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Nearshore Nexus 13- Mexico’s Hemispheric Role in IT Leadership
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Nearshore Nexus 13- Mexico’s Hemispheric Role in IT Leadership


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Mexico’s position as a global IT services leader has been driven by the need to serve the multinationals based in the country and fueled by the large supply of technical resources produced by its …

Mexico’s position as a global IT services leader has been driven by the need to serve the multinationals based in the country and fueled by the large supply of technical resources produced by its universities. Learn how the active cooperation between the private sector and the Government has helped create an industry that makes Mexico one of the top IT sourcing destinations in the world.

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  • ContextThe offshore IT services industry is a mature, successful business model that is working well for many enterprises and providersSome early concerns have been addressed (operating model, client service coverage, quality, scale)Other concerns persist or are developing (timezone, turnover, inflation, culture, immigration issues)Overall demand continues to grow and alternate offshore geographies are emerging with varying levels of capability, maturity and economic profileLatin America is an increasingly attractive alternative to offshore services; today you’ll hear some facts and analysis that explain whyYou’ll also hear why out of the various LATAM locations, Mexico is the most suitable for serving the U.S. market Here’s an observation: in the past, whenever a company was dissatisfied with its third-party services, the complaints were usually directed at a particular provider or situation. For example, “Provider ABC backed up the bus” or “Provider XYZ gave me the ‘B’ team”. Nowadays, it’s more common to hear complaints about a location. We’ve moved a lot of services offsite and the search for good locations is a small industry in itself. What I want to do today is explain why the dominant offshore locations have some structural challenges and why nearshore locations, particularly Mexico, are an increasingly attractive alternative.
  • First, some definitions:For the purpose of this analysis, “nearshore” is Latin America, which is shown in green as Mexico and south. That’s what we’re talking about todayI’m not including the U.S. in blue, which is considered “onshore”, and I’ve also excluded Canada, which is certainly nearby but not included in everybody’s definition of “nearshore”. - Then there’s “Jerseyshore” and I have nothing to say about that and I’m sure that’s OK with everybody. Let’s focus first on “offshore” IT services…and by “services”, I’m generally referring to outsourcing arrangements such as application management, ITO, BPO, etc., as well as project engagements such as ERP implementations and custom development.
  • There’s a lot that’s going right in the offshore space. Obviously, India is the dominant player and China is gaining ground quickly. The India providers have relationships with most of the country’s large enterprises and the growth rate of over 16% per year is staggering in this economy. Why is this significant? Because this kind of demand has attracted other players who are eager to exploit any weaknesses in the offshore proposition.Low hourly rates were irresistible to lots of buyers and business has boomed. What started off as a rocky road with offshore has become a smoother experience for many. Processes have become formalized and repeatableThe infrastructure is solid and there’s been an emphasis on qualityIt’s also helped that some big global players have made big commitments to the region and introduced their best practices.Accenture has far more employees in India than in the U.S. and a quarter of IBM’s employees are in IndiaGovernance and account management is typically also very soundSo what?In today’s multi-sourcing environment, the remote service model has become accepted by both IT and, increasingly, the business (i.e., business as usual, not high risk)
  • But our market has had challenges with offshore services…TimezoneImmigrationLast but not least: CultureThe soft stuff is the hard stuff – Dr. Michael HammerSource of cultural info: TMA World (’s go back a step and consider what’s important these days in sourcing…
  • …and I’m seeing that the game is changing, or at least it’s evolving…For example – - More and more, the cost evaluation is shifting from hourly rates to total cost of serviceCompanies love the access to technical skills but really want more in the way of functional or industry expertise There is now an appreciation for (and apprehension of) geopolitical stabilityThe bottom line: companies have become more sophisticated,and the nearshore model is a way to better address these expectations. Let’s discuss why and how by taking a closer look at the region
  • Americas in red make up 8 of the top 30Asia/Pacific – 9EMEA – 13All 30 are in “emerging” countries (developed countries omitted; worth considering but are at a lower cost advantage)Which is best for you? - Answering this question has become a small industry into itselfAnalysts (e.g., Gartner, Forrester)Third Party Advisors (e.g., TPI, NEOGroup)Industry media groups (e.g., Nearshore Americas, Global Sourcing)Self-Study and ”Trade Mission” researchGartner provides their assessment against several Evaluation Factors; so how do these countries compare?
