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?

Grupo Assa team members met with Nearshore Americas last year

By Filipe Pacheco

For Grupo Assa,  the old traditional (and stereotyped) rivalry between Brazil and Argentina is strictly kept to the soccer field. Grupo Assa, specializing in IT consulting and outsourcing, was created in 1992 in Argentina, but Brazil is the country that is now responsible for more than half of the company’s revenue.  The group recently announced plans for a second delivery center in Sao Paulo, scheduled to open in the second half of of this year.

The company anticipates 35% revenue growth in Brazil this year, but what is the rationale for targeting São Paulo? “Because we are expanding to where our clients are. Even though the city is considerably expensive, it is worth it for us to grow here,” explains Marcio Caputo, Vice-President of the group in the country.

Currently Grupo Assa has operations in another location of the city of São Paulo (Chácara Santo Antônio) and Curitiba, which provide services to about 10,000 users in the country. The company’s 2008 revenues were around R$ 85 million (US$48.6 million), an increase of about 38% compared to last year.

“We are a Latin Group, it is not fair to say Grupo Assa is a company from Argentina. We are Latin, operate in Latin countries and have Latin clients”

Rooted in Latin America

Outside of Brazil, Grupo Assa also has operations in DF, Mexico, and in Tandil and Buenos Aires, Argentina. The whole group has clients in 30 different countries, and had revenues of US$105 million in 2011. Besides the new delivery center in São Paulo, which will provide about 100 jobs to start, the firm also in the plans to simultaneously open a similar one in Cape Town, South Africa.

Even though the city of São Paulo is one of the most expensive places in Brazil to settle (or expand), Caputo reasons that it is important for the group to grow in the city and the region that is the economic heart of Brazil, and where it finds the best infrastructure available.

“Currently, about 70% of the domestic earnings are derived from clients we have had for more than two years. We know how important it is to keep them,” he says. According to Caputo, clients in Brazil are divided basically into three categories: 1) multinationals that have operations in the country, such as Johnson & Johnson, KraftFoods, Electrolux and so on; 2) Latin American corporations that have expanded to different regions, such as Vale and Camargo Correa; 3) local national clients, like the retail chain Lojas Marisa.

“We are a Latin Group, it is not fair to say Grupo Assa is a company from Argentina. We are Latin, operate in Latin countries and have Latin clients,” emphasizes Caputo. He uses the operations in Brazil as a clear example – in twelve years, the revenues in the country top those of the company in the region, followed by those in Mexico, then in Argentina and Chile, respectively.

SAP and Oracle

Recently the company announced a strategic partnership with SAP to offer financial services from Argentina, Chile and Mexico to clients across the region. The main products offered permit the interconnection between front office operations and back-office systems.

The whole group offers application management services to more than 40,000 final users of SAP and Oracle J.D. Edwards in different parts of the world. Among the global clients are AstraZeneca, Pfizer, Kraft Foods, PepsiCo, Bayer and Amcor Rigid Plastics.

Brazil, according Caputo, will remain strategically vital the firm’s overall growth. For him, the challenges the providers faces are similar to those confronted by the entire industry when operating in Brazil – basically lack of professionals, infrastructure and high costs. “But what we have to consider the most is how to attract and to retain our clients; that is something bigger than anything else. I cannot make mistakes with my clients.”

Ci&T’s head of mobile strategy talks about how to deal with the many flavors of mobile app development.

Ci&T’s head of mobile strategy on the huge difference between mobile and web applications

On the clock: What's it going to cost you?

By Filipe Pacheco

Brazil’s newest labor law could raise the cost of IT services and outsourcing there, or it could turn out to have only marginal effect. Implementation details of the regulation that says employees who answer work-related e-mail or phone calls after hours are, in the words of one Brazilian judge, “on the clock,” are still being resolved. But if nothing else, the decision reinforces the notion that doing business in Brazil is expensive compared to the rest of Latin America.

As in other countries where technology can enable job and life to meld together, there has been some intense debate in Brazil about working overtime and remotely and ensuring that employees are fairly compensated. On December 15th of last year, president Dilma Rousseff signed federal law 12.551, which alters the 6th Article of the CLT (Consolidação das Leis do Trabalho, the set of rules for legal employment in the country) to say that people who work overtime away from the office through various technological means have to be compensated for it.

