Brazil IT Must Skate to Where the Puck Is Going Next

CAN BRAZIL INFORMATION TECHNOLOGY COMPETE ON THE GLOBAL STAGE? Absolutely. By the end of 2011, Brazil will be the world’s 6th largest economy and the 7th largest ICT market. The country has a very diversified economy and is an exporter of sophisticated products like aircraft, automobiles, industrial equipment, and software and IT services. You can’t be in that position if you are not a qualified global player.

But has Brazil IT been competing effectively beyond its borders in the past few years? No. Not to the extent of its enormous potential. But, most important, perhaps not at the right games.

Wayne Gretzky, the greatest hockey player of all time, once said that the secret of his success as a player was his ability to “skate to where the puck is going to be next.” The late Steve Jobs also mentioned Gretzky’s quote during the launch of the iPhone to describe Apple’s strategy. That worked just fine for both.

One of my strategy professors at the University of Chicago used to say that a winning value proposition effectively aligns the capabilities (resources and activities) necessary to deliver value – higher relative benefits (differentiation) or lower costs – to the customers that have the need at a price they are willing to pay, and that a winning business strategy effectively delivers distinctive value in a well-defined set of markets through a set of distinctive capabilities.

Most Brazilian IT companies have adopted the same offshore outsourcing model implemented by the Indian companies to compete in global markets. There is no question that Brazilian and Indian companies have the set of capabilities required to compete in the offshore outsourcing game. Holding all other factors equal, perhaps on average the Indians’ stronger discipline for processes would put them in a better position to compete in process-oriented work, while Brazilians’ stronger ability to think laterally would put them in a better position to compete in creative work.

But since cost has been a key decision factor, the strong valuation of the Brazilian currency has put a lot of pressure on Brazil’s ability to compete in the offshore outsourcing game. Higher taxes and lower incentives in Brazil compared to India have also been a barrier.

Brasscom’s proposal, recently approved by the government under Plano Brazil Maior and effective Dec. 1 2011, to eliminate the existing 20% social security contribution on the payroll of software and IT services companies – establishing a 2.5% tax on net revenue that goes to 0% in the case of exports – is expected to not only lower costs, but also to formalize jobs and reduce labor liability risks for companies in the sector. But the direction of taxes and incentives in both countries, wage inflation, as well as the behavior of the Rupee and the Real against the Dollar, will continue to be key competitive factors in the future.

More Process, Productivity Required

Productivity is another key competitive factor. The foundation of best practices and management excellence established by multinationals – IBM arrived in Brazil in 1917, GE in 1919, J&J in 1933 – combined with Brazilians’ creative DNA, has fostered an outstanding environment for business and trade over the past decades. But the country needs to continue to improve its labor productivity. This will require process and technology improvements, which will create even greater demand for technology in the domestic market.

The strength of the internal market has been a great blessing, but it has also presented challenges for Brazilian companies that are competing globally. According to IDC, the domestic Brazilian IT-BPO market has grown 44% from 2008 to 2010 against 9% for IT-BPO exports in the same period. Margin pressure is also higher in global engagements. Where would a decision-maker put its constrained resources? Easy guess.

You Also Need Skates and Speed

It is not uncommon for organizations to say that they want to innovate, while their products and services only reflect the current markets. They get stuck in today’s paradigm when they should be looking at developing a winning business strategy for the future. Some of the new technology trends – cloud computing, mobility, big data, clean tech – can be very disruptive. Brazil, like Gretzky and Jobs, should “skate to where the puck is going to be next,” creating an environment that fosters productivity and innovation to capitalize on these future trends. This would be a more interesting game, but it is also a harder championship league. Investing in infrastructure, building competencies, and structuring the environment to be nimble and adaptive are critical success factors. Having the skates and the speed to get there first is almost as important as knowing where the puck is going to be.

Innovation and entrepreneurship have long been key pillars of competitiveness, but in order for them to create sustainable competitive advantage, they require a complex ecosystem that includes other key factors like strong educational systems and human capital, deep and efficient capital markets, and open and free competition, among others.

Conditions in Brazil have been improving steadily. The country has achieved macroeconomic stability and institutional maturity and is now undergoing broad and fast-paced expansion, driven by an increase in income and social ascension as well as an increasingly important position in international trade. The country has well-developed capital markets, and a solid regulatory foundation. Foreign direct investment (FDI) will reach an annual record of US$60 billion in 2011. The presence of major global venture capital and private equity players has significantly increased over the past years, along with their investments. Although the cost of capital is still higher than it should be, companies have had access to capital like never before.

The IT sector is also considered by President Dilma Rousseff as strategic, and the IT industry has raised in priority in the national agenda like never before. But there is still a lot that needs to be done. The educational system and the broadband infrastructure still lag behind world- class levels. And for the industrial development policy, fostering the local industry should not be confused with protecting the inefficient.

Don’t Overlook Passion, Creativity, and State of Mind

But a key factor is also in place: the passionate, creative, committed, friendly, and happy people of Brazil. They are known for their resourcefulness, ability to explore options and remove obstacles to “find a way” through challenges. They are also welcoming, cheerful, and optimistic by nature, known as one of the happiest people on the planet. Forbes recently ranked Brazil as the 12th happiest country in the world – a great but unlikely accomplishment for a large and emerging economy with many social challenges. Of the 155 countries on the list, the other BRICs ranked as follows: Russia, 73rd; India, 115th; and China, 125th.

David Neeleman, the former CEO of JetBlue and currently CEO of high-flying Brazilian airline Azul (no pun intended), lived in the slums of Brazil as a young college student in a mission for his church. He said that a few things struck him during that experience: The poor people he met seemed always happy, and they were also incredibly generous in sharing what little they had. And the most striking thing was that he was actually feeling happier too, getting enormous pleasure and satisfaction from his work. Insights from that experience have been key drivers of his management style: For himself and for the people he works with, he tries to eliminate obvious differences in wealth and status while providing engaging experiences to others, and getting satisfaction in the process. In a post-globalization economy, this ability to create engaging experiences is an intangible but competitive advantage for Brazil.

In a recent panel of industry analysts at the Brasscom Global IT Forum, it was the consensus that Brazilian IT professionals have unique and different characteristics from those of other countries. But how to shape those professionals is the greatest challenge – and also the greatest opportunity -– for the future. A strong educational system is key. Strong and strategic leaders are too.

Is this a long shot? Not at all. Brazilians’ ability to turn challenges into successes should not be underestimated. The hyper-inflation of the 1980s led to extensive automation of the financial services sector and created one of the most advanced financial systems in the world, with sophisticated electronic payment systems and banking automation solutions, both web- and mobile-based; the oil crisis of the 1970s led to the creation of the “ethanol program,” fostered the country’s global leadership in biofuels, and sparked the flex-fuel technology for automobiles. Whether or not Brazil can transform a great challenge into great success for the third time remains to be seen. If that happens, it would be called a “hat trick” in hockey. Do you know who holds the record for hat tricks in professional hockey?

Easy guess.