In the highly competitive landscape of the tech industry, staying ahead often involves running foreign operations. However, the challenge lies in doing so efficiently, especially when faced with a tight budget for 2024. In this article, we’ll explore why B2B tech companies in North America have used Mexico’s soft-landing options to avoid unnecessary costs and risks, associated with the Do-It-Yourself approach. This capex-friendly approach is preferred by Private Investors, as they can achieve more with the same budget while owning the operation from day one.
Hiring an IT Professional in Mexico as opposed to the United States of America can lead to substantial cost savings, averaging around 50% to 60%. This cost differential becomes even more pronounced at both ends of the experience spectrum. For instance, recent graduates may offer savings exceeding 120%, while highly experienced, guru-level talent can provide savings of up to 80%.
Adding Mexico’s operational capabilities to the organization adds access to another Talent Pool for North America and access to the Latin American Market. Because of its lower cost of living, it provides cost-efficient operations in North America. Therefore, the challenge lies in determining the optimal approach to establishing operations in Mexico that minimizes the budget impact on these potential savings while harnessing other strategic advantages.
The comparison will focus on differences between a company starting and running Mexico operations on their own, versus using the assistance of a soft-landing option. The comparisons will focus on 3 areas: Operation Costs, Risk Management, and Time to Market. The soft-landing option for the IT Industry is known as Subsidiary-as-a-Service (SUBaaS), which is the equivalent of the successful Shelter model used by the Manufacturing Industry for the past 30 years.
1. OPERATION COSTS
Using SUBaaS versus DIY has a direct impact on costs, with the highest differential in the first twelve months, as the DIY has to set up capabilities that require time and resources that will not be used fully until later. The SUBaaS approach follows the as-a-service model, so its customers pay only for what they use, benefiting from a shared infrastructure (think AWS). It can start in weeks instead of months, ready to scale in size and functionality when needed, and not before (like Salesforce).
To estimate cost differences between DIY and SUBaaS, we will use the scenario of a Tech Company opening a Center of Excellence or Delivery Center that will house 25 engineers.
The biggest impact on reduced costs is in the first months, but cost savings are obtained after the first year as well. For this scenario, the foreign company reduces its total operational costs for the first 3 years of budget to almost 40%.
For a scenario of a delivery center that supports 50 engineers, the cost reduction of the first 3 years is 43%.
To simplify matters, this comparison assumes that the DIY scenario succeeds on every first attempt, which in practice, it follows a trial and error because of the local learning curve. If we add this factor, the cost difference is bigger.
It also does not include potential additional savings achieved through the use of the SUBaaS procurement team, which transfers the benefits to its customers of volume purchasing and nationwide coverage.
2. RISK AVOIDANCE
Countries known for their expertise in attracting foreign investment offer soft landing options that not only deliver cost-saving advantages but also protect (“shelter”) foreign companies from local risks while still running their operations. Although risk cannot be completely 100% eliminated, it can be decreased greatly versus the DIY approach.
To assess this difference, it can be measured in terms of economic impact through three distinct avenues:
2.1 Potential savings regarding local liabilities exposure. Calculate the potential savings from exposure to local liabilities by estimating potential fines in Mexico. This pertains to the company’s liability following the DIY approach, encompassing misclassification in hiring, tax penalties, and potential criminal prosecution for improper vendor hiring. Compare this with the option of transferring liability to the SUBaaS provider.
2.2 Potential Savings in Advisory/Consulting Fees: Quantify the potential savings associated with advisory and consulting fees. This involves estimating the costs incurred when employing advisory and consulting firms for foreign assistance under the DIY approach. These costs can include advisory services related to labor, legal matters, tax considerations, relocation, and market research. With the SUBaaS option, a significant reduction in these fees occurs, as the SUBaaS vendor handles the majority of these consultations.
2.3 Reduced Shutdown Costs with SUBaaS Option: If the decision is made to terminate operations in Mexico, opting for SUBaaS significantly diminishes shutdown costs compared to the DIY approach. For instance, in the scenario of establishing a Delivery Center, if the foreign company chooses to cease its Mexico operations in the ninth month, the overall cost impact is reduced by over 90%, as illustrated in the following graphic:
3. TIME TO MARKET / OPPORTUNITY COST
Estimating the opportunity cost or quantifying the amount of missed revenue in US Dollars due to a delayed time to market can be challenging, as it involves a rough estimate. However, the formula can be straightforward: it entails calculating the number of months during which the company lacked the resources necessary to deliver the services (externally or internally) and generate income.
As noted before, one of the main advantages of the as-a-service model is how quickly the operations can be ready to use. The saved time can be calculated as follows:
First, initiating a new operation in Mexico, including local incorporation, bank setup, and hiring the first administrative employee, typically requires a startup time of 4 months. This duration may extend depending on the availability of appointments with local authorities and the timing of the first employee joining the company. Versus the SUBaaS approach which takes weeks.
Second, utilizing a SUBaaS vendor specializing in your industry not only saves time but also shortens the local learning curve for establishing a new business practice. For instance, Everscale Group, specializing in the Enterprise Software Ecosystem, provides access to a pre-vetted talent pool of experienced bilingual IT professionals. Moreover, there’s no need to start from scratch with local universities for recent graduate hiring, thanks to the availability of a Recent Grad boot camp program with established connections. In the case of setting up a Sales Office, a curated list of recommended Sales Executives is provided, with assistance in defining local quotas. For establishing a PMO Practice, specialized talent has already been identified for tasks such as LATAM Rollout / Localization Projects, AMS, and Presales. The time saved in achieving full functionality for a new business practice, compared to the DIY approach, can range from 1 to 3 months.
In summary, SUBaaS significantly trims the implementation timeline from project approval to operational capability establishment for new business practices. Moreover, for operations involving multiple additions of capabilities/practices, the gap between SUBaaS and DIY widens.
An example scenario could be that a company plans to establish a nearshore support team comprising 20 members. Building this team from the ground up in Mexico could independently take 5 to 6 months, as opposed to 1 to 2 months using the SUBaaS approach. Assuming the company can start billing its customers two to three months early because it’s using the SUBaaS approach, the potential missed revenue from using the DIY option can be calculated as fo: (Number of People) x (Months) x (Hourly Rate) = Missed Income.
For tech companies navigating the complexities of foreign operations with a tight 2024 budget, the Subsidiary-as-a-Service option emerges as a strategic enabler. Despite its evident benefits as a financial strategy, its primary advantage lies in its flexibility. During the planning phase, companies outline a proposed operation size and hiring plan, but when reality intersects with the business plan, adjustments are often necessary. The SUBaaS model provides the essential capability to scale and adapt without incurring additional costs and risks, making it the ideal fit for uncertain economic conditions. This type of approach makes it ideal for a scalable and cost-efficient way to test digital initiatives, according to ISG. It enables critical elements of innovation: agility, scalability, cost-efficiency, and versatility.
To obtain the accompanying Local Research, Assumptions, and Data referenced in this article, please submit a request for download here.
The information provided in this document is intended to provide general and specific guidance on expanding to Mexico. However, it should be noted that laws and regulations are subject to change.