Why Indian Suppliers Are Moving to Tier 2 Cities | Article

templeIndia’s position as one of the dominant players in the offshore outsourcing industry has been largely possible because of its staggering supply base of talented human capital. But this very supply base is under increasing pressure as demand for offshore services continues to go north.

And, it is not just the country’s much-hyped back office resource pool that is under pressure; other factors like physical infrastructure, telecommunication costs, the quality of life, and niche skills in the country’s services nerve centers like Bangalore, Mumbai, Delhi, Gurgaon, and Noida are now facing the heat.

Beyond Bangalore, Delhi, Gurgaon: Indore and Belapur?

In 2004, outsourcing service providers began looking beyond the traditionally hot destinations towards Tier Two cities or even B towns like Pune, Chandigarh, Kolkata, Indore, Ahmedabad, Cochin, Chennai, Hyderabad, Secuderabad, Jaipur, Rajkot, and Nagpur among others.

Take Indore for example. This city, located in Madhya Pradesh, one of India’s largest states, is little known for its BPO or offshore product development prowess. John Winchester, Vice President of Engineering at outsourced product development supplier Impetus Technologies, says, “There is a definite increase in the trend of IT development outfits and BPO providers moving to smaller cities like Indore. Some cities provide companies with a talent pool because of the presence of a number of good colleges and a consistent workforce coming out every year. The presence of engineering colleges such as SGSITS and other excellent colleges gives us a new set of resources to tap every year.” Winchester, who is now based in Indore, says that most new recruits need training when they come out of college, which they receive on the job. This would be the case irrespective of whether they are in an IT hub or a smaller, Tier Two city.

Anshuman Magazine, Managing Director, CB Richard Ellis (CBRE), South Asia, a global real estate consultancy firm, says, “We see a movement to these smaller cities. For sure, it won’t be a rush, but we see evidence of this happening gradually.” For example, because of its proximity to Mumbai, Pune is a favorite with BPO suppliers among Tier Two cities in India. He says, besides the availability of competitive real estate and pricing that favor Pune, there are other factors like skill availability, excellent educational institutions (about 100,000 university graduates annually), and active political support from the state government to boost investment climate in the city.

Some of India’s prominent suppliers like Msource, the BPO arm of Mphasis-BFL; Wipro Spectramind, one of India’s largest third-party suppliers and the BPO division of software and IT services giant Wipro Limited; WNS; and big IT services names like Infosys Technologies, IBM, Cognizant Technology Solutions, Mahindra British Telecom, and HSBC have centers in Pune.

There are others besides Indore and Pune. Belapur, nestled midway between Mumbai and Pune, is an unlikely BPO destination. But it boasts of one of Wipro Spectramind’s seven centers spread across India. S. Vardarajan, VP of talent engagement and development at Wipro Spectramind, feels that availability of talent with specific skills sets and a good telecom infrastructure are major reasons for Wipro Spectramind to locate there. Vardarajan says at present only smaller outfits, or suppliers with 100-200 seats, are looking at the small towns, although some bigger suppliers (2,000-3,000 seats) do have clients who sometimes have site preferences that favor smaller cities.

Where and How?

Anand Ramesh, Senior Research Analyst, Everest Group, says Tier Two cities are gaining attractiveness primarily due to the lower operating costs relative to a Tier One city. “The cost differential can be as great as 10-15 percent for non-voice processes and upwards of 20 percent for voice processes, he says. Attrition in Tier One cities is a very serious issue for all suppliers and will only escalate in the future as more arise. This could be an opportunity for Tier Two cities to gain market share due to the benefits of lower attrition and hence lower recruiting and training costs. These are costs that are important for suppliers, Ramesh says. For example, Everest research shows that Pune, a city that has two-thirds the population of Bangalore, produces twice as many graduates. Ramesh comments that such ease of access to a qualified talent pool is becoming increasingly critical for success in the BPO sector.

Nilesh Kothari, VP Business Development and Finance at Gurgaon-based outsourcing provider Hero ITES, says that costs in the Tier Two cities are favorable essentially because of a lack of business maturity in the local market and their smaller size. He says that Chennai or even cities like Chandigarh have drastically lower transportation costs. This is essentially because of their smaller geographical size compared to outsourcing hubs. Transportation as an ancillary service line has boomed in the BPO hubs of Delhi, Gurgaon, and Bangalore, and costs have flared up. Transportation costs have risen because India’s public transportation system is not as developed as in the US and most call center agents are young graduates who often do not have their own transportation. Although, there is no specific agreement on this, suppliers often provide transportation facilities as part of the overall compensation package.

Just Get Me the Right Skills!

India’s smaller BPO suppliers are starting to provide value-added niche services. Because non-voice services are technical and need greater expertise, the revenues generated from such services will be greater than those from just simple voice processes. Look at third-party supplier Ugam Solutions. Based in Mumbai, Ugam concentrates on high-end data analytics, and has seen around 100 percent year-on-year growth over the last four years, its CEO Sunil Mirani says. Mirani expects this growth to soar primarily because he expects exponential growth in the offshore data analytics and high-end research sector. With growth, Mirani expects high attrition rates and wage inflation to follow, and as a result smaller suppliers will look at cheaper and smaller locations to reduce costs. “We understand the trends of the market and that BPO suppliers are looking forward to cities with specialization. So, we short listed Nagpur, Baroda, Ahmedabad, and Kolkata. Kolkata has been increasingly attracting big ITeS and BPO names and there’s a certain safety in numbers that we took into consideration.” Kolkata (formerly Calcutta) already boasts of corporate names like IBM, TCS, PwC, Cognizant and even Wipro Spectramind. BPO giants GE Capital and HSBC are planning to follow suit this year.

Mirani also sees potential in smaller cities like Coimbatore in south India, essentially because of people with great analytical skills there, which are an asset in non-voice processes, he says.

Small is Beautiful, but There’s No Rush

India’s BPO and offshore product development experts feel that although the Tier Two cities are improving their infrastructure, the small town BPO boom isn’t here yet. Magazine says that there is still considerable play left in the IT services hubs of Delhi, Gurgaon, Noida, Bangalore, and Mumbai. He says that overall infrastructure in the outsourcing hubs is still miles ahead of the Tier Two cities and smaller towns in India that also often come with big physical infrastructure handicaps and dodgy telecom connectivity.

The other big problem that often arises is in terms of the availability of senior level management and experienced middle management employees, who don’t want to relocate to a smaller city. “It is essential for progressive and innovative managers to go to these cities to help establish the facility with a strong foothold. Suppliers often have to offer better or competitive relocation packages compared to the main cities to tempt managers to shift to a Tier Two city, and this is a big cost that suppliers will have to factor in,” Winchester says.

Excitement Ahead!

Despite the various challenges that India’s Tier Two cities and B towns face today, they are making their play for a piece of the outsourcing pie. With the availability of India’s talented labor pool being on a premium these days, Indian suppliers will look towards greener pastures to tap the latent talent residing in the country’s smaller cities and towns. In 2005, we can look ahead to new and exciting sourcing strategies that will swing supplier fortunes between Tier One and the Tier Two cities as the next wave of outsourcing hotspots within India emerge.

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