STRATEGIC OUTSOURCING AT BHARTI AIRTEL

GROUP 11
Archana Maganti 1611086
Haruka Tsutsumi 16E4005
Madhura Kulkarni 1611111
Neha Arolkar 1611088
Rahul Saxena 1611127

SUPPLY CHAIN MANAGEMENT

TERM 4
PGP 2016-18
Introduction
In an extremely competitive telecom market of India, Bharti Airtel aims to compete against capital rich
companies like Tata and Reliance. The problems Bharti is facing include inability to keep pace with
network expansion, frequent negotiations with vendors, obsolescence of equipment and software at
a high rate, extensive capital expenditure and unpredictable cost structure. Although Bharti saw
capital inflows through issue of equity, was present in all the major economic and industrial centres
and improved its operating margins due to economies of scale, it still faces intense competition and
low ARPU as it has no distinct competitive advantage over its competitors.

It also faces vendor related issues such as inherent conflict of interest with respect to number of
‘boxes’, a complicated IT architecture which has multiple applications by different vendors, and
scarcity of top of the crop human resources.

Faced with this scenario, Mr. Gupta has come up with it the first-of-its-kind concept of strategic
outsourcing which included transfer of responsibility of setting up, operating and maintaining Telecom
network and IT infrastructure to the respective vendors. This proposal is not without its detractors
from Operations, IT, Marketing and Human Resources Departments. There is also hesitancy on the
part of the vendors to try out such an untested strategy. Thus it falls to us to consider the
characteristics of Supply Chain of Bharti Airtel, evaluate the proposals and analyse what the course of
action must be.

Should Bharti Airtel enter the outsourcing agreements? What are their
advantages and disadvantages?
Advantages of IT outsourcing
 Focus on core competencies– While outsourcing non-core activities related to IT, Bharti can put
all its resources to its core areas of activities such as product development, value added services,
marketing (sales, customer management and bill collection), and brand management, which can
lead to growth and scalability of the company. With this, Bharti can focus on creating sustainable
competitive advantage over its competitors.

 Acquire specialized skill – With outsourcing of IT, Bharti can utilize the specialized skills of
employees working in global companies like IBM. This can lead to a significant competitive
advantage for Bharti as it is currently unable to recruit the brightest of the talent (who prefer
working with MNCs like IBM). Bharti will also be able to access the best in class processes and
technology available in the market.

 Enhanced Customer experience - Access to new/world-class technology and quality will lead to
a customer rich experience which in turn will increase the brand image of Bharti.

 Quality control - Control over quality through several quality control checks specified in the
Service level agreement (SLA) will result in high quality levels. However, Airtel will have to pay
more for higher SLAs.

 Effective utilization of management resources – Top management will be able to focus on

growth opportunities in the market rather than spending time on other not so critical activities.
This will lead not only result in effective utilization but will also result in a focused approach from
the top management to leverage the growth opportunities available in the market.
Disadvantages of IT outsourcing
 Loss of control
As IBM, will be the sole vendor for managing Airtel’s IT infrastructure, there is a risk of over
dependence on IBM resulting in a potential loss of control.

 Reduced margins for Airtel

The proposal outlines a revenue sharing agreement with IBM. Looking at the industry
background, wireless services in India are expected to grow at ~65% CAGR in next three years till
2008. As Airtel has the highest market share, this implies huge revenue and customer base growth
for Airtel. In the event this happens; profit margins might reduce for Airtel due to the revenue
sharing arrangement.

 Loss of in-house capability and flexibility

Due to sourcing of entire IT operations to IBM, Airtel will lose its in house IT capability. Also, the
contract might restrict access to software and hardware other vendors, resulting in reduced
flexibility and restricted innovation. This is a severe problem if the software and hardware offered
by alternate vendors is much superior to IBM offerings.

 Human resource related issues

Transfer of 250+ employees to IBM poses a challenge since there is a huge difference in the
working culture of the two organizations. There might be resistance from Airtel’s staff as well as
from IBM to absorb this strength.

 Information leakage
If the same vendor is servicing other telecom companies, there is a possibility of leakages of critical
information from Airtel to its competitors. Due to total outsourcing, IBM will have extensive
knowledge of Airtel’s IT and CRM strategy.

Advantages of network outsourcing

 Transfer of uncertainty/risk – With the outsourcing of buildup, maintenance and servicing of
networks, Bharti can transfer the risk of demand uncertainty to the vendor. With Vendor
managed inventory (VMI), the vendors will decide the need for installing extra capacity. This will
shift the risk of demand uncertainty to the vendor and will reduce the forecasting costs for Bharti.

 Reduction of overall costs - Since the ARPU in the industry is low and has fallen at 50% over last
three years, reduction of costs such as capital expenditure, obsolescence costs, and human
resource costs (as the employees are transferred to the vendors) with the outsourcing of network
will become an important competitive advantage.

 Conversion of capital expenditure to growth based operating expenditure – With the proposed
usage linked cost structure (payment per Erlang), there will be no longer the need for capital
expenditure associated with the need to have 30-40% excess capacity. Hence, the total cost of
ownership can be predicted and future growth strategies can be suitably planned.
 Time to acquire additional capacity reduced- The process from planning for additional capacity
to installing it took about six months to one year. Due to the proposed contract, this delay was
expected to reduce thereby helping Airtel respond to growing demand faster.

 Quality control – Control over quality through several quality control checks specified in the Service level
agreement (SLA) will result in high quality levels.

 Supply Chain advantages – Leaner supply chain, decreased procurement costs due to lower
frequency of retendering and decrease in staff needed for procurement, very less inventory
buffers, high production flexibility without associated capex, access to best technology through
IBM which was the world leader in IT.

