Despite the steady march of IT services to offshore centers from India to Russia over the past 15 years, many IT tasks aren’t easily moved. Financial regulations, for instance, often demand that data such as bank records be processed in home markets. Privacy rules impose similar restrictions on health care data, while security guidelines require defense contractors to handle data analysis within national markets. By one estimate, more than 15 percent of data center jobs must remain there for these reasons.¹ Even with work that’s not bound by such regulations, it isn’t uncommon for up to 25 percent of all IT service tasks to remain in onshore or at least close-shore locations (close to the home market, though not necessarily in it), simply because that’s where skilled software technicians are found or can be quickly deployed. (For simplicity’s sake, from now on, we shall refer to locations in or near the home market as close-shore locations.)

But as companies review their IT needs going forward, there’s a growing problem with this picture. The onshore service facilities of many companies are located in areas where IT costs are among the highest in the world—often near headquarters operations in major European and North American urban centers. An increasing number of these organizations are now taking a close look at second-tier cities in close-shore locales as venues for future investments. Pools of high-level IT talent are available in such regions, wage levels are attractive, and generous government incentives are often available to spur local investment.