Outsourcing BPO Services to India’s Lower-Tier Cities

By Dezan Shira & Associates
Editor: Nishant Maddineni

With fierce competition for business process outsourcing (BPO) services from other Asian countries, state governments in India are increasingly looking to encourage companies to invest in rural BPO centers.

Outsourcing business processing services initially became popular for foreign businesses as a strategy to cut costs and improve organizational efficiency. With real estate prices and labor costs increasing in major Indian cities, numerous companies have taken up government initiatives to open BPO centers in rural areas.

Benefits of Rural BPOs

Economic growth in Indian cities has led to an increased cost of living and a greater supply and demand for labor has resulted in higher wages. Studies have shown that BPO companies could reduce total operating costs by 20-30 percent by moving to a low-cost city, with a cost differential of around 10-15 percent for non-voice processes and upwards of 20 percent for voice processes.

Higher wages have also led to significant migration from rural to urban areas as migrants seek paying positions to send money to their families. However, a combination of poor living conditions, distance between employees and their families and better opportunities in other sectors has contributed to high attrition rates in call centers.

Conversely, rural BPOs have much better employee retention rates, primarily due to a more comfortable working environment that is closer to home for staff and fewer rival opportunities to tempt employees away. Figures show that attrition rates at lower-tier BPOs are 3-5 percent compared to 50 percent in Tier-I Indian cities.

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Current Challenges

There are still significant disadvantages that need to be addressed when operating a BPO office outside Tier-I cities, such as poor infrastructure and more required training. Infrastructure has long been one of the biggest obstacles to doing business in India and this is especially true in rural areas.

Power capacity in Indian villages can often be very low, with long power cuts and poor quality electrical connections common. More isolated areas often don’t have power capacity at all. In addition, internet connectivity may often be poor with low speeds making certain services difficult to provide.

Although there are urban-educated employees that often return home to rural areas, there are also local employees who have gone through the poor education system of India’s villages. Since formal education for these employees is low, more intense training is often needed.

Comparison Between Rural and Urban BPOs

Most rural BPOs cater to lower value or non-core services that require less training and expertise. This includes tasks like data entry, email responses, document checks and data and bill processing. India’s urban areas, on the other hand, are dominated by higher-end services. These include jobs that need judgment-based analysis and domain expertise rather than function-specific, rules-based performance parameters. Most notable of these is IT support, which requires workers with a high level of training.

Because they serve areas with a smaller population, lower-tier offices are necessarily smaller than their urban counterparts. For example, Indian rural call centers typically employ around 100-150 people as opposed to the 500-1500 people in urban call centers.

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Competition with the Philippines

Despite its strengths, India has lost a lot of BPO business to foreign countries, with the largest chunk of that going to the Philippines. Similar to the type of BPO that has moved to the rural center, this is mostly due to the Philippines’ lower value services. However, there is still a notable difference between the two countries, with most of the gain in the Philippines being in voice-related services as opposed to the data and processing work done in rural India.

Conclusion

Despite the challenges that exist in operating BPO services in rural India, there have been an increasing number of offices opening up in the area. In 2008-09, rural BPOs reported more than US$10 million in sales, and that amount has been steadily building since. With urban wages and rental costs expected to continue going up, setting up a rural BPO office is looking increasingly intriguing for foreign businesses.     

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