Bangalore: Bharti Airtel Ltd , which is currently re-negotiating its 10-year information technology (IT) outsourcing contract with International Business Machines Corp. ( IBM ), is set to hand out more business to other technology services vendors led by Tech Mahindra Ltd and reduce IBM’s share of the contract in what will be the biggest overhaul of the landmark outsourcing deal.
The latest developments will also set the agenda in the way IBM’s other large telecom contracts in India with Vodafone India Ltd and Idea Cellular Ltd are negotiated when they come up for renewal in a few years’ time. IBM has a five-year contract with Vodafone, worth more than $1 billion, which comes up for renewal in 2016-17. With Idea Cellular, IBM has a 10-year contract worth about $800-900 million that comes up for renewal in 2019-20.
At stake is IBM’s dominance in India’s telecom outsourcing market where the combined business it gets from the likes of Bharti Airtel, Vodafone and Idea Cellular is about $5 billion through the tenure of those contracts and will give other rival vendors the opportunity to challenge IBM’s dominance in India.
Tech Mahindra may walk away with a sizable chunk of business amounting to about $50-100 million a year or even more, according to at least three people familiar with the development. They all requested anonymity as these details are confidential and nobody is authorized to comment.
“For (Bharti) Airtel, it’s become important to consider other alternatives, given that their relationship with IBM is not the same as it was a decade ago,” said the first person cited above. “The way this contract is negotiated will have a significant bearing on the way the other telecom contracts with IBM will be handed out.”
The 10-year contract, which was originally signed for about $750 million in 2004 and was partly a revenue-sharing agreement with payment linked to the number of subscribers, is valued between $2.5-$3 billion.
Simultaneously, IBM’s share of the business will come down from around $310 million a year to about $100-150 million annually as part of a three-and-a-half year long contract, the people mentioned above said, one of whom is directly involved in the negotiations.
The contract duration will be shortened to about three-and-a-half years to bring it at par with Bharti’s other outsourcing contract with IBM in Africa to manage its African back-office IT operations. The final terms of the contract will be decided over the next two months and will be charted out by February.
IBM said it does not discuss details of confidential client contracts, while Airtel, Tech Mahindra, Wipro and other IT firms declined comment.
The developments also underscore the fact that the decade-long relationship between IBM and Bharti are not the same any more, at a time when telecom firms face slowing revenue growth due to sluggish subscriber base growth. Earlier this year, Bharti even moved its office email application from IBM’s Lotus Notes to Microsoft Exchange.
For now, Bharti is looking to keep the lower-margin commoditized parts of the contract with IBM, while handing out newer services to other vendors. The renegotiations for this contract are being closely tracked by the industry because there are not many outsourcing contracts globally of this size. Tech Mahindra, which last year bought a 51% stake in the Bharti Group-owned mobile application firm Comviva, is strongly placed to win a greater share of business from Bharti Airtel, especially in the area of application delivery, the above mentioned people said. Tech Mahindra has already gained about $50 million of business from IBM over the past year.
“When the deal was originally signed, there were not many vendors who could match up to IBM,” said the second person cited above. “Now Airtel has more options and can go with a number of other credible vendors who have tasted a lot of success over the years.”
To be sure, nobody is suggesting that IBM will lose the entire contract and people familiar with the development say that Big Blue, as IBM is popularly known, will still end up with a respectable chunk of the contract. “The contract is definitely being broken up and diluted down and IBM will probably retain about 50-60% of the total quantum of business,” said the third person familiar with the development.
But with revenue growth having slowed for IBM over the past few quarters globally, any loss of business from important contracts will trigger concerns over the firm’s ability to hold on to large outsourcing contracts, especially after IBM lost its BP Plc contract to Accenture last year.
“Taking the economic interest allegations aside, one can expect that all options are back on the table and that a single source contract is less likely than before. However, one can expect that there are additional costs in a break-up that can sometimes outweigh the advantages of having a multiple vendor sourcing contract. For IBM to win, they must show that they are a better value than the costs of having a multi-vendor contract,” said Ray Wang, founder of enterprise research firm Constellation Research Inc.