Strategic Outsourcing at Bharti Airtel Limited

Overview
Bharti Airtel Limited- the Indian telecommunications firm formerly known as Bharti Tele-Venture Limited Akhil Gupta- Joint Managing Director of Bharti Airtel Limited Network Suppliers Agreement took 3 months and a quarter to finalize Bhartis customer base growing @ 100% per year o Challenge to keep pace with network expansion o PROBLEM #1 - Budgeting and the tendering process for network expansion takes up tremendous amount of management time and bandwidth. Tendering- Solicitation of vendors bids for contracts o PROBLEM #2 Management of firms IT Capital Expenditures; Equipment purchased within a couple of years becoming obsolete for intended purchase purposes. Huge investments at waste because of unpredictable expenditures! o Need a lean and predictable cost model- if Bharti had a reliable, predictable usagelinked cost structure, then could become the lowest-cost producer of minutes o Proposed Solution to Capital Expenditure nightmares: Plan consisted of two outsourcing proposals

One to Bhartis key telecom network equipment vendors, Ericsson, Nokia, and Siemens The other to Bhartis IT equipment vendor, IBM Vendors involved worried about taking on additional risk o Sunil Mittal- Bhartis Chairman and Managing Director gave Gupta free rein to investigate options to solve the problem.

Bharti History and Background Mittal founded Bharti in 1995 with $900 start-up

capital. Mittals Goal for Bharti has two-fold: o To take advantage of the liberalization of the Indian telecom market o To bid for a government license to operate the 1st private mobile telecom service in the Delhi area. Mittal was an entrepreneur at the time with experience in creating and successfully managing several businesses

o o o equipment

Bicycle Components business Portable Generator Import business Venture with Siemens to produce telephone

GROWTH Existence of first eight years: Growth because there was a Single minded devotion to the project and the industry. Basically, there was FOCUS. o Mittal stated, Our business is telecom and nothing else. o Bharti- first private provider in the Delhi market o In 1998, first private provider to make a profit o Drive for continuous expansion- Aggressively pursued acquisitions of licenses for mobile operations in other geographic regions or Circles. Circles- Telecom service in India was divided into geographical areas, called circles, for the purpose of awarding mobile and fixed-line telephone licenses. CAPITAL INFLOWS Acquisition strategy required greater capital inflows- In 1999; Bharti sold 20% equity interest to the private equity firm Warburg Pincus. Soon after, NY Life Insurance Fund, Asian Infrastructure Group, the International Finance Group, and SingTel, all acquired equity interest. 2002- Bharti went public raising $172 million in IPO o Indian National Stock Exchange o Mumbai (Bombay) Exchange o Delphi Stock Exchange 2002 year-end: Bharti raised over $1 billion through FDI

Capital Inflows financed next stage of growth o 2001-2002: obtained mobile licenses for 15 out of Indias 23 total circles o 6 Fixed-lined licenses of the 15 o Leverage with SingTel, licenses to be 1st private telecommunication service provider in India to launch national and international longdistance service. o By 2003- Bharti present in all major economic and industrial centers- 91% of all mobile users in India; Full coverage expected by 2005

FINANCIAL PERSPECTIVE March 2004 year-end: - Revenues- $1,113.4 million; 100% increase over 2003 - Economies of Scale advantage - Improved Operating Margin: (2003) -2.25% to (2004) 16.9% - Net loss (2003), (2004) Net income of $117 million - 2004 ROE: ~ 12% Bhartis Management and Organization

FAMILY RUN BUSINESS - Sunil Mittal: Chairman and group managing director - Rakesh Mittal: board director - Rajan Mittal: joint managing director, overseeing the functional directors Gupta- a chartered accountant with a degree from the Delphi University - CFO from 1995-2000; becoming joint managing director in 2001

Indian Market for Telecommunications

Prior to 1990- little change in the Indian telecommunication environment Installation is slow- several months Mobile phones a foreign luxury 1991- India policy of Economic Liberalization- opening the sector to private competition and foreign investment. Private telecom firms could tender for licenses. 2003- Total Indian telecom revenue was $8.5 billion with wireless contributing to 18%; Growing at 17% annum; Estimates through 2008 growth from $1.5 billion to $10.9 billion US dollars Adaptation of 2 G technologies (GSM or CDMA) throughout India. 2003- India will jump to 3 G technologies. Huge potential growth in development of basic phone services. Customer demand increased daily; in 2003, over 1.5 million people signing up for cell phones. Indian operators sell mobile phones and mobile telephone services separately. o Mobile services- sold either postpaid (40%) where customers were billed for their telephone usage monthly or prepaid (60%) where customers were allowed to recharge telephone with additional time via kiosks, drugstores and convenience stores

Market Competition
The Indian market was highly competitive by 2002-2003. Rates low as 3 to 4 per US cents per minute Average monthly revenue per customer unit- fallen by three years as telecom providers fight for subscribers In 2003, 7 major operators in India: Bharti (Operations in Fixed & Mobile), BSNI, Hutchinson, Reliance, Tata, Idea Cellular, and MTNL. Strong regional operators- Spice and BPL. Industry consolidation caused the switch from having national footprints to having the ability to provide value-added service. Operators now needed 2.5 G or 3 G technologies to accommodate those services Now, there is a major CAPITAL INVESTMENT CHALLENGE Competitive advantage possibly with Tat or Reliance because of their STRONG CAPITAL RESOURCES

