternative energies, and biotechnology. Paul Peñaherrera works as coordinator of the Software & Technology Sector for ProEcuador, a governmental institution that implements policies that support national investment in Ecuador. “Ecuador tends to manage the development of software companies in order to achieve internationally recognized quality processes of production, which leads to increased competitiveness of our enterprises worldwide,” Peñaherrera says.

Well-known BPO service providers currently operating in Quito include Azteca Bank and HSBC. Other US clients include American Airlines, Delta, GM, IBM and Microsoft. Quito has 130 service providers, 40 of which export IT services to Central and South America, Russia, India, and the United States. However, 90% of these companies have 30 or fewer employees, making companies in Quito small but specialized.

What Does Quito Have to Offer?

Quito has a pool of talented, well trained, and affordable labor. Nearly 70% of the workforce in the city is age 30 or under. Each year there is an average of 1,200 IT graduates in Quito, about 90% of which end up working in technology-related fields. Companies recruit and train IT graduates from local universities. The average starting salary for a recent graduate is between $800 and $3,000 per month, making it competitive in the market and well over the country’s minimum wage of $264 per month. The reality is, however, that many graduates leave Ecuador to pursue opportunities abroad, leaving a deficit of talented workers.

The attrition rate of workers in Quito also tends to be high. However, larger companies such as Cobiscorp (with 300 employees in Quito) as well as smaller companies such as MachangaraSoft (with 60 employees) have overcome this challenge by offering employees continued training, research, and opportunities for career growth and travel.

Location, Language, Currency

Quito is located in the central northern part of Ecuador close to the Pacific Ocean, making it a strategic location for local and international clients. The Spanish spoken in Quito is also considered to have a neutral accent and easy to understand.

The ability to speak business English, on the other hand, is perhaps Quito’s greatest deficiency. Less than one-third of workers in IT fields speak a basic level of English. This deficit results in other countries such as Argentina and Mexico being in a better position than Ecuador to produce software tools in English.

Ecuador adopted the US dollar in the year 2000, from the highly inflated sucre. Dollarization in Ecuador has brought stability and increased economic performance. In 2010 Ecuador’s rate of inflation was just 3.3%. From an investor’s perspective, doing business with the US dollar provides security and little risk of devaluation.

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What the Government Is Doing

In recent years Ecuador has had an extremely low amount of foreign direct investment compared with the rest of Latin America (in 2009 FDI amounted to just $318 million). In March, President Correa announced his “sincere interest” in attracting investors back to Ecuador. Government institution Invest Ecuador was created to publically promote incentives for investment in Ecuador as well as to deal with “aftercare” and other bureaucratic hurdles of FDI.

National Plan for Good Living: In 2009 SENPLADES (National Secretariat of Planning and Development) implemented the National Plan for Good Living to encourage economic development as well as foreign investment in Ecuador. The plan is in part being carried out through educational scholarships in public universities. For the first time in 2011, 1,700 scholarships were offered to students studying careers in hard sciences and information technology. In 2012 a total of 3,000 scholarships will be awarded.

Code of Production: In 2010 the government released an outline of incentives for new businesses, offering income tax deductions for technological training, research and innovation. It exempts new biotechnology and software companies from the minimum tax payment during the first five years of business and reduces their income tax from 25% to 22%.

Special Economic Development Zone (ZEDE): Quito is constructing a new 1,500-acre international airport, Quiport, set to open in 2012. The airport will dedicate 200 acres as a special economic development area, which will function as Ecuador’s first production hub for international trade. Pablo de la Torre, who works for airport administrator Corpaq, commented that the goods that will be produced in the ZEDE “will be low in weight and volume but high in value and price, thereby laying the groundwork for a transformation of production from being primarily commodity exporters to value-added goods and services.” Companies within the ZEDE will also receive a 5% reduction of their income tax.

Outsourcing Setback

Passed in 2008, Command 8 prohibits “contract labor” or payment by the hour for full- time workers. Companies are now required to pay employees a full salary with benefits. Although passed to support fair labor laws, Command 8 has unintentionally limited Quito’s outsourcing opportunities, as many outsourcing companies typically pay an hourly rate.

Perhaps the government will come up with a remedy for that situation. That kind of agility will be required as Quito tries to position itself in a highly competitive and constantly evolving global market. By offering English training programs, increasing government incentives and working to strengthen relations abroad, Quito will better position itself as an international service delivery location. For companies seeking to invest in untapped sectors, Quito holds potential in specialized software development for logistics, transportation, and tourism.

 

 

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