How to set up an IT firm in tier II and tier III cities

The information technology (IT) industry has been one of the most important industries for the Indian economy. It is expected to grow by another 19 percent in 2011 as more and more companies emerge to challenge the established players. The Centre and state governments have also understood the potential of the sector and are creating platforms and policies to support its growth. This openness shown by the government has opened avenues for aspiring entrepreneurs in cities other than metros. Several factors make Tier II and Tier III cities preferred destinations for IT services. These include increasing awareness about the industry, abundant local talent pool, availability of resources and facilities, competitive landscape and marketing opportunities.

Increasing Awareness
The IT industry accounts for over five percent of India’s GDP and over 2.5 million people are employed directly or indirectly with it. This is the biggest reason why awareness about the industry has spread so successfully. India is the 12th largest country in the world in terms of broadband internet users. This is another indication of growing awareness.

Local Talent Pool
Every year, India produces about 5,00,000 engineers and the level of education in Tier II and Tier III cities is on par with the metros. Cities such as Jaipur, Trivandrum and Kochi have emerged as places also known for quality education and work force. The people, too, have grown cosmopolitan from years of exposure to various cultures and considerable migration to and from the states. Eagerness to seize opportunities within hometown also helps ensure a highly stable and productive workforce and makes these cities rich in potential local talent.

On the other hand, metros already have numerous industrial clusters and other business units. This is an important consideration for an entrepreneur for two reasons. First, the concept of outsourcing is driven primarily by the desire to have less expensive talent and reduce operational costs. Second, social displacement or the need for people to migrate in order to find work. Tier I cities are becoming saturated with people and their infrastructure is nearing its limit. These factors have a powerful adverse effect on the ability to reduce costs while operating in Tier I locations.

Hiring and Training Manpower
One of the primary attractions for setting up an IT enterprise in Tier II cities is the abundance of talent pool. So, it is best to reach out to colleges to hire freshers, who can be trained according to the requirement of the services one plans to offer. Apart from reaching out to fresh college graduates, one can explore opportunities with professionals who work in other cities but would like to come back to their home town, given an opportunity; as far as lateral hiring is concerned. The compensation can be set according to industry standards—which often vary from a metro to a small city. It is always better to do a thorough research on this before hiring.

Licenses and Registration
The registration process for an IT firm is the same as is for other businesses. One has to start with obtaining Director Identification Number. This can be obtained online from the Ministry of Corporate Affairs portal in a day and costs around Rs.100. Then, one must get digital signature certificate (online) from a private agency authorized by the Ministry of Corporate Affairs. This costs Rs.1,500 and can be done in three days. Then reserve the firm name with the Registrar of Companies, stamp the company documents at the state treasury or authorized bank (private), get the Certificate of Incorporation from RoC, and make a seal (private). All these should take around nine to 10 working days and would cost around Rs.18,000 to Rs.19,000. Permanent account number and tax account number are taken care of during other processes.

Services Offered
Services offered cannot be different from what one offers in Tier I cities. This is why often the biggest competitors of a small and mid-sized company are the well-established enterprises. One needs to focus on the strengths instead of trying to offer all possible services to the clients. If you plan to start an IT enterprise in a Tier II and Tier III city, make sure you identify the expertise of each partner and plan the service offers accordingly.

Resource and Facilities
Resources and facilities are two important factors that need to be considered when setting up an IT firm in semi-urban cities. These cities offer another key differentiator that entrepreneurs should consider—the ability to build large centers that offer a great number of job opportunities but are dispersed around towns and smaller cities.
What has been called an IT “necklace strategy” is an effective way to deal with social displacement issues. Eliminating much of social displacement in this manner is a major benefit to technology firms. Also, there are no environmental concerns as IT is a service industry. An entrepreneur must research thoroughly about a town or city to know the availability of required resources and facilities. He must be convinced about the commercial advantages before investing in such a location.

The Competitive Landscape
Apart from the abundance of talent, another aspect to the competitive landscape is already the intense competition among cities for new technology companies. This means cities must grapple with building their infrastructure in order to attract entrepreneurs. By infrastructure I mean all the facilities that make a city a good place to live in—good schools, civic amenities, entertainment options, etc. It must be a place that attracts workers and their families.

Marketing and Publicity
Perhaps the single most influential new technology is mobile phone. India housing more than half a billion mobile phone users means entrepreneurs have an extraordinary new cost-effective tool with which to reach out, engage and build relationships with prospective customers, as never before. India has many semi-urban cities that could prove to be advantageous locations for new enterprises. The industry will only continue to grow for years to come. Will you become a part of it?