Head-to-Head: Frank Casale & Mark Hillary
This article originally appeared in Outsource Magazine Issue #24 Summer 2011
Brazil is probably the most buzzing location in outsourcing right now, and for our latest Head-to-Head who better than two of the most prominent commentators in the space to lend their thoughts on one of the most exciting markets on the planet? Mark Hillary, CEO of Brazil-based IT Decisions, and Frank Casale, CEO of the Outsourcing Institute: take it away…
Frank Casale: Brazil is getting a lot of press and generating a lot of buzz in the industry. Why do you think that is, Mark?
Mark Hillary: For a long time, we have been looking at the development of different offshore outsourcing markets – India is the classic one, in the last decade grown from a nascent offshore industry to a world-leading mature IT market. Especially US-based customers have started to explore the Latin America region because India is on the opposite side of the world – there are lot of issues around running virtual teams with a 12-hour time difference, for example – and Brazil is obviously the largest country in the region and also has a very well developed IT industry.
It’s something that has been under the radar of a lot of customers, I expect, but it’s not a bunch of entrepreneurs setting up companies because they have seen the outsourcing potential: it’s an industry that has been around serving the local markets for decades. That has started coming through. There are over two million people in IT services in Brazil. So there’s big potential – for the US especially. You’ve recently come down for a visit: what did you know about the market beforehand, and what do you see on the ground?
FC: Well, we have a very large membership network globally, and I am speaking to them every day, and certainly buyers in the US are making it clear to me that they are looking for alternatives and the one that is getting more and more traction in recent years is nearshore and specifically Latin America. As an industry we are all aware of the emergence of Latin America as a viable alternative, and certainly the fact that Brazil is the biggest player there and the one with the most scalable resources makes it that much more attractive to Fortune 500 organisations in the States.
Having recently been down there, presenting at conferences and having a number of meetings, I was very much impressed by the organisations I met with – and even more so with the true energy in the air. The closest thing I could equate it to is Silicon Valley in the late ‘90s – not from the standpoint of start-ups but from a standpoint of there being a whole lot going on, a lot of business, some interesting technologies, some very interesting service offerings, there is money there, there is government support. So there is a real electricity there, and I left there feeling really excited about what will be for Brazil, as an ITO player and some cases a BPO player here in the States. They are not without challenges, but net-net I left there very much jazzed about potential for Brazil and the States.
MH: You mentioned the difference in opportunity between the ITO and the BPO industries: there’s something to be aware of there, isn’t there?
FC: Part of me feels that that the companies there that want to be in the BPO space are there primarily because that is where the money is and that’s where the industry is going – which is the right thinking. As you and I know, though, the BPO business is different and quite complex. It’s more of a challenge on the front end selling it – making the solution connection – and it’s more complex in the back end, delivering and managing it. However, I met a handful of firms I think are just about ready.
The challenges both on the BPO and the ITO fronts I see, involve several things. One is just quite simply that selling into the US is different than selling into Brazil. There is a lot more competition. In other cases, it is culture and language. Not every provider I spoke to was fluent in English. So just some of the basics there will create a challenge in the vision. Flying to the States and sitting down with a major bank or consumer products organisation and you and/or your brochure or website are not fluent in English is going to create a challenge.
MH: It is a bigger problem for BPO sales into the US. I almost see a completely different opportunity. For the ITO, you’ve got a well-established IT industry with really deep domain expertise. For particular business domains there is actually much better expertise available in Brazil than the US and so you have the resource there. In this case there is this big opportunity to sell that expertise in the US. But in BPO it almost feels like the opportunity is for the BPO companies to come down and sell to the Latin market from Brazil, rather than set up in Brazil and sell it back to the US. As you mentioned there is the great vibe and a fast-growing economy serving over 200 million people in Brazil; and add to that the number of people in the Latin America region. So to me it almost feels like two separate opportunities: the outsourcing and BPO industry should be looking at the Latin America as a market itself; and IT definitely there is much more opportunity.
FC: We are seeing activity both ways as you mentioned and that’s a good point to bring up: I guess the challenge therefore for any emerging IT player right now, if you look at the landscape, if you look at the margins, is either moving into the BPO space or having anxiety wondering if they should just based on where the business is going. So the challenge I see amongst some of the ITO players in Brazil is doing just that. “Do we go at this as an ITO player because that is what we do? Or if we look at the States” – now the pricing is getting there and the fact that most of the ITO players there have already moved into the BPO business for the reasons I have mentioned – “should we challenge there in BPO?” I don’t have the answers – there are a lot of complexities there – but they are going to have to pick where they want to play.
MH: I think there is the idea that for an IT service company, as they move forward there won’t be so much demand for just distinct IT services: it will be solutions. Companies will say “I have to launch this new business”; “I gotta get this new product to market”; “I have to have X and need Y systems to that help me do that”: that is where you are going to get a blend of pure IT services players and bolting on business processes to make the solutions happen. I think that, in that sense, that is not just a Brazilian problem: that is all of the IT companies all over the world starting to be asked to fix a problem rather than just deliver a bit of Java coding.
