Is Costa Rica Heading for Saturation?

Long viewed as the top nearshore destination in the Americas, Costa Rica remains as attractive as ever, according to companies active there, but it will have to stay competitive to ward off competition from other countries such as Colombia and Mexico.

Outsourcing companies continue to set up shop in Costa Rica, with Canadian customer service outsourcing company Bill Gosling the latest to announce a call center opening in the country for later this year, while businesses already present in the country have recently expanded their operations there, such as cloud and digital services company Akamai, tech firm Neustar, Swiss biotech company Roche and IBM.

The country’s advantages as a hub are obvious and numerous: proximity to the US and its time zones, literary in English and educational standards that are higher than average for the region, good quality infrastructure and quality of life, and economic and political stability, and which outweigh the higher than average costs for the region, particularly for real estate.

Costa Rica has also incentivized foreign investment and the creation of companies in the country, with tax breaks, the creation of free trade zones (FTZs), known as ‘Zonas Francas’, and regulatory changes to expedite the incorporation of companies and reduce red tape.

The number of companies installed in the country’s free trade zones has increased by an average 6% over the last few years and the outsourcing sector now represents 52% of the total companies operating in the zones, according to Adelina Villalobos, a partner at law firm BLP in San José.

Salaries among the outsourcing companies located in the FTZs are 1.8% higher than in other sectors, while average salaries in the country are higher than in other Latin American countries, she says.

‘Costa Rica is not always the right answer’

However, the country’s popularity as a BPO, outsourcing and software development destination could lead to a saturation, Villalobos told Nearshore Americas.

“One of the points for concern is talent, because in some areas of expertise the skills that companies demand are not being developed,” she said. “But there are both public and private initiatives to align talent with demand.”

The country announced plans last year to make English language-learning a national priority and improve English proficiency among students.

“As a small country, not all skills are readily available, and so it depends what you want to do. Costa Rica is not always the right answer,” Raul Vega, president and CEO at US-based IT outsourcing and consultancy company Auxis, told Nearshore Americas.

“Where it has become a little over-saturated is in the captive center market, where large multinationals are going in and trying to put in their back office.”

Auxis has operated a global delivery center in Costa Rica since 2009.

“I counsel my clients that they have to be careful, if you’re going to Costa Rica today as a captive operation, how are you going to differentiate yourself? It’s very hard to have a growth pattern for your employees, and you run the risk that someone else is coming in as the new girl at the dance and everybody is going to leave,” he said.

“That’s a real issue. The reason we’ve had success is that we’re always bringing in new clients, with some 40 companies that we’re supporting, and I can provide a lot of different career pathing compared to a standard captive service center. But each company’s models are different.”

The other issue in Costa Rica is that everybody is concentrated in Heredia province, he said, and there are other opportunities in other parts of the country that have not yet really been explored.

“If you can expand your reach, there is room,” Vega said.

One of those regions is Guanacaste, which has seen an influx of technology companies in recent years, such as Ad Astra Rocket, an American rocket propulsion company, Continum Data Center and even Nimiq, a blockchain developer.

“I don’t think Costa Rica has an issue in general with talent, for our business at least, although we also leverage resources in other countries that work with our Costa Rica team, which is in a leadership role, but for specialized skillsets we leverage partners in Colombia, Mexico and Argentina.”

In comparison with its neighbors, Costa Rica is also a more expensive country to operate and live in, but the factors making the country attractive as an outsource destination outweigh that, according to Villalobos at BLP Legal.

And the driver for most multinationals is not the tax breaks or the costs, but stability, proximity, labor costs, Auxis’ Vega said.

“It’s never going to be the cheapest, but if you’re looking for the lowest costs you go to India or the Philippines,” he said.

“And the cost of living in the country does not translate to the wages, so you could save a little bit by going into Colombia or Mexico, but it’s not as significant as what you would perceive as a visitor to Costa Rica. But it needs to stay competitive as a wage market, because the multinationals will leave, as they are looking at cost savings compared to the US.”

And in terms of the size of the talent pool, the issue is not at the lower levels, but at the mid-management level, Vega said.

“You can get lower level people and train them, but you can’t just grow mid-managers, and that’s where some companies are hitting a wall as so many have moved there looking for that talent profile.”

RPA: The game changer?

He also says there is a lot of growth in robotics process automation (RPA) in Costa Rica, and that will prove a game changer. Auxis has already created an RPA center of excellence there.

“With all the shared service centers there, what is going to happen when RPA is really implemented there? Not everybody is going to be able to reposition themselves into an RPA-type world, and I think that’s going to loosen the labor market there.”

“It’s already happening, and it’s going to be very interesting over the next couple of years,” Vega said.

Any any perceived talent constraint or higher costs are not appearing to dampen enthusiasm for Costa Rica.

“Costa Rica is unbeatable in terms of quality, and when you’re elevating nearshore it’s not about a different cost but about a talent pool, where we can continue to focus on talent,” according to Mario Merino, managing director for nearshore at software developer Gorilla Logic, which has been delivering nearshore from Costa Rica since 1999.

And as well as the importance of talent, he also highlights the importance of retaining it.

“We are able to attract the top talent by creating a great culture for engineers to be a part of, and that is by virtue of the clients we attract, which are innovating, not only in products but the way they deliver those products,” he said.

He said Costa Rica has exceeded the company’s expectations since it set up shop there.

“As we’ve evolved and are nearing 500 people in Costa Rica in five years, we have been able to become a destination for developers seeking a sophisticated company providing sophisticated products.”

And he said that is down to Gorilla Logic seeking talent and not lower costs, and having arrived in Costa Rica as a functioning company that had established its quality and with a book of clients.

“So the transition to delivering nearshore services was a matter of incentivizing our clients to try nearshore, and what they found from us and from Costa Rica was a very talented and sophisticated group of people delivering unparalleled value,” he told Nearshore Americas.

“We focus on talent wherever we are. It’s about talent, where we can continue to focus on talent. We are chasing the most elevated value for nearshore, and that’s what we’ve done.”