Anna Frazzetto's Blog

Digital Innovations and Technology Solutions

Mexico and South America Need More Time

In the recent CIO.com article "Time Zones Do Matter: Increasing Interest in Americas and Nearshore IT Services Delivery," Stephanie Overby discusses how Mexico and South American countries like Brazil are gradually gaining popularity as nearshore IT services destinations. The article discusses what research director for AMR Research, Dana Stiffler, calls "India and China fatigue."

While I agree with Stiffler that growing turnover and rising wage costs, especially in India, are encouraging businesses to look elsewhere, I disagree that nearshore regions around the U.S. today offer the cost benefits and talent resources found in Asia. For example, in Brazil labor cost savings are only at 30%. When you factor the other costs incurred during an offshore project (such as travel, training and internal management of offshore projects), a company will basically breakeven in Brazil. Labor costs need to be at a 60% or more savings for it to offer an organization worthwhile savings.

In addition, when you look at Brazil you have to consider language. Portuguese is the national language and Spanish is widely spoken. However, English is not widespread, making communication challenges greater. The IT industry in Brazil is also limited. It produces minimal global exports, and there is not a single global Brazilian software firm to date.

Although the IT industry in Mexico has more experience in serving U.S. businesses, its still a very young marketplace and its advantages are also limited. The labor advantage is a 40% savings compared to U.S. labor costs, which is better than Brazil but no where near the 60% savings required to achieve valuable business impact. Ongoing corruption issues in Mexico also continue to make transparency difficult when it comes to business operations.

The article also points out the idea that some major corporations are setting up IT services centers in lower-cost U.S. locations. The issue with that strategy is talent supply. One of the main reasons business offshore IT services is the lack of skilled, experienced IT professionals in the U.S. Only about 27% of U.S. students are graduating each year with STEM degrees (science, technology, engineering and math). Gartner reports that only about 9% are technology degrees In many Asian countries, like the India and Vietnam where the talent pools are young and growing, science and math degrees make up 80% of the degrees awarded annually. The ongoing IT talent shortage in the U.S. will continue to plague U.S. businesses until graduate rates in STEM areas increase significantly.

All in all, I agree that around the world you will find countries with the capability and infrastructure to deliver topnotch offshore services. However, businesses must consider there own challenges, cost goals, locations and needs before considering ANY location. While you can offshore just about anywhere, there are still advantages and challenges to all locations. Those factors must be carefully considered in relation to business strategy and goals before any offshore decisions are made.