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Case Analysis - Bharti Airtel

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Case Analysis: Bharti Airtel |

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Introduction
Bharti Airtel Limited is a major Indian telecommunications firm, with a particular focus on operating in the mobile services market. Founded in 1995, the company quickly tried to exploit growth opportunities arising from the liberalization of Indian telecommunication markets. The family owned business was soon able to generate profits and extend market shares. However, the pace of company growth challenges the firm in terms of being able to setup the necessary infrastructural elements, both within the firm as well as outside the firm. Therefore Bharti considers “reverse outsourcing” of IT infrastructure and network setup and maintenance to well-established firms from developed countries, such as IBM, Nokia and Siemens. This case analysis examines the proposed outsourcing deal both from the perspective of Bharti and from the perspective of potential vendors in order to find the most appealing solution for both parties.
First, we talk about the success factors in the Indian mobile phone market and Bharti’s core competencies. Second, we will look into the outsourcing agreements outlined by Gupta and discuss the advantages and disadvantages of such agreements. Furthermore, we will discuss the question of how the contracts might affect Bharti’s core competencies. Third, we want to elaborate on the major concerns about entering in an outsourcing agreement with Ericsson, Nokia, Siemens and IBM respectively. Additionally, we propose some solutions to the problems identified previously in the form of governance mechanisms for the contract. Finally, we assume the role of IBM and Nokia to talk about the issues they might have when entering an agreement with Bharti and approach the question of appropriate governance mechanisms from the vendor perspective.
Core Competencies: Bharti’s Focus In order to maintain competitive advantage a company may look to outsource everything other than a firm’s core competencies. Ironically for Bharti, a mobile telecommunication company, network services and Information Technology (IT) architecture is not a core competency. Bharti’s primary core competency is operational superiority. They leveraged this focus to obtain licenses in 15 of 23 circles in India and created a diverse portfolio consisting of three strategic businesses:Mobile Services (64% or revenues), Long Distance, Group Data, and Enterprise (30% of revenue), and Broadband and Telephone Services (16% of revenue). In addition to operational superiority, this family run business, which strongly embraces the Indian work culture, also strives for industry dominance in pricing, product innovation, Value Added Services (VAS), and marketing. As an early entry into the Indian telecommunication industry, Bharti was able to develop name recognition amongst the public, but also developed agreements with vendors to utilize their products as transmission platforms for their service. These competencies translated to a 25% market share of the total Indian mobile market. Insourcing Requirement to Succeed To be successful in the highly competitive Indian telecommunication mobile market Bharti needs to stay ahead of its competitors by quickly adapting and expanding their network infrastructure to meet current technologies and support a customer base that is growing 100% per year. This rapidly growing customer base will force base station growth from 5,000 in 2004 to 40,000 stations by 2007. This expansive infrastructure growth will also require an uptick in their investment in human capital; Bharti plans to hire 3,000 to 4,000 people to build and maintain these additional base stations. While expanding its base infrastructure to accommodate the added capacity, Bharti also needs to ensure they are providing the latest technologies like the jump to Edge to further support 3G. In addition to the backbone technology, as the industry continues to consolidate, Bharti must also continue to provide value added services such as Short Message Service (SMS), games, ring tones, and different ring back tones. Finally to succeed Bharti must have a strong distribution network consisting of the top vendors in the industry, which consists primarily from Ericsson, Nokia, and Siemens. Being able to continue to couple their innovative service packages with the hardware devices these industry vendors provide will not only build brand loyalty with current customers, but also attract new customers. Outsourcing to Strengthen Core Competencies Many of the requirements to succeed are not aligned with Bharti’s core competencies. Bharti should stay true to its core competencies and outsource those misaligned tasks. As mentioned earlier, Bharti does not pride itself on network services or their IT infrastructure and thus should outsource these critical tasks. By reaching outsourcing agreements to maintain and expand the public network service infrastructure, Bharti can save millions of dollars in capital expenditures tied up in revolving equipment purchases without reducing the Quality of Service (QoS). A typical network uses only 60%-70% of its installed capacity. This excess capacity could save Bharti $300M to $400M [1], not to mention the short life-cycle these network devices posses. By turning this responsibility to an expert in this space, Bharti can reduce conflicts between the operator and the network controller, negate the prevalence of obsolete hardware, and reduce software compatibility conflicts to stay ahead of the competition and provide new services to the customer faster. In addition to the capital savings, Bharti can use the contract support to predict a reliable usage linked cost structure. A reliable projection report tailored around pay per use could propel Bharti into the lowest-cost producer of minutes in the world.
With an outsourcing agreement, management would now be freed from the recurring negotiations that consumed a quarter of their time. This increase in available bandwidth along with the capital expenditure savings can now be directed at improving their core competencies; specifically, continue to innovate and expand the value added services category to improve the customer experience. Not all Agreements are Advantageous Outsourcing does however, come with many risks as well. By outsourcing the network infrastructure Bharti is completely dependent on the vendor to provide quality connections to the telecommunications grid and timely upgrades to accommodate Bharti’s release of new innovative products. There is also the risk of limited network flexibility to meet emerging technologies. In the event of a network outage, Bharti would not be able to provide services without redundant agreements. These redundant links would negate the outsourcing cost savings.
Another IT related risk Bharti would need to accept is the backend private IT infrastructure equipment and services IBM would be providing. Any agreement to provide these IT services may both directly and indirectly affect Bharti’s operations. Outsourcing this requirement may limit the flexibility to innovate from the restriction of non-IBM related software. In addition to possible limits on specialized software, Bharti also risks compromising company operating procedures or intellectual property.

