The consensus from NSAM's readers: Wait for the Castros to move on before taking Cuba seriously.

By Jon Tonti

A mere 230 miles from Miami, Havana’s ultra-attractive geographic positioning continues to push Cuba on to the radar of ‘what ifs’ when looking at explosive possibilities in the Nearshore services sector.

But before floating into dream land – let’s review the facts: Cuba’s BPO market today is nearly non-existent and the Cuban government is not focused on jump-starting it.  Despite an intelligent workforce that is increasingly exposed to private-run business, Cuba still has a long way to go to become viable for global services. We drew upon our pool of experts and did some poking around of our own to find that Cuba lacks a BPO scene because of the Cuban government’s preference for other industries, a weak technological infrastructure, a dearth of transparency, and political and workforce uncertainty.

“The Cuban government doesn’t appear to be that interested in BPO; they seem to be more focused on tourism and natural resource extraction.  You really may need a regime change to get things moving with BPO,” says Peter Ryan, lead analyst at Ovum.  His opinion reflects the results of a recent Nearshore Americas online poll that indicated over 65% of audience members saying “Wait for the Castros to Move On” before examining Cuba.

Cuba already has plenty of experience participating in joint ventures with first-world democracies like Canada and Spain albeit in non-service related industries.  Canada based international mining giant Sherritt Corp. has operations in Cuba.  Spanish foreign direct investment is mostly focused on the Cuban tourism industry, which currently accounts for 12% of the labor market as reported by the US State Department, and was made possible by a series of market oriented reforms in 1993 and 1994 in attempts to stave off fiscal crisis.

Joint ventures occurring between Cuba and international companies would seem to be a signpost of Cuba’s readiness and capability to take on BPO operations, even majority foreign ownership has supposedly been allowed since 1995 despite little evidence of its actual existence. Regrettably, joint ventures between the Cuban government and foreign firms steadily declined in the seven year period between 2002 and 2009.  Reasons cited for the decline are encumbering regulations, grueling bureaucracy, and high-priced inefficient labor.

“Therein lies the problem, it is not a free market,” says Ryan when asked about how a company interested in launching a BPO joint venture with the Cuban government would go about negotiating wage rates.  “Instead you have the DR or Jamaica right there and they are already proven BPO markets with less red tape and more transparency.”

“I am sure Cubans can adapt and provide quality customer service, but it will not happen overnight”

 Is the Workforce There and Ready?

UNICEF data shows that the Cuban population has 100% literacy and youth enrollment in primary and secondary education is on par with that of the most economically successful nations in Latin America.  That reality combined with the fact that 12% of the labor market is employed in the tourism industry, where those workers may be either formally or informally receiving an education in current hospitality standards, is an argument used by some to predict that Cuba is ready for BPO.  How many workers of that 12% are truly focused on guest centric activities?  The impact is overestimated.

BPO would also find it difficult to pinch those few readied workers focused on guest centric services from the tourism sector because of the tips they receive; it is not uncommon for a worker to receive a tip that is half their monthly salary.  As for the vast majority of the Cuban workforce that is not involved in tourism, although highly educated, may take time to deliver high quality BPO services.

“It is hard to conceptualize Cuba becoming a hub for customer service anytime soon.  Customer service is very much an idea rooted in the North American business psyche.  To generalize, Cubans have simply not been exposed to this practice and as a society and they will need time to switch gears.  I am sure Cubans can adapt and provide quality customer service, but it will not happen overnight,” says Sonya Fierst, a research analyst for Centro de Estudios en Economía Sistémica (ECSIM) who recently traveled to Cuba.

Even if Cuba were to become a market economy tomorrow the communism hangover would endure for some time.

 Infrastructure Woes

Internet connectivity in Cuba has been known to be abysmal with the Cuban National Statistics office reporting as recently as 2010 that only 2.9% of the population used the internet over the previous 12-month period.  The arrival of an undersea fiber optic cable in early 2011 from Venezuela evoked wary optimism by freedom of information supporters; all Cubans know that with any increased access to virtual information monitoring and blocking technologies will escalate in lockstep.  As to date there has been little reporting on the anticipated internet access that was promised with the delivery of the fiber optic cable, sources on the ground say internet access for the average citizen continues to be absent.

Political and Economic Uncertainty

Any BPO buyer has political and economic stability on the top of their due diligence checklist.  Unfortunately, Cuba remains a wildcard in terms of its post-Castro future.  The island is also preparing for an altered relationship with Venezuela and the Cuban government, which now employs 85% percent of the Cuban workforce, claims that within the next 4-5 years 50% of the country´s economic activity will be in the private sector as reported by NPR.

However, the Cuban regime has a track record of making claims and not following through or reversing course, especially when it comes to the issue of economic liberalization.  It remains true that the small subset of Cuban entrepreneurs cannot deal directly with foreign firms, and until a big shift occurs an unpredictable Cuban government still controls everything.

