Vamos a Mexico: Software Development Outsourcing Tips

Planning to relocate certain business processes and can’t pick the destination? Why not bask in the sun while exploring the potential of Mexico City? After all, nothing is impossible to a willing mind. Just take our word magic, add to it a pinch of your imagination, and reach any place in a blink of an eye. And to ginger up this trip with some valuable insights, let's meanwhile focus on the IT industry of Mexico (software development, outsourcing laws, and business growth opportunities).

What Is Outsourcing?

First, let's give a shake to your memory and recall the key idea behind outsourcing. When a business delegates certain processes to a third party to take advantage of a quality workforce, lower taxes, or reduced operational costs, we are witnessing an outsourcing strategy in progress. Depending on the service provider’s location, outsourcing can be divided into three types — onshoring (within the same country), offshoring (far away from your country), and nearshoring (close to your country).

As a rule, when relying on outsourced software engineers, a company just pays to them the agreed-upon hourly rates. Income taxes and most other fees become a burden of the service providers. But that's not the case with the Mexican talent pool.

Latest Outsourcing Laws in Mexico

Until September 2021, Mexican federal labor law suffered from loopholes that allowed 5 million freelancers (subcontractors) to evade taxes. It means, when outsourcing software development to Mexico, neither offshore tech companies nor Mexican developers paid the proper amount of contributions. As a result, all state benefits and pensions kept decreasing.

To tackle workers' rights violations, the Obrador (Andrés Manuel López Obrador, President of Mexico) administration passed a bill restricting subcontracting jobs.

According to the new Mexican labor law, offshore companies are obliged to resort to outsourcing partners from a special registry. What's more, the companies that outsource to Mexico may hire the required specialists only for services not related to the principal business activity. Furthermore, it's the offshoring businesses that are now in charge of the social security taxes. Moreover, you won't be able to fire an outsourced employee at your own sweet will (we'll plunge into the issue later).

Mexico in Brief

Can Software Development Companies Outsource to Mexico?

To better understand how software outsourcing should unfold today, take a look at the Mexico outsourcing guide.

• Decide which business processes you'd like to outsource.
• Define whether these processes belong to your principal business activity (i.e., the activity which brings your business the highest income) or not.
• If the required services are not related to the core activities, you may choose Mexico as an outsourcing destination.
• While selecting a service provider, give preference to the outsourcing companies from the REPSE registry.
• When working with Mexican engineers, don't forget to follow labor regulations and pay taxes.

Let's say, your company elaborates various educational programs and derives the highest revenue from conducting courses and workshops. One day, you venture upon a new step and decide to create an upscale educational platform. In this case, if you don't have enough in-house software developers, you may take advantage of the Mexican IT sector.

And one more example for those who run a software company. Let's say, you get involved in a huge project, that requires additional senior developers, and decide to fill talent gaps in the international outsourcing market. In this scenario, since software development is your core business activity, you can't turn to Mexican developers. At the same time, you may still reap the benefits of cost-friendly HR or legal solutions provided by a Mexican company.

Outsourcing to Mexico: Pros and Cons

When it comes to software outsourcing, Mexico does know how to attract American businesses and Eastern Europe companies. Bellow, we've shortlisted what to expect from the Mexican tech talent pool.

Why Outsource to Mexico?

Affordable Labor Costs

You've probably heard of Guadalajara Software Center and Monterrey Technology Park, but the Mexican software potential is not limited to these outsourcing destinations. The country is renowned for its friendly startup community and dedicated engineering graduates, which means you'll easily find quality services at a favorable price tag ($25–50 per hour).

Language & Cultural Fit

Minimal communication and cultural barriers are another tangible benefit that drives international companies toward Mexico (primarily, it relates to US companies outsourcing to Mexico). Thus, when an in-house software development team shares similar values and principles with an outsourced one, an excellent outcome is inevitable.

Convenient Time Zones

Mexico is located in four time zones, which makes it a perfect match in the global outsourcing market for many countries. Since work in the same time zone ensures real-time collaboration, nearshore software development in Mexico becomes an increasingly popular outsourcing strategy for various companies.

What Are the Disadvantages of Outsourcing to Mexico?

Intricate Legislation

To protect employees from unjustified dismissals, the Mexican government obliged employers to pay three-month severance wages and vacation & year-end bonuses to the contracted workers, fired without good reason. That’s why, if your outsourced partners don't work under drugs or alcohol, don’t use violence on colleagues or haven't got incarcerated, you can't fire them and avoid penalties.

Strict Tax Compliance Requirements

When outsourcing to Mexico, keep in mind certain tax regulations. If a software engineer estimates the work at $700, get ready to add to this sum up to 25% and pay $875 (this $175 will go to the Social Security, Housing, and Retirement Fund). But the good news is that it is an employee who must pay income taxes out of pocket (about 22–35%).

Must-Know Outsourcing Tips

If you are ready for Mexico's challenge to get cost-friendly software solutions, check our recommendations on how to outsource successfully.

#1. Find a Highly-Skilled Labor Attorney

As already mentioned, Mexican laws don’t make it easy to fire a diligent worker (even an outsourced one) and avoid extra costs. But it's still possible to reduce these costs by drawing up the right employment contract. And for this, you'll need a professional labor attorney with practical experience in Mexican legislation.

#2. Hire a Dedicated Accountant

When outsourcing to Mexico, you may easily get into a muddle about tax regulations and overpay. To avoid this trap, don't forget to hire a qualified accountant who will help you minimize taxes in compliance with the law.

#3. Create a Reserve Fund

One more thing you should think through in advance relates to reserve funds. Because not only does Mexico dictate strict rules and regulations, but also imposes stiff fines and administrative fees for non-compliance with them. And even if you hire an accountant and an attorney, create a reserve fund for unpredicted costs to keep on the safe side.

#4. Always Play Fair

This recommendation is closely connected with the previous one. So, once again, to sleep well and not overpay, always stick to laws and regulations. Remember, that additional consultation on some tricky issue with an attorney will save you money and good night sleep in the future.

Strategic Advice Before You Go

If you hunt for dedicated software developers, Mexico is not the only destination to reach out to. Although outsourcing to Latin America entails certain benefits, it abounds in intricacies and pitfalls. So, why not rely on traditional outsourcing models and turn to time-tested software companies from Western Europe?

Need to outsource software development and do not know how to get started? Contact our specialists. Qulix is a long-standing outsourcing partner from Poland, ready to help you out.