Given the Indian work culture, personnel management is another disadvantage of outsourcing to multi-national companies. Bharti would require supporting companies to take on the employees currently performing these functions. As multi-national industry players, IBM and the network service vendors differ from the Indian cultural norms regarding hiring and firing employees. There is no guarantee these transfers will remain employed if the service providers are required to reduce their staffs. These employees identify with Bharti, and outsourcing the workforce conflicts with their culture.

Bharti’s dependence on public and private IT service providers could create a new threat. This dependency coupled with the transfer of all their IT staff leaves them without any support to fall back to if future Service Level Agreement (SLA) negotiations fail or their supported firm goes bankrupt.

Outsourcing: Concerns, Risks, and Rewards

Outsourcing can be laden with risks. When contemplating an outsourcing agreement, Bharti needs to consider the risks, outsourcing structure, and long-term corporate strategy impact. For example, loss of control, scheduling issues, trade-secrets being exposed, challenges of cultural differences, and cost and scope creep are all risks that need to be taken into consideration. For IBM and the vendors (“Ericsson, Nokia, and Siemens”), Bharti should consider the following: * How will the outsourcing impact Bharti’s long-term strategic plan? * How will outsourcing impact Bharti’s core competencies? * What is the risk reward profile for the outsourcing plan? * What additional value are the vendors and IBM providing that does not currently exist within Bharti?

When structured properly with sufficient performance metrics and governance standards, an outsourcing solution could be the right fit for Bharti. If the agreements are structured poorly it could end badly for Bharti. Especially considering Bharti is anticipating outsourcing both technical and operational components core to their business. In order for the arrangement to work, the counterparties’ arrangements would slightly differ to provide proper incentive alignment, performance metrics, and governance.

While Bharti is considering using IBM as an end-to-end provider of all IT architecture in addition to all the application software required to operate the architecture, Bharti needs to address some of the following concerns specific to the IBM relationship, which are; * Will IBM work with other vendors? * Will IBM supply and install the IT equipment on time? * Will IBM enter similar arrangements with other telecoms? * Is Bharti giving up too much control?

Some additional concerns relating specifically to the vendors are: * Will the vendors try to sell competitors the same telecom technology? * How will Bharti prevent sole sourced technology? * Will the vendors overbuild the telecom infrastructure? * Are the vendors providing the best technology solution? * Will the vendors maintain the telecom system properly? * How will Bharti maintain quality? * How will Bharti deal with emergency response and system outages?

In both agreements Bharti will want some of the same governing contract provisions to mitigate general business concerns. For example, confidentiality clauses will help mitigate some of the disclosure concerns. Also, a non-circumvent provision will help prevent IBM and the vendors from stealing clients or building their own network. Lastly, a non-compete would help assure that IBM and the vendors will not try to perform the same tasks for competitors and help maintain Bharti’s competitive advantage. Otherwise, the two arrangements will take on two distinct structures. When reviewing The Outsourcing Spectrum [2] below you can categorize the vendors relationship as one of a contractor and IBM’s more aligned with that of a partner.

