BPOs take tier-II call for new operations

Faced with rising real estate costs, crumbling infrastructure and intense competition for skilled labour in major centres, BPO firms are looking at smaller cities as sites for new operations. This phenomenon has the potential to substantially reconfigure India’s economic landscape. Let us discuss this as below.
In part, this trend is the price of success, as the BPO industry is growing strongly to $8.4 billion worth exports in FY 2006-07, up 35% from the previous year. Growing price competition from countries in Southeast Asia and Latin America, appreciating Rupee value and dominance of big software sector over infrastructure – land and labour, have forced BPO firms to look at alternatives. By this process, so-called tier I cities of Bangalore, Mumbai, Delhi, Hyderabad, and Chennai are beginning to lose investment to new locations.
Over the last few months, both local and international industry majors have set up BPO facilities in relatively unknown cities throughout the country, such as Mangalore, Jaipur, Madurai, Coimbatore and Vishakapatnam. Nevertheless, tier I locations will continue to be the prime locations for BPO operations for the larger first-time investors.
Apart from 15% cost advantage, according to Assocham, tier II cities have advantages like untapped real estate markets meaning lower direct costs, and good local colleges meaning cheaper labour and easier to retain due to proximity of their families. In addition, States that have yet to enjoy the benefits of these new industries are often offering additional incentives to large investors. However, moving outside established centres implies some risk and inconvenience. While roads may be less congested in tier II cities, other types of infrastructure may be lacking. Other concerns are: the existence of a local airport; the frequency and timing of flights to major centres; hotel capacity; the reliability of the power supply; and the existence of supporting services including construction companies.
Also, quality of recent graduates is lower, particularly with regards to spoken English, and training facilities, which BPO firms share with the software sector, may not exist. Presence of one or two firms may be enough to dry up the available labour. In addition, experienced managers may be reluctant to move to smaller cities with less vibrant career prospects. And, cultural factors can also affect operations, as traditional attitudes to women may prevent them from working at night or in the evenings. Smaller cities may also be far-removed from government officials and lack the critical mass of firms necessary to pressure state and local governments for necessary legislation and service quality.
Thus, firms without branches in capital cities will find themselves isolated from policy-makers. What will the country’s future economic landscape look like? Attracting and retaining BPO operations will only be the preserve of a limited number of cities, due to the industry’s onerous requirements. However, different locations will offer investors distinct advantages according to their specific attributes. tier II cities can be grouped into four, according to their relative attractiveness. The first group comprises capitals of states with large industrial sectors, but that do not have well-developed software or BPO clusters. Examples include Kolkata, Ahmedabad, and Lucknow.
They enjoy relatively well-developed infrastructure, good universities, and easier access to state government machinery. These cities will be popular with large local and international investors, particularly those seeking large numbers of workers. The second group comprises smaller cities close to prime industry centres. Mysore near Bangalore, and Trichi near Chennai belong to this group. Apart from lower real estate and wage prices, these cities are able to piggy-back on their neighbours’ ‘hard’ and ‘soft’ infrastructure such as airports, training facilities, and industry associations. These locations will be attractive for both local and international investors, in particular smaller firms seeking to lower costs.
The third group consists of large and relatively isolated cities. Examples include Nagpur in Maharastra, and Madurai in Tamil Nadu. These cities are large enough to offer a sufficient quantity of workers and have adequate infrastructure. They will offer larger cost reductions, but due to their relative isolation, they will likely be the reserve of larger, local firms or international outfits with an appetite for risk. The fourth group comprises smaller cities that are not on the radar of bigger international or local players. These include cities such as Udupi, Manipal, Hubli, and Belgaum in Karnataka, Kozhikode in Kerala, and Durgapur and Kharagpur in West Bengal.
Wage rates are low and these cities’ good regional colleges are able to meet the modest staffing requirements of small, local operators. We conclude that next few years will see an expansion of BPO activities in cities offering margins for cost reduction and greater availability of labour. A hierarchy of locations will develop, with state capitals and smaller cities near tier I cities getting the choicest investments. Smaller and more isolated cities will cater to local operators.