By Kirk Laughlin

Is it possible that IT departments will thrive, while at the same time outsourcers will continue to play a vital role in supporting corporate IT services?

As the U.S. battles to emerge from a bruising economic climate and new resource-efficient solutions like cloud computing become more mainstream, a key, strategic question confronts countless CIOs: how much of the IT function should be outsourced and how much should stay in-house? Some CIOs have taken the boldest of all steps by outsourcing the entire IT function (as CIO Brent Hoag has done at Wisconsin-based Diversey), while the majority of CIOs look to balance in-house resources with a combination of onshore and offshore managed services providers.

Managing complex IT outsourced relationships, determining what is truly strategic and stays inside the corporate four walls and what gets outsourced has defined the path most CIOs have walked over the last several years. However, are we finally reaching a point where the path diverges and decision-makers must choose between one path or the other?

Reality Strikes

The proposition of all-or-nothing options does not really match the reality of the highly dynamic role of IT which needs to scale, shift, re-allocate and augment at any given moment. Clearly, the role of the outsourced service provider is here to stay. Listen for example to what Jeff Relkin, director of IT for Quadel says in this recent TechRepublic interview:

“As technology becomes ever more commoditized and as the availability of objects for application construction without traditional development continues to expand, the need for in-house IT resources will dwindle. The overall organization of IT will also change, along with the skill sets required. IT professionals will need to become more mainstream business resources than ever before, with more emphasis on contributing to revenue generation rather than expense reduction.”

Another IT leaders, Michael Foerst (CIO of Missouri Employers Mutual Insurance), has a different take:

“Yes, on average it will be smaller but not because it is all outsourced. IT departments will leverage the capabilities of the cloud in order to allow their internal resources to become more familiar with the business and deploy technology solutions that will help differentiate their organizations in the market.”

And, finally, Lance Taylor-Warren (CIO of H.A.W.C. Community Health Centers) points out that – at the end of the day – the IT role will have to continue to stay flexible:

“Cloud computing is just one of many options that a company has to look at moving forward. No one knows what the next big thing will be. IT departments may shrink in certain markets, but health care IT is on the cusp of a huge growth phase due to health care reform and the requirements being forced on the industry by the federal government. Outsourcing can’t address the hands-on need.”

Danger of Playing It Safe

Because the IT department’s role has become more intertwined with actual business outcomes, the requirement that IT “speaks” in business terms will inevitably increase. Therefore, I’m quite sure that IT leaders with business acumen are going to be looked as as extremely critical to the overall value delivered by the business. Those who possess these skill sets are probably the “safest” of all IT professionals, especially for those individuals whose background is entrenched in the vertical industry where the company operates.

Meanwhile, the outsourcing partner can “play it safe” and continue to deliver commodity IT services and probably have quite a steady source of business. But the savvier players, those that can peer more deeply into the strategic challenges of their clients and truly commit to answering the call to drive innovation, are going to be the group that really defines the next-generation of world-class managed services firms. You might call them an “elite corps” of outsourcers – characterized by extremely robust process discipline, matched with both strong people and technical skills.

And that’s of course where the Nearshore players may step in, given their often strong cultural sophistication which – as we have talked about often at Nearshore Americas – gives these firms a critical advantage in digesting the true quandaries their clients end up in and devising solutions that can be properly explained and executed.

For Nearshore players keen to move into the elite level, the key qualification will be proven mastery in the vertical environments of your clients. Until that level of expertise is achieved, U.S. corporate clients will continue to source work to the farshore or decide that the in-house solution is the safest solution – but maybe not the most cost-effective.

Q&A with HP’s Keith Kerrison

By Dennis Barker

Keith Kerrison looks at the Nearshore region not in isolation but sees it for what it really is: part of the much bigger world. He’s been involved in sourcing applications projects (“mainly SAP”) for about 15 years, back when he was with Proctor & Gamble.

He came to HP as part of an outsourcing arrangement with P&G and now, as director of the Best Shore Application Services for the Americas Region within Enterprise Services, essentially has the job of running HP’s global applications delivery system. Besides being an expert on sourcing, Kerrison is also numbered among the Nearshore Americas Top 50 Power Rankings.

We asked him about global-sourcing challenges, the Nearshore region, what it takes to make clients happy, and Canada.

