Mexico Outsourcing: Violence Worries Rise

A spate of killings over five days in late January in Mexico served as a grisly reminder of the rising tide of drug-related violence just south of the U.S. border. On Jan. 20 there were three severed heads found inside a cooler in the city of Ju�rez in the state of Chihuahua. That same week private intelligence firm Stratfor tracked a string of incidents, including the deaths of a police officer and a federal agent. Then, on Jan. 23, at least 17 people were killed during a 24-hour period in Chihuahua state.

The escalation in violence that has accompanied the Mexican government's crackdown on drug cartels comes as more U.S. companies consider Mexico as an IT outsourcing destination—but it's causing some outsourcing consultants to question whether to relocate business elsewhere. "On a geopolitical level, we tell clients to be very careful about outsourcing to Mexico," says Ben Trowbridge, CEO of Alsbridge, a consulting firm that advises companies on outsourcing and related security matters. "In my opinion, Mexico is one step away from complete lawlessness."

Trowbridge is responding to anecdotal as well as statistical evidence of a lack of security in Mexico. He cites an incident in northern Mexico in December when a security adviser was kidnapped after leaving a conference where he'd spoken on the very topic of avoiding a kidnapping. The number of drug-related deaths rose to 4,000 in 2008, from 2,500 drug-related deaths a year earlier, according to the Council on Foreign Relations. Mexican newspapers including Reforma put the 2008 figure at above 5,000.

Outsourcing Demand Holds Up

Alsbridge isn't alone in calling attention to lawlessness in Mexico. The country was identified, in a worst-case scenario, as one of two that "bear consideration for a rapid and sudden collapse," according to the Joint Operating Environment 2008, a report on world security trends released by the U.S. military in December. The other state identified in the report was Pakistan. "The Mexican possibility may seem less likely, but the government, its politicians, police. and judicial infrastructure are all under sustained assault and pressure by criminal gangs and drug cartels," according to the report.

Companies that specialize in IT outsourcing in Mexico point out that the violence tends to be located in border areas and cite anecdotal evidence that demand for outsourced Mexican IT remains buoyant. "In my personal opinion, a collapse is quite an unlikely scenario," says Beni López, CEO of Softtek Near Shore Services, an IT outsourcing company headquartered in Monterrey, in the state of Nuevo León, south of Texas. Softtek also has centers in Aguascalientes, Ensenada, and Mexico City, as well as areas outside Mexico.

Last year, Softtek added 40 new clients, four of them Fortune 50 companies, López says. On May 22, Accenture (ACN) opened a second outsourcing center in Mexico, in Monterrey. Its first is located in Mexico City. Companies that send work to other countries have long balanced such risks as crime, geopolitical instability, or the potential for natural disasters with the rewards of low-cost labor.

Infosys Technologies (INFY), which serves many clients in the U.S., began building Mexican operations in Monterrey last year because some of its clients wanted to be closer geographically to the firm; other clients wanted Spanish-speaking skills. "The demand for our Mexico facilities is extremely high," says Ashok Vemuri, senior vice-president for banking and capital markets at Infosys. While Infosys keeps close tabs on the security situation in Mexico, violence has not become a problem, he says.

Violence and Corruption Could Increase

Security indeed can vary from state to state, say experts. "If you're in the right area in Mexico and you're not traveling down there a lot, you're fine," Trowbridge of Alsbridge says. Concerns arise for people who travel outside those regions. Allyson Benton, an analyst at Eurasia Group, a global political risk research and consulting firm, calls Nuevo León "one of the safer northern states." Still, Eurasia Group ranked Mexico as No. 7 on its list of 10 global risks in 2009.

According to Eurasia Group, the states with the most killings are Chihuahua and Baja California, and within those states the border towns of Juárez and Tijuana saw the most homicides. Sinaloa is also among the states with the most reported violence, Eurasia Group says. One of the reasons for the violence is that as much as 90% of the cocaine on its way to the U.S. passes through Mexico, according to the U.S. Drug Enforcement Agency.

In a report, Eurasia Group noted that there have been several high-profile assassinations of municipal, state, and federal government officials involved in the fight against organized crime, as well as several officials charged with taking bribes for releasing intelligence. Benton says that drug violence and corruption will continue and likely worsen in 2009, but it's likely that they will remain limited to groups directly involved in the drug war.

Still, Softtek maintains comprehensive disaster recovery plans, as do Infosys and Accenture. Says López, "Even if a Mexican city collapsed, we have a plan to relocate work."

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