Common mistakes that companies make when opening a business in Mexico.

header image of blog regarding Common mistakes that IT companies make when opening a business in Mexico.
  1. Learning Curve
  2. Local Compliance
  3. Unnecessary Costs
  4. Industry specialization

Now in a post-pandemic business environment with a mostly work-from-home workforce, companies in North America began opening a business in Mexico and Canada to extend their Talent Pool and take advantage of lower costs.

With travel times and costs similar to other US Cities, is a no-brainer that the IT Industry quickly added this as a common practice.

But why do large and small IT companies still continue to make mistakes when they open a nearshore operation in Mexico? it should be straightforward, right?

The impact of these mistakes goes from long delays, large penalizations, unnecessary costs, and working with the enemy. These can be avoided, but what are the most common?

1. Learning Curve

Not enough research

Yes, you should expect a learning curve but why make it longer by not doing some proper homework on local trends, safe landing programs, and what the competition is doing.

Small effort as its starts really small

Companies tend to minimize the team that will support it because they are only hiring one or a small team and assign it to a junior level who treats it the same as his current projects/vendors.

No learning is captured as key decision makers are not involved, the opportunities to test assumptions in the regions are lost, and possible junior decisions might create penalizations down the road.

Taking unnecessary shortcuts

If you don’t hire only one person in your country to make all the strategic decisions and act on all of them, why do it in a new country? Doing this adds the personal learning curve to your business learning curve, plus the added risks that the initial decisions will hurt you later as it will take time and money to correct.

Expanding internationally for the wrong reasons

It has happened that companies have opened or a opening a business in Mexico and operations in Latin American countries that offered fiscal incentives, only to find that the size of the talent pool is so small (Costa Rica) or the bilingual population in the hospitality industry and not in IT (Dominican Republic).

2. Local Compliance

Neglecting the government

Latin American bureaucracy is famous and always changing, Mexico is not the exception with its own legal regulatory environment. When opening a business in Mexico might start small, but you will need specialized assistance to be up-to-date to avoid penalizations and will need specialized assistance, local companies use them to minimize risk.

The added bonus of hiring specialized assistance early on is that you will know about how to use trade agreement benefits like the USMCA, so you can include them as a competitive advantage in your expansion plan.

Different rules

Don’t’ assume that the rules from home are similar. For example, when hiring in Mexico, if you hire a contractor and the tax authority finds that the contractor hasn’t paid taxes in years, your company is also responsible. Some contractors might want to avoid paying a high percentage of taxes when receiving payments from abroad (the tax is larger than getting paid in Mexico as a contractor) and hope that the tax authority won’t track them. But you are joining them in this Russian roulette.

Labor laws are just payroll?

Companies that don’t follow standard labor laws in Mexico are heavily targeted by the authorities. Not understanding payroll total costs will make your budget plan obsolete in no time. Also, not knowing how to build compensation packages will make you less competitive when hiring, as you might overpay or not be able to get star recruits by not offering a perk that is key for them.

Not having a Plan

Even if your company is starting small, develop a plan of key activities that will support your short- and long-term objectives. This will help to put the proper weight on the initial decisions by how they will affect the company in the future. Not just regular decisions like the type of local incorporation to be selected, but small decisions such as initial hiring can bite you down the road.

image referring to a checklist of common mistakes it companies make when starting a nearshore operation in mexico

3. Unnecessary Costs

Committing too early or too late

Scaling before you are ready will burn through your funds quickly and will limit your maneuverability to adjust in your initial period. But also failing to build an organization ready to scale quickly, can hamper your ability to advantage of opportunities that may be present to you. Plan for both scenarios with frameworks that support them.

Generic service providers

If you hire a local service provider because it looks good enough but is not specialized in your industry, you will pay their learning bill (and lost time).

Location, location, location

You might hire someone that knew somebody and establish your location in a medium size city, thinking that in a remote worker environment location does not matter much. Soon you will need to hire recent engineering graduates to have a proper mix in your team, so you better have selected the best cities in Mexico for nearshoring that have the top universities that generate a large talent pool to choose from. Also, you need an international airport or central hub, to fully deliver the nearshore value proposition (can travel on the same day with your U.S. customers). (view our article on the best cities to set up your business in Mexico)

To many providers

Even though you can start small and maybe with only one requirement, be sure that the provider can grow with you. Having different vendors for each service, or one that subcontracts others add unnecessary costs.

Incorporate locally right away

If you plan to only deliver Nearshore services to North America, you don’t need a local entity. Mexico has had options since the 80s that help you run your own operation without incorporating locally (see shelter program). Otherwise, you’ll end up paying unnecessary maintenance costs and your company will be under Mexican jurisdiction, making you 100% liable. Other advantages of these times of programs help you greatly if you are planning to relocate personnel from abroad or hire project-based contractors.

4. Industry specialization

Developing competitors

If you plan to outsource as a testing mechanism, be careful to hire only those that specialize in safe landing or similar services, but not other tech companies that offer to dedicate teams to your company, as they target similar customers as your company. You might end up training a competitor.

Posting jobs in a newspaper

The newspaper might have disappeared but hiring a company not specialized in your industry, is similar to posting it in a newspaper. Specialized companies have their own vetted database, so you know who to hire and NOT to hire. They already have a large recruiting team specialized in technologies and roles, versus one generic recruiter.

How specialized?

You can check if the service provider is truly specialized in your industry and if they bring to the table their local network and contacts. They should be able to make introductions on your behalf, so you can quickly start your presence. Some can help you to start targeting local prospects right away, using their economies of scale.

Cultural differences?

If the service provider is specialized, it can help with your solution localization (messaging, pricing, collaterals, etc). Latin America might be Spanish-speaking, but subtle differences appear that affect greatly some of your strategies, like using Inside Sales Executives. Your service provider should know this.

Conclusion

Most of these mistakes happen when companies throw common sense over the window, so using your usual checklist when investing in a crucial project should eliminate most of these mistakes. Develop a plan that will support your short- and long-term objectives, it doesn’t have to be detailed but it will help to shine a light on all the tasks you should cover. For those items that you will require local support, evaluate only the vendors that specialize in your field, do proper vendor due diligence, and test when possible.

Second, adding another region makes your organization more resilient by adding another talent pool and potential new customers, so be sure that the added operation is flexible, so the organization stays agile. There are options today that align with this approach.

And last, a learning curve costs money and takes valuable time. But the good news is that there are plenty of options that shorten it dramatically, as there is a high volume of companies that are looking to add or test their own operation in Mexico. Just look for the one that is experienced in your niche and has a solid track record, not just promises.

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