An increasing number of companies worldwide are outsourcing to Mexico to save on labor costs and scale their business operations.
Now, outsourcing to Mexico isn’t a new trend.
Industry giants like Honeywell and General Motors have operated from Mexico since the ’90s. Additionally, tech giants like Amazon, Facebook, and Intel have outsourced their technical talent to Mexico.
But is it the right move for your business?
Will it help scale your business operations and profitability?
In this article, we’ll discuss why outsourcing to Mexico is becoming a popular choice for several companies. We’ll also cover its advantages and challenges and the Mexican Labor Law Amendment. Finally, we’ll give you six simple tips to successfully outsource to Mexico.
This article contains:
(Click on the links below to jump to a specific section)
- Why Outsourcing to Mexico is a Popular Choice
- 6 Key Advantages of Outsourcing to Mexico
- Mexican Labor Law Amendment: 2021 Amendment
- 3 Major Challenges of Outsourcing to Mexico
- 6 Simple Tips to Successfully Outsource to Mexico
Why outsourcing to Mexico is a popular choice
Mexico has emerged as a hotbed for outsourcing with an influx of both large and small companies.
Here are some of the reasons why:
- Tech hubs: Mexico is one of the most attractive IT outsourcing destinations in Latin America. It has five key tech hubs, including Guadalajara, Mexico City, Monterrey, Tijuana, and Yucatan — each with great tech ecosystems and talented IT professionals.
- Specialized services: Businesses can outsource “non-core” or specialized services like human resource services, call center services, and property management services.
- Advanced digital ecosystem: Mexico ranks number 13 on the Top 50 Digital Nations List in 2021. This high rank considers the number of super cities, diversity in population, and innovation in Mexico.
Apart from these factors, there are several other advantages of outsourcing to Mexico. We’ll look at them in detail in the next section.
6 key advantages of outsourcing to Mexico
Mexico has been a profitable outsourcing destination for hundreds of companies and continues to be one.
1. Highly-skilled and educated talent pool
Mexico has a vast pool of talent that can bridge the gaps within your team.
That’s because the Mexican Government put education at the center of its efforts to boost its economy nearly a decade ago. The World Economic Forum stated that this effort helped increase Mexican STEM graduates from 15.5% in 2005 to 21.3% in 2012, and it’s still rising.
Additionally, owing to the Government’s initial focus on education and training, the country now has vast talent pools that are well-versed in the latest technologies.
2. Favorable trade treaties
If you’re looking to outsource manufacturing to Mexico, you’ll be able to reduce or eliminate transportation tariffs.
Mexico has 12 Free Trade Agreements (FTA) with over 46 countries around the world.
Here’s a list of the top three FTAs Mexico holds:
- North American Free Trade Agreement (NAFTA): Boosts trade between Mexico, the USA, and Canada.
- EU–Mexico Free Trade Agreement: Nearly all goods trade between Mexico and the European Union (EU) is duty-free thanks to negotiations between the two countries in April 2020.
- Japan–Mexico Free Trade Agreement: Reduced trade tariffs on agricultural goods and auto parts between the two countries.
3. Lower labor costs
As of 2021, Mexico’s minimum wage is $7.03 (USD) per workday. Although this is a 15% increase in Mexico’s minimum wage from 2020, the outsourcing cost is still significantly lesser than in its neighboring North American countries.
For instance, an entry-level manufacturing worker in Mexico would make $3.50 (USD) per hour compared to the USA minimum wage of $7.25 (USD) per hour.
You’ll see similar cost differences even in the case of skilled personnel.
For example, a skilled Mexican worker makes approximately $6-7 (USD) per hour, compared to an average of $16-18 (USD) per hour for similar positions in the USA.
4. Better infrastructure
In the past decade, Mexico has emerged as a global outsourcing hub with modern infrastructure.
The Mexican Government is working on a progressive infrastructure plan for transportation, IT, and energy projects. In 2020, it announced a budget of over $14 Billion (USD) for strengthening Mexico’s infrastructure.
