Mexico it 2012

GOING GLOBAL
The 2012 Investor’s Guide to Mexico’s Business and Technology Services
By Luke Bujarski

GOING GLOBAL
The 2012 Investor’s Guide to Mexico’s Business and Technology Services TABLE OF CONTENTS
EXECUTIVE SUMMARY Page 3

MEXICO IT SERVICES MARKET OUTLOOK 2012 Pages 4-6

MEXICO’S ECONOMY OFF TO A GOOD START IN 2012 Pages 6-8

LABOR POOLS Pages 8 - 11

BUSINESS ENVIRONMENT Pages 11 - 17

LABOR MARKET FRAMEWORK Page 17

TELECOMMUNICATIONS INFRASTRUCTURE Page 17

Pages 18 - 20
SECURITY
Pages 20 - 22
NEARSHORING SWEET SPOTS
Pages 23 - 32
REGIONAL PROFILES
Pages 32 - 35
Appendix A
Pages 35 - 38
Appendix B
Page 39
SOURCES

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GOING GLOBAL
The 2012 Investor’s Guide to Mexico’s Business and Technology Services Principal Researcher: Luke M. Bujarski

EXECUTIVE SUMMARY:
Despite an uncertain global economy, Mexico’s outsourcing industry is expected to grow by 10-15 percent this year, amounting
to roughly USD $13 billion by year’s end 1. ITO will represent around 60 percent of this revenue. However, fitting the proper
project to the right region within Mexico requires a keen understanding of how the country and the regions within it compare on
critical attributes such as wage levels, skills, infrastructure and security. This white paper provides a detailed look at the state of the
Mexican IT and outsourcing ecosystem, and a detailed comparison of these outsourcing and IT “hot spots” to help customers
make more informed nearshoring decisions.

Among the key findings:

Despite hurdles, Mexico’s outsourcing industry is expected to grow in 2012.

Key areas where Mexico can add value include agile development, software testing, multimedia and games, and software testing.

Challenges for Mexico include conservative business attitudes, high telecommunications costs, and a potential shortage of skilled
English-speaking personnel in key outsourcing locales such as Mexico City, Guadalajara, and Monterrey.

Customers should take into account significant differences in education and training quality among different areas of the country.

While security is a concern, actual risk levels vary widely across the country, and rarely affect either outsourcers or customers.

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MEXICO IT SERVICES MARKET OUTLOOK 2012
With sluggish global economic growth, political transition and continued fiscal instability in developed countries, Mexico’s
outsourcing industry will have hurdles to overcome in 2012. Experts also urge that nearshore vendors will need to do more to
stand out in a vastly competitive global market. While new technologies and applications continue to push global demand for IT
services, Mexico’s service providers will be pushed to deliver increasing value and innovation to ever-demanding customers.

Despite these challenges, the nearshore case for global IT services will remain strong in 2012. Service providers continue to
expand their operations in response to buy-side demand and pressure to reduce operational costs. Time zone alignment and
competitive wage rates have also made second-tier cities like Queretaro and Hermosillo strong candidates for new vendors and
captive operations. Likewise, moderate yet steady economic growth in Mexico and Latin America promises to boost local
demand for IT services, particularly in the energy, logistics, health care, and retail sectors. In addition to the big multinational
vendors, highly-specialized boutique service providers focused on high-end web, multimedia, and embedded software applica-
tions have also reported increased revenues in 2011, with continued expansion expected in 2012.

A recent report emphasized two key trends that suggest IT outsourcing vendors will grow in 2012. Firstly, IT spending in North
America is expected to grow in 2012. Secondly, while companies expect to spend more on IT, this expansion will not be coupled
with increased hiring, partly because companies lack the in-house capabilities to do the type of work that is in demand. Cloud,
social media, and mobile applications are among the IT categories most expected to grow. The question is whether the nearshore
model is compatible with this higher level of development. Nevertheless, there have been recent technological advances and
changes in best practices that could push additional business to Mexico.

Continued Global Growth in Offshore Outsourcing Will Benefit Mexico
If analyst predictions are correct and 2012 turns out to be a slow year for outsourcing, then total global offshoring industry
revenue –across ITO, BPO, and KPO – could grow anywhere between 20 and 30 percent, amounting to roughly USD 350-400
billion by year’s end 2. ITO will represent around 60 percent of this revenue. NASSCOM, the Indian Outsourcing Association,
expects global sourcing to expand across traditional functions such as IT and BPO, but also knowledge-driven services such as
legal process outsourcing (LPO) and financial analytics 3. Trends data on Mexico’s IT service industry also show an average annual
growth rate of 12 percent. These country-level forecasts are perhaps the strongest indication that the global services industry will
march forward at a brisk pace in 2012. A recent report by Information services Group also noted that IT services contracts have
been shrinking in size over the last ten years. This fact will also represent greater opportunity for Mexico’s niche domestic vendors
to snatch up contracts from US and Indian multinationals.

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Rapid Pace of Technological Innovation Presents Opportunities and Obstacles for Mexico
New technologies and industry best practices will also be a game changer for Mexico’s IT services in 2012. Time zone alignment
is proving to be a bigger competitive differentiator than most could have imagined when the term ‘nearshore’ was coined almost
20 years ago. The need for quick project turnaround has seen agile, scrum, and other ‘live-time’ software and application develop-
ment methodologies grow in popularity and are now said to be used by more than 35 percent of all companies in the United
States, large and small. The ability to collaborate on cross-functional teams in the United States gives Mexico a distinctive advan-
tage over India, where time zone differences make ‘live-time’ development less practical. India remains vastly cheaper than
Mexico on a FTE level, but total cost of project ownership can swing in greater favor for the nearshore, as ‘live-time’ development
becomes the industry standard.

Despite these advantages, IT automation is changing the overall workforce landscape. The cloud and virtualization are reducing
the need for redundant in-house IT infrastructure, particularly for application development and testing. And while the advent of
new technologies in the cloud, mobility, and social networking space are creating new opportunities for talented developers,
Mexico’s IT services providers will have to ensure that their technical and creative capabilities keep pace with the rapid prolifera-
tion of these technologies. As a direct challenge to the IT innovation environment, the Mexican work culture remains conserva-
tive and more risk averse than in countries like Chile and the United States. Professional failure (but not from a lack of trying) is
frowned upon which pushes professionals away from new companies and/or starting new companies, and more toward higher-
paid positions with locally established enterprises. This is particularly true of graduates coming from highly regarded private
institutions that are attracted to stability and attractive wages offered by industry.

