"The cost of operations is at least 15 to 20 percent lower in smaller towns," Nikhil Rajpal, practice head of global services at Everest Research Institute, told ZDNetAsia in a phone interview. This is despite the fact that smaller towns are characterized by high management costs and lower employability. For instance, if the rental rates in Gurgaon are around US$2.81 (120 rupees) per square foot, the rent in tier-2 cities is as low as US$0.58 (25 rupees) per square foot.
Many large and small IT-BPO companies have successfully set up BPOs in tier-2 cities and small towns. For instance, Infosys has a BPO in Chandigarh, Wipro in Nagpur; Mindtree Consulting in Bhubaneshwar; Bhilwara Scribe in Bhopal; and the Jindal group in Bellary.
In fact, some BPOs, particularly those run by NGOs (non-governmental organizations), have even established BPOs in rural areas.
But, multinationals still prefer to stay in tier-1 cities: Delhi, Mumbai, Pune, Hyderabad, Bangalore, Chennai and Kolkata. Only a handful, such as Dell Computer in Mohali and HSBC in Vishakapatnam, have ventured into smaller cities.
According to a recent Nasscom-Everest Research India BPO study, "the delivery footprint of [India's] BPO industry now extends to more than 30 cities across the country, and covers many tier-2/3 cities".
Navnit Singh, partner of global technology and business, and professional services practices at executive search firm Heidrick & Struggles, said: "The skill sets required for addressing the domestic market are already there in many small cities and towns."
As organized retail picks up in tier-2/3 cities, BPO activity in these areas will also pick up, Singh told ZDNet Asia in a phone interview.
With India's cost arbitrage narrowing due to the strengthening of the rupee, rising salaries, high real estate costs and rising inflation, IT-ITES (IT and IT-enabled services) companies have little option, but to expand to small towns.
K. Sudarshan, managing partner of global executive search firm, EMA Partners International, said in a phone interview: "The cost of running BPOs in metro cities is getting prohibitive." According to Sudarshan, it is difficult to find fresh graduates to take up a job in Mumbai, where real estate values and the cost of living are prohibitively high.
But while there are increasing instances of BPOs being set up in cities such as Vishakapatnam, Jaipur, Indore and Nagpur, Everest Research's Rajpal believes that as of today, the tier-2 story is over-hyped.
"There are around 700,000 employees working in the BPO industry, and 90 per cent of them are employed in the seven tier-1 cities," he said.
"The employability in smaller towns is a lot lower," Rajpal added. In India's tier-1 cities, the employable rate is between 35 and 40 percent, he said. "But in smaller towns the employability quotient goes down to 10 percent," Rajpal said.
However, he said, while the tier-1 cities will continue to grow rapidly, more BPOs will move to tier-2 and tier-3 towns and cities.
As per the Nasscom-Everest research, the BPO industry can fetch US$50 billion in revenues—five times its current size—by 2012. However, in order to meet this target, the tier-2/3 cities in India will have to meet approximately 50 percent of the additional talent requirements.