The Perils of Global Business

Posted by: Steve Hamm on April 06

The economic slowdown that grips the world is trouble enough for most globally-oriented companies to handle, but Softtek, the leading IT services company in Latin America, faces a couple of extra challenges: wild currency swings and concerns about Mexico’s drug crime wave.

First, the crime. Ever since Mexico President Felipe Calderon launched an all-out war on the drug lords, violence between police and gangs, and one gang versus another, has surged. Drug-gang killings totaled 6,300 last year. When Softtek CEO Blanco Trevino and some of her executives visited me in New York a couple of weeks ago, I asked them about the drug violence, and Trevino was ready. She smiled and shook her head. She signaled to Alex Camino, one of her lieutenants, and he dipped into his brief case and brought out a 8 ½ by 11 map of Mexico that showed where the drug violence has occurred. The data was for November, 2008 and it indicated a total of more than 500 deaths. Trevino: “You see, it’s in the cities near the borders where drug cartels are fighting each other and the government is going after the drug cartels.”

She took a pen and marked with an x the spots in Mexico where Softtek has service delivery centers. Three are in areas where there were fewer than five deaths in the month, and one is in the 5-50 category. I asked: “Is this part of your sales presentation these days?” Trevino nodded and assured me that the IT industry and the illegal drug industry barely overlap geographically. “You can work with any IT vendor in Mexico. It’s not so bad,” she says.

Maybe not, but the fact that Softtek has a diagram ready to make that point means they must get the question a lot from customers and prospects, and that means it’s a concern. It could be costing Softtek business.

Second, the currency. Softtek does business globally, but most of its sales are in the Americas and Europe. It has service delivery centers in Mexico, China, Brazil, Argentina, and Spain. Looks like a nice diversified global footprint, but currency swings are causing a problem—what stock analysts call headwinds.

The privately-held company tallies its earnings in dollars. Mexico represents more than 20% of the company’s revenues and business there is growing at a healthy rate—in pesos. But the peso has lost about 25% of its value compared to the dollar. So Softtek’s revenue growth in Mexico looks flat. It’s the same situation in Brazil, another major Softtek market. Last year, the company turned in a strong revenue growth performance, with sales increasing 22 percent to $269 million. This year, because of those currency headwinds, it’s forecasting flat growth in dollars but 15 percent to 18 percent in local currencies. Fortunately, it’s not a publicly traded company, so investors won’t be slaughting its stock price.

What Softtek has going in its favor is its near shore services strategy. That seems to be clicking. In the fourth quarter, the company landed major customers in the US in retail, telco, and healthcare—industries it had not penetrated previously. If the company keeps winning deals like that, currency and crime won’t hurt if much in the long run.

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