What’s it like to go from P&G to a giant tech company like HP?

Obviously it’s a big change to go from a company’s internal IT functions to a company where IT, rather than packaged goods, is the business. At HP there’s the scale of depth and capability, and you can always find the capacity to get things done. You can also leverage solutions developed at HP Labs. HP has the software and other tools, the infrastructure, the technology, and the people to be able to have that end-to-end reach to deliver solutions. In a typical IT shop you’re making relationships with contractors…. You don’t have all that scale and breadth that a company like HP can offer. That scale, those capabilities, and outsourcing experience became even richer after the acquisition of EDS [in 2008].

A consultant told us recently that no one has really figured out how to operate globally. You’ve helped define a global delivery model at HP. What does it take to make that global approach work effectively?

You have to think holistically about models. Early on the company assembled a brain trust to work through process models, best practices, and so on. One of the things we decided is that global delivery wasn’t just applications delivery but also infrastructure delivery. We integrate the applications work we do with our counterparts in the infrastructure area. We define a model that integrates onshore, nearshore, and farshore. We pull resources from various regions, various functions, and we have systems for passing the baton back and forth.

You need common terminology, you need consistent language, you need consistent standards and metrics, and you need the tools to make sure that everything is consistent across a network of centers. We’ve developed consistent processes for moving work. We had global methods for applications services at HP but were able to combine that with process methodology at EDS. With EDS we picked up a lot of expertise in how to move work. Consistent processes are deployed across all our centers. We’ve invested a lot of time and training in this, educating our workforce. How we operationalize applications management should be the same no matter where it’s coming from.

We wanted more than an India-centric capability. India of course is always going to be important, but we developed an approach that lets us leverage multiple connected hubs. This gives us scale but also proximity to clients. Large multinational clients look for our capability to be close to them.

What we did not want was a collection of distinct delivery centers. We put a governance structure in place to manage all our centers as a global structure. We invested in building capabilities across centers, creating a community of people and expertise across that organization.

Our largest multinational clients might take delivery from as many as 10 different locations around the world. We’re able to put that together seamlessly. But we only use, or would only add, a location that makes sense for the client.

Everyone expects that a provider will deliver on their SLAs, but that’s not enough to make a happy customer. To be successful you need to focus on the relationship and how to bring more value to the client. More value can come in various dimensions, like innovation.

Tell us how the Nearshore Americas region fits into HP’s world.

Our model is a global model, so we need to think of the Nearshore in that way. I manage my team as part of a global system rather than strictly regional. Our centers in Costa Rica and Argentina, for example, have a role to play in serving the U.S. but they are also woven into our global delivery model. A team in Argentina might serve clients in Spain because of the language affinity, but also might give clients elsewhere in Europe a better price. We think of our Nearshore centers as part of that global model, but they might also provide a local solution. Sometimes the best place is local. Sometimes it’s best to have that resource closer to the client.

But for reasons of scale, to get the capabilities you’re looking for, sometimes you have to go to India or China. Our ability to grow resources is better in those two countries. That’s why we’ll see more growth going to those farshore locations. The Nearshore will grow because we have multinational clients who want support in their time zone or want to follow the sun, but it will not grow as fast as farshore.

Many customers are looking for “India Plus One” capabilities. India provides depth, but for reasons of business continuity, some customers may not want to have all their eggs in one location. Maybe they keep two-thirds of their resources in India but the rest in a place like Argentina. They want to have some redundancy. In the Philippines, periodically a typhoon goes through there, so you may want some resources in another location. That’s smart business.

How do the Latin America centers differ?

Costa Rica today has a strong focus around SAP as a technology and applications management. Argentina has great capability around applications development, and Java for industries such as manufacturing and transportation. Brazil has a higher cost but a higher level of capability and a higher level of maturity. They’re focused on healthcare and communications. Costa Rica has the best cost structure, with Argentina now coming close, but if you’re trying to hire a high-level developer, for example, it’s going to be easier in Buenos Aires or Rio because of the size of the talent pool. Brazil we think of in a different context. We mainly focus on leveraging Brazil for domestic opportunities. We’ve grown these centers in a complementary way. We make sure we have a network of centers that don’t cannibalize themselves.

What do you think businesses do not know or appreciate about the Nearshore region (Latin America especially)?

