By Dennis Barker

If you’re thinking of doing business in Brazil, David Shpilberg can tell you many things you ought to know. For starters: Brazil has the IT people necessary to handle legacy systems, but language could be a problem, and the tax system is a mess.

Shpilberg, executive vice chairman of CPM Braxis, founded the company in 2006 and is recognized as one of the most important figures in Latin American IT outsourcing. He’s ranked #5 in the inaugural 2010 Nearshore Americas Power 50 List of influential executives. Shpilberg is credited with guiding the successful alliance of CPM Braxis with the global outsourcing giant Capgemini, resulting in CPM Braxis Capgemini becoming the largest IT services provider in Brazil, with revenues estimated at $1 billion.

When talking to Shpilberg, unlike many C-level interviews, you get the sense you are not listening to someone who is speaking through the corporate filter. Perhaps it’s because he is the corporate filter. At any rate, it’s always an informative conversation. In this recent interview, he talks about the biggest things IT buyers should know about Brazil, why India is not thriving in Brazil, and the most important thing about Nearshore outsourcing.

Sourcing Brazil: What are some important things IT buyers should know about Brazil?

David Shpilberg: First they should know that Brazil is a country that has had an IT industry for a very long time. It’s the eighth largest IT industry in the world, and not something that has sprung up as an export business during the last 10 or so years, as in some countries. People should know that graduate professionals in IT have been around here forever. All the major universities have computer science courses as core. There are an estimated 1.7 million IT professionals working in Brazil today.

One unique thing about Brazil is its support for older computing environments. Let’s face it: 70% of IT work is maintenance of legacy systems. And while Brazil has some world-class developers working with the new languages and technologies, there is also a significant population that knows Cobol and IMS and old-fashioned technologies. They still teach Cobol programming in the universities. There are people who can program in Cobol and Java. It’s necessary in a country with the second-largest installation of mainframes. Understanding of complex, very large information systems is not a novelty.

People should also know that the basic population adopted online processing long ago. Ninety-nine percent of the Brazilian people files taxes online. Since the 1990s there has been a huge amount of online banking. Brazil has long used online results to compute elections. We know the results 30 minutes after the last polls close, and that includes polling places in the Amazon.

Brazil’s culture is in many ways similar to the US, and the government is a federated, capitalistic democracy like the US. Even the occasional dictator was a capitalist.

On the negative side, I would remind them that the official language is Portuguese, and that although the percentage of people speaking competent English is growing, you need to understand that while every IT professional can probably read and write English, it is very different in real conversation. Not everyone you deal with is going to be proficient at English, or feel comfortable speaking it.

SB: And what about cost of services? Brazil tech labor is known for being higher-priced compared to, say, India.

DS: Don’t go to Brazil if you want the lowest cost. If you want the lowest cost today, you go to Vietnam. Next week, I don’t know. The lowest cost disappears in the air after a while. Remember when Japan was the cheapest place? Then it was Korea, then it was China, then Vietnam. Brazil does not pretend to offer the best deal in terms of hourly rates, but I do think the comprehensive cost of outsourcing to Brazil is attractive. We all know about the time-zone advantage, which has a direct relationship with total cost. We estimate that Brazil offers 30% to 50% net savings over the U.S.

SB: What about the complexity of the tax system? We hear from companies doing business in Brazil or thinking about it that tax policies are a problem.

DS: I’m afraid that taxation is a very difficult and complicated problem that will remain difficult and complicated. There is a lot of lobbying going on regarding taxes on exports. But every state has its tax, every city has its tax. It’s similar to the U.S. but much more complicated. ERP systems like SAP, Oracle, they’re incapable of dealing with tax structures in Brazil.

SB: Another concern we hear from IT buyers is that there’s a shortage of qualified IT workers in Brazil because the domestic market is so heated up.

DS: That is our assessment at the level of experienced IT employees. There’s lots of lateral recruiting going on. But that is not our assessment at the base. We have an easy time attracting the talent we want out of the universities. We hire out of universities four times a year. (They run on a quarters system.) We post on the Internet that we are accepting applications for internships from students in their last year of university. The government encourages students to do work/study in the last year of college, particularly in engineering, math, sciences. They are tax-free during the internship period but are restricted to no more than six hours a day. Companies in Brazil recruit from among these interns. We go out with about 500 to 1,000 positions open and we get from 40,000 to 60,000 responses. We prune that list down, then conduct fast interviews to ascertain the totally weird things. Eventually we are down to about 4,000 people whom we interview for the thousand open positions. It has been like that for the past three years.