By Luke Bujarski

Last week’s Bloomberg Latin America Investing conference in New York City was a sobering reminder of Brazil’s precarious economic balancing act hinging on foreign investment, consumption, government stimulus, and inflated commodity prices. Yet, despite mixed signals over the future macro outlook, Brazil’s IT services industry will continue to rage forward. Antonio Gil president of BRASSCOM shrugged off pragmatic panel concerns with confidence, reassuring the audience that IT will expand aggressively at ten percent annually, to reach $210 billion USD by 2020. We believe Antonio’s assertion is correct: Considering this country’s infrastructural challenges and consumption-driven expansion, the public and private sectors will turn to information technology to squeeze greater efficiency out of their operations.

This year’s Bloomberg Latin America Investing conference showcased the top brass of LatAm policy and investment experts, including our very own Alvaro Uribe who keynoted Nearshore Nexus 2012 the week prior. Two camps developed with pariah states Argentina and Venezuela in one corner, and tiger economies Mexico, Chile, and Colombia in the other. The “Nascent Giant” Brazil took center stage driving the conversation around macroeconomic stability and domestic market investment opportunities across the region.

Brazil’s Long-Term Macro Outlook Uncertain

An overvalued real was the major source of debate as investors wondered how long Brazil’s recent local bond rally can last. “The six interest rate cuts [Banco Central do Brasil] since July of 2011 proved to be a risk that paid off,” explained Chris Garman, Latin America Director at Eurasia Group, referring to a steadfast inflation rate. Despite the positive short-run returns on Brazil’s debt market, the country’s fundamentals were put into question. Brazil GDP grew only 2.7 percent in 2011 compared to 7.5 percent in 2010. Panelists and audience inquiries also challenged Brazil’s trade balance with the US, which swung from a $6.4 billion surplus in 2007 to an $8.2 billion deficit last year, as the real rallied and growth in Brazil spurred demand for imports. Moving beyond the impacts of monetary policy, attention swung to government spending and the deep-rooted infrastructural challenges facing Brazil.

“The long-run problem for Brazil is structural and nothing that short-term monetary policy can fix,” argued Joaquin Cottani, Chief Economist for Latin America at Citi Investment Research and Analysis. There is not enough investment in infrastructure, education, and health care.” Brazil is expensive relative to other emerging economies which puts a premium on the cost of labor, impacting the competitiveness of its manufacturing and professional services sector.

Will Argentina’s takeover of YPF kick off a new wave of government takeovers in Latin America and send foreign investors scurrying?

An overvalued real – arguably driven by US fiscal policy and quantitative easing – brings down the cost of imports sending Brazilian consumers into feeding frenzy. While China is an export economy, Brazil’s growth feeds on domestic consumption spurred on largely by a growing middle class and government programs targeting poverty reduction. Any fundamental change to fiscal policy is also unlikely, as long as economic growth is perceived as strong. “The Brazilian people have a positive and trustful relationship with government,” expressed Ernesto Araujo Minister Counselor of Economics at the Embassy of Brazil – which puts into question Dilma Rousseff’s ability to make hard choices when it comes to corporate taxation, public infrastructure spending, and direct subsidies for the country’s poor.

High Costs Will Drive IT Automation and Innovation

According to Antonio Gil of BRASSCOM, “pressure on enterprise to bring cheaper and better products to market will fuel IT demand for the foreseeable future.” Brazil’s expensive operating environment will propel IT as an enabler of enterprise agility. In a high cost and consumer-driven market like Brazil, companies look to cut costs across supply chain, back office, and procurement. Government will also look to IT to make health care delivery, education, and transportation more affordable to the masses. Brazil’s high labor costs also leave less room to ignore the value of IT-driven automation and operational efficiency. “Every week I have international IT investors coming to our offices inquiring about new acquisition targets and new market opportunities,” explained Gil.

Cate Ambrose Executive Director of the Latin America Venture Capital Association (LAVCA) also pointed to consumer-focused verticals for new market opportunities. “Anywhere where there is a direct connection to the consumer is where we see new companies and new applications for IT.” Ambrose pointed to retail, health care, and education as the hot sectors with the most startup and innovation activity.

Not Out of the Woods Just Yet

Brazil finally appears to be on the right track toward sustained economic expansion, even if GDP growth rates slumps below Wall Street investor expectations. By all accounts, the days of rampant hyper-inflation seem to flicker in the review mirror. This new epoch of stability should keep IT investment dollars flowing. Yet, Lawrence Goodman, Founder of the Center for Financial Stability warned to never underestimate the power of global economics and the impacts of external shocks. Will China’s slowdown prove to be a hard or soft landing and how will that impact Brazil’s commodities exports? Will Argentina’s takeover of YPF kick off a new wave of government takeovers in Latin America and send foreign investors scurrying? Will a growing European crisis derail global economic progress?