Until the law’s implications and enforcement are clarified, it’s too soon to say how the change could affect providers and buyers of IT services. But Brazilian business people are concerned. An article in Businessweek describes the law as “one more obstacle companies say they face in Brazil, where regulations mandating everything from employer-provided breakfasts to union contributions are a daily drag on efficiency.” One labor attorney said he’s gotten several calls from clients “worried the law could drive their personnel costs up.”

However, it’s possible that in the tech industry, at least, employers will be able to negotiate after-hours policies or define expectations of being on and off the clock. Contracts could be updated to reflect what has become a standard part of working life. For now, it’s reasonable only to say the law could theoretically have huge repercussions for the cost of IT delivery… or it could be dealt with in ways that render its effect minimal.

But here’s what we know so far.

The gist of the law lies in this typical scenario: The IT manager of a company has a BlackBerry given to him by his employer. He answers it at 2 a.m. from wherever he is. Now, he must be paid something for that, and for the time spent on all the other voicemails he responds to and e-mails he answers on a Saturday morning or a Sunday afternoon.

To André Grandizoli, secretary of Employment Relations in the Ministry of Labor, the legislation represents “an evolution, because it recognizes a kind of work that already is done, the so-called teletrabalho [or 'virtual work']. If the worker is available to the employer outside of his working space, through any technological device, he must earn extra hours,” he was quoted by the official presidency blog a few days after the law was published.

Grandizoli emphasizes that it does not matter anymore where the worker is, but if he is executing a certain task for his employer, he has to be paid for that.

What Is “Work?”

There are several unanswered questions regarding the new law, including some pointed out by judges from the Tribunal Superior do Trabalho (TST), the courts that have jurisdiction over labor cases.

According to some labor specialists, the main problem is that the original legislative text allows too many different interpretations, and considers basically as similar situations those employees who check their corporate e-mail from home and those who are working from home.

And how much would all of this compensation cost? Not even João Oreste Dalazen, president of TST, knows the answer. “There is no doubt that the services provided by distance can constitute a working relationship, but what will it be like in cases such as when a worker is not working exactly, but is ‘available,’ who can be called to work at any moment, and with a cellphone provided by the company on hand for that?” Dalazen raised those questions during an interview for the TST website.

Dalazen also points out that three different situations can be considered in such cases. The first is that the employee must be paid for being at sobreaviso (on call) but not actually working, he would receive one-third of the total value of a regular productive hour.

“The second scenario would consider the hour worked remotely or overtime as a regular working hour, and be paid for the total amount of a regular hour. And a third scenario would consider paying nothing,” he says. “Besides that, TST will have to study each method of communication [cellphone, pager, e-mail, fixed telephone] to define which of them can be considered means for sobreaviso.” In an attempt to clarify these doubts, Dalazen said, TST will have a week of debates this month.

He also says that the Súmula 428, a TST rule considered by courts and judges currently when such cases are brought to court, will have to be reviewed because it does not consider the teletrabalho the same way the new Law 12.551 does. According to Súmula 428, having a smartphone given by your employer does not represent sobreaviso.

Before a clear signal is shown by the authorities that have power to decide how this law will be interpreted and enforced, companies should review their internal policies regarding overtime and remote working to be prepared for problems. This could be especially crucial for companies that provide outsourcing services.

“Contracts will have to be updated considering forecasts of how the work will be provided, number of hours of work, use of technological devices made available by the company, as well as other important topics, may be a step toward prevention,” said Cristina Sleiman, specialist in digital law, in an interview given to TI Inside.

For British Eyes Only

Since the text of Lei 12.551 was made public, it started to reverberate on web social platforms and became a popular topic among friends in bars in the big cities. But are employees happy and employers worried?

Not exactly. Much has been said that this is just another “lei para inglês ver,” or “law to show to the British.”

This Brazilian saying recalls the country’s colonial era, when the Portuguese settlers had close business agreements with the British – especially around the time of Napoleon’s invasion of Portugal, in 1808, when the whole court and Royal Family moved to Rio de Janeiro. The British, much stronger commercially, used to impose some of their desires regarding trade with Brazil over the Portuguese conquerors. Then, the Portuguese would create the laws or royal rules – but “just on paper” (“só no papel“) for the British to see.

