Why did Bharti outsource its network operations?

Bharti was facing a challenge – the customer base was growing explosively (100% per year) but it was not able to keep up with the pace of the market growth. Bharti had challenges with management time, capital costs, and human resources.

1. Faster time to market: There was huge delay between the time when Bharti needed additional capacity and when that additional capacity could be up/running. Bharti was spending from six months to a year in the process of planning, tendering, purchasing, and installing. This took a lot of time from Bharti’s management team too and did not allow them to focus other important priorities in the company. 2. Scalability: Bharti was facing scalability issues both in its IT function and network function.

3. Human resources scarcity: Given the rapid growth in the industry, Bharti was finding it more and more difficult to hire and retain people. It was facing intense competition from other telecom providers as well are other multi-national companies to hire engineers.

4. Lean and predictable cost model: With the rapid changes in technology and also in the requirements for network capacity, Bharti was having a very unpredictable cost model. Instead of huge capital assets on the balance sheet and capital expenditures, Bharti wanted operating expenses which went hand-in-hand with the pace of its growth.

5. Capital Expenditures: With industry consolidation, the focus was switching from having a national footprint to having the ability to provide value-added service. Operators needed 2.5G and 3G technologies to provide those services, and the transition upward from 2G required major capital investment and Bharti did not have strong capital position at that time.

Describe Bharti’s value chain integration strategy (refer to telecom value chain with detailed network infrastructure diagram from class) in this context and explain the consequences for Bharti’s market position (how does Bharti expect to gain competitive advantage and market power following the outsourcing deals)? Consider the arguments put forth in both the “Vertical Integration Is Dead, Or Is It?” paper from earlier reading as well as “The Outsourcing Compulsion” paper from this week. How do these arguments relate to this context?

In current state, Bharti is planning/building/managing value chain components on the transport side as well as the service side. With the new outsourcing proposal, Bharti’s value chain integration strategy will change to where Bharti will be outsourcing management, design, development and deployment of network including capacity and coverage to vendors and it will manage providing services to its customers.

With the outsourcing deal, the ownership of the assets was still with Bharti but the management and maintenance of the equipment became the responsibility of the vendors. To ensure predictability of the costs, the payment was based on the peak hour capacity used by Bharti and excluded the unused capacity.

There are various point of views on outsourcing and the advantages/disadvantages of vertical integrations. The key insight is - to focus on the core that directly contributes to sustainable differentiation, and when you need to prioritize among the core you should attain differentiation in areas with most impact (ROI). This statement comes with a caveat that the ecosystem might change where the core that provides you competitive advantage might later change. For example: As detailed in the research papers* , during the industrial age the core was manufacturing and enterprises gained competitive advantage with innovate methods (Just in Time manufacturing) to manufacture but with technological advances the core has shifted to services component of the value chain (thus the power has shifted from manufacturers to distributors). In relation to Bharti, Bharti had to pick between “Transport-network/IT infrastructure” and “Services”, it cannot do both with the constraints (as described in Question 1) it had.

Bharti chose to outsource the “Transport-network/IT infrastructure” component as it believed that the outsouring deal provides competitive advantage in the following ways:

1. Positions Bharti to compete with Reliance and Tata in capital intensive transport upgrades even though Bharti has lesser capital
2. Allows Bharti to provide value added services with lower capital spending
3. Bharti does not need to sell equity to come up with capital to keep pace with technology upgrades
4. Allows management to strategize on providing value added services and building customer loyalty
5. Economic and learning benefits from owning the customer interface

What are potential adverse consequences (i.e., given the proposed incentive structure, what could each party to the deal be motivated to do which may be undesirable for the other party?)? What changes, if any, would you recommend to the proposed deal to address these potential adverse consequences?

Network outsourcing:

Adverse consequences:
1. Bharti pays the network vendors based on the network capacity that is used. This condition provides an incentive for network vendors to use technology that uses higher bandwith/capacity versus the technology that uses lower bandwidth/capacity to transmit information.

2. Once the erlang is installed the ownership of assets belongs to Bharti. This provides incentive for network vendors to go with equipment that might not be beneficial for Bharti in the long run. Network vendors will make a choice based upon the cost of best in class equipment versus the cost of operating inefficient equipment to meet minimum SLA criteria.

Changes to the deal:
1. The deal can be changed to provide Bharti the rigth to pick the kind of equipment that needs to be utilized for building the network.
2. Since the cost of data transmission is decreasing with newer technologies like fiber, the deal can be changed to either pay according to erlang or as percentage of revenue earned from customer whichever is lower.

IT outsourcing:

Adverse consequences:
1. IBM to manage IT infrastructure: This deal in essence is making IBM the gate keeper for all the IT decisions for Bharti. It gives IBM incentive to pick IT vendors or software that is advantageous to IBM versus Bharti. It also provides IBM incentive not to pick a vendor through a competitive process but to pick based upon IBM’s interests.
2. IBM will get paid a percentage of Bharti’s revenues. For IT services that do not directly impact the revenue for Bharti, IBM has incentive to pick/operate equipment/software that is cheaper for IBM.

Changes to the deal:
1. The deal can be changed to have Bharti as the decision maker for the equipment/software it wants to implement and have IBM play the role of implementing that equipment/software.
2. The deal can be modified to identify IT services that have impact on Revenue and IT services that do not have impact on Revenue and pay IBM accordingly.