Thursday, April 9, 2009

IBM-Bharti IT outsourcing deal and Louis Gerstner’s “full-body immersion” vision

Historic deal: Bharti outsourced its entire IT to IBM in 2004 in a historic end-to-end IT infrastructure transformation deal worth $750-million over 10 years. Today, at the half-way tenure mark (five-years), the deal has touched $2.5 billion. This isn’t surprising considering Bharti had about 10 million mobile subscribers in 2004 while today Bharti’s subscriber base has reached 94 million (growing at a rate of 3 million per month) and the business model involves revenue sharing. Riding on the success of this deal, IBM also signed similar contracts with Vodafone, Idea Cellular and Malaysia’s Maxis. Why does a company like Bharti outsource a critical function like IT? And what did it mean to IBM to prepare for such a deal? Let’s look at these questions below.

Bharti view: Following dialogue at IBM innovation site gives a glimpse into the minds of Bharti Chairman Sunil Mittal (SM), Corporate Director of IT for Bharti Dr. Jai Menon (JM) and Joint MD Akhil Gupta (AG):

SM: We are growing at near enough 100 percent a year. And we will be a 25 million customer company in the next couple of years. And we believe that we need to manage this growth and that's the biggest challenge in front of us.

JM: That leads to us really requiring a partner who has a very grand vision on where communications and computing is headed, and who can help us implement the right kind of technologies for the right kind of services to our customers.

JM: So we needed somebody who came to us not just for cost reduction or giving us a component technology, but somebody who understood our business, understood what the business processes could change into, and come along with us and be very flexible and adaptive in terms of what needs to be delivered to take us to where we need to go to.

AG: I think the only big vendor or partner I could look for all across, including with Wipro and Infosys (I have a great respect for them) was IBM.

IBM’s bet: How does this view of IBM compare to the vision Louis Gerstner (then CEO of IBM) had for the services business in 90s? Let’s look at following excerpt from his book “Who says elephants can’t dance?

Think for a moment about just the outsourcing business. What you are telling the customer is: “Transfer your IT assets—products, facilities plus the staff – onto my books. I’ll absorb it all, manage it, guarantee performance levels, and promise that you’ll always be on or close to leading edge of the technology. All that AND I’ll charge you less than it is costing you now.”

At the same time, you are telling yourself: “I can do all that and still make a profit”. It meant betting on following (1) Willingness to use your balance sheet. There is no such a thing as a toe in the water. When you take this plunge, it’s full-body immersion. (2) It’s a bet on your ability to drive economies of scale – to consolidate lots of data centers into megaplexes or the ability to do with 750 people what two or three customers once did with 1000. (3) It means we could build recruitment, training, compensation and HR processes. And finally (4) we had to learn how to be disciplined – how to negotiate profitable contracts, price our skills, assess risk, and walk away from bad contracts.

I would this deal to be a role model for level-5 in PMM.

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