Outsourcing Costs in India - Real Estate
The direct cost of outsourcing services is largely driven by employee compensation, but other elements can play a factor in determining a country’s cost competitiveness. Real estate occupancy costs can be a meaningful contributor in the cost of delivering services in otherwise low cost countries like India.
Class A office space in prime locations is in high demand in fast growing emerging economies. Rents in India’s financial capital, Mumbai, are now the 5th highest in the world, behind London, Moscow, Hong Kong and Tokyo. Key drivers of Class A rents in India include both high growth in demand and a short supply of Class A vs. lower tier properties. Summarized below are occupancy costs in top Indian cities and some comparable US locations.
Some top-tier operations are impacted by these high Class A rents, but most IT and BPO operations in India follow a number of strategies to keep costs down. First, most companies have the bulk of their operations in lower cost cities. Bangalore, has been a low cost location of choice for many years, however demand has driven costs up and many companies have broadened their focus to cities such as Chennai, Hyderabad, and Pune.
A second strategy, often followed by mid-sized and small outsourcers is to opt for lower tier facilities. Similar to salaries, there is a tremendous differential between top-tier and middle-tier. For example, in Mumbai it is not uncommon to find lower tier office space outside of the central business district for a quarter of the cost of Class A locations. In lower cost cities like Bangalore, mid-tier space is a half to a third as expensive.
The final cost reduction strategy is to provide less space for employee. In Mumbai, it is not uncommon to allocate 50-75 square feet per employee, about a third of the space typically provided in US offices.
Combining these strategies, Indian IT and BPO companies are able to keep real estate costs per employee to $2,000-$4,000 in expensive cities like Mumbai, and $1,000-$3,000 in lower cost cities like Bangalore and Chennai. This provides about a 50% lower cost compared with US services firms which often spend $4,000-$8,000 per employee.
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