Tag

tier 2/3

Can Indian Tier-2/3 Cities Fit the Bill for Digital Services Delivery? | Sherpas in Blue Shirts

By | Automation/RPA/AI, Blog, Shared Services/Global In-house Centers, Talent

India continues to offer an attractive service delivery location proposition for global companies, given its unique combination of a low-cost, scalable English-speaking talent pool, and the breadth and depth of available skills.

As the global digital services industry matures, and with increasing competition in the tier-1 cities, companies are looking to reduce the costs of talent and access additional untapped talent pools for digital services delivery.

Can tier-2/3 cities in India fit the bill? Let’s start by looking at the current state of digital services delivery in these cities.

Existing Landscape

Today, India is the largest destination for digital services delivery, with 75 percent of the market. Tier-2/3 cities in the country currently hold 14-16 percent of the market share, and we expect this proportion to grow by 15-20 percent in the next couple of years. Ahmedabad, Chandigarh, Coimbatore, Indore, Jaipur, Kochi, Lucknow, T-puram, and Vadodara are the top nine tier-2/3 locations, accounting for 55-60 percent of the digital services headcount in tier-2/3 cities.

Tier-2/3 cities are mostly leveraged to provide social & interactive (41-43 percent), cloud (21-23 percent), analytics (16-18 percent), and automation (10-12 percent) related services. When it comes to sophisticated digital technology services, such as cybersecurity, mobility, and Artificial Intelligence (AI), service providers still prefer tier-1 locations such as Bengaluru.

Major digital services Tier 2 3 blog

Now, let’s evaluate how tier-2/3 Indian cities’ value proposition stacks up against tier-1 cities.

 

What’s ahead for India’s Tier-2/3 Cities?

 Here are some of the key findings from our recently published report, “Will Tier-2/3 Indian Cities Carve a Niche in the Digital Story?

  • Tier-2/3 cities will continue to be leveraged predominantly as spokes to major hubs in tier-1 cities for the next two to three years
  • Because of a lack of skilled talent, delivery of advanced digital services such as machine learning, cyber security, and mobility from tier-2/3 cities will remain a distant dream for the next few years
  • An increasing number of enterprises will set up global in-house centers (GICs) or shared services centers for delivery of digital operations, due to increasing confidence and improvements in infrastructure quality
  • Reskilling/upskilling for digital capabilities will be paramount for companies operating in these cities
  • A few large service providers will invest in training talent, and benefit from early mover advantage by becoming distinguished employers in a less competitive market

To learn more – including the metrics around availability of talent, market maturity, cost of operations, business and operating risk environment, and implications for market participants including buyers, service providers, investment promotion councils, and industry bodies – please read our recently published report, “Will Tier-2/3 Indian Cities Carve a Niche in the Digital Story?.” We developed the report based on deep-dive discussions with leading shared services centers, service providers, recruitment agencies, and other market participants.

The second league rules in BPO | In the News

By | In The News

For the first time, smaller business services centers have won with the leaders. Thanks to Brexit they will grow even more.

This was not yet the case in the business services sector. Although investors have always chosen not only the most popular Kraków, Warsaw and Wrocław, but also a few smaller cities in Poland, in the first half of 2017, for the first time the second and third league attracted almost 70 percent. all new service centers – according to the Everest Group report.

Read more in Forbes

Onshoring, Talent Development, Automation – My Top 10 Picks from RevAmerica 2015 | Sherpas in Blue Shirts

By | Blog, Onshoring, Talent

Last month I had the opportunity to attend and co-present with Eric Simonson at a special event in the outsourcing sector, RevAmerica 2015, held in New Orleans, LA. You can download our keynote presentation here. For those who might not know, RevAmerica is a domestic outsourcing event in its second year. The event focused on a multitude of topics and was attended by a strong community of service providers, buyers, economic development agencies, analysts/consulting firms, and academic institutions. Here are my top 10 takeaways from the event:

  1. Buyers are looking at their IT and BP service delivery portfolio more holistically than ever and asking the shoring question more seriously. They are willing to evaluate onshoring as an alternate and in some cases willing to even bend their rules around cost savings to get the extra flexibility in delivery.

  2. Service providers have a major role to play in onshoring growth as they can not only harness the available talent pool, but also create a delivery model that makes economic sense.

  3. Domestic pure-play service providers are diligently making the business case for onshoring. The ones that do this without demeaning the offshoring benefits are likely to be more successful in not only winning pursuits, but also in sharpening their own value proposition for buyers. In this regard, I liked Genesis10, Nexient, and Rural Sourcing’s approach that are playing on the strengths of onshoring rather than making unnecessary comparisons with offshoring.

  4. Economic development agencies (EDAs) are evolving in their thinking and go-to-market approach. Those who are serious about this sector, such as North Dakota Dept. of Commerce and Louisiana Economic Development (LED), have a more collaborative approach towards working with providers/enterprises. However, there is a lack of collaboration among economic development agencies for the common goal.