  • When you look at their assessment, you see that LATAM countries are well represented…and Mexico shows up a lot. Let’s take a closer look at the region…
  • Let’s look at population:-Argentina is larger than Canada- Mexico is larger than Germany and not far off from Japan- Brazil is quite large at about 60% the size of the U.S.In total, there are 569 million people in Latin America and 21 countriesPopulation is interesting but there are lots of other important macroeconomic comparisons to consider. Time doesn’t permit today, so I suggest you look at inflation, GDP per capita, employee costs, foreign exchange, etc. - For example: Inflation over last couple of years: MX 3-5%, India 6-10%
  • The Latin America business climate has evolved to become highly suitable for the export of IT services. Why? First: 12 of the Global 500 are in LATAM (compared to 9 in the Gartner “Top 30” countries in EMEA)Brazil has 7, India has 8 and Russia has 7; Mexico has 3Second: IT labor pool is large and growingLastly, remember I described what is stressing the offshore model; this has created an opportunity for LATAM to jump in. How are they doing this?....[Monterrey is a commercial powerhouse hosting international companies like Sony, Toshiba, Carrier, Whirlpool, Samsung, Toyota, Hummer, Daewoo, Ericsson, Nokia, Dell, Boeing, HTC, General Electric, Gamesa and LG.]
  • 1) International Trade Promotion groups2) Public investment, labor cost reimbursement3) EducationBottom line: IT exports are considered strategic…and this high priority is important for policy-making
  • A spotlight on Mexico…Mexico is the leading IT economy in Latin America with a presence of over 25 years in the market (Accenture, IBM, Softtek).In 2008 the market value of information technology services (including business process outsourcing or BPOs) was $4.2 billion USD and the software market amounted to $2.4 billion USD in the same period, according to Business Monitor.Mexico has more than 1,393 IT companies and 225,000 jobs in the IT sector and is the world’s 7th largest IT human capital reserve.90,000 IT professionals graduate from college each yearTec de Monterrey – 90,000 students at high school, undergraduate and graduate levels; 25 campuses; major source for Neoris and large SAP customerWhere is the work performed?
  • There are 31 states in Mexico and most of the exportable IT services are coming out of 7 of themNote presence of US SI’s and major India firmsMonterrey is 140 miles from U.S. border; 90 minute flight from Dallas
  • First a baseline: Business Tourist visaH-1B – the subject of immigration reformSo what? UncertaintyTN VisaUnique to Canada and MexicoNo annual capNo work restrictionsIP protection standardsIndia provides IP protection; it’s been said that protections in India are good but will take years to get an injunction. “Justice delayed is justice denied”
  • Security is a concern for some but there’s a discrepancy between the headlines and the data.3% of homicides are innocent bystanders (about 200/year)Violent homicide (per 100,000):US: 5NY: 6MTY: 6Las Vegas: 8DC: 31Detroit: 33New Orleans: 90US gang-related homicides: 1,017 out of 731,000 members (139 per 100K)Offer the White Paper
  • Data is all over the placeBrazil, India and China are comparable as being generally OKMexico and Argentina are considered strongerIndonesia, Peru, Panama are lowOne of the frustrations often voiced regarding India(India accent vs. Hispanic accent)Consider not just what you can understand but how well you can be understood!What you might expectEnglish skills are better in the North of the region (KPMG report)Strong English skills may carry a premium if you want a staff augmentation relationship
  • The delivery model for nearshore providers is comparable to other remote providers who assign a mix of onsite and offsite resources.NAFTA makes the left side of the chart (onsite) much easier to deliverDiversity of service models available (turnkey, managed service, staff augmentation, etc.)There is familiar sense of “the right way to do things”. When you don’t have that, managing the relationship is all uphill
  • I hope I’ve given you some good reasons to take a closer look at nearshore options and discover for yourself how you can develop a quality, cost effective and comfortable relationship.Other closing thoughts (optional depending on time):Assess the total relationship cost of your current partnersIdentify pain points that are structural, not procedural, and incorporate them into your Business CaseDo your homeworkConsider where you, your customers or your vendors source, manufacture or go to marketGeography researchProvider research; meet executives, account management, project management. In many ways, this is more important than the geography researchAvoid these mistakes:Rate card shoppingRemote staff augmentationYou should expect a better cultural fit, not an identical matchNearshore is not “Offshore for Dummies”; the same due diligence for governance and mutual commitment applies
  • Transcript

    • 1. Mexico’s Hemispheric Role in ITLeadershipSpeakers:Alfredo Pacheco, Executive Director Mexico ITTom Taylor, Business Director, Neoris
    • 2. Confidential // Neoris 2Regional prominence and proximityAlfredo Pacheco – MexicoITTom Taylor – NeorisNearshore Nexus - April 24, 2013Mexico’s Hemispheric Role in IT Leadership
    • 3. Confidential // Neoris 3
    • 4. Confidential // Neoris 4Definitions Nearshore Mexico, Central America and South America Onshore US Offshore Everything else (EMEA, Asia/Pacific) Jerseyshore
    • 5. Confidential // Neoris 5Offshore IT services are well established as an integral part of manycompanies’ sourcing strategy. Foreign providers, particularly India and China, perform a large portion of our IT services Worldwide IT services market: $845B in 2011 (up almost 8%) U.S. market: $294B (2009) India exports to US in 2009: over $30B China: $9.6B in 2009 Offshore services for the U.S. market continues to be a growth industry Overall growth expected to be 16-18% India share of IT services in U.S. grew 6.5% in 2009 Over half of the Fortune 500 is outsourcing a portion of their software requirements to IndiaDemand for offsite IT services is stressing the offshore supply,creating opportunities for providers in emerging geographies
    • 6. Confidential // Neoris 6While the offshore IT service model is here to stay, frustrations andconcerns are common and some will be difficult to solve. Timezone differences Great for getting work done while you sleep, not so goodwhen collaboration comes at somebody’s inconvenience The “B” Team effect Agile development doesn’t fit Immigration (when onsite time is needed) Visa cost, time and work restrictions Cultural differences Risk-taking differences Decision-making: tight vs. loose (e.g., regard for timecommitments) Simple vs. complex reasoning Hierarchical structureSome challenges with offshore services are structuraland cannot be addressed simply with process improvements.
