Exploring the shift: GCCs moving to Tier-2 cities for cost and talent advantages

As companies across the world try to create a sustainable digital transformation ecosystem, they are looking for new-age talent and digital skills to help them. As per an estimate, approximately 2.1 million+ graduates join the workforce in India each year^[1]. A recent report by NASSCOM mentioned that India-GCC revenue can potentially scale up to US$60 to US$85 billion by 2026, which stood at US$33.8 billion in 2019-20; about 1% of India’s GDP^[2].

Some of the key points that reaffirm India’s dominance in the GCC space are:

• India is already home to 1500+ GCCs
• GCCs in India employ ~1.3 million people
• Indian GCC market has grown at a steady pace of ~11% CAGR from 2015 to 2021
• 500+ GCCs are expected to be added by 2026

Many executives believe that India is not just a labor arbitrage move anymore but having an India-based GCC has evolved as an imperative for digital transformation. As the GCCs focus has shifted from increasing productivity to building enterprise capabilities and transforming middle and front office; an increasing number of organizations are setting up Research and Development (R&D) centers and innovation labs in India, owing to the abundant and diverse skill-sets available across Tier-1 and Tier-2 cities.

Why choose a Tier-2 city?

Increased talent availability at reduced costs with an improving infrastructure and social security is creating a much sought-after business ecosystem for GCC expansion in Tier-2 cities.

Organizations ranging from IT and professional services to financial services, manufacturing, and technology companies are incentivized to set up their GCCs in Tier-2 cities by state governments through favorable policies and schemes. Many companies have already opened up GCCs in Visakhapatnam, Coimbatore, Jaipur, Vadodara, Kochi, Chandigarh, and other locations. Key services delivered from these GCCs include finance and accounting, human resources, supply chain and procurement, engineering, R&D and quality, and digital cloud and automation services.

Some of the key factors which have contributed to the growth of Tier-2 locations are:

1. Human resources

Tier-2 cities have evolved with respect to the availability of skilled and employable resources. As per the India Skills Report 2023, Lucknow and Mangalore, which are Tier-2 cities, fare in the top three most employable cities in India. Tier-2 cities are becoming centers for specialized and niche skill requirements; Coimbatore, amongst others, has emerged as one of the locations for engineering services. Additionally, attrition rates in Tier-2 cities have been observed to be up to 10% lower than Tier-1 locations^[3].

2. Cost elements

Lower costs of talent and infrastructure in Tier-2 cities, as compared to Tier-1 cities, are contributing to a reduction in the Total Cost of Operations (TCO). A recent analysis shows that Tier-2 cities typically have 10% - 35% lower cost of living as compared to the nearest Tier-1 location. According to a CBRE 2022 report, relatively affordable cost of living, increasing presence of healthcare facilities and educational institutions support the quality of life in Tier-2 cities as compared to Tier-1 cities.

3. Business environment

While Special Economic Zones (SEZs) to promote IT/ITeS industry have been set up in Tier-2 cities, State Governments are also incentivizing businesses that are setting up new centers or expanding existing setups into non-Tier-1 locations. For instance, as per Tamil Nadu ICT policy 2018, new or expansion of IT/ITeS industries located in B&C districts will be provided an additional capital subsidy of 10% and 25% respectively over and above the eligible limit.

4. Infrastructure:

As per the latest mobility index reports, two of the top five cities in mobility infrastructure are Tier-2 cities, namely, Bhubaneshwar and Jaipur, and some of the Tier-2 cities have better road infrastructure as compared to a few Tier-1 cities. Tier-2 cities are also witnessing an increase in scheduled domestic passenger traffic as compared to Tier-1 cities. Government of India, under the UDAN scheme, is focusing on better air connectivity to Tier-2 and Tier-3 cities and providing necessary incentives. Tier-2 cities have recently seen a high growth in coworking spaces. For instance, Chandigarh, Jaipur, Kochi, Ahmedabad, Lucknow, and Indore have more than four flex operators while Bhubaneshwar, Visakhapatnam, Thiruvananthapuram, and Coimbatore have more than one flex operator in the city.

5. Social factors

Five of the top 10 cities in the Ease of Living (EOL) index are Tier-2 cities, namely Ahmedabad, Surat, Coimbatore, Vadodara, and Indore. Lower pollution levels and better air quality index as compared to most Tier-1 cities are some of the other contributing factors to making Tier-2 cities more attractive. Subsequently, Tier-2 cities have surpassed pre-pandemic air passenger traffic numbers, which is also a sign of increased mobility in Tier-2 cities.

The chart below shows a comparative analysis between Tier-1 and Tier-2 cities across five parameters — human resource, cost elements, business environment, infrastructure, and social factors.