Nearshore Americas

More Than Twice as Many US Tech Firms Are Outsourcing IT Services from Abroad as in 2013

The number of tech firms that offshore or outsource IT services or programming to companies based outside of the United States has more than doubled in the last two years, according to BDO’s 2015 Technology Outlook Survey.

This trend went against a wider downturn in outsourcing, with the survey of 100 chief financial officers (CFOs) at leading tech firms in the United States finding that just 20% are currently outsourcing work out of the country, down from 27% in 2014 and 37% in 2013. However, that wider downturn looks like a temporary blip that is unlikely to continue, as only 20% of CFOs say they intend to bring any of the work they currently offshore or outsource back to the United States in 2015, down from 29% in 2014. Moreover, the number of tech firms that say they are likely to outsource services or manufacturing to companies based outside the United States has almost tripled from 5% to 14% in the last year.

While the amount of call center work that tech companies are sending abroad has declined (only 15% are outsourcing call or help center functions, down from 28% in 2014) research & development (R&D) and IT services and programming appear to be driving most current offshore and nearshore activity in the industry.

Of the CFOs who do currently offshore or outsource, 70% are outsourcing or offshoring IT services and programming, up from 41% in 2014 and just 30% in 2013. Another 74% are outsourcing or offshoring their R&D functions, up from 54% last year. This increase in R&D activity comes as tech companies seek to maintain their competitive edge and launch innovative new products and improved services, with 41% of CFOs citing competition as the top business challenge in 2015.

Explaining These Trends

Aftab Jamil, partner and leader of technology and life sciences at BDO, told Nearshore Americas that he believes the recent decline in offshoring can be attributed to several factors, including “political pressure” in the United States to bring jobs home, and “the erosion of the cost benefits of offshore work, as the cost of delivery and the standard of living in countries such as India and China start creeping up.”

Last year’s BDO survey showed that while only 14% of CFOs in the United States were outsourcing to Latin America, 57% said it was the region where they would be most likely to consider outsourcing in the future. This year’s survey did not provide updated figures for the region, but Jamil noted that “we’re not seeing so much research and development in Latin America,” despite the increase in R&D development outsourcing outside of the United States. However, Jamil said he still expects Latin America, and particularly countries such as Mexico and Brazil, to become increasingly popular destinations for call center work, IT services and manufacturing.

Regarding the recent rise in IT services outsourcing, Jamil said, “I think IT services and programming has always been something that could be outsourced quite easily because a lot of the legwork can be done elsewhere while you keep the quality control.” The sudden growth of IT services outsourcing from last year is most likely due to the limitations of the U.S. talent pool and the greater availability of talent elsewhere, he said. The BDO survey found that 27% of tech CFOs consider their ability to attract and retain qualified labor as their greatest business challenge in 2015, while 23% described a lack of skilled labor as the biggest barrier to overall industry growth.

“Finding engineers is one of top issues for companies in Silicon Valley because, despite the vast talent pool that exists there, it’s just not nearly enough for those companies to find all the right people,” Jamil explained. “Locations like India and China are producing more engineers than the United States at this point in time so given the talent pool that is available in the locations it is easier – even it’s no longer much more cost effective – to find the talent that you need.” Furthermore, given the availability of talent in Latin America and the advantages of operating closer to the United States, the nearshore region is also becoming increasingly competitive in the IT services market, he added.

Incentives and Low Costs

Guilherme Campos, IT Industry Analyst at Frost & Sullivan, told Nearshore Americas that “in the last two or three years many governments in Latin America have started to create incentives to attract bigger investments related to software, semiconductors, customer applications development and related segments.”

These incentives have encouraged local companies to specialize in software development or R&D in order to provide nearshore services to the United States, he explained. This has become particularly common in Mexico, Colombia, Chile and Peru, although Brazilian companies have been slower to explore these opportunities because “Brazil has a very big internal market so companies here are not so used to providing nearshore services to the United States,” Campos said.

With Latin American firms having specialized in software development and other IT services, “the quality of the final product in Latin America and the United States is basically the same and the service is much less expensive,” Campos added. Furthermore, changes in currency valuations have also encouraged investment in countries like Brazil, Colombia, Peru and Mexico, as U.S. firms can now get more for their dollar investments, Campos said, noting that “One dollar is 3.3 Brazilian real and two years ago it was 1.6. This is happening in other countries as well and it’s one of the main factors (in the recent increase in outsourcing to the region).”

LATAM vs. Asia

Latin America is also beginning to win much of the call center work that was previously outsourced to countries like India and the Philippines, Jamil said. The recent decline in the offshoring of call or help center work is likely due to “customer frustration” and the “less desirable quality” of service from the traditional Asian markets, he said. This has led companies to set up more contact centers in the United States and Mexico. “As those countries improve the quality of call centers and develop that expertise then that market is expected to grow,” Jamil added.

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While Campos expects Latin America to continue to receive more IT services and R&D investment, he acknowledged that “there is a bigger challenge ahead because there are other markets that have even better quality (or lower prices) and very good relations with the United States.” He explained that “it is easier to outsource to Latin America because of the time zone, but if we consider the cost of developing a solution in Colombia or Peru, and the cost of developing it in India, it will probably be half the price in India.” Therefore, in the future, “most of the U.S. investments will still be related to countries like India and Korea or even Israel, which has a very good relationship with the United States and has created a software specialization program and is creating a lot of products for the U.S. market.”

Duncan Tucker


  • Interesting news and in line with our observations in the German market, where lack of skilled IT experts is a major driver for offshore and in particular nearshore outsourcing. Although German companies are more hesitant giving away major task, lack of experts forces them to do so. One key element in successful sourcing is a proper governance, which sourcing veterans in Germany have been working on: This is enriched by a free b2b marketplace for SW services, i.e. used by European customers identifying the fitting nearshore partner, in Eastern Europe and more and more in Southern Europe.

  • in my opinion, the lacks of skills in countries is purely down to short sighted managers who offshore work to save a few pennies. Ok, it’s usually a lot of pennies to begin with, but the quality of work I have personally experienced from offshore staff is shocking. Perhaps they have probably never been taught about it, they just want to get the product in and running and the mess is usually left for the client to sort out, usually by bringing in contractors to fix it, therefore probably costing the same as it would have done if the work had been done onshore in the first place. A few people have said, yes, that used to be the case, but as of Mar 2015 it’s still the case, I see it everyday. Did you know that if you live in India, to remain technical means you are a bit of a loser, because you should be trying to make it into management at all costs, which means the programmer people “churn” is very high, which means a lot of the staff are very inexperienced, which leads to bad quaility work and so it goes on and on. IT staff in the offshore countries I think are waking up to this now and the good programmers are now asking for more money as they are getting more experience, which leads to more expensive outsourcing ..

    Would you advise your children to try a career in IT if you lived in eg. the USA, Europe, Australia ? I certainly would not (due to offshoring) and this, I believe, has led to IT skills shortages in these countries.

  • Dear Dave, there are good and bad experiences in outsourcing, especially offshoring. We had that kind of discussion years back in Central Europe. My experience and this being confirmed by many others is that in case the homework is done, proper offshoring often increases quality etc. by still reducing the costs.

    Another important point is that globalisation is here to stay and it is a question how to benefit from it. My SaaS start up pliXos is an example. It is a digital business model with ow SaaS products to further “industrialise” SW delivery by distributed teams If you want “German engineering” in he global SW services space. So I see this as a chance.

    Furthermore on a more strategic point, if the customer company benefits, the managers there (e.g. in the US or Germany) can reinvest and innovate. And clever local IT guys move into a delivery manager or product engineering role, I assume.