When it comes to global outsourcing, Brazil and its formidable IT industry have been dealing with an identity crisis ever since the country’s economy went into a tail spin three years ago.
While the failing economy in and of itself is a not a worthy excuse for Brazil’s sputtering performance on the global IT outsourcing stage, a lingering recession and the cloud of corruption around its political leadership have combined to undo a lot of the global momentum the country once had.
Strong Domestic Market, Weak External Focus
Without question, the legendary domestic market, with its vast demands for digital services, has effectively come to define Brazil’s IT services delivery focus for the past few years.
“The ambition to build a stronger ecosystem is there in the minds of many,” said Sergio Paulo Gallindo, President at Brasscom, the Brazilian Association of Software Companies and Services for Export. “Brazil’s internal economy was the main distraction from any external expansion, and it became more attractive for companies to invest in the domestic market that to use the country as an export platform. Today, there is plenty of opportunity to be had as Brazil comes out of its recession.”
Brazil’s global outsourcing track record has, in the eyes of many, been a disappointment. Sure, the country maintains a tremendous pool of IT talent, and its banking industry continues to serve as the crown jewel of industry advancement, but over the years there has been an overriding uncertainty about which part of the LatAm IT market Brazil is trying to play in.
The question is, is the country principally about providing services internally to its domestic market (as many perceive the country today), or does it still harbor hopes of becoming a globally leading exporter? Or, is Brazil settling somewhere in between those options by performing as a solid Nearshore option?
Have the Ambitious Claims been met?
Back in 2009, then President of Brasscom Antonio Gil helped shaped an image of Brazil, not only as a giant among Latin America IT exporters, but as a player that could compete against the world’s largest outsourcing hubs. “We are now running for second or third place in the worldwide outsourcing race,” he said in this Nearshore Americas article, characterizing the emergence of Brazil as a major worldwide player in offshore services.
With India taking the lead position back then, Gil believed that Brazil and the Philippines would battle for second place worldwide. He dismissed China and Russia as not having the technical leadership and talent levels to match the potential performance of Brazil and the Philippines.
Gallindo, who stepped into the role of Brasscom President in 2014, is among several key voices in the Brazil IT market who are faced with both an opportunity and challenge: What is the real vision for Brazil IT?
“In Brazil, most new opportunities for IT offshoring are not going to come from traditional helpdesk centers or remotely delivered IT services, but will probably come from a combination of chatbots, AI systems training, Big Data processing, a little digital transformation consultation, and implementation of new IoT solutions – it’s not going to come from the trends of the past, so we are gearing up to that and embarking on the mobility aspect of digital transformation,” he said.
In terms of Brazil being positioned to become a true Nearshore provider, the company CINT is already claiming roughly 80% of its revenue from outside of Brazil. The company is active and doing well in the US, as is CFT, ThoughtWorks, E-core, BRQ, TOTVS, and Stefanini, so Gallindo remains optimistic.
“Due to the uncertainty of the last few years, Brazilian entrepreneurs are waiting for things to become stable,” he said. “Next year we have the general elections, which will be a huge event, so maybe we will see more appetite from Brazilian entrepreneurs to go abroad in 2019. As the sense of opportunity combined with a more predictable economic environment invades the minds of decision makers, it will be just as natural for more investment and talented people to come to Brazil.”
Alongside the possibility of inward investment, Gallindo sees untapped strength and potential in the Brazilian entrepreneur ecosystem, which, for many Nearshore powerhouses, is the key to strengthening the service provision to the United States.
“Brazilian entrepreneurs have to be more confident in their differentiation strengths to present to the US, namely their high level of flexibility, their acute customer focus, and their ability to innovate – these three are the main characteristics of Brazilian professionals.”
Between 2009 and 2011, Brazil saw a substantial 31.8% depreciation of the real against dollar. During that time, the domestic IT industry actually grew extremely well, so the labor market became very competitive. This led to a substantial increase in nominal wages.
In 2009, an hour’s worth of work in cost US$4.84. In 2011, and including the inflation variation, that same hour was costing US$6.75. This cost increase was not an incentive for companies to come to Brazil and invest in the country as an offshore platform.
