BackIdea extends IT outsourcing contract with IBM
Originally signed in March 2007 for 10 years, Idea Cellular has extended the contract to 2020 for $700 million
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Bangalore: Idea Cellular Ltd, India’s fourth largest mobile phone operator by subscribers, has extended its information technology (IT) outsourcing contract with International Business Machines Corp. (IBM) till 2020 and an additional $700 million (around ₹ 3,800 crore).
The original contract to manage Idea’s IT infrastructure and applications was signed with IBM, the world’s biggest technology services firm, in March 2007 for 10 years.
The mid-term extension of the contract means IBM will avoid formal bidding by rivals when it would have expired in 2017, said at least two company officials familiar with the development. They requested anonymity because they were not authorized to disclose the mid-term extension of the contract. The contract has now been extended to 2020.
IBM has also started negotiating its existing 10-year-long outsourcing contract set to expire in 2014 with India’s biggest telecom company, Bharti Airtel Ltd, the first executive said.
“Things have changed from our first total outsourcing contract with Bharti eight years ago—telcos now are very price sensitive as their revenue and profit growth have slowed down," the second executive involved in discussions with Idea Cellular added.
When contacted by Mint last week, an IBM spokesperson said the company would not comment on speculation. A Bharti Airtel spokesperson said on Thursday that the company would not comment “because of confidentiality in partner relationships". The Idea Cellular spokesperson didn’t respond to an email query sent on 10 December.
Indeed, when IBM signed its contract with Bharti in 2004, the payment was linked to the number of subscribers. As Bharti Airtel added more subscribers, IBM’s revenue from the project grew accordingly. However, India’s telecom growth has been under pressure to maintain profitability as call rates drop because of intense competition. Bharti Airtel, for instance, reported its 11th straight quarterly drop in profit, crimped by rising costs and higher taxes in the three months ended 30 September this year.
Experts said Indian telcos are facing new realities as they renegotiate and renew their ongoing IT outsourcing contracts because of rising costs, low voice tariffs, and newer revenue opportunities in data services.
“The challenge faced by operators is how to negotiate IT contracts that can balance risks and rewards because the market has slowed and it’s no longer about number of subscribers," said Kamlesh Bhatia, a research director at Gartner Inc. who tracks the Indian telecom market. “Now revenue growth does not necessarily mean profit margin growth—the business complexity has increased," he said.
Technology researcher Gartner said India’s IT services market will reach $10.2 billion next year, from $9.1 billion in 2012. The research firm added that the country’s overall IT market including computer hardware, services, software and telecommunications will be worth $71.5 billion in 2013, a 7.7% increase over this year.
“IT is no more a non-core part of the business for telcos, it’s a lot more integral to business than before. In many cases, IT is now a product because many telcos are offering enterprise services," said Bhatia.
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