Bhartis Telecommunication Network

2003- Licenses obtained for 15 of the 23 total circles serving a 25% market share of total Indian mobile market and 6 million subscribers Fixed Line services- 1 million customers and licenses for six circles. New Regulations would allow Bharti to offer wireline services into any circles in which it held a wireless license. Growth expected to be exponential over the upcoming 18 months as Bharti obtained licenses Operations and Service Structured into three strategic business units: 1. Mobile Services- 64% of Bhartis revenues. Bharti achieved the most in terms of market dominance and customer service by implementing error free service. a. Out of six of 15 regions, had over 40% of market share, 2. Long Distance, Group Data, and Enterprise- 30% of Bhartis revenues. Services leveraged its recently completed high-speed fiber-optic network spanning out to 24,000 kilometers a. Provided end to end service, broadband. Long-distance, videoconferencing, and dedicated data and voice line services 3. Broadband and Telephone Services- 16% of Bhartis revenues. This unit provided wire-line based telephone service in six circles and broadband in all major economic centers. a. Broadband included DSL, Wi-Fi, VPN, and video surveillance. Technology and Development 2004- Mobile network connected 1,400 towns using GSM technology 2007- Running in all the 5,161 census towns; 100 towns/month on average 5000 base stations by March 2004 Required demand service would require a jump to 40,000 and also require hiring over 2,000 additional people to build and maintain them. Deployed EDGE in Mumbai Long-distance network used fiber-optic cables o Joint venture with SingTel- with (i2i undersea cable system) used in the international carrier business

Bhartis Relationship with Its Vendors

As Bhartis market share grew so did its network supplier relationships. GSM technology was very openly standard: Bharti was comfortable with working with several suppliers. If a supplier proved to be unsatisfactory- change or switch was painless Vendors would try to oversell their supplies- i.e. base stations, switching stations o This is a problem because operators wanted maximum coverage and capacity with as little equipment as possible. o Typical networks used only 60% to 70% of its installed capacity at any point in time o Need capacity-erlangs (Erlangs- were a measure of telecom traffic. One erlangs a circuit occupied for 60 minutes)

Business practice- purchase ~30% to 40 excess capacity to keep ahead of customer demand On the balance sheet- 30% excess would represent ~$300 million to $400 million

IT Requirements Bhartis IT requirements fell into three categories: 1. Telecom systems and software 2. Customer management information systems 3. Business-support software and hardware architectures Bharti contracted with IBM, HP, and Oracle for the business-support software and hardware architectures and customer management systems.

Bharti facing HUGE up-front investments in IT in order to get the right architecture in place and to be ready for growth over the next 10 years.

Human Resource Issues Human Resource scarcity related to IT and network development requirements. Needed RETAIN and HIRE the best and brightest talent Network development would require to hire ~2000 to 3000 people in 2004

Bhartis Proposed Deal

Two-pronged Outsourcing Structure for Bharti and its vendors. Outsource responsibility for the buildup, maintenance, and servicing of the telecom network to equipment vendors. (Nokia, Siemens, and Ericsson) o Vendors will provide Bharti with network capacity- erlangs. o Once capacity is installed- ownership is Bharti o Responsibility of good working order remains with equipment supplier o Agreement 3 year period- mutual renewal thereafter.

Outsource responsibility for the buildup, maintenance, and servicing of the core IT infrastructure. (IBM) o Complete and comprehensive end-to-end management service for supplying, installing, and managing all of its hardware and software requirements of basic IT architectures of company o Subject to quality controls specific to SLAs (Customer Satisfaction hotlines) o Exchange for services, Bharti agrees to pay IBM a share of its revenues o Agreement 5 year period- renewable for additional 5 years

Reactions to Bharti

Don Price- the CTO of Bharti Mobile Services Never heard of such an agreement- expressed serious reservations about handing over network management and operations to the vendors IT AND Marketing departments Concerned that the software or hardware applications not supported by IBM would no longer be available

In addition, concerned about the implications the deal would have on the time to market of new IT-based services for customers

Human Resource departments Concerned about the management of transfer of nearly 1,000 staff members Cultures different from India: India is not a Hire-and Fire country

Vendor Reactions
Initial reactions were mixed. Liked the opportunity to do more business with Bharti Concerned with the risks and the need for senior Buy-In from top levels Major Concern: Might be stuck with important investments in network equipment that they made in behalf of Bharti in the event that Bharti did not use the equipment Concerned with absorbing hundreds of Bhartis employees If vendors dont sign- could be dangerous because of the rapid growth of Bharti causing lock out of lucrative deals IBM had concerns about forecasting Bhartis future revenue growth in order to estimate how much they would get paid over the next five to 10 years. o IBM needed to be fairly sure of Bhartis future success o Not sure if investment would improve Bhartis chances for success in the future o Felt like betting on a horse in a horse race