Outsourcing from Brazil: Trends and Traps
Think of this as a quick but data-packed introduction to Brazil. In this special two-part analysis, Atul Vashistha, founder & chairman of Neo Group and a world-recognized outsourcing expert, explores the situation in Latin America’s fastest-growing provider of IT services.
Atul starts by examining the current landscape, then points out the potential pitfalls that all sourcing clients should know about. In part two, he will discuss the opportunities that Brazil offers to sourcing partners.
Diversify your stock portfolio. This is a mantra we have been hearing for ages. Well, it is now ringing true in sourcing too! As global sourcing continues to grow, so does the interest in new locations. Companies are interested in new locations to diversify risk but also to better serve their own diverse operations or diverse needs.
Brazil is emerging as an alternative (or complement) to other offshore locations, with an interesting combination of characteristics that are similar but also very different from the traditional low-cost locations, such as India and the Philippines.
Brazil has a very strong economy domestically, which was one of the least affected in the world by the economic downturn. Many of its Latin American neighbors are also experiencing strong growth in their GDP. The Latin America services market will reach $31 billion in 2010, with a 10.4% CAGR through 2013. Brazil comprises about 40% of this total, with an expected growth rate that is higher than the region’s average.
Several USA and European suppliers are active in the country.IBM, Unisys, HP-EDS, Accenture, Capgemini, andTeleperformance have offshore centers in Brazil. Indian firms such as TCS and Infosys are present here. More importantly, several strong local firms seem to have a headstart, such as Stefanini, Tivit, BRQ, CPM Braxis,Ci&T, and Politec, to name a few.
The IT services market in Brazil is characterized by the emergence and growing maturity of indigenous service providers, continuous investment in Brazil-based operations, the growth of all major global providers participating in the Brazil market, and the arrival of the leading Indian players into Brazil (notably TCS, Infosys, Wipro, and to a lesser degree HCL and Cognizant).
All these players have always expressed that they could not afford to be absent in the promising Brazilian market. In fact,Capgemini’s partial acquisition of CPM Braxis and Chilean IT company Quintec’s plans to merge with Brazil’s Politec clearly signals Brazil’s and LatAm’s potential.
The various players have also indicated that they expect a solid, steady growth of the internal market in the next one to two years, with a long-term perspective that more-decisive support from the government will make service costs more competitive abroad.
Let’s take a look at the trends in Brazil that support sourcing. In 2009:
Population – 193.7 millions (fifth largest in the world)
GDP – US$ 1574 billions (eighth largest in the world!)
GDP per capita – US$ 8220 (57th)
GDP (PPP) as a % of world total – 2.87 (ninth in the world)
Worldwide rankings according to the World Economic Forum’s Global Competitiveness Report:
Secondary education enrollment rate – Rank 22
Availability of research and training services – Rank 36
Financial services availability – Rank 27
State of cluster development – Rank 23
GDP was forecasted at 7.7% growth in 2010 and reached a 7.5%. The forecast for 2011 is at 5.1%.
According to the same report:
1. The services sector contributes 65% to the overall GDP, very close to developed economies like Australia.
2. Brazil ranks at 58 on the Global Competitiveness Index, with only Chile (30), Panama (53) and Costa Rica (56) from LatAm ranked higher, making it a very competitive country for global business.
3. Brazil ranks at 10 in terms of the market size due to its huge domestic market.
4. Brazil is a fairly stable economically at 58th, after following an impressive upward trend for the last couple of years (between 2007 and 2009). The country’s recent dynamism in the rankings has reflected the remarkable strides made in the past 20 years toward macroeconomic stability, liberalizing and opening the economy, and reducing income inequality; among other dimensions. These efforts have been instrumental in putting the economy on a much sounder competitiveness foundation and in providing a markedly more business-friendly environment for private-sector development.
5. Brazil is enjoying a very steady economic growth. While the country’s GDP contracted slightly in 2009 (negative 0.18%), the economy started to grow again in 2010, with an expected annual growth rate of 5.5%.
6. Among its solid competitive advantages are its large market size (ranked 10th), providing the efficient and dynamic business sector (ranked 31st for business sophistication) with important economies of scale, and a large basis on which to absorb and introduce process and product innovation (ranked 44th and 42nd for technological adoption and innovation, respectively).
Moreover, Brazil displays one of the most developed and sophisticated financial sectors in the region, coupled with fairly efficient infrastructure by regional standards and a relatively well functioning higher education system, notably in its on-the-job training component.
Labor Force: Short on IT
Brazil has a labor force of 86 million, 66% of which work in services, in general. Growth rates for the IT services industry indicate that 750,000 additional professionals will be needed in the country in the next 10 years (300,000 for the export market).
Projections indicate that the number of college graduates in IT-related careers will reach approximately 48,000 in 2010 and 53,000 in 2013.Additionally, graduates from other areas, especially business areas, will also pursue careers in IT. Some of the new professionals will replace retiring professionals among the 600,000 in the IT labor pool (1.7 million, considering call centers).
This scenario indicates a progressive shortage of IT professionals. As a result, enterprises in the IT industry undertake the responsibility of preparing the workforce, usually in partnership with local governments in second-tier cities.
