I recently read an article by Esteban Herrera titled “Five Questions You Should Ask Before Near-Shoring in Latin America”. Some very good insights there, so I thought I’d share. To begin with, it’s only in the last two or three years that the concept of nearshoring to Latin America has been fully affirmed. US companies have seen that the location works, and there are enough advantages due to proximity to offset the slightly higher labor cost than India or China. And so large market destinations like Brazil and Mexico have seen a huge influx of tech firms, while also producing homegrown IT powerhouses that are now even beginning to compete on a global scale.
The problem now is that the destination is seen as such a necessary part of a sourcing portfolio, that firms sometimes blindly set up in a location without really completing the necessary due diligence. Herrera gives you five questions you can ask before committing to a project, to evaluate whether it really is the best decision for your business:
1) Have I selected the best location for my specific needs?
When we start seeing Latin America as one broad destination, and not a bunch of different countries with different pros and cons, that’s when the trouble begins. First assess what exactly you’re looking for, then go out and find it. Instead, firms often go at it the opposite way – they pick the country and then try to fit their project to it. As Herrera says, are you looking for low costs? Nicaragua, Ecuador, Guatemala or Peru are your best options. Is a technically trained workforce your main criteria? Consider Mexico, Chile or Costa Rica. Looking to sell to a large domestic market? Go for Brazil or Argentina. Planning a call center and need English skills and US cultural affinity? Don’t go further south than Central America. Investment incentives? Chile is one of the best. Need scalability and large labor pools? Brazil and Mexico.
This is clearly a simplified version of how LatAm countries can be differentiated, but it gets the point across. Each country has its comparative advantage (also disadvantage). Make sure you’ve done your homework.
2) Captive or outsourced?
Latin America has a good mix of third party providers and captive centers, but the large to medium size buyers always lean towards making captives. Apart from the logistics and the fact that they want to keep sensitive work in-house, part of the reason may be the lack of big IT providers focused on tech innovation in Latin America. Most of the innovation in agile or social media is coming from small to medium companies across the region, while the big players seem set in traditional software development. But things are changing, and we’ll see more US buyers going with third party vendors in coming years, especially since those vendors are now providing integrated IT and BPO solutions in an effort to stay competitive.
Another reason we may see less captives is, as Herrera says, “becoming a business entity in many of these countries can be a slow and painful process, so if speed is paramount, you are better off seeking an established provider”.
The other three questions to follow soon. Feel free to post your comments below and get the discussion started.
Tarun George