Many corporations would consider outsource providers or delivery centers in the Nearshore region as places to get work done for local projects. But they might not have considered how Latin America can play into a broader model, a global delivery system. People gravitate to India, China, the Philippines, but may not think about how these Nearshore centers can play a role. I’ve worked with this region. There are great people, there is great talent in this part of the world. It would be a mistake if people think of those countries only in terms of Latin American delivery. Costa Rica, for example, is closer to Houston than parts of the U.S. are.

And how about our friend to the North?

I probably started with Canada back in the late 90s with P&G, and the cost structure then was about two-thirds of the cost of the U.S. Over time, though, the cost structure has become close to the U.S. The cost advantages have slowly eroded. But Canada still has a big role to play. In the Toronto area, for example, there’s a really great talent pool. There are high-end skill sets for client-facing roles and solution architecture. If you need those resources and need them close to the client, it makes sense. We have to recognize that for things like application maintenance, it makes no economic sense to do that in Canada anymore. High capabilities but relatively high costs compared to other locations.

What are the reasons some outsourcing projects do not succeed?

Everyone expects that a provider will deliver on their SLAs, but that’s not enough to make a happy customer. To be successful you need to focus on the relationship and how to bring more value to the client. More value can come in various dimensions, like innovation. Customers expect us to have all the resources to execute the work, but they look for more than meeting SLAs. They want innovation and thought leadership, even if they don’t mention it at the beginning. They want a partner who can deliver innovation that helps drive down costs or helps them achieve their business goals.

The biggest mistake is to look at outsourcing as a transaction. Customers are expecting more from a partner. We have to strive for service excellence but also a strong relationship with the client. If we wait for the client to ask us for that, we’re too late.

How do you think outsourcing is going to evolve in the next few years?

Everyone has played the labor arbitrage game. There’s going to be a bigger focus on leveraging software tools and automation to eliminate work, getting more for less. There’s a lot of noise right now around how cloud services will change the game. People will be thinking less about services and where they’re delivered from and be more interested in quality. Companies that will be successful are the companies thinking about those challenges today. How do you automate, how do you integrate? How do you streamline and virtualize that whole thing, service delivery from end to end? Where services are delivered from will become invisible.

By Linda Rosencrance

For years the refrain echoing in the ears of CIOs and IT decision makers has been “do more with less.” And in today’s economic climate, that refrain rings true more than ever.

With that mandate, the question is what can CIOs do to help their companies weather these tough business conditions? And since India is more expensive than ever, what is preventing those buyers from examining Latin America more seriously.

While labor costs may be on par with India, there are fewer cultural differences when working in Latin America. And geographic proximity makes communication easier and travel less expensive and less time consuming. Yet still many IT leaders seem to be reluctant to participate in nearshoring.  Find out what three IT executives told us about why Nearshoring is not as attractive as some of us think.

Perceptions: True or False

“I think some of the problems are the same as everywhere else—the nexus of control and part of what injures Latin America more so than other areas is the perception of government stability or instability. And also the perceptions around the various crime and the dangers rates—true or false,” said Joanne Kossuth, Vice President for Operations and CIO, Franklin W. Olin College of Engineering in Needham, Mass.

Another perception is that the Latin America doesn’t have the same infrastructure as countries where offshoring typically takes place, she said.

“If you look at China and Asia [IT leaders] think those people are really technical and they have this connectivity and they have bandwidth and those perceptions make people think they’re putting their data and their operations in the hands of people that get it,” Kossuth said. “And those are not the same perceptions about Latin America.”

Another reason companies are not jumping on the nearshoring bandwagon is because they really don’t know much about it. That’s because Latin American countries haven’t done a very good job at marketing the services that they can provide, she said.

Additionally, when it comes to outsourcing IT functions to Mexico, Kossuth said IT leaders are afraid to put their services in a place where the crime rate is high. “All we know about Mexico is what we see on the news and that’s people getting killed because of drugs,” she said. “And even if it’s not happening in the entire country and it might not be true in the area you put your services—you think it is.”

“I go to Juarez, Mexico and every time I walk over the Rio Grande Bridge I remind myself that I have no U.S. rights. So when I consider my data and processes going over into Latin America or Mexico I want to know what laws govern that data.” – Shaun Cooper, CIO New Mexico State University

Maturity Meter

Anand Ramesh, a research analyst at Everest Research, said one of the reasons that IT decision makers don’t want to outsource their IT functions to Latin America has to do with the level of maturity of the providers in that market.