Mexico’s momentum in the IT services space comes amid political and economic turmoil in developed countries. The 2012 US
Presidential election and ensuing debates will focus heavily on America’s ‘jobless’ economic recovery and the role of government
in stimulating job growth. While analysts overwhelming agree that recent anti-outsourcing rhetoric coming out of Washington is
“toothless,” and will not stop companies from offshoring support functions outright, recent congressional proposals like the U.S.
Call Center Worker and Consumer Protection Act should be monitored closely by Mexico’s sourcing community. Economic insta-
bility in Europe will also put a damper on the outsourcing industry globally. Slow growth and declining consumer demand in
Europe will affect global economic growth which will in turn limit new contracts. Despite this turbulence, new technologies and
a growing demand for IT services will continue to propel Mexico’s IT services industry forward.

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Buyer Preference for Vendor Diversity Will Push Additional Volume to Mexico
In a recent interview with CIO.com, John Keppel, partner and president of research and managed services for ISG noted that "A
decade ago, a client may have awarded an ITO contract to one service provider with instructions to 'take care of everything.' These
days, clients are separating out asset purchases from services and splitting the service stream by scope to many different service
providers 4 ." This trend toward smaller IT outsourcing contracts will likely open the door for Mexico’s service providers to shore up
additional contracts in 2012, and beyond. The broader adoption of the ‘multisourcing’ approach could also benefit niche IT
outsourcing firms in Mexico that offer more specialized services. The big full-services firms will also be challenged to ensure a
higher level of customer value as services integration capabilities – i.e. experience in managing multiple contracts for the client,
will become more sought after by demanding buyers.

MEXICO’S ECONOMY OFF TO A GOOD START IN 2012
Nissan’s recent announcement of a multi-billion dollar expansion of their manufacturing facilities in Aguascalientes underscores
Mexico’s growth as an export economy, as well as its heavy focus on the manufacturing sector. The country’s dependence on
exports also makes Mexico vulnerable to external shocks and particularly to recessions in the United States. Nearly 80 percent of
Mexico’s exports are received by the United States, while in comparison, Brazil is around 60 percent. 2012 could also see increased
government spending in Mexico, as a result of the upcoming Presidential election. In a recent interview, Thomas Wainwright
Mexico Bureau Chief for the Economist magazine noted that government spending on infrastructure projects and education goes
up during election years as incumbent party officials seek to get reelected.

The World Bank estimates that the global economy will grow at just 2.5 percent in 2012.5 The latest revisions to the IMF global
economic outlook report points at the Euro Zone Crisis as the most influential destabilizing factor for global growth, with Greece,
Italy, and Spain as the central concerning factors 6. How economic sluggishness will affect the global sourcing sector is controver-
sial. Clearly, the expansion and growth of consumer markets and companies creates greater demand for outsourced services.
However, lower demand for products and services also pushes global companies to reduce costs via offshoring arrangements and
increased productivity. Disproportionate economic growth between the developed and developing world also pushes multina-
tional enterprises to expand their business lines into developing markets. Emerging markets now make up more than half of
global GDP, compared to only one third just 30 years ago. More significant still is the fact that developing markets made up four
fifths of global real GDP growth over the last five years 7.

Despite a gloomier global economic picture in 2012, the International Monetary Fund positively reflects on Latin America and the
Caribbean as positioned for more “sustainable” growth. The Economist magazine also noted that compared to other Latin Ameri-
can markets, Mexico’s economy has remained more stable with regard to core inflation, GDP growth, excessive expansion of
credit, and current account balance 8.

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The declining value of the Mexican Peso relative to the dollar has also made the country’s export sector more competitive, particu-
larly in the U.S. market (see chart). Currency fluctuations can affect both the buyer and vendor but disparities in exchange rates
tend to favor both parties during new contract negotiations. As vendor-country currencies rise, profit margins erode which can
affect service quality of existing contracts.

Figure

01
Historical Exchange Rates - USD to Mexican Peso
Data Source: www.oanda.com

14.5

14

13.5

13

12.5

12

11.5
May-10

May-11
Dec-10
Apr-10

Aug-10

Dec-11
Apr-11

Aug-11
Jun-10
Jan-10

Jul-10

Oct-10

Jun-11
Mar-10

Sep-10

Nov-10

Jan-11

Jul-11

Oct-11
Feb-10

Mar-11

Sep-11

Nov-11
Feb-11

Currency risk should not overshadow other cost issues when exploring new geographies. Cost of living inflation is what ultimately
erodes cost arbitrage and profitability, as wages go up. Analyzing other macroeconomic indicators such as unemployment rates,
GDP growth, excess credit growth, and of course inflation also offers a better sense of overall market health. Mexico has seen
relatively low baseline inflation compared to countries like India and the Philippines.

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Figure
Select Macroeconomic Indicators
02 Data Source: International Monetary Fun

INDIA MEXICO PHILIPPINES
Population 2011 (millions) 1,206 110 96
GDP Per Capita (USD) 1,527 10,803 2,255
GDP Growth (over previous year) 8.80 5.40 7.60
Rise in Consumer Prices (last 5 years) 58.30% 19.30% 26.10%
Rise in Consumer Prices (5 year projection) 21.50% 12.20% 17.00%
Government Dept % GDP 62.43 42.90 44.43

LABOR POOLS
With a population reaching 113 million people, Mexico’s overall labor pool is large compared to most Latin American countries.
Compared to developed countries and other emerging economies Mexico’s population is also quite young with a higher concen-
tration of working age people between 16 and 65 (see figure). However, with a labor force participation rate of only 64% – i.e.
those of working age that are actively participating in the economy, this also limits the available pool of talent in Mexico. Gender
distribution in Mexico’s workforce is among the most disparate of among OECD countries. Employment rates among men are 81
percent, while only 44 percent of the female labor force is employed 9.