As contemplated, the IBM arrangement is leading to be more like a quasi-partnership. One of the key components of this relationship is the revenue sharing incentive. It aligns both IBM and Bharti to grow the business. One performance metric Bharti should consider adding is a cost component so IBM does not just expand and spend without taking into account the cost. Also, in order to reward higher performance and better IT solutions Bharti should consider adding a performance bonus for added IT efficiency. Similarly Bharti could provide an incentive for on time delivery of upgrades and project completions. Conversely, Bharti could penalize IBM for missing on-time deliveries in the form of a daily liquidated damages.

In order to ensure Bhrati is not giving up to much control they should contemplate a contract out that allows Bhrati to terminate the contract for convenience. Bharti may have to pay a termination payment to IBM, but it would provide comfort that Bharti will control its own destiny.

The relationship with the vendors differs because the vendors will be treated more like a contractor than a partner. The vendors have the investment risk, will supply the equipment, and will be managed by Bharti. The challenges to overcome with the vendors will be related to scope and cost creep, quality, proper technology solutions, and maintaining operational control. All of the items can be addressed in a service level agreement (“SLA”) with the vendors. The SLA should have provisions that allow Bharti the right to specify certain equipment and installation requirements for their telcom networks. This would allow Bharti to ensure quality technological solutions, and help prevent scope and cost creep by having design and construction standards. Similarly, to ensure quality Bharti should require third party inspections of the equipment and installations prior to paying a fee and taking over the telcom asset.

A core competency of Bharti is its operational excellence. In order to maintain operational control Bharti should implement segregation of duties and a chain of command among the vendors. This will allow for quick decision making, but not give any Vendor too much control. All major decisions should be routed through Bharti. In order to ensure quality service and equipment maintenance from the vendors, Bharti should provide incentive payments for good service performance. Also, having a performance metric tied to a contract renewal or extension would be another possibility.

Nokia and IBM Concerns

Given the common industry standards of purchasing at least 30% to 40% excess network capacity to compensate for eventual estimation errors and unforeseen demand shifts, Bharti faces a major outsourcing decision. Either they would have to face the costs for excess capacity of $300-$400 million or they would have to outsource major network responsibilities. Also, parts of the IT-management should be outsourced given the huge upfront investments Bharti would have to make to keep up with its expected growth and their inability to scale up their existing IT-network.

Part of Bharti’s agreement was handing over responsibility of the build-up and maintenance of telecommunication networks to the equipment vendors. They would provide Bharti with network capacity and scalability. The advantage for Bharti is a “pay only what you consume” model which saves unnecessary costs. In this model, Nokia would bear the burden of figuring out what to do with the unused bandwidth. As a result, the risk of unused bandwidth should be shared jointly between Bharti and Nokia.

Bharti also wants to transfer its employees to the vendors, which could become problematic for Nokia. The diverging cultural backgrounds might be challenging. A possible solution to manage risk associated with cultural differences would be to have a separate division within Nokia or IBM that only focuses on Bharti and consists of mainly Bharti personnel. Besides the difference in corporate culture there are also a lot of employees involved in an outsourcing agreement. These employees should all be re-employed at the vendors. Given their operational efficiency, these vendors might not be in need of so many employees. Bharti could lay these employees off and give them severance pay.

Given those risks mentioned above, Nokia also has to consider some potential benefits working with Bharti. Ericsson already established working relationships with Bharti and has a much larger market share than Nokia. Thus, not signing the contract with Bharti could have tremendous consequences for Nokia. First, Ericsson would probably become the preferred supplier, which means that Nokia would lock itself out of any future working relationship with Bharti. Moreover, the fear and uncertainty of the Indian market in the beginning may be discouraging; however, the potential to profit by contracting with other operators may outweigh those doubts. Considering the highly competitive market structure where finding a vendor is unproblematic, this definitely has to be taken into account as a serious risk. That means Nokia faces the risk of missing out on a great business opportunity in a rapidly growing market like India. A rapidly growing industry also implies change in organizational structure, company policies, personnel and equipment. Technologies frequently develop and change, as well as customer’s demands. Consequently, vendors need a certain level of flexibility to fulfill those market requirements in order to also satisfy Bharti’s needs. If they can, they should sign the deal with Bharti, since some of the earlier mentioned risks also pave the way for new opportunities.

