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Costa Rica Offshore Software Development

Costa Rica is a small central American country that demonstrates uniqueness in several ways. Costa Rica constitutionally abolished is army in 1949 in order to refunnel limited funds to social services programs. The local residents refer to themselves as Ticos. Most Ticos have two surnames, one from their father, which is listed first, followed by one from their mother. Normally only the father's surname is used when addressing someone. The most repeated phrase in the country is “Pura Vida” (pure life), a catch all phrase used for pretty much any occasion.

The locals are friendly and at the professional level speak English at an intermediate level. The country’s Pacific coast and interior tropical forests are splendid and the clear draw for ecotourism. However, the capital city of San Jose is where commerce occurs and is a congested and dirty city with significant poverty.

Getting around can be interesting. Driving is an adventure due to the congestion, fast moving vehicles and poor state of the infrastructure (many holes in the roads and highways have been around long enough that they actually have names). More striking to foreigners is that a street addressing system is not used. Except for a very few downtown roads, the streets are not named and the houses and buildings are not numbered. Getting around or addressing mail is done entirely by landmarks (e.g. the green building 250 meters North of the movie theatre). Despite the initial uneasyness for foreigners, visitors generally come to understand directions in short order.

Costa Rica has been an offshore and near shore software development destination for about two decades. While its efforts in attracting foreign technical employers have not been as proactive and organized as competing Latin American countries such as Mexico, Columbia, Argentina and Brazil, the small central American country possesses a small but steady technical workforce of software programmers.

Outsourcing in Costa Rica is enhanced by its proximity to the US and a shared Central Time Zone making the country more of a near shore outsourcing destination. The largest technical employers are clearly HP and Intel. However, while Intel is slowly growing its workforce in the country, that growth consists mainly of unskilled assembly jobs and the company has been gradually shifting its technical and programming jobs to other countries.

The remaining technology industry is almost entirely composed of online gambling and sport book companies. Similar to their support for legal prostitution, the Costa Rican government turns a blind eye to illegal online gambling and has become dependent upon the Internet gaming industry. If you hire experienced software programmers in the country, it is most likely that every technical resource will have worked for either Intel or an online gambling company – and most likely both.

From a software development outsourcing perspective, Costa Rica programmers are similar to any other Latin American destination in terms of skills and work ethic. Because there are few large employers in the country and most employers are small sport book operations, big project experience and credible project management skills are very rare. While software programmers are viewed as high end professionals in the country, many still request to be paid under the table in order to escape the Government’s high social taxes. The practice is common among the sport book employers and refusing to meet this demand will certainly penalize more legitimate employers by reducing the size of the recruiting pool.

The local currency (colon) experiences steady inflation but is otherwise dependable. Many local suppliers and many staff prefer or demand to be paid in US Dollars. Expect to make your rent payments and other large disbursements in US Dollars. Staff desire US Dollars as the Costa Rican colon experiences constant double digit inflation (it is currently the fourth highest inflation rate in Latin America).

Costa Rica appears at a tenuous cross roads with regard to free trade and protectionism. Despite the strong protests of the country’s monopolistic utility companies (primary ICE (The Instituto Costarricense de Electricidad) and Rasca), the Government passed the CAFTA (Central America Free Trade Agreement) which promises to bring increased competition, products, services and foreign investment. Nonetheless, implementing CAFTA and increasing global trade remains tenuous and very questionable.

Costa Rica

Costa Rica Outsourcing Advantages

  • Creating a new Costa Rican company is relatively simple. To do business in the country, you will have to incorporate a Costa Rican company. The incorporation will require a local attorney but is fairly straightforward and inexpensive. Don’t expect to access government web sites which spell out the regulatory requirements, instructions and paperwork for incorporation, they do not exist.
  • Payroll and other tax fulfillment obligation are simple although laborious. Payroll taxes, social services payments and workers compensation are deposited with supporting (handwritten) schedules to Tributacion, Caja (CCSS) and INS (Instituto Nacional de Seguros). Several attempts at putting these processes online have not been successful.
  • Financial record keeping is archaic but simple. Your fiscal year will be September 30. Monthly financial statements and required schedules can be prepared according to International Accounting Standards (IAS) and must be in Spanish. For a fee of around $500 USD per month, a local accountant will prepare a simple monthly financial package which will likely satisfy the government's requirements. Several supporting schedules and financial statements must be taken to government offices to be physically stamped. Electronic documents are rare in the country.
  • Intellectual property (IP) protection is reasonable. Costa Rica has laws for the rights and protection of IP which include trademarks, trade secrets, patents, and copyrights, and are supported by the Ministry of Justice and the Chamber of Industries. Because enforcement of those laws is light, inconsistent and some IP breaches have been publicized, most foreign technology employers implement multiple levels of internal controls in addition to the available legal safeguards.
  • For the most part, labor unions only have a significant role with public sector workers. The main form of labor organization in private companies are the Solidarity Associations.
  • The country offers political stability. Despite constant corruption (several prior presidents are in jail or on the run), the government is a legitimate democracy bound by a strong constitution. Costa Rica has been able to avoid much of the violence that has plagued other Latin American countries.