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Figure Compared to other developed or developing nations Mexico’s population is quite

03 young with a higher concentration of working age people between 16 and 65
Data Source: U.S. Census Bureau International Database

100+ India - Total Population 1,205,073,612 100+ Mexico - Total Population 114,975,406
90-94 90-94

80-84 80-84

70-74 70-74

60-64 60-64

50-54 50-54

40-44 40-44

30-34 30-34

20-24 20-24

10-14 10-14

0-4 0-4
0.0% 2.0% 4.0% 6.0% 8.0% 10.0% 0.0% 2.0% 4.0% 6.0% 8.0% 10.0%

100+ USA - Total Population 313,847,465 100+ China - Total Population 1,343,239,923
90-94 90-94
80-84 80-84
70-74 70-74
60-64 60-64
50-54 50-54
40-44 40-44
30-34 30-34
20-24 20-24
10-14 10-14
0-4 0-4
0.0% 2.0% 4.0% 6.0% 8.0% 10.0% 0.0% 2.0% 4.0% 6.0% 8.0% 10.0%

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There also exist regional extremes in education outcomes and performance among Mexico’s different states. Here, data on gradu-
ation rates, concentrations of talent with advanced degrees, as well as trends across the K-12 base were used for deeper compari-
son of 11 local markets in Mexico:

Figure

04
Education by Region: Labor Pool and Quality Metrics
Data Source: Instituto Nacional de Estadística y Geografía (INEGI)

0.12 Bubble size represents relative size
of labor pool with a bachelors degree
or higher
0.11

Mexico City
Percentage with Advanced Degree

0.1
Queretaro
Guanajuato
0.09

Jalisco
0.08 Nuevo Leon
National Average
0.07 Puebla State of Mexico

0.06
Coahuila de Zaragoza
Tamaulipas
Veracruz
0.05
Sinaloa

0.04
7 7.5 8 8.5 9 9.5 10 10.5 11
Average School Grade Completed in K-12 Education

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Mexico City performs well with the largest pool of college graduates (bubble size); the highest concentration of graduates with
advanced degrees (vertical axis); and the highest K-12 grade achievement rates (horizontal axis). Veracruz, on the other hand, has
a relatively large pool of generalized talent, but scores low on K-12 quality, as well as on concentration of postgraduate degrees.
Queretaro is a third scenario where you have a relatively small talent pool, but one that is highly specialized and above the
national average when it comes to K-12 performance.

BUSINESS ENVIRONMENT
The Latin American Venture Capital Association 2011 Scorecard report commends Mexico’s overall private equity and venture
capital environment. Favorable tax treatment, corporate governance requirements, and a strong capital market relative to other
Latin American countries makes Mexico a more stable option for foreign investment. Economic growth and FDI hit a ten-year low
in 2009, directly following the global financial crisis, but investment and economic activity has since resumed. The North Ameri-
can Free Trade Agreement (NAFTA) also simplifies global services exchange between Mexico and the United States, particularly
with recent visa and travel restrictions imposed on foreign nationals in India. The World Bank Ease of Doing Business survey also
pointed to local-level improvements on new company formation and incorporation, but Mexico scored comparatively low on
overall ease of doing business 10. The World Bank report also pointed to regional differences in overall business climate, with
Mexico City considered the least friendly environment for doing business.

According to Gartner, Mexico is the fourth largest producer of IT services after India, the Philippines, and China. Data from the
Ministry of the Economy shows that exports in the information technology, administrative and technical services sector (ITO and
BPO) have more than doubled over the last four years, with a total market value reaching four billion US dollars in 2010. This
robust growth was reflected in Mexico’s performance on the 2011 A.T. Kearney Global services Location Index. Placing sixth out
of fifty countries, Mexico moved up by five slots from 2009 and beat out China, Poland, Argentina, and Chile on overall financial
attractiveness 11. In addition to favorable exchange rates and low wages, this noteworthy jump in the rankings likely had to do
with Mexico’s somewhat delayed recognition and emergence as a global services player.

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Figure

05 Mexico's BPO/IT Outsourcing Industry (blns USD)
Data Source: Mexico Ministry of the Economy

4.99
4.15
3.16 3.72
2.51
1.99

6.72 7.26
5.82 6.34 5.9
5.0

2006 2007 2008 2009 2010 2011

Domestic Market Export Market

Various ‘push’ and ‘pull’ factors have lifted Mexico into the mainstream as a viable offshore alternative to India. As new markets like
Mexico improve their services maturity and infrastructure, enterprises that had outsourced exclusively to India in the past, now
have more options and are exploring total cost and the relative advantages, and disadvantages of each market.

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Figure Push and Pull Factors Driving Nearshore Momentum
06 Push factors are reasons why vendors/buyers look to diversify out of current geographies;
while Pull factors are reasons why vendors/buyers look to the nearshore as a delivery platform.

PUSH FACTORS PULL FACTORS
Offshore Fatigue Proximity: Distance, Time Zone
Risk Mitigation Expanding Talent Pool
Delivery Diversification Growing Domestic Market
Client Demand Lower Talent Movement Restrictions (vs. offshore)
Increasing Offshore Costs Cultural Affinity (suited to serve unique costumer needs)
Value Chain Alterations High Growth Rates & Standard of Living
Slow Infrastructure Improvement NAFTA, FTA Agreements
Slow Policy Making/ Implementation High Concentration of Young Population
Restrictive Trade Practices/ Taxation Overlaps Key Market for MNC’s
Limited MultiVertical/ Service Experience GeoPolitical Stability

Growth in the outsourced IT services sector can largely be explained by two core global market trends: First, the practice of
offshoring business activities from developed to developing countries continues to grow at a rapid pace. Even while 2012 is
forecasted to be a slower year for outsourcing activity in relative terms, year-on-year growth rates for the industry since 2005
range anywhere from 25 to 43 percent – according to data from the OECD, NASSCOM, and the Boston Consulting Group. Going
forward, this tide of U.S. and European capital in the way of outsourced work will continue to offer opportunities to countries like
Mexico. Close economic ties with the U.S. and Mexico via the NAFTA have also accelerated services exports to the U.S.