  5. Talent development continues to be an area of immense interest. Partnership with universities, training/re-skilling programs to create talent in places where people have limited opportunities, and hiring veterans and their spouses are all examples of initiatives to strategically develop the available talent for domestic sourcing. A great example of this is the partnership between IBM, LED, and LSU College of Engineering where State of Louisiana will invest in the institution to expand higher education programs in order to increase the annual computer science graduate output to support IBM’s delivery center in Baton Rouge.

  6. Tier-3 cities are the epicenter of activity in the domestic sourcing space, with maximum centers and headcount located in this cities. They are also the ones that will see maximum growth in the future, but we should watch for saturation trends.

  7. The buzz around robotic process automation (RPA) is getting stronger, especially in the context of domestic sourcing as onshore providers can compete with the offshore labor arbitrage model by harnessing the potential of RPA (where applicable).

  8. The role of educational institutions has to increase to make onshoring a compelling alternative in the eyes of both providers and buyers. EDAs can only promise sustainable talent pool, but not deliver it unless educational institutions show the flexibility and support at a sustained, tactical level – implying changing curriculum, adding industry interaction programs, etc. while still serving the overall mission.

  9. Agile methodology and its implications for working models for IT teams are a great blessing for the onshore model. However, agile can only be one of the selling points. Domain expertise, ability to ramp up/ramp down, technology expertise, and cost of delivery are all factors for evaluating a provider’s capabilities in the onshore context.

  10. The notion of “domestic sourcing = impact sourcing” is flawed. Beyond generating jobs for the underprivileged, domestic sourcing’s larger mandate is to create jobs for the unemployed educated people of the country. There are some domestic sourcing plays such as Onshore Outsourcing and Liberty Source that are doing impact sourcing in an onshore model.

Overall the event touched upon some very relevant topics from the domestic outsourcing perspective and is paving the way for developing a stronger ecosystem to support this sector. Kudos to the Ahilia team for organizing a great event! Last but not the least, in case you are interested in learning more about the domestic outsourcing landscape, you can download Everest Group’s full report here. You may also want to read Eric’s blog on tier-3 cities: John Mellencamp Named Honorary Everest Group Analyst of the Month.


Photo credit: Omni Royal Orleans

John Mellencamp Named Honorary Everest Group Analyst of the Month | Sherpas in Blue Shirts

By | Blog

“Well I was born in a small town
And I live in a small town
Prob’ly die in a small town
Oh, those small communities

All my friends are so small town
My parents live in the same small town
My job is so small town
Provides little opportunity

— John Mellencamp, Small Town (1985)

Turns out Mr. Mellencamp was a pretty good analyst when it comes to assessing global services employment opportunities in small communities. So much so, that I am officially naming him as “Honorary Everest Group Analyst of the Month.”

No, I am not smoking something.

We just completed a first of its kind analysis of the U.S. Domestic Outsourcing location landscape for RevAmerica and finally have the key facts the industry has been lacking. In short, although smaller communities are sometimes used for service delivery, the reality is that the vast majority of the market is concentrated in larger communities with populations measured in the 100,000s vs. 10,000s. In particular, tier-3 cities are the sweet spot…the largest number of centers, the largest employment, and the largest centers.

Defining the city tiers

In order to analyze approximately 250 metro cities, we segmented them into six groups – tier-1 through tier-5 plus rural. As indicated below, the city segments are characterized by differences in population size plus commercial and educational factors.

Location Definitions

Although only one dimension of a city’s potential for service delivery, it is easy and revealing to look at the differences in average population size of the city tiers. Each city tier is 20-40% of the population of the next larger city tier, which leads to a dramatic difference in the profile of cities that are 2-3 tiers different from each other.

Population of city tiers

It’s good to be a tier-3 city!

One of the most interesting findings from the research was the extent to which tier-3 cities dominate on almost every dimension. As shown in the exhibit below, they have the largest share of FTEs and delivery centers of all cities. Further, their centers are on average larger than any other city tier.

Distribution of FTEs and US delivery centers by city-tiers

Additionally, tier-3 cities have the largest portion of multi-function centers (some combination of IT, business process, and contact center) and are the centers which are expected to grow the most in coming years.

Given that tier-3 cities average one million in population, most are surprised that cities of this size are driving the growth of domestic outsourcing delivery – many would expect smaller cities to be the primary forces. So why are tier-3 cities favored?

