Despite a wobbly global recovery, Mexico’s economy has shown remarkable resilience, growing faster than its arch-rival and fellow Latin America heavyweight Brazil. This has implications for IT outsourcers who keep a close eye on macro-economic factors such as inflation, currency valuation and labor costs.
“Inflation is still fairly high,” says Joseph Hogue, an emerging market financial analyst who provides investment research via his firm, Efficient Alpha. “At around 4.5 percent, it is higher than the Central Bank’s forecast target, which was 4 percent at the upper range.”
Specifically, June inflation came in at 4.34 percent, the highest it’s been since 2010. Despite the fact that Mexico has one of the world’s most conservative monetary policies, Hogue and other experts say it is unlikely to hike rates significantly to bring down inflation and boost the currency.
“I don’t foresee any big moves,” says Hogue. “The Mexican peso is an extremely stable currency, and the country has a solid reserve account.”
That allows for longer-term visibility for outsourcing companies. But they are not without their worries.
“We increase our billing to match inflation,” says Stéphane Jacquin, sales director for Asisteo IT Outsourcing in Mexico City, which specializes in network, backup and email solutions. “Labor costs are acceptable and steady, but what worries us more is the exchange rate between the Mexican peso and the U.S. dollar.”
Specific to Asisteo, currency stability is a plus because the company purchases Microsoft products in U.S. dollars. That consistency has helped it to manage some pretty impressive growth rates. In a year-earlier comparison, the company grew 88 percent this month.
For the outsourcing industry as a whole, Mexico’s firm monetary policy will ideally put the industry on course to focus on higher-value projects, though traditional IT outsourcing is expected to remain the bread-and-butter of outsourcing revenues.
Mexico’s Upward Outsourcing Movement
“Some large clients in Mexico have been exploring business process outsourcing (BPO) solutions,” says Paul Reynolds, chief research officer, TPI Momentum, which is part of Information Services Group (ISG). “But often they struggle to find a compelling business case to do so.”
Reynolds says that Mexico had more outsourcing service delivery centers open in 2011 than any other Latin American country. Other IT research firms, such as International Data Corp (IDC), confirm that optimism.
“In Mexico, the outsourcing market for hosting, managed services and co-location is strong,” says Alejandra Mendoza, research and consulting manager for the Enterprise and Telecommunications Markets at IDC in Mexico City. “These are domestic trends, but of course some companies are also trying to move their services from the U.S.”
As capabilities increase among Mexican providers, Mendoza says they will be able to offer more hybrid solutions that address both local and international demand.
“Infrastructure-as-a-service (IaaS) is now in highest demand to address server and storage capacity,” says Mendoza. “But the move to cloud computing will see more ERP solutions delivered by IT companies like Oracle, as well as more vertically-oriented outsourcing solutions in education, healthcare and government.”
Mendoza expects Mexico to put in place more international delivery centers for application management and software development. Multi-national IT services firms would mostly run these, with an eye to the U.S. market.
“The U.S. market is still the largest revenue generator for them, and they are growing nicely and steadily.”
Given the slow pace of the U.S. recovery, that might seem strange, but the economic conditions are nonetheless much better than they were directly after the global crisis in 2008.
“Outsourcing activity in Latin America rebounded in 2011 after a steep downward spiral that began in 2009,” says Reynolds from ISG. “The region had aggregate outsourcing spending of $734 million in 2011, up 26 percent, with Brazil and Mexico accounting for more than 90 percent of the total market.”
ISG is bullish on smaller Latin American markets like Colombia, Chile and even Uruguay and Guatemala. Brazil still has the biggest spend, but only modest growth. One bright spot is increased BPO interest in Brazil. Still, Mexico appears to be stealing the limelight in the near term.
As U.S. Goes, So Goes Mexico
“Last year, Mexico outperformed Brazil because the U.S. has stabilized – and even grown,” says Hogue from Efficient Alpha. “Mexico is much more related to the U.S., and manufacturing has rebounded nicely.”
That said, macro-economic storm clouds still loom over Mexico’s outsourcing industry, given a European economy that is limping from one crisis to the next and a lukewarm U.S. recovery. About 80 percent of Mexico’s exports go to the U.S.; another downturn could be painful.
For now, however, it is Mexico’s economic resilience and stability that is making the headlines – and rightly so. A recent report from Grupo Financiero Banamex, which surveyed 21 financial institutions, pegged GDP growth expectations at 3.69 percent for this year, with a modest slowdown to 3.3 percent in 2013.
“Outsourcing spending by Mexican companies reached an all-time high in 2011, with service delivery capacity in Mexico continuing to expand,” says Reynolds. “It is still growing in popularity as a nearshore destination for U.S. clients.”