Latin America became one of the best locations for nearshoring or PEO (professional employer organization) services. The popularity of Colombia, Peru, and Mexico as PEO and nearshoring destinations, which was already growing, was boosted by the pandemic and recent armed conflicts in Europe.
COVID-19 infected more than just bats and humans, it seems like supply chains also took the hit, with 94% of Fortune 100 companies reporting major disruptions in their supply chains due to the pandemic. Since production was reduced due to the fall in demand caused by the pandemic, the world is experiencing a recovery during which supply cannot match increasing demand. This inevitably results in a significant increase in the price of raw materials and final products.
Furthermore, wages in China are rising and Ocean freight rates from Asia to the United States have increased more than ten times during the pandemic. All these changes happening simultaneously mean international companies are forced to rethink the structure of their operations. The first step is taking their production and other outsourced services closer to home. This is where nearshoring comes into play.
What is nearshoring and International PEO?
Nearshoring is the process of relocating business operations to a nearby country where the labour is as highly skilled but costs much less. The purpose of nearshoring is to identify workforces that share similar values and time zones and are close in proximity to the parent company. Companies are always looking for ways to drive down costs and maximize profits, nearshoring presents a viable alternative.
A Professional Employer Organization (PEO) is an outsourcing firm that provides a variety of services to small and medium sized businesses, mainly HR and payroll tasks. International PEO is a global employment solution for hiring employees in foreign countries without the need to establish a legal entity.
Nearshoring and International PEO are concepts that anyone in the business world should be familiar with. Although they share big similarities to other practices such as outsourcing, onshoring, and offshoring, they have some important differences.
What are the Key Differences with Outsourcing, Onshoring, and Offshoring?
All these terms refer to the process of a company transferring different services of their business to another company with the aim of reducing costs.
- Outsourcing essentially signifies the process of a company relocating business activity to a third party. Anything that you hire someone else to do because you lack in-house expertise or are looking to benefit from cost savings is outsourcing. 53% of manufacturing companies outsource, placing it as a lucrative industry. However, depending on location, time differences and cultural barriers can cause several limitations.
- Onshoring is the process of relocating business processes to a lower-cost location inside the national borders. Normally an approach adopted by small-medium scale companies. This method guaranties excellent coordination and communication, which is a great advantage.
- Offshoring occurs when companies relocate services abroad regardless of location, for the sake of driving down operational costs. This term is typically used when the outsourcing company is located far from the parent company. Although, this method has the potential of offering the lowest prices initially, issues with communication and management might add unexpected costs.
Find a quick YouTube summary of business-relocation terms below:
So what makes Latin America an attractive nearshoring/PEO destination?
Prevalence of English speakers
In 2021, EF, a language school chain produced an English Proficiency Index (EPI). It concluded that Latin America has a higher average EPI-493 when compared to the Middle East-449 and Asia-485. Moreover, Argentina, Costa Rica, Paraguay, Bolivia, Cuba and Chile all have higher averages than China and India. Given that English is one of India’s official languages, that is an impressive achievement. A testament to the region’s growing English-speaking population.
According to Entrepreneur Magazine, while the US is facing a talent shortage in the IT industry, Latin America is producing an increasing number of IT experts. For example, Colombia, which is one of the countries with great tech programmes, produces roughly 13.000 software engineers annually. The technology sector is growing fast in Latin America, and it shows no signs of slowing down. This essentially means that Latin America has a large volume of skilled labour available at a low cost.
The price of running a business is significantly lower in Latin America. Whether it be employing a software engineer, an HR business or a company like Ongresso. The region consistently offers significantly more competitive prices to help maximise the productivity of a businesses finances.
With regards to companies in the US looking to relocate. This is one of the key benefits of nearshoring to Latin America. Typically, the U.S. has looked to India, China and South-East Asia to offshore. However, as costs to relocate continue to increase, the negatives are beginning to outweigh the positives. Being in a similar time zone is essential to allow for a smooth and efficient running of a business. If any problems occur and the two parties aren’t able to communicate, business operations will be drastically affected. The whole of Latin America is within a very similar time zone to the United States and Canada. Colombia, Ecuador and Peru all sit within the same time zone as New York.
The nearshoring process means that once you have decided to nearshore and collaborate with another company. You don’t have to spend time recruiting staff and establishing a new department to get things up and running. The most suitable employees are chosen by the company you’re using to nearshore to, making it a stress-free and efficient process.