Secondly, while India continues to dominate a large portion of the offshoring industry, global enterprises and services providers
have embraced a global delivery model. This has pushed Indian and American IT services providers to cater to buyer preferences
to work with partners that have expanded capabilities outside of India. And while Mexico has become a viable alternative to India
as an offshore outsourcing platform, expert sentiments favor the notion that Mexico complements a global sourcing strategy and
is uniquely suited for certain functions, but is not in direct competition with India.

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However, Mexico is not a one-size-fits-all option when it comes to global services. For U.S. based clients interested in more
advanced IT support for application development and maintenance, Mexico would almost certainly be a better fit than would
countries like Vietnam or Malaysia. For Europe-based firms looking to establish a multilingual contact center operation that
covers English, French and Arabic, then Mexico might not be the most suitable option, particularly because of time zone and
language requirements.

Figure

07
Average Savings in Percentage Terms Relative to the United
Data Source: KPMG's Guide to International Business Location

70

60

50

40
Mexico
30 Canada

20

10

0
Back Oﬃce/ Call Centers Software Development Web and Multimedia

Government Support and Company Incentives
Mexico has adopted an aggressive strategy aimed at attracting multinational technology companies and at fostering a favorable
climate for domestic firms. These efforts have been coordinated by guidance and funding from the Program for Development of
the Software Industry (PROSOFT), a federally appointed arm of the Secretary of the economy in charge of strengthening Mexico’s
IT ecosystem.
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From 2004 to 2010 over 850 million U.S. dollars have been pooled together from direct PROSOFT funding, state government,
enterprises, academia, and other contributors to fund attraction incentives, workforce training and certification programs, enter-
prise certifications, events, and acceleration of public policy. After evaluation, PROSOFT can fund up to 50 percent of an invest-
ment project (including equipment, leasehold improvements, etc). Of that 50 percent, 25 percent comes from the federal govern-
ment and 25 from the state government. The criteria used to evaluate an eligible project are typically the number of jobs created
and the quality of those jobs. These grants come in the form of cash payments and not tax credits which are more common in
Asian markets. There are other programs, both federal and state-level, that address needs such as training. Industry promotion
efforts are managed by MexicoIT, a public-private partnership which serves as a hub for information for prospecting investors and
as liaison between local governments and foreign companies. There are also exceptions to payroll taxes, and municipal-level
incentives, usually related to the attraction of large investments.

Figure
Government Support Structure, Funding Goals, and Funding
08 Sources

Secretary of the
Economy 2. Technological equipment

PROSOFT
4. Use of IT and related services
Mexico IT CANIETI Mexico First 5. Innovation
Industry Promotions Training and Certi cation
6. Commercialization
Regional Clusters 7. Studies
Centro de Software Jalisco – InteQSoft – CSOFTMTY - Others
8. Professional services
9. Events
State 10. Creation and strengthening of
25%
50% Proso
25% Beneﬁciary
11. Acceleration of public policy

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Mexico’s Service Providers Should Step Up Training Initiatives
While a high level of technical talent is available, one criticism that Mexico continues to receive is concern over scalability of opera-
tions beyond those that have already been established. The major domestic and foreign operators are concentrated in three of
Mexico’s biggest economic and population centers: Mexico City, Guadalajara, and Monterrey. Some question whether these
markets can sustain additional operations with a headcount of 1,000 to 3,000 programmers, architects, technicians, and other
support personnel. Here, lessons learned from India may be adopted. While India has a clear advantage when it comes to popu-
lation (over one billion compared to 110 million) as well as English speaking personnel, some also point to the overall manage-
ment model of domestic operators in Mexico, and a lack of focus on comprehensive training programs at the company level.

“Many companies in the region are finding it challenging to replicate quality, and lack maturity models as well as training
programs that have been one of the successes in other offshore destinations, ” explained Anupam Govil President of Avasant LLC,
an outsourcing consultancy 12. While Mexico’s education system has been making efforts to tailor programs to the IT industry, we
question whether domestic service providers are doing their part to adequately train personnel. According to Ravi Shanker, Sales
Director for HCL America, companies in India like Infosys can hire 25,000 people every year, 80 percent of which are straight out
of college and not necessarily from technical backgrounds 13. The difference is that they put new recruits through an intensive two
to three month training program, building their workers’ skills from the bottom-up. “I am not sure that firms in Mexico and Brazil
understand the training concept as they do in India, and they need to establish strong training programs for new graduates.”
Doing so would certainly open the door for more graduates to enter into the IT industry.

One champion for technical talent creation has been Mexico’s public university system. Under the direction and guidance of the
Mexican government, many public universities have been working with private sector partners to develop curriculum uniquely
suited for the IT services industry. However, the multinational vendors – both domestic and foreign – will have to invest more in
employee training, if they are to compete outright with operators in India.

Coordinated Government Initiatives Will Improve Mexico’s Language Training
The Ministry of the Economy and PROSOFT, the government entity responsible for promoting and strengthening Mexico’s com-
petitiveness in information technology, continues to increase budgets available to locally-driven initiatives to improve training,
subsidies for capital expenses, cash-in-hand grants, and other incentives for technology companies. Along with the more estab-
lished markets including Mexico City, Guadalajara, and Monterrey, second-tier cities have also opened themselves up for business.
Cities like Aguascalientes, Queretaro, Hermosillo, Tabasco, and others are recognizing the potential and promise of global services
as an engine for economic growth, as well as a pathway towards a higher-value, knowledge-driven economy.

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The biggest challenge for these second-tier locations, and for the Mexican market as a whole, is not technical talent, but the
limited supply of senior-level, travel-ready English speakers. Efforts are underway to improve on this, but language learning is an
incremental process. As Mexico’s IT services market grows at a rate of twelve to twenty percent annually, we predict that supply
will have a hard time keeping up with demand; this could drive up the wage premium relative to other Latin American and Asian
offshore destinations.

LABOR MARKET FRAMEWORK
Mexico has a long tradition of labor unions and has strong laws protecting its workers. These rights include the right to form and
join unions, the right to compensation in the event of injury on the job, the right to a safe workplace, and the right to be free from
discrimination 14. A National Minimum Wage Commission sets minimum wages in different regions of Mexico based on factors in
the local economy and the minimum wage increases each year with inflation. Also, the minimum wage is set as a daily rate rather
than an hourly rate. Wage compensation and medical attention for on-the-job injuries are part of the social security system.
Health insurance is provided by the Social Security Institute for all non-work related injuries and illnesses. In Mexico, workers can
be legally fired only for certain reasons. Laid off workers are typically compensated with three months of severance pay in addition
to 12 days salary for each year worked. However, firing employees can be difficult and can result in legal disputes, even with
proper severance compensation.

