IBM's loss in Bharti IT outsourcing deal a gain for TCS, Tech Mahindra

Deal renegotiated last week; IBM's size may have come down to $400-500 mn

In what could be one of the biggest blows for Big Blue, telecom services player Bharti-Airtel has restructured its contract with IBM, giving away work to Indian information technology (IT) services entities, Tata Consultancy Services (TCS) and Tech Mahindra.

The restructuring has also meant IBM’s share in the $2-billion landmark IT outsourcing deal would come down significantly. IBM is likely to get about $500 million worth of outsourcing contracts from Airtel, after the renewed contract that was signed last week, said sources in the know. An announcement is likely within the next couple of days.

According to the earlier contract, IBM’s share of revenue was $250-300 million a year. After the renegotiation, the size has come down to $100-$125 million a year. The tenure of the deal has also been brought down to five years, instead of the earlier 10 years.

IBM’S OTHER DEALS WITH TELCOS

• With Vodafone about $1 bn
• With Idea Cellular $800-900 mn
• With Bharti Airtel  Expected to be about $400-500 mn

A Bharti-Airtel spokesperson declined comments on the issue. And an email sent to IBM India did not elicit a response.

“The re-negotiation has been going on for a long time now. The idea is to carve out a smaller portion of the deal for IBM and also get on board other vendors, based on capabilities and niche speciality in certain technology. IBM will not go away completely from the contract. They have been managing this for long,” said a source close to the deal discussion.

The contract size of TCS and Tech Mahindra could not be confirmed. An email sent to TCS came back with the reply: “We do not comment on market speculation.” An email sent to Tech Mahindra did not elicit any response.

Sources said the fresh deal would not mean the total size of the contract would increase. “Bharti is looking for a medium-term outcome and in a few years, they may also ease out IBM completely. The strategic change is that they have chosen two other vendors, which means Bharti wants cost efficiency,” said Alok Shende, founder director and principal analyst, Acsentius Consulting.

In the renewed contract, the key areas of work for IBM would be data services and increasing cost efficiency.

The IBM-Bharti deal was a landmark deal in the telecom space when signed in 2004. Though a total outsourcing contract, it was also based on revenue sharing. The deal size was $750 million. It kept going up, as Bharti-Airtel’s customers grew. In 2004, when the first contract between IBM and Airtel was signed, Airtel had four million subscribers, and now, Airtel has more than 200 million users.

Though there have been reports that the IBM deal was getting reduced due to some ‘violation of business-process guidelines’, analysts feel that should not be the sole reason for the overhaul. “Telecom players are going through a tough time. They are under tremendous pressure. This is more of an innovation call where Bharti wants better cost management. Besides, if there are players who are ready to give a better pricing, then why would Bharti hold on,” said an analyst on condition of anonymity.

From a deal perspective, Bharti Airtel is following a trend that is being witnessed globally, where large deals are being broken into smaller sizes, as companies prefer to work with more than one vendor. Not only do companies manage to get a good pricing advantage, but also access to niche technology firms.

For IBM though, the deal being broken is bad news. For Big Blue, the Bharti contract was a showcase deal. Not only was it a landmark deal in terms of the size, but was also the first IT outsourcing deal from the telecom sector in India.

After this, IBM also signed a contract with Idea Cellular worth $800-900 million, which comes up for renewal in 2019-20, and with Vodafone, which is worth $1 billion.