Topic: Picking the Winners Among Tier-2/3 Cities – An Offshoring Perspective

The offshore BPO industry has grown by more than 35 percent over the last three years to reach revenues close to US$28 billion in 2007. A large portion of this growth, however, has been restricted to Tier-1/1.5 cities (metropolitan regions) in established offshore destinations. Across geographies, large cities such as Bangalore and New Delhi in India, Metro Manila in Philippines, and Prague and Budapest in Eastern Europe supported the bulk of this rapid growth. As a result, some of them have started showing symptoms of saturation including high attrition levels and steep increases in wages and other operating costs.

Exhibit: Delivery centers of global suppliers and buyers are concentrated in Tier-1 cities

In the recent past, Tier-2/3 cities (cities with lower population and relatively less-developed infrastructure facilities, compared to Tier-1 cities) have started to emerge as viable alternatives for captives and third-party suppliers. These lesser known and typically smaller cities, with their lower operating costs and untapped labor pools, are increasingly becoming attractive to investors. For example, Indian Tier-2/3 cities provide a 15-30 percent reduction in operating costs compared to Tier-1 cities and are also instrumental in meeting the Indian BPO industry’s growing demand for talent.

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Key location developments

Market activity

• India and Philippines have witnessed a lot of supplier activity in recent months, including:
• Leading India-based suppliers’ plans to set up large-scale mega centers – Infosys and Wipro announced plans for large centers in Kolkata (~5000 seats each) while TCS announced plans to create a 20,000-seat center in Pune
• The NCO Group launched a new contact center in Clark Freeport zone (redevelopment of the former U.S. Clark Air Base in the Philippines) and expects to employ 5,000 people initially
• EXL and WNS made a foray into the Philippines BPO market with their centers in Manila
• Emerging locations like Vietnam and Thailand have also witnessed some activity in recent months, including:
• TCS entered into a joint venture with Firstech Solutions, a Thai firm, to provide BPO and IT services to serve customers in Thailand
• Luxoft, an Eastern European provider of outsourcing services has opened a delivery center in Ho Chi Minh City, Vietnam
• Companies continue to divest their captives in different regions; for example:
• Unilever divested its financial services shared-service centers in Santiago, Chile, and Sao Paulo, Brazil, to Capgemini
• Shell’s IT captive in Malaysia will transfer to suppliers as a part of an outsourcing agreement with EDS, T-Systems, and AT&T

Location promotion initiatives

Countries continue to refine their incentive programs to attract investors into the IT/BPO space. Examples include:

• The Indian government announced a one-year extension (previously until 2009) to the STPI scheme until March 31, 2010. The government only recently announced the extension of the EOU scheme by one year (until March 31, 2010).
• The Lithuanian Development Agency announced plans to become a "One-Stop-Shop" for Foreign Investors under its new Investment Promotion Programme 2008-2013.

Overview of Location Optimization

Everest Research Institute provides actionable insight and visionary research on a wide range of offshoring issues through its Location Optimization practice (LO). Our Location Optimization research covers multiple regions and issues relating to offshoring locations, with a focus on helping companies assess the trade-offs of choosing between alternative locations. Our Location Optimization team combines deep subject matter expertise with broad analytical skills and insight into the global sourcing market, all of which are based on years of experience working in the offshoring industry.

For more information, contact us at:

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