IBM and Vodafone have renewed their outsourcing contract. This contract comes on the heels of numerous contracts that are renewed and renegotiated before the term expires, an industry trend. The estimated value of the deal between IBM and Vodafone Essar is rumored to be around $1 billion. The new contract states that IBM will manage IT systems for Vodafone Essar till the year 2017.
The original contract
Vodafone, India’s third largest phone company had initially signed a contract with IBM in 2007. The $400 million contract spread over five years was set to expire in 2012. Prior to the expiration, however both companies sat down to renegotiate and restructured the deal, currently estimated to be worth between $800 million and $1 billion.
The spokesperson for Vodafone Essar chose to attest that the contract between IBM and Vodafone Essar had been signed but did not divulge any details about the estimated value of the deal.
An executive familiar with the contract that was inked was quoted on the condition of anonymity, “The deal could have come up for renewal late this year if this agreement was not reached – it completely rules out any opportunity for rival bidders.”
The industry trend
When contracts expire, there is an opportunity for the new contract to be in the midst of an intense bidding war. The possibility of the bidding war is attributed to the unsightly global economic conditions and the value that these contracts hold.
Gartner, a research firm had estimated that the Indian IT industry will be valued at $9.5 billion in 2011. The estimates showed an increase of nearly 18% over the revenue generated in 2010, $7.6 billion. The domestic IT market is forecasted to grow to be worth approximately $15 billion by the end of the year 2014 and is ranked third in the Asia-Pacific zone.
Popularly known as the Big Blue, the International Business Machines Corporation has slowly and steadily grown over 19 years to control India’s domestic IT market. In a market that features the world’s top IT players, IBM has created a niche for itself. The company grew from humble beginnings. IBM’s foray into the limelight came from writing software codes to help overseas companies deal with the millennium bug scare in the 90’s.
The name Big Blue comes from the blue-color mainframe computers of the 60’s. A company that has a long and colorful history, now controls nearly half of the entire value of outsourcing contracts valued to be worth around $1.5 billion. A large majority of IBM’s market value comes from the Indian domestic IT market with a mix of computer hardware, service functions and software that they host for companies like Bharti Airtel and Vodafone.
A portion of the company’s revenue is also generated from developing solutions for the official Government clients like the Indian Railways. The railways contacted IBM to develop a crew management system in 2010. Despite having significant weightage in the Indian market, IBM faces stiff competition from companies like Infosys, TCS, Wipro, HCL and Cognizant.
IBM employs over 120,000 employees in India, a number that is a quarter of their global workforce. Despite some strong numbers and statistics, the company needs the telecom contracts especially since the telecom industry itself is looking to cut costs and create larger profits.