All the speculations on whether IBM will get a renewal of its landmark contract with Bharti Airtel, largest telecom operator in India, have finally come to an end. Yesterday, IBM announced that Bharti Airtel has extended the agreement to manage latter’s infrastructure and application services over the next five years. The key highlights:

  • Although the deal value was not disclosed, Forrester estimates it at between $600 million and $700 million spread across five years.
  • The tenure of the contract has been reduced from 10 years to five.
  • Bharti Airtel plans to build in-house tech capabilities and expand its partner ecosystem as part of its new IT vision.

What it means: Bharti Airtel has taken a pragmatic and obvious approach for its new contract with IBM. Our analysis of the deal:

  • The revenue-sharing model is becoming less adequate given the size of Bharti Airtel. The operator had around 4 million subscribers when it signed the revenue sharing-based contract with IBM in 2004. The main objective for Airtel at that time was to scale up operations to support a rapidly increasing subscriber base. It has grown more than 60 times over since 2004 and is now too big for a revenue-sharing model. Moreover, the growth in subscribers has plateaued, so the revenue-sharing model makes less economic sense for Bharti now. It’s now more about cost containment than subscriber growth for the operator. As a result, we believe the revenue-sharing component must have been significantly reduced as part of the new contract.
  • Rising customer expectations and economic challenges demand new partners. Recent Forrester Business Technographics® data indicates that addressing the rising expectations of customers and improving customer satisfaction is a top business priority for 90% of Indian firms. The low average revenue per user (ARPU) and rising customer expectations coupled with tough economic situation in the country have forced operators to become “customer-obsessed” to improve both top- and bottom-line growth. Although IBM has a strong digital marketing portfolio, the decision to restrict IBM to IT management services highlights the growing realization within Bharti that it needs to broaden its partner ecosystem to better win, serve, and retain its customers.

While IBM continues to be a strong IT partner for Bharti Airtel, the operator sees an opportunity to mitigate the potential risks of working with a single vendor by introducing new partners into the ecosystem and ramping up its own technology management capabilities. While yesterday’s Bharti Airtel success was largely defined by the size of its subscriber base, tomorrow’s Airtel will be shaped by customer expectations. A broadened tech vendor ecosystem will help the company achieve its vision in the long run.