Global Outsourcing and Innovation: Analytical Essay

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Question:

Analyse the ‘Strategic Outsourcing at Bharti Airtel Limited’ case applying insights from the module to answer the following questions

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Question 1

Introduction

Bharti like any other growing telecom company was faced with the challenge of managing network expansion for its growing customer base. In order to succeed in the Indian mobile phone market firstly, Bharti must focus its services on providing excellent customer services through “error-free” services (low call drop rates, value-added service, etc), cost efficiency, and innovation in new products and services.

Secondly, Bharti must scale up network coverage to cover its growing customer base and Bharti must come up with a strategic and sustainable business model that will enable it to increase network infrastructure simultaneously as customer demand increases.

Discussion

Bharti should focus on its four core competencies to succeed in the Indian mobile phone market. Core competencies in Sales, Promotions, Customer Care/ Services, and Identifying Customer's Pain Points (Harvard Business Review, 2012). From a sales point of view, Bharti can offer mobile telecom service at $0.01 to $0.005 per minute, perhaps the lowest rates in the world. Bharti enjoyed compounded annual growth in sales revenues of 120% and growth in net profits of 282% per year between 2003 and 2010. Its market cap has steadily grown over the same period and stood at around US$30 billion as of 2010 (ibid.).

For branding and promotions, Bharti went for a variety of advertising using different brand ambassadors, starting from cricket icons like Sachin Tendulkar to renowned music composer A.R.Rahman to cine stars like Shahrukh Khan, Madhavan, etc (Jeyavelu and Radha, 2008). It also carried out a combination of both functional and symbolic campaigns. Bharti conducted regional campaigns to ensure a wide reach to even the most remote areas. Bharti also ensures all campaigns had a common theme and went for high visibility advertising, targeting a variety of customer segments (ibid.).

Bharti took several awards for marketing and brand excellence as well as for distribution and service excellence over the last few years. In 2004, Bharti has announced the 'World Communications Best Brand of the Year(ibid.). This was a prestigious award that recognized outstanding performance by companies and brands from across the world in the telecommunications industry.

A survey conducted by The Economic Times (ET) Brand Equity in 2007 also recognized Bharti as The Second most trusted Brand’ in the world (ibid.). Bharti also implemented comprehensive intelligence and data warehousing capabilities which helped it better understand customers' usage patterns and predict network coverage demand. This service enables Bharti to identify customers' pain points and make relevant improvements to better serve its customers (ibid.).

Bharti also focuses its services on providing excellent customer services through “error-free” services (low call drop rates, value-added service, broad coverage, etc), cost efficiency, and innovation in new products and services. Bharti introduced new and innovative products that were received well in the market and enabled the Company to maintain its leadership position in the Indian mobile phone market despite highly competitive pressures. For example, in 2005 the company introduced new products like BlackBerry wireless solution, Airtel Live, and Ring back tones (Hello Tunes) which were all firsts in the country (ibid.).

Conclusion

Bharti must focus on its four main competencies; Sales, Promotions, Customer Care/ Services and Identifying Customer's Pain Points, by doing this well the company can succeed in the Indian mobile phone market. Bharti's strength was grounded in its brand management, people management, and customer management capabilities.

Question 2

Introduction

“Outsourcing refers to the practice of transferring activities traditionally done within a firm to third-party providers within the country or “off-shore” (Sen and Shiel, 2006). In the case of Bharti, the proposed outsourcing agreement is to multinational vendors operating within the country. The author strongly agrees with Gupta's proposed outsourcing agreement. Gupta’s strategy includes handing over responsibility for the build-up, maintenance, and servicing of the telecom network to an equipment vendor.

Gupta considered Ericsson, Nokia or Siemens as potential partners. In addition, Gupta’s strategy also considers outsourcing the build-up, maintenance, and servicing of Bharti’s core IT infrastructure to IBM. The next section discusses the advantages and disadvantages of the Gupta outsourcing agreement, backing them up with relevant theories and examples from an external source. Furthermore, the following section highlights how the outsourcing agreement works toward building Bharti’s core competencies.

Discussion

This section discusses the advantages and disadvantages of the Gupta outsourcing agreement and then highlights how the advantages of the outsourcing agreement work towards building Bharti’s core competencies discussed in question 1.

Advantages of Bharti’s Proposed Deal

Firstly, the proposed deal can enable Bharti to reduce operating costs (Oshri, et al, 2009).

Typically, suppliers will always want to sell more equipment than required, while the operator will aim to maximize coverage and capacity with as little equipment as possible. The outsourcing of the build-up, maintenance, and servicing of the telecom network to equipment suppliers can reduce the operating cost because this agreement helps get rid of the inherent conflict of interest between Bharti and telecom suppliers. The proposed agreement will ensure the optimum use of equipment to provide the required network capacity.

A typical network uses only 60% to 70% of its installed capacity at any point in time, it is an industry practice to purchase excess 20% to 30% capacity to in order to keep on step ahead of customer demand. For Bharti, in terms of capital assets, the excess 30% excess capacity through 2007 would represent around $300 million to $400 million, hence outsourcing this process presents a huge cost-saving strategy for Bharti.