PRONicaragua stood out with the best results among all investment promotion agencies in the world in the 2012 Global Investment Promotion Benchmarking, recently published by the World Bank, the International Finance Corporation (IFC) and the Multilateral Investment Guarantee Agency (MIGA).

Among the 189 institutions evaluated, PRONicaragua was the only institution to achieve a rating of “best practice,” the highest distinction awarded by the study in each of the three evaluations implemented. This edition marks the first time in history that a non-member country of the Organization for Economic Cooperation and Development (OECD) receives such recognition.

Robert Whyte, the World Bank’s Project Manager for the GIPB 2012, mentioned that with FDI levels only slowly recovering post-crisis, it is more important than ever for government agencies to be highly responsive to the needs of potential investors as they search for new investment locations, adding that “PRONicaragua, as the world’s top performer in the World Bank Group’s GIPB 2012 report, has clearly taken this message to heart.”

The GIPB report examines the investment attraction activities of investment promotion agencies (IPAs), which refer to investment facilitation, including the ability to provide investors with detailed, accurate, timely and necessary information to successfully establish a business in the country of interest.

“As lead contractor for the World Bank’s GIPB 2012 survey of Investment Promotion Agencies in 189 countries, OCO Global is pleased to endorse PRONicaragua as the world’s top performer. PRONicaragua provides an example to IPAs across the world of best practice in investor facilitation,” commented Joe Phillips, Managing Consultant of OCO Global.

Furthermore, General Alvaro Baltodano, Presidential Delegate for Investments, applauded the successful coordination between the government, private sector and workers, leading to worldwide recognitions such as the one granted by the GIPB report, stressing that this is “an achievement of Nicaraguans that demonstrates there is a national consensus on the importance of investments for the country, which generates jobs and stimulates the national economy.”

In the 2009 edition of the study, PRONicaragua also obtained excellent results, being named the second best national agency in Latin America and eleventh in the world.

The 2012 results were presented by the World Bank on Friday April 20th during the third annual World Investment Forum in Doha, Qatar, a high-level, biennial, multi-stakeholder gathering that is designed to facilitate dialogue and action on the world’s key emerging investment-related challenges.

By Luke Bujarski

Distinguishing between domestic and export driven business is becoming increasingly important to vendors operating in LatAm. How are Brazilian banks outsourcing their back office? Why is Mexico’s manufacturing industry rebounding and what technology solutions are producers looking for? Is Colombia’s telecoms market the next big opportunity? Likewise, multinational enterprises will be looking for those service providers best suited to support their specific industry, as they invest in these oft complex markets.

The Latin America outsourcing model poses a new dynamic relative to India where exports still comprise 80 percent of total sales. Across LatAm exports are more to the tune of 30 percent. In a recent interview with our sister affiliate Global Delivery Report, TCS revealed that 70 percent of their Latin American presence (nine thousand heads) focuses purely on domestic consumption. As Brazil, Mexico, Colombia, and Peru blaze forward economically, we surmise that in-region deals will eat up an even bigger portion of that pie. Furthermore, while Mexican exports continue to grow rapidly, so too is its domestic outsourcing market.

Data Source: Mexico’s Ministry of the Economy

The Discussion Will Shift Toward In-Country Sourcing

As Latin American economies pick up steam and push labor markets to their limits, the Nearshore model will be put to the test. We already see this happening in Brazil and in Chile where increasing labor costs are making it less practical to export services. Multinational vendors are shifting certain BPO projects from location to location, transferring operations from high cost to low cost countries, from Chile to Guatemala, from Brazil to Argentina, from Mexico to Colombia.

As this game of ‘hot potato’ plays out, the global sourcing conversation will likely shift in different directions as it relates to domestic markets: How can we service Portuguese clients out of Colombia? Should Mexico’s public sector be a priority for us? How will the Colombia-US Free Trade Agreement impact local demand? Are we ‘vertical’ enough to break into Mexico’s manufacturing sector?

David Shpilberg of CPM Braxis touched on the ‘domestic’ issue, during an interview at Nearshore Nexus last week, when reflecting on the relevance of the US market to Brazil-based vendors – in light of the huge in-country workload. He responded by saying that “it has become difficult to distinguish between what is local and what is global.” Outsourcing mega deals involve numerous end-user and service provider locations across countries and continents. “To be a global player, you must show clients that you can manage nearshore contracts.” Keith Jones from advisory firm Pace Harmon also confirmed that “when entering into uncharted markets, multinationals [enterprises] want service providers that have experience working on projects in the United States.”

So as enterprises move in, Nearshore contracts can play as the ‘hook’ that catches more work on Brazil’s domestic front.

