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Mexico: Strong BPO Potential

Proximity to the U.S. market, the same time zone, Spanish language and a solid regulatory framework are boosting Mexico's BPO sector.

BY GUILLAUME CORPART MULLER AND ENRIQUE ORELLANA

MEXICO CITY --  When Tata Consulting, one of the world’s biggest outsourcing firms, announced in June 2007 that it would ship 500 jobs from its home base of India to its new Guadalajara facility, Mexico turned a corner.  Since then, others have followed Tata’s lead.  MindTree, a global IT and R&D consultancy; NoShore Group, an IT maintenance services firm; Indra, a leading Spanish IT multinational; and Genpact, another giant Indian outsourcing firm,  are all either setting up new Mexican outsourcing operations or expanding existing ones. 

The recent boom in business process outsourcing (BPO) is not only creating much-needed jobs, but is also having a ripple effect throughout Mexico’s IT industry.  Mexican IT firms are suddenly flexing their muscle on a global stage.  Neoris, an IT consulting company and subsidiary of manufacturing conglomerate CEMEX, is winning clients in the United States and Europe.  Meanwhile, Softtek, a Mexican IT company with operations throughout much of Latin America, last year expanded its reach to Asia by acquiring the Chinese service provider IT United.

LEFT BEHIND

Despite the recent upsurge in interest in Mexico as an IT service hub, Mexico has been largely left behind in the outsourcing wave of the past 10 years.  While the global offshore market is valued at $30 billion, Mexico has so far conquered a meager 5 percent share, or $1.5 billion per year.  The global economic crisis, however, has altered the dynamics of the outsourcing industry in fundamental ways.

India is beginning to see its dominance challenged. It is running out of talent to recruit. That is reflected in the pace of expansion of its outsourcing sector, which dropped from 35 percent in 2007 to 15 percent in 2008 and is expected to grow by only 7 percent this year. Wage inflation, presumed to be between 15 percent and 17 percent in 2008, has further eroded India’s competitive edge.  The recent scandal at Satyam Computer Services, involving financial irregularities and fraud, is raising doubts about the regulatory oversight of Indian outsourcing providers.  China, on the other hand, although growing strongly, has fallen short of expectations as an offshore location, constrained by communication challenges, data security and regulatory issues.

With Asian currencies appreciating against the dollar, concerns about geographic concentration of risk, economic instability, and problems posed by the physical distance from corporate headquarters, U.S. companies are realizing that near-shoring to Mexico can be an attractive alternative.   In 2008, Mexico’s outsourcing industry grew 18 percent and is poised to capture a larger share of this global industry. 

U.S. RECESSION OPPORTUNITIES

There should be plenty of new business opportunities for Mexico, as the recession in the United States will drive companies to look for administrative efficiencies and protect their core activities, thus increasing the reliance on outsourcing IT and other business processes.  In addition, anticipated consolidation in industries such as healthcare, education, retail, and telecom will lead a greater use of outsourcing.  At least 40 percent of Mexican outsourcing firms expect their businesses to grow as a result of these trends, according to a recent survey by TEAM Solutions. 

As companies begin to pay more attention to outsourcing, new providers who present fresh ideas will prosper.  Outsourcing firms that offer pay-for-use models or low capital investments in exchange for world-class services can be expected to be rewarded in 2009. 

CRITICAL MASS
 

With over 2,000 IT companies operating in Mexico and 550,000 trained IT professionals, Mexico’s outsourcing industry has already reached a critical mass. Its labor pool continues to grow, as an additional 64,000 IT professionals graduate annually from 121 technology-focused universities, more than any other Latin American country.  Mexico already has six resident software firms – Softtek, Itera, ABS-IBM, Hildebrando, Stefanini, Sigma Tao-EIDON – that have attained the Software Engineering Institute’s highest ranking for software development processes, known in the industry as Capability Maturity Model (CMM) Level 5, and another seven companies are ranked at Levels 3 and 4.


As Mexico is in the same general time zone as the U.S. market, it has a privileged position for delivering services that require constant communication.  Proximity also translates into low travel and logistical costs. Mexico is within a five-hour flight of most U.S. cities.

Mexico has other advantages. The most obvious is language.  Neither Chinese nor Indian suppliers can offer Spanish-language capabilities. There are also cultural and professional affinities between the United States and Mexico, as well as the fact that many Mexican professionals and, increasingly, technical staff, are bilingual. 

SOLID FRAMEWORK

Another factor in Mexico’s favor is its solid regulatory framework, including trade facilitation schemes and intellectual property laws that are considerably aligned with U.S. regulation.  Finally, the Mexican peso’s recent 30 percent slide against the U.S. dollar has made Mexico that much attractive for international investors.

Meanwhile, the Mexican government is making efforts to position Mexico to compete with India and other IT service providers.  It recently launched the Program for the Development of the Software Industry (Prosoft) and has gone to great lengths to publicize the competitive strengths of the country’s IT and BPO industries.  These efforts have been applauded by companies such as IBM and Sun Microsystems, which have joined the pledge to help develop Mexico’s IT industry.

On the other hand, Mexico is not without its failings and its detractors.  The outsourcing industry has been caught in the crossfire of northern Mexico’s deteriorating security situation.  President Felipe Calderon's crackdown on Mexican drug cartels has hit Ciudad Juarez and Tijuana, two of the country’s outsourcing hubs, particularly hard, damaging Mexico’s image in the United States and scaring away some potential clients.  Mexican officials are quick to counter that the Mumbai terrorist attacks last December prove that security risk in India is not negligible either, but that is hardly a consolation.

MOM-AND-POP COMPETITION

Another worrying trend is the mushrooming of small mom-and-pop operations in the business process outsourcing sector, which offer attractive prices to lure customers.  As their clients realize sooner or later, these firms lack expertise.  Also, although speaking English is ever more common, there still exists a language barrier that has prevented Mexico from exploiting its full potential.

In addition, Mexico is not as well positioned as other Latin American countries to offer high-end IT services. While Brazil, Costa Rica, and Argentina are moving towards value-added services such as managing shop-floor inventories, creating graphics or artwork, and reading blood tests for medical labs, Mexico is still focused on back-office accounting, document management and basic call-center services. 

It is possible to follow in the path of other countries and ascend the food chain, but in order to do this, companies established in Mexico will need to build a solid reputation, differentiate themselves and improve their service delivery processes.  While the primary attraction will be for low-cost services, Mexico must prove to be a place where it is possible to stage deeper and more valuable business processes.

Guillaume Corpart Muller is Associate Managing Director, Market Intelligence, and Enrique Orellana is Senior Analyst, Market Intelligence, in the Mexico City office of Kroll Inc, a global risk consulting firm. This article is republished with permission from Kroll Tendencias, the company’s monthly newsletter.  

 

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