Many of these regulations became part of traditional Brazilian bureaucracy. But practically speaking, these “joke laws” make no difference to real life. At this point with Lei 12.551, due to the difficulty of monitoring or controlling how each company will deal with its employees working overtime or remotely, and the wide range of interpretations the law may permit, many people are thinking it will turn out to be just one more lei para inglês ver.

Meanwhile, many Brazilians – employers and employees – are anxious to know whether it is going to become a “real law” or not. Buyers of outsourcing services should be too.

It’s been called “Silicon Valley South” and is one of many locations to be nicknamed “the Silicon Valley of Brazil.” Although Curitiba differs from the original Valley in several key ways – less traffic, for instance, and more trees – it does share one essential similarity: a concentration of technology expertise and software development experience.

Curitiba is capital of the state of Paraná, which is home to more than 260 software companies and six software clusters. Those providers embody more than 50 areas of business intelligence and more than 30 areas of IT specialty. Clients of Curitiba include ExxonMobil, HSBC, Nokia, and Wipro. IBM, Dell, and HP were among the first international tech companies to set up operations in Curitiba.

Click on the image to read the E-book

One of those six clusters is particularly focused on taking Brazilian development skills to a global clientele. Curitiba Offshore is home to 14 software companies, providing services from R&D to application development to systems integration and infrastructure management. The Curitiba Technopark connects IT companies with R&D centers and the area’s many universities in an effort to boost collaboration and innovation. And the city’s emphasis on sustainable urban planning has helped it attract an educated group of people looking for a better quality of life.

KPMG referred to Curitiba as one of the world’s most attractive business locations, and Gartner called it one of the world’s leading IT and software destinations. Find out what’s attracting IT providers and IT buyers to this green Brazilian city in the new e-book, Curitiba, Brazil: A Higher Vision for IT Exports. You can download it here.

São Paulo: Making Manhattan look cheap.

By Filipe Pacheco

High costs are one of the prices international companies must pay for doing business in Brazil– especially when it comes to the services industry. Now one of the most plugged-in financial institutions in the world, the International Monetary Fund, has released numbers that demonstrate what many suspected anyway: The cost of living in Brazil in 2011 rose to slightly higher than that of the United States.

Considering a list of 150 emerging economies, Brazil is basically the only one that had an expected GDP forecast for last year based on purchasing-power-parity (PPP) lower than the real GDP – which means the prices converted to American dollars are higher than in the United States.

The IMF estimates that the Brazilian GDP was US$2.51 trillion, which makes the country the 6th biggest economy in the world. Emerging economies typically have a higher PPP GDP than their real GDP, which means that, even though they might produce less than the United States, the same amount of money can buy more within their boundaries.

Brazil is essentially the only exception. Here, you can buy less than in the United States with the same amount of money. The other BRIC countries – Russia, China, and India – are all cheaper in the same comparison. Just four other emerging economies had results similar to those of Brazil, according to the IMF, but the comparison is not quite fair. They are St. Vincent & The Grenadines, a small archipelago in the Caribbean; Zimbabwe, with a hyperinflation economy that has destroyed the national currency; and the oil-rich regions of Kuwait and the United Arab Emirates.

What brings the prices higher in Brazil is the cost of services, since they cannot be imported. If national industry comes up with high prices for goods or machinery, for example, there is the possibility that competing goods or machinery can be imported, even though there are taxes that fall upon them. Those prices have become considerably lower recently, due to a depressed economic situation in the rich countries and China producing lots and lots of everything.

The Real Problem

Added to that is the value of the Brazilian real – today traded at about R$1.80 to every US$1. That price is affected by the exportation of commodities – Brazil is among the biggest exporters of iron ore in the world, for example – and the large inflow of foreign money that enters the country to take advantage of the high interest rates that still prevail here and the good prospects for the local economy. Another reason pointed to as an explanation for the high cost of living is a problem that is also considered a barrier for the IT industry as well: the high rate of taxes.

“This inversion shows that things here do not fit the normal pattern, because the currency rate is completely out of synch with historical activity, with a huge valuation in the past few years,” Armando Castelar, economist at Fundação Getúlio Vargas, one of the most recognized economic institutes in the country, told the newspaper O Estado de S.Paulo.