Having a developed infrastructure puts Mexico’s ability to support stable supply chains on the map.
5. Low staff turnover
There’s fierce competition for talent in outsourcing marketing around the world, leading to increased employee retention issues.
However, Mexico hasn’t been as exposed to the international outsourcing market. As a result, it has relatively higher rates of staffing and employee retention.
To give you an idea about why Mexico is preferable for outsourcing, here’s a breakdown of how much money countries could lose because of high employee turnover in 2030.
- The United States: $435.7 billion
- China: $147.1 billion
- Germany: $136.9 billion
- United Kingdom: $90.0 billion
- Mexico: $9.0 billion
The low staff turnover for Mexico is because of the relatively lesser competition in the Mexican job market. So you may be working with the same team till you complete your contract with the outsourcing firm, helping you stabilize your operations easily.
6. Proximity to target market
Companies whose target audience is in the USA usually resort to subcontracting their manufacturing to Mexico. This practice reduces the risk of outsourcing long supply chains and transportation routes, especially during the pandemic.
Private companies can also carry out manufacturing by establishing a low-cost factory called maquiladora. These Mexican factories let you carry out duty-free trade between Mexico and the USA.
Apart from outsourcing manufacturing, companies also outsource their customer care needs and other BPO services to Mexico. And with a similar time zone as the USA, Mexico also has cultural similarities to its neighbor.
That’s why, if your target audience is in the USA, outsourcing BPO services to Mexico can be beneficial for your company.
Now while outsourcing to Mexico has many advantages, it comes with a set of challenges. Most notably, the new amendment to Mexico’s labor law.
We’ll give you an overview of the new law before diving into the other challenges.
Mexican Labor Law: 2021 Amendment
On April 23, 2021, Mexico’s populist President Andrés Manuel López Obrador (AMLO) amended the Federal Labor Law (FLL) to ban international companies from subcontracting jobs for “core business activities.”
This implies that you can’t outsource tasks that are a part of your company’s main economic activity.
The Mexican Senate passed the bill to tackle a serious issue for the Mexican economy — corporate avoidance of tax obligations.
With the number of outsourced workers and employees increasing in Mexico, companies have taken advantage of a regulatory loophole in the Mexican labor law. Through labor outsourcing, companies have avoided paying tax and other mandatory benefit payments.
The bill is an attempt to bring about labor reform, but it could have certain repercussions for businesses looking for outsourcing arrangements in Mexico.
We’ll break down what the new law means for companies in the next section.
A. What it means for businesses in Mexico
It’s important to note that the new law doesn’t ban personnel outsourcing to Mexico for a company’s “non-core activities.”
These activities aren’t directly related to producing the service or product of a private company. Non-core activities usually include subcontracting services such as human resources, data processing, supply-chain management, and logistics.
However, as of June 2021, the Mexican Government hasn’t defined what business activities are “core” and “non-core.” Because of this ambiguity, there’s still confusion about how the new reform will affect the staffing of highly skilled specialists.
B. Key obligations under the new amendment
The new reform lays out obligations for both a “beneficiary” and a “subcontracting or outsourcing company.”
For example, in a scenario where you outsource a call center in Mexico, you’re the employer and the “beneficiary.” The call center provider is the “subcontracting company.”
Here are the key obligations that you’ll have to fulfill as a beneficiary:
- Employee profit-sharing: Share 10% of your taxable income with employees under profit-sharing obligations. An employee’s share in the company’s profit-sharing model is capped at the equivalent of the employee’s three month’s salary.
- Year-end bonuses: Provide mandatory annual year-end bonuses, along with health and retirement plans.
- Verify registration: Ensure your outsourcing company is registered with the Ministry of Labor and Social Welfare. The registration certificate is proof that the outsourcing company has met its social security and tax obligations.
- Quarterly report: Ensure that the outsourcing company shares a quarterly report with INFONAVIT — Mexico’s employee housing agency.
- Payroll: Add outsourced talent for core activities to the company’s payroll within three months of hiring them.
