Upwardly mobile

Upwardly mobile
The bad news: the city is getting too pricey for low-end BPO work. The good news: it's attracting more high-end work.

Businessworld




Companies engaged in low-end BPO work are finding Bangalore too costly. While some of them are trying to bypass the city en route to their expansion, none can ignore it

In late 2002, Sutherland Global Services was trying to identify potential bases for its BPO operations in India. It looked at all the options - Bangalore, Mumbai, Delhi, Hyderabad and others - and decided that its first India centre will be in Chennai and the second one in Mumbai. Sutherland is a truly global company; it has operations in 14 cities in four countries. Last month, it announced a new 500-person centre in Manila in the Philippines, a city that's 15 per cent more expensive than Indian cities. Yet, Bangalore did not find favour.

Its decision has been vindicated now. In the last two years, Sutherland has achieved one of the fastest ramp-ups among Indian BPO companies. It now has over 7,500 people in India - about 6,000 in Chennai and about 1,500 in Mumbai (hired in the last 12 months). "Mumbai as a second location has worked quite well for us," says Dilip Vellodi, chairman and CEO. "We decided to stay out of Bangalore because there were too many companies rushing into the city. We did not want to follow the herd. Availability of talent at the pace at which we needed them would have been an issue in Bangalore."

The cost of doing business in Chennai and even Mumbai was substantially lower than Bangalore. Availability of talent in these cities was another key reason that influenced this decision. But even Vellodi, who lives in the US and visits India once every 45 days, finds himself touching Bangalore on almost every trip to the country: too many of his client partners and representatives are based there. Bangalore can't be ignored even by those who have tried to bypass the city.

Vellodi's is just one perspective of the city. Increasingly, many of his ilk - BPO firms, and more recently, even IT services companies - are beginning to share his point of view. But there is another view of the city. Several high-tech companies working at the forefront of global technology swear by Bangalore despite the recent collapse of its public infrastructure. Philips Software, Texas Instruments, Motorola, Oracle and others see the city as an integral part of their global R&D game plan. To say that Bangalore is important for technology companies is to stress the obvious, like saying that London is an important city for finance companies. Which is why even now, global technology companies keep opening R&D centres or expanding their existing ones in the city.

But Bangalore is also undergoing a transformation that, if continued for several years, could alter the face of the city. We would have liked to simplify this trend to its essentials and told you this: the call centres and other BPO outfits are moving out, and the high-technology companies are moving in. However, while this is largely true, there are several exceptions that would make us pause.

There are several reasons for this trend, and poor infrastructure is probably the least important of those. Because of high demand and low supply (in purely relative terms), wages in Bangalore have been rising extremely fast. Demand for engineers in areas like chip design and wireless technology is almost 50 per cent more than availability. This leads to a churn that companies - except some large multinationals like Texas Instruments and Motorola, who offer cutting-edge engineering work - find difficult to cope with.

Bangalore engineers are becoming an arrogant lot - they sometimes even set preconditions for attending job interviews. We pick one of the several incidents that highlight this point. Hari Iyer, vice-president (people and people support) at Sasken Communication Technologies, recently told a young engineer that he was asking for too much. The engineer in turn asked Iyer: "Why don't you go and check with your boss?"

Sasken's development centre in Pune has none of these problems. Engineers in Pune seem to be happier, more content with their work and wages, a fact that reflects on the attrition rates: about 2 per cent compared to about 25 per cent in most companies in Bangalore. Attrition is an issue that most companies discuss when they give work to Bangalore. To add to the attrition, the costs are rising as well. Raymond Lane, co-founder of Oracle and partner at private investment firm Kleiner Perkins Caufield & Byers, which has sizeable exposure in India, says: "Three years ago, the cost arbitrage between Silicon Valley and Bangalore was 5:1. Now it's down to 3:1."

The poor infrastructure brings another set of problems for companies: longer commute times, decreasing safety, pollution and its impact on health and so on. "Indian's are just not comfortable with a 1-2 hour commute to work," says Ram T. Chandnani, head (south India operations) at CB Richard Ellis. "Such commutes are pretty much the norm in other clusters like the Silicon Valley."

Yet, companies like Sasken need to be in Bangalore - no other city can offer so many experienced engineers in high-tech areas like silicon design, wireless, and so on. But for those who do not need highly skilled engineers, Bangalore's problems are easier to transcend - they only have to move out.
Says N.S. Raghavan, former joint managing director of Infosys: "There are certain kinds of jobs that do not really require highly skilled people. It is best that these jobs move out of Bangalore." Many companies are already doing this.

Vee Technologies is a mid-sized, third-party BPO company. It services clients in the banking, insurance and healthcare sectors. It has a very interesting model. It is based in Bangalore and has about 250 people there, but a bigger chunk of its operations lies elsewhere, mostly in second-rung cities. It has a full-fledged facility in Salem, a three-hour drive from Bangalore, where it is easier to hire and retain talent. Over the next few years, its Bangalore head count is unlikely to cross 500, but it plans to add another 2,000 people in Salem, 1,000 in Tiruchi and about 500 in Coimbatore. The idea is to use Bangalore as the headquarters and as a centre for really high-end work, and farm out the rest to the other second-rung cities.

There are several companies that did not choose to come to Bangalore. The best example is the $20-billion EDS, the world's second largest technology services company. It operates in over 60 countries and employs 1.2 lakh people. It currently has 2,400 people working in India: Chennai (1,200 people), Pune (400), Mumbai (600) and Gurgaon (200). EDS is planning to double its headcount in India to about 5,000 by this year-end. The company has conspicuously ignored Bangalore. Abhay Gupte, managing director of EDS India, says that besides the infrastructure issues, one big reason why EDS prefers Chennai and Pune to Bangalore is their capability to grow operations.

There are exceptions. Accenture, for example, already has 4,000 people in its BPO unit in Bangalore, and it plans to expand significantly. So are several other call centres and BPO companies. Bangalore does offer advantages to even BPO companies. "We could hire from anywhere in the country sitting in Bangalore," says Vivek Kulkarni, former IT secretary and now managing director of B2K Corporation. Bangalore is still a place where people in the country want to come and live. At one time, the moderate climate was the attraction of the city. Now, the opportunity to move into any stream of technology provides a bigger attraction.

Bangalore has one of the largest concentrations of technology companies of any place in the world. The city's R&D centres are not just islands working in isolation. They are part of the Bangalore ecosystem which any city will find it difficult to beat. For example, Texas Instruments works with five large bulk sub-contracting firms, more than 50 application developers on Texas Intruments' platforms, electronic design application companies, testing companies, and so on. Says Bobby Mitra, managing director: "The power comes from the arches and not the nodes." The company cannot easily move this ecosystem, which acts as strong exit barrier.

Texas Instruments, Motorola, Intel, Philips, Oracle, Cisco... all have partners in the city. Oracle, for example, has Infosys, Wipro, i-flex, and TCS as major partners. The work in these multinational centres has also gradually increased in complexity. About half of the software for Motorola's phones are developed in Bangalore, along with half of its network software. The plan is for the Bangalore centre to take ownership of this area by 2006. The city is a hub for expertise in soft switches. No wonder, Motorola plans to increase its head count here by another 500 this year.

It takes a long time to develop knowledge and experience. Bangalore has been in this game for two decades now, and it may not be easy for other centres to catch up.