The Impact of COVID-19 on Outsourcing to LATAM
By Dennis Fox | May 1, 2020
COVID-19 has created new challenges for businesses: working remotely in a collaborative and effective way, building critical new software products, controlling increased cybersecurity threats, and maintaining appropriate and meaningful digital marketing campaigns and presences. These are all necessary for a business to operate successfully in today’s complex environment, and because of the accelerated need for digital technologies, technical talent in the U.S. that can bring these technologies to life is scarce and expensive. What is the solution? Enter outsourcing to a neighboring region.
Outsourcing provides clear benefits to companies, namely, access to strong technical talent at cheaper bill rates (see table below). 7 Mile has previously written on how we view Eastern Europe and Latin American companies, in particular, as leaders in the next generation of outsourcing. Here, we focus on the benefits of tech services delivered to U.S.-based companies from Latin America (LATAM) markets.
Benefits of Outsourcing to LATAM
Elite Technical Talent
LATAM has surfaced as a world leader in the spheres of UX/UI (user experience/user interface), custom software development, digital transformation, and digital marketing. Globant (NYSE:GLOB) is a premier use case. The Argentina-based, publicly traded digital-transformation-focused firm has employed a consultative and agile methodology centered around a client’s needs. Its approach – taking an engagement from a strategic starting point through product development, is a great example of how LATAM leads within digital transformation. Through 7MA’s direct transaction experience, we observe that LATAM firms continue to generate interest and notoriety, while being lauded for the combination of creative design and high-quality technical development talent. In particular, UX/UI and marketing-related product development within ecosystems such as Salesforce, Adobe, Marketo, and others has become synonymous with LATAM delivery.
Below is a visual representation of where we see LATAM tech services firms leading the pack. In an environment where customer engagement commands the attention of enterprise organizations, development firms with front-end, user-facing credentials are positioned to excel.
Salaries in LATAM are comparable to Eastern Europe, moderately higher than in Asia, and significantly lower than in the U.S. In the past, companies in LATAM would have to increase workers’ salaries multiple times a year to keep up with runaway inflation. The recent relative economic stability has allowed wages to remain more constant (with the exception of Argentina which continues to face high inflation), allowing LATAM to better compete with India and Eastern Europe – the other hotbeds of outsourcing to the U.S. When looking at the average hourly billing rate outsourcing and consulting firms charge their clients, we can get some insight on the wage levels for that firm’s workforce, as they tend to bill a resource at a multiple of about 1.5 of their compensation. LATAM bill rates range from approximately $30 USD per hour to about $72 USD per hour, which is approximately 33% of the average cost for the same skillset in the U.S. See the chart below for bill rate ranges among these regions.
*Chart data is as of reported date of February 18, 2020 (Source: Daxx)
Cultural and Work Methodology Alignment
U.S. clients report that there is greater cultural alignment with LATAM individuals working on a day to day basis with U.S. companies, which appears to be derived from similar cultural upbringings and work practices. In fact, as of 2016, there were approximately 58 million Latino Americans and 20 million foreign born Latinos living in the U.S. To that end, a heavy emphasis on agile methodologies and strong English language skills, coupled with cultural affinities, lead to more productive working relationships for LATAM companies working with U.S clients. (Source: Latino USA)
The geographic proximity of LATAM to the U.S. may appear obvious, but it’s worth highlighting. Having a nearshore delivery team allows for time zone alignment which facilitates better daily collaborative work schedules and virtual meetings – and when the Corona pandemic is over, easier in-person meetings given that many LATAM countries are reachable within a short flight.
Looking Ahead – Even Faster Pace of Demand for Digital Workplaces
We see a post-Coronavirus world where there will be exponential demand for more digitized workplaces and enterprises. Firms that were not properly situated to deliver remotely in a work from home context (ie: if they had on premise IT infrastructures) or did not have proper collaboration software applications up and running, are behind the curve and will recognize the need to have these systems in place going forward. The next several months will also change how individuals work and where they work – for the long term. Organizations will become more accustomed to working from home models, which will also play into the need for robust and enhanced cloud technology environments. All of this translates into increased demand for technical talent delivery from LATAM to the U.S.
Increased Demand for Nearshoring Delivery to LATAM
We believe that COVID-19 will act as a catalyst for more nearshore delivery of custom software development and other IT services, especially to LATAM. Talent supply/demand dynamics aside, there will also be an accelerated need to optimize costs and a shift away from distant outsourcing regions to regions closer to home. These benefits, combined with those related to time zone alignment and cultural affinities – which ultimately improve working relationships and productivity – position LATAM especially well to take advantage of the new opportunities that lie ahead.
7 Mile has extensive experience with some of the premier IT services transactions in Latin America. We highlight our most recent LATAM transactions below.
As the political and economic climate changes day by day, we continue to learn and adapt, and encourage anyone with questions to reach out. Our team may be working remotely, but we are very much engaged and welcome continued conversations on this topic or others. Please reach out to Dennis Fox (firstname.lastname@example.org) with questions.
Blog Series: The Impact of COVID-19
The COVID-19 pandemic is impacting people across the world in their homes, in their offices, and in their wallets. With political turmoil, market uncertainty, and a general sense of fear at the forefront of many American’s minds – we at 7 Mile are consistently being asked the questions, “what does this mean for your business?” and “what does this mean for my business?”
As a result, over the next couple of weeks, we will be releasing our COVID-19 blog series, which dives deeper into those two key previously mentioned questions for each of the industry verticals that we cover. We welcome feedback and questions, as we continue through the series. Other posts in the series include:
About 7 Mile Advisors
7 Mile Advisors provides Investment Banking & Advisory Services to the Business Services & Technology Industries globally. 7 Mile Advisors advises on M&A and private capital transactions, and provides market assessments and benchmarking. As a close-knit team with a long history together and a laser focus on our target markets, 7 Mile Advisors helps its clients sell companies, raise capital, grow through acquisitions, and evaluate new markets. For more information, including research on the M&A markets, visit www.7mileadvisors.com.