Bangalore has always been a favourite business process outsourcing (BPO) location for various reasons—relatively cheap labour, proper infrastructure, availability of qualified local talent, and adequate support from the government.
A report, “Location roadmap for IT- BPO growth: Assessment of 50 leading cities” by National Association of Software and Service Companies (NASSCOM), along with A.T Kearney has classified Bangalore as a leader among the 50 leading cities on the IT-BPO road growth. With other cities in India and abroad catching up with Bangalore, what is Bangalore's future as a leading BPO destination? Is there a need to panic?
Som Mittal, President, NASSCOM said that the development of only a few select set of cities has put severe pressure on the infrastructure, costs and also increased migration of resources. He added that the success of these cities as BPO centres would depend upon the speed and commitment with which the local city and state governments will work to fill up the gaps identified.
Bangalore had the right ingredients for the flourishing IT-BPO industry in 2000. Whitefeld provided ample space to the BPOs to expand as space rentals were low. Hosur Road housed the Electronics City and the Karnataka industrial areas development board industrial layouts. However, with infrastructure unable to match the growth of the industry, only a few companies developed further in the area.
According to Som Mittal, although Bangalore leads the BPO sector with nearly 30% of India's BPO business, the city is not an attractive destination in terms of operational costs. Even though Bangalore is not losing its power to attract BPO business, the important fact is that the companies have a wider range of options, with other locations competing with Bangalore.
The NASSCOM-A.T Kearney study lists cities such as Chennai, Hyderabad, Kolkota, Mumbai and Pune as top BPO destinations. Cities such as Ahmadabad, Coimbatore, Madurai, Mangalore, Thiruvananthapuram and Nagpur are listed as challengers. Cities such as Bhopal, Mysore, Kanpur, and Goa are listed as followers.
The study has recognised Coimbatore for its BPO potential, which was noticed when Cognizant Technologies set up their facility in 2005. Coimbatore boasts of the lowest attrition rates compared with other metros. However, real estate, which was one of the competitive factors, has also increased over the last few years. Another limiting factor may be its slow pace of life, much to the dismay of its young BPO crowd.
A Gartner report entitled “IT outsourcing to India - Analysis of cities”, states that Hyderabad and Chennai may replace Bangalore and Mumbai as preferred destinations for IT outsourcing by 2010. The report is based on factors such as infrastructure, skills availability, skills retention, access, cost of living, political support and quality of life.
The report classified Bangalore, Mumbai and New Delhi under tier 1, Chennai, Hyderabad, Pune, Noida, Gurgaon and Navi Mumbai under tier 1-1, and cities such as Kolkata, Mangalore, Mohali, Chandigarh, Bhopal under Tier 2.
The main cause of concern for Bangalore as a BPO destination is lack of infrastructure. According to experts, Tamil Nadu and Andhra Pradesh have given priority to infrastructure development. Cities such as Chennai have better infrastructure as the cities were planned taking into consideration the long term interests of the industry. Major infrastructure developments including widening of the road and construction of the 9-kilometre elevated road, which is expected to be ready this year, are believed to ease traffic congestion towards Electronic City.
Can Bangalore look forward to improving its infrastructure to meet the projected growth? The state financial budget for the fiscal 2008-09 has estimated an investment of Rs 36,000 crore ($8.4b) for addressing infrastructure problems in Bangalore in the next 5 years, towards which the government has allotted Rs 1,800 crore ($420.8m). However, the chief minister (CM) B S Yeddyurappa, admitted that an investment of this scale was possible only through public-private partnerships (PPP). CM’s take on PPP initiatives has passed the buck to the IT-BPO sectors. While the plan looks good on paper, it is to be seen whether an initiative of such magnitude can take off.
While competition at home may not sound as threatening, there may be more causes for worry from foreign players trying to grab a share of the pie. The BPO scene is fast changing for the Indian BPO industry as for several foreign players that have entered the market.
