Arbitrage is generally sustainable for most locations and functions, but timing varies
Arbitrage is generally sustainable for most locations and functions, but timing varies
With both buyers and service providers increasingly understanding the benefits of tier-2 and 3 cities in their quest for greater cost savings and access to additional talent, these lower tier locations are witnessing significant growth in new set-ups and expansions.
Companies typically look for at least 10-15 percent additional cost savings over tier-1 cities to justify the business case for moving to tier-2/3 locations. But to achieve their goals, they must create a sustainable business case considering both benefits and trade-offs, e.g., a decrease in operating costs versus an increase in management overhead, and entering an established market late versus entering a relatively nascent market.
Some argue that additional cost savings over tier-1 cities can also be realized by expanding into peripheral areas within tier-1 locations (e.g., Pune/Hinjewadi and Mumbai/Navi Mumbai, versus Coimbatore, Ahmedabad, Jaipur, and Bhubaneswar) or in existing tier-1 locations through scale economies. But the “right” answer here is highly context-specific, and depends on an organization’s specific needs and priorities. For example, a company battling for talent in a tier-1 city will not benefit much by expanding to peripheral locations but can access to additional talent by setting up in tier-2/3 cities.
Central Eastern Europe (CEE) and Latin America (LATAM) both had more global services delivery set-ups in tier-2 cities than in tier-1 cities in 2012-2014 H1. Although increased activity in tier-2 locations is a relatively recent trend in Asia Pacific (APAC), it is fast catching up with the highest number of tier-2/3 set-ups among all three regions during 2012-2014 H1. Global in-house center (GIC) and service provider activity in APAC is concentrated in India, but distributed across multiple locations in CEE and LATAM. The above chart presents the top five tier-2 locations in each region.
India continues to be an attractive offshore destination for global companies, given its unique combination of low cost, scalable talent pool, and breadth and depth of available skills. Tier-2/3 cities add to the value proposition by providing additional cost savings of 8 to 12 percent (for IT services), due to lower facilities and other operational costs.
With higher concentration risk in tier-1 cities, it is becoming increasingly important for enterprises and service providers to access talent from tier-2/3 cities.
For more information, download a complimentary preview of Everest Group’s recently released report, Tier-2/3 Locations in India for Offshore IT Services Delivery – Does Reality Meet the Hype?
While the Philippines’ key tier-1 cities (especially Manila and Cebu) are becoming saturated, the proliferation of tier-2/3 cities offer a strong proposition. Emerging tier-2/3 cities – e.g., Dasmarinas, Malolos, Iloilo City, and Baguio – contribute 30 to 40 percent of the relevant graduate pool, and for IT-BPS offer a cost differential of 10 to 25 percent as compared to Metro Manila.
For more information, download a complimentary preview of Everest Group’s recently released report, Is Philippines Stepping Up to Lead the Industry into the Next Horizon of Global Services?
Operationalizing a center in tier-2/3 cities and successfully deriving the above-mentioned benefits requires a slightly different approach than in tier-1 locations:
Talent hiring strategy: Companies need effective talent strategies to meet the needs of experienced personnel who often need to be relocated. They also need appropriate employer branding to capture mindshare in local colleges and universities.
Client engagement and contract type: To optimize costs and improve profitability, tier-2/3 cities are likely better suited to deliver work for existing (rather than new) clients/modules.
Operating model:Tier-2/3 cities can serve as self-sufficient centers directly handling clients, and can also be structured as a spoke to tier-1 cities in certain cases.
Creating an ecosystem: Companies need to invest in infrastructure, the social living environment, and the delivery ecosystem in order to successfully operate a tier-2/3 city set-up.
Many tier-2/3 cities options with multiple benefits and opportunities are available across various regions and countries. But enterprises and service providers must take into consideration multiple associated challenges – e.g., scalability, lack of enabling environment, trade-offs with peripheral cities, and lesser breadth of skill sets – before setting up or expanding their operations in these locations. A commercial-driven business case may not be enough to evaluate these cities; what is needed is a risk-reward assessment!
