Compelling Business Model
However, the economics of operating in rural areas and small cities are too compelling to ignore. Also, there have to be a few first movers before it can become big. These first movers might opt for tier-2 or -3 cities and then look at going to villages. For instance, take this Legal Process Outsourcing (LPO) firm, which shifted from Manhattan to Mysore!

At a three-storey office in Mysore (about 100 miles from Bangalore), Smith Dornan Dehn (SDD) Global Solutions is handling some of the most high-profile entertainment and media litigations for its U.S.-based buyers and also processing visas for actors, directors, producers and other U.S.-based professionals. Its team of 40, including lawyers, is doing legal research for Al Pacino’s next film. And litigation concerning the Hollywood comedy film Borat, is also being handled here.

“We are a NY-based law firm but have found it very attractive to start our LPO in Mysore. Traffic congestion is almost non-existent. Also the commute time is from one minute to 10 minutes. Cost of living is very low. Office space is 43 times cheaper than in Manhattan,” said Russell Smith, President and Chairman of SDD Global Solutions. SDD works for over 100 customers including HBO, Sony Pictures Television, Universal Pictures, MTV Networks, Channel Four TV (U.K.), 20th Century Fox, and former U.S. President Bill Clinton’s organization, the Clinton Foundation.

In rural sourcing, the driver for the companies to send IT work to rural America rather than India, Philippines or China, is a combination of cost savings and convenience. RSI bills about $38 to $45 an hour for programming work. That’s considerably less than the $80 an hour that an experienced programmer in a hub like San Francisco, San Jose or NY could command, but somewhat more than what a company would pay for developers in India, where a good Java coder in a major city gets $23 an hour.

Benefits of Rural Insourcing

Work does not leave the country but shifts to hinterland Excellent option for data and information sensitive tasks Lower salaries Cultural similarities Similar time zones 30 to 50 percent cheaper than big cities Reduced travel and management expenses Politically acceptable.

Experts argue that the cost of moving work offshore can’t be measured solely by hourly labor rates. The additional executive hours needed to manage an offshore engagement, as well as travel and other startup costs, must be factored into the true cost of offshore outsourcing. The additional overhead that comes with offshoring puts the price of such work in the $30-per-hour range or higher. For an additional cost of 5 or 10 percent, it’s very appealing if you can get the work done at home.

“Culture, communication and work-time integration are some of the concerns for offshore outsourcing. RSI resources tend to work on our customer engagements anywhere from three months to a year; the ability and speed with which we can assimilate people on to the project directly affects the timeline and cost. The close physical proximity also helps customers, if necessary, to do service provider audits or have the resources to come onsite to the project. When customers look at total cost of delivery, the RSI model is highly competitive. Our customers see that the per-hour rates may be lower for offshore resources, but with rural sourcing we can reduce the work transaction time,” adds Plummer of Clarkston Consulting.

Often companies look at remote sourcing within the geography that they are located and offshoring as well. For instance, Ciber, a Denver-based company that operates a service center in Bangalore, India, launched its Cibersites program, under which it plans to open application-development centers in midsize U.S. cities. It says that while customers are under cost pressures, not all of them want to send work offshore. A number of potential customers are concerned about security and Intellectual Property (IP) protection in an offshore environment. They also don’t want to deal with midnight calls to an offshore project leader. So, it’s a combination that works well — sourcing in rural areas to keep cost low in the expensive countries and offshoring some tasks to global centers.

“The lower cost of personnel, combined with local economic development programs, enable us to offer skilled personnel at rates better than the sourcing alternatives offered by IT consulting firms in major metropolitan areas,” says another senior executive at a BPO.

Future Focus
As the global sourcing movement picks pace, rural sourcing will provide a great alternative to keep costs low or even keep the work at home. Companies are likely to engage in multisourcing strategy where the most critical and high-touch activities may not move out-of-customer locations; the critical work that calls for IP protection and has concerns around data security could go to an interior village or a small town of a customer country and finally the work that is offshored will be done in big cities, small cities and even rural areas.

For instance, already in countries such as India where IT and BPO exports are over a $40 billion industry, 18 percent of the supplier firms are located in small cities or the traditional non-IT clusters (that is, outside Bangalore, Mumbai, Delhi, Hyderabad and other big cities). “Offshoring to non-metros is on the rise. There is a great growth potential. However they are limited by the size of the market and availability of trainable labor force. Hence growth in rural areas could be slow,” says P. Vigneswara Ilavarasan of Department of Humanities and Social Sciences, Indian Institute of Technology, Delhi.

Agreed, it’s very limited and almost invisible at present, but rural sourcing could potentially become big
as companies are forced to look at the next big cost cutting model.