Nearshore software development is a widely used business practice that allows IT companies to tackle mounting talent shortages and reduce labor costs – by tapping into a neighboring market’s potential. During the last few years, Mexico has been in the spotlight as an expedient nearshoring destination among American technology businesses. So, let’s see what this LATAM IT market has to offer.
In this article, I am going to dwell on the advantages of nearshoring to Mexico, median local software developers’ rates (and how they differ from the US), as well as challenges of outsourcing Mexican developers and how to overcome them. I’ll also cover some of the common engagement models, so you could choose the most beneficial for your IT company.
Mexican IT Market Overview
The IT industry in Mexico is one of the fastest growing in the international outsourcing market. Being neighbors with the leader in the technology field, the USA, Mexican government has been taking decisive actions to make their country a top destination for nearshore tech outsourcing. There are currently 38 IT clusters with about 400 IT outsourcing companies in Mexico which offer a wide array of services, including software development, engineering, and high-tech manufacturing. Many governmental initiatives and reforms have been implemented to create a tech-driven environment with cloud computing, AI, and Internet of Things at its core.
The increased focus on digitalization and innovation in Mexico is anticipated to result in a boosted CAGR of 10.6% during the next 5 years. Since Mexico’s IT sector has been developing in a service-centric direction, its largest segment has become IT outsourcing. Between 2016 and 2020 there was a noticeable rise in its revenue with a 10.2% increase in the CAGR. With mobile app development, fintech, and cybersecurity solutions to keep on dominating, Mexico’s software development market volume is expected to get to $3.92bn in 2023.
Why Outsourcing to Mexico is a Good Choice?
Growing Tech Talent Pool
One of the key reasons why American tech companies nearshore software development in Mexico is its vast IT talent pool. Nowadays, there are about 225,000 software developers in the country, which is steadily increasing by over 110,000 STEM graduates annually. Such impressive growth in the tech workforce is conditioned by government’s initiatives that encourage the young generation to pursue IT careers. Mexican programmers are considered the most educated in LATAM, as they study in highly regarded universities. Six of them are ranked in the top 50 in Latin America, including the National Autonomous University of Mexico, Tecnologico de Monterrey, and Universidad Autonoma de Nuevo Leon (UANL). If you are seeking developers with PHP, Java, C#, Python, and Ruby skills, hiring IT professionals from Mexico is your way to go.
As known, the US IT market provides some of the highest annual remunerations for programmers. To reduce costs and at the same time get quality services, many American tech companies choose Mexico’s tech talent for nearshoring software development. Such a business move allows them to cut their labor expenses by up to 50%, as the average salary in Mexico constitutes about $46,000, while in the USA it reaches $97,000. Keep reading this article to find out more about the differences between Mexican and American developer wages.
Among other key advantages of outsourcing to Mexico is its convenient location. Situated in the southern part of North America, nearshoring software development to Mexico is a beneficial option for US tech companies. For instance, it takes about 4 hours by plane to get from San Jose, CA to Guadalajara. This enables on demand face-to-face meetings which can boost your corporate culture and build better cohesion between two teams. In case you would like to continue your tech expansion, Mexico can serve you as a good strongpoint for entering South American IT markets.
Similar Time Zones
Another reason why Mexico is preferable for outsourcing software developers is due to overlapping time zones (UTC-6, UTC-7, UTC-8) with the USA. For example, the American IT hub of San Francisco has no time difference with Mexican tech center Tijuana, while being only 2 hours behind Guadalajara and Mexico City. This fact allows in-house and remote teams to reduce ramp-up time and cope with arising issues quickly and effectively, sustaining an uninterrupted software development process.
Developed IT Infrastructure
Mexico’s government has been allocating massive budgetary funds to upgrade local tech infrastructure. In 2021, the country launched the 5G mobile network which is meant to enhance internet connections (and as a result speed up digital operations). Moreover, IT companies are also fostered to build AI-based cutting-edge technologies that can streamline software development processes and make it more error-free. In addition, over 20 tech parks with modern facilities and office buildings were established, including the Guadalajara Software Center, Creative Digital City, Apodaca Technology Park, and Monterrey Technology Park. They can be found in 3 Mexican IT powerhouses like Guadalajara, Monterrey, and Mexico City, as well as in 2 emerging ones: Tijuana and Merida.
Vibrant Business Environment
One more reason why US-based IT companies nearshore software engineers in Mexico is the country’s political stability, low business climate risk, and decent Ease of Doing Business score. To facilitate foreign investment and establish free trade between Mexico and the USA as well as Canada, the Mexican government signed a new act called “USMCA” (United States-Mexico-Canada Agreement). Apart from economic ties, this document also sustains protection of intellectual property rights, making IT outsourcing to Mexico not only cost-effective but also safe. Therefore, it’s no wonder why such well-known giants as Netflix, Google, Apple, Microsoft, Amazon, Oracle, Dell, and Cisco assembled their engineering teams in this nearshoring destination.
But it’s not only foreign companies that function in Mexico. Multiple governmental grant programs like 500 Startups LATAM and Fondo Nacional Emprendedor encourage local tech entrepreneurs to do business. Currently there are about 450 startups and 6 unicorns (Kavak, Bitso, Clip, Konfio, Merama, Clara), the majority of which are concentrated in Mexico City.
