It has become increasingly common to hear that now is the opportune moment for IT and ITES companies to establish a presence in Tier 2 and Tier 3 cities. For small and medium enterprises (SMEs) nestled within larger cities, questions abound: Should we take the plunge, is the timing indeed ideal, and can SMEs lead the charge, or do heavyweights like Infosys, Wipro, or TCS need to blaze the trail, paving the way for smaller firms to follow?
Take Shimoga, for example, a modest town approximately 300 kilometers north of Bangalore classified as a Tier 3 city, while cities such as Mysore and Mangalore likely hold a Tier 2 designation. Numerous towns throughout the nation are emerging as promising Tier 2 and Tier 3 candidates for IT and ITES endeavors. Notably, Shimoga is home to the state's current Chief Minister, fostering local hope and ambition to attract IT/ITES firms, with at least one such company already thriving in the region for the past couple of years.
Numerous advantages exist in relocating: the tranquility of smaller cities provide respite from the congestion and pollution often associated with major urban environments. The lower cost of living, lack of traffic, and an enhanced quality of life are substantial draws. However, the standout benefit remains the reduced costs associated with land and real estate—especially appealing if government initiatives can offer subsidized land through Special Economic Zones (SEZ).
Yet, these advantages are tempered by numerous drawbacks: a shortage of local talent, and even if some skilled professionals are available, attracting them away from the allure of metropolitan areas poses a challenge. Essential support systems, such as schools and additional infrastructure are often scant, a situation exacerbated by the higher costs SMEs face in establishing any needed facilities. Local amenities such as shopping centers, nightlife, and recreational options are typically absent. Talent retention can emerge as a significant hurdle unless local residents choose to remain close to home.
As expenses for operating in big cities surge due to inflation, climbing fuel prices, real estate costs, attrition rates, and the increasingly frantic pace of life, discontent regarding the urban grind mounts. The dilemma now resembles a classic chicken-and-egg conundrum: do IT firms leap into Tier 2/Tier 3 locations first or must the supporting ecosystem be developed ahead of them? Ideally, larger corporate players would take initiative in scaling up operations, creating a conducive environment, but this might result in lost early advantages for SMEs as property prices rise.
As companies grapple with the challenge of attracting and retaining talent, many of today's professionals, despite existing gaps and deficiencies, remain drawn to the metropolitan lifestyle that offers shopping and entertainment on weekends—something Tier 2 and Tier 3 cities could struggle to offer. According to a NASSCOM-Kearney assessment analyzing 50 top locations for the IT-BPO sector, a shortage of leisure facilities in these smaller cities is considered a detrimental factor. Furthermore, a study on the 'location road map for IT-BPO growth' forecasts that the employment share of the seven leading hubs will contract to about 60-75% within the upcoming decade, paving the way for rising opportunities in Tier 2 and Tier 3 cities.
SM Doshi, partner at A.T. Kearney India, commented, "However, merely building physical infrastructure like power grids and transportation systems in Tier 2 and Tier 3 cities won't suffice. It's essential to foster an ecosystem that encompasses social infrastructure reflecting the amenities of metropolitan living."
Industry experts assert that simply being the first to move is insufficient for IT companies to attract skilled employees to these new locales. One ITES employee, prompted to relocate to a Tier 3 destination, opted instead to explore other job opportunities. The IT-BPO sector currently provides over two million jobs within India, with more than 90% concentrated in the seven major cities: Bangalore, Mumbai, NCR, Hyderabad, Pune, Chennai, and Kolkata. This yields a mere 10% employment representation in Tier 2 and Tier 3 cities, a meager fraction by any standard.
Confronted with these realities, will SMEs take the audacious step, leveraging government incentives to migrate to Tier 2 and Tier 3 cities for an early mover advantage, or will they hesitate until larger firms initiate moves or a critical mass is formed?