Can IBM retain Airtel IT deal worth $2 billion?

IBM CEO Virginia Rometty and Airtel chairman Sunil Mittal recently discussed several options to renew their $2 billion IT outsourcing deal that will expire next year.

IBM may not get the full IT outsourcing deal as competitors like TCS, Wipro, Tech Mahindra, etc. will be looking for a part of the contract — nearly $250 million in annual business — from Airtel, India’s #1 telecom operator.

The outsourcing contract — which was originally signed in 2004 — is for managing telecom networks, desktops and different software applications. It’s IBM’s largest IT outsourcing deal in India, Mint reported.

The report says ever since IBM lost its BP Plc contract to rival Accenture last year, there has been a newfound drive internally to save large deals due for renewal.

Bharti Airtel, which is looking at increasing profitability, is exploring ways to break down the existing contract with IBM across different areas. ( Airtel revenue up 9%, profit dips 10% in Q1 FY 2014 )

IBM is not a better position to renew the entire contract. Airtel may be looking for more vendors at this point of time.

There are signs that Airtel is looking at adding new vendors to its list. For instance, Airtel moved its office email application from IBM’s Lotus Notes to Microsoft Exchange in April.

SAN DIEGO - JULY 14: IBM booth on the trade floor of the ESRI (Environmental Systems Research Institute) user conference. July 14, 2010 in San Diego California

The negotiations for renewing the IT deal is happening at a time when Airtel is trying to focus more on revenue generation than telecom Capex this year. Airtel is going to lower its Capex in India this year. Airtel’s total Capex for telecom infrastructure in FY 2014 will be around $2.2 billion against $2.5 billion in FY 2013.

Out of this, $1.6 billion will be invested in India and South Asia and $600 million in Africa. In Q4 FY 2013, Airtel’s total Capex was about $650 million. ( Airtel Capex dips 34 percent to $411 million in first quarter fiscal 2014 )

The deal with Airtel is significant for IBM to improve revenue. IBM second quarter revenues declined 3 percent to $24.9 billion. The IT giant’s net income dipped 17 percent to $3.2 billion. IBM Q2 revenues in the BRIC countries — Brazil, Russia, India and China — were flat.

Airtel used to outsource lots of major IT projects to vendors. Recently, the telecoms scrapped its fixed line managed services deal with Alcatel-Lucent. Airtel is now looking for more partners including its rival telecom operators to join them and run the show themselves.

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