Fierce Debate Over Prospect of Higher Prices for Digital Expertise

As we enter an era of unprecedented digital transformation, companies are frantically seeking to update their technology systems, introduce cloud infrastructure and implement strategic outsourcing. More than a third of US and UK companies not currently outsourcing IT and development are considering doing so in response to the Covid-19 pandemic, according to new research from LiveArea, the global commerce services provider.

Increased demand for Nearshore engineers is in many cases leading to increased wages. That could mean Nearshore clients will soon have to pay more for outsourcing. But as Nearshore Americas discovered during interviews with four top-level CEO’s operating in the region, the question of cost – what changes to expect and when they will happen – is a matter of fierce debate in the industry.

Pablo Velasquez: Expect Big Price Increases

Atlanticsoft Inc is an IT outsourcing firm with a software house in Armenia, Colombia. Its CEO, Pablo Velasquez, said that Covid-19 was already having a transformative impact on the economics of IT outsourcing.

“We saw things stop for two months,” Velasquez said. “There was no hiring, and no one knew what was going to happen. But over the last month things have picked up. We have seen money coming in… and we have seen US firms looking for talent.”

With work-from-home arrangements normalized across the Americas, the barriers to employing talent abroad have suddenly been removed. Velasquez said that translates to increased competition for Colombian talent, with US firms typically offering higher wages. However, he added that these trends were already evident, and the pandemic has only accelerated their motion.

“In Colombia we have a shortage of 60,000 engineers, and by 2025 we are going to have a shortage of 200,000,” Velasquez said. “So, we were going to see wage increases anyway. It is hard to put numbers and a time frame on it, but I might see salaries doubling in the next two years.”

Velasquez said these wage hikes would inevitably lead to price increases for clients. In fact, he said that change was already happening in Colombia.

“I have already told my clients that we need to raise what they are paying. Basically, I am telling them: ‘give me more money… I need to pay the developers to keep them with you.’”

Velasquez said the increased pace of digital transformation had created major opportunities for Nearshore operators and developers.

“This is the industry that could [start] the next revolution for South America. It could replace oil,” the CEO said. “It brings big challenges, but if governments know what to do, we could benefit a lot from software development in the coming years.”

Carlos Limeres: Nearshore Operators Need to Specialize to Survive

LabsXD is a technology service company headquartered in Argentina but with offices in Spain, Mexico and across South America. Its founder and CEO, Carlos Limeres, told Nearshore Americas that the pandemic had increased demand for software engineers across Latin America.

“We have to [work harder] to retain our professionals against US and European demand… It was a challenge before Covid-19 and it remains a challenge,” Limeres said. “We have increased salaries four times this year in Argentina. We pay above the market rate. But if someone from the United States wants to hire from one of our locations, the challenge is greater.”

Despite wage hikes and increased overall demand, Limeres said many clients now expect to pay less for IT services. However, as LabsXD specializes in salesforce technology – a customer data technology combining cloud computing and customer relationship management – the company can maintain premium rates.

For future projects, Limeres warned that Nearshore operators would have to increasingly focus on niche, premium services.

“If you don’t specialize you are going to be competing with India at very low rates,” he said. “If you are a commodity you cannot raise your rate. But your salaries are increasing so the margin keeps lowering.”

To retain their employees, Limeres said LabsXD is focused on offering a culture of professional growth. To build a long-term relationship with engineers, the company invests heavily in training. Limeres added that rising demand has mitigated the outgoing costs for the firm. “We are working on more projects and bigger projects… so we can maintain the wage increases.”

Bismarck Lepe: No Change in Costs for Premium Services

Wizeline is a software and product delivery company with offices in Nearshore tech hubs such as Mexico City, Guadalajara and Queretaro. Bismarck Lepe, the president and CEO of the company, said the Covid-19 pandemic was driving increased interest in the Nearshore region. However, he did not forecast significant price increases in the region’s most established tech hubs.

“I would say that [prices] are probably not going up as much in Mexico as they will in other markets because there are great options for fantastic talent to be able to move to the United States to work at these high paying companies,” Lepe said.

Instead, Lepe expects greater pressure on newer markets such as Guatemala or El Salvador. “No one has looked at them before, and now they are looking at them,” Lepe said. “Demand is going to increase pretty significantly.”

However, Lepe said that prominent providers such as Wizeline were already used to competing with the United States for talent. “We are not expecting a significant increase in pressure… Wizeline has a very strict hiring process. We pay way above average and the people we are hiring are the people who potentially would have gone to the United States,” Lepe said.

According to Lepe, price increases becomes less likely as you move further up the value chain.

“Anything that has to do with digital applications, fake data, machine learning. Those types of salaries are universal. People are already paying a pretty significant premium and they are not going up from where they are already.”

Mario Chaves: Economic Factors to Prevent Price Increases

Mario Chaves, the CEO of the Nearshore provider Avantica, does not believes that outsourcing prices are set to increase steeply in the near future, as the current economic crisis should slow wage inflation. “There are companies that are not going to be able to hold on to their engineers because they don’t have projects,” Chaves said. “Their bench is too high, and they’ll be laying off. So that will actually create an effect on the market of lowering or maintaining prices.”

In fact, Chaves believes that Covid-19 has had a negative overall impact on the situation for software engineers.

“If you have a job and you are being sought after by another company, you can demand [an increase],” Chaves said. “In today’s market, if you’re looking for a job, you can’t demand that because the market doesn’t bear it out.”

However, Chaves painted a positive picture of prospects in the Nearshore region. He stressed that looking beyond established tech hubs would be a great idea for long-term providers.

“If I were looking for where am I going to create my new center I certainly wouldn’t look at Guadalajara… I would look at another city where competition is not quite as stiff,” Chaves said. “If you have not done it before I would not recommend that anybody [build] a local presence in Costa Rica… You are just going to be beating each other out for the talent.”

Instead Chaves urged operators to find untapped resources in lesser-known locations, where salaries would be lower and competition less of a factor.

“Take a look at some of the emerging cities,” Chaves said, pointing to Avantica’s offices in the Peruvian capital Lima, the Bolivian city of Cochabamba and Cali, in southwestern Colombia.

“We are trying to shift away from highly competitive locations,” Chaves said. “If you’re in it for the long term I’d rather invest… and build a brand-new team someplace where I can have the advantages for the long term. That’s been our view and that has worked out really well.”