We have not seen any shortage at the level of beginning workers. But if I’m looking for an SAP programmer with five years experience, I’m going to have to pay 20% more than we paid for the person who was in that position we’re filling because I want to take that person away from another company. Midsize companies are taking the greatest hit.

SB: Besides competing with giants like IBM and HP, your company now competes with the Indian providers. How tough is that?

DS: It depends on how we go against them in Brazil. The Indian firms are not doing very well in Brazil because they cannot work remotely from India to support Brazil. Brazil is more expensive than India but not 40% more expensive, and there is a 40% import tax on labor from India. So, the main thing the Indian providers do in Brazil is support their global clients that require Brazil support. We don’t see them as major competitors in Brazil except when they are trying to provide services for multinationals who are locked into global delivery from an Indian firm. Then we find that Indian firms come to us to be their local provider.

Outside of Brazil, the story is different. Indian companies are strong, and remote services is how they compete. TCS has done the most with that approach out of Latin America. In that market, we compete more on sophistication and maturity of the product. We do not entertain time-and-materials work. Only 3% of our revenues comes from time and materials, and that’s because of one client we have; our contract with them is based on SLAs, the number of devices.

I don’t want to keep mentioning the Nearshore time-zone or cultural advantages, but they are significant in terms of being able to compete and in terms of providing quality service. A business can be more efficient if it doesn’t have to work with the night shift, and you will get along better if a client and a provider have the same cultural approach to problem solving. It is extremely important to share a problem early. Not sharing a problem early enough leads to poor results. Now, everyone agrees with that in principle, but western cultures work that way more naturally. It’s easier in our culture to mention or discuss a problem because society is not based on a structured caste. That’s just an observation of reality, of how we interact with clients.

On the other hand, if your price is off by 15% to 20%, then for many clients culture goes down the slide. For many businesses, it always will come back to dollars and cents. It’s how much I’m going to pay you versus what I’m going to pay this other vendor.

SB: What IT trends are you seeing? What are buyers asking for these days?

DS: We are seeing many proposals regarding remote infrastructure management, from management of clouds to management of specific networks, server farms or data centers. In applications, we are seeing a lot activity in terms of maintenance of existing apps to development of new ones, including iterative development of trading apps.

CPM Braxis has done a lot of good work in infrastructure. Almost 2,000 of our workers support infrastructure, and our fastest growing service in the U.S. is remote infrastructure management.

SB: Does demand for cloud services right now match the amount of publicity the cloud gets?

DS: I would say it’s a minority of our 300 clients asking for cloud management, but that number is growing. We are seeing some interesting projects.

SB: For example?

DS: We’ve designed a private cloud to support a global network of 800 developers working for a leading online brokerage. The developers use cloud services to do their design and coding. We developed the infrastructure management process. The programmer gets assigned a certain level of computing power and software, and we create and allocate a virtual machine, virtual storage, and so on. We provide the resources to slice and dice pieces of the cloud as well as the tools to monitor activities, to find out if each developer is doing enough with their resources.

SB: Are customers saying ‘We want some innovation from our IT provider’?

DS: The topic of innovation does come up, but generally it’s in the context of a client saying ‘We are pleasantly surprised that you are innovative.’ They don’t usually ask for it specifically. The CIO from a coupon company said they like working with CPM Braxis because of the innovation we bring. He meant that our developers don’t just take the requirements given to them but come up with alternatives. This is not something they asked for but have become addicted to. We make it part of every offering. Even the most boring remote infrastructure projects can be made more innovative or valuable.

One of our most important elements is the people who work in our service intelligence unit. Some of them are IT people, some are trained statisticians. They don’t analyze data just looking for mistakes. Instead, they analyze data and make predictions about where problems will occur next. They work with teams to teach them about what data to analyze, how to interpret it. When these guys have ideas, they get everyone involved. They are a motivational group of people helping others become more proactive.

And those people are the greatest asset we bring to clients. At the end of the day, that’s what nearshoring is all about: the people.

SB: You mentioned at the Nexus conference that you tell your account executives to walk away from a prospective client if they don’t hear one of three things. What are those three things?

DS: De-risking from India, importance of time zone, and cultural fit. If none of those items comes up, just stop the conversation, because for this client it’s all about hourly price, and you won’t be able to match the hourly labor price of India. You might be able to match on total cost of ownership, but that’s not going to be an easy sale with that type of client. So, stop and look for customers that have matured enough in their understanding of outsourcing and are willing to pay for better service, better outcomes.

SB: Has an account executive ever walked away from a deal upon not hearing one of those items?

DS: I doubt it. They don’t listen to me.