Latin America

Samba nation plays the right tune

Atul Vashistha & Sudeep Misra take a look at sourcing trends, traps and opportunities in Brazil

Diversify your stock portfolio – this is a mantra we have been hearing for ages. Well, it is now ringing true in sourcing too!  As global sourcing continues to grow, so does the interest in new locations.  Companies are interested in new locations to diversify risk but also to better serve their own diverse operations or diverse needs.

One of these rising destinations is Brazil. The nation is emerging as an alternative (or complementary) location to other offshore locations, with an interesting combination of characteristics that are similar but also very different from the traditional low-cost locations, such as India and Philippines. Brazil has a very a strong economy domestically, which was one of the least affected in the world by the economic downturn. Many of its Latin American neighbours are also experiencing strong growth in their GDP. 

The Latin America services market will reach US$31 billion in 2010, with a 10.4% CAGR through 2013. Brazil comprises about 40% of this total, with an expected growth rate that is higher than the region's average.

Growth Rate Forecast for IT Spending 2009-2014 - Latin America Leads Spending Growth

Several US and European based suppliers are active in the country.  IBM, Unisys, HP-EDS, Accenture, Capgemini and TelePerformance have offshore centres in Brazil.  Even Indian firms such as TCS and Infosys are present here.  More importantly, several strong local firms seem to have a head start, such as Stefannini, Tivit, BRQ, CPM Braxis, Ci&T and Politec to name a few.  


The IT services market in Brazil is characterised by the emergence and growing maturity of local service providers, continuous investment in Brazil-based operations, the growth of all major global providers participating in the Brazil market, and the arrival of the leading Indian players into Brazil (notably TCS, Infosys, Wipro, and to a lesser degree HCL and Cognizant).

All these players have always expressed that they could not afford to be absent in the promising Brazilian market. In fact, Capgemini’s recent partial acquisition of CPM Braxis and Chilean IT Company Quintec’s plans to merge with Brazil’s Politecis a clear signal to Brazil’s and LatAm’s potential.   The various players have also indicated that they expect a solid, steady growth of the internal market in the next one to two years, with a long-term perspective that more-decisive support from the government will make service costs more competitive abroad.


Trends in Brazil that support sourcing


Worldwide rankings (According to World Economic Forum)

Further information according to the World Economic Forum’s Global Competitiveness Report:


Size and availability of labour force: Brazil has a labour force of 86 million, 66% of which work in services, in general. Growth rates for the IT services industry indicates that 750,000 additional professionals will be needed in the country in the next 10 years (300,000 for the export market).

Projections indicate that the number of college graduates in IT-related careers will reach approximately 53,000 in 2013. Additionally, graduates from other areas, especially business areas, will also pursue careers in IT. Some of the new professionals will replace retiring professionals among the 600,000 in the IT labour pool (1.7 million, considering call centres). This scenario indicates a progressive shortage of IT professionals. As a result, enterprises in the IT industry undertake the responsibility of preparing the workforce, usually in partnership with local governments in second-tier cities.

More than 60% of IT service companies' labour pools are located in seven major cities — Sao Paulo, Rio de Janeiro, Curitiba, Belo Horizonte, Porto Alegre, Recife and the capital Brasilia. The biggest labour pool in the country is located in Sao Paulo, with a size of 225,000. However, the scarcity of resources is already becoming an issue, and companies are rapidly and successfully reaching out to Tier 2 cities with good universities (for example, Campinas, Hortolandia, Sao Carlos, Uberlandia, Londrina, Maringa, Florianopolis and many more)

Characteristics of flexibility, creativity and client empathy, in addition to specific domain skills (especially in the financial, insurance and communications verticals), make Brazilian resources attractive. A large percentage of workers have good business acumen and knowledge of business practices.

Cultural Compatibility: Brazil is well connected to the world. Immigration has resulted in cultural diversity. The culture in general, and business practices in particular, are influenced by the US and Western European practices. Brazil has been the destination for several waves of immigration from different areas, most notably Portugal, Italy, Germany, Japan, the Middle East and other Latin America countries. Since World War II, Brazil has been strongly under the economic, and cultural, influence of American culture. Meanwhile, business practices are influenced by American and European MNCs.

Political and Economic Stability: Brazilian international risk ratings are low and trust from international investors is high. The economy has been stable and growing, and inflation has been under control. The country has shown continued political stability and this is forecast to continue with the new government. Merger and acquisition activity has increased in 2010 as an rising number of IT service providers look to establish operations in Brazil.