In short, we believe this is due to three factors which work in combination with each other:

  • Sufficient cost savings: Relative to tier-1 cities, tier-3 cities offer 15-20% savings; moving to tier-4 cities may only offer 5% more savings and in many cases is either cost neutral or even higher cost than a tier-3 city.
  • Enough talent: With nearly one million in population, the installed base of experienced talent is sizeable. Further, most tier-3 cities have large colleges which produce fresh talent for the entry labor force. Combined with the life style benefits of a larger city (airport, entertainment, shopping, etc.), tier-3 cities have the ability to both keep talent and to attract talent from other cities – either smaller or larger cities. Not everyone would want to live in New York, NY; similarly, many people could not imagine living in a town of Midland, MI (a town of roughly 50,000). However, many people could be comfortable in a city of one million.
  • Accessible: Although the idea of a remote, small city may seem attractive in order to capture an isolated labor pool, this doesn’t hold up well when assessed in detail. First, even small communities have competition for talent plus limited talent pools – costs can quickly spiral up. Second, the practical logistics of transit to these small cities creates an inconvenience that most organizations wish to avoid (especially for IT service delivery, requiring more cross-center collaboration). Most tier-3 cities are connected by direct flights to other major business centers within two to three hours of flight time.

In other words, tier-3 cities have an attractive mix of cost savings and talent, while still being comparatively easy from an operational perspective. This is broadly true, but less true for pure contact center work which can more easily operate at scale in tier-4 cities and even some tier-5 cities due to the broad labor pool which can fill contact center roles.

So, would Mr. Mellencamp’s small town have been a viable service delivery location? He is from Seymour, Indiana, with a population of about 16,000 – clearly a rural community by our definition. Highly unlikely many organizations could operate an IT or business process center of 200 FTEs in Seymour, although a smaller contact center could be viable. So, yes, there might be jobs…but little opportunity…

Also check out my co-presenter Sakshi Garg’s top 10 takeways from RevAmerica.


Photo credit: Flickr

Tier-2/3 Cities’ Growing Attractiveness as Promising Locations to Deliver Global Services – Can Runners Up Be Winners as Well? | Sherpas in Blue Shirts

By | Blog

The broad picture

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.

Distribution of set-ups by Tier-1 and 2 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’s tier-2/3 city story

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?

Philippines: moving beyond Manila and Cebu as delivery locations

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?

Dimensions for operationalizing a tier-2/3 delivery center

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!

Slow Growth of GICs… Is the Model Losing Its Sheen? | Sherpas in Blue Shirts

By | Blog

The Global In-house Center (GIC, formerly referred to as captives) market was once thriving with unprecedented statistics – 97 new GIC set-ups in 2009, 105 in 2010, and 103 in 2011. Then there was a dip, with only 75 new centers in 2012, and 69 in 2013. This, coupled with numerous acquisitions of GICs by service providers, (e.g., KBC Group’s financial arm by Cognizant, Bayer’s Indian IT operations by Capgemini, and Hutchison Whampoa’s India-based call center operations by Tech Mahindra), is likely to raise questions and concerns about the future of the in-house model.

GIC Landscape Report 2013-I1

Let us look at the ground realities of the GIC model’s growth and evolution:

  • Indeed, the rate of growth of GIC set-ups has slowed down. However, this can largely be attributed to a weak economic scenario and slow decision-making cycles, and should not be construed as weakening confidence in the GIC model. As the future outlook of the global economy is positive, we expect the GIC market to gain momentum in the near future
  • Established GICs are evolving in their journey to be a partner of their parent firms, rather than just an offshore cost-saving entity
  • The success of the GIC model in pioneer delivery locations such as India and the Philippines is leading buyers to explore and diversify to other locations
    • CEE countries are witnessing increased activity due to aggressive government incentives, the language advantage, and the nearshore proposition
    • Relatively untapped regions in the Middle East and Africa reported an astonishing eight GIC set-ups in the last year alone
    • Firms are expanding their GIC operations to tier-2 and 3 cities due to saturation in tier-1 cities in mature locations such as India

GIC Landscape Report 2013-I5

  • While the technology, manufacturing, distribution and retail, and BFSI industries continue to have a strong foothold, other verticals – such as conglomerates, business services, hospitality, and printing and publishing – have emerged to gain a noticeable share of the GIC market.

Further, while buyers’ moves from an outsourced to an in-house model rarely receive considerable fanfare, they do paint a picture of the health of the GIC model. For example, HP had been General Motor’s main IT vendor per a US$2 billion contract awarded in 2010, but in 2012 the automaker decided to insource a huge amount of its services as part of its new strategy, leaving HP with only a few. AstraZeneca plans to reduce its outsourcing work, which is currently spread across multiple Indian software service providers. BT plans to have more control of its processes by taking back its outsourcing contracts from service providers, and increasing its capacity in existing shared services centers in India and Malaysia.

The bottom line is that while GIC set-up growth may be slowing, the model continues to be an integral component of organizations’ sourcing strategy. Firms continue to leverage both sourcing models (service providers and GICs) based on best fit with their sourcing needs, cost and value objectives, and services demand profile.

For more insights on the GIC model landscape, please refer to our recently released report “Global In-house Center (GIC) Landscape Annual Report 2013.” The report provides a deep-dive into the GIC landscape and a year-on-year analysis of the GIC trends in 2013, comparing them with trends in the last two years. The research also delivers key insights into the GIC market across locations, verticals, and functions, and concludes with an assessment of strategic priorities for GICs.