“Either Brazil gets cheaper and improves its productivity or we will become a services economy at an early stage,” argues Júlio Sérgio Gomes de Almeida, director of the Institute of Studies for Industrial Development (or Instituto de Estudos para o Desenvolvimento Industrial). He warns there is a risk of Brazil becoming an expensive country based only on a services industry, and without a strong industrial base.

Office Space Deluxe

Research done this month by the consulting company Cushman & Wakefield South America has shown that renting a business office in Itaim Bibi, in São Paulo, or in the charming neighborhood of Leblon, in Rio, is often more expansive than in fancy commercial areas of Manhattan or Washington DC.

In Leblon, the price for a square meter of commercial rental space is US$69.4 a month, while in Midtown Manhattan, a square meter may cost around US$63. In São Paulo, in the business regions of Avenida Faria Lima, Jardins, Avenida Paulista, or Chácara Santo Antônio, the average price for a square meter is about US$60.

In the past year, Brazilian office-space prices have risen 22.6% in comparison to the same period of 2010, according to Cushman & Wakefield. Even though the prices are high, the vacancy level is quite low – in Itaim, only 0.9% of the offices are vacant.

When it comes to services, a few other examples can give you a good sense of how expensive some things can be in the big Brazilian cities. Going to work out at a Rebook Center gym in São Paulo costs R$690 (US$385) per month with an annual membership, while in New York, the average price for the same chain is around R$382 ($US210).

Going to the movies costs, per person, R$28 (US$16), while in a good movie theater in New York, that would be R$24 (US$12). A cheeseburger with soda at the local unit of PJ Clark’s is around R$37 (US$21), while in the States that would be about R$32 (US$18). On your way back home, a ride from Avenida Paulista, in the heart of the city, to the International Airport at Guarulhos may cost R$108 (US$60), one dollar more than going from Manhattan to JFK – R$107 ($59). The numbers are drawn from research done by O Estado de S.Paulo.

“São Paulo scares me more and more each time I am here,” Raphael Quintella, who has lived in New York for five years, told the newspaper. “Going to a good restaurant in the city costs me more than going to one of the same level in New York. That is applicable to a good Japanese restaurant or to a churrascaria [typical Brazilian barbecue house].”

On the record: Brasscom, Tivit, Neoris point to some immediate requirements

By Felipe Pacheco

With the World Cup just around the corner, the world waking up to it’s formidable economy and the expanding demand for sophisticated IT services – Brazil is just now entering a powerful new era. To get some perspective on the year ahead, and to hear what Brazil’s technology service providers need to do and deliver to help their outsourcing customers succeed, we talked with five prominent members of the Brazilian IT scene.

André Frederico, corporate development director at Tivit

Benjamin Quadros, CEO and founder of BRQ IT Services

Frederico Vilar, country manager of Neoris

Paulo Pichini, CEO and founder of Go2neXt

Antonio Gil, president of Brasscom

Q: What will be the main challenges for Brazilian IT and services providers and their customers in 2012?

Andre Frederico

André Frederico, from Tivit: The perspective of growth for the Brazilian IT and services market in 2012 remains above 10% – almost 7% higher than the outlook for the Brazilian GDP – which, naturally, generates big challenges for IT service companies. I believe that 2012 will continue to be a challenging year for those companies in some aspects already recognized in the past few years. The biggest of them is the employment of qualified workforce. 2011 was already a very competitive year in that respect, due to the growth seen in industry and the situation with the Brazilian labor market in general.

Frederico Vilar

Frederico Vilar, from Neoris: Our industry will have to keep up with the growth of demand for services and be able to use new technologies in order to deliver services that go beyond the “commodity model.” IT providers will have to be able to aggregate value to the client’s business. The adoption of processes based in cloud computing and Software as a Service will be intensified, just as much as new technology solutions such as in-memory HANA [High-Performance Analytic Appliance], from SAP.

Besides that, it is fundamental for the market to create mechanisms to deal with the lack of professionals, especially for certain platforms. In Brazil today, professionals in certain positions at IT companies are very highly paid, which of course affects the cost of doing business and has an impact on their ability to be more competitive, especially when they aim to widen their participation in the Brazilian market and in the exportation of IT services.

