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Airtel chops IBM contract in half, comes full circle with its IT strategy

Airtel's new deal with IBM is an indication of the shift underway in telecom, where the biggies want to do a lot of the work required in-house rather than outsource the whole pie away
Written by Rajiv Rao, Contributing Writer

Recently Bharti Airtel signed a new deal with IBM for its IT needs that sent shockwaves through the IT industry and signaled a whole new era, not just for the Indian telecom giant, but in how relationships between telecom and IT may play out from here onwards.

Airtel did renew its contract with IBM, first signed in 2004 for roughly US$1 billion over ten years—but it did so while chopping the deal size in half, or US$500 million, according to reports. Apparently, the big beneficiaries are other IT Indian players such as HCL Technologies, Wipro, TCS and Tech Mahindra, who apparently will get the other 50 percent chunk.

There are several reasons for this—which if you peek under the covers, reveals a paradigm shift in the way that Airtel is thinking of itself and its business. The 2004, 10-year deal with IBM was forged through a revenue sharing agreement. That was then, in the early days of the telecom boom, when Airtel had a 4 million subscriber base, and it needed to do whatever it could—which included offering attractive inducements to technology partners to help it to scale up—to grow rapidly. This is now, when its base has grown 50 times to 200 million, too large to justify the revenue sharing model anymore.


"The declining Average Revenue Per User (ARPU), rising customer expectations coupled with tough economic situation in the country has forced operators to look beyond 'subscriber base' theory to become 'customer obsessed' to improve bottom-line growth," said Manish Bahl, vice president and country manager for India, Forrester Research.

These days, the whole mindset at large tech-dependent companies like Airtel has changed. Airtel still wants someone like IBM to handle its tech needs, but today, those are more focused and in areas like Analytics and Big Data which is what the new deal is all about. For everything else, "with the evolution of India’s IT industry, Airtel now has the option of hiring readymade, trained talent from the marketplace. And they have two reasons to do that now—lower cost and more control," says Peter Bendor-Samuel, chief executive and founder of outsourcing advisory Everest Group.

Plus, as Greyhound Research's Sanchit Vir Gogia observes, more and more "strategic outsourcing deals are increasingly being replaced by cloud and/or managed services delivery methods to leverage the cost and delivery benefits."

Also, back in the day, Airtel was legendary for pioneering an unusual and ground-breaking agreement regarding its equipment networks, where Airtel would pay for network capacity and not the infrastructure, thereby mitigating its capex spends in a deviously efficient way. This approach—dubbed the dollar per Erlang model—meant that Bharti didn't have to muck about trying to figure out when and how much infrastructure to add on but only paid for traffic coming out of the tower boxes leaving capacity utilization headaches to the network folk.

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That too is now being deep-sixed at Airtel thanks to a new era in telecom where saturation points are being reached and where the focus is now on retaining quality customers rather than pell-mell growth. Moreover, Airtel's rivals Vodafone and Idea Cellular have been able to do this in-house and ramp up and down efficiency and utilization as it see fits, allowing it to decrease the margin difference between themselves and the industry leader. Now, Airtel wants to make sure that this gap doesn't narrow further.

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