Airtel Outsourcing Case

Jins JoseNavneet Kumar Vivek Kumar Singh

STRATEGIC OUTSOURCING AT BHARTI AIRTEL LTD.

FINANCIAL PERSPECTIVE

• March 2004: Revenues of $1,113.4 million, a 100%

increase over 2003.

• Operating margins from negative (–2.25%) in 2003

to 16.9% in 2004. (Able to take advantage of the

economies of scale due to its larger network).

• While it had suffered a net loss in 2003, the next

year saw a net income of $117 million.

• Return on equity in 2004 was nearly 12%.

TELECOM SECTOR: MARKET

2004-2005

Bharti; 25

Reliance; 19.5

BSNL; 16

Vodafone; 12

Idea; 11

Tata; 2

MTNL; 1.5 Others;

13

Core Competency of Bharti• The main core competency of Bharti was OPERATIONS.• And its focus was to maintain the quality leadership with competitive pricing.

• Improve on Market Share• Maintain Quality leadership• With growing competition remain competitive on

pricing.• Emphasis more on value added service to improve

bottom line.• More investment for capacity expansion

Major Concern for Bharti•Bharti’s customer base was growing 100% per year

•Equipment bought for $15 to $20 million in the last couple of years was no longer of much use as the new software wouldn’t run on it.

•Budgeting and the tendering process for network expansion is taking up a tremendous amount of management time.

• ARPU was falling to $4- $5 as against $10 in US, Europe.

•Had to keep 30% excess capacity to meet the growing demand.

•Could not afford to delay the purchasing of additional capacity as it might effect the quality of service.

• software or hardware applications not supported by IBM would no longer be available.

• Transfer of nearly 1000 employee can pose cultural & managerial problems.

Major Concern for Bharti

• Threat to security and confidentiality of Bharti.

•Quality problem •Tied to financial Well-being of vendors

Major Concern for Bharti

Advantages of Outsourcing• It can use its resources and expertise to its core areas

of product innovation, value-added services, marketing, branding and pricing

• Company do not have to keep investing in maintaining excess capacity of 30 -40 %

• Improvement of overall industry profitability by reducing conflict between network equipment vendor(like Nokia, Ericsson) and telecom company(Bharti)

• Can provide world-class mobile services by leveraging Ericsson's expertise.

• Rapid Growth is possible.

• Cost reduction for Bharti: Rapidly changing trends in telecom industry leads to quicker obsolescence of equipment's

Disadvantages of Bharti outsourcing •Chances of losing out Bharti core competency.•Over dependency on its vendor.•Outsourcing from smaller company to a larger company.

•Time to market of new IT based services might get affected.

•The IT and marketing departments were concerned that software or hardware applications not supported by IBM would no longer be available.

• Transfer of nearly 1000 employee can pose cultural & managerial problems.

Nokia, Ericsson ,Siemen & IBM’ s Concern

•They might be stuck with important investments in network equipment

•And hence the deal might become risky.•They were also concerned with absorbing hundreds of Bharti employees – culture mix

•Turning down the Bharti offer can hamper future growth in Indian market

• IBM needed to be fairly sure of Bharti’s future success

Agreement Structure

Ericsson, Nokia, and Siemens• Buildup, maintenance and servicing of telecom networks equipments

• Payment agreement based on erlangs used by Bharti excluding the unused capacity

• Ownership of assets rests with Bharti and maintenance responsibility rests with service providers

• Quality parameters also taken care by SLAs• Three year contract and renewable under mutual agreement

IBM:• Buildup, maintenance and servicing of core IT infrastructure

• Everything from computers to mainframes excluding telecom network specific networks

• Sharing of revenue between Bharti and IBM• Percentage of revenues share set to decrease as overall revenue increases

• SLAs – hotline customer satisfaction and application implementation delays

• Five year contract renewable for another five years

Agreement Structure

Thank You