Brazil: Always On the Edge of Greatness

Can Brazil replicate the Indian IT services success story? More than a few observers have noted the similarities between Brazil today and the India of 1990, right before its outsourcing industry exploded. Is Brazil on the same meteoric path? After the recession, both BRIC countries show a recovery growth rate that many nations would be proud of in peak time – India at 8.9%, and Brazil at 7.6%. But in spite of all the signs, Brazil always seems to be just on the edge of greatness. Nearshore Americas examines a few similarities and differences between the two sourcing powerhouses here.

Growth history

India’s economy in the 80s’ was one of the worst managed in terms of unharnessed potential. Government policy was to close the country to the outside world, using high tariffs to prevent foreign imports, and a system of central planning in which firms required complicated licenses to invest in the country. The socialist belief was that if internal markets were strong, India would be self sufficient.

That fell apart with the economic crisis in 1990. India asked for a bailout from the IMF, which in return demanded sweeping fiscal reforms. Those reforms resulted in widespread liberalization of the Indian economy in the ‘90s, and one of the biggest service economies in the world. In 2008, the IT and BPO industries contributed to over 25% of India’s total exports. The share of the IT industry alone was 7% of GDP.

Brazil may not have gone through the same protectionism-liberalization cycle, but it has a few things in common with India, and more than a few things to learn.

Bureaucracy

Like India, Brazil has many issues related to administration that make it difficult for US firms operating in the country. The difference is that in the late ‘90s the Indian government made a conscious decision to keep its nose out of the IT industry, which immediately lessened the bureaucracy. It provided large tax breaks and rental subsidies to investing corporations – in other words, created an incentivized business climate – but apart from that, left ITO to the private sector. That’s what Brazil has been unable to do.

“They have a hard time keeping the government out of the IT industry,” says Alok Aggarwal, Chairman and Co-founder of Evalueserve. “And so the system is one of the most bureaucratic in Latin America. The whole taxation structure needs to be revamped. I’m not talking about lowering taxes; just making it simpler and more straightforward.” These are issues that slow down a country that could otherwise achieve much more.

“It’s unclear whether Brazil can fully replicate the Indian success story, given that its cost structure is so high. The Indian cost was about 0.125 of the US around 1990, whereas Brazil is already 0.75 times the US,” says Aggarwal.

If we take a lesson from India, the country did one thing better than anyone else which really established it as a destination of choice.

Service providers

One of the main parallels that can be drawn between the two countries is their vendor offering. Brazil has a strong crop of home-grown IT service providers like Neoris, Stefanini, Ci&T and CPM Braxis (recently partially acquired by Capgemini), just like India had in the late 1990s. And they’re all trying to make it big on the world stage, very similar to India’s TCS, Infosys and HCL several years ago.

“The fundamental difference is that the Brazilian companies are playing in a market that’s much more evolved than 13 or 14 years ago,” says Anand Ramesh, Research Director of Global Sourcing at Everest Group. “They’re selling to a client base in North America that understands the value proposition of outsourcing, and know for a fact that it can be done successfully – a huge advantage.” By contrast, when TCS or Infosys were starting to sell internationally, the offshore model hadn’t been proven yet. Essentially, US executives didn’t know if it would work.

So does that mean Brazilian providers will grow much faster than the Indians did? Not necessarily. It’s true that today’s buyers already believe in the sourcing model, but now there’s also a lot more vendor competition in the market. Brazil is not only contending with India, China and the Philippines; it’s also competing intensely with home turf rivals in Latin America.

Education from the private sector

When it comes to the technical skills of the public, Brazil is exactly like India in the late 1990s. “Most of the IT activity was centered in Bangalore, and if you went to secondary IT cities like Chennai, finding those same skills was difficult,” says Ramesh. “Similarly, Brazil today has a great technical base in mature locations like Rio and Sao Paulo, but in Tier II locations like Belo Horizonte, you have to look harder.”

In terms of educating the Indian people, once again the government created the environment and then largely left it to private sector companies like NIIT. And so people learned Oracle and other software solutions much quicker than they would have with poorly funded public programs. In Brazil, we see a good mix of public-private education ventures, however it will be some time before there are clear results. Investment promo agency Brasscom is helping, but there is no single strategy to up the IT knowledge base.

A clear message

For several years now the pieces have been in place for Brazil to explode onto the global sourcing stage – and yet Latin America’s biggest economy is always just on the edge of greatness. Why? If we take a lesson from India, the country did one thing better than anyone else which really established it as a destination of choice. It was investment promotion, or in one word, NASSCOM. The biggest proponent of the Indian services industry, NASSCOM for the past two decades (and most strongly from 2001 onward) has been communicating one clear vision to the rest of the world. “That’s the biggest thing lacking from Brazil right now – a cohesive and simple articulation of the role it can play for investing firms,” says Ramesh. “Most of the message has been around the fact that there is robust talent and the ability to perform many different functions. The message should be that for a large global organization, Brazil can play a unique role. What is that role?”

NASSCOM by contrast, has made it a point to consistently go back and reinforce the right message. Every few years, the organization re-evaluates its focus and comes up with the next set of things clients should think about. The most recent case was in 2007 when it decided to gear the Indian BPO industry toward higher value services and away from call centers.

Given the amount of choice that firms have in sourcing locations, Brazil will always be compared to other LatAm countries. And with the high tax rates and currency appreciation, it quickly becomes unattractive in terms of cost. The solution for Brasscom – and other related advocacy agencies – is to identify clearly what services Brazil can perform better than anyone else. “But I haven’t seen any such articulation from Brasscom yet,” says Ramesh.