Mexican Manufacturing Will Drive more IT/BPO Deals

Vertical expertise could also be a game-changer for LatAm domestic markets. Jimit Arora of Everest Group sees the “verticalization” of IT application development and maintenance (ADM) as a major paradigm shift in today’s global services marketplace. “Clients are reassured when vendors can speak their language whether it’s financial services, hospitality, manufacturing, or health care.”

Mexico is the largest trading partner with the United States second only to China. 2010 was a record year for goods exports totaling $230 billion US dollars 

Accenture is credited as the pioneer of the ‘vertical’ approach, but most outsourcers now market their offerings based on specific vertical expertise. Nearshore Americas surveyed the top IT services vendors operating in Mexico and identified the following verticals to keep a close eye on:

Data Source: Nearshore Americas supplier survey

Manufacturing in Mexico is a good example of how vertical know-how could help IT/BPO outsourcers grow their domestic business. According to the Offshore Group, rising costs in China are a boon to Mexican manufacturing. The sector suffered in the late 1980s as producers packed up and began moving production overseas, but the last five years have seen a rebirth of even more advanced manufacturing, particularly in aerospace. In 2004 aerospace companies operating in Mexico exported a total of $146 million US dollars worth of products; that number rose to $3.5 billion US dollars by 2010. Of particular interest to the big outsourcers might be the multinational packaged goods and automotive clients (see chart).

 Data Source: Instituto Nacional de Estatistica y Geografia

Mexico is the largest trading partner with the United States second only to China. 2010 was a record year for goods exports totaling $230 billion US dollars (US Census Data). Indian product exports to the US barely scratched $30 billion US dollars in 2011. Nissan’s recent decision to locate a $2 billion US dollar facility in Aguascalientes gave the industry an additional boost as well as a recent survey by the IMF, showing that Mexico’s rapid economic recovery (as the US rebounds) shows strong fundamentals particularly in manufacturing.

Verticals and Co-Location – The Way Forward?

As multinationals bring manufacturing back to Mexico, vertical expertise will be a ‘hook’ for both IT and BPO contracts. Homegrown technology services providers like Neoris – Latin America’s only SAP Global Partner – will likely see a bright future in that vertical. These homegrown players are expanding their sales force in the United States undoubtedly pitching global goods manufacturers – among others. BPO providers with proven expertise in manufacturing could also see a bright future. “Co-location is always beneficial because it removes another layer of complexity,” explained Keith Jones of Pace Harmon. “If you’re manufacturing in Mexico, does it make sense to send your back office to India?”

Opportunities to deepen ties ranging from trade and investments to education and security

The First CEO Summit of the Americas wrapped up on April 14, 2012 with calls for greater cooperation among Western Hemisphere nations on matters ranging from trade and investment to education, science and technology and security, in order to boost prosperity from Canada to Chile.

At the end of the conference, held ahead of the 6th Summit of the Americas, Presidents Dilma Rousseff of Brazil, Juan Manuel Santos of Colombia and Barack Obama of the United States participated in a roundtable discussion in front of an audience that included more than 700 top executives from many of the Western Hemisphere’s leading companies.

After praising the economic and social progress achieved by countries such as Brazil and Colombia over the past decade, Obama said there were many fields where countries in this hemisphere could collaborate fruitfully. “We’ve never felt more excited about prospects of working as equal partners with our brothers and sisters in Latin America and the Caribbean,” he added.

Rousseff, whose nation recently overtook the United Kingdom as the world’s sixth biggest economy, also spoke in favor of closer cooperation, but stressed that alliances should be based on equality among allies. She called for greater integration of supply chains among countries in the Americas, most of which have to catch up to Asian and Eastern European countries that are well connected with global production systems. “We need to view this region as an area where you cannot have protectionism,” Rousseff added.

Santos, who called for closer coordination of economic policies to avoid the “export of crises,” proposed that the countries of the Americas should arrive with a common position to the G20 meeting due to be held in Mexico in June to discuss possible joint actions to head off another global recession.

The three heads of state also agreed on the importance of improving education and job training in their countries in order to improve people’s employment prospects. “If we were to ask our people what is their greatest concern, I am sure that the answer would be jobs,” Santos added.

Science and technology research and development was also seen as a fertile ground for collaboration in the Americas. Obama noted Brazil’s leadership in biofuels, adding that both countries should intensify their cooperation on developing clean energies.

The conversation among the American, Brazilian and Colombian presidents capped the two-day event organized by Colombia’s private sector with the endorsement of the Colombian government and technical support from the Inter-American Development Bank. During the CEO summit participants discussed opportunities to speed up economic growth and reduce poverty in Latin America and the Caribbean through public-private partnerships and deeper regional integration.

In his opening speech on Friday, Santos called on the private sector to contribute to inclusive economic growth. “Without business people prosperity will not come to the peoples of this continent,” Santos said. “But business also has a tremendous responsibility. You must do everything possible to improve social conditions. Fighting poverty is a great business proposition for everyone.”