Peculiarities of IT Outsourcing to Mexico
For quite a long time, employers were taking advantage of a regulatory loophole, hiring software engineers as outsourced workers, and therefore paying zero taxes. To overcome this problem, the government enacted the 2021 Amendment of the Mexican Labor Law that prohibits employers from sub-contracting personnel if it’s done to fulfill a corporate purpose. Therefore, to nearshore outsourcing in Mexico, IT companies have to deal with the following aspects:
- Obtain the registration certificate before the Ministry of Labor and Social Welfare to make sure you can meet Mexican social security and tax obligations;
- Submit a quarterly report to Mexico’s Social Security agency;
- Fulfill profit-sharing obligations by paying 10% of your taxable income to your employees;
- Provide the contractor with a copy of the registration certificate as well as tax receipts.
*Non-compliance of all the above may result in fines or even legal liability.
So, to avoid these challenges of outsourcing to Mexico, it’s better for IT companies to set up their own team of programmers. Basically, there are 2 options: hire top IT headhunters for a tech company or partner with a BPO agency. The latter covers a much wider spectrum of non-core activities though, including IT recruitment, HR, payroll, and legal compliance.
Challenges & Risks of Outsourcing to Mexico
Bureaucracy and Legal Compliance
Even though Mexico has been making decisive steps towards digitalization, the majority of processes related to business registration, contract conclusion, and tax payments require in-person presence in governmental institutions. Moreover, frustrating paperwork and vague terms of decision-making by the authorities usually eat up a lot of your time. Not to mention possible inconsistencies that may arise if failing to follow local rules and regulations.
I recommend cooperating with a professional BPO agency just like the US-based IT company Grammarly did. They needed to legalize their remote software developers in the offshoring destination. As a result, the company received all-around assistance with employment agreements, residence permits, and business trip arrangements, as well as consultations on local legislation and IP rights protection. The Grammarly case study shows that scaling up in an offshoring destination with a trustworthy partner can liberate IT companies from arduous paperwork and smooth the entire offshoring process.
Protracted Hiring Process
Each labor market has its own specific features and the Mexican one is not an exception. Some tech companies overlook the prior steps needed to successfully hire programmers. As a result, they take too long to assemble a software development team, which often results in substantial wastes of time and money (that could be channeled into product development instead).
Firstly, analyze the local market to know about its talent trends (developer availability and expertise gaps), competitive landscape, salary benchmarks, and benefits that local programmers are the most interested in. As statistics show, 77% of Mexican coders are ready to leave their current job for better pay & benefits, while 76% of them look for flexibility and remote work opportunities. When devising an Employer Value Proposition (EVP), it’s good to add a Christmas bonus, English classes, and unlimited vacation time as well. Another IT recruitment tip is to develop a powerful employer brand in the offshoring destination which will accelerate your hiring process.
The Cost of Outsourcing Software Development to Mexico vs Local US Developers
As I mentioned above, Mexico’s IT market provides much lower annual salaries for programmers than the US one. For instance, if hiring a senior Mobile App Developer in your immediate area, you will pay about $140K per annum. However, the compensation of the same specialist in Mexico is only $41K. This means that on average Mexican tech remunerations are approximately 3 times lower than the US ones, which makes outsourcing software development to Mexico a real bargain. In the table below, you can see more salary comparisons of American and Mexican coders:
Engineer in Test
|Mexican salaries were converted to US dollars at a relevant exchange rate for March 2023.|
Outsourcing Software Development to Mexico: Engagement Types
Using Services of a Freelancer
In case you are looking for short-term cooperation and inexpensive IT services in Mexico, then finding a coder on freelance platforms will do the trick. This option allows you to cut expenses on labor costs, benefits, and taxes since freelancers work as sole entrepreneurs. Moreover, you won’t have to deal with all IT recruitment stages but get down to business as soon as you contract the right software developer. Still, if you anticipate dedication and diligence from freelance programmers, it’s better to consider some other alternatives.
Getting an Outstaffed Team
Another variant is getting software developers from an outstaffed service provider. This solution can be characterized as a temporary fix to your in-house expertise gap. Based on your business needs, a vendor provides you with coders who possess required skillsets. Whenever your project changes, you can easily scale up or down the outstaffed tech team. The disadvantage of this engagement model though is a lack of commitment from external developers, as they don’t have a sense of ownership over your product. In addition, a long-term cooperation with an outstaffed vendor presupposes additional expenses, such as commissions and buy-out fees.
Building a Dedicated Tech Team
The most cost-effective and safe option for tech companies is outsourcing BPO services to Mexico. By opting for an all-in-one-place solution, you’ll be able to hire Mexican developers in your own tech team, maintaining full control over software development and expenses. An experienced IT recruitment company will also cover back-office functions for you, including accounting, payroll management, and all legal compliance, etc.
This is what the US-based company Sift opted for when they were expanding abroad. Sift had an ambitious goal to build a team of 30+ developers. The company assumed they could face a time-consuming IT recruitment if performing it on their own. Thus, the company reached out to Alcor, and was amazed with the results! It took us only 1 year to provide our client with a fully backed team of 30 programmers. By applying the best practices in recruiting software developers, we managed to close many positions from the second CV! Our IT recruiters worked on vacancies, ideal candidate profile and appealing EVP to attract only well-versed candidates. Alcor’s account managers and lawyers also took care of the legal and payroll aspects to make Sift’s business fully compliant with local labor & contract laws.
In case you’d like to assemble your own tech team, Alcor is at your service! We need only 3-6 weeks to close one position, while 98% of all candidates successfully pass the probation period. Our team will also be glad to cover other BPO functions on your request.
Mexico is a rapidly growing nearshoring destination that has much to offer: skilled yet affordable IT workforce, developed tech infrastructure, good conditions for doing business, and, most importantly, geographical proximity to the USA. Still, Mexican IT outsourcing can be quite challenging due to some peculiarities of the local labor law. To avoid possible legal complications, it’s better to build your own tech team in Mexico with the help of a reliable IT recruitment company that possesses deep expertise in the local market.
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