Bharti Airtel finally says 'yes' to IBM but with caveats

All the speculations on whether IBM will get a renewal of its landmark contract with Bharti Airtel, largest telecom operator in India, have finally come to an end. IBM announced that Bharti Airtel has extended the agreement to manage latter’s infrastructure and application services over the next five years. Here are the key highlights:

- Although the deal value is not disclosed, Forrester estimates to be in between $600-700 million spread across five years
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- Tenure of the contract has reduced to five years now (from 10 years earlier)

- Bharti Airtel plans to build in-house tech capabilities and expand its partner ecosystem as part of its new IT vision

What it means: Bharti Airtel has taken a pragmatic and obvious approach for the new contract with IBM. Provided below is our analysis on the deal:

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- Revenue sharing model is becoming less adequate considering the size of Bharti Airtel. The operator had around 4 million subscribers when the revenue sharing based contract with IBM was signed in 2004. The main objective for Airtel at that time was to scale up operations to support a rapidly increasing subscriber base. It has grown more than 60 times since 2004 and the scale is now too big for a revenue sharing model. Moreover, the growth in subscribers has plateaued so the revenue sharing model makes less economic sense for Bharti now. It is now more about cost containment than subscriber growth for the operator. As a result, although not disclosed by IBM/ Bharti, we believe the revenue sharing component must have reduced significantly as part of the new contract.

- Rising customer expectations and economic challenges demand new partners. Recent Forrester Business Technographics data indicates that addressing the rising expectations of customers and improving customer satisfaction is a top business priority for 90% of Indian firms. The low average revenue per user (ARPU), rising customer expectations coupled with tough economic situation in the country have forced operators to become “customer obsessed” to improve both top- and bottom-line growth. Although IBM has a strong digital marketing portfolio, the decision to restrict IBM to IT management services highlights the growing realisation within Bharti that they need to broaden their partner ecosystem to better win, serve and retain their customers.

While IBM continues to be a strong IT partner for Bharti Airtel, the operator sees an opportunity to mitigate potential risks of working with a single vendor by introducing new partners into the ecosystem and ramping up its own technology management capabilities. While yesterday’s Bharti Airtel success was largely defined by the size of its subscriber base, tomorrow’s Airtel will be shaped by customer expectations. A broadened tech vendor ecosystem will help the company achieve its vision in the long run.

The author is VP and Country Manager, Forrester India.