Hope you enjoyed solving the India GIC landscape crossword we posted last week. Below is the answer key to it. (Download a printer-friendly version of the answer key.)
|Texas Instruments and GE were among the first entrants in the GIC landscape|
|None. GIC divestiture activity has seen a decline in recent years after peaking in 2011 and 2012|
|India has dominant share in the GIC market in terms of revenue (~50%), number of delivery centers and headcount|
|Mumbai has the least number of GICs among tier-1 cities in India|
|United States-headquarteredfirms have more than 60% share in the Indian GIC landscape|
|Share of United Kingdom-based firms setting up GICs in India has declined in the last 2-3 years|
|GICs were formerly known as captives|
|Telecom is the 2nd largest vertical after BFSI in terms of average headcount|
|BFSI is the largest vertical in terms of overall GIC headcount in India|
|Technology is the leading vertical in terms of number of GIC set-ups in India|
|Bangalore has the maximum number of GICs in India|
|Pune is the leading tier-2 city in terms of number of GICs and has seen lot of GIC activity in the recent past|
|Companies started GICs to capture cost arbitrage|
|Outsourcing to service providers in an alternative to the GIC model|
|Engineering services is the leading function delivered by GICs in India|
|Value beyond arbitrage|
|Within the Energy & Utilities vertical, Europe-based firms have highest share|
|ADM (Application Development & Maintenance) is the topmost sub-function within IT|
|Kochi is also seeing GIC activity among tier-2 cities in India|
|Cognizant acquired ValueSource NV, a subsidiary of KBC Group|
Photo credit: Taki Steve
Over the last 18 months, we have seen a significant shift in the global in-house center (GIC) location strategy of UK-based firms, with many more embracing Central and Eastern Europe (CEE) over offshore countries for their GICs.
Factors driving the growth in nearshore locations include:
Some of the popular nearshore locations being leveraged for IT, F&A, and call center (CC) services are depicted in the diagram below:
While some companies are leveraging their existing nearshore offices and expanding them into GICs, others are setting up greenfield centers. Recent examples of new GIC set-ups by UK firms in nearshore locations include:
What are the implications of this trend? Are we saying offshore locations will lose their draw for UK-based buyers? Certainly not! Although the CEE region will continue to maintain its growth momentum, several factors will still drive GIC activity in offshore geographies among UK buyers:
Beyond the traditional offshore locations, there is increasing acceptance of South Africa, Egypt, and Mauritius as delivery locations for UK and other European buyers due to accent similarity and strong cultural affinity. But the battleground is now definitely becoming hotter between nearshore and offshore locations.
For more insights into the GIC space, please see the following additional Everest Group research:
Photo credit: Charles Clegg
India Accounts for the Lion’s Share in the GIC Market
India remains the key global GIC location; maintains its leading position over other locations such as China, Costa Rica, Malaysia, Philippines, and Poland
We recently published a report on the Global in-house Center (formerly known as captives) landscape in India that provides comprehensive coverage of the GIC landscape in the country. (Download a complimentary preview deck of the report.) India is now home to 700+ GICs delivering a range of IT, business process and engineering services to buyers globally. Would you like to know more key insights from this report?
Let’s play a game!
Below is a crossword that captures 20 key insights from the report. (You can also download a printer-friendly version of the crossword.)
Stay tuned! We will post the answer key in a few days.
Photo credit: Jessica Whittle
If you said Asia Pac, great … but do you know what APAC is particularly good at? And do you know about available alternatives beyond APAC?
We all know location is half the battle (possibly the entire battle). But location selection is difficult – it’s not just about cost arbitrage, talent scalability, and sustainability, but also linguistic and cultural affinity.
The most mature location may not be the best fit for your company or your industry, and you definitely can’t toss a dart and hope to find the right location.
Here’s the battle plan – a map of GIC “hot spots.” Need multi-lingual support? Check out Central & Eastern Europe; Poland alone delivers services in more than 34 foreign languages. Need support in the Technology and Telecom industry? You might want to take a look at MEA (Middle East & Africa). While you’re there, check out Latin America, India, and the rest of Asia, too.
Click on the map to expand the image
Looking for more information on GICs? Check out these three resources: