By Filipe Pacheco

BRAZIL IS NOT ENOUGH, if we might borrow from the title of an old James Bond film. IT companies that serve only the domestic market are bound to disappear or become marginalized in a tiny niche, warns César Gon, entrepreneurial founder and CEO of software provider Ci&T.

This company was born thinking about growing abroad. Started up in Campinas as a small business back in 1995, Ci&T today is one of the most important Brazil-based players when it comes to exporting software and services, with income of R$101.4 million (US$60 million) at the end of 2010 and 96 clients around the world. Those clients include Coca-Cola, Google, Johnson & Johnson, and Nestle.

In this first of a two-part interview, Gon (who is #8 on The Power 50 List of the most influential leaders in Nearshore outsourcing) talks with Sourcing Brazil about Brazil “losing competitiveness,” the importance of the offshore market to Brazil’s IT industry, why the Henry Ford model leads to failure, the company’s philosophy, and the most important element of successful software development.

Sourcing Brazil: It is hard not to notice that the Ci&T philosophy appears to be centered on employees and customers in a personal way, a human touch. What is the importance of this approach in terms of business results?

César Gon: What I always tell my colleagues at Ci&T is that we develop

people before developing software. This is the cornerstone of our purpose as a company. If we want to be an example and transform the industry, we need to radically change the corporate environment typical of outsourcing companies. In particular, such “software factories” were inspired by the Henry Ford model and are based on the false premise that it is possible to produce software just as [other types of] products can be produced in a parts factory. Nothing is more elusive and expensive than producing software by sending specifications to such factories. The results of this model are known, and the failures that follow are known in the corporate world.

The fact is that the design of corporate software is not an algorithmic activity but heuristic and intellectual, based on the quality of human interaction, the ability of people to understand business problems, and resolving them in an unprecedented way, creatively and collaboratively, through available technologies. This is a game of people, much more than processes and technologies. And people are motivated by a strong sense of purpose, autonomy, and being allowed to master skills in a learning environment.

SB: Ci&T was born with a clear focus on the foreign market and offshore outsourcing. Does this model prevail today?

CG: When we founded Ci&T in 1995, our initial concept was to create a “Brazilian exporter of software.” Today that vision has evolved into a global and multicultural company — with Brazilian flavor and spice, of course.

On the domestic versus international matter, I have a pragmatic view: Companies that are not competitive internationally will disappear or be stuck in very specific areas. Brazil is still a peripheral market and uncompetitive. Exporting is a window into the future, an opportunity to meet and learn from real competition in the industry, where innovation and differentiation is crucial. No industry knows as few geographical barriers as IT. In the long run, you become globally competitive or you will be off the market.

Today, in addition to Brazil, our main markets are the U.S. and Japan – 35% of our business is from outside Brazil. We use the concept of nearshoring, with small local structures and development centers located in supported time zones. We serve customers in the U.S. through three office locations (Philadelphia, New Jersey, and Atlanta) and through our development centers in Brazil (Campinas and Belo Horizonte) and Argentina (Buenos Aires). And we serve customers in Japan through a combination of our unit in Tokyo and a development center in Ningbo, China.

Despite the financial crisis, our plan is to continue growing at a rate of 35% per year, and holding between 35% and 40% of our business outside of Brazil. We have a value proposition of gains in efficiency and reduction of waste, which is very appropriate for times of uncertainty. Financial crises are cyclical, recurring, and our approach is to not stop investing when the sky is dark but also not to overdo the optimism when the sun reappears.

SB: How would you assess the Brazilian outsourcing industry? Are Brazilian companies focused enough on exporting software, or is the emphasis still on the domestic market?

CG: As an industry, my view is that we are going backwards, losing competitiveness. In the last two years, Brazil saw its [already small] share in the global market fall to less than 2%. Completing the scenario, the role of domestic firms in total exports is very low [US$2.39 billion in 2010, according to IDC]. Besides not advancing in exports, Brazilian companies are losing ground in the domestic market.

Much is said about the currency situation, but this failure, if you look carefully, is associated with issues far more fundamental than the exchange rate or labor costs, often referred to as “the cost of Brazil.” Our problem is linked to the structure of our industry, based on a culture of short-term thinking and little differentiation.

The issue of long-term is chronic: Any internationalization strategy must be designed in a wide horizon of at least 10 years. What I noticed in the past two decades in Brazil was a bipolar behavior: Domestic firms decided to export when the domestic market is sluggish and the exchange rate is favorable. Then the scenery changes, the domestic demand increases and/or the U.S. dollar depreciates and initiatives abroad lose priority. The result is zero because the fact is that the internationalization process takes time, consumes capital, and demands innovation. It is not something that’s supposed to be done in two or three years. Assemble a local executive structure, establish credibility, innovate to differentiate your offerings in each market or culture, and so on. All of these are critical activities that require time to mature. Of course there are noble exceptions, but generally speaking we do not advance as an industry.

SB: Faced with a steady if not growing crisis in the U.S. and Europe, doesn’t the domestic market become increasingly important to Brazilian technology companies?

CG: The local market is always important as a basis for growth and learning. But it is also a big trap that pushes domestic companies to niches of low competitiveness.

The crises are cyclical and should not be overvalued. In our industry, the world’s most competitive market is the U.S., without parallel in any other region of the globe. It is the largest, most complex and innovative market on the planet, with substantial investments in IT, driven by large corporations in search of differentiation and efficiency or by the environment of startups in Silicon Valley, where companies such as Apple, Google, and Facebook sprang up.

Brazil is part of a second group, along with major European countries, Japan, and the BRICs, that even though they are peripheral in terms of innovation, they still are representative technology markets. The remaining markets are small and not very relevant in shaping the future of IT.

SB: What is the biggest weakness of Brazilian software outsourcing companies? And their greatest strengths?

CG: I have no doubt that the greatest problems are in the industry structure, which was forged in the 1980s and ’90s by arbitration costs and “stomach” for labor liabilities. This focus has generated a great market of skilled labor allocation — or, in industry parlance, “body shopping.” Incredibly, this is still the predominant type of service in the domestic industry, a very low aggregated value. For the suppliers, the culture of “sell and then hire” was accepted as standard, as opposed to continuous investment in training of professionals, and that is what created an environment of high turnover and low quality. The result is a weak relationship between businesses and professionals, generating uncompetitive companies and unmotivated professionals.

The greatest qualities are the expertise and the cultural adaptability of our IT professionals. We cannot underestimate the cultural aspect. Producing software is increasingly a creative, social, and global activity. It’s amazing how Brazilian professionals act as aggregators in multicultural processes that involve people from various geographies, languages, and cultural environments. Their ability to learn, adapt, and be flexible are also outstanding.