Paulo Pichini

Paulo Pichini, from Go2neXt: I think that 2012 will be a year when many projects that were just being planned “on paper” will be effectively executed. The proximity of the great events in Brazil [the Soccer World Cup in 2014 and the Olympic Games in 2016] will demand sensible and fast investments and implementations to renew the networking infrastructure, the information wires, which are already overwhelmed. Besides that, the process of consumerization of the use of IT is already under way and will not stop, so IT companies will have to reinvent themselves to offer scaled-down services to small and medium-size businesses.

With this aggressive growth in the IT world, IT service companies will have plenty of new job possibilities and new commercialization models. Obviously this scenario points to big growth in the use of IT as a service, which will leverage the use of cloud computing in a wide manner. Cloud will be a new outsourcing model for corporations, and without doubt will be the greatest focus of attention by the big providers, such as telecom operators and datacenters. These providers don’t know yet how to sell this new model, but they are seeking advisors to support them and help create shortcuts to quickly launching the biggest number of IT solutions in the cloud.

Benjamin Quadros

Benjamin Quadros, from BRQ: IT is more and more important to companies both from the innovation and the efficiency perspective. The challenges of the industry are: gain scale to offer more choice of services at a more competitive cost, and to specialize in the segments in which they provide services that offer relevant solutions to their clients. In most parts of the country’s economic segments there is a lack of qualified workforce, and in IT, a market in constant growth, that is no different.

There are three technologies that are transforming the industry, and the companies that are able to support their clients with these technologies will be very successful next year. Those technologies are:

• Cloud computing, which will make it much easier for businesses to consume technology without demanding large teams and infrastructure facilities to support them (especially in applications such as e-mail, collaboration, and CRM).

• Agile methodologies, which are transforming the way IT projects are executed, forcing clients and IT companies to work more and more together to achieve better and faster results.

• Smartphones and other mobile devices, which are starting to change the business process of almost every company, and offer enormous opportunities both in terms of innovation and efficiency.

Antonio Gil

Antonio Gil, from Brasscom: Brazil has four main challenges for the development of its IT industry, and some of the recent announcements made by the federal government demonstrate the progress that we have achieved in each of those fronts. They are:

• Labor costs. They represent 70% of the costs of the IT companies, because it is an industry that uses workforce intensively. With the recent passage of the law that provides discounts on payroll taxes, that problem has been addressed. The taxation will go from 20% over the payroll to 2.5% over a company’s income. This will reduce the labor costs of IT companies, and will help to formalize employment in the sector, in a most transparent, ethical, competitive, and productive way.

• Workforce qualification. Even though the IT industry employs 1.2 million people, the segment still faces a serious problem of lack of qualified workforce. Projections point that, for this year, the deficit is almost 92,000 professionals, a number that might be as high as 120,000 in 2012. We need to educate a technological workforce with knowledge of English to incorporate 750,000 new professionals in the market in the next 10 years, with 450,000 working in the domestic market and 300,000 focused on exporting activities. The resolution of that problem might happen with the implementation of Pronatec [Programa Nacional de Acesso ao Ensino Técnico e Emprego], launched in April by the federal government, and which has already been approved in the Senate.

• IT infrastructure. Brazilian broadband is slow and suffers from low quality. We need to invest in networks to support the high data traffic, need to grow the penetration of data services, and need to improve the quality of broadband. The PNBL [Programa Nacional de Banda Larga] has been effective in the expansion of access to broadband, but the low quality and high costs are still a challenge for companies and their development in Brazil.

• Innovation: Brazil still has to meet the challenge of innovation, and incorporate innovation into the DNA of its companies. The program Science Without Borders, a project of the Ministry of Science, Technology and Innovation, will offer, until 2014, 100,000 scholarships to students of different levels to attend 50 of the best foreign universities, promoting expansion and internationalization of Brazilian science and technology. Our talented professionals will participate in the process of technology transfer, experience, and knowledge.

This article was originally published on Sourcing Brazil

Rogerio Oliveira, former president of IBM Latin America, talks about the evolution of the IT vendor relationship – and how the CIO has become far more influential within the executive boardroom.

By Edileuza Soares

Amazon will soon start offering cloud computing services to small and medium-size businesses (SMBs) in Brazil, using basically the same model it employs in the US. The company has already hired an executive to lead the operation and is quietly creating its team in Brazil.

