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IBM’s New Game Plan

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In March 2009, Alok Sah, chairman of Kurmanchal Nagar Sahkari Bank, a small, 17-branch co-operative in Nainital, was scouting for an IT vendor who could host and manage the bank's IT infrastructure, provide networking services and take care of disaster recovery. The cost was high. But being a small operation, the bank's budget was low. Given the constant change in technology, Sah was also worried about technological obsolescence.

Several vendors, including HCL Infosystems and IBM, made a pitch for the business. HCL, says Sah, quoted Rs 3 crore for the data centre alone. It was beyond the means of the bank that made a net profit of Rs 6.21 crore in 2008-09. Then came a deal he could not refuse. IBM India offered a $1-million (about Rs 4.5 crore) shared services contract spread over 10 years. At Rs 45 lakh a year, "it helped us reduce IT capex by 60 per cent. I have stable operational expenditure planned out for 10 years. IBM will take care of all technological obsolescence and will not raise charges till we grow to 50 branches," says Sah.

What IBM plans/is doing: Offers analytics and business intelligence over and above core banking, which is almost universal now

Rivals: TCS, Infosys, Wipro, Oracle
What IBM plans/is doing: ‘Smarter Planet' initiative to drive efficiencies in power distribution

Rivals: Wipro, Accenture, TCS, Capgemini
What IBM plans/is doing: Aiming to tap the government, which is likely to be a big IT spender

Rivals: Infosys, TCS, Wipro, Accenture, MindTree, HP, Dell
What IBM plans/is doing: Utilising growing scale and complexity of Indian players to engineer solutions for emerging markets

Rivals: Wipro, HP, TCS, Infosys
What IBM plans/is doing: Developing new models for this nascent
but fast-growing segment

Rivals: TCS, Wipro, Infosys
(Rivals list is not exhaustive)

For the $101-billion International Business Machines Corp (IBM), a deal worth $100,000 a year would probably pass off as a rounding off error, but it is this kind of focus on the smallest of customers that helps the Armonk, New York- based IBM garner $1.5 billion from the Rs 1.23 lakh crore (about $27 billion) domestic IT market. That is miles ahead of home-grown IT firms such as Infosys, TCS and Wipro who ignored the market for most part and are playing catch up only now (though Wipro has emerged as a formidable player).

With An Eye On Mining
An obsessive focus on small clients, of course, is with the hope that they can be mined for bigger contracts as they grow large. Take dairy major Gujarat Cooperative Milk Marketing Federation (GCMMF). It was looking to outsource its IT. GCMMF, popular for its Amul brand, collects close to 11 million litre of milk daily from 2.8 million farmers. Its products reach 600,000 retail outlets through 3,500-odd distributors. The IT vendor would have to factor in that several of these farmers are illiterate, which would affect its ability to manage their payment records accurately.

Though the deal was worth just Rs 80 crore over 10 years, IBM India's managing director Shanker Annaswamy and the team spent months at collection points in remote villages to understand the chain. That was in 2009. Today, the IBM-GCMMF engagement has expanded to include consulting services and Spoken Web, which helps farmers access information in local language without using computers or text.

IBM believes such nondescript deals, if mined properly, could become multi-million dollar IT hardware, software and service contracts such as the ones it has with Bharti Airtel, Vodafone and Idea Cellular. "There is this myth that we are just for large enterprises. We want to grow with the small and medium companies as they are the large enterprises of tomorrow," says Nipun Mehrotra, vice-president of general business, routes to market and geo expansion. The engagement with Bharti Airtel, its largest client in India, began in 2000 with minor system integration work. That culminated in a $750-million contract in 2004 — now worth $2.5 billion over 10 years. Similarly, the $800-million comprehensive outsourcing contract with Idea Cellular and the $600-million deal with Vodafone for IT infrastructure outsourcing began small initially.

Such large telecom deals helped IBM race past domestic IT services firms. Its status in other industry verticals is not so undisputed. And there lies the key to IBM's next big bets. "We are not going to rest on our laurels. We know that others will copy us. So, we need to keep doing new and better things," says Jeby Cherian, director, strategy and business development, and the man tasked with the challenge of keeping IBM ahead of the curve in India.

More The Merrier
Seven years since the Bharti deal, IBM is on the prowl for yet another game changer. This time in five new industries (of the 17 segments it operates globally): BFSI (banking, financial services and insurance), travel and transportation, energy and utilities, public sector, and media and entertainment. Annaswamy says these sectors have been chosen for their potential for growth and keeping in mind IBM's confidence in developing new business models in these.

