Locational Differentiation in the IT-BPM Industry - Myth or Reality?
educational institutions around them churning out trained
graduates and postgraduates who are willing to work in or
near their hometowns, popular belief has it that they are
also willing to work at lower compensation in these cities
than they would work for in the Tier I cities (Bangalore,
Mumbai, etc.).
Aon Hewitt conducted primary research with the
aim of validating or refuting these myths and helping
organizations understand the trend that we see across
the outsourcing market in terms of leveraging the cost
and talent advantage that non-Tier I cities offer. For the
purposes of this article, we have focused on the IT services
and Third-Party BPO organizations, which are sectors that
have led the foray into the non-traditional cities. In fact,
from data available to Aon Hewitt over the last five years, it
is apparent that Third-Party BPOs were the organizations
that pioneered the entry into Tier II and Tier III cities with
IT services organizations following suit.
Apples to apples or apples to oranges: On the face
of it, the migration of talent from Tier I to Tier II and
Tier II to Tier III seems to be a no brainer. In the Third-Party
BPO space, the per FTE (Full Time Employee) costs across
individual contributor and management levels seem to
be starkly different across Tier I, Tier II and Tier III cities
making a strong case for organizations to strengthen their
locational play.
IT services on the other hand shows a clear cost
benefit at the Junior Professional and Senior Professional
levels; however, the cost advantage gets significantly
reduced at the management levels. We believe that this
is an indication of the maturity of the locational strategy
models that organizations have adopted. Over a period
of time, IT services firms will have to evolve to increase
the location differential in FTE costs for Tier II and Tier III
cities. However, a closer look into the data reveals that
the location advantage exists only for certain jobs. Highly
commoditized jobs seem to have a much larger locational
cost advantage as compared to the more complex jobs.
Case in point is the trend in data we see in the Third-
Party BPO space. 1st Gen BPO jobs (jobs like data entry,
voice, transaction processing) which have been around in
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