    • 7. Confidential // Neoris 7IT leaders are evolving their priorities for global sourcing.Costs Reduce hourlyrateReduce totalcost of serviceSkills Gain access totechnical skillsGain access totechnical,industry skillsand innovationFlexibility Core vs. Non-CoreOperationalflexibility:scope, skills &delivery modelService &RiskIncrease ServiceLevelsMitigatesecurity risks:infrastructure,IP, facilitiesPredictability Rapidly deploynew capabilitiesGeopoliticalstabilityCompanies have become more sophisticatedand the nearshore model is a way to address these expectations
    • 8. Confidential // Neoris 8Many good alternatives for IT services have developed in variousregions of the world.Gartner’s Top 30 Offshore LocationsEvaluation Factors- Language- Government Support- Labor Pool- Infrastructure- Educational System- Cost- Political and Economic Environment- Cultural Compatibility- Global and Legal Maturity- Data/IP Security & Privacy
    • 9. Confidential // Neoris 9How do the countries compare?Evaluation Factor Among the Top Rated Among the Lowest RatedLanguage India, Costa Rica, Mexico, Egypt Peru, Hungary, PhilippinesGovernment Support India, Mexico, Indonesia, Poland Bangladesh, Russia, Vietnam,ArgentinaLabor Pool India, Mexico, Indonesia, Poland Bangladesh, Russia, Vietnam,ArgentinaInfrastructure Chile, Morocco, Brazil Czech Republic, South Africa,ColombiaEducational System China, Chile, Mexico Czech Republic, South Africa,PanamaCost China, India, Mexico, Indonesia Colombia, Czech Republic,South Africa, PanamaPolitical and EconomicEnvironmentBrazil, Malaysia, Romania, Ukraine Argentina, Bangladesh, Russia,VietnamCultural Compatibility Brazil, Malaysia, Romania China, Thailand, CzechRepublic, HungaryGlobal and Legal Maturity India, Chile, Peru, Bulgaria Colombia, Vietnam, SouthAfrica, RussiaData/IP Security & Privacy Mexico, Indonesia, Poland China Russia, VietnamSource: Gartner‘s 30 Leading Locations for Offshore Services, 2010-2011
    • 10. Confidential // Neoris 10For context, let’s first consider the size of the countries in the LATAMregion compared to other major countries.Major Countries Latin America
    • 11. Confidential // Neoris 11The Latin American business climate has evolved to become highlysuitable for the export of IT services. Some of the largest companies in the world are based in Latin America LATAM is home to Global 500 companies in Banking, Oil, Chemicals, Energy,Telecommunications, Mining and Steel industries There is a large and growing IT labor pool Mexico: 600,000 Brazil: 250,000 Argentina: 70,000, growing at 15% per year Chile: 20,000 Uruguay: 20,000 University focus on developing IT professionalsThere’s an indigenous IT service industry that has competently servedthe local market for decades and is eager/prepared to serve the U.S. market
    • 12. Confidential // Neoris 12Many LATAM countries are actively encouraging the growth of theirIT export business with trade promotion and policy initiatives. International Trade Promotion and Local Advocacy Brazil – BRASSCOM Mexico – MexicoIT Investment Creation of Technology Parks (Mexico, Uruguay) Tax incentives (Argentina, Brazil, Colombia) Education initiatives Argentina Vocational Education and Training (VET)initiative Uruguay’s “One Laptop per Child” initiative Labor cost reimbursement for employment expansion Mexico launched PROSOFT in 2002 and awardsgrants that may account for up to 50% of projectexpensesIndia 3.1%China 2.8%Argentina 4.9%Mexico 4.8%Brazil 5.1%U.S. 5.5%Education expendituresas % of GDPMany LATAM countries recognize the IT services industry as strategicand have taken market and policy actions to help it expand Chile – Invest@Chile Argentina – VET
    • 13. Confidential // Neoris 13Mexico has special status as a nearshore provider due to NAFTA,proximity, skills and other advantages. Maturity and Scale IT services industry is over 25 years old and generates $4.2B; additionally, $2.4B ofsoftware development is performed About 1,400 IT companies manage the world’s 7th largest IT human capital reserve One of the highest numbers of CMMi certified centers worldwide (A.T. Kearney GlobalServices Location Index – 2011) “Mexico is now Latin America’s top location in the Index, thanks to currencydepreciation and increased nearshoring sentiment in the United States…” Skills engine 600,000 IT workers and 90,000 IT professionals graduate annually from the universitysystem Monterrey Tech – 25 campuses and 90,000 students Cultural affinity Shared, highly transited border Familiarity with U.S. business and social environment
    • 14. Confidential // Neoris 14Where are the IT service capabilities located in Mexico?
