IT Outsourcing to Mexico in 2024 Guide

In the turbulent year of 2022, the Mexican outsourcing market generated $3.9 billion in revenue, securing its spot as the world’s third-largest technology services exporter. This upward trend will likely persist, as 75% of US companies are eyeing LATAM talent. So, what does the future hold for IT outsourcing to Mexico in 2024? 

I’m Dmytro Ovcharenko, Alcor’s CEO and founder. At Alcor, we help tech companies build their own R&D centers in LATAM and Eastern Europe, while our IT recruiters in Mexico and other countries take care of finding software developers for their teams.

In this article, I’ll walk you through the benefits, myths, and risks of outsourcing IT services to Mexico, share local tax regulations for technological businesses, compare this country to other outsourcing destinations in Latin America, and describe efficient alternatives to this collaboration model.

Mexican IT Industry Overview

The IT industry in Mexico is a powerhouse, with a whopping market valuation of $28 billion. It proudly holds the title of the second-largest technology market in Latin America, just behind Brazil. With a growing emphasis on digitalization and innovation in AI, robotics, cybersecurity, healthtech, and blockchain, the Mexican technology industry is poised for even greater success. Experts predict an impressive CAGR of 12.6% over the next four years. Mexico already ranks third in LATAM with the most innovative economy in the tech sector, placing its S&T clusters in Mexico City on the top global list. 

Mexico’s IT sector has been steering towards a service-oriented direction, with IT outsourcing emerging as its largest segment. This sector exhibits an impressive annual growth rate of 10%-15%, propelling Mexico to become the third-largest IT services exporter. According to Statista, this growth trajectory is set to continue, with predictions indicating a volume of $18 billion by 2028, boasting an annual growth rate of nearly 7%.

Mexico is home to approximately 400 software engineering companies, as reported by Clutch. Local companies offer various services, including IT consulting, custom software development, IT managed services, and web and mobile development. They are situated in critical Mexican IT hubs such as Mexico City, Monterrey, Guadalajara, and Mérida. 

5 Benefits of IT Outsourcing to Mexico

1. Big talent pool

One of the main reasons why US companies choose Mexico for nearshore software development is the wealth of tech talent available. With a whopping 700,000 software developers, Mexico boasts one of the biggest talent pools in the region. What’s more, this pool grows by an impressive 124,000 skilled graduates each year. 

These remarkable numbers are primarily thanks to the government’s proactive stance in promoting STEM education among the younger generation. In 2023 alone, the Mexican government allocated approximately $9.1 billion to higher education. Additionally, they supported and launched 1,335 undergraduate programs focused on information technology, engineering, and mathematics.

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2. Affordable costs 

Offshoring to Mexico offers another strategic advantage — affordable salary rates. American IT companies can slash labor costs by up to 60%. Take, for example, the salary of a Senior AI Engineer in Mexico which ranges from $50,000 to $75,000 on average. Compare that to their counterparts in the US, who pull in around $121,000 to $170,000 annually. The pattern holds for Senior Full-stack developer salary in Mexico which spans between $50,000 and $62,000. In the US, similar-level specialists receive $128,000-$150,000 per year. Want to see the potential savings from hiring other Mexican IT experts? Take a peek at the table below.

3. Thriving startup ecosystem 

In 2023, Mexico boasted 440 dynamic startups and, according to the Global Startup Ecosystem Index, was one of the prime locations in Central America for launching a startup. Notably, in 2019, VC investments in Mexican startups reached $650 million, nearly quadrupling the amount from the previous year. This flourishing environment, complemented by the success stories of unicorn startups such as Bitso, Clara, and Kavak, is a compelling magnet for ambitious tech entrepreneurs looking to outsource their operations to Mexico. 

4. Business-friendly environment

Another advantage that lures US-based IT companies to outsource software development to Mexico is its financial attractiveness and A4 business environment. Notably, this nearshoring location ranks 10th in the 2023 Kearney Global Services Location Index. Moreover, Mexico benefits from a free trade agreement with the USA and Canada (USMCA), simplifying foreign investment and enhancing the protection of intellectual property rights.

