Last year, a frustrated Matt Pérez joked about outsourcing software work to Mexico instead of India, and before he knew it, he had the beginnings of a business plan. As a veteran Silicon Valley software executive, Mr. Pérez knew all about sending jobs to to India.

But working across time zones was a headache. “I was the guy who stayed until 9:30 or 10:00 at night to talk to the guys in India,” he remembers. Sometimes, it would take days of back and forth on the phone to make sure everyone was clear on what needed to be done. Then there were the cramped 20-hour flights to India.

Mr. Pérez, a former director of multimedia software at Sun Microsystems and CEO of several startups, figured there had to be a better way. So he teamed up with Roberto Martínez, then CEO of C³ Technologies, a Mexican software company, and formed Nearsoft in San Jose, California.

Today, Nearsoft outsources projects for U.S. companies and sends work down to Hermosillo, Mexico, 860 miles south of Silicon Valley. Factoring in reduced travel costs and fewer overhauls resulting from projects lost in translation, he says software services ended up costing 20 percent less than what they do in India.

Nearsoft now boasts clients like software maker KLA-Tencor and Chamberlain, a company that makes garage door openers.

Indian outsourcing companies have their hands full these days, fighting a skills shortage (and parallel wage inflation). They also face consolidation through 2007-08, according to a report last year in India’s Business Line. The Hindu’s online news service, citing Forrester Research, said Indian outsourcing companies would have to regroup to fight off heavier competition from IBM, EDS, Accenture and other U.S. players.

According to the National Association of Software and Services Companies (NASSCOM) in India, the country’s exports of software and other services like call centers totaled $23.6 billion in 2006, up 33 percent from 2005. And Plunkett Research says that global outsourcing revenues are projected to hit $450 billion by 2007. The Houston, Texas-based research firm doesn’t monitor Latin America outsourcing revenues, but notes that subcontracting in the region is on the rise as U.S. companies seek out closer offshore sites.

And so Mexico, Brazil, Argentina, Chile, Peru and other countries are appearing on radars. Managers are in the same time zone as their employees, and can troubleshoot all day in real time.

To take the closest example, a flight to Mexico costs a few hundred dollars and takes only a couple of hours from Silicon Valley. Managers also say that Mexico is much more similar to the U.S. than India is, making the United States' southern neighbor an up-and-comer in the world of outsourcing.

“Our customers are people who are already doing outsourcing in India, or have done it, and are looking for something else,” says Mr. Pérez. “Would they have thought of Mexico before I showed up? No. It’s not really on the map.”

The problem with Mexico is the perception it doesn’t stack up to India. “My bias, to be honest, was, I’m not going to find the people, the training, the schools,” he says. But Hermosillo, capital of the state of Sonora, south of Arizona on the U.S. border, is home to several tertiary institutions, including a campus of Tecnológico de Monterrey, Mexico’s top engineering university. Something must be right: Mr. Perez, who emigrated from Cuba to Chicago with his family as a teenager, says the 30 engineers he now employs at in Hermosillo do fantastic work.

Mario Chaves used to have the same doubts about his native Costa Rica. He came to the U.S. when he was 18 and studied electrical engineering at U.C. Davis. He worked for Hewlett-Packard after graduation and eventually became a project manager at accounting software company Intuit. Working on a costly project several years ago, Mr. Chaves contacted his brother, a technology manager for a prominent Costa Rican bank, to see if anyone down there could help.

“My standards are pretty high because I’ve worked with some of the best teams in Silicon Valley,” says Mr. Chaves, admitting he’d never considered Costa Rica as a place to get software development done.

But the engineers his brother provided turned in fantastic work. And so Mr. Chaves started his own outsourcing company called Avantica in Menlo Park, California. Over the ensuing eight years, he built a team of 150 people, culling talent from the University of Costa Rica.

Avantica’s clients have included companies like Cupertino, California-based Chordiant, which makes CRM-based customer loyalty software; Emeryville, California-based educational product developer Leapfrog; and web development tool maker Macromedia (which later merged with San Jose, California-based Adobe Systems).

Mr. Chaves moved on from there, recently opening up operations in Lima. Now he’s thinking about expanding beyond Peru, possibly to Argentina and Chile.

But despite U.S.-friendly time zones, some doubt how far software outsourcing can go in the region. “The fact is that you don’t have the critical mass in Mexico,” says Vivek Wadhwa, an executive in residence at Duke University’s Master of Engineering Management program. Mr. Wadhwa has conducted a number of studies on outsourcing and some facts are inescapable. If HP needs a development team of 1,000 engineers, he says, the company knows it can get them in India.

Latin America, he says, just doesn’t offer that kind of scale.

Ron Hira, a public policy professor at the Rochester Institute of Technology, has written extensively on outsourcing and notes that Latin America doesn’t enjoy the government support outsourcing has in India. “Are these countries prepared to support their industries?”

Sanjiva Nath agrees Latin America may lack the infrastructure to support large scale projects, but he doesn’t really care. Born in India, and a longtime engineering manager in Silicon Valley for companies like IBM, Mr. Nath decided to start his own software company, zAgile, an open-source software tool company, in San Francisco.

He set out to find engineers, and after four months’ traveling through the region, he pulled together a team of 11 engineers from Peru, Brazil, and Chile. “South America is my secret,” he says gleefully. “What I’m paying them would blow you away!” (When pressed, Mr. Nath says says that in Brazil, you can give a developer $2000 a month; in Santiago where the cost of living is higher, the payscale might climb to $3000-3200—versus $4000-$4500 for a good developer in India, or $8000-9,000 in the U.S.)

“You don’t have rocket scientists coming out of Latin America anytime soon,” Mr. Nath concedes. “But the question for a lot of companies is, ‘Do I need a rocket scientist?’”

Andres Franklin, a former senior software director at Avantica client Leapfrog, says Avantica’s work made a big impression. Mr. Franklin had organized Leapfrog’s foray into outsourcing for five years, leading teams in India, China—and Latin America. And he found, in Costa Rica, at least, that engineers understood the importance of deadlines and frequent communication.

“It didn’t seem to be a whole lot different from [the U.S.],” Mr. Franklin says. Some outsourcers with experience in both hemispheres note that, unlike some Indian suppliers who have been known to promise the earth, Latin American engineers tend to be upfront about what they can achieve and what they can't do. 

Mr. Franklin was so taken with some of his outsourcing vendors he decided to leave Leapfrog and join one. He is now the vice president of new business development with Panarea, an Argentine firm of about 40 engineers.

However slowly, Latin America is scaling up.