Explore the Tale of Tier 2 Cities for IT Outsourcing Options

If you're not thinking about Thiruvananthapuram, India today, you might be soon. Along with Bhubaneswar, Indore, Madurai, Mangalore and Secunderabad, just to name a few other second-tier IT service provider possibilities.

By Stephanie Overby
Fri, March 15, 2013

CIO — IT outsourcing providers are increasingly setting up operations in so-called tier-2 cities to decrease their cost of delivery and access new labor pools.

[Related: The Best (and Worst) Countries for Cloud Computing]

"As offshoring grows, most leading offshoring destinations face pressures around availability of talent, escalating salaries, rising real estate prices, and high competitive intensity," says H. Karthik, vice president with outsourcing consultancy Everest Research.

"Service providers keep pushing the forward envelope in terms of locations to preserve-even if partially-their margins against significant pressures from their customers," says Karthik

"Companies needing a broader range of services from their provider should stay with the primary locations, as the tier-2 locations are still largely focused on providing specific services."

Rakesh Bhatia, Pace Harmon

Many tier to cities are also home to prominent universities and research labs, says Alan Hanson, senior vice president with outsourcing consultancy Neo Group.

In some cases, it's customers who are asking outsourcers for options outside the big cities in the hopes of taking advantage of the cost benefits or diversifying their geographical risk, adds Karthik.

According to the Neo Group's Global Supply Risk Monitor report, the macro-economic risk of Pune, India, for example, is lower than leading outsourcing cities Bangalore, Chennai, Hyderabad, and Kolkata. Rental costs in the central business districts of tier two cities in Latin America are 25 cheaper than in tier one cities.

A company that sets up an outsourcing center in Lodz or Poznan in Poland can expect total operational savings of 20 to 30 percent over Warsaw and Krakow, according to Everest Group.

In addition, state and local governments often adopt initiatives to promote growth in up-and-coming hubs. In China, for example, the Government of Hubei province has set up a special supporting fund of US$ 16 million for the development of the services industry in Wuhan, according to Neo Group.

[Related: Is it Now Crazy to Offshore IT to China?]

Tier-2 activity is robust in Central and Eastern Europe, Latin America, India, and China. Outsourcers are setting up shop in Kochi in India, Iasi in Romania, or Campinas in Brazil, to escape the increased competition of the tier one centers in Bangalore, Bucharest, and Sao Paolo. In Mexico, Guadalajara , Hermosillo, Queretaro, Ciudad Juárez, and Culiacán are becoming as attractive as Mexico City or Monterrey.

Tier-2 locations in the United States are growing particularly active in the outsourcing space as well. "In the U.S., the move towards tier-2 cities is driven by the growing need or preference for more onshore resource from customers," says Karthik.

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