Monday, February 16, 2009

The Next Generation Boom in Services Industry

An article originally intended for L!VE, our student magazine @ SJMSOM:

Working in one of India’s leading software services exporters, what will be your reaction if you were to be transferred to Belapur? Confused. You shouldn’t be, if these are any indications of the times to come. Welcome to the next generation of expansion in the software service industry. The software industry of Bangalore, Mumbai and Gurgaon is now moving deeper into the country. The new centers of information technology are no longer the big metros but low cost centers like Jaipur, Trivandrum and Chandigarh.

Unsurprisingly, the high cost of operation in the metros coupled with the high rates of attrition prevalent among the leading companies has made them look other places for a better option. The Tier II cities have a distinct advantage in this regard for many companies. The reported cost differential is around 10 percent for non-voice based services and higher for voice based services create a huge margin of operational profits for the firms. Also, thanks to the large population of the country and increasingly effective education system, the number of university graduates coming from these cities is enough to take care of the major manpower requirements for the companies.

All major outsourcing companies have scouted out new locations, away from the hustling bustling metropolitans to locales such as Kochi, Baroda and Coimbatore etc. These include companies like Wipro Spectramind, Infosys Technologies and Cognizant Technology Solutions. Kochi and Coimbatore are coming up as feasible alternatives to Bangalore and Chennai in south, while Pune has already cemented its place in the outsourcing pantheons because of its close proximity to Mumbai and its rich educational system, providing close to 1,00,000 graduates every year, acting as an essential resource pool for the companies.

One another reason associated to moving to Tier II cities is the low cost of transportation involved in the cities, because of their small geographical stretches and comparatively low count of vehicles compared to outsourcing hubs. The average employee starting out in the service industry is a college graduate, who mainly relies on public transport for commutation to the workplace. As an unwritten rule, the companies have decided to include transportation costs as part of the compensation packages, providing for company buses and cabs, which again hit the operating margins of the companies. Though the outsourcing industry has funneled in loads of money into the metropolitan cities, the infrastructure development has been unable to maintain pace with the rapid growth and the lack of development in transport facilities are not helping the cause of these cities.

An additional impact of the gradual shift towards Tier II cities has been the entry of many smaller service providers, specially the ones catering to niche sectors like high-end data analysis. The Tier II and Tier III cities make the entry level costs of these companies substantially less and are fostering the entrepreneurship ventures of many technology specialists. The presence of sufficient talent pool in these cities helps these firms by reducing their attrition rates and hence, their training and recruitment costs are also going down, further promoting the cause of the Tier II cities.

However, all is not well with the migration plans of these companies. The primary concern of all the companies is the infrastructure related issues that generally accompany the Tier II cities. The doubt that whether the smaller cities will be able to rise over the infrastructure handicap and dicey connectivity, to actually make the small city boom happen still looms large in the minds of the senior management of many companies. It is estimated that 30% of the workforce of all leading IT/ITES companies is going to be based in these Tier II and Tier III cities. Hence the onus is on the respective public bodies to develop the amenities in these places to provide for the large workforce.

Another area of concern for the companies is bringing quality talent to these cities, especially with respect to the senior management and experience middle management employees, to these smaller cities. Obviously the promise of better work-life balance is not a good enough reason for these executives to relocate to these new situations and hence, companies might be forced to offer relocation bonuses or other such perks to facilitate the shift of work force to the new places. Also, an interesting trend that has been observed in the recent recruits is that, they do not want to leave the glitz and glamour accompanying a metropolitan city for relocation for some nondescript city offering little or no life outside office hours or during weekends.

Another major impact of this relocation to smaller centers in the country will be a more symmetric distribution of the outsourcing pie between the large hubs and the fast catching up wannabes. The recent years had seen a skew in favor of the metros, with the retail and real estate booms in the city projecting them as the face of modern India. These recent developments will enable the smaller players in this field to develop their own identity in this market and present a more representative picture of modern India. Already signs to this effect are visible with an increase in spending by real estate giants in these centers and the entry of retailing giants like Reliance and Big Bazaar in these cities. The development of these new consumption centers is also good for related sectors of manufacturing and allied services, giving them further impetus for growth.

However, none of this is going to happen in near future. The challenges are still clear for all of us to see. Firstly, the infrastructure needs a great impetus from the government. It is heartening to see projects like the Golden Quadrilateral being visualized because they will improve connectivity of the smaller cities with the outsourcing hubs. Also, the telecom revolution in the country should help ensure that the network and data connectivity are maintained at requisite levels for the companies to show confidence in these cities. Finally, the public amenities need to be improved to attract the skilled labor into these cities rather than switching jobs in the major cities themselves. The rise of latent talent and potential in the smaller cities is not under any sort of doubt, it is just the timing of the event that is debatable. The sooner it happens, the better.

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