Providing a true cost comparison between Mexico and offshore locations is difficult because offshore locations vary so much in price, attrition ratios and telecom expenses. But, we can do a direct comparison between India and Mexico for one skill-set and compare the results.
In Mexico, a bilingual Senior Java engineer, with more than five years of experience in the technology and able to travel to the U.S. anytime, costs an average of $37/hour. In India, with companies like TCS and Infosys, an engineer with the same qualifications costs about $30/hour. Of course, these figures change with the size and scope of the effort.
Some companies initially "buy" your business with lower rates in the beginning, then raise them later so they can survive, but in general, these ratios hold true. While costs are rising in India , they are still about $5-$10/hour cheaper than in Mexico for a similar resource. So why doesn’t everyone keep racing to India? And why are the largest Indian vendors setting up shop in Mexico? Because it takes an average of 25 hours to travel to and from an Indian offshore location and the time zone disadvantage of working with them is a real contributor to value dissipation. There is a cost associated with wear and tear on travelling executives.
Other factors contribute to cost comparisons, like attrition rates, telecom expenses, shipping equipment to the vendor’s location and lack of intellectual property protections within the legal system.
Below is an actual cost comparison done by a Unosquare client based in Dallas, Texas.
The company set out to assess the real cost and productivity comparisons between Mexico and India.
The issue comparison chart above is for one company with a starting team size of 10 resources in one technology for a specific type of development in a very specific application. With that said, every company will have a different set of criteria to use when making a comparison. Your company may not care about shadow staffing, IP security or ramp-up time because those may not come to play with your outsourcing program.
A direct cost comparison for the same company and the same team size is below. Again, this is for a very small team and the numbers can change dramatically when a team of 30 or more is required.
For some, the costs are close enough to be considered a wash; however, even this cost assessment chart does not include a realistic comparison of outbound travel expenses.
In reality, team leaders visited Mexico more than twice per year thereby raising travel cost, but also increasing productivity and quality of the end product - a trade worth making. Also, the above comparison is lacking the internal cost of program management… a cost model that changes with each company and therefore not included here.
And one more thing, it was nearly impossible to assign a cost advantage for an increased ease of communication due to cultural affinity and time zone advantages. Don’t forget to also ask about the cost savings derived from a happier program manager!
NAFTA Visa: This is probably the greatest advantage for larger vendor programs with a lot of moving parts. This class of Visa (TN Visa) takes between one and two weeks to attain and, unlike the H1b or L1, there are no annual quotas on the number of Visas one company can acquire. NAFTA Visas provides the following advantages:
An unlimited number of Visas
A fast one to two week turnaround time
Annual administrative renewal
Short Term Onsite Staff Augmentation: Imagine this - you setup a flexible Java development team or a QA team, in Mexico, to work hand-in-hand with your full-time development team in the US. Nothing new there, right?
But with a nearshore provider, you can now bring key Mexican resources to your U.S. location for critical meetings, training, or problem-solving sessions, typically without paying a higher bill rate.
As long as the duration and visas are in compliance with border protection laws, you can move key resources back and forth more easily than ever before.
Close Proximity Advantages: The time and cost required for travel between Mexico and the U.S. is minimal compared to what it costs to work with larger Asian-based vendors. In some cases, resources can travel to a meeting in the U.S. and return to Mexico in the same day, thereby lowering T&E expenses while providing much needed training, problem-solving and increasing productivity. This is what we call the "Proximity Value" consideration and one fairly easy to quantify.
Note: Indian multinationals, like HCL and TCS, have also recently established nearshore operations in Mexico, providing their Fortune 500 clients with their own India-centric version of proximity value.
For a homework assignment, walk over to your development or QA manager and ask them, "What is the single most annoying thing about working with our Asian vendor?"
As long as your boss is not overly controlling and ego-centric, you’ll get an honest answer and probably from among one of the following responses I’ve heard myself:
"I'm tired of late night and early morning conference calls."
"For me, 'Follow the Sun' really means 'Following day'… I can’t get immediate responses to immediate requests."
"When I visit the country I can’t leave the hotel without getting mobbed by beggars."
"Turnover among the team leaders is high enough to hurt our productivity."
"I never really know who’s working on my project at any given time. When they say I’m paying for 50 people… I just hope I really have 50 people."
"It took me three weeks to get over the jet lag and a month for my stomach to recover."
Everyone has a different take on working with Asia. I’ve met plenty of very capable executives on both sides of the debate, along with personally having seen both sides. I’ve been to India five times while working for two large Indian ITO firms, and I’ve seen the quality of the work coming from that region, plus I’ve experienced the business ethics first hand.
Without going into detail, the main difference I experienced between India and Mexico is how the average employees are treated by management. If you’ve been there yourself, you know exactly what I mean.
Stronger Cultural Affinity: It’s no secret North America is not just the U.S. and Canada, it also includes Mexico and Costa Rica. Three of these countries are incorporated into the North American Free Trade Agreement (NAFTA) and have become a fine example of how nations can live and work together as neighbors.
These three nations banded together largely to provide a response to the European Union which formed in part, to better compete with the U.S. for goods and services. That response was creating NAFTA to compete with the EU.
Latin Americans have been a vital part of the U.S. labor force long before Wipro and Infosys began sending us their talented resources. In some parts of the U.S., Latin Americans are becoming the majority ethnic group and a Latin American woman was recently appointed to serve on the U.S. Supreme Court. The most recent census data shows that nearly ome in five Americans are Hispanic.
While communication problems persist with most Asia-Pacific programs, understanding the Latin accent is not an issue expressed by nearshore provider clients. When a person of Latin descent speaks, the average speed and linguistic nuances are similar to that of North American English.
At a fast growing Portland based company, Thomas Seitz is a vice president. He’s in charge of remote development teams in addition to his nearly 40 internal engineering and product development staff. His take on the differences between offshore and nearshore is more informed than most. He grew up in Europe, works in the US and has recent and relevant experience managing engineering teams in China, India and Mexico. He prefers North America over Asia. "The difference is not so much the time zone," he said, "we can all work around that. To me the difference is that North Americans are risk takers by nature. The Mexico team is trained to question things and push the envelope. I don’t see that in Asia. It’s almost like they don’t question project requirements because that is seen as questioning authority." He went on to say that he wants engineers, internal or external, to question his requirements. He wants them to take risk.
Family Friendly Values: While turnover rates in Asia reach unprecedented numbers, Latin American providers remain well below the global industry standard. Why is that? I’m not really sure, but I do know loyalty is a big deal in Mexico.
When a company agrees to hire a knowledge worker, that company is culturally obligated to care for that person beyond just their work hours. That kind of care can extend to other family members as well, especially when medical or family emergencies arise. It all adds up to a culturally lower tendency to leave a job for more pay.
In addition to the emerging economic factors and lack of competitive pressure on workers, lower attrition rates in Latin America are connected in part to its family-oriented culture. When investing in Mexico or any Latin country, U.S. executives don’t often realize the subtle expectation in the culture to care for the families of workers. Worse, they expect the Latin workers to morph into the U.S. culture which can have its own set of devastating consequences.
As an owner, it’s vitally important for me to know who is having babies, who is getting married, and whose parents are ill and in the hospital.
Mike Barrett is co-founder and CEO of Unosquare, providing Nearshore consulting, software development, and software testing services from Latin America. He has authored two other books – The Danger Habit (Random House 2007) and LA’s Finest, plus a dozen articles for periodicals like Neue Quarterly Leadership Journal, Christianity Today, and Nearshore Americas. Clients include Kelly Services, MedAssets, Tektronix, and Vesta Corporation.