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Is Latin America the New Main Hub for US Tech Outsourcing?

In recent years, we all have experienced rapid technological evolution in areas such as AI, blockchain, cybersecurity, and cloud computing. With their expansion, businesses worldwide have started to increasingly require specialized expertise in sectors like software development, computer systems, and information security. 

Many companies though have begun to face challenges in finding enough tech talent to fill open positions because their local talent pools could not keep up with the growing demand. Korn Ferry has projected a global shortfall of up to 85 million workers by 2030, mainly in industries like technology, engineering, and healthcare. The US, Japan, Israel, and the Nordic countries are especially affected, as their high-tech industries are growing much faster than the number of qualified professionals entering the workforce. In the US, this situation is worsened by numerous tech giants such as Google, Amazon, and Microsoft attracting top talent with high salaries and benefits and making it difficult for smaller companies and startups to compete for qualified candidates. 

So, it is no surprise that outsourcing and staff augmentation (learn the difference between them here) have become a new norm for US companies. In addition to just filling required roles, outsourcing provides access to the global pool of talent, allowing countries with attractive job markets like the US to attract top professionals. Besides, lower labor costs and costs of living make outsourcing a smart choice for North American companies. If you are still unsure if outsourcing is right for your business, read one of our previous blog posts: Is It Worth Outsourcing Your Software Development?

What Is Causing the Latin American Boom?

Outsourcing destinations such as India, China, and Ukraine have traditionally been among the top options for US companies looking for cost-effective talent pools, largely due to low costs and easy availability of talent. However, the post-pandemic tension between the US and China, production delays in India, and the ongoing military conflict in Ukraine, which has forced many developers to move to countries with a higher cost of living and higher salaries, have prompted more North American companies to seek alternatives. As a result, more US tech companies have started considering Latin America as a closer, more reliable partner. 

In turn, Latin American governments recognize the importance of technology and the need to meet global demand for software outsourcing. They are investing heavily in IT and engineering talent development, helping to build a skilled workforce in the region. With strong technical universities, state policies that prioritize technology growth, and entrepreneur-friendly business laws that have lowered barriers to entry, over the past decade the LATAM region has become a hub for IT services, attracting global corporations and startups with its skilled workforce and favorable time zones. 

Main reasons to outsourcing in Latin America:

Vast Talent Pool

Latin America is home to a large number of IT professionals with a variety of skills – more than 1 million in total, with numbers growing rapidly day by day. Accessing this wide range of specialists helps companies fill skill gaps with skilled developers or receive extra support during peak demand seasons without the need for permanent staff. Brazil has the largest pool of software developers in Latin America, followed closely by Mexico. Argentina and Colombia also produce a substantial number of STEM (science, technology, engineering & mathematics) graduates annually. This talented workforce and growing entrepreneurial spirit make LATAM stand out as a promising frontier for innovation with a favorable investment environment. 

Number of software developers in Latin American countries in 2023

Time Zone Alignment

One of the main advantages of outsourcing software development to LATAM is that it allows for real-time collaboration with teams in the US. Unlike outsourcing to Eastern Europe or Asia, where time differences can exceed a full working day, the time difference with Latin America's countries constitutes from 1 to 4 hours. For example, São Paulo in Brazil is just one hour ahead of Miami. Such close alignment of time zones helps synchronize work efforts and ensures fast feedback, leading to effective project management, reduction of delays, and increase of the timeliness of project deliveries. 

Expertise

Governments throughout LATAM have created programs to encourage STEM education, software engineering has become a very popular and widespread university degree. Each semester, new graduates complete their studies and enter the marketplace with the latest skills and cutting-edge technology.  For instance, Mexico has over 1,200 colleges offering programs in computer science and related fields, and the country is expected to graduate 160,000 tech-oriented students every year. Besides, tuition rates in Latin America are significantly lower compared to the US. The cost of studying in Latin America is relatively cheaper than in countries like the US, UK, or Australia. While the average price for studying in a state college in the USA is $9970 and £9250 in the UK, the average price for higher education in Latin America ranges from $4000-5000.  What's more, in some countries, like Brazil, for example, public higher education till the postgraduate level is stated to be free on the governmental level. 

Besides, initiatives like CESSI (the Argentine Chamber of Software and IT Services Companies) and "Jóvenes Construyendo el Futuro" (Youngsters Building the Future) in Mexico offer programs that include internships and hands-on training and certification by partnering with private companies. They aim to build a more skilled workforce and prepare it for jobs in, among others, spheres like software development, IT, and other tech-based careers. Such versatile and multi-faceted tech education systems and government-led programs contribute to the region's constantly growing and highly skilled workforce. Latin American software developers are known for their strong technical proficiency, particularly in popular programming languages like Python, JavaScript, Java, and PHP. They also demonstrate ease with full-stack development, cloud platforms, and various technology stacks (e.g., MEAN, MERN) widely used globally in software development.

Lower Salaries

Outsourcing in Latin America presents a compelling financial advantage. The region's lower living and labor expenses, compared to the United States, offer substantial savings. For instance, according to recent surveys, the average salary for a senior software developer in the US is about $132,879 per year. In contrast, a developer with equivalent experience earns roughly half in Latin America. For instance, the average salary of a Senior Software Engineer in the Buenos Aires area is ARS 2,827,452 per month, which is equivalent to about $3,000 and just $36K per year. These cost benefits allow businesses to allocate resources more effectively, improving areas like business development and product innovation. Besides, when partnering with established local vendors, there is no need for direct recruitment and onboarding, which reduces operational costs and streamlines the development process.

