The Covid-19 pandemic led many companies to consider relocation and Nearshoring to Latinamerica, with Colombia and Mexico being key target markets.
Since the trade war between the U.S. and China began, some American companies have been looking for alternatives to relocate their outsourced business processes closer to home. Mexico has been the primary benefactor of U.S. outsourcing for years thanks to its shared border and cheap labor.
However, Colombia has emerged as another attractive option for a variety of factors including its strategic geographic location, young and educated workforce, free trade agreements, tax incentives created and promoted by the government, large local market (almost 50 million people), and more.
The ‘Back to the Americas’ initiative, led by several American companies could bring $30-$50 billion dollars in U.S. investment to the region.
Nearshoring Definition: What is Nearshoring?
Nearshoring is when a company decides to relocate its business processes to a foreign country that is geographically nearby. The benefit of transferring operations to neighboring countries is to have a cost-effective partnership and overlapping timezones. The idea is to maintain relatively low costs while making collaboration between remote teams easier.
Some of the tasks most often outsourced in the current business environment are:
- Software Delivery
- IT Infrastructure Management
- Customer Support
- Marketing and Design
- Corporate Training
Nearshoring vs Offshoring:
When offshoring, a company is outsourcing to a foreign country in a different time zone and it’s typically the lowest cost option. Around 53% of manufacturing companies benefit from offshoring, making it a billion-dollar global industry.
At first glance, offshoring might seem like the most cost-effective solution for manufacturing companies, but the reality is that the distance can make communication and coordination challenging due to the difference in time zones. Cultural differences and language barriers also hinder productivity and long-lasting, healthy work relationships.
Nearshoring on the other hand, while typically not the cheapest alternative, makes communication and collaboration quicker and easier, while expediting travel and customer responsiveness. This Outsourcing model has become a trend growing at a 10.5% annual rate, as more companies have realized its many advantages.
Nearshoring to Latinamerica:
The U.S. has primarily relied on India, China, and Eastern Europe as outsourcing destinations, but the increasing cost of these operations has incentivized them to look into other alternatives.
The Total Costs of Ownership (TCO) that traditional offshoring initiatives imply include documentation, travel expenses, infrastructure, and productivity loss due to time zone differences and delayed/inconvenient communication.
Extra TCOs could be avoided or significantly reduced by choosing nearshoring to Latinamerica. The large quantity of qualified and available Latinamerican talent, many of which went to college in the U.S. or at least understand its market needs, make the region a great option for collaboration.
Another benefit of nearshoring is that cultural affinities between the U.S. and Latinamerica are much greater than many popular offshoring locations. . Overall cultural barriers were identified as a serious problem when it comes to offshoring. 26% of people who responded to the survey, said these barriers would be reduced by moving operations to Latin America.
Nearshoring to Colombia:
According to AmCham’s (Colombo-American Chamber of Commerce) executive director Sergio Diaz-Granados, the ‘Back to the Americas’ initiative will propel Colombia’s industrial growth. Given the country’s political and financial responsibility and the fact that it is home to one of the biggest IT markets in Latin America, it has already had success attracting companies looking to outsource their business processes.
The Double Taxation Agreement that is in works between the U.S. and Colombia, is another tool that is expected to bring more foreign direct investment to the country. According to the DIAN (National Directorate of Taxes and Customs), this agreement will set rules to avoid double taxation between the two countries, thus boosting the foreing investment flow and making Colombia an even more competitive Nearshoring destination.This agreement is planned to enter into force during the first half of 2021.
Teleperformance and Amazon have hired around 12,000 Colombian Employees to take care of the customer service across the American continent. The government is pursuing foreign investors, enticing them to relocate to Colombia to take advantage of opportunities to unlock the country’s export potential, making the market entry easier than ever before.
Reasons to move your business processes to Colombia:
Workforce and Regulations:
Colombia was one of the Top 3 Latinamerican countries in the World Talent Ranking in 2019. This means that Colombia offers a high labor availability of highly qualified personnel at low hourly costs. For example, the average wage per hour in the manufacturing sector is as low as 1,9 USD, so Euromonitor International.
