Outsourcing Research by ValueNotes - Outsourcing Opportunity for Tier 2 & 3 cities grows further

Outsourcing Opportunity for Tier 2 & 3 cities grows further

Friday, 15 June 2007

With IBM (NYSE: IBM) chairman and CEO Samuel J. Palmisano’s visit, the Indian outsourcing industry has received another shot in the arm. Among the big gainers will be a number of smaller Indian cities that are looking to make a mark on the outsourcing scene. These tier II and tier II cities have lagged tier I cities such as New Delhi, Mumbai, Gurgaon and Bangalore in cashing in on the outsourcing boom. However, in recent years WNS (NYSE: WNS), Infosys (NYSE: INFY), OfficeTiger and Genpact have established centers in tier II and tier III cities in India. Michael Cannon-Brookes, vice president, business development, IBM, also talked about tapping the resources available in the tier II cities in India in one of his interviews.

While companies have ambitious expansion plans across the tier I cities as well, issues such as higher entry level wages, attrition, poaching, high real estate costs, infrastructure problems, saturation in terms of availability of talent have forced them to expand horizons to newer destinations.

Pull of smaller cities becomes more difficult to resist
As IT and BPO companies tried to resolve issues posed by larger cities they realized that there were alternate destinations in India that offered all the benefits…and a few more, albeit they do pose certain challenges.

Typically, people residing in smaller Indian cities have always flocked to the metros for employment akin to their qualifications. The outsourcing space has also sourced a number of employees from cities that have decent educational facilities but sparse employment opportunities. However, these employees also fuelled the trend of increased entry-level wages and attrition as they needed to establish themselves in new locations and were on constant lookout for opportunities that would lead them closer home.
Companies have always been aware of the talent availability in smaller towns. Therefore they are now flocking to tier II and tier III cities not just to scout for candidates but also to establish centers too. With opportunities available at their doorstep, local residents have shown preference to be located in their hometowns. This has resulted in increased loyalty and less job-hopping. With lower costs of living, wages have also been reasonable.
State Governments across India have extended tax sops to encourage investments in these destinations. Better infrastructure facilities and other benefits have also been promised.
Some tier II destinations that have found favor among the outsourcing companies are – Pune, Kolkata, Mysore and Chennai. Tier III cities that have come up include - Nashik, Chandigarh, Mangalore, Jaipur and Vishakhapatnam.

It is a long road ahead
However, the growth of outsourcing companies in smaller cities has been slow. They lack benefits that tier I cities offer like easy availability of trained manpower, infrastructure facilities, better international connectivity and increased awareness. While availability of entry-level employees has never been an issue, the biggest challenge has been finding middle level management employees. As pointed by companies that have already established centers at smaller destinations, connectivity becomes a major issue, as they do have well equipped airports for international flights. Even domestic flights are meager, making road and rail travel compulsory, which in turn are time consuming.

Training costs are also usually high in these areas, as candidates are not computer savvy and also having studied in vernacular mediums, communication in English is not always their forte.

Given the growth that is being witnessed by the Indian outsourcing industry, it is inevitable that these smaller cities should also gain from it. However if they are able to overcome the challenges, they will achieve it faster. The state governments need to take a proactive stand, making connectivity, infrastructure and education their priorities.

ValueNotes Outsourcing Watch: Insights for Investors is a unique news and analysis service from the ValueNotes Outsourcing Practice, focused entirely on outsourcing; This weekly publication analyses events in outsourcing, outsourcing companies, trends in the sector, impact of global competition from offshoring to established US companies, and emerging investment opportunities.

No responsibility is accepted for errors of fact or opinion. Neither the analyst nor ValueNotes has a position in the stocks covered above, or has received any payment in any form for this report. ValueNotes does not own or trade in the stocks of companies under coverage. ValueNotes does not provide investment banking services or investor relations' services to preserve the independence of its research. Neither ValueNotes nor the analyst incurs any liability arising out of use of the above information/ report. Reproduction in whole or in part without written permission is prohibited.

ValueNotes Outsourcing Watch articles are distributed through FinancialWire, an independent, proprietary news service of Investrend Information, www.investrend.com

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