IBM’s case is similar to Nokia’s. The build-up and maintenance of Bharti’s core IT infrastructure should be outsourced to IBM. This means that basically the entire management of hardware and software, as well as all negotiation with external suppliers that will be outsourced. The main difference between Nokia and IBM is that IBM is paid in the form of a percentage of Bharti’s revenues. This clearly bears a lot of risk because it is impossible to forecast Bharti’s development and thus according revenues. It is very hard for IBM to evaluate whether the benefits from this contract outweigh the incurred costs. Since IBM never envisages a revenue share arrangement with any client, this is a highly unfamiliar risk for them. IBM has worked with Bharti for many years and they have proven to be a reliable partner. Moreover IBM does not face tough competition like Nokia does with Ericsson. Therefore, they are definitely in a good bargaining position and could even use this to their advantage, they could lock Bharti in.

Another point, which was the same for Nokia, is the risk associated with the takeover of employees. Again, the question of how to manage such a corporate culture mix arises. Still, IBM should sign the contract since they are definitely in a stronger position than Nokia. It is very likely that Bharti increases or at least maintains its already existing market share which would result in increasing revenues for both Bharti and IBM.

AGREEMENTS AND GOVERNANCE
In order for the outsourcing contracts to be successful, a variety of governance mechanisms have to be installed to ensure the smooth functioning of the partnership. To reduce the risk of shirking, Bharti should engage in consistent monitoring of the network providers and include periodic audits even if they are performed by a third party. These extended controls should be executed by Bharti themselves to rule out collusion between the network providers. Furthermore, the tests should be conducted at random, so there is no possibility that the providers perform well during the test and shirk during the remaining time. To further reduce the risk of shirking, Bharti could engage in horizontal chunkification or enlarge the pool of potential vendors.

The concept of paying for the services only when they are available and used seems very sensible. However, to reduce the inherent risk of atrophy, Bharti should consider retaining at least some of its network specialists in house. This is especially important if the contract is terminated prematurely and a process of in-sourcing is required. Furthermore, this might be helpful to overcome motivational problems of the employees since at least some of them will remain in-house. On a similar vein, the outsourcing contract should be designed in a way that all employees of Bharti are taken over by the network providers and more importantly receive equal pay. This helps Bharti’s reputation with current and future workers as a socially conscious employer.

In addition to the governance items listed above, there are two points that apply more readily to the contract with IBM. Solving these problems is more difficult since all potential solutions have major drawbacks. First, Bharti could demand a “freedom of software”, (they have IBM build the architecture), but reserve the right to run other software on it. This reduces the risk of customer lock-in and dependency on IBM. Even though this would solve their problem, it is rather unlikely that IBM agrees to this, since it further weakens their position. Second, the risk of deliberate underperformance could be tackled through horizontal chunkification by engaging more vendors. Again, this only presents a feasible solution if Bharti refrains from the idea of sourcing their entire IT from one vendor.

Even though there are many pitfalls there is a chance of success if some Bharti follows some basic guidelines. The SLA should be drafted carefully and precisely to set clear terms and conditions. This document also builds the basis for any renegotiation or legal dispute. To prevent problems from occurring there should be a general alignment of interest between the two parties. This can be done as proposed by either sharing the revenues or engaging in some sort of cross-holding structure. There is also the possibility of Bharti engaging financial rewards and punishment dependent on the performance of IBM. Finally, a periodic comprehensive assessment and evaluation should be conducted to measure the performance and expectations of the agreement.

SUMMARY

To conclude, the Indian market has huge potential for stable growth during the upcoming years, opening great opportunities to telephone companies and network providers. Even though the proposed approach to outsourcing is rather unpopular at Bharti’s headquarters it has significant potential, especially because it frees up managerial capacity for strategic tasks instead of tying resources to technological processes. Even though the literature identifies shirking as one of the major problems in outsourcing contracts, the proposal seems to omit this pitfall by proposing a construct of interest alignment through cross-holdings and shared revenue. In contrast, it is difficult to see the upside potential for the outsourcing providers since they seem to bear most of the risk while incurring only parts of the benefits. However, this might be the only choice for European firms if they want to gain a foothold in the growing Indian market. Responding positively to Bharti could be interpreted as a long-term strategic move to prevent future exclusion from the Indian market. In sum, the outsourcing agreement can yield significant gains for both parties, as long the contract is designed, executed, and governed properly then, there is potential benefits for both IBM and Nokia.

Works Cited

[1] Martinez-Jerez, A. F., & Narayanan, V. (MA). Strategic Outsourcing at Bharti Airtel Limited. Boston: Harvard Business School.

[2] McNurlin, B., R. Sprague, and T. Bui. 2008. Information Systems Management in Practice, Pearson Prentice Hall, 8th Edition, Upper Saddle River, NJ 07458.

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