Taking into account Brazil’s standard payroll tax, which exists to support social service and public pensions, the cost of labor in 2011 totaled US$7.45 per hour – an additional 20% burden. Looking at these pure economics, it wasn’t surprising that the exports of services and software from Brazil to the US stayed stagnant at around US$560 million per annum.
Stable and Steadfast
After 2011, there was a period of stabilization. The exchange rate gradually reduced and public policy was introduced that replaced the payroll tax on revenues. This meant that exports were finally exempt from payroll tax.
“That was an immediate 20% benefit, so with a more stable currency, we started to see an improvement in exports,” said Gallindo. “In 2015, our labor cost per hour was lower than it was in 2009. Consequently, we started to see a steady and constant increase in exports, and Brasscom predicts that the net export value of software and services with reach 2.4 billion reals by the end of 2017. Compared to the half billion that we had in 2009-2001, that’s a robust increase.”
The Brazilian market today, according to International Data Corporation (IDC), is sitting on approximately US$54 billion per annum. With telecommunications revenues added to that, Brazil is the sixth largest market in the world, with a total of US$103 billion in revenues.
Deep Pool of Talent
Despite a shaky economy for many years, technical talent in Brazil has been abundant.
According to Gallindo, the number of Brazilian software and service employees grew from 513,000 to 609,000 from 2010 to 2015. In 2015, he recalled, Brazil had approximately 1.5 million employees: 600,000 in ICT companies and the rest in non-ICT companies, such as the largest banks and consumer goods companies that have captive centers in the country.
“That figure is still stable,” he said. “During the recession, our employment in the sector only reduced by around 100,000 people. This year, with other sectors in the economy actually decreasing, the ICT sector grew in net value by 4,131 employees: 3,200 in software and services and the rest in manufacturing.”
Even so, Gallindo feels that this figure not enough to serve Brazil’s domestic needs. He believes that the country is still short of talent, especially in state-of-the-art trends like digital transformation, artificial intelligence (AI), Big Data, and even Internet of Things (IoT).
“There are areas of expertise that we are still missing,” he said. “But, on the flipside, our financial sector was the first to jump on digital transformation, and our large banks today are digital banks for the masses, with mobile apps already ingrained in the country.”
While the numbers are there, the people still need new skills in order to thrive. Brasscom is promoting the demand for digital transformation and trying to facilitate investment for the sector to grow. The association is in partnership with the government on educational programs that are geared toward youngsters coming out of high school.
“We are helping to improve a concept that, by including social and emotional skills as a capability to be delivered, actually improves the quality of the talent base, giving people the prospect of having more longevity in companies where they work,” said Gallindo. “The success of the domestic industry during the recession actually helped to attract more talent and more students to the relevant fields of study.”
The association is also working with congress to pass a law on personal data protection, which is key to improving the level of security surrounding the rule of law, and will ideally attract investment into Brazil to enable the country to provide digital transformation services. Furthermore, pushing for more flexible policies surrounding immigration – a difficult topic when unemployment is so high – should diversify the talent pool even further.
“Personally, I think that Brazil should open up frontiers to attract talent,” said Gallindo. “The government could introduce prerequisites to bring in the right type of talent, which Canada has been very actively pursuing – a lot of Brazilians went to Canada actually. I hope that, as the economy turns upwards, the right environment will be created to make these decisions.”
Strong Potential to Reclaim its Position
Clearly, Brazil has most of its dominoes in a row: IT talent is readily available, the market size speaks for itself, and the foreign exchange rate is expected to be stable for years. However, in order to really seize the Nearshore opportunity, the country most overcome its biggest challenge, which is to create a business environment that people feel confident about investing in.
It seems as if the country has made progress on this, with the passing of two labor laws that transformed and modified some rigid labor laws from the 30s. Sure, it has led to more instruments for hiring talent and has reduced problems that companies faced at labor courts, but it’s not enough to convince US buyers that the country is up to scratch.
As these milestones continue to be reached, the country’s economic evolution will come naturally, so by developing a warm and welcoming business environment Brazil may finally live up to its Nearshore potential.