Further testament to Brazil’s political and economic stability:

Since 2003, Brazil has steadily improved its macroeconomic stability, building up foreign reserves, and reducing its debt profile by shifting its debt burden toward real denominated and domestically held instruments. After record growth in 2007 and 2008, the onset of the global financial crisis hit Brazil in September 2008. Brazil experienced two quarters of recession, as global demand for Brazil's commodity-based exports dwindled and external credit dried up. However, Brazil was one of the first emerging markets to begin a recovery. Consumer and investor confidence revived and GDP growth returned to positive in 2010, boosted by an export recovery.

Brazil's strong growth and high interest rates make it an attractive destination for foreign investors. Large capital inflows over the past year have contributed to the rapid appreciation of its currency and led the government to raise taxes on some foreign investments. President Dilma Rousseff has pledged to retain the previous administration's commitment to inflation targeting by the Central Bank, a floating exchange rate, and fiscal restraint.


The World Bank's Doing Business 2010 report ranks Brazil at 129th out of 183 countries for ease of doing business. It is ranked low because of bureaucratic difficulties in registering property, starting a business, closing a business, paying taxes, employing workers, and doing business across borders.

Data and IP Security and Privacy: Brazil has several laws and legal protections on privacy, but enforcement is not stringent. While a growing information security industry exists, considerable work remains to be done in the areas of intellectual property (IP) protection, the enforcement of anti-piracy laws and physical security. Further information with regards to this issue:


Restrictive Labour Regulations: More attention is needed to correct antiquated labour laws, which make Brazil labour rates higher than those of competing countries. Greater scale of IT resources, which would lead to greater government support of job creation in the IT sector

Macroeconomic environment: Despite the progress made toward fiscal sustainability, the macroeconomic environment in the country remains worrisome, with notably low savings rates (15%, 101st), a high interest rate spread (35.4%, 136th), and relatively high public indebtedness (48% of GDP, 84th)

Attrition rate: Attrition rates are in the 15% range but comparable to the other Latin American countries and significantly better than those experienced in India.

Taxes and regulatory costs: Many corporations say that the high taxes compromise Brazilian competitiveness in the global market. The middle class complain that, besides paying high taxes, there is not a return in services from the government; most middle class families have to pay for private education, private health, and, more recently, private safety. The tax burden is a less in Latin American neighbors like Colombia, Mexico and Peru.


Infrastructure Quality: Brazil's infrastructure is capable of providing the expected double-digit growth for the country's IT services industry with high levels of support. Government investments aim to give appropriate support to the FIFA soccer World Cup in 2014 and the Olympics in 2016. The government plans to spend US$880 billion on infrastructure between 2010 and 2016, including telecom and broadband access. Telecommunications carriers and infrastructure providers are also ramping up their investment budgets.

The infrastructure challenge in Latin America – (Source: - WEF_GCI and Mia et al., 2007)

The overall quality of infrastructure has to develop more because the current quality results in higher logistics costs and inefficient patterns of inter-regional and international trade. The most problematic areas, as highlighted by the GCI, are the quality of port infrastructure (123rd), roads (105th), air transport infrastructure (93rd), and to a lesser extent, railroad infrastructure (87th) and mobile telephony (76th).

This assessment reflects the appalling state of transport infrastructure in the country, its underdeveloped railroads, the unexploited potential of its 48,000km of navigable waterways, its congested ports and airports, and its costly and underdeveloped telephone infrastructure.

Education: Brazil has shortcomings in education but inadequate government efforts are complemented by the private sector (IT user companies and service providers), which runs extensive internal IT training programs.

The literacy rate for people aged 15 and older is 89%. Eight years of education are mandatory, but adults have an average of 4.9 years of schooling. Approximately 16.5% of the population attends college. Higher education enrolment has more than doubled in the past 10 years to more than five million each year. Government programs doubled the number of openings in federal universities for 2009 to 230,000


About 10% of the total educated labour force has completed higher education, and about 30% has completed secondary education. The deficiency in higher education availability is complemented by private IT technical high-school programmes.

The government spends 4.2% of gross domestic product (GDP) on education today, but has stated that it plans to raise this to 5.0% in 2012.

Further focus and efforts are required to improve the quality of the educational system at all levels (ranked 106th for primary education and 97th for the quality of the higher education) and to reduce regional disparities in educational access and attainment.