“I don’t they’re reluctant to do it, it’s that they think that the [service providers] in Latin American countries are not as evolved as those in India,” he said. “They don’t think that the providers in Latin America have the same skill level in terms of talent and sophistication as the providers in India. So it naturally creates that concern in the minds of the decision makers about whether they could find the same kind of skills—the same breadth as well as depth and sophistication of skills—to be able to [handle] all the different IT services.”

Shaun Cooper, CIO, Associate VP of IT New Mexico State University in Las Cruces, New Mexico said he worries about placing protected student data in machines in other countries because, for one thing, he’s afraid he’ll lose control over that data.

“I go to Juarez, Mexico and every time I walk over the Rio Grande Bridge I remind myself that I have no U.S. rights,” he said. “So when I consider my data and processes going over into Latin America or Mexico I want to know what laws govern that data.”

Cooper said he’s also worry about the political stability in those countries.

“I remember a story about company that had some equipment in Fiji and there was a coup and all they had was about two hours to pull all their equipment out and get it on a plane,” he said. “How do I know there’s not going to be a coup [in those countries]? For me it really has to do with the laws governing the data and the stability of the country.”

But Steve Romeo, Vice President of Information Technology, Breg/Orthofix, a medical device manufacturer, in San Diego, said he’s starting to drift toward nearshoring because he thinks it’s a great alternative to doing on-premise development.

“In my case I started working with a firm in Tijuana and the beauty of that is that they’re so close we can just drive across the border to do scoping and have discussions,” he said. “but at the same they have a richly skilled development team that can accommodate everything from iPhone development to .NET development. And they have resources readily available and the talent pool is growing.”

Romeo said he’s seeing more momentum toward nearshoring especially as budgets have been reduced and turnaround is an issue.

“The challenge with offshore outsourcing is that when you try to scope something and there’s any type of scope creep or deviation or additional information is needed, it can be a challenge to have someone on the ground physically there to go through that process,” he said. “The resistance to nearshoring has always been the assumption that India has a much stronger talent pool than nearshore options. I agree that has been the case but that belief is fading now that the talent pool is growing in Mexico and Latin America.”

Linda Rosencrance is a veteran IT journalist who has been an editor and contributor to Computerworld for over ten years. (This is her first contribution to Nearshore Americas.)

CPM Braxis Co-Founder David Shpilberg identifies the drivers that led to the creation of CPM Braxis - and why Brazil is exceptionally well-positioned to provide high value IT services to U.S. customers.

Senator Schumer probably doesn't realize the huge incentive he is helping create to boost outsourcing to Mexico.

In its Haste to Gouge India, Congress Neglects to Consider the TN Visa

By Kirk Laughlin

In what could be one of the most extraordinary examples of the self-defeating consequences of slapdash, politically inspired protectionism, the new Congressional border bill which partly takes aim at Indian outsourcers is likely to trigger a nearshoring bonanza – with Mexico poised to become a major beneficiary. But wait, isn’t Chuck Schumer (D-NY) who is a key sponsor of the bill, going to protect U.S. jobs? Actually no and we’ll explain why.

Taking Aim

First, let’s take a look at the bill itself which is designed to strengthen the Southwest U.S. border by hiring more law enforcement and deploying more high-tech tools to monitor illegal immigration. In order to fund the $600 million project, Schumer and co-sponsor Sen. Claire McCaskill (D-Mo.) are taking aim at companies like Wipro, TCS and Infosys which depend on non-immigrant “H1B” visas to transfer highly skilled workers from countries like India to come to work in the U.S. The bill would raise the visa processing fee by $2,000 per visa, a huge hike which has been called “discriminatory” by leaders from the India outsourcing industry.

The issue gets very interesting however when you take a step back to realize that Congress has basically exempted the TN Visa (borne from NAFTA)  from falling under the new levy, effectively emboldening the pursuit of highly skilled nearshore labor to supplant those inflicted with the onshore visa surcharge. The non-immigrant TN Visa enables Mexican nationals to transit without hassle in and out of the U.S. In addition to its close proximity to the U.S., the TN Visa stands out as one of the most compelling attractions of nearshoring to Mexico, and continues to be one an important value-enabler for companies like TCS,  Infosys, Dell, HP and Accenture among others.

