The Coming of Age of India’s Tier-2 and -3 Service Delivery Locations | Blog

India is widely regarded as a preferred service delivery location for global companies, given its attractive low-cost proposition, skills availability and scalability, and mature global services ecosystem. Until recently, the country’s tier-1 locations shouldered the weight of the services delivery agenda. However, with increasing maturity and saturation, enterprises and service providers are expanding their footprints across tier-2 and -3 locations throughout the country to take advantage of lower competition, cost savings, and better living standards, as well as to diversify location risk.

Read on to learn about the tier-2/3 global services delivery market in India and their accompanying advantages and underlying trade-offs, as well as what it takes to successfully operationalize a tier-2/3 delivery center in the country.

Understanding tier-2/3 locations’ value propositions

Tier-2/3 locations currently account for 18-20% of the global services workforce in India. Unlike most European countries, where a small clutch of cities offer services delivery, India offers a plethora of tier-2/3 location options, including: Ahmedabad, Gujarat; Coimbatore, Tamil Nadu; Jaipur, Rajasthan; Kolkata, West Bengal; Kochi, Kerala; Visakhapatnam, Andhra Pradesh; Chandigarh and Thane, Maharashtra; Lucknow, Uttar Pradesh; Thiruvananthapuram, Kerala; and, Indore.

Delivery of global IT services is more mature than is global business process services (BPS) in most tier-2/3 locations, but the share of global voice and non-voice-based BPS is on the rise. Service providers occupy a larger market share than enterprises’ Global Business Services (GBS) organizations in most tier-2/3 locations, facilitating transactional work, servicing incumbent clients and fixed-price projects, and, at times, supporting complex workstreams.

Multiple factors enhance the tier-2/3 locations’ value propositions:

  • Lower compensation and facility costs translate into considerable cost savings of 10-20% versus a typical tier-1 location
  • Relatively low competition allows the scope to differentiate, create a better brand image, and attain leadership in talent markets, and provides access to a largely untapped talent pool with relevant skills
  • Tier-2/3 locations also experience 10-15% lower attrition than tier-1 cities, resulting in better service delivery and lower hiring and training costs
  • In contrast to most tier-1 locations, which are experiencing increasing traffic congestion, worsening quality of life, and health-related issues, tier-2/3 locations offer a better standard of living at a lower cost, making relocation an attractive proposition
  • Various state governments have started offering incentives such as single window clearances, ease of land allocation, stamp duty exemptions, Floor Area Ratio (FAR) relaxation, and capex/interest subsidies to further increase the attractiveness and viability of tier-2/3 locations

All these advantages have driven companies already to open centers in tier-2/3 cities or at least to begin to explore the viability and value. For instance, a leading telecommunications services firm employs over 40% of its Indian workforce at its tier-2 delivery center; a leading professional services firm is looking to scale its overall GBS headcount at existing tier-2 locations; and, a leading e-commerce firm is evaluating multiple tier-2/3 cities to support customer services delivery. Many service providers are also showing keen interest in expanding their tier-2/3 footprints to support both transactional and complex workstreams.

But, of course, tier-2/3 cities aren’t panaceas, and both enterprises and service providers must be fully cognizant of the realities of establishing a center in one of them and address challenges quickly to unlock their maximum potential.

Key challenges in supporting service delivery from tier-2/3 locations

Scalability, especially beyond 1,000 FTEs, can be a challenge in some tier-2/3 locations (such as Chandigarh, Visakhapatnam, and Coimbatore) with limited peer presence and better opportunities in nearby tier-1 locations. Given the relatively low market maturity and paucity of adequately skilled talent, companies would have to invest in training recent graduates and/or building a recruitment engine from the ground-up. Additionally, the entry of a few large companies can easily congest the market and increase costs quickly.

Challenges with infrastructure and delivery enablers like utilities, transport, meal/catering, and stationery providers, as well as inferior connectivity to domestic/international locations, also pose hindrances. Thus, it might be difficult to relocate experienced talent at the managerial and leadership levels. Further, most tier-2/3 locations primarily deliver transactional services, and companies that want to support more specialized operations would have to make substantial investments in the talent market.

At the same time, we believe that a sound understanding of the location and its advantages and challenges, coupled with a nuanced strategy, can help companies establish successful delivery centers in tier-2/3 locations and integrate them into their portfolios.

How to successfully operationalize a tier-2/3 location delivery center

To extract maximum value from their tier-2/3 centers, we believe that companies should undertake the following steps:

  • Capitalize on the early-mover advantage to access benefits beyond cost savings, such as footprint diversification, lower attrition and competitive intensity, and wider access to talent
  • Create a distinctive employee value proposition, such as defined career paths, exposure to leading technologies, and financial benefits, to ensure better positioning
  • Invest in talent development and revamp the existing operating model to support complex workstreams. A case in point is a leading BFSI firm, which is betting big on its tier-2 delivery center in Thiruvananthapuram to move up the automation and analytics value chain and support new processes
  • Play a talent shaper role by working with the local academic and government bodies to influence educational curricula, training infrastructure, and programs, and reskill/upskill talent or seed talent from other centers. A leading service provider, for instance, has opened one of the largest corporate education centers globally in Mysore, Karnataka, helping it attain leadership in the regional talent market
  • Enhance the relocation proposition for existing talent by providing adequate monetary and non-monetary incentives, especially those that alleviate some of the problems associated with tier-1 locations, such as congestion, pollution, safety, and security

Are you currently leveraging or considering tier-2/3 locations for your service delivery efforts? We’d love to hear your thoughts on including tier-2/3 locations in your portfolio, and/or your views on how the tier-2/3 delivery landscape will evolve in the coming years. Connect with us at [email protected], [email protected], or [email protected].

And keep your eyes peeled for an upcoming blog on how tier-2 and -3 delivery locations can support organizations’ business continuity planning efforts.

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