Outsourcing prospects in Brazil good, but economy is a barrier

Midmarket CIOs have plenty of reason to look to Latin America for outsourcing. But can Brazil continue to provide true cost savings?

Brazil may be a leader for Latin American IT outsourcing, but all isn't well below the equator as an appreciating Real cuts into potential cost savings.

It makes sense for a midmarket CIO to give outsourcing opportunities in Latin American countries serious consideration. The close, if not exact, time zones make business simpler and Latin America generally possesses a cultural compatibility with the United States that some might find lacking in India and elsewhere.

Analysts at Stamford, Conn.-based Gartner Inc. last November called Brazil "one of the most sought-after destinations" for outsourcing and recommended the country be considered for "a wide range of services."

A Gartner report analyzing Brazil's effectiveness as an offshoring home rated the country "very good" for infrastructure and cultural compatibility, but cautioned readers about an only "fair" level of government support, educational opportunities and data security.

But more troubling to CIOs looking to outsource to the south may be the rapidly appreciating Brazilian Real. With the currency up 22% in the last year and 12% in the last six months, according to recent data from Everest Research Institute in Dallas, the possibility for cost savings has begun to evaporate. That threatens Brazil's foothold as a Latin American outsourcing country as Argentina and other countries gain ground.

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Still, Brazil is only a two-hour time difference from the eastern U.S. seaboard. And -- like Rome, London and New York -- major population centers there are world cities, melting pots of Portuguese, Germans, Japanese and others. The country, Gartner notes, has been economically and culturally influenced by the U.S. And "national identity is strong and racial friction is virtually unknown to Brazilian culture," according to the November Gartner Report.

"Latin America is America's backyard," argued Peter Albers, president and CEO of Politec USA, the stateside branch of the major Brazilian outsourcing provider. "If [CIOs] go to Brazil they will be very positively impressed."

Politec, a $320 million revenue company, has been expanding its operations as of late. It recently was taken in as an affiliate of Mitsubishi Corp., a while-in-the-making pact that Albers said stems from Brazil's immigration-fueled connection with Japan.

And the company is also starting to put down roots -- connections, really -- in the U.S., opening offices in Atlanta, New York and Miami. Albers was announced last month as CEO for American operations.

Albers and Politec executive vice president Alexander Schmitz-Kohlitz consider the physical proximity of Brazil -- Politec also operates from Japan and Argentina -- a major plus when courting midmarket companies. And the company's emphasis on providing SAP AG-related services also has it seeking out midmarket clients, they said. SAP in recent years has increased focus on the midmarket with a series of ERP products.

"We believe there is a need for intimacy and close contact with smaller CIOs," Albers said when discussing the U.S. offices and the value of a nearshore provider.

Asked to identify other Latin American countries that would be good locations to scour for outsource work, Schmitz-Kohlitz identified Argentina and Uruguay. He said he saw Colombia as a viable option. Venezuela is "totally off limits." And Mexico, he said, doesn't work from a cost point of view.

Latin America is America's backyard. If [CIOs] go to Brazil, they will be very positively impressed.
Peter Albers
president and CEOPolitic USA
But will Brazil for much longer? The rapid appreciation of the Real threatens the ability of outsourcers there to provide services at a significant savings. Arbitrage, the likely profit from price differences, has dropped from 40% to 25% in just over a year, according to Everest Research Institute. That puts Brazil at a cost level comparable to Eastern European companies, according to the research firm.

Everest also offers Argentina for comparison, where the value of the peso has actually decreased slightly in the last year. But the research institute notes concerns that the stability of the currency has been manipulated by the Argentinean government and "may lead to future revaluation."

The average Brazilian programmer makes about $20,000 annually, making the country's wages the lowest in Latin America, according to Gartner. Yet wages, too, are on the rise.

Other downsides to the country include a lack of enforcement of privacy and intellectual property protection laws, as well as physical security at outsourcing facilities, something Gartner calls a "prominent issue." Brazil also lacks in education, according to Gartner, but that's offset by the outsourcing industry's willingness to train IT staff.

Gartner did give Brazil points for strong physical and technological infrastructures, saying the country is ready to handle double-digit growth in the IT industry.

The Brazil outsourcing industry is also supported by a number of government lobbying groups, including the 36-member Brazilian Association of Information Technology and Communication Companies. Members include Politec, Tata Consultancy Services Ltd., Microsoft, IBM and Sun Microsystems Inc.

Let us know what you think about the story; email: Zach Church, News Writer

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