If you put that in the Brazilian context, though, they have actually got some good advantages there. I went to see the CIO of HSBC recently – of course that is a company that has IT development shops all over the world – and I asked him how he decides where to assign different projects. He said the bottom line is that if it has a good specification, if they know the business case, if they know what they want, it goes off to India because they can code it really well based on design. If they want a lot of input from the IT team, if they want creativity around business solutions, then they kick it off to Brazil, because they almost have an expectation of more creative IT culture. So you can see the cultural differences coming into play there.
FC: I have had many conversations with buyers in recent months trying to get a sense of their drivers as to why would they seek an alternative to India – why they would diversify, what these drivers were – and that collaborative DNA, if you will, was certainly on the shortlist. One of the other drivers I found was certainly the need for more timezone-friendly delivery – what I found was that the buyers that are most experienced with India, in many cases are just worn out by the timezone differences. Having something within the same timezone plus or minus one or two hours is a huge upstart for these organisations. Not that they would switch everything over – every single one told me they would stay in India – but they would begin to diversify.
Another driver is just from the standpoint of travel: if you have to hop onto the plane once a month, once every quarter, and go somewhere, Brazil is just a more attractive place. Most of what we have to do is business and very little pleasure – so it’s not a bad trip.
MH: Definitely, it’s a nice place on business – but the important point you brought up was collaboration. It is very difficult to collaborate even if your development teams are using tools like IM or video conferencing – you don’t want to be in your conferences til 10 in the evening. It is very hard to get things to work together if they are on the other side of the world. I think both from a risk-diversification attitude – not having all your eggs in one basket – definitely I see US companies exploring the Latin America option. It’s not just Brazil, but Brazil is definitely the largest player in the region.
FC: I spoke with a senior IT executive, a major brokerage player here in New York, and he was actually quite intrigued by several other Latin American countries. However, the reason why he is staying away from them is they cannot scale to the level he needs. There’s just not enough of a talent pool. So that is going to be the challenge of some of the other places – Costa Rica, Chile and the others who have some very interesting strengths. This big challenge is going to be really focused on smaller companies and smaller niche projects where scale does not disqualify them.
MH: What have you seen of the indigenous Latin American suppliers? Have you seen any of them actually trying to compete back in the US or in Europe?
FC: Well, it is an interesting question. Sometimes you look at something in a totally different context and it just ends up looking the same as everything you have seen. What I mean by that is: when I think about the providers that we worked with back in the States in the early-to-mid-‘90s when we first started the network, there were two categories. There were those who seriously committed to outsourcing and made financial commitments, strategic commitments, they committed resources and you just saw they were going in that direction. But those were the minority. The majority of the companies – and this is a challenge to this day -–were dabbling. So they would just go about their business day-to-day and they would put one or two people in the corner, give them an outsourcing brochure, and ask them if they could get a deal or two – “and if you get a deal then we will put money in”. It was a chicken-and-egg kind of thing. And a good portion of those cases after a year or so would pull the plug. So it is a tough business to grapple with.
So, if you think about Brazil, and what I have seen and the discussions I have had there, there are I would say three categories of providers there. One category is committed and they really have their feet on the tree here in the States; they have personnel; they have office space; they have English brochures and websites etc.
The second category is still based in Brazil. They fly in a couple of times to conferences, have meetings, get some referrals: basically they are constantly dabbling and hedging their bets before they make the commitment. The third category are those that have not decided if they want to break into the US market. They are busy enough in Brazil – there is a lot of activity there, it is keeping them busy, they are making money, they are profitable, their investors are happy. So they are in Brazil and focused on Brazil.
I would say the first example are in a good place. The third example – focused on Brazil – are in a safe place. It’s the middle group – the dabblers -–who may think they are hedging their bets or mitigating the risk, but in many cases they are increasing the risks. It may take them three years to look back and suddenly realise that they are going to have to make the decision. Do you agree?
MH: Absolutely. The problem they have is that they have so much local business and it is so easy to remain firmly in the local market down here. The one thing that’s not obvious – when you look at this market but you are actually not here and experiencing the vibe – is that there is actually so much business going on with good rates. It is really not heavily discounted, you have lot of government projects going on, you have major multinationals commissioning in with big projects, you have the World Cup coming here, you have the Olympics coming here. Massive projects being commissioned. The domestic market here is bigger than both India and China combined. So there is a lot of work – and I guess you can hardly blame a lot of IT vendors for just serving that local market.
One interesting fact worth pointing out, I think, is that all of the Indian players have moved into Brazil. If you look at Infosys, for example, their staffing and their customers -–97 per cent are Brazilian, and over 90 per cent of the business they get is in Brazil. So it’s like they have taken Infosys’ business model, but they are only serving local clients. They have come in to tap into this market. With HCL you can say the same thing. It is quite an interesting phenomenon to see Indians coming in when what they are not doing is shipping all the work back to India.
FC: Exactly. They have all done their homework. That gives clearly a sense of where the future is. It’s certainly one of the key destinations.