Another of Colombia’s strengths is it’s flexible labor regulations when it comes to hiring and firing workers. The regulations also make it easier for employers to expand the number of working hours. Furthermore, the Colombian government aims to incentivize the hiring of young people for the first time by implementing regulations like Article 88 of Law 2010 from 2019, which states that 120% of the salaries paid to employees who are under 28 will be deducted from taxpayers’ tax returns.
Governmental Incentives for Investments:
Colombia offers several benefits to its over a hundred Free Trade Zones for investors, like a 20% income tax rate and zero tariffs or VAT for goods in the Free Trade Zone. Not to mention tax deductions for anybody who invests in the research, innovation, renewable energy, and environmental improvement sectors.
Optimal geographical location:
Colombia has a great strategic geographical location, and it’s home to one of the best-connected ports in the world. The country is now part of Dubai’s World Logistics Passport, which is expected to increase the country’s connectivity even further, and allow access to the main ports of America in an even shorter amount of time.
Bogotá also holds the 1st place when it comes to cargo traffic in Latinamerica, mobilizing over 740 thousand metric tons in 2018 and surpassing cities like Sao Paulo, Mexico City, Lima and Santiago de Chile. Additionally, the country has one of the most competitive air freight in the world, offering 30 direct and indirect air routes and charging only 1,12 USD per kg to the US.
Colombia has a full workday overlap with the US, making it easier to collaborate in real-time for most of the year.
Business Opportunity in Colombia
The Covid-19 pandemic has severely impacted the world’s economy, but Colombia has the capacity to withstand the crisis. Not only is it expected to reach a GDP growth of 8,6% in 2020, but the prognosis for 2021 is also promising.
The current climate has presented a huge opportunity for software-based companies like Netflix and Zoom, and other banking and financial services who have been the real winners during this pandemic. Since Colombia is home to Medellin, 2013’s most innovative city in the world, and it is recognized worldwide as an innovation hub for science and technology, it presents a great window of opportunity for companies looking to outsource their software development processes. Not to mention the fact that Colombia is the 4th largest IT market in LATAM.
An example of how much more efficient labor costs for software development can be in Colombia can be seen in the table below. (Average monthly salary for software developers in the USA vs. in Colombia).
|Costs in USA||Costs in Colombia|
|Junior Developer: $5625 USD/mo||Junior Developer: $870-$1245 USD/mo|
|Senior Developer: $8000 USD/mo||Senior Developer: $4068 USD/mo|
Bellow, you can a list of several multinational companies that have invested in Colombia and succeeded greatly:
Below is a summary of the reasons why many businesses have already chosen Nearshoring as part of their international business strategy:
- Shorter travel times to meet with business partners, foreign subsidiaries, clients, etc
- Working in the same time zone makes coordination and collaboration easier and more efficient
- A higher level of shared culture leads to ease of doing business
It is Colombia’s close alliance and Free Trade Agreement with the U.S., young an educated workforce, government support of foreign investment, and the sizable opportunity of Colombia’s once-neglected Agriculture and promising IT industries that make it an attractive nearshoring option for US companies.
Ongresso can help you enter the Colombian market
If you are planning on relocating your business, contact Ongresso for Market-Entry Strategies and Consulting, Company Formation, Back-Office Services, Partner Search, and Employer of Record Services in Latinamerica.
Our team has been helping American companies position themselves in Colombia for over 10 years, which gives us a great understanding of both of the countries’ cultures. Our clients’ success stories attest to our expertise and professionalism.
“Ongresso was really quick to analyze and understand our situation, suggest and visualize different options, benchmark and compare the pros/cons of each option, and to finally make a conclusive recommendation on the best solution that was accepted and implemented by our top management.”
Fabio Pellegrini, MAGEBA ‘s manager for the Andean Region.