The value of BPO business globally stands at $287 billion, according to international research firm McKinsey. The business is expected to grow at the rate of 19.3% this year. Research, however, shows that costs have been rising rapidly in India, forcing most multinationals to look elsewhere.
According to NASSCOM, the Indian IT industry, which has been showing impressive growth rate in recent years, may slow down in the next fiscal due to competition from China, the Philippines and Sri Lanka.
Everest Research Institute in its report “Global Sourcing - Market Vista Q1 2008” said that the cost inflation in Indian cities is exceeding the 2007 levels and has increased the risk of other markets exploiting the differences in operational costs. Rising costs may erode India’s dominance in the BPO sector.
Indian BPO centres are under constant threat from newer locations such as China, Philippines and Eastern Europe. According to the Everest report, the industry players are continuing to expand and the competitive strength for talent did not change. Further, the consumer price is at an unprecedented high since 2004, resulting in rising pressure on wages.
However, BPO locations like Argentina, Brazil and Mexico have their own share of woes. In Brazil, the appreciation of its currency Real has reduced its global advantage. Mexico, where major Indian companies like Infosys, Wipro and even MindTree are setting up their development centres, may experience pressure on expansion due to labour problems.
Although the governments in Eastern Europe and Philippines have been supporting their IT industry by providing incentives, they face stiff competition from newer destinations like Thailand, El Salvador, Paraguay and Honduras.
Although China continues to grow as a potential off shoring destination, China based suppliers are small players compared with the BPO giants in India. Other negative factors include low service maturity and difficulty in English language. According to a Forrester study, “China's realistic offshore role separating the hype from the market reality” by John C. McCarthy, China may not be competition to India. China may play a different role altogether. The country may develop as a BPO center to support customers’ Asian operations, as a hub for companies with large operations or headquarters in Japan, Hong Kong, or Korea, and as a global risk diversification player beyond India for multinationals.
According to a Forrester study by Bill Martorelli, “Latin America is best suited for a complementary offshore role”, the attractiveness of several Latin American destinations has recently increased. However, Latin America's collective long-term role is likely to be at best a complementary destination in combination with India and other emerging locales as a large volume of Latin American activity still focuses on domestic requirements instead of exports.
Canada and European countries encounter problems of high wage rates in spite of their excellent business environment. Meanwhile, Malaysia is also threatened by problems like the unpopularity of BPO jobs.
Kenya was in news recently for closing down of its call centres. In spite of the government’s plans to promote Kenya as the next BPO hot spot in Africa, the call centres may close down due high operational costs and limited access to international contracts.
The main reason is the failure by the government to sanction a bandwidth subsidy plan, which could have cut down the operational costs. This is blamed on the delay in introducing marine fibre optic cables to give high speed and cheap access to the internet.
Even though the number of BPOs being set up in Bangalore has decreased, experts point out that this could be attributed to the state of economy and elections in the US. According to Som Mittal, the growth projections of the industry indicate that even the seven existing centres including Bangalore will see significant growth. However, this would need proactive planning and meticulous execution to support this growth.
For Bangalore to fully utilise its potential, it is important to lay emphasis on trimming operational costs, manage increasing compliance and regulatory requirements, offer competitive prices, and remodel the services into global services oriented business model and address challenges related to attrition, lack of skilled staff across various developed markets. NASSCOM proposes improvement of infrastructure for roads, highways, mass-transit systems, power, water, accommodation, and development of the international and national airport, hotels, convention centers and international flight connectivity. X
Check Out
IT Examiner:
Philippines attracts US outsourcers: here
BPO industry is the choice for young professionals: here
IT and BPO sectors to grow by 33%: here
Bangalore is the leading BPO destination: here
Kenya woos BPO companies: here
Dalian poses a threat to Indian cities: here
Others:
The Hindu: here
BDAfrica.com: here
Economic Times: here
Indiatimes: here
NASSCOM: here
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