An interesting side note: Infosys – which was directly embroiled in the Schumer bill controversy when Schumer referred to Infosys as a “chop shop” – recently told us that Mexico has a bright future for the firm. It appears the firm now has every reason to further expand operations in Mexico, given that it would effectively be penalized by bringing more workers onshore.

The NAFTA Professional TN visa has no cap,  is good for three years and can be extended

Unlike the H1 visa which reaches a cap sometime during the year and restricts further visits during that year or the L1 which requires sometimes complicated justification of domain expertise, the TN visa enables the free flow of employees to and from the US. The NAFTA Professional TN visa has no cap,  is good for three years and can be extended.

Adjusting Business Models

Further evidence that Mexico will win big when visa complications are put in place came two years ago when Phaneesh Murthy, president and CEO of IT services firm iGate, said during a conference call: “We will probably utilize a higher growth in our Mexican center by having more people come from Mexico to the U.S., where they don’t need the H-1B because of being part of NAFTA.” said Murthy, according to a transcript on the financial site Seeking Alpha. “So, I think our business models will change and we are ready for those changes in business model,” he said.

Mexico has somewhere between 500,000 and 600,000 IT professionals and the country graduates approximately 65,000 IT students a year. Both Guadalajara and Monterrey landed on Nearshore Americas ranking of the Six Leading IT Cities in the Nearshore Region.

The other consequence from the Schumer Bill (which was received congressional approval today) is that Indian outsourcers may think twice about bringing Indian nationals into the U.S., which may result in the U.S. collecting far less that the $200-$250 million it is projecting to fund the border programs.

Finally, it is the U.S. companies themselves – who are battling to compete in a fiercely competitive global economy – who really hold the cards. The Schumer bill does nothing to inspire long-term strategies to compel U.S. companies to keep jobs in the U.S. What it does do is pass along an increase to their operating costs in an assortment of mostly back-office, non-strategic functions – from application maintenance to business processing activities.

Of course economic reality will trump the politically charged motivations of the bill – which conveniently is being pushed through Congress to maximize the impact during the Fall election season.  And economic reality will be the driving force behind what is likely to become a huge boost for Nearshore outsourcing – and classically what Schumer had least hoped for.

Manzano: "We have much more information about Latin America than our competitors do"

By Tarun George

Newest in the line of “India Inc.” conquests in Latin America, Tata Consultancy Services (TCS) announced recently the opening of a new delivery center in Lima, Peru. With centers already in Mexico, Uruguay, Argentina, Chile, Brazil, Ecuador and Colombia, TCS has the largest LatAm presence of any of its Indian counterparts, and has expanded aggressively there ever since Gabriel Rozman initiated the company’s expansion six years ago.

We sat down with Henry Manzano, CEO of TCS Latin America, to find out more about his growth strategy and what TCS sees in the region that its competitors do not.

Peru: Part of a Global Strategy

With an 8% estimated growth rate for 2010, and one of the fastest emerging economies in Latin America, Peru is being noticed for its stability and business potential. The services industry accounts for 53% of GDP, which means the country is eager to support the needs of sourcing companies setting up there.

Latin America as a regional economy is expected to grow up to 5% this year according to figures from the IMF, and TCS is looking to capitalize on that. But why aren’t the other Indian players following suit?

According to Manzano however, it’s not about the specific advantages of Peru but rather that it was always part of the TCS global delivery model. “We divide the market into global, regional and local sectors, and we’re able to service clients from each of those accounts from Peru”, says Manzano, who ranks #18 on the 2010 Nearshore Americas Power 50 List. “On the local level especially, we’re seeing a lot of growth from different industries in Peru, as well as many firms from Chile and Argentina also coming here”. The new office will offer IT, BPO and consulting services to that growing Peruvian market.

Weak IP Protections

Manzano points out that integrating the local workforce into the TCS global force is a critical factor. But the new office will benefit from TCS’ seven-year history of integration into Latin America, by bringing in key managers from India who hold specific positions and train up their LatAm counterparts.

