The 10-year contract with Idea, India's fifth-largest wireless operator, boosts Idea's competitiveness and increases IBM's lead in IT services and consulting
For IBM (IBM), it was a big win in its most critical foreign market. On Mar. 21, IBM announced that it had bagged a 10-year contract valued at up to $800 million from India's fifth biggest wireless operator, Idea Cellular. And the deal suggests that the global computer service and technology kingpin's massive build-out of staff and investment in India this decade is starting to pay off.
IBM has more than doubled its India staff to 53,000, has spent $2 billion there since 2004, and plans to spend another $6 billion by 2009. IBM has major research labs on the ground delving into everything from nanotechnology to chip design. It is also raking in considerable revenue (sales clocked a torrid 37% year-on-year growth in 2006) from sales of servers, software, and consulting.
The irony here is rich—earlier this decade, the rise of ultra-efficient and low-cost Indian outsourcing firms such as Tata Consultancy Services (TCS), Infosys (INFY), and Wipro (WIT) were seen to be threatening IBM, Accenture (ACN), and Electronic Data Systems (EDS). They still are, but India is now IBM's fastest growing market globally and other companies are rapidly building up staff in India to grab big-buck local outsourcing contracts.
A Full-Spectrum Contract
In Mumbai, IBM's regional general manager for India and South Asia, Shanker Annaswamy, said the contract (which could scale up from an initial $600 million to $800 million) was key "endorsement" of IBM 's array of services. "India is an important market for us, and market leadership is our goal," he said.
Under the decade-long pact, IBM will provide hardware and software applications and customer and billing support. It will manage computer networks and help scale up operations for Idea, which is part of the Aditya Birla diversified industrial group controlled by billionaire Kumar Mangalam Birla. Idea, which just launched a successful initial public offering earlier in March, has seen its mobile phone subscribers double in number to 14 million since last year.
As part of the contract, more than 200 Idea employees will move to IBM's payroll. These and other moves will help free up cash as Idea goes up against far bigger mobile operators such as Bharti Airtel, the nation's largest mobile operator, and Reliance Communications.
Providing Speed and Scalability
On Feb. 11, in a game-changing deal for India's hotly contested wireless market, British mobile phone operator Vodafone (VOD) agreed to pay $11.1 billion in cash for a controlling 67% stake in Hutchison Essar, India's fourth-biggest mobile-phone company (see BusinessWeek.com, 2/11/07, "Vodafone's Passage to India").
The IBM alliance, says Idea managing director Sanjeev Aga, will give the company the speed and scalability it needs to compete in India's hot mobile market, the fastest growing in the world right now. Last year the number of mobile connections in India more than doubled, to 142.2 million, and that figure is expected to increase 48%, to roughly 211 million, by the end of 2007. "For us, IT is not a support function, but a real-time tool," says Aga. "We are looking at scale to be ahead of the curve."
Priyanko Panja, a telecom analyst at Edelweiss Capital in Mumbai, agrees that the deal is a smart move for a fast-growing outfit like Idea that has huge cash-flow demands on its business. "For Idea, which is on an expansion mode, this comes in very handy," he says. As for IBM, Idea is its second major contract triumph in the mobile phone sector. Three years ago, Big Blue nailed an IT outsourcing deal from Bharti Airtel—then valued at about $750 million, and now worth about $1 billion.
Other big foreign IT consulting and system integration companies are trying to play catch-up with IBM's dominant position in India. Last summer, EDS paid $380 million to buy a majority stake in MphasiS BFL, a Bangalore-based outsourcing services company with about $210 million in annual revenues. With that acquisition, plus EDS's own expansion plans, the company's workforce in India vaulted from 3,000 to roughly 20,000 at the end of 2006 (see BusinessWeek.com, 6/26/07, "EDS: Getting Out Front in Outsourcing").
Yet closing the gap won't be easy, given IBM's success at leveraging its India engineering and software brainpower for work elsewhere around the world. IBM's network of Indian research and technology labs now employs 3,200 researchers. In short, IBM is doing swimmingly well in what used to be considered the riptide of the global outsourcing business.