Foreign IT businesses can also leverage Mexico’s well-developed infrastructure, which includes 20 tech parks. Among them are Apodaca Technology Park, Creative Digital City, the Guadalajara Software Center, and Monterrey Technology Park, which provide modern offices and support for IT endeavors.

5. Geographical proximity

One more reason why international tech companies choose to offshore software outsourcing in Mexico is its location. Nestled in North America, Mexico offers proximity to many major U.S. cities. The flight from Los Angeles to Mexico City takes just around 3 hours, making it an accessible location for in-person meetings. Moreover, Mexico shares the same time zone (UTC-5) as California, fostering real-time communication and seamless collaboration for US-based tech companies.

2 Myths about IT Outsourcing to Mexico

Underqualified developers

Some believe lower costs equate to lower qualifications and knowledge among Mexican software engineers. This is one of the main misconceptions among tech companies that opt for Mexican software development outsourcing.

The reality is that Mexico stands out as the leader in the American continent, boasting the highest number of STEM graduates, adding 124,000 to its pool every year. Developers from Mexico stand out as some of the best-educated in the region, with six universities making it into the top 50 in Latin America and also appearing in the prestigious Best Global Universities ranking. 

On top of that, Mexican IT talents lead the pack for technology skills and rank third for data science skills in Latin America and the Caribbean. They have high proficiency in a range of programming languages and technologies, including JavaScript, Python, C#, SQL, React.js, and Angular.  Interestingly, TechCrunch encourages US-based businesses to consider Mexican developers, highlighting the current abundance of highly trained tech professionals in the country. 

Mexico’s outsourcing ban

Another popular myth regarding IT outsourcing in Mexico involves concerns over the legal landscape, particularly considering the 2021 amendment to the Federal Labor Law. This amendment reportedly bans outsourcing of core business functions, prompting worries about the feasibility of working with outsourced programmers in Mexico.

But let me debunk this myth. The amendment’s primary objective is to combat tax evasion and does not outright prohibit outsourcing. Instead, it targets subcontracting, which is a distinct practice. In summary, while the perceived ban on software outsourcing in Mexico presents a challenge, professional legal guidance can navigate these complexities, allowing  you to engage skilled developers in Mexico still transparently.

5 Risks of IT Outsourcing to Mexico

1) Questionable dedication

When IT companies go offshore to Mexico with IT outsourcing providers, they often encounter challenges related to team indifference. Software developers at outsourcing companies frequently shift between projects, emphasizing output over outcome. This approach can lead to questionable dedication, product quality, and alignment with your corporate values and goals. At the end of the day, your project becomes just one among many, underscoring the importance of going the extra mile to ensure its success.

2) Lack of control

Outsourcing software development to Mexico comes with another risk: which is potential loss of control over the team and product development. Communication with the outsourced software developers typically occurs through an intermediary, often a project manager. This can slow project delivery, increase the likelihood of miscommunication, and potentially introduce errors. Furthermore, limited visibility into the product development process can make it difficult to assess performance and quality terms accurately.

3) Cloudy pricing

While offshore outsourcing to Mexico might appear as a cost-efficient choice on the surface, there may be better long-term solutions. Beyond the apparent expenses tied to product development, some companies incorporate additional, often unnecessary, services into their billing structure without the customer’s full awareness. Consequently, the final invoice can carry a significantly inflated price tag, exceeding initial expectations.

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4) Data security concerns

When opting for software development outsourcing in Mexico, you inevitably share essential aspects of your product development with the provider. As the collaboration draws to a close, the software engineers involved often transition to fresh projects with other tech companies. This progression inherently heightens concerns related to data security, the potential for information leaks, and the safeguarding of your IP rights.

5) Complex taxation 

Tech companies often stumble over local tax regulations and legislation when developing their outsourcing strategy to Mexico.

First, this country is well-known for its bureaucracy, which becomes particularly intricate regarding payroll management. Payroll in Mexico involves a myriad of calculations and encompasses various mandatory payments. These include PIT withholding, occupational risks, sickness and maternity benefits, disability and life insurance, retirement, severance at an advanced age and old age benefits, childcare and social benefits, and state payroll tax.

Thus, it implies being constantly up to date with new reforms, laws, and other regulatory changes to ensure your outsourcing operations in Mexico remain compliant and efficient. But let’s have a general overview of local tax rates.