Other challenges of running an operation in Peru include weak intellectual property laws. The International IP Alliance in its 2010 report estimates business software piracy in Peru to be 71%, citing lack of resources, enforcement and legislation as major causes. Things could improve due to the new US-Peru Trade Promotion agreement signed last year which includes high standards for IP protection and enforcement. In any case, Manzano says he doesn’t anticipate much IP risk for the Peruvian operation.

Revenues to Hit $1 Billion

The opening of the new Peru center ties into TCS’ broader strategy for the region, which is visibly more aggressive than its competitors. The company’s current LatAm revenue is US $300 million, and it expects to reach $1 billion in the next three to five years. Latin America as a regional economy is expected to grow up to 5% this year according to figures from the IMF, and TCS is looking to capitalize on that. But why aren’t the other Indian players following suit? Firms like Infosys and Wipro are noticeably more cautious about LatAm expansion – something that Manzano says is an issue of experience in the region.

“Their plan is also to grow, and you can see that they’re trying to do that”, he says. “But we came here first seven years ago, and we’re maintaining that position as leader. We have much more information about Latin America than our competitors do, with around 7000 employees most of whom are local, and relationships with different local companies and governments. All this gives us more confidence”.

There are also certain countries that have almost been blacklisted by other Indian firms, but in which TCS is cheerfully advancing operations. Take Colombia for example. Infosys recently told Nearshore Americas that they would never locate to Colombia, claiming that negative perceptions among customers in the US is a major roadblock. “But Colombia can show the world that it’s much more stable”, says Manzano. “Security has progressed, and the US is helping out. President Uribe is making an effort to reduce the guerrillas and drug trade. We are there because we believe in that market, and in the maturity of that market”.

Does this kind of attitude mean TCS is less risk-averse than the competition? Maybe. According to Manzano at least, TCS sees Latin America as just one country. Different locations simply provide different advantages.

Jorge E. Sequeira Picado is one of those entrepreneurs who knows all about running a lean startup – he co-founded SPS Software in 1986 (which later became Exactus Corp.) in a garage in San Jose. The firm later grew to employ over 200 people in four regional offices around Latin America, supplying ERP software to  enterprises.

Now Picado has an entirely different challenge ahead of him – he is taking the reins of Procomer, the already matured trade-promotion agency that is focused on accelerating the flow of exports out of Costa Rica through an assortment of trade channels –from BPO to pineapples. “I always wanted to dedicate myself to public service,” said Picado, who has spent most of his career in the role of entrepreneur and this month becomes CEO of Procomer. “There is a lot that can be done.  This country had developed its model around foreign trade… and I see an opportunity to really make a difference.”

One of the first objectives Picado plans on tackling is to strengthen the exporting base of Costa Rica, which he believes should be much larger given the size of the Costa Rica economy

Picado is walking in to an organization that is – from my own personal experiences –well organized and efficient. An army of Procomer country leaders are stationed in countries around the world, focused on trumpeting the unique products, services and opportunities available through working with Costa Rica product-builders and service providers. In the New York region, for example, Procomer director Maykool Lopez is constantly out forging new relationships, organizing events and expanding business opportunities for members of Procomer.

One of the first objectives Picado plans on tackling is to strengthen the exporting base of Costa Rica, which he believes should be much larger given the size of the Costa Rica economy. Making business leaders more aware of Procomer within Costa Rica is critical, he says. Costa Rica may no longer be looked as a “Banana Republic”, says Picado, but the country brand also needs to be aggressively promoted.

Costa Rica’s “peers” in the global services industry are countries like Chile, Argentina, Brazil and Mexico – but the challenge facing Picado is how to differentiate Costa Rica from those nations by drawing new points of comparison which transcend the commonly referenced issue of population.

With Picado’s experience in enterprise software and also familiarity with working in the United States, he is in a great position to better articulate the value of Costa Rica to the typical sourcing decision maker or CIO.

What Picado is up against however is a fairly entrenched bureaucratic culture in San Jose, that has become so pronounced that even the new President, Laura Chinchilla, singled it out as one of the key impediments to attracting foreign investment during a recent video interview with Nearshore Americas.

We wish Picado well as he look to re-position Procomer – and also start painting a new identify for the Costa Rica export services brand.