Engagement has begun with a few customers in these areas. All of which are work in progress, and it may take a while before IBM can claim a breakthrough (for instance, the telecom outsourcing model came through after 2-3 years of tinkering). While that sounds like IBM is fishing around in fresh waters, the firm assures the agenda is not as obscure as it seems. Annaswamy says the focus will be on increasing efficiency, improving revenues, and cutting down T&D losses (in energy and utilities) under its Smarter Planet initiative or taking the Web through the Spoken Web project to those who cannot access it conventionally.

IBM zeroing in on BFSI is a no-brainer. Over a third of all IT spend in the country comes from BFSI. But what is being watched is what it wants to do in this space. Realising that domestic players such as TCS, Infosys and Oracle have made significant inroads into the core banking solutions market already, IBM is trying to break into their stronghold with complementary solutions.

"Core banking rollout has meant a lot of data is being generated. Can we help banks make sense of the data? Can we assist them in tailoring their products to individual customers? We can, through data analytics and business intelligence," says Annaswamy.

The challenge? Core banking solutions firms are also working with their clients on these lines. IBM is rolling out such a project with India's largest bank, State Bank of India. But it remains to be seen how IBM cracks SBI and similar clients because data analytics and business intelligence are at the core of what these providers hope to do — including TCS, whose core banking solution BaNCS currently powers the SBI. Expect a bitter battle on the SBI front.

Praveen Bhadada, engagement manager at management consulting firm Zinnov, says such clashes for market share will rise. "Just because one player has expertise in international markets does not mean it would have an edge in India. Here, requirements are fairly unique. International companies have expertise, but Indian players understand the local market."

In travel and transportation, too, IBM started small in September 2010 with a $63-million, 10-year deal with Jet Airways to provide data centre operations, help desk support and security services. "More than the size of a deal, we are looking to push the envelope in improving productivity and efficiency. Given the scale of Indian players, if we execute successfully, we can take these models to other emerging markets," says Cherian. With a clutch of airports coming up across the country, IBM hopes to sell more of its airport management solutions — such as those it has sold already to private airports in Delhi, Hyderabad and Bangalore. It feels the learnings could provide it an edge in the global market, too.

"IBM's business analytics capabilities together with its strong understanding of our business have helped improve efficiency of our day-to-day operation," says Srinadh Prasad, head of IT operations at the GMR-run Hyderabad International Airport. But here too, IBM will face tough competition. TCS already provides similar services to Mumbai's Chhatrapati Shivaji International Airport. Wipro and HP, too, are closely eyeing this segment.

In government IT contracts, IBM already provides crew management system to Indian Railways. It offers networking services to the Income Tax Department and helps manage data centres of the Central Board of Direct Taxes. According to Bhadada, all of its rivals, too, are working with the government as it will be one of the largest spenders on technology. "Whether it is the Unique Identification Authority of India or other opportunities, it is a huge market waiting to be tapped. But cost, scale and customisation will be challenges," he says.

Annaswamy agrees: "If we offer compelling value, by doing innovative things, we can grow larger, even faster." Explaining the choice of media and entertainment, he says: "Whether it is Bollywood, Indian music or content created in India, they now have a presence across Asia and the world." IBM is working with practically every TV channel, offering them digital content storage and management solutions. "Imagine a channel putting 20 years of its video on storage and wanting to pull out a specific clip from a particular episode. The key is to offer path-breaking solutions," says Annaswamy.

Similarly, IBM helps direct-to-home service providers such as Tata Sky and Sun Direct manage their billing and customer relationship management effectively. Cable and broadband service provider Digicable took IBM's assistance in ensuring greater revenue per subscriber by facilitating launch of value-added services such as video on demand, interactive TV, Internet on TV, gaming and telephony.

On an average, an Indian consumes 12 times less power used by his American peer. While India is trying to improve power generation, cutting down on transmission losses — which currently account for close to 40 per cent of the power generated — is the key. This May, IBM announced a tie-up with the Bureau of Energy Efficiency for a smart grid project in which accurate information on energy use is generated to plug leakages. But IBM is not alone in this segment, players such as TCS, Infosys and Wipro are also looking at the energy and utilities sector intently.