TELECOMMUNICATIONS INFRASTRUCTURE
Telecommunications costs in Mexico are among the highest in the OECD. In a recent study commissioned by the Mexican govern-
ment, the OECD calculated that mobile and landline carriers overcharged consumers by $13.4 billion a year for phone and internet
services from 2005 to 2009. Mexican telecoms magnate Carlos Slim has received criticism by international and federal agencies
on his majority control of the country’s telecoms market. The Telmex company controls 80 percent of Mexico's landline market,
while Telcel controls 70 percent of the mobile phone business. Mexico’s government, which commissioned the OECD study, is
using it to validate efforts to create more competition in telecommunications. The findings support the government’s plans to
auction off fiber-optic lines owned by the state power company and contracts to push high-speed Internet into communities
where it’s not available. Despite these challenges, Mexico’s telecommunication infrastructure investments may be receiving a
boost in 2012. Mr. Slim recently announced that Telmex and America Movil could invest as much as $13.9 billion dollars to
improve Mexico’s and Brazil’s telecoms infrastructure.

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Figure

09
04 ITC costs inby Region: Labor Pool and Quality Metrics
Education Mexico are among the highest in the OECD
Data Source: Instituto Nacio nal de Estadística y Geografía (INEGI)

1200
Mobile -2008 60000
Fixed Line - 2008
1000
50000

800
40000

600 30000
Messaging
Usage Usage
400 20000
Fixed Fixed
200 10000

0 0

SECURITY
While news headlines emphasize violence between rival drug gangs, government statistics and anecdotal evidence show that
most incidents involve those involved in the drug trade or law enforcement. In addition, much of the violence occurs in specific
areas along drug “corridors,” leaving many parts of the country (and even specific areas within affected cities) safe and pleasant
areas to do business.

An examination of homicide statistics for business centers around the world show that many have homicide rates as high, if not
higher, than Guadalajara (the “Silicon Valley of Mexico”). Some North American cities that businesspeople or tourists would not
hesitate to visit actually have higher homicide rates than Guadalajara.

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Figure Guadalajara homicide rate lower than many other business centers

10 Sources: Guadalajara - Instituto Nacional de Estadistica y Geografia (2009), All US cities - FBI Uniform Crime Reports (2010)
Rio de Janeiro - Institute of Public Security (ISP) of Rio de Janeiro (2010), Bogota - Instituto de Medicina Legal (2010)
Capetown - South African Police Service (2010)

50

40

30

20

10

0

Figure
Personal Safety Perceptions - Guadalajara, Mexico
11 How often do you feel your personal safety threatened?

5%

Never A survey of foreign professionals living in Guadalajara, a center of IT and
25% Rarely outsourcing businesses, shows these statistics are reflected in day-to-day
Often living.
70% Always

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Finally, respondents to a survey conducted by Global Delivery Report were given the opportunity to comment on what it is like to
live in Guadalajara. Sample comments include:

“I have been living here for five weeks, have taken the bus and walked around in the city, and have never felt that my safety was threat-
ened.”

“The way the U.S. media has reported on the situation in Mexico is very misleading to potential business visitors and tourists...yes, there
is a drug war going on but it is important to point out it is in isolated areas near Mexico’s border with U.S. and is mostly in-fighting
between cartel members.”

“Most people take precautions to keep their homes and businesses secure. I am more afraid of falling on the sidewalks than being robbed
or mugged.”

“In spite of the media's exaggerated reports of violence in Guadalajara, our lives and those of family, friends, business associates, etc,
goes on as usual.”

“You take your normal precautions that you take anywhere you live, and you should be fine.”

“I was raised in NY City during the Mafia wars. Enough said. I don't buy or sell drugs. I am not a member of the Mexican military. I drive a
simple car and don't go to drug-infested areas after midnight. No problems.”

NEARSHORING SWEET SPOTS
When it comes to IT services for U.S. clients, Mexico is a more suitable platform for projects requiring a higher-level of collabora-
tion between onshore and offshore teams 15. Two major reasons are geographic proximity and time zone alignment, particularly
as agile and other ‘live-time’ software and application methodologies become more prevalent; cultural alignment and the ability
to set and deliver on realistic project goals also effects overall client satisfaction. On ‘people skills and availability’ Mexico actually
scored fifth (A.T. Kearney Index) against those countries that we normally consider as developing. Every year, Mexico graduates
90,000 students in the technical and engineering fields and the Mexican government has taken aggressive steps to align training
and education initiatives toward the information technology sector.

Along with agile development, multimedia and software testing are other Mexican specialties. The country’s development exper-
tise is reflected in its boasting one of the highest numbers of Capability Maturity Model Integration (CMMI) certified centers
worldwide 16.

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Figure

12 Top 10 Countries with CMMI Certifications - 2010
Data Source: Software Engineering Institute – Carnegie Mellon

Country Number of Certiﬁcations

China 1,048
United States 680
India 294
Spain 131
Brazil 98
Japan 87
South Korea 71
France 70
Mexico 70
Taiwan 67
Rest of the world 519

Gaming, Multimedia & Design
Organic growth and government support have spurred on technology companies increasingly focused on gaming, multimedia
and design. The city of Guadalajara in particular is making a name for itself as an innovation hub and creative technology ecosys-
tem. Companies like Kaxan Games are building on their experience in gaming applications for mobile devices and are making
strides in developing games for major consoles including Nintendo’s Wii. The Mexican government also has high hopes and ambi-
tious plans for this sector. While still in the early stages, the Ministry of the Economy has plans to develop an industrial park in
Guadalajara focused on creating synergy between the technology and creative industries. The project so aptly named Ciudad
Creativa Digital (Creative Digital City) will host local software companies but is also meant to attract international giants such as
Viacom, Walt Disney, Sony, and others 17. Guadalajara’s major value proposition for such companies is a relatively high concentra-
tion of technical and creative talent, as well as the competitive wages which are one fifth of the equivalent wage in the United
States. Digital art and multimedia in Mexico is also being taken seriously by at least one established IT services provider. Brain-Up
Systems is a level three CMMI-certified company based out of Mexico City, employing over 300 people working on SAP implemen-
tation, in addition to interactive web development, 3D animation, design and illustration, and other creative service offerings.

