Warning bells are ringing on Bangalore's future as a leading BPO destination. It is not a full-blown crisis yet but the portents are disturbing, according to a cross section of industry, human resource and real estate experts.

"From January 2008, only a handful of BPO companies have set up shop in Bangalore, as against an average two or three companies beginning operations every month in 2007," says a source in a real estate consulting firm.

"Of late, we don't hear of too many companies coming to Bangalore, whereas we have seen many BPO companies starting operations in cities like Chennai, Noida, Kolkata and Kochi. I feel Karnataka is losing its advantage as a BPO destination," said S Nagarajan, founder and chief people officer of 24/7 Customer, a Bangalore-based BPO firm which employs around 7,000 people across various cities in India.

Industry sources say that BPO hiring numbers in Bangalore have been lower by up to 30 per cent in the April-June quarter, but these are expected to pick up in the current quarter.

The decline in the number of new companies from the US or Europe setting up shop in Bangalore is the high cost of operations in the city, economic crises in their home country and 2008 being an election year in the US.

Currently, it is only the existing companies located in Pune, Chennai, Hyderabad and Gurgaon that did not have a base in Bangalore are now setting up operations. On the other hand, large firms which already have 10,000 or more staff in the city are automatically looking elsewhere for expansion.

It is not gloom all around. Global HR solutions giant Adecco is yet to see the effects of any slowdown. "The actual impact of the developments in the US will be seen only towards the end of the year," Sudhakar Balakrishnan, MD (India and West Asia), Adecco, said. "Much of the hiring today is happening at the entry level, a lot from college campuses."

There is no fall in the absolute numbers till now, and on the surface it is business as usual. But what is worrying is that "most of the hiring is for attrition backfill and project positions. Bulk hiring is today few and far between," said Madan Padaki, co-founder and director of talent assessment firm MeritTrac.

HR professional Ramesh Hande notes that hiring is today driven more by attrition than business growth. "In the last 6-8 months, attrition has only increased." No amount of training seems to have helped in slowing down attrition rates.

Fiscal 2006 saw upwards of 100 per cent growth mainly due to large scale-ups by the captive operations of IBM and Accenture, supported by capacity expansions from Fidelity, Infosys [Get Quote] BPO, Idea, 24/7 Customer and Reuters.

Whitefeld, which has a sizeable number of global firms, saw the office space market correcting over the last three years. As this market bottomed out, it gave opportunities to existing companies in the region to expand because space rentals were lower, enabling them to get the required space at short notice.

The primary reason cited by the industry for Karnataka's failure to attract new BPO investment is lack of infrastructure. Citing the Chennai example, Nagarajan said that the Tamil Nadu government has planned the city's infrastructure with the long-term interests of the industry in mind.

All manufacturing industries have shifted to the Sriperumbudur-Kancheepuram sector, while IT companies have been concentrated on the Old Mahabalipuram Road, also called the 'IT Corridor'.

The six-laned OMR has been designed to enable traffic to flow freely. "Karnataka is no more the industry-friendly state it was in 2000," Nagarajan lamented. But things can change. Hosur Road, which has one of the highest concentrations of Indian IT companies, by way of Electronics City and the Karnataka Industrial Areas Development Board industrial layouts, saw market correct due to poor connectivity, with few companies expanding in this area.

Now with an elevated highway to Electronics City coming up, almost every big company in the area is enquiring about additional space.

Industry nodal body Nasscom has sounded off a warning that Bangalore has displayed symptoms of warding off investments on account of increasing cost of operations.

Discussing a recent Nasscom-AT Kearney report on the assessment readiness of 50 leading cities to take forward the IT-BPO industry, Nasscom President Som Mittal said, "In terms of location attractiveness for the BPO sector, Bangalore grew organically and continues to lead the pack with about 30 per cent of the country's BPO delivery happening here. But in terms of cost of operations, it is not attractive."

B S Murthy, chief executive of Bangalore-based recruitment firm Human Capital, notes that the phenomenon is not as much one of BPOs finding Bangalore unattractive to carry out their operations as "other locations becoming as attractive as Bangalore. The priorities of companies planning to set up centres with 1,500-2,000 seats have widened".