Outsourcing: Brazil Blossoms as IT Services Hub

CapGemini’s announcement last week that it would invest $298 million in Brazilian IT service provider CPM Braxis attracted a lot of attention in outsourcing circles. The move will give the Paris-based company a 55 percent stake in CPM Braxis, the option to buy the company outright within three to five years of the close of the deal, and the chance to leapfrog its global competitors already entrenched in the country.

“CapGemini is visionary, getting into the market ahead of its global competitors,” says Atul Vashistha, president of offshore outsourcing consultancy Neo Advisory. “This is a very promising strategic move.”

Meanwhile, CPM Braxis—a major South American outsourcer with 5,500 employees—is predicting 20 percent growth and $450 million in revenue in 2010.

The Brazilian company’s financial outlook is emblematic of the Latin American market for outsourced services, which is expected to grow 12 percent in 2010 to $8 billion, according to Forrester Research. That’s on top of the $19 billion that local companies will spend on IT consulting services.

Brazil—with its 250,000 IT professionals, 23,000 annual IT graduates, and infrastructure capable of supporting double-digit growth—is at the heart of the IT services supply chain in the Southern Hemisphere.

In fact, most major U.S. players including HP, Accenture and Unisys have an escalating presence in Brazil, which has been largely unaffected by the recent global economic slump. In June, IBM announced plans for its first South American research center, located in Brazil, as part of its strategy to sell technology and services to large, fast-growing emerging nations.

Indian outsourcers such as Satyam, Infosys and Wipro have been aggressively expanding in Latin America. Tata Consultancy Services (TCS), for example, has three global delivery centers, including an Oracle center of excellence and more than 1,500 employees working in Brazil. Home-grown providers, like Politec, Ci&T and Stefanini, have been expanding rapidly.

“They are looking to grow regionally and also tap the U.S. market, hiring resources in the U.S. and other South American [countries],” says Vashistha.

According to the Brazilian Association of Information Technology and Communication Companies (commonly known as BRASSCOM, an allusion to NASSCOM, which worked to fuel India’s IT industry), Brazil’s offshore outsourcing market hit $1.4 billion in 2008, rising 75 percent in a single year. An October, 2009 report from Gartner states that “Brazil’s economic footprint combined with having the largest domestic IT consumption in all of Latin America, as well as international recognition as one of the most promising and rapidly emerging economies, makes it a natural destination to evaluate for IT services.”

But it’s far too early to call Brazil a leading offshore outsourcing destination—at least for U.S. corporate IT. Multinational and local IT services firms are working with a variety of customers—financial services, manufacturing, telecom, media, government—but are largely focused on local and regional support.

“There are huge growth opportunities in Brazil’s ITO and BPO market. Many of the firms that have outsourced their U.S. operations are now trying to do the same for their regional operations,” say Vashistha, who spends half of his time in South America. “But there is little offshore support towards U.S. operations.”

For one thing, BRASSCOM is no NASSCOM, and local providers have not gone after the U.S. market as aggressively as India did in the run up to Y2K. And for all of Brazil’s offshoring pluses—time zone compatibility, growing IT labor pool, and economic growth—there are a few minuses: “Brazil can be challenging to do business in due to security issues, inflation, currency strength, and language limitations,” Vashistha says.

Indeed, Brazil’s currency, the real, continues to strengthen against the U.S. dollar, which can erode some currency-based savingsfor U.S. customers. Although Gartner says that the country’s risk-adjusted costs for specific services are competitive with other leading offshore destinations, it warns of “outdated labor laws and a slow-moving official bureaucracy” that hamper outsourcing companies’ agility and speed.

However, non-governmental organizations and private IT services firms have been proactive about pushing the government to enact changes, according to Gartner. And the presence—and influence—of more international providers will only increase the pressure to make regulatory shifts that will enable Brazil-based operations to compete at the rapid pace of the offshore outsourcing industry.

“Right now [Brazil-based providers] are not competing [head-to-head] with U.S.- or India-based providers, but that will change rapidly in BPO and ITO, particularly in the the financial services and telecom sectors,” says Vashistha. “I think Brazil and Brazil providers have great potential.”