English Proficiency

When you are outsourcing developers, not only do their tech skills matter, but so does the language they speak. It determines the effectiveness of communication and, in the long run, the success of the whole project. Fluency in English reduces misunderstandings, improves clarity, and helps projects run smoothly. Fortunately, many tech professionals in Latin America are highly proficient in English. Educational systems across Latin America emphasize English language learning from an early age, with continuous opportunities for workplace training. With such educational policies, most developers are bilingual, ensuring smooth communication with international clients and meeting global standards. While English proficiency is common in Latin America, fluency still varies. According to the 2023 EF English Proficiency Index, Argentinians lead the position in English proficiency within South America, followed closely by Costa Rica and Uruguay. Brazil and Colombia have lower levels of English proficiency, but the proficiency rate is generally improving, and even here, it is still possible to find outsourcing partners with strong English skills. 

Cultural Fit

When outsourcing, especially to Asia, cultural differences may pose significant challenges to business interactions. Not all American organizations can get accustomed to the peculiarities of Asian business ethics. Differences in business approaches and distinct cultural environments can contribute to misunderstandings and, over time, potentially lead to decreased productivity. When it comes to LATAM, while it also has cultural differences with the US varying by country, they both share aspects of Western culture, such as certain communication styles, work expectations, and values like professionalism and quality standards. At the same time, adjusting to possible differences is no more difficult than managing a diverse US workforce. This cultural overlap facilitates smoother collaboration, while relative diversity often sparks fresh ideas and innovation. It all makes it easier for teams to work together and even connect on a personal level through shared interests. 

Geographical Proximity to the US

The time zone alignment is an obvious result of geographic proximity, the benefits of which cannot be overstated. Although most collaboration takes place remotely, you can have an easy and affordable site visit. It will only take you a few hours to get there. It is less expensive and less tiring.  You will not suffer from jet lag as you would when flying to countries located in other regions. In addition, there are plenty of flights that can take you directly from the US to Latin America.

Government Support 

IT outsourcing opportunities in Latin America continue to grow thanks to a favorable business environment and local tax laws. Countries like Mexico, Chile, Colombia, and Brazil are introducing legal reforms and initiatives to support entrepreneurs and startups and also to encourage foreign companies to conduct business in the region.  For instance, concerted efforts by the governments of Argentina, Brazil, Colombia, Costa Rica, and Ecuador have significantly enhanced the region's infrastructure, including communication lines and internet accessibility. According to recent reports, only 7% of the population experiences a coverage gap in internet access. 

To attract software development businesses to Uruguay, the government has introduced various tax incentives. Software development benefits from a 100% exemption from corporate income tax, provided the business incurs at least 50% of its associated costs in Uruguay. This incentive is designed specifically to attract foreign companies, and the requirement to incur 50% of costs in Uruguay encourages a substantial presence in the country. Another example is that Argentina has enacted the Knowledge-Based Economy Law (Law 27,506) and the Entrepreneurs' Law, which foster a knowledge-based economy. Eligible companies are entitled to a reduced income tax rate of 15%, which is a significant reduction from the standard 35% corporate tax rate. Entrepreneurs' Law offers tax deductions to investors supporting startups. The 75-85% deduction applies specifically to the investor's personal or corporate income tax based on their investment, not to the startup's direct income tax rate. The company itself may still benefit from incentives under the Knowledge-Based Economy Law.

Challenges of IT Outsourcing in Latin America:  

It is not that easy to find arguments against outsourcing to LATAM. Still, there are a few moments that you might consider before you opt to do so:

Complex taxation

The biggest challenges relate to complex labor laws, taxation, payroll, and other operational aspects that can pose challenges for businesses. While reforms are ongoing, these complexities can make it difficult for foreign companies to navigate local regulations, and the specific tax policies and requirements often vary by country. Working with local experts or outsourcing partners familiar with the regulatory landscape can help overcome these difficulties.

Political Issues and Economic Instability

A few countries in this region, such as Venezuela and Ecuador, have faced political upheaval and economic instability, which can affect business operations, including outsourcing. Besides, they may still operate under outdated systems and practices. But not all countries in the region are affected in the same way. Mexico, Brazil, Argentina, Chile and Colombia, have relatively stable political environments and strong economic growth. These countries are also often seen as more progressive in adopting innovative business practices and modern technologies, particularly in urban centers and tech hubs. Still, it is reasonable to keep an eye on the political situation in the region (although it applies to any destination) and spread your team across several countries not to keep eggs in one basket. 

Higher Costs In Contrast to Some Other Destinations

Latin American developers have lower salaries than developers in the US; they even have lower salaries than their European colleagues from popular outsourcing destinations like Poland,  but their salaries are higher than in Asia. The average salary of a senior developer in India is just about 900L Indian Rupees per year, equivalent to just about $11K per year. And it is 3 times lower than the average salary of an Argentinian developer as we mentioned above. Outsourcing to India comes with mismatched work hours and significant cultural differences. Still, if you need to cut costs as much as possible, this option might suit you more than outsourcing to LATAM.

Infrastructure limitations

Infrastructure, particularly Internet or other teck setup, like essential hardware, software, networking, data management systems, and support services, can sometimes be less developed or stable in some Latin American countries, especially in rural areas. Yet this is changing, with many regions investing in technical and logistical advancements. Choosing the right outsourcing partner with a robust technology infrastructure is key to delivering high-quality services. Additionally, considering multiple providers can ensure a reliable backup.

Bottom Line 

Latin America is quickly becoming a tech powerhouse and a top choice to consider for software outsourcing by North American companies. The region has everything to deliver successful tech projects quickly and effectively: Latin American tech professionals have the proper education, English proficiency and operate in time zones similar to those in the US. This LATAM outsourcing boom presents an even more significant opportunity for the region itself.  It allows for more widespread access to knowledge and the creation of opportunities that contribute to the region's development, fostering economic growth while retaining skilled professionals locally.

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Maryna Kharchenko

10/09/2024

Business
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