    • 15. Confidential // Neoris 15Spotlight on Mexico, continued Visas for non-NAFTA countries (typically H-1B) Previously capped at 65,000 for professionals with occasional temporary increases; theallotment usually runs out Policy is being revised right now; cap could be raised but restrictions could be a concern toIndia providers (e.g., fee increase, limit on how many workers have a visa and onsitework prohibition) Requirements: paid at prevailing wage and must meet education/experiencerequirements (possess a 4-year degree, have 12 years of experience or 6 years experienceand 2 years college) Limitations of Business Tourist Visa NAFTA provision for TN Status (TN Visa) Started 1994 and is unique to Canada and Mexico No annual cap No prevailing wage requirement IP Protection First treaty to protect intellectual property Minimum standards set for protection of copyrights, trademarks, trade names & slogans,patents and trade secretsTravel to the US is made easier for NAFTA parties (Canada and Mexico)
    • 16. Confidential // Neoris 16U.S. perceptions of Mexico are still fraught with misunderstandingsbut are slowly merging with reality. Security “Despite the negative press regarding violence and the potential dangers of traveling toMexico, the growth of the IT services industry in Mexico has not been significantlyaffected and the industry has been able to effectively manage the initial short-term risklabel that comes with these political and economic issues.” Gartner Analysis of Mexico asan Offshore Services Location, November, 2011 Ongoing gap between data and news headlines/perceptions Whitepaper available on request: “Doing Business in Mexico: Is the Country Safe?”
    • 17. Confidential // Neoris 17Source: EF Education First, 2011What can you expect from the region regarding language capabilities?
    • 18. Confidential // Neoris 18The delivery model for nearshore providers is comparable to otherremote providers who assign a mix of onsite and offsite resources.Client Team (On Site) Nearshore TeamNewDevelopmentMaintenanceProductionSupportConcept100%• RequirementsDesign70% 30%• Quick Design• Prototype Construction• Integration test and fixingUAT100%• Prototype Evaluation• Refine PrototypeApplication Analysis50% 50%• Application Analysis• Requirements and Functional Design Enhancements20% 80%Ad hoc Reports 100%Technical Upgrades 100%Performance Tuning 100%• Prioritization, Escalation Fix on Fail20% 80% • Fixes and root cause analysis• Daytime operations Operations Support20% 80% • Day and night operationsUser Queries20% 80% • Day and nighttime service• Daytime responses• Engineer Final Product Build & Test25% 75%Design50% 50%Build & Test25% 75%• Functional Design• Majority of Build Nearshore• Technical Design• Urgent Changes• Operational Urgency Changes Build & Test50% 50%Nearshore content mix varies depending on client outsourcing maturity and preferences
    • 19. Confidential // Neoris 19To recap, we’ve discussed several reasons why nearshore services areworth considering as a dedicated or complementary sourcingstrategy. The cost gap is narrowed when considering total service costs Travel expenses, duplicate onsite/offsite management, retraining, after-hour support, etc. Culture influences how things get done (and how well) There is a long history of commerce and social interaction with nearshore countries Timezone matters Morning is morning, afternoon is afternoon, today is today! IT wage inflation is a serious worry Demand-driven inflation on top of economic inflation will definitely spoil a business case
    • 20. Confidential // Neoris 20There are several good locations for nearshore services…but Mexicostands out. According to Gartner, Mexico is ranked as the 3rd global IT Services provider Among Top 5 global IT Services Providers in Forrester’s list Ranked 6th in 2011 Global Services Location Index of A.T. Kearney Most competitive option - Localization of several IT Services, according to KPMG Indisputable leadership in LATAM
    • 21. Confidential // Neoris 21Thank youTom TaylorVice President, Business Directortom.taylor@neoris.comThank you!Alfredo
    • 22. Mexico’s Hemispheric Role in ITLeadershipSpeakers:Alfredo Pacheco, Executive Director Mexico ITTom Taylor, Business Director, Neoris