Over a year ago, southern California-based UST Global revealed plans to open a new delivery center in Costa Rica, capping a furious series of announcements by global services’ players to capitalize on what was at the time the hottest of Latin America outsourcing destinations. What a difference a year makes.
Costa Rica is no longer ‘red hot’, and UST Global has failed so far to live up to its projections of hiring hundreds of IT workers to fill a center slated for Grecia, Costa Rica – on the outskirts of the San Jose metropolitan area. In fact, instead of hundreds, UST Global has just four employees working in Costa Rica (as of early March), and they are operating out of rented space at a Regus co-worker location in Escazu, which is nearly an hour away from a center it has conceived to establish northwest of the capital, San Jose.
But taking an alternative route into Costa Rica is partly reflective of the DNA of UST Global, and should not surprise those who have watched the company evolve over the years, according to Manu Gopinath, Global Head of Human Resources at UST Global, who spoke to Nearshore Americas this week. “We believe there is business potential (in Costa Rica),” Gopinath says. “It all depends on how much business we can get, and how quickly we can get the volume.”
Doing Things Differently
UST Global is clearly taking the path less traveled – one that very few global IT players are willing to take: Land in a country (in this case, apparently without a solid commitment from a major client partner), make sure global customers are aware of the new presence, and meanwhile look to cultivate local commercial and government business opportunities. The strategy may sound a bit like a ‘build it and they will come’ approach, but actually UST Global hasn’t fully committed to building a physical structure quite yet, according to Douglas Sanchez, the country manager for UST’s Costa Rica operation, who previously served as Manager for the Services Sector at CINDE, the lead investment promotion agency for Costa Rica. “We’re still in negotiation with the developers and working on paperwork for the building permits,” Sanchez said, during an interview earlier this month.
The decision to locate in Grecia, a solid 45 minutes to one hour drive from central San Jose, was another unusual move. Sanchez argues that attrition is likely to be lower in Grecia and that many IT professionals from the Grecia area would prefer to work locally, instead of commuting into San Jose.
While at CINDE, Sachez witnessed the arrival of many multinational IT and shared services companies who established centers throughout the Central Valley of Costa Rica, but virtually all of them have one common goal: use Costa Rica as a center to export services to other countries. What UST Global is doing is distinctly different, he explains. “Multinationals come here, take advantage of the free-trade-zone regime and export services. They are not interested in the local market,” says Sanchez. “We are totally different.”
The Tier-2 Approach
In a press release issued in February, 2014 UST Global stressed its desire to focus on “Tier 2 cities, where the Governments are trying hard to attract investors and establish knowledge industries like IT services.” Along that line, the company’s Mexico strategy reflects a ‘Tier 2’ approach through the establishment of its Leon, Mexico facility, which has emerged from a venture between UST Global and former President Vicente Fox. The center was created in 2012 and was projected in the first report in Nearshore Americas to have as many as 750 employees at the end of that year, and then last year the hope – stated again in this press release – was to reach 1,000 employees in Leon.
According to Gopinath, the total headcount in Mexico (including Leon and a sales office in Mexico City) is between 500 and 600, well short of the goal to reach 1,000.
A centerpiece of the Costa Rica strategy is to provide services to the Government – including projects oriented toward ‘Smarter Cities’, which can including applying analytics to yield smarter use of energy, utilities and other resources. “It’s about innovation and helping the government tap into these new technologies,” says Sanchez. Additionally, there is a huge opportunity to expand mobility services within the municipalities, which often struggle with limited support from the central government. In fact, Fox came to Costa Rica last summer to promote the virtues of Smart Cities, and in essence wave the banner of UST Global in the process.
Time Will Tell
Whether the Costa Rica government has the sufficient appetite to capitalize on tools to modernize systems, including the way in which it handles and collects taxes and manages social security for its citizens, is obviously a significant question that so far has not been made clear. According to the Heritage Foundation, Costa Rica’s fiscal and structural reforms to liberalize its economy are “long overdue.”
With Costa Rica among the most expensive places in all of Latin America to operate outsourcing centers, UST Global faces a complex challenge to both secure strong enough contracts from new customers, including the government, and then executing them efficiently enough to produce a profit. Gopinath acknowledged the challenging cost of doing business in Costa Rica, noting: “Cost is always a key factor for most customers…that’s not the only determinant, as some companies are willing to pay for quality and service.”
Until UST Global lands solid business and drives pillars in the ground to build a center in Grecia, its Costa Rica exploration will continue to resemble a gamble, and like many gamblers it may pay off big or not at all. Only time will provide the real answer.