Bangalore: During her first visit to India last month, Virginia M. “Ginni” Rometty, chief executive of the world’s largest computer services firm International Business Machines Corp. (IBM), kept a rather low profile.
On top of her agenda was a meeting with Sunil Bharti Mittal, chairman of Bharti Airtel Ltd, India’s largest mobile phone operator and an IBM customer, providing nearly $250 million in annual business as part of what is now over a $2 billion outsourcing contract for managing telecom networks, desktops and different software applications.
The original contract signed in 2004 will expire next year and executives at IBM are nervously pushing for renewing the contract that once helped it beat Indian software firms Infosys Ltd and Tata Consultancy Services Ltd in their home market.
Rometty’s quiet visit and meeting with Mittal was a last-ditch effort by IBM to save its biggest outsourcing contract in India, three people directly familiar with the discussions said last week. Ever since IBM lost its BP Plc contract to rival Accenture Plc last year, there has been a newfound drive internally to save large deals due for renewal.
“At this point in time, it looks highly unlikely that Bharti will give back the entire contract to IBM. The relationship is jaded, (and) other rivals like Tech Mahindra are much more aggressive and competent,” said the first person who participated in the discussions during the original contract signing in 2004. All three people cited requested anonymity.
For now, Airtel is exploring ways to break down the existing contract with IBM across different areas and working to ensure that the deal does not go to the incumbent in totality, the first person said.
“An extreme step would be to replace IBM from the entire contract, a possibility not looking imminent given the costs and hassles of transitioning complex work to a new vendor,” said this person. “But IBM will lose its monopoly status.”
Earlier this year in April, Bharti Airtel moved its office email application from IBM’s Lotus Notes to Microsoft Exchange, another sign that almost a decade-old relationship was no more the same.
“The discussions are focused on what parts of the contract can be given to newer rivals, not whether IBM can do it all at lower cost, etc.,” said the second person, who is part of the team involved in evaluating different vendors.
Both IBM and Bharti Airtel declined to comment on the matter.
The outsourcing contract is divided across five major areas—managing computer data centres, software applications, desktops, managing customer help desks and the back office. Of these, IBM is best positioned to retain the computer data centre portion, especially since most of the hardware is from the Big Blue.
“We see more intense rivalry in BPO (business process outsourcing), helpdesk services and desktop support than data centre, etc., which still account for nearly half of the total work,” said the third person, an IBM executive.
Experts watching the negotiations from outside said more often than not incumbents do not win back the entire contract.
“From what we have heard, the renewal of the IBM-Airtel contract will take place, but possibly some of the services will definitely go to other vendors,” said Sudhanshu Bhandari, an analyst at Forrester Research. “They will have a multi-vendor strategy. Most likely services such as desktop and laptop support at least will go to other vendors.”
There is nothing unusual about incumbents such as IBM not winning back the entire deal, according to Sid Pai, partner and president, Asia Pacific region, at outsourcing advisory firm ISG.
“While it is disappointing for the incumbent to lose a chunk of a big contract, it is not entirely unexpected or unusual. These things keep happening in the re-bid space,” Pai said. “Many of the Indian service providers are extremely competitive and aggressive in the renewal space, and thereby have in a lot of instances taken away at least a part of the scope from the incumbents.”
Some experts said availability of more competitive vendors is also a trigger for Bharti Airtel to think beyond IBM.
“What’s at stake is a close and productive relationship built over a decade as both companies have grown. When that contract was signed, IBM was one of a few companies who could deliver a global footprint for Bharti Airtel,” said Ray Wang, founder of enterprise software research firm Constellation Research Inc. “Today there are more competitors than ever.”
“The challenge in renewing a contract after 10 years is that both sides may have to inject fresh thinking, reconsider cost structures on core, and make commitments to invest in innovation. If the relationship remains just a cost out, then it will be a contentious one,” Wang added.
Other experts such as Phil Fersht of outsourcing advisory firm HfS Research said IBM cannot afford to lose a contract of this size.
“Bharti is a landmark contract for IBM and very important for its brand and presence in Indian market,” said Fersht. “More importantly, IBM’s IT services business is under massive attack from the likes of TCS and Infosys on large enterprise deals, and it cannot afford to be seen to be losing deals like this in the market at a time where competitive pressures are reaching a boiling point.”
Some IBM executives remained hopeful of renewing the contract.
“For anybody doubting IBM’s ability to work on newer engagements with Bharti, the contract we signed in Africa in 2010 is enough proof that we can win fresh business,” an official at IBM India said, requesting anonymity.
In Delhi, where Rometty met Mittal, the IBM officials were told about the new choices and prevailing business conditions in the world’s second-biggest telecom market.
“This meeting lacked the warmth and the positive energy Mittal and Sam Palmisano (president and chief executive officer of IBM until January 2012) shared when original contract was signed,” said the third person familiar with the discussions. “In fact, the pressures of maintaining profit margins in telecom, some issues with the ongoing engagement with IBM, dominated the agenda.”