By Filipe Pacheco

One U.S. dollar today is worth around 1.60 Brazilian real, an extremely low rate if compared with 2002, when political instability and economic worries surrounding the election of Luis Inácio Lula da Silva made 1 dollar worth close to 4 reals.

Nine years later, a strong real reflects, among other factors, investments made by foreigners who bring their dollars attracted by one of the highest interest rates in the world – 11.25% a year – and expectations of big earnings in an economy that shows great possibilities for future growth.

With so many dollars in the Brazilian market, the price naturally drops, just as if it were a commodity. Since the beginning of 2011, 1 dollar went from buying 1.66 real to 1.57 real – a loss of strength of 5.7%.

For IT and outsourcing companies, it is a very delicate moment: Cheaper dollars means more power to grow and conquer foreign markets, but it also makes the costs of Brazilian services and products more expensive for foreign clients. Add in the high costs of specialized IT workers, with a projection of a work force deficit of 92,000 for 2011, and that combination of factors may hurt the earnings of many Brazilian IT and services entrepreneurs.

The cost of running a sourcing business in Brazil is definitely affected by the high value of the real. “If you look at pure salaries, Brazil is not more expensive than other countries,” says João Lencioni, CIO and Sourcing Leader for GE Latin America. “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 restrictions on services exported from Brazil, and the currency appreciation, and you have a mix that could potentially limit the growth of the outsourcing industry in Brazil.

“A cheaper dollar corrodes our competitiveness internationally,” says Benjamim Quadros, president and founder of BRQ IT Services, a Brazilian IT and outsourcing company that projects to earn $210 million this year. “We would like Brazil to be a second India when it comes to outsourcing services, but that didn’t happen. This is the moment for us to gain strength in the domestic market and then grow abroad. Our focus will remain in the domestic market.”

BRQ is one of the biggest developers of IT solutions and services for financial institutions, and has around 100 employees in the United States that work for what the company calls “premium services.”

Theoretically, it is the moment to grow beyond domestic frontiers, but that is possible only for a few that are already very well established in the homeland. “With a more expensive real, companies have had to sacrifice their earnings margin in one way or another, that was inevitable,” says Ruy Moura, president of Acquisitions Business Consulting. He explains that companies that already made projections of international acquisitions do not depend that much on the daily currency fluctuations, which end up hurting more the smaller service providers and exporters.

Stefanini IT Solutions, one of the biggest tech players in Brazil, has taken advantage of the moment, but also believes that a strong real can be dangerous for the sector as a whole. “It sure is good to grow in markets that are very competitive, like the United States,” says Ailtom Nascimento, executive director of Stefanini. The company bought two American firms (TechTeam and CXI), and also a Colombian company.

“But when it comes to the services area, that is not positive at all. We have been exporting products in areas like contact service, service desk, and back-office service since the time when 1 dollar cost 4 reais. Since then, we had to adapt in many ways to keep our products competitive and profitable,” he says.

A Chance to Capitalize

For Ricardo Asse, director of market development at Brasscom, the association of Brazilian IT and outsourcing companies, this is the right moment for national companies to internationalize. He explains that companies don’t need to generate development only from within Brazilian boundaries, but that it can happen from anywhere in the world.

With big economies going through difficulties, mostly Europe and the United States, he says, it is a good moment for Brazilians to combine three strategic points to make a difference in these markets, where their brand names are not traditional or widely recognized: innovation, presence, and customized solutions.

“We need to come up with offers of sophisticated products,” he says, as the country already does in financial and bank services.

Brasscom has been working to make things easier for companies. “One of the challenges right now is how to reduce the cost of doing business in Brazil,” says Sergio Pessoa, director of marketing and international markets. “We’ve implemented two initiatives: reduced the social contribution on payroll by 50%, and for every dollar spent on R&D and training, you can have a $2 reduction in taxes.” Other monetary incentives are in the works, on the state and municipal levels, he says.

Still, the IT and outsourcing business in Brazil does not show signs of suffering. “The currency appreciation is something that companies here are learning to live with” GE’s Lencioni said in an interview with Nearshore Americas. “Many of those companies are still growing, even at double-digit levels.”