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Agile Software Development
The widespread adoption of agile development has opened up a unique opportunity for nearshore delivery platforms to further
capitalize on time zone alignment. Forrester Research estimates that 38 % of businesses, from small to large, now use agile meth-
ods. The agile methodology is used to speed up the software and application development process by relying on cross-functional
teams collaborating in real-time. Instead of an incremental approach where tasks are developed sequentially, agile integrates
developers, systems engineers, customer support and marketing personnel, and testers into an iterative and collaborative project
management approach that has been shown to not only improve quality, but also overall speed of delivery. Chris Snyder CIO of
rail engineering firm Hulcher uses Brazilian based company Stefanini to augment his agile team in the United States. “We tried
agile with India, but employee turnover got to the point of ridiculousness.” The growing adoption of video conferencing on
personal and mobile devices is also facilitating the project management process.

Creative Web Development, Interactive Marketing, Web Design, Animation
As more and more businesses and people go online there is a growing need for heavily customized and interactive technologies
as applied to marketing and branding. There is a growing need for heavily customized and interactive web application develop-
ment services, as enterprises find new and interactive ways to reach clients and stakeholders. Time zone proximity and cultural
affinity to the U.S. consumer culture gives Mexican designers and web developers a unique advantage over distant offshore
markets, and cost savings over U.S. based personnel. The Mexican government has recognized the potential for Mexico to
become an exporter of these services and has sponsored various projects to support new and existing firms. Costa Rica is another
nearshore market that has seen successes in creative development services and could be used as a benchmark for comparison
with Mexico. Global media group Possible Worldwide has their main development center in San Jose, Costa Rica employing
approximately 100 developers and designers responsible for much of the company’s interactive marketing application work.

Software and Application Testing
Cliff Schertz, CEO of Tiempo, a provider of software development and BPO services to U.S. companies with development centers
in Mexico, compares the maturity level of the testing market in Mexico to that of a “teenager.” According to Schertz, a general
movement away from “waterfall” software development, where testing is performed separately from core development activities,
and toward “agile” development, where testing and development resources are integrated into same team, bodes well for near-
shore testing providers. “Proximity offers advantages not just in terms of time zone, but in traveling back and forth, since agile
development often requires user involvement.” As a result, Schertz said some U.S. companies who outsource software develop-
ment according to the waterfall method will send their core development activities to an overseas provider but send the testing
to a nearshore provider.

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REGIONAL PROFILES
This section takes a closer look at the overall distribution of IT talent and other technological and economic resources available
across Mexico.

Map Talent Distribution: Percentage of the Population with a Bachelor’s Degree

01 The graph illustrates percent of educated population and lists number of CMMI designees per state,
but says nothing about Bachelor’s Degrees.

Number CMMI
State of Certiﬁcations
Aguascalientes 1
Baja California 1
Baja California Sonora Chihuahua 2
Coahuila 2
Chihuahua
Distrito Federal 21
Coahuila Guanajuato 4
Baja California Sur Jalisco 7
Nuevo Leon 13
Puebla 2
Sinaloa Nuevo Leon Queretaro 4
Durango
Sinaloa 11
% Educated Sonora 1
Zacatecas Tamaulipas
Yucatan 1
6.3 - 10.0
San Luis Potosi
10.1 - 11.5 Aguascalientes
Nayarit
11.6 - 14.0 Guanajuato Yucatan
Queretaro
14.1 - 16.0 Jalisco
Mexico
Hidalgo
Quintana Roo
Veracruz
Michoacan
16.1 - 21.1 Colima Puebla Campeche
Morelos
Tabasco

Mexico City Guerrero
Oaxaca
0 250 500 Miles
Chiapas

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The country is divided into 31 states, 2,486 municipalities, and one federal district – also known as Mexico City, Distrito Federal, or
simply, DF. Like most of Latin America, Mexico’s 113 million people are heavily concentrated in urban areas – 75 percent com-
pared to 28 percent in India. Most states therefore have one dominant city where much of the labor force and economic activity
cluster together. The overall population is heavily concentrated in the Occidental region or the southern belt of the country
stretching from Jalisco to Veracruz. For the most part, bordering states with the U.S. are arid and sparsely populated, and hold a
high concentration of Mexico’s manufacturing activity.

Map

02 Labor Pool Distribution: Population Density Across Mexico

Tijuana

Ciudad Juarez

Hermosillo

Culiacan

Monterrey

Major Population Centers and
Surrounding Labor Basins Queretaro
0 - 20
20 - 200
Guadalajara
200 - 500
Mexico City
500 - 1000
1000 - 2000
2000 - 5000
5000 - 17423
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Wealth is also heavily concentrated in more industrialized parts of the country. Six of the 31 states make up over 50 percent of
Mexico’s GDP (see chart below). In the 1960’s the Mexican government initiated the Border Industrialization Program (BIP) which
courted U.S. manufacturers through substantial tax holidays and duty-free imports of capital requirements. This transformed
Mexico from a largely domestic agrarian and commodities economy into the world’s sixteenth largest exporter of goods and
services.

Much of Mexico’s progression into white collar professional services including business process and IT services outsourcing has
been a direct result of the country’s industrial policies in support of manufacturing. It comes as no surprise that many of the
regions with traditionally heavy concentrations of manufacturing have also become IT services hubs. Monterrey in Nuevo Leon
and Guadalajara in the state of Jalisco were traditionally manufacturing destinations and have subsequently developed stronger
than average concentrations of IT services, primarily focused on Mexico’s domestic manufacturing sector. The exception is
Mexico City which is the financial and government center for Mexico. D.F. is headquarters to most Mexican and international com-
panies operating in Mexico. With a metropolitan area population of 22 million, the city has a naturally high concentration of IT
professionals. While small, the state and city of Queretaro has also attracted a lot of attention as a global services location.