The official date for opening the Amazon office in Brazil is still secret, but rumors say that it will happen soon, possibly by the end of December. The executive chosen to lead the operation is José Nilo Cruz Martins, a Brazilian who was local director of sales for Google, worked for Sun before its acquisition by Oracle, and he also worked for Promon.

Martins was hired in May as the director of Amazon Web Services (AWS), the unit’s cloud computing company. Since then he has been trying to structure the operation. He would not reveal details about Amazon in Brazil, but said the service launch strategy will be announced at the right time by executives at company headquarters in the US.

Negotiations are still going on between Amazon and Oracle Brazil to offer ERP applications to Brazilian SMBs on a software-as-a-service (SaaS) basis. Amazon will also work with other partners to broaden its cloud computing offerings.

Renting Its Infrastructure

It’s not clear yet how Amazon will price its model of cloud computing services in Brazil. But presidents of local data centers say that the company does not have its own infrastructure as it has in the US, or at least not yet. To save time, Amazon will start serving customers using third-party data centers.

According to market sources, Amazon has closed an agreement with TIVIT, a Brazilian company that provides IT services, infrastructure, and BPO and is controlled by the American investment fund Apax Partners.

There are also rumors that Amazon is talking with Terremark, a provider of IT infrastructure and cloud services that is linked to the American telecommunications carrier Verizon, which operates in Alphaville, a metropolitan region of São Paulo.

“Amazon has bought equipment from Cisco and will operate in Terremark with a co-location model,” says an executive of an IT company serving the Brazilian market. He says that Amazon can launch their cloud computing offerings in Brazil at any time.

Negotiations are still going on between Amazon and Oracle Brazil to offer ERP applications to Brazilian SMBs on a software-as-a-service (SaaS) basis. Amazon will also work with other partners to broaden its cloud computing offerings.

None of the companies would comment on their possible agreements with Amazon.

“It’s no secret that Amazon is already in Brazil,” says the president of a data center, located in São Paulo, that sells cloud computing services to SMBs. This same executive, who prefers to remain anonymous, says that the next big company to come to Brazil with cloud services will be Microsoft.

Microsoft confirms that it intends to bring its cloud computing services to Brazil to compete for SMB clients. Its argument is that the Brazilian market is strategic for the company and that it has a project to provide IT services in the country. However, it has no forecast of when it will be arriving and if it will have its own data center or use infrastructure from a Brazilian partner.

Counting On Cloud Growth

Fernando Belfort, industry analyst at Frost & Sullivan in Brazil, notes that cloud computing still represents a small slice of IT spending, but will tend to expand over the next year. Gartner estimates that this kind of service grew in 2010 to 3% of all investments on IT, and that by 2014 this share will rise to 19%.

Currently Brazil is the seventh largest information technology and communications (ITC) market in the world, with approximately $130.6 billion dollars of revenue in 2010, according to Gartner. The annual growth rate is projected to be about 10% by 2014. The IT services business should follow this pace of 10% and jump from approximately $15 billion dollars in 2011 to about $23 billion dollars in the next three years, the research consultancy predicts.

Amazon and other international players want to explore the IT services market in Brazil because of the potential for business growth, Belfort says. There is strong demand for outsourced services driven by the momentum of the economy, he says. The choice of Brazil to host the World Cup and the Olympics should also heat up these businesses.

The biggest buyers of cloud computing in Brazil are SMB enterprises that do not have their own IT departments and have limited budgets. Government estimates indicate there are more than 5,000 companies of this size in Brazil in various segments of the economy, many of which lack technology to integrate operations and improve business management.

The cloud computing model of buying infrastructure and software can be a cheaper alternative way to consume ERP, BI, CRM, corporate e-mail, and other business IT solutions. It is this market that Amazon wants to get a piece of in Brazil.

Amazon will increase the local IT services competition — but Brazilian providers contacted by Sourcing Brazil say they aren’t worried. “Their arrival in Brazil should not impact our business,” says Marcelo Safatle, director of HostLocation, which has two data centers in São Paulo and specializes in cloud offerings for SMBs.

David Shpilberg, co-founder and CEO of CPM Braxis Capgemini, considers the entry of Amazon in Brazil as positive. He says he thinks the competition with the US company will strengthen the local market and help position Brazil as a global player in IT services.

This article was originally published in Sourcing Brazil