Language capabilities: English is the primary foreign language, and most college-educated Brazilians can understand written English, but are not comfortable in conversations. This is one of Brazil's major challenges in the international ITO and BPO services market. Nevertheless, language diversity in Brazil makes it attractive for niche language skills.

Portuguese is Brazil's official language, but English, French and Spanish are widely taught as part of regular school curricula. The strong presence of foreign colonies means that Japanese, Italian and German language capabilities are also available. English is regarded as the most important foreign language, but the local educational system still struggles to provide the required proficiency levels.

A typical student requires additional courses at private language institutes. Export-oriented service providers will often take it upon themselves to provide English language education, through internal training or by subsidizing language course fees.

Cost of Labour: Despite the steady appreciation of the Brazilian real against the US  dollar, the country still offers competitive service costs. In a risk-adjusted total cost comparison, relatively competitive costs, coupled with strong business acumen, solid infrastructure, low geopolitical risk and high international business exchange structure, highlight Brazil's overall attractiveness.

Brazil has relatively competitive salary rates among the various countries in Latin America. Average annual salaries are: IT programmer (US$20,000 to US$40,000); IT project manager (US$53,000); software engineer (US$32,000); and IT manager ($77,000).

Hefty social taxes, which can reach almost 100%, are applied to salaries and collected from the employing company. However, there are several incentives for service exports, which combined can reach about 15%. 2010 salary increases in Brazil are expected to be 5.7%, down just slightly from 2009 (5.9%).

The cost differences between Tier 1 and Tier 2 cities can reach 50% in the three biggest cost areas for IT services — salaries, facilities and telecommunications — demanding extensive due diligence from providers and clients alike.

The Brazilian currency (the real) has been appreciating steadily and now floats at around 1.7 per US dollar. This represents a 25% increase in costs over two years for American buyers of Brazilian services.

The cost of living in Brazil — especially in the major cities — is higher than in other countries in Latin America. Sao Paulo (ranked 21) and Rio de Janeiro (ranked 29) are the only Latin American cities among the top most expensive cities to live in the world.


Government effectiveness: Outdated labour laws and a slow-moving official bureaucracy continue to reduce the agility and flexibility of businesses in Brazil. Outdated labour laws pose hurdles, and although currently under debate, they are not expected to change significantly in the short term. However, the country has made important forward strides in the past few years.

Government continues to create incentives, such as tax breaks, to boost technology-oriented innovation and workforce development, with the double objective of developing the IT services industry and making Brazilian service costs more competitive abroad

The Brazilian Association of Software and Service Export Companies (Brasscom) enjoys high visibility and drives strong programs (including education, marketing, regulations and intelligence). Its President has a seat in Brazil's Economic Development Council and is widely respected.  Brasscom also has talented leaders focused on the USA market and is well connected with USA based CIOs.

Other IT industry organisations – the Brazilian Association of Software Companies (ABES, representing software companies) and Assespro (representing software and Internet companies), join Brasscom in incentive programmes and government lobbying. Apex-Brasil (a government export promotion agency) and Softex (an organisation focused on software and services development) develop additional activities in partnership with Brasscom.


Brazil can be a viable outsourcing choice for a wide range of IT and IT-based services, including IT and application outsourcing and business process outsourcing, especially for Brazil based operations. Also, the nation can be considered for US-based operations for clients with mature offshore experience. Total risk-adjusted costs for specific services are competitive with those in many other offshore destinations. Monitor effective control and transparency regarding required local compliance with complex, bureaucratic legal requirements.

Keep in mind that its outdated labour laws and slow-moving official bureaucracy reduce the agility and flexibility of businesses. And, often, you’ll be competing with the strong domestic demand.

Nevertheless, despite the steady appreciation of the Brazilian real against the US dollar, the country still offers competitive labour rates. In a risk-adjusted total cost comparison, Brazil is very competitive among Latin American countries and against many African, Middle Eastern and Asia Pacific destinations. Relatively competitive costs, coupled with strong Western culture alignment, business acumen, solid infrastructure and high international business exchange structure, highlight Brazil's overall attractiveness as a service sourcing country.

Atul Vashistha is Founder & Chairman of Neo Group, a firm since 1999, focused on monitoring, predicting and managing outsourcing and global supply relationships and risks. His co-author, Sudeep Misra, is a manager at Neo Group with experience in Latin America and India based supply markets.