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Figure Gross Domestic Product For Top Fifteen Wealthiest Mexican States
13 * Current prices **2003 prices
Data Source: Instituto Nacional de Estadística y Geografía (INEGI)

GDP 2010* Portion of national GDP - Compound annual
(Thousands of Pesos) economy growth 2003-2010**
México Total 12,504,744,198 100.0% 2.2%
Distrito Federal 2,160,048,526 17.3% 1.8%
México 1,172,479,719 9.4% 3.3%
Nuevo León 938,002,962 7.5% 3.2%
Jalisco 787,147,048 6.3% 2.0%
Campeche 645,293,199 5.2% -3.7%
Veracruz 590,287,903 4.7% 3.4%
Guanajuato 491,382,991 3.9% 2.5%
Tabasco 462,467,019 3.7% 4.7%
Puebla 423,877,988 3.4% 2.9%
Coahuila de Zaragoza 388,502,943 3.1% 2.0%
Tamaulipas 387,540,126 3.1% 1.6%
Chihuahua 371,014,956 3.0% 1.4%
Baja California 339,451,756 2.7% 1.6%
Sonora 320,899,924 2.6% 3.1%
Michoacán 300,829,596 2.4% 2.0%

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Mexico City - QUICK STATS
Population Metropolitan Area: 21.2 million , Total Labor Force: 8.9 million
Average Annual GDP Growth: 1.8 %, 18 years and over with college degree: 4.2 Million

CERTIFICATION
CMMI CERTIFIED COMPANIES LEVEL
Saitosoft S.A 2
ITE Soluciones S.A. de C.V. 2
Centro de Inteligencia Competitiva S.A. de C.V. 2
Mapdata S.A. de C.V. 2
Tecnologia, Asesoria, Sistemas, S.A. de C.V. 2
Brainup Systems S.A. de C.V. (Shared with Argentina) 2
IDS Comercial S.A. de C.V. 3
Informatica Integral Empresarial S.A. de C.V. 3
Servicios Telepro 3
Accenture Technology Solutions – Mexico 3
EDS, an HP Company 3
Blitz Software 3
QuarkSoft S.C. 3
Azertia Tecnologias (INDRA SISTEMAS S.A.) 3
T&D Automated Testing & Development Software, S.A. 3
Vision Consulting 3
AsTecI S.A. de C.V. 3
IBM AMS Mexico 3
CRS IT Consulting S.A. de C.V. (Shared with Argentina) 3
Ultrasist S.A 5
Praxis de Mexico S.A 5

Local Economy: Mexico City also known as ‘Distrito Federal’ is the economic and governmental nerve center of Mexico. It is
surrounded by the state of Mexico which together account for almost 25 percent of the country’s entire population, and over 25
percent of the country’s GDP. The local economy is centered around financial and other professional services as well as the local
consumer market. The top twenty-five percent of GDP per capita holders in the city had a mean disposable income of US $98,517
in 2007. High personal incomes attract most of the world’s largest retailers, but that also puts a premium on global services.

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Labor Pool: Global services draw from the local economy which is focused heavily on business administration and support
services. Competition for senior level technical talent is also intense and wages are high compared to other parts of the country.
D.F. attracts young professionals from all over the country but the hectic lifestyle has made mid-career professionals reconsider
other locations surrounding Mexico City. The state of Mexico engulfs the Distrito Federal which is practically an extension of the
capital. Despite higher than average costs, Mexico City has a deep labor pool and international services ecosystem from which
much of Mexico’s business professionals emerge. Given its high concentration of trained professionals, Mexico City has become
an option for larger BPO operators like Indra, Genpact, and ACS.

Education: In 2011 more than 32,000 students were enrolled in IT related programs, more than 12% of the national total. There
are three main universities in Mexico City. The Instituto Politecnico Nacional (IPN) offers only technical programs and is a big
talent factory for IT services. The Universidad Nacional Autonoma de Mexico (UNAM) offers a fully developed computer science
program that recruits some of the best IT talent in Mexico. The third one, Monterrey Tech, has three campuses which graduate
engineers. Their motto is “entrepreneurial culture,” and these graduates are Mexico City’s entrepreneurial base.

Wages: Wages in Mexico City have been reported to be 30 percent higher than what can be expected in Guadalajara. However,
senior-level professionals are more readily available which can lower recruitment costs, particularly compared to second tier cities
where at least part of the recruitment for higher-level positions has to be done on a national scale. Indeed, technology companies
operating in other cities often talk about recruiting talent from Mexico City by enticing them with comparable salaries as well as
a better overall quality of life.

Queretaro - QUICK STATS
Population Metropolitan Area: 1.08 million, Total Labor Force: 750,000
Average Annual GDP Growth: 4.0 % , 18 years and over with college degree: 126,000

CMMI CERTIFIED COMPANIES CERTIFICATION LEVEL
Vision Software Factory, S.A. 2
OPEN ROAD Solutions 3
ALTEC Mexico S.A. 3
SigmaTao Factory S.A. 5

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GOING GLOBAL

Local Economy: Queretaro’s economic base is grounded in manufacturing and prides itself as an aerospace hub with Canada’s
aircraft manufacturing firm Bombardier located there. Queretaro is now home to multinational operations located on the periph-
ery of the city in one of four main industrial parks: Zona Industrial Benito Juarez, Parque Industrial Querétaro, Parque Industrial
Jurica Parque La Montaña and the Querétaro-San Juan del Río Industrial Corridor. The city is well connected to the rest of Mexico
and the world via road, rail, and air. Direct flights are available from Dallas and Houston to Queretaro International Airport which
began operations in 2004.

Labor Pool: Queretaro has recently come onto the global services stage as an ‘overlooked’ IT/BPO option in Mexico. However,
with a small yet highly educated labor pool, Queretaro is more aptly suited for operations focused on higher-end IT development
services, particularly for the Mexican market. IT services company Praxis operates out of Queretaro, serving mainly clientele and
projects for Mexico. Queretaro may also be more suitable for IT consulting services companies with a heavy focus on Latin
America and manufacturing. English language speakers are in very high demand and relatively low supply here which has forced
a number of larger organizations to disqualify Queretaro for large-scale BPO operations. However, its relative proximity to Mexico
City – 2.5 hours driving – and good quality of life has made it easier to recruit talent from outside the region, particularly mid-
career level talent for looking proximity to family ties and escape from the often hectic lifestyle of Mexico City.

