The Good, the Bad, and the Ugly of Brazil Outsourcing

From a sourcing perspective, Brazil offers service providers myriad opportunities to acquire new logos and establish delivery centers, coupled with some formidable challenges. Consider the state of the real, which has been declining steadily against the U.S. dollar. On the one hand, the exchange rate makes Brazil attractive to buyers. On the other, it highlights the fact that the country has been in a downward economic spiral for several years.

Let’s start with the positives. Brazil offers an ideal location to base delivery centers (mainly around São Paulo) to support international clients in Latin America as well as North American customers. The Brazilian IT workforce is strong and vibrant, and ideally suited for call center support, infrastructure management services, and ADM (particularly Oracle and SAP ERP).

Brazil’s technical colleges are top notch, and several service providers have wisely established offices close to major university campuses to facilitate recruitment and renewal of talent. Relative to offshore alternatives, attrition rates in the ITO space are low at around 5%. English-language speakers are readily available, as Brazilian schools require language education, and English and French are traditionally first choices. While Spanish speakers are also readily available, Brazilian-accented Spanish is less desirable than Colombian or Costa Rican options. That said, the primary impediment to offering Spanish-language services from Brazil is not language fluency but rather connectivity costs to other countries, such as Chile.

To take full advantage of these positive attributes, providers must address a number of underlying economic, political, and business-climate issues. One is restrictive financial laws that make repatriation of money and establishment of local operations extremely difficult. Strategic alliances or acquisition plays with local firms can be an effective strategy to market entry. In the ADM market, local firms with strong SAP or Oracle expertise can be a viable option. A French provider, for example, recently pursued an alliance-to-acquisition approach with a local firm that resulted in a strong Brazilian presence along with a sizable customer portfolio.

The alternative to alliances is a full-bore approach to market entry by establishing a local subsidiary. This strategy is most effective when adding a multi-national client with a Brazilian presence, and has been the favored route of many of the India heritage providers. Major global players such as IBM, HP, and Capgemini have had Brazilian operations for years.

Despite the signing of the Mercosur free trade agreement, which has allowed Brazil and its neighbors to exchange products without major import taxes, Brazil remains a relatively closed market. For example, Brazil’s state and federal governments, together with the local taxis unions (called “sindicatos”), are bitterly resisting Uber’s efforts to penetrate the Brazilian market. São Paulo’s Public Transportation Department argues that Uber breaks municipal laws regarding paid transport activity and should therefore be subjected to regulation and taxation. Beyond the courtroom battle, reports have surfaced of Uber cars being confiscated and drivers kidnapped and beaten by union thugs.

While Brazilian wage rates are reasonable per se, several variables affecting total cost of resources must be considered. First off, Brazilian employees start with a 14-month salary (one extra month of vacation pay plus the “décimo terceiro,”or bonus paid to all employees). Additional taxes, as well as transportation, meal subsidies, recruitment, retention costs, add to the total.

In short, the Brazilian tax system is a huge problem, with significant levies imposed not just on earnings but on, for example, consumption of energy. In August of 2015, the federal government imposed a surcharge of 4.50 reais for every 100kWh of energy consumed. In addition to being onerous, the tax system is exceedingly complex, and varies based on the state and locality where services are delivered. Foreign-based companies often contract with a local third-party specialist firm to provide guidance on tax issues.

From a business culture perspective, personal relationships are still paramount. Face-to-face interaction is critical, and potential clients want to get to know their partners, not just from a business standpoint but to talk over “um cafézinho” (a cup of coffee). Familiarity with business customs and the ability to communicate in Portuguese is a significant advantage.

Ultimately, Brazil can be a dream or a nightmare, depending on the scope and focus of your business. There is no doubt that the country can offer viable opportunities for service providers seeking to expand their client base and scope of operations. The key, of course, is taking advantage of the pros while mitigating the risks of the cons.