Until recently, the IT Services industry has been dominated mostly by large companies leveraging their presence in mass-scale geographies such as China and India and servicing equally large clients in the US and Europe.
Today, a silent shift toward “democratization” of IT Services Industry is underway. This trend reflects an increasingly wider variety of service providers – large and small – that offer a growing range of affordable IT services and solutions to small and mid-size companies from nearshore destinations.
Liberation of an Industry
The IT Services Industry was pioneered by organizations such as IBM, EDS and CSC. The business models, used by these companies, were centered on providing their clients a full range of outsourcing solutions, from application support to infrastructure monitoring. For example, leveraging outsourced solutions, large household clients such as American Express have achieved mass reduction in headcount with a corresponding magnitude of cost savings. In addition, the suppliers liberated their clients from fiscal responsibility for assets such as servers, storage and network devices and desktops. This condition alone provided millions in annual savings.
Key factors which need to be considered are business, technical, personnel and strategic initiatives of clients when looking at establishing an offshore or a nearshore model.
Where Costa Rica Fits In
The model described above has proven so successful that whole countries began making intentional improvements to their infrastructure and business climate to encourage the development of the IT Services industry by attracting global players as well as nurturing local providers. Costa Rica is undoubtedly among the leaders of this trend. The country that won the groundbreaking deal to house Intel manufacturing and support facility in the late 1990s certainly has the infrastructure, resource pool, competitive advantages over developed offshore markets and success stories to sustain and grow its position as a major player in the global IT economy. Many believe the time has come for companies to pay closer attention to Costa Rica when examining their supplier support.
Costa Rica has been a stable democratic country for almost 200 years. It has a three-branch Government system consisting of the strictly independent Legislative, Executive and Judicial powers. The country has a four-year term for Presidency and MPs with reelection possibility. San Jose, the nation’s capital, ranks in the top ten Latin America cities for business and is considered the Beverly Hills of Central America due to its sophistication and social outlets.
The physical infrastructure of Costa Rica ranks on par with the top countries in the world. In fact, according to the World Economic Forum, Costa Rica scored higher in the quality of electric supply than China, Brazil, Mexico, and India. With redundant fiber optic cables, satellite and terrestrial microwave networks and mobile devices, the technical reliability is exceptional.
There are several industrial parks in place or under construction to support the influx of companies moving into the region. The benefits of these parks include Government-backed tax incentives as well as first-class support for business requirements and employee needs in areas such as public transportation and healthcare services.
Education Leads the Way
While many emerging markets are trying to position themselves to include differentiators such as a highly educated workforce, Costa Rica has long been among the leaders. In this Spanish-speaking country, English instruction begins in elementary school, and a large percentage of citizens are fluent in English. There are five major public universities in Costa Rica, along with over 50 private ones, for a population of 4.65 million. Technical and IT education is strong and widespread. In addition, it is part of the local culture and it’s common for individuals to pursue multiple degrees in science, technology and business or engage in ongoing non-degree training throughout their careers. With the adult literacy at 96.9%, Costa Rica’s educational system is ranked 22nd in the world and highest in Latin America.
Hear what Costa Rica President Laura Chinchilla has to say about Costa Rica’s IT Economy in this NSAM Video Interview
Some concerns exist regarding the nearshore environment such as the maturity of the workforce and/or limited resource pool. Costa Rica is attractive to North America companies due to its time zone, language, cultural and business alignment, high-quality resources, travel cost containment, and low attrition rate. All of this makes the total cost of ownership more suitable than even that of major Indian firms.
In Costa Rica, business acumen can be seen through the cultural alignment of local resources with North America’s business practices and culture. The business values, processes and structure successfully emulate the developed regions of the world. The business and technical certifications such as PMP, Six Sigma, ITIL and others are widely available and sought after by local professionals.
The ease of traveling to your supplier’s technical center must also be considered when evaluating nearshore support. Have you ever had to take a business trip which requires you to spend 24 hours of total travel time to reach your destination? How about needing to take connecting flights just to reach the location your supplier has chosen to set up their support operation? Both of these scenarios are fully eliminated by connecting with a service provider in Central America. Costa Rica is just a few hours of flight time from a variety of North American hubs and provides many direct flights to numerous other important destinations around the globe.
While the total cost for most IT skill sets in Costa Rica is 30% – 50% lower than that in North America and 20% higher than the cost in developed offshore markets such as India, businesses must consider the total cost of ownership.
Included in the total cost of an outsourced or co-sourced service is the annual attrition rate. On average, it takes four to six weeks to fully staff a small team of skilled IT professionals in an emerging market and up to 12 weeks before the team is fully functional (which includes knowledge transfer from the client’s staff). The attrition rate in developed offshore markets is near or above 30% annually, whereas the rates in an emerging market such as Costa Rica are below 8% for the same skill sets.
Finally, although Costa Rica is considered an emerging outsourcing market, the success stories are plentiful. Besides Intel, companies such as Hewlett Packard, Baxter, Wal-Mart, IBM and many others have established nearshore operations in the San Jose metropolitan area. The services performed from this vibrant market include Shared Services / Back Office, Contact Centers, Software Development, Engineering and Design, Infrastructure Engineering and Support.
In 2012, the global IT Services economy will continue to move forward with the increased inclusion of countries such as Costa Rica. A major reason could be the fact that the Fortune 1000 companies will look to bring work closer to North America, as more clients are looking for nearshore strategies to support their cost saving goals.
In addition, the market shift is causing the supplier base to pull together strategies to target the small and midsize business sector. With many big deals already decided, the major IT Services providers will be competing for smaller deals, examining the market for new revenue streams from midsize companies who may be seeking operation cost savings. For these midsize clients, nearshore is arguably a more comfortable destination that makes the idea of outsourcing much more palatable and less risky, compared to sending work to India or China.
Thus, as the major forces of the global economy – the US, China, Japan, Germany, the United Kingdom and others – continue down the path of looking for alternative quality IT Service providers, Costa Rica will figure strongly as the emerging market and a trend setter in the global IT services economy.
Mark McLoud, Executive Vice President, Partner Intertec International has 20 years of Professional Services and Outsourcing experience. McLoud’s technical background, strong financial acumen and consultative approach have been beneficial to his Fortune 100 customer list. His experience includes developing markets throughout North America, Europe and Central America.
Jagdish Dalal is Founder and President of JDalal Associates LLC (JDA) and Managing Director, Thought Leadership for IAOP and a world-renowned consultant in the field of outsourcing. He brings over three decades of senior executive leadership experience at Fortune 100 companies and PricewaterhouseCoopers. JDA specializes in outsourcing consulting around strategies, transition management and governance; including risk management. Dalal is a noted author and presenter and has earned recognition for thought leadership in the field of IT management and outsourcing. He is a Certified Outsourcing Professional (COP®).