Education: The city is home to some of the most important universities in Mexico including the National Autonomous University
of Mexico and the ITESM (Instituto Tecnológico y de Estudios Superiores de Monterrey), have located campuses in the outskirts of
Queretaro where significant research is conducted. UNAM is a public institution and the ITESM-Querétaro Campus is private.

Wages: Living costs and hence labor costs are lower in Queretaro than in Mexico City, Guadalajara, or Monterrey.

Page 29

GOING GLOBAL

Guadalajara - QUICK STATS
Population Metropolitan Area: 4.4 million, Total Labor Force: 1.9 million
Average Annual GDP Growth: 2.8 % ,18 years and over with college degree: 484,000

Computacion en Accion, S.A. 2
DW IT services S.A. 2
Ejecutivos en Computacion y Servicios S.A. de C.V. 2
Tecnologia en Informatica y Administracion S.A. de C.V. 2
GEUSA, Grupo Embotelladoras Unidas S.A. de C.V. 2
INNEVO 4
IBM 5

Local Economy: Guadalajara is the second most populous metropolitan area in Mexico after Mexico City. The Guadalajara Metro-
politan Area is roughly 4.4 million inhabitants and has received considerable attention from the international community. It
recently hosted the Pan American Games and is known as "the Mexican Silicon Valley," due to its legacy in electronics manufactur-
ing and emergence in global IT services. The city is the main software producer in the country, and also is a leading producer of
electronic and digital components. Such high technology companies as General Electric, IBM, Intel, Hitachi, Hewlett Packard,
Siemens, Flextronics and Solectron have facilities in the city or its suburbs. Guadalajara has continued to expand as a hub for
high-tech manufacturing and engineering/software development, with 12 original equipment manufacturing, 16 electronics
manufacturing services and 24 design centers as of 2011.

Labor Pool: Guadalajara’s history in the electronics manufacturing industry doubles as a rich source of labor for IT services. In
addition to global electronics brands, Guadalajara houses many of the country’s IT services and consulting firms. Tata Consulting
services, ACS, IBM, Dell, all have major operations in Guadalajara.

Education: Guadalajara is a very important hub for universities and educational centers with national and worldwide prestige,
such as Universidad Panamericana, ITESO, Universidad de Guadalajara, Monterrey Tech and the Universidad Autónoma de Guada-
lajara (U.A.G.), among others.

Wages: Increased international exposure has some local IT services providers worried that wage inflation will become a problem.
However, cost more often depends on the type of talent required. Local sources have suggested that costs for senior-level, bilin-
gual engineers have increased by approximately 10 percent over the past three years. However, costs have not risen dramatically
for non-English speaking personnel at all levels. This suggests that Guadalajara has a deep pool of technical talent,
but language barriers continue to put a premium on high-end developers. Page 30

GOING GLOBAL

Monterrey- QUICK STATS
Population Metropolitan Area: 4.4 million, Total Labor Force: 1.9 million
Average Annual GDP Growth: 2.8 % ,18 years and over with college degree: 484,000

Ilinium S.A. 2
Kernel Technologies Group 2
Tecnologico de Monterrey – VRHTI 2
i-place 2
Consiss S.A. 2
VENTUS Technology S.A. 3
World Software Services Group, SA 3
AD INFINITUM S.A. 3
SYTECSO, S.A. 3
Expert Sistemas Computacionales S.A. 3
Softtek 5
Sieena Software 3
Hildebrando Software Factory 5

Local Economy: Tech services giants in Monterrey including Softtek, Neoris, and Hildebrando are not the only ones hungry for IT
talent. 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. Most if not all of these companies
also have in-house IT departments that need to be staffed. So coordinating around the needs of both domestic and offshore com-
panies will clearly keep CSOFTMTY and particularly the universities very busy in Monterrey.

Labor Pool: This interplay between the various private and public sector partners is what has allowed the region to grow an
impressive IT services sector. And while the nearshore advantage in terms of proximity and labor arbitrage has been a key enabler
for this industry, a well-developed university system and a commitment to tech training and education should continue to drive
innovation and excellence in field.

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GOING GLOBAL

Education: Monterrey is home to two of the nation's most prestigious universities, the National Autonomous University of Nuevo
Leon and Monterrey Tech. Other reputed universities include the University of Monterrey (UDEM) and the Universidad Regiomon-
tana. The state has 44 higher education institutions offering education to more than 111, 000 undergraduate students, and more
than 10,000 students at the graduate level. Graduates entering IT Careers: 3,000 per year

Wages: Monterey’s high standard of living puts a premium on wages. When asked to compare Monterrey to other regions, most
industry experts identified Monterrey as less expensive than Mexico City, but more expensive than Guadalajara.

Appendix A: MEXICO’S IT SERVICES MARKET STRUCTURE
Mexico’s IT services industry has diversified to include new company models and service delivery strategies. Traditionally, there
have been four general categories of IT offshoring companies in Mexico, which were dominated primarily by the large multina-
tionals: Developed country multinationals including HP, IBM and Accenture; Indian multinationals including TCS, Infosys, and
Wipro; Mexican multinationals including Hildebrando, Neoris, and Softtek; and captive operations for global enterprises such as
Dell, Bank of America, and Oracle. These organizations have focused mainly on servicing large enterprises on major IT infrastruc-
ture projects, software development, systems integration and maintenance, and IT consulting. While these companies continue
to be the biggest employers and revenue generators for the industry, we note the continued expansion, both in terms of employ-
ment and capability, of small-and-medium sized providers, as well as multimedia firms focused on the U.S. market.

Page 32

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Figure

14 Mexico’s IT Services and Innovation Ecosystem

Full-Service
Multinationals

Small-
Multimedia
Medium
& Design
Providers

Captive Operations

Full-Service Multinationals
Foreign and domestic firms with operations across Latin America and Asia continue to dominate Mexico’s IT outsourcing industry.
Seven firms account for approximately 80 percent of industry employment and revenue: Softtek, Neoris, Hildebrando, IBM, HP,
Accenture, and Tata Consulting services.

Page 33

Mexico it 2012

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