In his presentation for the CEO summit, IDB President Luis Alberto Moreno said that the Americas could double the value of their commerce within a decade if governments and the private sector undertake key investments. “This would have a tremendous impact on job creation,” Moreno said, “especially for the millions of young people who enter the job force each year.”’

Moreno called on companies and governments to ensure that benefits of digital connectivity not only benefit wealthy consumers in large cities, but that they also push out into isolated rural areas and down into the base of the income pyramid. “We need to bet on the future, and take infrastructure, products and services not only to the growing urban middle class, but also to isolated populations, to families that aspire to greater social mobility,” Moreno said.

Moreno announced two new IDB initiatives that seek to leverage greater connectivity among public and private sectors to help solve two important development challenges: youth unemployment and access to finance.

The IDB and the Multilateral Investment Fund (MIF) are teaming up with the International Youth Foundation and the region’s biggest employers, including Walmart and McDonald’s operator Arcos Dorados, to launch an alliance to train as many as 1 million youth for their first jobs over the next decade. They also announced the provision of up to $55 million in financing for institutions to develop new lending models to improve access to credit for women entrepreneurs in the region.

Throughout the CEO summit heads of state and distinguished cultural, diplomatic and business figures shared their vision for accelerating connectivity and development across the hemisphere.

The president of Mexico, Felipe Calderón, urged Latin American countries to advance free trade agreements, eliminate trade barriers and embrace open markets. “Trade is one of the key factors for progress,” he said, “and humanity has known for a thousand years that trade generates benefits for all.”

Colombian singer Shakira exhorted the business community to deepen its commitment to corporate social responsibility. “It would be fantastic to see the business leaders of Latin America embrace philanthropic capitalism in the way that executives in other countries have, for example Bill Gates and Warren Buffet, who asks multimillionaires to promise that they will pledge half of their fortunes to help the poor,” she said.

Shakira, who started her own educational foundation as a teenager, added that she is waiting to see a Latin American version of philanthropic capitalism, and that she would like to see business people in the region “encourage each other and compete to see who writes the biggest checks.”

On the eve of the CEO summit, the IDB and Shakira’s ALAS Foundation presented their joint awards for excellence in early childhood development. During the ceremony, the artist invited Moreno and leading business people to join a “movement for early childhood” to promote programs to serve children from birth to the time they enter school, prioritizing investments for the 35 million children in the region who currently lack access to adequate nutrition, health care and education services.

By Robert L. Scheier

Hourly labor costs in the Latin American Nearshore are still slightly higher than in traditional low-cost leader India. But other factors such as faster time to market and simplified communications often still make the Nearshore the better choice, according to speakers at the Nearshore Nexus outsourcing conference in New York City last week.

As a result of wage inflation in India caused by strong demand for talent, the total cost of ownership (including costs such as travel to the outsourcer’s site) of using a Nearshore company are currently only about eight percent higher than those in India, said Esteban Herrera, COO and advisor, of outsourcing consultancy HfS Research. But “when you consider the intangibles, the advantages of Latin America will erase that in a short time, if they haven’t already,” he said.

The increased awareness of such benefits by customers has, he said, driven significantly more interest in the Nearshore over the last two years. Among the most popular countries which are close to price parity with India, he said, are Colombia, Argentina, Mexico and Costa Rica.

Look Beyond Rates

“If all you’re doing is looking at rates, for the most part, Latin American countries will not appear to be least expensive,” said Mark Peacock, CIO of Pegasus Solutions, a provider of ecommerce and transaction processing services to the hotel industry. “But when you really, truly think about TCO, and start thinking about the cost of complexity in your operation, and the cost to coordinate and reach out and train people, and deal with people, there is a kind of hidden cost to going fully offshore.”

With customers in both North America and Europe, it’s difficult enough for Pegasus employees to keep track of time zones without also factoring in the time difference to a service provider in India, said Peacock. Forcing workers to stay up late, or get up early, for phone calls with an Indian outsourcer for too long will eventually mean the loss of skilled talent, he says. “People will walk out the door if their lives are miserable.”

As a startup, the biggest challenge Noodle Education faces is “the need to pivot so quickly” as market needs change, said CTO Jason Rodriguez. Because it uses the agile development methodology to make rapid changes to its education-oriented search service, working with an Asian outsourcer is “very difficult to do in an efficient manner” while working with a Nearshore vendor “makes sure everyone is in sync, and we still get the benefits of the low cost.”

Challenges Remain

Despite such advantages, Nearshore geographies still face challenges in rising to the level of world-class providers. “It all comes down to the talent that is serving the customer,” said Alex Camino, VP marketing and communications of IT and business process outsourcer Softtek.

