Cost fractures growth of IT in Bangalore

BANGALORE, INDIA: India's journey as an IT superpower gained momentum in the early 80s as the country's commercial capital Mumbai housed most of the companies who went on to become majors in the global market.

Soon, rising infrastructure cost in the city made Infosys, Wipro and others to shift their base to Bangalore, now known as the Silicon Valley of India.

At that time, Bangalore became the preferred destination due to several advantages it offered to the IT industry.

Infrastructure cost was cheap and so was real estate price. The first software technology park, assuring supply of electricity and telecommunications bandwidth, was set up in the Karnataka capital in 1984.

The labor was cheaper and in greater supply.

Its over two decades now and Bangalore seems to have reached a point of saturation with signs of fading eminence. Due to high cost and infrastructure problems some foreign companies are hesitant to select Bangalore as their base.

Instead, they are on the look out for alternative venues to drive their expansion plans. "For instance to set up a typical consulting development shop with a team of 100, scalable to 200-300 employees would cost Rs 20–30 crore in Bangalore. Whereas, it is 25 per cent lesser in Hyderabad and over 30 per cent less in Kolkata,” according to Shouvik Bhattacharyya, CEO, Adea Technologies, a company focused on high-end consulting, SAP and IT services.

"For a 1,000 people center, Kolkata has around 15 per cent cost advantage in terms of the operational costs, while Hyderabad is around the same as Bangalore. For a similar-sized BPO outfit, Kolkata has a 15–18 per cent cost advantage, while Hyderabad has 5–8 per cent cost advantage over Bangalore in operational cost terms," says Nishant Verma, principal, Tholons, an investment and advisory firm.

Many US company delegates are well aware of the troubled infrastructure in Bangalore and in know how of opportunities elsewhere. "Hyderabad and Kolkata are under the scanner," observes Bhattacharyya.

"High deposits and rent, STPI fees, administration cost, transport cost, bad infrastructure has made many companies to think of other alternatives to set up their base," he adds.

"Major problems are wage inflation, which is at around 15 per cent at present. Add to that, the infrastructure is getting saturated, and weighing against the decision of setting up operations in Bangalore. To our estimates, due to these reasons, Bangalore is losing between 20–25 per cent of the opportunities to other cities," says Verma.

According to Tholons, Chennai is the next preferred location for IT, apart from Bangalore. Overall costs in Chennai are more or less equal to Bangalore. Chennai's salaries are slightly lower compared to Bangalore, but other overhead costs neutralize any savings. "Chennai is able to leverage a lot of talent from the neighboring educational hubs within the state. Moreover, the investment climate is favorable," says Verma.

Theoretically companies are looking at other cities like Hyderabad, Mysore for expansion where they can find space at lesser cost, points out Verma.

“New firms and existing firms who want to expand operations are not considering Bangalore. In a big way even we don't advice our clients to come to Bangalore. Bangalore, no more has the unique capability be it in terms of skill or cost, and it is available somewhere else in India," says Verma.

KP Unnikrishnan, director, Marketing, Alliance and Teleweb Sales, Sun Microsystems India, feels that there are infrastructure challenges but Bangalore is still a preferred destination.

Expensive talent

A techie in Bangalore seems to be more expensive as compared to Hyderabad, Mysore, Kolkata or elsewhere.

"Be it talent availability, competitiveness and talent retention or keeping them motivated has become a problem in Bangalore. Whereas, in other cities the same talent is available at lesser cost and the attrition rate is also lower," informs Verma.

A Bangalore software engineer with same skill, experience and educational qualification is 25 per cent more expensive when compared to the local talent in Hyderabad with same skill sets and qualification, informs Bhattacharyya. "In that case why not go recruit talent elsewhere," questions Bhattacharyya.

Verma further added that many BPO and IT employees in Bangalore are migrants and the competition is increasing as ever. "Given a chance the techies will always be ready to work near their hometown, and can also be retained at lesser increments."

Speaking about government's support to IT in different states, Verma said that currently, other states are much more aggressive to get IT investment in their states when compared to earlier days. Bangalore has seen success and Karnataka is finding it difficult to keep up with the same pace of growth. The state government has to find a way out to tackle the infrastructure problem.