IT Consulting: Forget About India

"We can outsource software support and development to our Monterrey, Mexico, solution center, which is an hour flight from Dallas," said Neoris CEO Claudio Muruzabal. "Although it's not the same language, culturally a software developer out of Monterrey is closer to the U.S. than someone in the Far East. If the customer has a need for face-to-face interaction, it's an hour or two away rather than having to fly 40 hours to India, the Philippines or China."

That message seems to be resonating with U.S. customers. Neoris, whose majority owner is Mexican cement producer CEMEX, was founded in 2000 and has tripled in size over the past 24 months to reach $250 million in annual revenue in 2006, Muruzabal said.

Fueling much of that growth is a nearshoring business model that leverages solution and development centers in Mexico and Argentina to serve the North America market.

"The U.S. is clearly the market that is moving fastest in taking advantage of nearshore opportunities as an option to India," Muruzabal said.

He said market forces now make nearshoring using Latin American resources a more cost-effective option for the U.S. Fortune 500—Neoris's target market. He said the attractiveness of Indian outsourcing is fading because the boom of recent years has led to a scarcity of talent and a resulting increase in labor costs. As a result, labor costs in Latin America now compare favorably with those in the Far East, he said.

"And when you build into the equation proximity, we are almost on a par with India, and that's the model we have been taking advantage of that has allowed us to grow to this level," Muruzabal said.

Rich Matlus, vice president of research at Gartner, agreed that North American companies could use nearshoring technical resources to "beat or match costs in India, and the quality is good."

Matlus said that many U.S. companies believe the costs for India-based services is 30 cents on the dollar. "Actually, the costs are 60 cents on the dollar," he said.

He added that companies typically spend an additional 5 percent to 7 percent to manage an outsourcing contract in the U.S. "But the costs to manage an outsourcing deal with India is 20 percent to 25 percent," he said. "When you add the 60 percent to that, that ups the cost to 85 percent."

More importantly, Matlus said, there is a growing backlash against Indian help-desk support because of the language barriers.

Neoris currently has four solution centers employing about 1,000 engineers in Mexico and Argentina. The centers are networked together so that the four facilities operate as a single unit.

Muruzabal said Neoris feeds its solution centers with engineering talent from local universities in Argentina and Mexico. And he says Neoris likely will expand in the near future into Chile and Brazil.

While Muruzabal said finding qualified talent is the No. 1 problem in the IT industry, Neoris has managed to dodge the issue by developing close relationships with Latin American universities. In Mexico, for example, the company has just co-located a facility at a local university and gets direct access to engineering graduates.

"India has [labor] turnover rates of 25 percent annually, and we are at less than 5 percent," Muruzabal said.

The cost of labor in Latin America gives him a significant advantage over large U.S. consulting companies and keeps him competitive against India-based IT consultants going after the North American market, Muruzabal said.

"When you look at the U.S. market, we deal with Big Five consulting firms that have delivery capabilities in the Far East and Indian companies that try to sell services in the U.S. and do as much as possible in India," he said. "Then you have a model like ourselves. We don't have territorial issues."

He said Neoris assigns a managing director to be in front of the customer in the United States and one is assigned to the account at the solution center. He noted that customers often have difficulty defining in very specific terms the exact specs for specific projects, and they often need an on-site connection.

"Some companies are used to getting involved in every step of the process and those [traits] are very typical of U.S. clients, then the nearshoring model becomes a very attractive alternative," he said.