Govt push, saturation in tier-I cities will push IT industry to smaller towns: Everest report

A strong push by the government coupled with saturation in tier-I cities and reluctance on the part employees to return to cities — after they went home during Covid — will force Indian IT companies to move at a faster pace to tier-2/3 cities. Currently, most of these tier-2/3 centres are being leveraged as a spoke/satellite and business continuity planning location to support tier-1 hubs.

Looking ahead, some of the relatively mature tier-2/3 cities will evolve into a hub for global services delivery.

India’s pro-investment government continues to make significant progress in strengthening the enabling ecosystem for global services delivery. Notable initiatives have been undertaken by state and central governments, along with enabling bodies such as Nasscom, to facilitate industry growth, according to a report by research firm Everest.

India most leveraged

India is the world’s most leveraged location for services delivery. Tier-1 Indian locations, such as Bangalore, Mumbai, Hyderabad and Delhi NCR can support the breadth and depth of global services. However, high attrition and intense competition in tier-1 hubs is forcing organisations to widen their India portfolios to include tier-2/3 locations, such as Coimbatore, Ahmedabad, Jaipur and Indore, which offer lower cost of operations and a large untapped talent pool,

Chief Operating Officer of Ramco Systems Sandesh Bilagi recently told businessline that the company had no choice but to start the Madurai centre as employees were reluctant to return to Chennai. Similar view were expressed by officials of many other companies.

Indian IT services market $230 b

The IT services market in India is $230 billion with export services accounting for nearly three quarters of the business. Export services market is poised for significant growth in FY23, with companies willing to spend more on R&D, digital initiatives like cloud, AI, robotics, cybersecurity, innovation and new product/service development, the report said.

Benefits of tier 2-3 cities

With increasing maturity and saturation in tier-1 cities, companies and service providers are expanding their footprint across tier-2 and -3 locations to leverage untapped talent potential, lower competition and operating costs, as well as to diversify location risk.

Youngest IT talent

India offers one of the largest and youngest talent markets to support global services delivery across breadth and depth of IT Services (ITS), Business Process Services (BPS), and Engineering R&D (ER&D) services. The proposition is further strengthened with significant cost arbitrage (up to 80 per cent) over source geographies.

The report said that Bangalore, Delhi NCR and Hyderabad offer the most attractive talent-cost proposition for services delivery. These leaders provide attractive options, given balanced propositions in terms of talent availability (primarily employed talent), overall market maturity and favourable business environment, according to Everest Research.

The major contenders are Chennai, Mumbai and Pune that have alternative attractive locations with a large talent base, moderate to high market size and relatively favourable cost proposition (compared with the leaders). Chennai and Pune typically offer 5-10 per cent cost savings over Bangalore, the report says.

The Everest report says that Tier-1 locations constitute more than 80 per cent of the new centre setups in India. However, tier-2, tier-3 locations are seeing an uptick in market activity (mostly in the past 2-3 years). Players are expanding into tier-2 and tier-3 markets to tap into the large talent base these markets have to offer.

Multiple players are expanding into tier-2, -3 markets to provide their employees with location flexibility, since after Covid-19 a large section of the workforce does not want to relocate to tier-1 locations, the report said.

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