- Tax receipts: Collect tax receipts for the following payments from your outsourcing company:
- Payment of withholding tax.
- Payment of employer contribution.
- Payment of employee salary.
Note that you can’t access tax deductibility under the newly amended Income Tax Law and the VAT Law unless you fulfill the obligations mentioned above.
C. What businesses can do about the new law
For companies looking for outsourcing arrangements for their “non-core” activities, it’ll be business as usual.
But for companies looking to outsource activities related to their corporate purpose, an offshoring solution could help despite the outsourcing reform. Offshoring refers to shifting your business operations to Mexico instead of contracting work to experts.
If you’re a US-based company, you can also nearshore to Mexico to help scale your business rapidly.
3 major challenges of outsourcing to Mexico
Apart from the labor law amendment, outsourcing to Mexico has other challenges.
Let’s take a look at some of them.
1. Dependence on an outsourcing company
You would depend on your outsourced talent from a Mexican company to maintain a certain level of quality and meet your deadlines.
Engaging with an outsourced talent could also expose you to possible data breaches. Your mutual working relationship is heavily dependent on trust.
2. Unforeseen costs
Apart from the usual labor costs, you may overlook certain costs involved in subcontracting services. For example, the cost of knowledge transfer and transition.
It takes a significant amount of time, energy, and capital to bring an outsourcing partner up to speed on the work they’re supposed to do.
There are many other cost factors like tax and exchange rates that are usually unforeseen and are subject to change.
3. Monitoring issues
The distance between your outsourced team’s operations and your business location can make it difficult to monitor their performance.
Additionally, you’ll most likely pay your outsourced talent by the hour. This makes it even more important for you to know if your outsourced partners are working on your projects.
One way of keeping track of your outsourced employee’s performance is by introducing employee productivity management software like Time Doctor.
With Time Doctor, you can track your employees’ time, attendance, schedules, and more, even while working remotely. You can also analyze your outsourced team’s productivity through Time Doctor’s customizable productivity reports.
Want to learn more about outsourcing risks?
Check out these top 10 risks of outsourcing.
6 simple tips to outsource successfully in Mexico
Outsourcing can be a daunting task, especially if this is your first time doing it.
However, comprehensive planning will ensure that your outsourcing experience goes smoothly.
Let’s look at some of the tips for outsourcing successfully to Mexico.
1. Avoid arbitrary outsourcing of personnel
Take the time to analyze your company’s activities before outsourcing them to a Mexican company.
An in-depth analysis of your company will help you understand your “core” and “non-core” business activities. You can then make the call to outsource one or more services to Mexico.
2. Establish the scope and schedule of a project
Start with a clear goal of what you want to accomplish through the outsourcing project.
This will ensure that your outsourcing firm clearly understands what they need to deliver. A service provider will give you a reasonable proposal based on the accurate information you provide to them.
3. Carefully evaluate the service provider
It’s important to check a provider’s references before hiring them for outsourcing services.
You can take this opportunity to express any concerns and ask questions regarding the outsourcing process.
4. Start with a small project
If this is your first time engaging with an outsourced service provider, start by assigning them a small and simple project.
You can evaluate the quality and speed of their work before you assign them larger and more critical tasks.
5. Have a clear contract and payment structure
Make the most of your service provider by tying their payments to clear deliverables.
One way to do this would be to pay no more than 20% to 30% of your service provider’s fee upfront. You can then tie the rest of the payments to defined project milestones.
6. Establish ownership of work
Be clear about who owns the final work delivered by your outsourced talent.
For example, with software development outsourcing, your service provider will develop a software application for your company’s use. It’s important that you establish your ownership of the software through contracts.
Outsourcing to Mexico can help you cost-effectively scale your business operations.
However, like with any other business decision, you have to carefully consider all the pros and challenges of outsourcing to Mexico. Use the information covered in this article to get a head start on exploring outsourcing opportunities for your company in Mexico.
Andy is a technology & marketing leader who has delivered award-winning and world-first experiences.