India's traditional outsourcing centers appear to be falling out of favor.
According to Pierre Audoin Consultants, outsourcing companies are increasingly looking outside Bangalore and Mumbai when choosing bases in which to set up shop.
PAC found that while India remains popular with the top 50 outsourcing companies--11 of the 49 new offshoring delivery centers set up in 2008 were based in the country--vendors are progressively creating more bases in cities such as Chennai, Noida, Hyderabad, and Pune.
According to Nick Mayes, a senior consultant at PAC, conditions for outsourcers in Bangalore and Mumbai are no longer as favorable as they once were.
"Over the last two or three years, labor markets, particularly in Bangalore and Mumbai, have become overheated. The big IT services companies and multinational companies have been competing very intensely for the best resources coming out of the universities and also resources from their rival organizations," he told Silicon.com.
Big Indian outsourcers TCS and Wipro have been first to turn to the second tier, establishing links with the universities and inspiring a shift toward cities like Chennai and Pune.
The consultants also found a trend among outsourcers to spread outsourcing sites over a number of countries.
"(Outsourcers) are spreading not just the risk but also being wary of being overdependent on single-market terms of salary inflation in that country or the political environment in that country," Mayes noted.
Over 2008, PAC found that 10 new outsourcing centers were opened in Latin America and another six in China, while Mayes believes Malaysia and the Philippines will also increasingly prove to be attractive outsourcing destinations.
While similarities in business culture and language will keep India at the top of the United Kingdom's list of outsourcing hot spots, Eastern Europe and Russia could be set to emerge as an alternative.
"There's some fantastic technical skills coming out of the former Soviet Union--guys with 20 or 30 years' experience of programming for military organizations and things like that," Mayes said.
"Slowly but surely," he said, "companies are starting to get the supplier marketplace in place to be able to support Western clients--previously, it was 10 or 20 man outfits out there, but we're starting to see some sizeable companies build up, and that's what Western clients want to work with. They want the security of knowing the company they're working with will be around in 12 months time so they can commit to serious business with them."
Jo Best of Silicon.com reported from London.