March Of The Rivals

The new course of action is not just driven by IBM's desire to push the envelope. There is a push factor too: rivals are fast learning the tricks of the trade. Naveen Mishra, principal research analyst at research firm Gartner, says India's IT market is extremely value conscious. Also, there is no labour arbitrage, margins are either in single digits or low teens. So, most Indian IT firms focused on the more lucrative international clients in North America and Europe, where operating margins were nearly thrice. But the global slowdown made them focus on the domestic market.

At a time when IBM appeared unstoppable, Wipro decide to take the fight to the enemy camp. In January 2008, Wipro Infotech grabbed a Bharti-IBM-like $600 million contract for IT outsourcing from Aircel over nine years. In May 2009, Wipro proved the deal was not a fluke by winning another Rs 2,500-crore contract from Uninor. Anurag Mehrotra, vice-president and head of client relationship group of Wipro Infotech, says, "Customers are comfortable with technology agnostic system integrators and outsourced services provider such as Wipro rather than IBM. Unlike IBM, HP or Dell, we are not looking to push our hardware or software."

Wipro has emerged as an unnerving rival earning about 22 per cent of its IT revenues from India, the highest for any local vendor. TCS, India's largest IT firm, gets 9.8 per cent of its revenue from the local market. The firm says it pioneered the telecom-outsourced services model. G. Srinivasa Raghavan, vice-president of strategic initiatives, country head-India business, TCS, says: "We had a similar deal with Tata Teleservices in 2003. As it was a group company, it did not receive the same kind of attention."

While IBM has built a large business, its dominance in services is under threat from resurgent Indian IT companies as well as players such as HP, Accenture, Dell and Capgemini, which seek to carve out a greater share of the pie for themselves. HP, an old foe, enjoys several of the advantages that Big Blue has. With a presence in hardware and software, its main challenge was lack of scale in services, which had been potentially addressed after the acquisition of Electronic Data Systems (EDS). Earlier, EDS had MphasiS, which had a bulk of its people in India. Dell has hired Wipro's former co-CEO Suresh Vaswani as chairman of its Indian operations. Vaswani had built Wipro's domestic business and knows the lay of the land.

With competitors successfully replicating its model, IBM needs to find new ways to retain its lead. One way to do so is by widening its footprint in the Indian market from 22 cities now to 47 by 2013. "We will create a local enabling eco-system. While there are challenges like getting talent in tier 2 and 3 towns, we are confident that we will be able to do it," says Annaswamy. IBM intends to penetrate markets such as Kanpur and Ludhiana. "Whether it is infrastructure or financial inclusion, the areas chosen (by IBM) mirror the India growth story. They bring their global expertise to the local market and offer compelling value," says Amneet Singh, vice-president, global sourcing at Everest Group, an advisory services firm.  


"Globally and in India, we have had immense success competing against several players including IBM"
G. Srinivasa Raghavan, vicepresident of strategic initiatives, country head-India business, TCS (left)

Customers are comfortable with technology-agnostic system integrators such as Wipro rather than IBMAnurag Mehrotra, vice-president and head, client relationship group, Wipro Infotech

To deliver on innovation in each of the five focus areas, IBM is banking on the 12 centres of competence (CoCs), the India Software Labs (ISL) as well as the research labs headed by director and chief technologist Manish Gupta. While the CoCs and ISL largely address immediate market needs, the research lab is what gives IBM a long-term edge. Last year, IBM Corporation's R&D budget was $6 billion, almost equal to the revenue of Infosys. Little wonder then that IBM was awarded 5,896 patents in 2010, the highest in the world. ISL, for instance, is working on the Spoken Web project. Gupta says this ability to make investments that may not yield results for years is a huge competitive advantage.

IBM's 100-year history is replete with serial reinventions. It was founded as Computing-Tabulating-Recording Company in 1911 by Wall Street financier Charles Flint. In 1914, he hired Thomas Watson Sr to head the company., who renamed it International Business Machines Corporation and took the firm to a level where it was selling 90 per cent of all tabulating machines in the US. In 1993, under former CEO Lou Gerstner, IBM transformed from an IT hardware firm to a software services and consulting behemoth. Even though the IBM India initiatives may not be as radical as those by its parent, IBM's DNA may be its greatest strength in moving towards their implementation. And everybody is watching if Big Blue can deliver yet another game changer out of India.

venkatesha (dot) babu (at) abp (dot) in

(This story was published in Businessworld Issue Dated 18-07-2011)