-Kirk Laughlin, Editorial Director

By Tarun George

When debating the merits of various Nearshore outsourcing locations, the topic of currency fluctuation usually takes a backseat to the discussion of wages, talent availability and tax and investment incentives. But what happens when a major outsourcing player’s currency appreciates over a short period of time? That’s the case for Brazil’s real, whose value spiked in early 2009 and steadily increased throughout the year. While now normalizing to its pre-crisis levels, a number of US companies outsourcing in Brazil report that the high rate is making a dent in their balance sheets. The result is that Nearshoring operations in Brazil are more expensive than they were even a year ago. We take a look here at whether companies are feeling that pricing pressure, and how Brasscom is responding.

Appreciation at a Cost

With a currency risk rating of BBB- according to Standard and Poor’s, Brazil is the world’s eighth largest economy by GDP, and the largest in South America. That economy has been performing well in recent years, gaining eight positions on other countries in the World Economic Forum’s 2009 Competitiveness Report. But with these gains comes a currency appreciation that at present has the real at 1.76 to the dollar – a blow to companies searching for lower costs who located to Brazil in, say, 2002 when the rate was almost R$ 4 to the US dollar. 

Most Affected

It’s important that we put this situation in context however. US sourcing companies across the board in Brazil are not gravely affected, and in fact there is little evidence that the majority of them are even that concerned. “The currency appreciation is something that companies here are learning to live with. Many of those companies are still growing, even at double digit levels”, says João Lencioni, CIO and Sourcing Leader for GE Latin America.

The firms that are feeling the pinch on the other hand are those for whom low costs are the only criteria. “Companies that use Brazil only for call centers, BPO or other maintenance activities….yes those companies are feeling the pricing pressure”, admits Sergio Pessoa, Director of Marketing and International Markets at Brasscom. “But companies focused on ITO or other complex activities are not feeling it as much. They continue to benefit from the amount of domain expertise and capabilities available in cities like Sao Paulo”. Pessoa also mentions the many clients that are now moving their more complex operations to Brazil, while using India for maintenance and support services.

The firms that are feeling the pinch on the other hand are those for whom low costs are the only criteria.

Brazil has a relatively closed economy, with only about 15% dedicated to exports. That strong internal market allowed it to be extremely resilient during the economic crisis, and one of the first LatAm countries to bounce back. Many Indian players like Infosys and Wipro have recently established in Brazil, and they all seem more focused on the domestic market than on exported outsourcing services.

Taxes and Overhead 

 The cost of running a sourcing business in Brazil is definitely exacerbated by the high value of the real. “If you look at pure salaries, Brazil is not more expensive than other countries”, says Lencioni. “What adds to your expenses is the high tax rate and overhead cost. For example in Chile, the overhead is 10-15%, but in Brazil it can be 60-80% of salary”. Add this to the high restrictions on services exported from Brazil, and now the currency appreciation, and you have a mix that could potentially limit the growth of the outsourcing industry in Brazil.

However Brasscom is actively working to make things easier for companies, even if a little slowly. “One of the challenges right now is how to reduce the cost of doing business in Brazil”, says Pessoa. “We’ve implemented two initiatives – 1) we reduced the social contribution on payroll by 50%; and 2) for every dollar spent on R&D and training, you can have a two dollar reduction in taxes”. He mentions that Brasscom is also working on other programs, and there will be monetary incentives coming soon on the state and municipal level to smooth the way for interested firms. 

Government Response

The most recent update on the currency situation came yesterday from Brazilian Finance Minister Guido Mantega, who said that the real will weaken soon because of the country’s current account deficit, estimated by the central bank to be at $5.18 billion. “The current account gap should lead to a devaluation of the real. The current account is an important parameter, and we can’t ignore that there is a deficit”, said Mantega, quoted on Bloomberg. This has all increased speculation that Brazil’s central bank will soon start buying dollars to slow down the real’s gain. Mantega has already said that he favors this strategy, and that a weaker real would boost exports from Brazil.

In terms of making costs lighter to bear for sourcing companies in Brazil, it’s clear that the government does need to come up with new initiatives. “Brasscom has been working with the government to educate them that growing the outsourcing business in Brazil requires different treatment”, says Lencioni. “There is still not a major move to change the competitiveness of the country as a whole, but there’s a lot more awareness now in government about what actions are needed”.

