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Software Outsourcing In Costa Rica

By Ian McGovern

Costa Rica is a small central American country that bears uniqueness in many ways. The country constitutionally abolished is army in 1949 in order to reallocate scarce funds to human services programs. The local citizens refer to themselves as Ticos and Ticas. Most Ticos have two surnames: one from their father, which is listed first, followed by one from their mother. Only the father's surname is used when addressing someone. The most repeated phrase in the country is “Pura Vida”. Translated as ‘pure life’ it is catch all phrase commonly used for pretty much any occasion.

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

Getting around the country can be interesting. Driving can be an adventure due to both the congestion and the poor state of the infrastructure (some holes in the roads and highways have been around long enough that they actually have names). More striking to first-timers is that only about 20 roads in the country are named (and most of those are not marked). Getting around or addressing mail is done entirely by landmarks (e.g. the tin building 100 meters to the South of the cemetery). Despite the initial awkwardness for foreigners, visitors generally come to understand directions in short order.

Costa Rica has held itself out as an offshore and near shore software development destination for nearly two decades. While its efforts in attracting foreign technical employers have not been as organized as competing Latin American destinations such as Mexico, Brazil, Argentina and Columbia, the country does possess a small but steady workforce of technical resources and software programmers.

Outsourcing in Costa Rica is enhanced by 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 Intel and HP. However, while Intel is growing in the country, that growth consists primarily 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 sport book companies. Similar to their support for legal prostitution, the Costa Rican government turns a blind eye to illegal online gambling and along with Antigua and a few other destinations, the country has become dependent upon the Internet gaming industry. If you hire experienced programmers in Costa Rica, it is near inevitable that every resource will have worked for either Intel or a sport book gaming company – and most likely both.

From a technical perspective, Costa Rica programmers are similar to any other Latin American destination. As there are few large employers in the country, big project experience and project management skills are rare. While 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 far too common and refusing to meet the demand will certainly reduce the recruiting pool.

While the currency (colon) experiences steady inflation but is otherwise dependable, many local businesses and many staff prefer or demand to be paid in US Dollars. Expect to make your rent payments 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). Agenaldo is the name of a regulatory requirement to pay each staff person an extra month’s salary at the end of the year.

Costa Rica appears at a strenuous 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 Outsourcing Advantages

• Organizing a new 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 government websites to spell out the requirements, instructions and paperwork for incorporation, they don’t exist.
• Monthly payroll and other tax fulfillment 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 proved successful.
• Financial bookkeeping is archaic but simple. 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 to satisfy the government requirements. Certain schedules and statements must be taken to government offices to be stamped. Electronic documents have not fully made it to the country.
• IP (intellectual property) protection is reasonable. Costa Rica has laws pertaining to the rights and protection of IP including trademarks, trade secrets, patents, and copyrights, supported by the Ministry of Justice and the Chamber of Industries. Because enforcement of those laws is inconsistent and some IP breaches have been publicized, most foreign technology employers implement 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

• Regulatory compliance is a guessing game. Just trying to understand all the business regulatory requirements is a frustrating process and varies based upon who you speak with. The country lacks a single definitive (online) source for business compliance support.
• Business basics can be consuming. Simple tasks like setting up a bank account generally require multiple signed and stamped attorney documents (such as Poder Generalisimos, Poder Especials, Personeria Juridicas and/or Cedula de Persona Juridicas), multiple trips to the bank and great patience.
• The technology infrastructure is poor. The technology infrastructure is dated, unreliable and expensive. Electricity, telephone and Internet services are provided by monopolistic Government bodies (ICE and Rasca) and without competition services are poor and prices are high. The government run 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, many workers expect bribes and payoffs. Some will simply ask for a ‘fee’ or other payment term while others will simply deny services or impose long wait times until they are offered money.
• Bogus workplace fraud claims are common. A CIO magazine 2008 outsourcing comparison review among many near shore and offshore destinations showed that Costa Rica incurred more workplace accidents that any other country.
• Scaling a software development shop is next to impossible. There is a very small population of experienced software programmers. The Costa Rica programmer population is less than ten percent of the developer populations in other Central and South American countries such as Mexico, Brazil and Argentina. The small population of developers limits offshore offices to small shops.
• More technical positions such as information security administrators, chief architects and data center operators are very rare.
• Recruiting is very difficult. Costa Rica lags other Latin American countries in organized recruiting methods. There are 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 sole third party recruitment method is the recognized local newspaper – La Nacion – and its effectiveness rate is poor. The sole recruiting method in the country is word of mouth.
• Technology workers are expensive. The average compensation plans for Costa Rican programmers and technical positions are approximately 11% higher than Mexico, 13% higher than Brazil, 21% higher than Columbia and 26% higher than Argentina. When comparing technical staffing costs outside of the Latin American region, Costa Rican technical 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 technical talent in the country is low which keeps prices high.
• Payroll and HR 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 regulatory HR programs for sick time, paid time off, maternity leave, Aguinaldo (legally required Christmas bonus), termination payments and the like make the true burdened cost much closer to 50%.

With its proximity to the US, Costa Rica offers a viable near-shore outsourcing destination for North American enterprises 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, Columbia, Brazil and Argentina.

READER COMMENTS

By Bobby Goldberg

We are looking at starting an offshore software programming office in Mexico. What cities should we consider?

I recommend you begin 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 and a very impressive university. The area also offers prosperous suburbs such as San Pedro Garza Garcia. The volume and quality of the technical resources and the area have made Monterrey an outsourcing home to over 1,650 US companies.

By Frank James

What are the travel requirements and recommendations when visiting Costa Rica and is the country safe?

Citizens of United States, Canada, Great Britain and most European nations may visit Costa Rica for a maximum of 90 days. No visa is necessary, but you must have a valid passport. Ticos must get a Visa to come to the US and the US Government 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 assured that any young Costa Rican woman will not get a Visa.

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

Are there differences between the ticos and other Latin Americans?

I think so. Costa Ricans are by far the most punctual people in Central America. The country has a low power distance ranking which de-emphasizes the differences between a person’s power and wealth, in other words, equality and opportunity for everyone is important. Costa Rica also ranks lower on masculinity which indicates a low level of differentiation and discrimination between genders. Women are treated more equally to males in all aspects of society.

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

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