Vodafone inks IBM India

Earlier this week Vodafone Essar announced that it is outsourcing its entire IT operations, except network service platforms, to IBM, in a five,year deal. The agreement includes application development and maintenance, including billing, business intelligence, ERP systems, as well as data centre operations, and end user services. 300 Vodafone Essar staff will transfer to IBM. The deal size was not disclosed, but it will be linked to the commercial performance of Vodafone Essar.This deal is worth highlighting for three reasons. Firstly, it underlines IBMs success in the Indian IT services market generally and in particular the telco vertical. This is IBMs fourth full outsourcing deal with Indian telcos following deals with Bharti Airtel, Bharat Sancham Nigar and Idea Cellular, as well as a number of other deals including DLF, Delhi Airport, and Central Board of Direct Taxes.

Secondly, it comes in the backyard of Indian players TCS, Infosys, Wipro, Satyam and HCL who seem unable or unwilling to win deals at this scale and scope in their home market. All of them are keen to add larger full outsourcing deals to their portfolio, but it does not seem to happen in India, compared to their record of some success in other markets. We believe the limited outsourcing experience of the Indian enterprises most of whom are first generation outsourcers plays into the hands of global players such as IBM, which has the brand and the track record of delivery on this scale.

Thirdly, this is another outcome,based pricing deal, with IBMs pay related to the commercial performance of Vodafone Essar. Entering into such a deal is a completely different ball game to the typically fixed price or time and materials deals that prevail in the IT services industry today. It requires a step up from a supplier,client relationship to one of a very close partnership, where each side trusts the other to deliver on their commitments to achieve clients business not just technology outcomes. This is infinitely more risky for both sides, but equally the rewards can be far greater for both sides once there is a concerted push for the same objectives.

Value,based pricing is today a small percentage of IT services projects and outsourcing contracts, but we expect it to gradually grow going forward, with deals such as this. Vendors are already pushing hard for such deals in order to generate the coveted nonlinear growth i.e. revenue growth in excess of the people,time input, and clients get more comfortable in sharing the risk,reward with their IT vendors. But besides an alignment on measures, incentives, risk and reward, the key is the level of client intimacy. For all their financial success, the Indian players have work to do on this both home and abroad, in order to catch up with their Western peers.