More than 60% of IT service companies’ labor pools are located in seven major cities — Sao Paulo, Rio de Janeiro, Curitiba, Belo Horizonte, Porto Alegre, Recife and the capital Brasilia. The biggest labor pool in the country is located in Sao Paulo, with a size of 225,000. However, the scarcity of resources is already becoming an issue, and companies are rapidly and successfully reaching out to Tier 2 cities with good universities (for example, Campinas, Hortolandia, Sao Carlos, Uberlandia, Londrina, Maringa, Florianopolis and many more).
Characteristics of flexibility, creativity, and client empathy, in addition to specific domain skills (especially in the financial, insurance and communications verticals), make Brazilian resources attractive. A large percentage of workers have good business acumen and knowledge of business practices.
Brazil is well connected to the world. Immigration has resulted in cultural diversity. The culture in general, and business practices in particular, are influenced by U.S. and Western European practices.
Brazil has been the destination for several waves of immigration from different areas, most notably Portugal, Italy, Germany, Japan, the Middle East and other Latin America countries. Since World War II, Brazil has been strongly under the economic, and cultural, influence of American culture, such as movies, TV shows and magazines. Business practices are influenced by American and European multinationals.
Political and Economic Stability
Brazilian international risk ratings are low and trust from international investors is high. The economy has been stable and growing, and inflation has been under control. The country has shown continued political stability and this is forecast to continue with the new government in 2011. Merger and acquisition activity increased in 2010 as a growing number of IT service providers looked to establish operations in Brazil.
Brazil ranks among “the best one third” of 178 countries, according to World Audit (democracy, 50/150; press freedom, 54/150; and corruption, 57/149), and is progressing in the rankings each year. Due to the international economic crisis, expected foreign direct investment (FDI) was reduced to $38 billion in 2010, after reaching an all-time record of $45 billion in 2008. The country remains among the world’s top FDI destinations.
Economic indicators are favorable: Inflation was at an all-time low in 2010 at 4.43%, and GDP growth should reach 4.5% in 2011.
The country exhibits high “IT readiness.” For example, elections have been totally computerized for several years; close to 100% of all income tax returns are filed through the Internet; and the Brazilian federation of banks reports that close to 20% of all banking transactions originated on the Internet in 2009. The Brazilian software and IT services industry reached $22.4 billion in 2009. Exports reached $3 billion and are growing at a healthy compound annual growth rate of 20%.20
Since 2003, Brazil has steadily improved its macroeconomic stability, building up foreign reserves, and reducing its debt profile by shifting its debt burden toward real denominated and domestically held instruments. After record growth in 2007 and 2008, the onset of the global financial crisis hit Brazil in September 2008.
Brazil experienced two quarters of recession, as global demand for Brazil’s commodity-based exports dwindled and external credit dried up. However, Brazil was one of the first emerging markets to begin a recovery. Consumer and investor confidence revived and GDP growth returned to positive in 2010, boosted by an export recovery. Brazil’s strong growth and high interest rates make it an attractive destination for foreign investors.
Large capital inflows over the past year have contributed to the rapid appreciation of its currency and led the government to raise taxes on some foreign investments. President Dilma Rousseff has pledged to retain the previous administration’s commitment to inflation targeting by the Central Bank, a floating exchange rate, and fiscal restraint.
Know the Potential Traps
The World Bank’s Doing Business 2010 report ranks Brazil at 129th out of 183 countries for ease of doing business. Brazil is ranked low because of bureaucratic difficulties in registering property, starting a business, closing a business, paying taxes, employing workers, and conducting business across borders.
Restrictive labor regulations: More attention is needed to correcting antiquated labor laws, which make Brazil labor rates higher than those of competing countries. The country also needs to create greater scale of IT resources, with the government doing more to support creation of IT jobs. As mentioned earlier, the country faces a significant short supply of IT professionals that is projected to last for the next several years at least.
Macroeconomics: Despite the progress made toward fiscal sustainability, the macroeconomic environment in the country remains worrisome, with notably low savings rates (15 percent, 101st), a high interest rate spread (35.4 percent, 136th), and relatively high public indebtedness (48 percent of GDP, 84th).
High attrition: Attrition rates are in the 15% range, but comparable to the other Latin American countries and significantly better than those experienced in India.
Data security and privacy: Brazil has several laws and legal protections on privacy, but enforcement is not stringent. While a growing information security industry exists, considerable work remains to be done in the areas of intellectual property protection, the enforcement of anti-piracy laws, and physical security.
• A very sophisticated financial industry, integrated through a countrywide, real-time network, commands a very high level of security and intellectual property protection in IT services.
• Data piracy rates were estimated at 56% for 2009 (down from 64% in 2005), the lowest in Latin America, next to Colombia (55%).
• Brazil’s 1996 industrial property law brings its patent and trademark regime up to the international standards specified in the TRIPS agreement, although the fraudulent use of internationally famous brands remains a problem.
• Brazil’s copyright law generally conforms to world-class standards, and the country is a member of the World Intellectual Property Organization.
High taxes and regulatory costs: Many corporations say that the high taxes compromise Brazilian competitiveness in the global market. The middle class complain that, besides paying high taxes, there is not a return in services from the government; most middle class families have to pay for private education, private health, and, more recently, private safety. The tax burden is less in Latin American neighbors like Colombia, Mexico, and Peru.