The balancing act of reducing costs while planning for accelerated growth
Tech companies frequently experience the fluctuating influence of Silicon Valley relentless pursuit of growth at any cost. Usually tied to a bullish market outlook followed by a pessimistic swing that triggers an avalanche of cost-containment strategies. Common sense appears and disappears as well, when it shouldn’t, regardless of the economic climate.
Executives should take a page out of Private Equity and Venture Capital operating partners that work with portfolio companies with the contradictory mission of helping companies to accelerate growth but also to drive costs down. Every year, the goal is the same: increase the company valuation.
Although common companies don’t have the budget for a dedicated team to research new operating models and technologies, this always-on mindset of looking for advantages can be copied. The organization should strive for operational efficiency while creating a scalable structure.
Agile Operating Model
Before the pandemic, there was already a movement toward building an agile operating model[i], which required an adjustment of internal and external capabilities to become nimble and flexible. But in 2020, new organizational variables appeared, creating hybrid work models and the reconfiguration of global supply chains that moved from a single geography to regional hubs. Companies shed infrastructure and assets, as they reduced office space and operating systems moved to the cloud.
Overnight, Software companies could enter new geographies as most of the sales process and implementation was done remotely, so it didn’t have the expensive cost traditionally associated with entering new markets. The value of startups offering international payroll platforms skyrocketed, as IT companies could potentially hire 100% remotely from anywhere in the world.
Then the Great Resignation[ii] happened and after it, mass tech layoffs. This year, large SW companies have announced return to the office mandates, but still, it remains a skilled staff shortage in the IT Industry that has more employment options than ever.
Hybrid work is a common practice that strives to provide the best of two worlds. This year, SAP, the world’s leading enterprise software vendor, modified its annual tradeshow to be held in several regional venues, versus one geography. It also included the possibility to attend the event online. This is the new normal.
Traditionally, systems integrators (SI) possess flexible operational structures that can adapt to fluctuating workloads. It varies from year to year due to the changing number of projects, differing starting dates, and the evolving technologies they must master. Their organizations manage internal and external talent and use different geographies to access more customers and lower operational costs.
Now, with the acceptance of mostly remote implementations and onsite visits when needed, SI’s in North America expanded their hiring radius to include Canada and Mexico, as it has similar travel distances as other U.S. cities. This grew the talent pool that they can access and lowered their North America operation costs via Mexico.
Mexico is also known as Latin America port of entry, as tech companies opt to initially trial their solutions in this country[i]. This choice is influenced by Mexico being one of the largest economies in the region, along with its prevalence of Spanish-speaking population, which aligns with the predominant language in Latin American countries. If Mexico supports cost-containment strategies and if needed, can add another market to grow, the question is how to start benefiting from running operations in Mexico without the high entry price and risks associated with opening a company in a foreign country.
How to Implement a structure that adds scaling capabilities AND helps with cost-containment as well
For quite some time, Mexico has positioned itself as one of the emerging countries most open to foreign direct investment[i]. As a result, it has implemented safe landing programs to facilitate and encourage foreign companies to come to Mexico.
The Manufacturing industry has benefited from the shelter model [ii]in Mexico for the past 30 years, which enables foreign companies to operate under an existing Mexican corporation, providing a “shelter” from legal and financial exposure. The Shelter transfers to their customer their economies of scale cost-containment and minimizes the learning curve by running some or all of the areas of Recruiting, HR & Payroll, Procurement, Facilities Management, Accounting & Finance, Gov’t Support, Permits & Compliance.
Just like manufacturing companies that use the shelter model to operate in Mexico, Tech companies have adopted similar strategies to start operations, using the Subsidiary-as-a-Service (Sub.aaS[iii]) model, similar to the shelter model but with added flexibility. This framework is used today by the Enterprise SW Ecosystem to start and run operations in Mexico. Some prefer to start with a temporary operation and run a pilot first, while others open a 300-employee Center of Excellence.
Because the shelter company already has the infrastructure with turn-key capabilities ready, the foreign company can start and scale when it needs to. Think AWS Public Cloud, instead of building a new data center for an initial small operation, you only pay for what you use.
This approach maximizes the advantages of incorporating Mexico as a cost-containment strategy. By adopting the Sub.aaS framework, a company aiming to establish a team of 30 individuals in Mexico can potentially save up to 80% during the initial 12 months of operation compared to a standalone operation.
By implementing a conservative team-building strategy, further cost-containment can be achieved. It is advisable to avoid hiring a large team right from the beginning, as Mexico, along with other LATAM countries, has labor laws that mandate severance payments, even for employees with a relatively short tenure. The Sub.aaS model supports this approach as well, which proves beneficial for companies intending to enter the LATAM Market. These companies prefer to develop a pipeline first, allowing them to gauge market response and demand before committing to full-scale deployment.
To lower total costs and build their own capabilities, Tech companies moved from the need of hiring a group of vendors that include head hunters, hiring platforms (PEO/EoR), Law firms, Realtors and IT agencies that could become future competitors, to using Sub.aaS. In the case of Operating Partners, many operate within a 3-5 year timeframe, so the opportunity to circumvent the risks/costs posed by the company learning curve in a foreign country, while also reduce greatly the initial costs, proved to be an ideal framework.
Along with Hybrid Work and the Nearshoring trend, Sub.aaS providers are also part of the Operating Partner toolbox and available to any company to improve operational performance (People, Processes, Structure). There are providers available for Asia, Europe, North and South America.
Even the most traditional companies had to update their operating model after being hit by the Pandemic. With conflicting economic data, organizations are putting a premium on cost containment strategies but should be aware that like the Sub.aaS model, there are frameworks that don’t inhibit growth, but support growth strategies as well, creating agile operating models that adeptly navigate through challenging and unpredictable economic climates.
- Accenture: Adapt to Survive – An agile operating model for the digital age, 2017. McKinsey: Introducing the next-generation operating model, 2017.
- Microsoft Whitepaper on Geo Expansion into LATAM, for Partners. 2019. (link 1, link 2)