The spiralling real estate costs, capacity constraints, high attrition rates, wage inflation and talent shortage are pushing business process outsourcing firms to tier-II and tier-III cities. Thanks to this move, the estimated $9.5 billion (exports and domestic revenue) sector is hopeful about maintaining its cost advantage.

Around 95 per cent of the IT outsourcing activity, both domestic and offshore, is still concentrated in the six tier 1 and tier 2 cities. However, the rising costs and local capacity constraints are driving firms to tier 2 cities such as Chennai, Hyderabad and Pune and tier 3 cities such as Jaipur, Chandigarh, Mysore and Ahmedabad, according to India IT Services Executive Report 2007.

WNS, for instance, has 1,200 people in Nashik, a tier II city. It is looking at expanding its presence in tier II cities.

"We are looking at expansion in all the three regions that we are in and will finalise something by the end of this year," added Eric Selvadurai, CEO WNS enterprise services. However, he believes that growth for WNS will come from the metro cities. The tier II cities will see more of low-end and less-complex work.

The rising salaries at call centres are another reason for moving station. They have increased 15-20 per cent in the last three years and continue to rise.

A newcomer joining a call-centre in a metro is likely to be paid anywhere between Rs 15,000 and 18,000. "That's because the demand is huge. One company is feasting on employees from another and vice versa. The demand for skilled workforce in this sector is not being met by enough skilled supply and that's why the salaries have scaled phenomenally," said Vishal Mehra, vice-president, HR (APAC), OfficeTiger.

Siddharth Pai, partner and managing director, TPI Advisory Services India, corroborates that companies will expand into tier II cities to tackle the talent issue. The demographic spread in India allows talent to be spread out and companies have realised that the other cities too have a good mix of talent.

But is it easy to find project managers in smaller cities? "The talent base, anyway, is saturated in the metros and other top IT cities," reasons Ashok Tyagi, senior vice-president (Enabling Services), Genpact, "There is abundant skilled pool in smaller towns, but additional training effort will be required."

The company is planning to take its headcount to over 1,000. "The per employee cost is manageable for us, with lower attrition rates as compared with our peers in the metros," says Mehra.

However, the journey to smaller cities is not always smooth as Infosys BPO chairman T V Mohandas Pai discovered. "All governments want BPOs in secondary and tertiary cities. But where is the infrastructure? Firms cannot scale in the absence of government support in creating the basic facilities."

Recalling Infosys BPO's experience in Mangalore where it runs a 500-seater operation, Pai noted the firm did not get power supply for the first seven months.

"We had to deploy generators for our operations. The experience was not encouraging. Only recently, we have been given land in Mangalore for a campus. But the transport link between Mangalore and Bangalore is inadequate. The frequency of flights has to increase since travelling by road consumes a lot of time," Pai said.

He, however, added that Infosys BPO was keen on tapping the talent in secondary and tertiary cities.

The experience of OfficeTiger and Genpact, though, appears to be better.

The companies maintain the state governments have been very helpful in addressing their needs.

"For instance, the power situation in Jaipur is far better than we would face in Gurgaon," said Tyagi, adding that operating costs would be certainly lower in a city such as Jaipur.

Also, the real estate comes in cheap for companies. The firms save almost 20-40 per cent on land acquisition or renting commercial office spaces in smaller towns.