Costa Rica Outsourcing Disadvantages

  • Business and HR regulatory compliance are a guessing game. Just trying to understand all the business regulatory requirements is a frustrating process and changes based upon who you speak with. The country lacks a single definitive (online) information source for business compliance support.
  • Simple business activities can be consuming. Common tasks like setting up a bank account generally require multiple signed and stamped attorney documents (including as Poder Generalisimos, Poder Especials, Personeria Juridicas and/or Cedula de Persona Juridicas), multiple trips to the bank and strong patience.
  • The technology infrastructure is poor. The information technology infrastructure is dated, unreliable and expensive. Telephone, Internet services and electricity are provided by monopolistic Government units (Rasca and ICE) and because there is no competition the services are poor and the prices are high. The government owned telephone company, ICE, is currently attempting to outlaw VoIP. Power outages in even the most high rent office districts are common. Internet service is antiquated and unstable. There are no real data centers in the country and bandwidth is expensive.
  • Corruption is common. Even with government positions, some workers expect bribes and payoffs. These people often ask for a ‘fee’ or use a similar payment term or may deny services or impose long wait times until they are offered bribe.
  • Insurance fraud claims are common. A 2008 CIO magazine outsourcing comparison review among many near shore and offshore outsourcing destinations illustrated that Costa Rica incurred more workplace accidents that any other country.
  • Growing a software development shop is extremely difficult. There is a very small population of experienced software programmers. The Costa Rica software programmer population is less than ten percent of the developer populations in other Latin American countries such as Mexico, Brazil and Argentina. The small population of developers limits offshore outsourcing offices to small shops.
  • Higher-end technical positions such as information security administrators, chief architects and data center operators are few and far between.
  • Recruiting is a very difficult process. Costa Rica lags other Central and South American countries in organized recruiting methods. The country offers no Internet-based recruiting sites, there is no Monster.com for the country, there are no headhunters and there are no technical job fairs. The only third party recruitment tool is La Nacion, the primary newspaper, and its effectiveness rate is dismal. The sole recruiting method in the country is word of mouth.
  • Software programmers are expensive relative to other near shore destinations. The average compensation plans for Costa Rican programmers and similar technical positions are approximately 11% higher than Mexico, 13% higher than Brazil, 21% higher than Columbia and 26% higher than Argentina. When reviewing development staffing costs outside of Latin America, Costa Rican programmer salaries are approximately 32% higher than equivalent positions in India. The higher labor costs are largely a function of demand and supply. The supply of programmers and technical talent in the country is low which keeps prices high.
  • Payroll and taxes are extremely high. Costa Rica is a welfare state. Employer taxes are 25% to the employer (for Tributacion) to be applied to full payroll cost and 9% to the employee (for Caja). Additional government imposed regulatory fees for sick time, paid time off (PTO), maternity leave, Aguinaldo (legally required Christmas bonus), termination payments and the like make the true burdened human resource (HR) cost much closer to 50%. Aguinaldo is the name of the government requirement to pay each staff person an extra month’s salary at the end of the calendar year.

With its proximity to the US, Costa Rica offers a viable near shore software outsourcing destination for North American companies looking to staff small programming shops. However, if scale or costs are key decision making criteria, the foreign employer would be wise to also consider Mexico, Argentina, Columbia and Brazil.


READER COMMENTS

By Frank Goldberg

We are considering starting an offshore programming office in Mexico. Are there certain cities where we should look first?

Yes. I recommend you start your Mexican outsourcing search in Mexico City, Guadalajara and Monterrey. Mexico City and Guadalajara are large cities which have been near-shore outsourcing locations since the early 1990's. Monterrey is home of Mexico's top university, Tecnologico de Monterrey, which is modeled after MIT in the US. This area also offers prosperous suburbs such as San Pedro Garza Garcia. The technical talent and the area have made Monterrey an outsourcing home to over 1,600 US companies.


By Frank James

What are the travel requirements and recommendations when going to Costa Rica and is the country safe for visitors?

Citizens of US, Canada and most European Union (EU) countries may visit Costa Rica for a maximum of 90 days. A travel visa is not required, but you must have a valid passport. To travel out of the country, Ticos must get a Visa to come to the US and the US embassy service scrutinizes Tico Visa requests to make sure they will return to Costa Rica after their trip. Due to legal prostitution which has created a large workforce of young women seeking to exploit their trade into the US, it is virtually impossible for any young Costa Rican woman to get a Visa to the US.

For the most part, San Jose is a safe and friendly city. However, walking the Paseo Colon or the eleven block area known as the Boulevard in downtown San Jose at night could be dangerous and should be avoided. Property crimes are common which is why every house and building in the country has bars on the doors and windows. Organized crime is minimal however increasing due to influences from Columbian crime rings. Costa Rica has a nationwide power grid standard 110 volt, 60 Hz electricity so US appliances work without electrical converters.

Are there differences between the Costa Rican ticos and other Latin Americans?

I think so. Costa Ricans are much more punctual than in many other countries. Ticos have a low power distance ranking which deemphasizes the differences between a person’s power and wealth, indicating that equality and opportunity for everyone is important. The country also ranks lower on masculinity which indicates a low level of differentiation and discrimination between genders. Women are treated more equally to males in nearly all aspects of society.

Send reader comments to info[at]outsourcedestination.com.

By Ian McGovern. Ian McGovern has been managing an offshore software development group in San Jose, Costa Rica since 2001. He also manages offshore programming offices in Mexico and Argentina.

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