Outsourcing to Bangalore? That's So 2002.

Bhubaneswar, Lucknow, Gandhinagar, Ahmedabad— these are just a few of the new hot spots for outsourcing shops in India. Never heard them? Don't feel too bad. Yet.

A recent article in India's Economic Times says the country's tier one outsourcing providers are increasingly looking to tier II and even tier III towns to set up their latest IT and BPO campuses, as real estate prices and cost of living have skyrocketed in the bigger cities that served as the unofficial headquarters of India's IT services boom.

Bangalore is out. Kochi is in.

That's no surprise to anyone with more than a passing interest in the offshore outsourcing industry. But while attracting entry-level employees to jobs in the tier II municipalities hasn't been terribly difficult, management talent has proven a little harder to sway, says a Satyam spokesperson in the story. Middle managers are more concerned about issues like schools, healthcare, and quality of life than their younger counterparts. Incentives including one-time bonuses of 50,000-100,000 rupees (about $1270-$2540), help with issues like school admission for the children of employees that make the move, and extra time to settle in are being used to entice would-be transfers.

Some workers may have career concerns, wondering if the move to the second-tier locations is more of a detour than a move up the ladder. "Most tier II centers are currently bottom-heavy and complexity of work is not that high, Pari Natarajan, CEO of outsourcing research firm Zinnov, tells the Economic Times.

Outside of India, in less mature outsourcing markets like Latin America, IT services providers are jumping to second tier cities from the get go, in an attempt to side-step the rush to set up shop in a major metropolis. "You can take some of the best practices from India and look at second-tier cities to set up a large center," says Juan F. Ferrara, chief operating officer for the Americas for India-based IT service provider Genpact. "You’re already seeing that in Brazil and Argentina... where (companies) are already in second and third-tier cities."

So what happens when India's tier II—or even tier III—cities grow as saturated or expensive as their more mature counterparts? Will offshore service providers or their customers consider locating the work in the U.S.? Don't bet on it, says an India@Wharton article. There were several media reports this year of a few Silicon Valley companies bringing jobs back from Bangalore in response to rising wages and retention problems. But India@Wharton says such cases will remain the exception, not the rule.

Tier IV, anyone?

Stephanie Overby
Senior Editor
CIO magazine and CIO.com