Mexican Taxation for IT Companies

The corporate income tax (CIT) in Mexico stands at 30%, with an additional 10% withholding tax on dividends from profits already subjected to CIT, resulting in a rate of 37%. However, for businesses involved in research and development activities, a substantial tax credit of up to 30% is possible.

On the personal income tax front, American IT firms venturing into Mexico face a critical choice in employment models. They can opt for the traditional employment model, subjecting both employees and employers to taxes, or the B2B model with a 25% tax for programmers. These decisions intersect with Mexico’s personal income tax structure, where rates range from 1.92% to 35%, and non-residents face taxation between 15% and 30%, with a $7,000 income exemption within a 12 months.

While navigating these tax intricacies, US companies might also need to address labor code restrictions and explore tax treaties to mitigate double taxation risks. It’s worth noting that Mexico offers relief through tax treaties with the USA and Canada, and various employment models are available, with tax implications for both employees and employers.

Mexico vs other LATAM Outsourcing Destinations

When weighing the pros and cons of outsourcing to Mexico, tech executives also explore other destinations in Latin America. Let’s take a closer look at a few of these options:

Mexico vs Brazil

One of Mexico’s outsourcing competitors in Latin America is Brazil. In 2022, its information technology sector reached a remarkable market valuation of $45 billion, the highest in the region. Projections indicate that Brazil’s IT outsourcing market will continue to grow, potentially reaching $9.82 billion by 2028. With over 500,000 software developers, Brazil boasts the second-largest talent pool in LATAM, trailing only behind Mexico.

Brazilian developers excel particularly in data science skills, although they lag behind Mexico in overall technology proficiency. They demonstrate expertise in JavaScript, CSS, Python, Java, C#, and PHP. The country’s software development ecosystem thrived last year, with over 8,000 companies actively participating in the sector. Additionally, Brazil is home to 13,000 startups, boasting the largest number of unicorns in Latin America.

Mexico vs Colombia 

Another common destination in the region is Colombia. In 2022, the local ICT market was valued at $ 18.83 billion, and it’s on a trajectory to reach $35.02 billion by 2027. Colombia boasts more than 150,000 software engineers, and over 13,000 STEM graduates join its pool every year. Developers in this country are as good at technology skills as their Mexican counterparts but are a bit legging in data science knowledge. You can always find Java, C++, Python, SQL, and Ruby in their arsenal.

Colombia is a burgeoning startup hub, boasting a thriving ecosystem with more than 300 of these innovative companies. The heart of this entrepreneurial wave beats strongest in cities like Bogotá, where 190 startups call home, followed by Medellín with 56 and Cali with 44. The country proudly hosts several unicorns, including well-known names like Rappi, LifeMiles, and others.

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Mexico vs Argentina

The IT market in Argentina is on a promising path, expected to achieve an 8.3% CAGR between 2022 and 2027, ultimately expanding the market by $6.6 million. Projections also indicate a steady rise in revenue within Argentina’s IT services market from 2023 to 2028, with a cumulative increase of $4.5 billion in total. 

Argentina is home to major tech parks, including the Catalinas Norte Technology Park, one of the world’s largest. In addition, Argentina has more than 500 startup companies and around 11 unicorns.

The country provides access to 100,000+ tech talents and is #1 in English proficiency in LATAM. Argentinian developers also possess strong Python, TensorFlow, Cloud APIs, SQL, R, and NLP skills. These facts make IT software outsourcing to Argentina a top choice among US companies.

Mexico vs Chile

Another noteworthy outsourcing destination in LATAM is Chile. Predictions indicate that its IT outsourcing sector will generate $1.87 billion in revenue by 2024. Chile has a smaller pool of software developers compared to Mexico, with only 61,000 professionals. However, the Chilean government has implemented various educational initiatives like Talento Digital and Fundación Kodea to bolster STEM education and increase the number of graduates in the country. Chilean IT experts are renowned for their proficiency in programming, cloud computing, operating systems, and data analysis. They excel in languages such as Java, Python, PHP, Perl, Node.js, and ASP.NET.

