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Strategic Outsourcing at Bharti Airtel Limited

Sanjay Jharkharia

Indian Institute of Management Kozhikode

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Bharti: History and Background• Sunil Mittal founded Bharti in 1995• During liberalization Bharti won the

govt. tender and launched “Airtel”• First private provider in Delhi• In 1998 Bharti was India’s first

private provider to turn on profit• In 2002 Bharti went public on NSE

and raised $172 million in its IPO• 91% of all mobile users in India• First private telecommunications

service provider to launch national/international long-distance service

• Able to take advantage of economies of scale

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Bharti Management and Organization

Board of Directors

Chairman and Group Managing Director

(Sunil Mittal)

Director IT & Technology

Director Marketing

Director Corporate Affaires

Dir Business Development

Joint Managing Director

( Rajan Mittal )

Joint Managing Director

( Akhil Gupta)

Group Director Strategy & Planning

Director Legal

Director Human Relations

President Infotel

President Mobility

Director Corporate Communications

Head Regulatory & Group Company Secretary

Supervisory Director

Group Financial Controller

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Indian Market for Telecommunications

• In 1989, there were 4.2 million telephone subscribers

• In 2003 the number was 54 million.

• 8th largest telecom network in world

• By 2003, India adopted 3G technologies and provided value added services like data transmission, SMS, Ring Tones etc.

• Indian operators chose to sell mobile phones and mobile telephone services separately.

• 60% - Prepaid vis-à-vis 40% - Postpaid

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Market Competition• By 2002-03 mobile rates were as

low as 3 to 4 US cents per minute

• Average monthly revenue was fallen by 50% per customer unit

• Bharti operated in both fixed and mobile segments

• With industry consolidation the focus was shifting to provide value added services. This was a major capital investment challenge for any telecom sector

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Bharti’s Telecommunication Network

• Bharti had a 25% market share in 2003

• Growth in both wireless and wire line sectors was expected to be exponential as Bharti obtained licenses to achieve nationwide coverage

• Bharti operations was structured into 3 strategic business units:

1) Mobile Services – 64% of Bharti revenues. Focused on providing excellent customer service through error free service, cost efficiency, innovation in new products and services.

2) Long-Distance, Group Data and Enterprise – 30% of Bharti revenues. This network spanned 24000 km and connected almost all major cities

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Bharti’s Telecommunication Network Contd…

3. Broadband and Telephone Services – 16% of Bharti revenues. Provided wire-line bases telephone services in six circles and broadband services in all major economic centers

• 10% of revenues pertains to inter-segment eliminations

Airtel’s Revenue Breakup

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Mobile Network Architecture

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Technology and Development• By March 2004, Bharti network

covered 1400 towns using GSM

• Target: GSM system up in all 5161 census towns by 2007

• This required an increase in the number of Base Stations from 5,000 (Mar ‘04) to 40,000 (Mar ‘07) and an additional 2,000-3,000 increase in headcount

• Started deploying EDGE (Enhanced Data rates for GSM Evolution) in major cities

• Network reach through fiber optic cables, deployed in partnership with Singtel (SEA-ME-WE 4)

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Bharti’s Relations with vendors• Bharti had number of relationships with

network suppliers like Nokia, Siemens, Ericsson

• Bharti was comfortable working with many suppliers as everything is “plug and play”

• Environment was also very competitive between telecom vendors

• Issues in the industry– Vendors always tries to sell more

equipment– A typical network uses only 60% –

70% of installed capacity– Around 35% excess capacity to keep

one step ahead of customer demand– Delay between the time the need for

additional capacity is identified and the time it could be up and running

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IT & HR Requirements• The telecom network systems and software –

related to basic functioning of telecom connection and switching system

• Customer management information systems that allowed for collection of data on customer use, service quality

• Business support software and hardware architectures including internal programs such as billing, security, user programs etc

• IT issues:– The IT systems of acquired companies are

incompatible with existing systems– Certain applications like fraud management

are not provided by its existing vendors like IBM, HP, Sun Microsystems etc.

• HR issues:“Would you rather go work for one of the world’s

top multinational firms, large in size and reputation, or for a local upcoming operator like us?” said by Gupta

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Bharti’s Proposed Deal• Build-up,

maintenance, and servicing of the telecom network to equipment vendors – Ericsson, Nokia and Siemens

– The agreement is to be for an initial period of 3 years subject to renewal by mutual agreement.

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Bharti’s Proposed Deal• Build up, maintenance, and servicing of its

core infrastructure to IBM– IBM will provide end-to-end management service

for supplying, installing, and managing all of its hardware and software requirements and all of the applications to operate it

– It includes all internal customer service and all negotiations with external software and hardware suppliers

– It includes maintenance of all hardware and software, including those provided by other vendors such as security, data warehousing, fraud management, business intelligence, HRM etc.

– IBM services will be subject to a number of quality controls specified in SLAs

– Bharti will pay the share of its revenues which will progressively decline as overall revenue increases

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The DilemmaThe Bharti personnel presently

carrying out tasks would be taken over by vendors

“Should the proposal be accepted by the vendors, around 270 IT staff and 800 network staff could be transferred out of Bharti”

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Reactions at Bharti• The reaction was not highly supportive

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Vendor Reactions

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IT Outsourcing Pros for Bharti• It is not the core competency of Bharti• Strategic outsourcing of non core activities will

help the company to focus on distinctive competencies

• Specialists will be able to perform the activity at a lower cost because they are able to realize economies of scale

• Quality of the activity performed by the specialists will be better

• Clearly defined performance metrics• Existing incompatible IT systems

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IT Outsourcing Cons for Bharti

•Hardware and Software not supported by IBM will be of no use

•Accessing services of other vendors•Transfer of 270 employees

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Network Outsourcing Pros for Bharti

•Technological Superiority is essential for competitive advantage

•No expertise in installing such a huge network

•Utilizing economies of scale•Carefully defined performance metrics

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Network Outsourcing Cons for Bharti

• Huge Capital Investments for Network Equipment and Installation if not outsourced

• HR issues, transfer of staff, nearly 800• Loss of control• Wastage of installed capacity• Outsourcing a core competency, operations

management

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Vendor’s Risk and Returns

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Proposed Deal with Vendors

• Vendors provide network capacity and paid only for running Capacity

• Unused Capacity – No Payment (Vendors can have problems here)

• Capacity Ownership with Bharti, Maintenance with Vendor

• SLAs signed with vendors for quality control etc• Renewal after 3 years

Microsoft Office Word 97 - 2003 Document

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Proposed Deal with IBM• IBM to provide end to end supply, installation,

maintenance and management of IT infrastructure

• SLAs for quality control, etc• Ability to process 1.5 million new customers per

month• Bharti to pay IBM a share of revenues which

will progressively decline as revenue decreases (IBM can have problems here)

• Renewal after 5 years

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Proposal Implications on Bharti

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Proposal Implications on Partners

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Kralijic’s Supply Matrix

SUPPLY

RISK

PROFIT IMPACT

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Kralijic’s supply matrix• Network equipment lie in the Leverage

Item grid–They have low supplier risk–High Profit Impact–Hence Bharti has the bargaining power

• IT architecture lies in Strategic Item grid–It has high supplier risk (only IBM)–It has high profit Impact

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IT Equipment Outsourcing Analysis

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Network equipments

• Telephonic network components are Modular products

• They are designed to be easily plugged• Very critical for the functioning of the

system• Easily available

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Network Equipment Outsourcing Analysis

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Porter: Strategic Analysis