Indian outsourcing so far rode the value proposition of significant labor cost savings. However, the widespread financial crisis coupled with the rising costs is leading to decreasing margins for many Indian BPOs. To meet the challenge of margin pressures, offshore service providers are exploring several ways to reduce costs, including moving to smaller cities.
Until recently, much of the BPO growth has been concentrated in a few large cities such as Bangalore, Mumbai, Delhi, Hyderabad and Chennai. However, the increasing labor costs, attrition and escalating real estate costs are forcing BPOs to consider smaller cities. While several BPOs have experimented with setting up centers in smaller cities, more recently several large BPOs are scaling up their existing centers while others are setting up new facilities in tier 2 and tier 3 cities.
The exhibit below lists some of the recent activities of BPOs moving towards tier 2 and tier 3 cities.
BPOs
Locations
Number of Seats
Services offered
TCS
Lucknow
1,500
The facility will provide software solutions for clients
in the US, Canada, the UK,
Singapore, and South Africa
Tech Mahindra
Kolkata
500
Delivery center
Ugam Solutions
Coimbatore
400
The center will offer market research outsourcing,
analytics, and online marketing services.
SPi
Pondicherry
450
The center will offer editorial and
content production services.
Xchanging
Shimoga
1,000
The center will provide complex financial
processing modules.
Source: ValueNotes Research
The Advantages
Lower costs are one the primary reasons that make setting up centers in tier 2 and 3 cities an attractive option. For performing the same level of work, an employee in a tier 2 city gets Rs. 4,000-5,000 compared to the Rs. 8,000-10,000 in a tier 1 city in India. Real estate costs in tier 2 cities are almost two-fifths of those in established BPO centers. The cost differential between a Tier 1 and Tier 2 city can be as high as 10 to 15 per cent.
Moreover, State governments are promoting tier 2 and 3 cities and are setting up better infrastructural facilities. There is adequate talent availability in smaller cities, and most of them prefer to be located in their hometowns. Add to these benefits, the element of safety! According to a recent study conducted by the Black Book of outsourcing, most of the Tier 1 cities were riskier as compared to Tier 2 cities. The reasons of risk were terrorism, pollution and geopolitical issues.
Going Forward
Large cities are burdened with increasing infrastructure woes coupled with rising real estate costs and wage hikes. However, there lie significant challenges in setting up centers in tier 2 and tier 3 cities. Some of the smaller cities lack trained manpower, better infrastructure facilities and international connectivity. Further, the investment in training is significantly higher for BPOs. With most of the people having completed their education in vernacular medium, their inherent knowledge of English is usually poor, but the attrition levels and salary expectations in smaller cities is much lower than that among the tier 1 cities.
State governments play an important role in attracting BPOs to invest in their states. The proactive stance of the government of Karnataka contributed to the overall attractiveness of destinations such as Mangalore, Mysore and Hubli. Other States are also making efforts to develop infrastructure and initiate policy changes in order to lure large companies to set up centers.
The decision to set up in tier 2 and 3 cities is a patient long-term approach. Striking the right balance between all elements is the key. Moreover, given the huge needs of the BPO sector, along with challenges in the current scenario, expanding to smaller cities will become an imperative.
