This week IBM announced that it had won a 10 year, $600-800m, full outsourcing deal with Idea Cellular, an Indian mobile operator with 14 million customers. IBM will manage Idea's whole IT infrastructure and applications, as well as telecoms related systems and software. In addition IBM will provide consulting services to 'transform' Ideas business processes such as customer management, billing and business intelligence.
Ovum's IT services practice leader, Angel Dobardziev, comments:
This deal is significant for IBM and the IT services industry for a number of reasons. IBM is taking a revenue sharing approach to being rewarded for its services, hence the range, rather than the fixed value of the deal. IBM is betting that as Idea's customers and revenues grow, it will get much more, as is happening with the similarly structured Bharti Telecoms contract.
That contract was signed in 2004 for what was then valued at $750m (over 10 years) and as a result of Bharti's growth, there are now estimates that it could bring $1.5bn for IBM over its lifetime.
The current IT service vendors' alignment around the concept of innovation (see our Innovation: vendor strategies study) is aimed to exactly drive up engagements such as this, where they bundle consulting and outsourcing services, position themselves as business partners to their clients, and get rewarded as such (and avoid the threat of commoditization).
The type of business outcome-based pricing is rare in the IT Services industry today, and our research suggests that this is due to client organization's reluctance to share rewards of growth to IT suppliers (unlike risk). This deal also indicates the growing role of business consulting capability in IT services, a topic which we address in a soon to be published [email protected] report.
It will be interesting to note how many more clients adopt this bundled and pricing model going forward. We don't expect an avalanche just yet, but the mobile telecoms industry (which has traditionally been open to network and business process outsourcing) could be one where we see more of this type of deal.
Why‾ Because the need to reduce costs and advance legacy combined with the need to manage growth amid intense competition, leaves many operators open to partners which can bring more comprehensive options to the table.
Angel Dobardziev is the IT services practice leader, managing Ovum's advisory business in the IT services area.