A Tale of Tier-2 and Tier-3 Cities

Written by Chaithra Hanasoge

The expeditious growth of offshoring and sourcing has not only changed the way businesses are managing their operations globally but also transformed countries such as India, China, Philippines, Brazil, and Mexico into major IT-BPM (Information Technology – Business
Process Management) hubs. Massive revenues, huge employment opportunities, and global reputation has made the IT-BPM industry as one of the primary growth engines in these countries, major chunks of the operations being located in key cities such as Delhi, Mumbai, Bangalore, Manila, Beijing, Shanghai, Mexico City and Rio de Janeiro.

Many of these cities have emerged as chief operational hubs for simple reasons; they are the capital cities or the economic hubs of the respective countries and were pretty much unexplored on a worldwide scale, thus offering privileges such as infrastructure, talent, space and global connectivity, all at competitive prices. However, with exponential growth, these cities are grappling with the growing business needs, primarily in terms of continuing cost competitiveness and good infrastructure. Businesses are increasingly faced with issues such as burgeoning real estate prices, space constraints, rising operational costs, traffic congestion and pollution in the established hubs, prompting them to look for alternative locations of operation. To meet this requirement, governments have been actively identifying Tier-2 and Tier-3 cities and promoting them as alternative locations for conducting businesses.

The ‘Next Wave’ Cities

What are Tier-2 and Tier-3 cities? The determining factors vary from country to country. For instance, in March 2016, the IT and Business Process Association of the Philippines (IBPAP) and the Information and Communications Technology Office (ICTO) identified the latest ‘Philippines- Next Wave Cities’, a list of ten cities (Baguio City, Cagayan De Oro City, Dagupan City, Dasmarinas City, Dumaguete City, Lipa City, Malolos City, Naga City, Sta. Rosa City, Laguna, Taytay, and Rizal) that can serve as alternative locations for the major IT-BPM hubs in the country namely Metro Manila, Metro Cebu, Metro Clark and Bacolod city. The cities have been identified based on factors that impact four key parameters i.e. talent availability, presence of infrastructure, good business environment and cost competitiveness. In Romania, while Bucharest is considered as the Tier-1 city, Tier-2 cities such as Cluj-Napoca, Lasi, Timisoara, Brasov and Craiova are considered towns with good infrastructure, more than 120,000 inhabitants, reasonable pool of resources, positive population growth rate, universities, good real estate offer, skills/competences.

Generally, Tier-2 and Tier-3 cities are those that may be the secondary or tertiary capitals of the country or even the lesser known business hubs, have a smaller population, good infrastructural facilities, talent pool and a strong cost advantage. In the recent times, businesses have shifted/expanded their operations to such locations for cost cutting purposes as they face growing Tier-1 city issues as mentioned before.

For instance, in India, reputed BPOs including Tata Consultancy Services, Xchanging and SPi are also located in lesser known cities such as Lucknow, Pondicherry and Shimoga. Some of the other upcoming cities in the country are Nashik, Coimbatore, Ahmedabad, Bhubaneswar, Chandigarh, Mysore, Indore, Jaipur, Kochi, Thiruvananthapuram and Visakhapatnam. In China, Chengdu, Wuhan, Tianjin have received rising attention by foreign investors; Chengdu has even been touted as the next silicon valley of the country.

Benefits of the ‘Next Wave’ Cities

The ‘cost advantage’ factor is the most prominent benefit of moving to a Tier-2 or Tier-3 city. This includes lower costs of starting a business, taxation, real estate prices and cost of labor. Besides this, these cities offer a number of advantages such as:

  • Better infrastructure facilities in terms of office space availability
  • Government promotional measures such as business incentives and infrastructure improvements
  • Untapped talent pool (for instance, despite being a smaller city, Guadalajara offers a large untapped talent pool that has made it equally competitive to Mexico City which is the primary business hub in Mexico)
  • Lower employee attrition rates
  • Better quality of life in terms lower traffic and pollution levels
  • Lower bureaucracy

Is it Sustainable?

If the benefits of shifting to a smaller city are so many, why isn’t everyone doing it? This brings the matter of sustainability to the forefront, as there are many factors to be considered.  Smaller cities are not always technologically advanced in facilities such as mobile and internet, which is a significant requirement. Finding niche skills may pose an issue, which means the company has to spend on training the recruits.  Language proficiency in English and other foreign languages may be limited, a prerequisite for BPO operations.

Besides these, there are other niceties that firms may have to deal with. An example of this is work culture. While Tier-1 cities are mostly well versed with the Western working culture to which most of the outsourcers belong, Tier-2 and Tier-3 city residents are not very attuned to this, which can pose hassles in the work environment.

The decision to set up operations in Tier-2 and Tier-3 cities is a patient long-term approach. With the mounting needs of the IT-BPM sector, along with challenges in the current scenario, expanding to smaller cities may also become an imperative in the future. However, there are many trade-offs that firms need to consider and striking the right balance between all elements is the key. Supply WisdomSM real-time risk assessment methodology enables businesses to understand business risk and leverage emerging opportunities. Contact us for more information or to get started with a free trial.

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