While Mexico boasts of graduating 90,000 potential outsourcing employees each year from college, “the challenge (is) bringing that talent to the next level, “ he says. especially in areas such as English fluency. “If you’re starting to teach English at the university level, you’re already late, he said, recommending English education begin in kindergarten.

Uribe highlighted positive social, political and business developments in the Latin American/Caribbean region

Kirk Laughlin, CEO of Nearshore Americas, kicked off today’s Nearshore Nexus Conference at the Crowne Plaza in New York City by stating nearshore outsourcing has gone from “novel to mainstream.” Laughlin promised that conference speakers would illustrate how outsourcing destinations in Latin America and the Caribbean are “no longer in the shadow of India or China,” but have instead become vibrant providers of sophisticated IT and business outsourcing services in their own right. The first speaker, former President of the Republic of Colombia Mr. Alvaro Uribe, delivered on that promise.

Uribe Highlights Positive Developments in Latin America

Rather than focus exclusively on Colombia (although he did touch on how Colombia has transformed itself into a stable, secure democracy which attracts foreign investors), Uribe highlighted positive social, political and business developments in the Latin American/Caribbean region as a whole. The region has about 600 million people with an average age of 28. While 170 million people are in poverty, another 40 million have left poverty in recent years and Uribe classified 64% of the region’s population as members of a “progressive middle class.”

Uribe stressed that with a few exceptions, Latin American countries now abide by the “rule of law” rather than dictatorships. “Public indebtedness, defaults and hyperinflation are the province of the past,” he stated. Uribe also highlighted Latin America’s extensive natural resources, including 30% of the world’s oil resources, 26% of the world’s beef, and a potable water supply expected to account for half the global total in 2030.

Moving to human and political resources, Uribe stressed that with a couple of exceptions such as Venezuela and Ecuador, Latin American countries are following the example of Colombia in creating a “triangle of cohesion” based on security, free investment, and social cohesion. Uribe’s prepared remarks led directly to a Q&A session with CNN Senior Latin Affairs Editor Rafael Romo, who began with a question about the message Argentina’s recent decision to nationalize its leading oil company YPF.

“Maybe Argentina has made mistakes,” said Uribe. He said Argentina is privatizing key elements of its oil industry because of concerns there is not enough exploration, but would have been better served by discussing the matter with private industry. “In Colombia and Brazil there is a middle ground,” he said. “The government has an important role in oil production, not a monopoly.”

During his conversation with Romo, Uribe also discussed some of the specific ways Colombia has bolstered its BPO industry. “We consulted with private industry and identified five or six sectors where Colombia would become world class (including BPO),” he explained. “We had 2,000 BPO jobs and now have close to 100,000.” As part of its efforts to boost Colombia’s BPO industry, Uribe said the government eliminated the value added tax (VAT) on business services and is working on advancing education to provide workers with skills BPO and ITO buyers require, including by offering free university education to poor citizens.

Uribe also said he thinks Latin America should approach education on a regional, cooperative basis. “Twenty-five years ago, economists recommended countries in Latin America needed to change from commodity-based to knowledge-based economies,” he said. “They need to do the same today to add value to commodities.”

Eliminating the Software Factory

In the morning keynote, Leonardo Matiazzi, VP of International Business for Ci&T, said it is time to eliminate the “factory approach” to software development. “IT is the one industry that can change the world,” he said. “The mental model organizations use to develop software is optimized for mediocre results. It won’t be a total failure, but will be mediocre.”

Matiazzi compared developing software to writing a book. “Can you write a book by copying the first page 250 times?” he asked. “Try and come up with a book writing factory. You can’t. Writing software is the same as writing stories. You’ll end up with a dull book nobody cares about, just like you end up with dull software nobody uses.”

Matiazzi acknowledged moving away from the “software factory” model will be difficult, but necessary. “It’s not easy to throw away,” he said. “The concept has been part of the IT culture for so long.”

By Filipe Pacheco

It might be surprising and paradoxical at the same time, but when it comes to business competitiveness, Brazil can be almost as expensive as developed European countries. A study recently published by KPMG shows that producing in the country is almost as expensive as doing it in places such as the United Kingdom and the Netherlands. According to the research, called Competitive Alternatives, it is more expensive to produce in Brazil than in any of the other of the so-called BRIC countries (Brazil, Russia, India and China) plus Mexico, which are some of the fastest growing economies in the world.

Producing in the South American giant is about 7% cheaper than doing the same in the US, while in China the same activity is 25.8% cheaper. India follows at 25.3%, then Mexico at 21.0% and Russia at 19.7%. You can review the entire list of countries considered in the research at the end of this post.

The equation is quite understandable when looking closer at the conditions of the Brazilian domestic market. Even though it is considerably cheaper to produce in Brazil than in the United States, the difference of costs in the South American country and in the mentioned emerging economies is quite large, which brings Brazil to a position on KPMG’s list that is closer to developed nations, such as the United Kingdom and the Netherlands, than to its emerging peers.