Does CPM Braxis really have the horsepower to jump into the ranks of TCS, Wipro, Genpact, Infosys, Accenture, HP and Dell and other world-beating heavyweights? Find out what the company’s co-founder, David Shpilberg has to say about it. ROLL THE VIDEO

By Kirk Laughlin

What really gets CIOs and sourcing decision makers excited about Brazil? The two issues that come up repeatedly among those doing business there or who are inclined to have services delivered from Brazil are – capacity and capability. Scale counts for a lot and Brazil is increasingly built to respond to the tall orders of CIOs whose India-based experiences will continue to be used as points of comparison when they go shopping in Brazil.

One of the many notable rising stars out of Brazil that is trying very hard to live up to this CIO-driven reality is CPM Braxis, formed in 2007 when separate operating companies CPM and Braxis merged. A key architect behind the creation of CPM Braxis is David Shpilberg, a co-founder and vice chairman of the organization, whose headquarters are in Sao Paulo.

Shpilberg himself has quite a deep career resume in IT services, banking and finance, including his days as a vice chairman at Ernst and Young where he appointed Gabriel Rozman, Nearshore Americas’ Top Ranked Influencer in our 2010 Power Rankings to run LATAM operations, before Rozman left to spearhead TCS’s huge expansion into South America.

Shpilberg stands out in one sense from virtually any other Brazil-based IT outsourcer – he and his senior-level colleagues make it explicitly clear that CPM Braxis is going for the gold by striving to become one of the top outsourcing providers in the world. The goal will require some aggressive tactics and growth with a capital “G.” Does CPM Braxis really have the horsepower to jump into the ranks of TCS, Wipro, Genpact, Infosys, Accenture, HP and Dell and other world-beating heavyweights?

Shpilberg’s mission is partly inspired by trying to separate his firm from the pack of other Brazil-based providers who, in his eyes are “still like US companies were ten years ago.”

For Shpilberg the fuel to get CPM Braxis to that lofty plateau is sourced from within. ““We designed this company from scratch four years ago. We wanted an employee based company that is destined to be a top ten player in the world,”  Shpilberg says. The CPM Braxis brainstrust puts a lot of emphasis on creation of a “career company” where employees (5,500 of them currently) are actually hired and legally put on the payroll, instead of the alternative route – practiced by many outsourcing providers in the region – where workers are contracted for certain durations based on workload and then made expendable when the project ends.  This is a key priority for several reasons says Shpilberg, who says labor liabilities are problematic under the contractor route and that in order to attract private equity funding, accounting practices around managing human capital have to be clean.  “The level of sophistication of the Brazil IT professionals is very high, because of how accustomed they are working in mainframe technology,” Shpilberg adds. Brasscom reports that Brazil has an IT workforce approaching 1.8 million people.

Jump in Revenue

In a recent Gartner report, CPM was identified as having the “highest growth” from 2008 to 2009 among what the firm has identified as “the top 20 IT services providers in Latin America.” CPM Braxis was reported to have experienced revenue increases from $286 million in 2008 to $403 million in 2009, a 40%-plus spike. Some of the company’s growth is clearly attributed to its increasing roster of banking and finance organizations, especially in the U.S. “We have a very happy, highly satisfied client base, with 50% in financial services; 20% is telco and 15% manufacturing,” he says.

Shpilberg’s mission is partly inspired by trying to separate his firm from the pack of other Brazil-based providers who, in his eyes are “still like US companies were ten years ago.” He identifies multinationals like IBM and Accenture as more appropriate peers because his firm competes with them regularly and most, including his firm, have established quality standards like CMMI Level 5 as well as ITIL, COBIT and ISO 14001.

One of the biggest hurdles for Brazil Inc. to overcome of course is cost, especially when compared to its Latin America neighbors. (Currency risk is no picnic either as Senior Editor Tarun George explores in this revealing report.)  “It is true, in certain areas, Brazil is more expensive than Mexico and Argentina,  specifically in areas of application development,” says Shpilberg.

But for this executive, cost  competitiveness is not what defines the CPM Braxis’ expansion strategy  – instead the current global services market is very much about being in the right place for the next outsourcing tidal shift. In Shpilberg’s view India “will always be dominant” but that being in the Nearshore and leveraging the fundamental advantages of time zone plus culture, value is going to spill out to those CIOs who open there eyes southward.

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