 Vendor relations and reduction of risk – Bharti Airtel being the market leader in telecom in India
had significant bargaining power over the vendors. By involving three vendors in the outsourcing
contracts Bharti would also be able to diversify risk and avoid overdependence on just one
vendor.

 Better relationship with vendors – This arrangement would reduce the current conflict of
interest between vendors and Airtel in which vendors were trying to sell more equipment
whereas Airtel wanted to get maximum capacity out of fewer equipment.

Disadvantages of network outsourcing

 Loss of control
Payment as per erlang capacity utilization means that Bharti Airtel will not be able to decide on
when, where and how much the capacity should be established. It will be completely managed by
the vendors which might result in loss of control.

 Human resource related issues

Transfer of 800+ employees poses challenges of employee resistance and dissatisfaction due to
difference work cultures of Airtel and the vendor companies.

 Information leakages
If the same vendor is servicing other telecom companies, there is a possibility of leakages of critical
information from Airtel to its competitors.

 Risk of forward integration by the vendors (Remote possibility)

In the long run, the vendors can forward integrate and become competitors. However, this is a
far-fetched possibility as in India, there are many complex regulations in the telecom sector.

Conclusion
After analysing the advantages and disadvantages of both the proposals, we feel that Airtel should go
ahead with the outsourcing model as its advantages outweigh the disadvantages.
If you were IBM or Nokia, what major concerns would you have
entering an agreement with Bharti?
IBM would have the following concerns
 Investment risk
IBM had not envisioned a revenue-sharing model and as such would face teething problems.
More importantly, it would have to forecast the growth of Bharti’s revenue in order to
estimate its own revenues from Bharti over the next decade. However, the associated
investments in the IT services would have to be made in the present. This situation involved a
high level of uncertainty and therefore posed a crucial investment risk. Furthermore, As IBM
would provide a comprehensive set of end-to-end IT management services for Bharti, there
was high risk of obsolescence as well as not being able to provide other IT applications which
Bharti may want to use.

 Being subject to quality controls by Bharti

Services provided by IBM would be evaluated on parameters such as hotline customer
satisfaction and delays in implementation of new IT applications. It would have to meet the
specified quality standards and accept the penalty-reward mechanism in its Service Level
Agreements with Bharti.

 Price inflexibility and decline in percentage revenue shared

As Bharti and IBM would enter into a fixed contract for 5 years (renewable for another 5
years), there would probably be no scope for negotiating prices in this period. Furthermore, a
declining percentage of revenue sharing was planned, so it could continue to decrease even
more if Bharti’s customer base did not increase significantly.

 Increased human resource costs

IBM had more talented employees and could be supposed to have more stringent hiring
standards. In order to accommodate the erstwhile Bharti Airtel employees, they would have
to re-train them and enable them to adapt to the new organizational culture. This would
involve significant costs.

Nokia would have the following concerns

 Market risk
Although India is a growing market, if the switching costs proved to be lower or another player
aggressively brought a new offering to the market (as it eventually happened with the advent
of Reliance Jio), vendors like Nokia could risk losing Bharti’s customer base.

 Utilization and investment risk

Bharti wanted to create the additional capacity of 30-40% which it required, without incurring
the associated capital expenditure of $300-400 million. Basically Bharti planned to transfer
the risk of creating this capacity to vendors like Nokia. Although Bharti would pay a fee and
take ownership of the installed capacity, it would pay Nokia only for the erlangs actually used.
 Hence, Nokia faced the risk of incurring huge capital expenditure because vendors were
mandated to establish the excess capacity even though they may not garner payment from it.

 Being subject to quality controls by Bharti

Network quality provided by vendors like Nokia would be evaluated on parameters such as
number of dropped or incomplete calls. Vendors would have to submit to the inspections and
controls imposed by Bharti Airtel, and accept the penalty-reward mechanism set by Bharti in
the Service Level Agreements.

 Decrease in bargaining power of vendors

As the outsourcing happens to multiple firms in the market, an individual vendor’s bargaining
power may be reduced and could also cause vendor’s costs to increase.

 Price inflexibility due to fixed contract

As vendors like Nokia and IBM would enter into a fixed contract for 3 years (renewable for by
mutual agreement), there would probably be no scope for negotiating prices in this period.

 Risk of demand uncertainty, forecasting costs and inventory management

Bharti is seeking a vendor-managed inventory model. Risks of demand uncertainty and
inventory management would be passed to the vendors such as Nokia. Furthermore, vendors
would incur costs of forecasting demand and venture into new fields in which they had no
prior experience.

 Increased human resource costs

There would be issues with cultural fit and acquisition of employees who may not satisfy the
usual hiring standards of vendors like Nokia. In order to accommodate the erstwhile Bharti
Airtel employees, they would have to re-train them and enable them to adapt to the new
organizational culture. This would involve significant costs. Furthermore, some of the vendors
were smaller organizations and would probably not be able to assimilate the sudden rise in
number of employees.

 Getting buy-in from senior management

As it was a new model/concept in the industry, Nokia and similar vendors would need to get
approval from top management for the same. The major concern was the loss incurred if
capacity was eventually not utilized.

However, the Indian market is currently quite attractive, with projected revenue growth of 17%
per annum. As per Exhibit 7, Bharti has the highest share in the wireless network market (25%). It
was also a pioneer and has first-mover advantage in India. In 2003, it represented 91% of mobile
users. Furthermore, Exhibits 1 and 2 of the case show that the financial health of Bharti is
improving. The revenues have risen over 100% from 2003 to 2004. Hence, in order to have a strong
foothold in the rapidly growing Indian telecom market, we would recommend that IBM and the
network vendors accept Bharti’s proposal.
Exhibit 1: Framework to map core and non-core activities in the
Telecom sector

Exhibit 2: Shift in the supply chain as per the deal proposed by Bharti