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.

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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