In the past decade, India has emerged as the top outsourcing destination in the world. India's share in the global outsourcing industry had increased to 55% in 2010 from 51% in 2009. Large numbers of skilled human resources, cost-effective solutions, flexible labor laws, enhanced productivity, and excellent quality of business process services make Indian cities such as Delhi, Mumbai, Hyderabad, Kolkata and Bangalore preferred destinations for outsourcing. However, these cities are now facing stiff competition for both back-end and front-end outsourcing from emerging destinations such as the Philippines and Thailand. A number of companies have moved to these countries looking for greener pastures. However, the emergence of Tier II Indian cities as new outsourcing hubs has stopped the outflow and unveiled better options for outsourcing majors.
The Philippines has emerged as the 2nd most-preferred outsourcing destination in the world and is slated to beat India by early 2012. Manila, Cebu, and a number of 2nd-rung cities have become the backbone of the $13 billion BPO industry in the country. Less expensive labor, low operational costs, recognition of English as an official language, and affinity to American culture make the country a favored destination for US outsourcing firms. Thailand's position as the top outsourcing destination in the ASEAN region makes it another global player in the field. Its liberal economic laws, low cost of living, proximity to China, government support, and 2015 ASEAN liberalization policy offer veritable opportunities for service sector BPOs.
The recent emergence of Tier II Indian cities such as Jaipur, Kochi, Bhubaneswar, Mangalore, Thiruvananthapuram, Ludhiana, Dehradun, Pune, Nasik, Bhopal, Mysore, and Chandigarh, has almost offset the price advantages that the Philippines and Thailand offer to the outsourcing industry. People in these cities are as skilled as those in Delhi, and can be recruited with minimum expenditure on training and salary—even less than companies pay in Manila or Bangkok. The average salary of a BPO worker in Dehradun is just one-third of the pay offered to a worker in Delhi or Gurgaon. The distance between the two cities is less than 300 km, which makes coordination, moving, communication, and employee monitoring easy from the head office in Delhi.
The low real estate price in Tier II cities and low cost of investment also help companies cut down their operational costs. They do not have to pay high rents, and spend less on employee conveyance, as the Tier II cities are small compared to the big metros. Local governments also offer incentives and fast processing of applications to boost investments, which cut costs and increase profits for the BPO industry. Outsourcing firms can pass on the benefits of cuts in establishment costs to clients. Most Tier II cities in India have good educational facilities, though employment opportunities are fewer for the large numbers of skilled professionals graduating every year. Outsourcing companies can take advantage of this fact and recruit skilled employees at lower salaries—a big advantage for sustained profitability.
Low operational costs are not the only benefit that Tier II Indian cities offer to outsourcing companies. Other factors such as political stability, better infrastructure and security, links to quality IT services, high educational standards and stable labor conditions give these cities an advantage over their Philippine and Thai counterparts. Firms can get capable people who can handle KPO operations, R&D activities and IT-related services at low cost and minimum training. Again, effective patent laws and the presence of a highly-admired domestic IT sector provide support for outsourcing establishments opened in non-metro cities in India.