While popularity and demand are good for any market, people are essential to sustain growth, and without a sufficient talent pool to draw from Nearshore clients end up paying for it when vendor costs inevitably rise.
In recent years, Colombia’s IT services sector has quickly garnered a reputation in the US for its high-performance development teams, world-class best practices, and top-notch quality, all factors that have been attracting major IT players and services clients alike, which in turn has been driving up costs.
“The last three years were really intense, with lots of large companies coming in and hiring hundreds of engineers,” said Diego Caicedo, CEO of Portal Finance, a nearshore tech company operating in the financial sector. “When one company comes in it causes ripples, but when ten come in that’s a tidal wave. Companies had to increase their salary base, start protecting their employees, and add non-economic compensation in order to stay in the game.”
High Demand, Higher Wages
The demand for information technology professionals in Colombia far exceeds supply, with analysts expecting the talent shortage to reach 70,000 by 2019. As a result, salaries have increased between 20% and 30% as companies clamor to find enough people, but with 95% of engineers in Colombia already being employed, that task is made even more difficult.
Colombia’s cost ratio has become less attractive as salaries have risen due to the country’s exorbitantly high employee tax and social costs.
“The Colombian tax system has made it increasingly more expensive to hire and retain talent,” said Caicedo. “This is because of the cost associated with healthcare and social security expenses, so any employee you look at will cost 40-50% more in taxes and social security, which, without doubt, generates a more costly solution than you have in other markets – for instance, Chile is around 28-31% and Mexico is similar.”
Furthermore, the cost of firing an employee is high in Colombia because of a legal system that is highly biased toward the employee. These costs and taxes are being included in service prices, which are then marked up before being passed on to the client – the unavoidable reality of a popular market.
Steep Wages and Additional Costs
According to “IT Wages in South America”, a Nearshore Americas study, companies also have to consider total cost of employment, which encompasses a “loaded wage” including vacation, paid holiday leave, severance pay, and bonuses, and can add anywhere from 40% to 100% to the cost of employing an IT professional.
For Colombia, specifically Bogota, the additional cost of IT employees equated to an average of 54% of their wages in 2016, according to the report. In comparison, companies in Buenos Aires, Lima, and Sao Paulo reported a 44%, 58%, and 82% average additional cost, respectively. Uruguay is reportedly slightly different.
“In terms of salaries, we pay on average 10-15% less in Colombia than we do in Uruguay, but this has been increasing over time due to demand as more companies arrive,” said Marcelo Martinez, Country Manager for Colombia at UruIT. “In terms of sales, in some cases we sell at the same rate as in Uruguay, but for others we are offering some discounts, maybe 20% lower. My perception is that rates are a little bit lower that Uruguay, probably around 10%.”
Despite not having the highest rate of additional cost, front-end developers in Bogota claim US$44,276 per year, while the same role in Sao Paulo and Buenos Aires pays around US$25,800 and US$25,500, respectively, confirming that Colombia offers significantly higher salaries than its regional counterparts.
When these two factors are combined, the total cost of a front-end developer in Bogota comes to just under US$70,000, with Sao Paulo the next highest at US$50,000. This is a sharp contrast against the region’s northern markets, where wages for this role are much more aligned – Guadalajara, Mexico City, Monterrey, and San Jose all come within 6% of US$21,035 per year.
There are brighter sides, though: if you look outside of Bogota there is a salary gap of around 30%, which plays well for companies that aren’t necessarily in the capital, but the higher concentration of English-speaking engineers in the capital makes it more attractive.
Generating Talent to Sustain Growth
Whatever the cost burden that vendors face, entry-level salaries for programmers are still 60% lower than the equivalent in the U.S., where a Tier 1 employee might cost US$150,000. Even so, prices in Colombia used to be a lot less, according to Caicedo, and the stiff competition has resulted in companies asking for people’s pay grades, and offering to double their salaries, meaning that engineers are being poached.
On the flip side, this gives a clear incentive for new developers to enter the industry, or for existing developers to become better at what they do – competition is ultimately better for developing a stronger talent pool, something that the country desperately needs to do in order to sustain its growth.
One initiative currently in action is that the sector’s local players and the government are explaining to students that the IT sector is where the jobs are. The program, called “IT Talent”, aims to reduce the deficit prediction to 35,000 engineers this year. Between 2010 and 2014, the Ministry of Technology spent US$153 million on this program, but will spend another US$30 million before the end of 2018.
Colombia is also offering 80% of the training cost for people pursuing a career in information technology. According to the ICT Ministry, 9,400 students signed up for this program last year.
Furthermore, over the past two years, the country has trained more than 6,000 people under its ambitious program known as “Plan Vive Digital”, which is slated to last until the end of this year.
At the end of the day, if the Colombian IT industry and government can create a sustainable and scalable pool of talent, it’s unlikely that salary costs will begin to drop as the bar has already been set. Now that the tidal wave of new companies seems to be tapering off, it’s far more plausible that prices will remain at a stable level as more people are created for the industry.