Sao Paulo, July 8, 2008 ? With a series of advantages such as cultural affinities and a favorable location, Brazil has a big potential to become the second IT offshore services provider, or even the first in some areas, says Frances Karamouzis, Gartner Group Research Vice President. Some measures, such as the recent tax reduction for the sector and the reinvigorated leadership in BRASSCOM, are extremely positive. But the window of opportunity will close in two or three years, and there is still a lot of work ahead for Brazil, says Frances, in this exclusive interview to the reporters Priscilla Murphy and Thais Trapp, from BRASSCOM News.

BRASSCOM News ? What is Brazil doing right to achieve its goal of being a power in IT?

Frances Karamouzis ? Essentially, Brazil is in a very good position. The market is growing at a rate of over 41% and it has a very small portion of that, just about US$ 1 billion. So, Brazil has a big potential. The reinvigorated leadership in BRASSCOM is a very good indicator, as well as the recently enacted policy to reduce the tax burden for exports of labor services, and the fact that they are bringing together a lot of vendors. There is power in numbers and collective growth is very good, as is the fact they will be inviting and open to foreign vendors, like the Indian vendors and multinational companies that want to set up facilities here. Both the foreign vendor and the native Brazilian vendor create jobs. It?s a healthy level of what we call ?coopetition?, as in the saying that a rising tide lifts all boats. It?s good in some ways for everyone and it forces the local vendors to increase their standards, increase their quality to compete in a global level.

BN ?What is the country doing wrong?

Frances ? I think BRASSCOM?s goal of exporting US$ 5 billion by 2011 is extremely low and very conservative. The growth rate is so high for offshore outsourcing that they should be setting their sights much higher and be much more aggressive. Also, Brazil is part of the BRIC countries: Brazil, Russia, India and China. Since India is already established, now it is between Brazil, Russia and China. We?ve evaluated all three. Russia is not going to be very much in the game, so it is really between China and Brazil. And Brazil has a much higher set of assets, meaning a higher cultural affinity, a more westernized kind of business acumen and protocols, and the same time-zone, for instance. Brazil has a lot of assets and a lot of advantages, so they have a bit of a head start. Comparatively, even though the English speaking skills in Brazil still need to grow considerably, they are far ahead of China. But China is investing ten times more money than Brazil in the growth of the IT industry. In less than three years in China, the government has built 18 technologies parks in 11 different cities, with brand new, top of the line equipment, top of the line telecommunications, offering vendors two years of free real estate. Brazil is not even close to spending this kind of money, and China has a goal to close the gap very quickly. So Brazil?s opportunity is a certain time frame, roughly two to three years, because if China gets a lot of momentum, they will be very hard to stop. This is definitively an important area that Brazil really needs to focus on.

BN ? So Brazil lacks public investment?

Frances ? Part of it is lack of public investment, part is lack of promotion and part is lack of branding. The biggest gap that we see is that there?s no consistent common theme in the minds of buyers about Brazil. If I ask ten people what do they think about India?s technology, very quickly they will name two or three things that are consistent. But if you ask somebody about Brazil IT, it?s basically a blank piece of paper. There isn?t a common concept of what is the brand, what is the promise of Brazil?s IT. So, it is really up to BRASSCOM and the vendors to define the three to five things that they want to be known for in IT. Definitely when you say India IT, people say low price. When you say Brazil IT, you might want them to say high quality or financial services expertise, SAP, or wherever it happens to be. But you have to be very clear about what those things are. Any person that works in the IT industry travels all over the world and can be a sort of ambassador of the message. So it?s not just about advertizing in a business magazine. It is also living the mantra, living the message. This needs to be formulated very quickly.

BN ? What are the other gaps?

