IBM's Big Deal in India

The computer giant's five-year contract with Vodafone Essar will expand its already huge presence in the country. Will local shops fight back?

On Dec. 10, IBM (IBM) bagged a five-year contract from India's third-largest wireless operator, Vodafone (VOD) Essar. The deal includes maintaining billing, data centers, and financial systems for Vodafone in India. Vodafone became India's third largest cellular operator when it acquired Hutchison Whampoa's 67% stake in Hutchison Essar in February, 2007.

Vodafone is an existing IBM client across the world—especially in the Czech Republic, Spain, Italy, Greece, New Zealand, and Australia—and Vodafone uses IBM for all its customer-related IT requirements.

But for IBM, this contract is a big, big deal. Vodafone is IBM's third large telecom hookup in India. In March, it won a 10-year, $800 million contract to integrate and transform business processes and IT infrastructure for Idea Cellular, India's fifth-largest cellular operator. In 2004, IBM won a 10-year IT outsourcing deal from Bharti Airtel, India's largest telecom player. The contract was then valued at about $750 million and has grown to about $1.2 billion.

Hiring more workers

IBM's rise in India has been breathtaking. Since 2004 the company has ramped up its business, with research labs and global delivery centers. In 2007, IBM won deals for application and business transformation services and infrastructure management in India's rapidly growing sectors such as telecom, real estate (DLF), aviation (Delhi International Airport), health care (Apollo Hospitals), and a microfinance technology service provider. It has 73,000 employees in the country and plans to invest $6 billion over the next three years to set up infrastructure, hire more employees, and boost education and training.

This year alone, IBM's India revenues will be up 30%, to $1 billion. "India is the fastest-growing market for IBM, and we want to maintain our lead," says Shankar Annaswamy, managing director for IBM India and South Asia.

All of IBM's telecom deals have been won over established Indian players such as Tata Consultancy Services (TCS), Infosys (INFY), Wipro (WIT), Satyam and HCL. Dabur, one of India's large sellers of health-care and ayurvedic products, outsourced its IT infrastructure to Accenture (ACN) in a 10-year contract. Accenture will also consult on the company's business plans and build and run IT systems for supply chain and sales.

Looking for Outside Expertise

The reason Indian companies are choosing non-Indian service suppliers is simple: In the new growth sectors, particularly telecom and retail, Indian players lack expertise. "It's all about the skill sets that global players have," says Ravi Trivedy, executive director of KPMG Advisory Services. Another wrinkle: Some industries, such as cellular, are actually more advanced in India than in the West. Indian telcos say local tech companies are ill-equipped to handle their sophisticated, rapidly transforming IT application, maintenance, and development needs.

In addition, Indian companies are looking for IT service operators with experience, as most of the high-growth companies outsourcing their needs are run by first-generation entrepreneurs. For them, the vendor's track record matters more than cost. Multinationals are able to draw on their global experience and offer a range of products and services, including consultancy, to their Indian clients, says Angel Dobardziev, IT practice head at Ovum, a London advisory and consulting firm.

Western companies in contrast have plenty of experience but are facing dwindling and mature home markets. So when they look for back-office service providers, they demand cost-cutting opportunities. That's where Indian players like Infosys are more suited.

Standing Up to Western Rivals

Infosys and other Indian IT companies are trying to diversify from their U.S. focus to other markets such as Latin America, Europe, China, Japan, and Australia. They are also struggling to increase the value of their exports by getting into the business of consulting—a new skill they have yet to acquire. That's putting them in direct competition with foreign rivals, which have had long years of experience as consultants in their home markets. "What counts today is an amalgam of expertise, experience, and price, where Western companies have a clear advantage," says Siddharth Pai, partner and managing director of global tech advisory TPI Advisory Services.

The Indian IT shops are still confident they can stand up to their Western rivals. "There is room for everybody," says S Mahalingam, chief financial officer and executive director at TCS. Among all the Indian players, TCS has the largest domestic Indian market share—9% of its $4.5 billion revenues, focused mainly on financial services, banking, government, and manufacturing sectors. "As the rupee strengthens, India will be a larger focus area for us," adds Mahalingam. In 2007, TCS won more than $500 million in contracts in India including telecom deals from sister company Tata Teleservices and the state-run land-line and cellular operator Bharat Sanchar Nigam.

Others are following TCS's lead. For the first time ever this year, the mighty Infosys said it would start bidding for domestic business. Rival Wipro has won 10 deals in the last two years which include some of India's leading banks such as HDFC Bank and Yes Bank.

Still, multinationals like IBM are expected to dominate the Indian market. New heavyweight retail entrants to India like Wal-Mart (WMT), Carrefour (CARR.PA), and Tesco (TSCO.L) will likely follow in Vodafone's footsteps to outsource most of their tech services needs to experienced multinationals. The Indians have to learn the multinational way of doing business—or risk being relegated to second status in their home market.

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