Vodafone set to extend IT outsourcing contract to cover Idea Cellular; IBM to take a hit

Vodafone India has begun an exercise to extend its outsourcing contract with IBM to cover Idea Cellular as well, besides kicking off work to streamline and standardise all its own IT processes ahead of the proposed $23 billion merger between the phone companies.

The move is aimed at making things easier for the proposed union and also means Idea’s existing IBM contract- which runs until 2020-won’t get renewed separately, people familiar with the matter said. The proposed Vodafone-Idea merger is set to shrink the revenue pie for all IT vendors involved, but will likely impact IBM the most as it has contracts with both, one of the persons said.

“We are streamlining our processes and standardising them so that when the merger happens, we have everything documented,” said a top executive at one of the two telcos. “That’s not only for IBM but for all the IT vendors. Even the current contracts which are active today will definitely be impacted and streamlined.”

The streamlining of IT processes between both the telcos will take another two quarters to complete, another person said.

Vodafone India renewed its outsourcing deal–pegged at around $800 million–with IBM for five years last August. Idea had initially signed a 10-year contract with IBM in 2007, but in 2012 extended it until 2020 in a deal worth $800-900 million.

The reworked contract may be 40-50% lower than the previous combined deal value, the first person said. IBM declined to comment. Vodafone India and Idea Cellular didn’t respond to queries.

IBM gets about $800 million-$1 billion from the telecom vertical, which is the largest contributor toward its $3 billion-plus yearly revenue in India. “The telecom vertical’s contribution will go down to $500-700 million only due to the ongoing consolidation among major telcos, including the Vodafone-Idea merger,” said one of those cited above.

The reworked deal may be structured similar to Bharti Airtel’s IT outsourcing deal that was renewed in 2014 and is said to be worth over $500 million. The No. 1 telco kept some processes in-house so that a monopoly situation didn’t arise, the person said.

In the newly structured IT outsourcing agreement, analytics, business intelligence and applications are most likely to be drawn from the existing Vodafone contract, given Idea’s existing pact is largely focused on IT infrastructure.

“They are still figuring out what to keep and what to give away before covering the Idea processes and infrastructure under the existing contract,” one person said, adding that negotiations are on to restructure the current Vodafone contract to remove overlaps.

Ashish Kumar, who was vice president of cloud at IBM Asia Pacific until earlier this year, has been brought in to work on the Vodafone-Idea merger, said one of the persons. He is said to be the executive who started the telecom journey for IBM in India and was the architect of the initial outsourcing deals with Bharti Airtel and Vodafone India.

Kumar, along with Nipun Mehrotra, IBM’s chief digital officer, Karan Bajwa, managing director at IBM India, and IT services veteran Vikas Arora, who recently joined IBM as cloud business leader, are all working on big strategic outsourcing deals, including the Vodafone and Idea contracts, said one of the persons cited.

IBM’s Bajwa recently told ET that the ongoing consolidation in the telecom industry will open up new opportunities for the company in different areas. “Our customers will merge, and not the number of subscribers in India as the size increases,” he said.

Sanchit Vir Gogia, chief analyst and founder of Greyhound Research, said, “There is an increased uptake of cloud and opex (operating expenditure). This along with the fact that the merger is happening is bound to have an impact on the deal size.”

According to Greyhound Research analysis, IBM’s erstwhile large and long-term outsourcing deals are quickly getting broken into multiple smaller–and shorter-term–managed services deals with components of cloud delivery. “We have also observed IBM India’s increasing unwillingness to participate in
outcome-based deals,” Gogia said.

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