3 Reasons Why Colombia Could Benefit from Mexico’s Outsourcing Ban

By Craig Dempsey May 31, 2021

Colombia could be well-positioned to take advantage of changes in Mexican outsourcing laws.

Photo: Berkeley Communications on Unsplash

Colombia could be one of the big winners from the recent implementation of an outsourcing ban in Mexico, which is set to severely restrict a type of employment arrangement that is popular among foreign investors and potentially cost the North American country millions of jobs.

The outsourcing ban, which was passed into law on April 23 with the endorsement of populist President Andrés Manuel López Obrador, is designed to close a loophole that has seen companies avoid tax and employee benefits via outsourcing arrangements, and which has contributed to a major spike in outsourcing in the country over the past two decades.

President López, who is known as “Amlo,” had been promoting the legislation since the second half of 2020, despite suggestions it could cost millions of jobs, and he quickly moved to sign off on the new bill after it passed through both houses of the Mexican legislature in just a week.

It stipulates that workers engaged in “core business activities” cannot be outsourced, and that such outsourced workers must be brought onto company payrolls within three months. It also forces outsourcing companies to provide the same benefits to outsourced employees as they would enjoy if directly employed, improving profit shares. 

This will effectively eliminate a large portion of professional employer organization (PEO) services, a popular outsourcing option among investors because it allows them to hire staff overseas without having to establish a local legal entity. PEO services can also be known as employer of record (EOR) services.

Many of the staff employed via EOR arrangements throughout Latin America are engaged in what could be considered “core business activities.” That will leave EOR clients affected by the ban having to choose between business formation in Mexico or taking their business elsewhere. 

For clients who benefit most from the convenience of an EOR arrangement, and are not necessarily tied to having their outsourced staff in one particular place, Mexico’s biggest regional competitors, such as Colombia and Chile, as well as the nearby sub-region of Central America, appear to be well placed to benefit.

Why Colombia Could Benefit from Mexico’s Outsourcing Ban

Colombia stands to benefit from Mexico’s outsourcing ban because of a mix of its geopolitical location, well-established investment ecosystem, and growing tech sector and related workforce.

  1. Geopolitical location

There is no denying that one of the big draws to doing business in Mexico is its status as a trade hub and proximity to the largest market on the planet — the United States. While Colombia obviously doesn’t benefit from sharing a land border with the global superpower, it is still less than seven hours by plane between Bogotá and Los Angeles or New York, while Cartagena and Miami are just a three-hour flight away. 

What’s more, Colombia’s status as one of the closest regional allies of the US, as well as the large Colombian population in the North American country, means there are strong economic ties and significant commerce and traffic between the countries.

In terms of trade, Colombia also benefits from major ports that serve both the Atlantic and Pacific oceans, while it is closer to some of the other key regional economies, such as Argentina, Chile, and Peru, not to mention the region’s powerhouse Brazil.

As such, for companies whose Latin American business is not concentrated in Mexico — or whose plans involve expanding further into the region — Colombia offers a central location with easy access to the entire Americas region.

  1. Business-friendly environment 

Another big pull factor in Colombia’s favour is the business-friendly conditions the country maintains and growing interest among international investors, which saw foreign direct investment (FDI) inflows grow almost ten-fold between 1999 and 2019.

Hiring through an EOR in Colombia is a popular option among investors, and is not going to be subject to the kind of ban that Mexico has implemented any time soon, making it a good alternative for anyone forced to look elsewhere by that ban.

Meanwhile, the country continues to promote entrepreneurship and innovation, as highlighted by the 2019/20 edition of the Global Entrepreneurship Monitor, in which Colombia scored better than the worldwide average in terms of government policies in support of enterprise, government-run entrepreneurship programmes, and post-school stage education.

That in part explains how Colombia has been able to emerge as a tech and innovation hub in the region, with Medellín and Bogotá boasting well-developed and growing startup scenes, and other cities throwing their weight behind support for innovation.

  1. Growing tech sector 

That leads to the final reason why Colombia stands to benefit: its rapidly growing tech and startup ecosystem, which means there is a ready supply of providers and talent in the country.

While Bogotá and Medellín are known as the major hubs of innovation, cities such as Cali and Barranquilla have seen significant growth in their tech sectors. This in combination with the educational opportunities on offer adds up to a growing pool of technicians and other skilled workers.

Such workers are commonly contracted via outsourcing arrangements to undertake what could be considered “core business activities,” making Colombia well-placed to sweep up contracts that can no longer be met in Mexico.

Meanwhile, Colombia also boasts growth in other commonly outsourced or increasingly in-demand services, such as the contact centre industry.  As such, the supply of talent on offer in the South American country will become increasingly interesting to companies forced to look beyond Mexico.

All of these factors add up to Colombia being in a particularly strong position to capitalize on the recent outsourcing ban implemented by Mexico, which could prove a boon to the country’s economy as it looks to battle back from the damage caused by the COVID-19 pandemic.

Craig Dempsey is the co-founder and CEO of Biz Latin Hub, a company dedicated to providing legal, accounting and back-office services to companies throughout Latin America and beyond.