Hot Economy Faces Cooldown

The Brazilian economy is extremely heated, as is widely known, and its growth is structured on a sound basis. But the lack of qualified workforce and service suppliers, summed up with high production costs and a high tax burden, makes it much more expensive to produce in Brazilian territory than in China, India, Mexico and Russia.

“The salary level of the Brazilians, including minimum wage, are significantly higher than those in other countries that have seen an increase in Gross Domestic Production (GDP). Besides, the high tax burden also impacts the total costs of production in Brazil,” says Roberto Haddad, responsible for the International Taxation division at KPMG.

For Mark Goodburn, global head of Advisory for KPMG, many companies are seeking markets with high levels of growth to support and build an effective global supply chain for their businesses, but to take full advantage of them, it is necessary to understand certain local characteristics that might not be quite clear at a first.

Intrinsic Market Complexities

“The advantages of those markets are not only determined by costs, but also by the generation of value within them. With the technology explosion, the productivity capacity and the specialization in planning methods, such emerging economies have conquered a space they were not competing in before,” said Goodburn, commenting on the results. “Nevertheless, complexities in such markets can be intrinsic, from the costs of labor to taxation, making the preparation of a very well thought-out business strategy it mandatory in order to obtain success in such areas.”

In its research, the global consulting company includes costs relative to labor, taxes, real estate and public services in 110 different cities from 14 countries. It also takes into account costs that are not directly related to the main operations of the company, but that have an indirect impact on the costs of living of its employees – such as education, infrastructure and job conditions.

The following list specifies the difference in production costs per country as compared to the US (lower costs are shown in positive numbers):

China 25.8%

India 25.3%

Mexico 21.0%

Russia 19.7%

Brazil 7.0%

United Kingdom 5.5%

Netherlands 5.3%

Canada 5.0%

France 3.9%

Italy 2.1%

Germany -0.1%

Japan -9.4%

By Clayton Browne

There is a growing consensus among international economists that Argentina’s decade-long economic boom is rapidly becoming an out-of-control inflationary spiral. Real inflation has grown at 20+% annually for over three years, and the Argentine government is clearly in denial or even cover-up mode regarding the situation.

Many businesses in Argentina are already struggling from the double-digit inflation, especially industries like outsourcing that rely largely on income from outside of Argentina, and things are only going to get worse as most sources expect Argentina’s inflation rate to approach 25% in 2012.

Like many Latin American countries, Argentina has a long history of economic ups and downs. The most recent major economic bust occurred just a little over a decade ago, as Argentine unemployment hit 21% and 60% of the population fell below the poverty line in 2002 just before Nestor Kirchner and the Peronist party came to power. However, the resulting devaluation of the currency, and the default/renegotiation of national debt under very favorable terms as well as the expansionary monetary policies promulgated by Kirchner and the Peronists (led by Kirchner’s wife and protege President Cristina Fernandez today), has created a multi-year boom in the Argentine economy.

It is a basic law of macroeconomics that expansionary economic policies cannot continue indefinitely without causing an economy to over-expand and leading to inflationary pressures, and the evidence is mounting that Argentina is no exception to the rule. The bad news is that the current Argentine government is showing no signs of changing its expansionary policies, and worse yet has responded to criticism by resorting to intentionally misrepresenting the official inflation figures and instituting price controls as well as protectionist policies in a number of industries (including effectively nationalizing the Argentine operations of the Spanish oil company REPSOL on April 17).

The official Argentine inflation index listed inflation as ranging between 8.5-10.9% in the period from 2007 to 2011, whereas a wide range of private sources all calculated inflation at rates ranging from 16-27% during that same time span. The official inflation rate was 9.5% in 2011, as compared to 22.8% estimated on average by half a dozen private sources. Furthermore, there is no evidence that the inflationary pressures are easing. A number of economists have forecast that real inflation in Argentina will exceed 25% in 2012.

Cesar DOnofrio, CEO of MakingSense, a software development company with offices in Argentina, says that everybody knows that inflation is really 20+%. “Everyone knows the government inflation index is not correct. If you bought one pound of meat for 20 pesos in 2010 and you are paying 40 pesos today, it is obvious.”

However, the Argentine government has ramped up the programs in its social safety net significantly over the last few years, and is providing a generous inflation-pegged stipend to many lower income families. According to DOnofrio, this means that it is not the poor, but the middle class that is really getting squeezed in the current inflationary economy.

Wage inflation has become a huge problem for businesses in Argentina. Argentina is a highly unionized country, and the unions have contracts with annual wage increases tied to the inflation rate (based on private source figures, not the government inflation index). Furthermore, most non-union businesses (including the outsourcing industry) peg their wage increases to those of the unions. This has resulted in wages in Argentina doubling in the last three or four years in many cases.

