Antonio Gil, Brasscom's chairman and chief executive of CPM, a Brazilian IT company, says good progress was made in the first year with marketing activities to put Brazil on the radar screen as a potential IT outsourcing destination.

But he admits that in some areas – such as legislative reforms needed to create a level playing field with countries such as India – progress is slow.

Part of the reason was the recent presidential election, which focused politicians' minds on domestic politics, he suggests.

Still, Mr Gil is confident that Brasscom will meet its goal and points to a combination of factors that position Brazil as a suitable offshore destination for companies looking for an alternative to India.

He points to stable political conditions, a world-class financial sector, costs that, although higher than India, are lower than the US, as well as a similar time zone to North America.

Brazil's population of 182m also includes the largest Japanese community outside Japan, while large German and Italian communities provide a closer cultural affinity to customers in the wealthy north than many Asian countries.

Multinationals such as HP, IBM, Accenture and EDS were also quick to spot the potential and set up offshore hubs or software development centres primarily in the industrial São Paulo region.

One example of the growing trend came in September, when the Brazilian arm of Japanese insurance company Tokio Marine Seguradora signed a 10-year, $44m, contract with IBM locally to outsource its data centres and technological hardware upgrades.

João Pedro Paro Neto, Tokio Marine's director for alternative channels, says the company decided to outsource to IBM simple tasks such as unifying multiple websites, through to revamping hardware for its core business activities.

Even Indian IT service providers such as Tata Consultancy Services (TCS) and Infosys have set up local operations to compete with other international and local players operating in Brazil.

Faced by a barrage of international competition, local companies such as CPM, Politec and Stefanini IT Solutions, are furiously positioning themselves in the IT and software market.

To grab its share, Brasilia-based IT outsourcing company Politec delivers commoditised solutions such as application codes, helpdesk management and data centre monitoring.

"Standard IT services work, which is based on price, gives us an opportunity to build relationships and deliver more complex solutions later," said Humberto Riberto, executive vice- president at Politec.

The company aims to provide the full application life-cycle support in a four-year timeframe, said Mr Riberto. And like many local companies, it also launched a unit to build ties with the likes of German software giant SAP to deliver its products and services at home or abroad.

Politec, which expects to make sales of $230m in 2006, is spreading its net by setting up operations in the US, Japan and most recently a joint-venture with offshoring company Neusoft to provide coverage in China.

But even Brazil's supporters admit that its plans to become a global IT outsourcing giant need to overcome hurdles to compete against rival destinations in Asia, eastern Europe and elsewhere. Chief among these are the burdensome tax regulations and outdated employment laws.

Industry analysts also complain that IT laws have not kept pace with changing times and intellectual property regulations provide insufficient protection for software developers.

They also worry that insufficient training in IT and language skills overall will be a problem.

In the opinion of Cassio Dreyfuss, vice-president for research at Gartner, companies cannot afford to wait for the government to take over training and education. Any companies entering this market need to factor the training of employees into their costs.

The local unit of Indian company, TCS, for example, aims to grow to 1,800 employees by March 2007, compared with 1,100 today.

TCS is investing R$1.5m a year in training and recruitment, while establishing alliances with education institutions such as the University of São Paulo.

But, as in other countries, the domestic and international IT service suppliers have also learnt a lot in the past five years.

Alexandra Reis, management consultant at IDC, says that many companies learnt from their mistakes during past contracts. "An IT outsourcing contract was often like a black box, with neither side knowing exactly what was in it," she recalls.

Companies need to work closely with suppliers to avoid disputes, according to outsourcing specialists.

It is common to see clients discovering that their needs were not met by the IT service suppliers, while the suppliers felt companies did not clearly specify what they wanted, Ms Reis explained.

She also notes that careful planning by all departments is needed to avoid misunderstandings.

Companies must consider their objectives as early as possible, which may include productivity or future goals such as supporting a new product, she said.

Despite the challenge that Brazil faces to establish itself as a top-five IT outsourcing destination, local and international IT specialists talk of the mature level of technology and the improving quality of its IT outsourcing market.

Klaus Ehmke, finance director at TCS's Brazilian unit, believes Brazil is moving in the right direction to become a leading global destination.

He says it has many positive aspects, an important change being that local and international companies are increasingly securing industry benchmark certification and qualifications.

"They have the methodology and skills to handle complex work rather than just body-shopping," he adds.