What sets IT outsourcing to Chile apart from Mexico is its political and economic stability, A3 business environment, and free trade agreement with 65 countries globally. Chile also boasts a thriving startup ecosystem, with over 300 startup companies supported by the government. Furthermore, Chile’s commitment to digitalization and the implementation of the Chile Digital 2035 strategy has positioned it as the second most innovative country in Latin America.

IT Outstaffing to Mexico

One of the well-known alternatives to software development outsourcing is IT outstaffing to Mexico. This approach involves a temporary collaboration with remote programmers or development teams offered by an outstaffing service provider.

This model also allows you to adjust the team size according to your current business needs and overall workload. Yet, contrary to traditional outsourcing, tech companies maintain direct control over the development process and team management, bypassing the need for intermediaries.

Still, IT outstaffing often brings a touch of detachment to your project since these team members aren’t your in-house employees. This separation can raise concerns about how it might affect product quality and data security. Consequently, potential investors may become apprehensive, questioning the future success of your product.

Apart from that, outstaffed developers grow as specialists and gain more expertise within your project. Yet, when your collaboration stops, you lose these talents. If you decide to bring them on board and keep them in-house, you’ll have to pay buy-out fees.

Better than IT Outsourcing

To bypass all the risks and drawbacks of outstaffing and software outsourcing to Mexico, tech companies opt for other ways to work with local IT talents. Let’s explore them in detail.

IT Recruitment 

Western software companies often choose IT recruitment services, partnering with experienced IT staffing agencies. These firms maintain sizable recruitment teams that can hire software developers from Mexico promptly and effectively. Some IT hiring agencies go a step further by providing EoR services, sparing companies from the need to establish a legal entity in their offshoring destination. This means that businesses can directly engage with their hired developers, while some of them also assist with essential payroll and legal matters in the local market. 

That was Dotmatics‘ solution after deciding to step back from traditional outsourcing. Alcor engaged a group of researchers and 4 experienced headhunters to help the company with full-cycle IT recruitment. Within a year, we assembled a team of 30 seasoned software engineers for Dotmatics. Alcor brought on board a Director of Engineering, along with a diverse team of professionals skilled in Full Stack development, React, QA Automation, DevOps, Node.js, and other tech talents. In addition, we provided the client with back-office support and handled developer payroll and laptop procurement while also ensuring full legal compliance.

R&D office

Another approach to nearshore software development in Mexico is establishing your own research and development center. As a rule, with R&D service providers, you access a one-stop solution that encompasses various essential components, including IT recruitment, EoR services, legal and compliance, office leasing, procurement management, and employer branding.

That’s what Alcor did for People.ai to expand to a foreign market:
 

Hire Mexican Developers as Simple as Is 

Planning to go global and expand to new markets such as Mexico, Colombia, Argentina, or any other Latin American and Eastern European country? Let Alcor have your back!

Alcor is an experienced provider of R&D center services with an exclusive focus on hiring Senior/Lead software developers, as well as programmers with rare tech skills. Our solution differs from traditional IT outsourcing and outstaffing models, ensuring that you have your own dedicated team of IT talents while retaining full control over the decision-making. Additionally, we offer comprehensive back-office support and transparent pricing, allowing you to choose the services that best suit your business needs. 

Our IT recruitment department comprises 40 experienced headhunters with extensive networks and up-to-date knowledge of the latest hiring trends and techniques. We guarantee to hire the first 20 software engineers within 3 months and over 100 programmers in a year. If we don’t meet these deadlines, we’ll hire the remaining resources at no additional cost. 

Ready to explore new prospects for your IT business with a reliable partner committed to your success? Just drop us a line! 

References on IT Outsourcing to Mexico

1. Statista
2. Global Innovation Index 2023
3. The World Bank
4. Nearshore Americas
5. Mexican Talent for Economic Growth and Nearshoring
6. Global Startup Ecosystem Index
7. 2023 Kearney Global Services Location Index
8. Mexican Startup Ecosystem
9. Coface for Trade
10.  Best Global Universities for Computer Science in Mexico
11.  Coursera Global Skills Report 2023
12. TechCrunch
13.  Más Colombia
14.  LatamList
15.  Technavio
16.  EF English Proficiency Index 2023
17.  Data Privacy Framework