DOnofrio reports that at MakingSense they gave employees 25% annual raises in 2010 and 30% annual raises in 2011, and that was just enough to keep them competitive in the industry. DOnofrio also mentioned the inflation-related phenomenon of “rotation” that is actually working to his benefit right now, as he has recently hired a couple of top-line, highly experienced software engineers who formerly worked for larger outsourcing firms whose corporate policies did allow them the flexibility to increase wages fast enough to keep up with inflation.

DOnofrio continued on the subject of inflation in 2012. “I have spoken to several people in the government off the record, and they all agree that the annual inflation rate is likely to remain close to 25% in 2012.”

Maintaining Margins in an Inflationary Environment

It is not easy to run a business when you have to deal with 20%+ inflation. While there are obviously a number of steps you can take to reduce costs and keep overhead down, margins inevitably get squeezed when wages double in three or four years. There is only so much you can save on the overhead side of the balance sheet, and businesses have to start thinking strategically.

DOnofrio emphasized that businesses, smaller businesses in particular, have to be nimble and seize opportunities to scale up business whenever they present themselves. It boils down to expanding revenues sufficiently so that you can survive on lower margins.

Another strategy DOnofrio discussed was adding more value to your products and services so that clients are willing to pay more. “At Making Sense, we are adding more value to our services by developing expertise in specialized areas like agile development and improving user experience, areas not yet dominated by the bigger outsourcing firms.”

DOnofrio concluded with the thought that undertaking this specialized value-added niche strategy is obviously easier said than done, and it requires long-term planning, but that creating value for your clients is almost always a win-win situation.

Effect on Argentine IT Industry

The Argentine IT/software development industry entered a rapid growth phase in 2003 as the country began to emerge from the economic chaos of the previous three or four years, and has grown at a 15-20% clip ever since. In fact, Argentina, along with Mexico, has become one of the largest software outsourcing destination in Latin America today. However, the IT and software development industries are certainly not immune to the out-of-control inflation that is driving up the cost of all businesses in Argentina, and DOnofrio commented that he has seen signs of a slow down in the industry already. And beyond that, many of the more savvy human capital providers have focused their sales efforts on still-growing local Argentina markets as an inflation hedge.

By Filipe Pacheco 

The encounter of two giants: one of them is IBM, a global IT provider, and the other is Eike Batista, the richest man in Brazil and the commander of a corporate empire in the country. Together, they closed a deal that includes the construction of an industrial tech center and the supply of outsourcing services of around US$ 1 billion in a ten year interval.

Batista is the head of the EBX Group and the agreement that has been under the spotlight of the local market last week involves the selling of 20% of SIX Automação, a subsidiary of SIX Soluções Inteligentes, the technology branch of the EBX Group. SIX Automação is a technology provider specialized in systems for the utilities and marine sectors.

The Agreement

According to a joint communique issued by IBM and the EBX Group, the “strategic partnership” has three main purposes:

1) IBM’s investment in SIX Automação;

2) The creation, within SIX Automação, of a development center for tech solutions and research and development (R&D) focused mostly in the infrastructure and natural resources segments; and

3) The outsourcing to IBM of operational activities of the EBX Group over a ten year period.

SIX Automação was created in October of 2011 after the acquisition of AC Engenharia, a company that was active in the Brazilian IT industry for over 18 years. IBM’s contribution to SIX Automação should be mainly focused in the Oil and Gas, Mining, Naval Engineering and Ports sectors.

According to the terms of the agreement, IBM will provide IT services for the EBX group until 2022, which include operational and support services and development of new IT solutions for the group. The partnership also previews the creation of an industrial solution center for clients from four Latin American countries (Brazil, Chile, Colombia and Peru) — the location of the center was not disclosed, though. The EBX Group which currently employs  around 20,000 people, will invest approximately US$ 15.5 billion over 2011 and 2012 in the Brazilian economy through its different business. For the next ten years, the group expectsto invest more US$ 50 billion in its operations.

Win-Win

“Partnering with one of the largest technology companies in the world offers EBX Group a broad portfolio of modern IT solutions,” Batista said in a statement. “IBM, in turn, will expand its presence in one of the most promising markets in the world, working with a group that has a significant presence in strategic sectors.”

“The broad knowledge of the business of EBX opens significant opportunities to participate in the development of markets inside and outside of Brazil. IBM will bring innovation and high technology that will contribute to the development of the country,” said Ricardo Pelegrini, president of the Brazilian IBM unit.

This is the second “billion-dollar” deal announced by EBX in 2012. In March the Mudabala investment fund, owned by the government of Abu Dhabi, announced an investment of US$2 billion in EBX, through the acquisition of about 5% of the shares of the group.

According to Gartner’s latest IT spending forecast, emerging markets, including Brazil, will account for 31% of global IT spending in 2012. Latin America will collectively spend up to US$326 billion on IT during the year, the research firm predicts.