A Change Of Address; The outsourcing industry is moving to cheaper locales.

Byline: Ron Moreau and Sudip Mazumdar

India's robust outsourcing industry grew up in the country's major cities--New Delhi, Mumbai and Bangalore, to name three. Prominent information-technology firms like Wipro, TCS and Infosys set up shop in those places, took advantage of smart but inexpensive technical talent, and flourished. In the mid- to late 1990s, Bangalore became one of the world's hottest IT centers. The city was clean, leafy, uncongested and offered financial incentives to businesses. Many firms grabbed them and turned the southern city into a symbol of India's low-cost tech prowess.

But nearly a decade later, Bangalore's success is turning into a liability. The city's infrastructure is creaking; citizens face power shortages, maddening traffic jams and poor public transportation. The cost of living has soared. Other big cities are experiencing similar urban problems, including high real-estate prices and worker salaries that are rising by 10 to 15 percent annually.

That's an alarming trend for an industry largely dependent on cheap labor. To lower their cost structure, top outsourcing firms are now moving both new and existing operations to smaller, cheaper cities--among them, Cochin, Jaipur and Pune. Some in India are calling these cities "mini-Bangalores." According to the National Association of Software and Service Companies (NASSCOM), about 30 percent of India's outsourcing revenues ($12.5 billion last year) will be headed to smaller cities within a few years.

Some major firms are already making the move. Last year General Electric Capital International Services (GECIS), a subsidiary of the giant U.S. company, opened a customer-service call center in Jaipur, a city of 2 million people that's fabled for its royal palaces. The GECIS call center employs 200 local youth to handle voice and online customer service, but the firm has bigger ambitions for the area. It's now building a large, modern facility on the outskirts of Jaipur that will house 2,500 employees within two years. Wipro, India's second largest IT firm, is following GE's lead. It has bought 10 hectares in the new $100 million Infopark in the southern coastal city of Cochin, and is building a $22 million campus that will eventually employ 5,000 workers in its software development and business-process outsourcing operations.

Wipro studied several smaller towns before settling on Cochin. The city, with a population of 1.6 million, has relatively cheap real estate, reliable power, good schools and a privately run airport. It sits along a beautiful, palm-fringed coastline, and has one of India's largest seaports. There are 25 colleges in the city, and as elsewhere in India, they produce a large pool of literate English-speaking young people. "People simply like living there," says Wipro vice president Tamal Dasgupta. The starting salary for Web designers and software developers is about $130 a month, half the pay for the same job in Bangalore.

The shift is not merely a matter of saving money. Officials at IT firms now in the provinces say their employees tend to be more loyal. In Delhi, Mumbai and Bangalore, competition is fierce for top-notch tech graduates. Trained engineers are not only more difficult to hire in the megacities, they're ready to jump at the first better offer. In less-developed provincial capitals, there's less competition for good graduates and a lower employee-attrition rate--roughly 5 percent, say experts, compared with about 30 percent in Delhi. For these reasons, says Sunil Metha, vice president of NASSCOM, "There's no doubt that the movement of outsourcing to tier-two cities will quickly gain ...