“Janney’s Emerging Market Series” examines the progress of various global IT services destinations. Although we believe that India is the premier destination for the offshoring of IT services, we are keeping a close watch on other potential offshore and nearshore destinations including: China, Russia, Mexico and Canada (Nearshore), and Latin America. IDC estimates that the worldwide IT Services spending market was $438 billion in 2005 and is expected to grow at a CAGR of 5% to $555 billion by 2009. We expect nearshoring and offshoring to continue to grow as a percentage of total IT service spending over the same time period at a faster growth rate than total spending.

HIGHLIGHTS:

• We recently attended an IT Services conference sponsored by Mexico IT and the Secretaria de Economía held in Guadalajara, México. The event was well attended and provided insight into the value proposition of the nascent, nearshore IT Services market in Mexico. Although we believe that India remains the premier destination for the offshoring of IT services, we see other destinations as potentially value add propositions.





• Mexico’s IT services industry could be a useful piece in a global delivery offering. There are positives associated with Mexico. The country’s physical infrastructure appears sound and its geographical location, bordering the US, lowers traveling costs and eliminates time zone differences. The close geographic location also allows for the quick transfer of employees to onsite US locations. Attrition appears to be under control in Mexico, running at about 5% or lower for most vendors. The industry has the backing of the government, who offers a cash grant of 50% of total cost and tax credit of 30% of total R&D expense. Mexico presents an interesting proposition for vendors looking to diversify their global delivery offerings serving as a complement to an India centric offering.





• The industry is still in its early stages of development and has obstacles to overcome.The English speaking ability of Mexican IT services employees’ needs improvement. Although the Spanish-speaking predominance poses an obstacle on the IT services side, it could work as a positive in the area of BPO, allowing call center employees to reach 40 million Spanish speakers in the US. The cost of labor in Mexico is about 4 times higher than India. IT services college graduates make about $20,000 in Mexico compared to $5,000 in India. Mexico’s labor supply is also smaller. Mexico graduates about 65,000 graduates compared to 280,000 in India.





• India still the leader in the offshoring of IT services.The most difficult problem that Mexico and other emerging markets will face in trying to compete in the global IT services arena is the comparatively large pool of talented, lower cost IT services professionals in India. India’s size and scale is unmatched. However, wages are on the rise in India, and attrition rates continue to be an issue. We continue to view India as the premier destination for offshoring IT services, but believe emerging markets, like Mexico, could potentially be a useful addition to a global delivery offering.





• Some of the top companies in Mexico are beginning to build scale. Two of the countries larger companies, Softtek and Hildebrando, have over $100 million in revenue and over 1,000 total employees. Softtek has been particularly aggressive reporting total headcount of over 4,000 employees. Another Mexican-based company, Sinapsis, has been instrumental in helping large firms build captive centers.