Frances ? It is necessary to have some common programs to build English speaking capability. There are what we call stop gap fixes for that, but the real long-term solution lies with the government. In the short-term, the vendors are spending lots of money hiring English teachers, paying for training programs, and doing what they need to do to be able to get the right people to their clients today and in the next six months. But, for example, in China, they implemented a program about five or six years ago where every child starting in third grade must take English. They are going to raise a generation that will have some English speaking capability. It will take 10 or 15 years for those kids to graduate, but that means Brazil is already behind. In Brazil, English classes may cost 75% of an average person?s salary, so only the upper middle class and the rich people are going to have kids who speak English. The big population in the middle, the lower middle class and the big numbers of people, are going to grow up not speaking English. It?s up to the government to create models to foster that. Otherwise, every vendor will be at a disadvantage with millions of dollars of higher cost structure, because they have to pay that incremental amount. In India, none of the vendors has that cost. When everybody comes out of school they already speak English.

BN ? What else increases the burden for Brazil?s companies?

Frances ? Taxes. Even though Sao Paulo has the highest level of skills, it is also the most expensive place to operate. For example, in the last 15 years all those big Indian companies ? Tata, Infosys, Wipro and Satyam ? paid zero corporate taxes. There is no corporate tax for IT companies in India, while in the US corporate tax is anywhere from 30% to 50%. For Brazil, this would be a very small sacrifice for the government to make. There are only 50 big companies that would be in that category, that wouldn?t pay tax. The incremental cost for the government is actually quite small. Those things really trigger the economy of an industry.
The government has to come up with very clever and creative things to really make the industry change dramatically in a small period of time. That?s a very important area for Brazil. It has to become policy. The government has to focus on it. Last year, the president of Brazil went to India and brought with him people from the oil industry, the steel industry and a lot of industries. There was zero people from software and zero people from outsourcing companies. This was a very visible signal that software, services and knowledge workers are not important to Brazil. That?s a bad message. It was shocking to me. He didn?t even visit the biggest companies in software and services, which have created 1.5 million jobs in India. So Brazil has to be very clear that IT is a priority. And that is not very clear today.

BN ? Is the world seeking an alternative to India in IT?

Frances ? At Gartner we track the top 100 companies that buy offshore services, at least once or twice a year. Of the top ten companies who spend money offshore, three are saying, since 2007, that they are not going to send new work to India. They want to look at alternative countries to diversify their risk. India is still important for them, but they don?t want to grow anymore there. What is the number two country after India? Essentially, our clients are saying: ?tell us number two.? That?s a very unclear story. It is a great opportunity for Brazil to be number two and potentially even number one in the categories they want to be number one in. But Brazil is not making a good bid yet to be number two. Basically, five or six countries are racing for number two: China, Philippines, Mexico, Brazil and probably some combination of eastern European countries, the Czech Republic, Poland, Hungry, and coming behind them is Romania. Of all those choices, the highest population, the highest skilled workers and the highest potential client base is Brazil. Brazil?s economy has really large financial services sector, large manufacturing, and oil and gas sectors. It a very interesting location also because a lot of multinational companies are familiar with business practices in Brazil.

BN ? How does Brazil compare with these other countries in policy?

Frances ? Mexico is far ahead of Brazil in terms of the focus of the government, the focus of their equivalent of BRASSCOM, called Mexico-IT. They are extremely more aggressive than Brazil, although they are much smaller. They have other challenges, but they have made very good progress for the last two, three years. For example, the top six Indian companies are in Mexico already. In Brazil there is just Satyam and Tata. Even the next set of Indian companies, like Genpack, Hexaware and MindTree, second tier vendors, have opened facilities in Mexico. Why aren?t they coming to Brazil? It is a little bit harder to establish operations here. It is not very good to hire people, because if you fire them you have to pay a lot of money. There are very few incentives from the government to actually set up operations here, while in Mexico there is a lot.
And there is very little information. You should be able to easily find the number of graduates, the names of the companies, how big they are, and what kind of clients they have. That?s only step one of the process. And then when these companies want to come to Brazil they should have an experience where you get off the plane and they explain to you the benefits of the culture, the benefits of the workforce, how easy it is to do business here. All of those things should be completely available and they are not. In the early days, when you got off the plane in India, not even for one minute you were by yourself. They would tell you everything, take you to understand the culture, understand the labor pool, the facilities that are available, the real estate structure, the telecommunications structure, the software structure. I mean everything. So it?s a lot of work.