Bangalore: Bharti Airtel Ltd, India’s biggest mobile-phone firm, has started discussions to renew its information technology (IT) outsourcing contract with International Business Machines Corp., estimated to be valued at $2.5 billion, in what is set to become the most intense battle among multinational and Indian software rivals vying for the contract.
As IBM, the world’s largest computer services firm, prepares to renew its biggest information technology contract in India that is set to expire next year, it faces competition from rivals like never before. Ten years ago, when it first signed the contract that later triggered a trend among almost all phone firms in India to outsource their non-core processes, Bharti Airtel had just 8 million subscribers. Now, with more than 260 million subscribers globally and phone tariffs at the lowest in the world, Bharti is looking for ways to cut costs.
The outsourcing contract for managing software applications and computer hardware networks for India’s biggest mobile phone firm was originally worth $750 million over 10 years and is now estimated to be over $2.5 billion according to four executives involved in the delivery of this project. Bharti Airtel has also started discussions with IBM’s rivals, including Wipro Ltd, Accenture Plc, Tata Consultancy Services Ltd, and Capgemini, executives chasing the business confirmed last week.
“Ten years ago we could not have even dreamt of chasing a contract of this size and complexity—but a decade is long enough time to prepare,” said a senior executive at one of the multinational firms chasing this opportunity. He requested anonymity because any public comment on the contract could affect his company’s prospects.
“Informal discussions started sometime back—both IBM and Bharti don’t want to wait till 2014 for negotiating the renewal,” the official cited above said.
An IBM India spokeswoman declined to comment while a Bharti spokesperson said her company does not comment on specific deals with partners. Officials at Capgemini, TCS and Wipro declined to comment.
Over the years since this contract was signed, IBM has captured nearly half of the IT outsourcing market in India, beating rivals. Big Blue, a nickname that IBM acquired by selling blue-painted mainframe computers during the 1960s, has used its relationship with Bharti Airtel to gain more business.
In 2010, Bharti Airtel awarded a 10-year contract to IBM to provide IT solutions to its employees in 16 countries in Africa, which was the second 10-year deal between the two companies in Africa. In the first deal which was signed in September 2009 and was worth $1.5 billion at the time, IBM agreed to manage all IT requirements for Bharti Airtel across 16 countries in the continent. In 2008, Bharti outsourced all its IT requirements for its Sri Lanka operations to the software firm.
The outsourcing contract at Bharti also gives an opportunity to Indian technology firms to regain the lost share to IBM.
“This is a significantly political moment with the development of Indian IT majors. Do they have the price competitivePhil Fersht, founder of outsourcing research firm HfS Research.
Experts and outsourcing advisers across the world are keenly watching the progress of this deal because there aren’t many opportunities of this size in the global IT industry.
Some experts said Bharti Airtel has many options compared to 10 years ago, and if anything, these negotiations will help bring down the rates significantly.
“It’s a great client, they’ve got good money and they’ve put a lot of investment in it. I don’t think they’ll go away without a fight. I don’t think IBM is backing down easily. I don’t see the other guys backing down easily either. It should be fun to watch,” said Peter Bendor-Samuel, chief executive of outsourcing advisory firm Everest Group.
“If I were (Bharti) Airtel, I’d certainly be sifting through the market. I’d certainly want IBM believing that. It doesn’t mean they’re ready to throw IBM out, but they’re probably ready to see the price decrease,” Samuel said.
For now, nobody is suggesting that IBM could lose the contract completely, especially given the investments it has made and knowledge it gained about managing processes over 10 years.
But Airtel would like to use this opportunity to bring current costs and billing rates down, and even introduce a strong second vendor to ensure that IBM does not control all of its operations.
“Some 80-85% of those deals go back to the incumbent (or at least include them in a new mix) according to our numbers. This domestic battle will be a tough one to fight. I would compare it to a marathon where on day one of that battle, IBM is already at 21 km (in case the client is happy),” said Frank J.H. Ridder, research vice-president at Gartner Inc.
Other experts said while IBM continues to be the biggest vendor for IT services in India, rivals are catching up.
“The domestic market opportunity for companies like IBM, Accenture and Capgemini are much bigger than they were 5-6 years ago. IBM is still the market leader in the domestic IT services market with a 12.5% share (the overall domestic IT market is pegged at Rs.400 billion which is Rs.40,000 crore), according to IDC), but that doesn’t mean that IBM is the only one dominating the domestic landscape,” said Nirupam Chaudhuri, research manager of software services at IDC.
Over the years, IBM has presented Bharti as the case study for transformation across the globe, and Sam Palmisano, chief executive officer of IBM, himself ensured a healthy dialogue with Sunil Bharti Mittal, the phone firm’s founder chairman.
“Bharti is special to IBM. It is a strategic contract that it will be desperate to keep. Last year, IBM lost British Petroleum, a major BPO client, to Accenture, which sent shockwaves through the company - it realized it was not immune from losing re-bids with clients, despite many years of history with them,” said Fersht.