Secondly, the proposed outsourcing deal not only gives Bharti access to the best possible technology, these partnerships also enable Bharti to focus on core competencies (ibid.). By freeing itself from managing technology, the company can use all its resources to focus on its core competencies – strategic management i.e building its own strategy without external consultants; increasing sales revenue, branding and promotions, and providing excellent customer services - through constant innovation and providing value-added services, identify customers pain points and working with regulation and regulators.

Finally, the proposed outsourcing deal helped improve Bharti’s Time-to-Market (Ibid.) From the case study, when there is a need for network expansion, typically the process of planning, tendering, financing, purchasing, and installation could take between six months to a year. With this partnership, the speed comes because each partner is a specialist and can do a bit better than anyone. This entire arrangement allows Bharti’s network utilization to be high all the time. The agreement gives Bharti the ability to increase network capacity in a quick time and creates a situation where the capacity is made only when they are ready to be consumed.

Disadvantages of Bharti’s Proposed Deal

Firstly, the proposed outsourcing agreement can be hindered by the cultural difference between the two organizations (Oshri, et al, 2009). Bharti being an Indian-based company with a start-up culture, IBM was quite the opposite. The potential vendors looked at the deal as an arrangement where the main objective is to provide world-class infrastructure while for Bharti, the main objective is to respond to a high-intensity environment of growing customer needs. There is bound to be initial glitches between these two diverse objectives, but communication between the two parties can help in sorting this out. Secondly, the proposed agreement state that Bharti staff carrying out the task to be taken over by the vendors would be transferred to the vendors respectively. This can lead to another important issue of loss of loyal staff.

In terms of achieving Bharti's core competencies, the proposed agreement to outsource the telecom infrastructure to suppliers such as Ericsson, Nokia, or Siemens and internal IT infrastructure to IBM will enable Bharti to focus on improving Sales, providing excellent customer services through “error free” services (low call drop rates, value-added service, etc), cost efficiency and innovation in new products and services, promotion and identify customers pain points. These outsourcing agreements will enable Bharti to free up resources as they no longer have to worry about technology.

Conclusion

The proposed outsourcing agreement presents more advantages than disadvantages to Bharti and will help Bharti achieve its core competencies. The main advantages provided by the agreement are cost saving, quicker time to market, access to the best technology, and enabling focus on core competencies.

Question 3

Introduction

Bharti outsourcing agreement like any other presented some major concerns mainly due to uncertainties the deal could cause for Bharti itself. According to the case study, a senior employee acknowledged the fact that vendors such as Ericsson/Nokia /Siemens have access to the best technology but questioned the vendor's operative expertise in managing network installation, servicing, and maintenance of the Telcom infrastructure.

Another issue raised by the marketing and IT department was if IBM will be willing to work fairly with other vendors, would the agreement mean Bharti will no longer have access to certain creative new applications? Also, whether hardware and software not supported by IBM would no longer be available. There were also concerns about staff relocation, some staff might not want to be transferred or the vendors might not want to take them. The following section discusses Bharti’s major concerns about entering an outsourcing agreement with IBM and Ericsson, Nokia or Siemens in detail, backing each point with relevant theories.

Discussion

Firstly, Bharti’s main concern with the outsourcing agreement to Ericsson, Nokia or Siemens is their delivery competency (Feeny, D et al, 2005) – particularly the vendor's lack of domain expertise (ibid.). The vendor may provide access to the best technology, but that doesn’t necessarily mean that they are competent in planning, building up, installing, servicing, and maintaining of telecom infrastructure.

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This increases the chances of Operational risk (Aron, R et al, 2005) as network expansion processes might not operate smoothly after being outsourced. To avoid this risk, Bharti being more experienced in planning, building up, installing, servicing, and maintaining of telecom infrastructure can codify the process and share knowledge with vendors (ibid.). Alternatively, domain expertise can be transferred from clients to vendors via employee transfer which is already included in the agreement. This will allow vendors to apply and retain sufficient professional knowledge of the target process to meet Bharti’s requirements.

Furthermore, another concern with the outsourcing agreement to Ericsson, Nokia or Siemens is Bharti's lack of control (Feeny, D et al, 2005). The proposed agreement gives full control of the management of telecom infrastructure to the vendors. The telecom infrastructure is the backbone on which Bharti provides services to its customers. In a case where an issue arises such as a power failure, Bharti has no control and is fully dependent on the vendors to rectify such issues. The major effect will be felt by Bharti and this can damage the brand image or even make loyal customer switch providers.

Bharti can solve this problem by ensuring the selected vendor has good relationship competency (Feeny, D et al, 2005), this will ensure the vendor will go to the far extent to cultivate a win-win relationship that will align Bharti and vendors' goals and incentives over time.

Thirdly, Bharti's main concern with the outsourcing agreement to IBM is their transformation competency – particularly in IBM technology exploration (ibid.). Technology exploration is the willingness and ability of a vendor to swiftly deploy new technology to support critical services and ensure client meet their improvement targets (ibid.). For instance, in a case where IBM fails to innovate or is behind competitors in deploying new technology, Bharti will be directly affected by this because competitors might have more advanced technology hence gaining an advantage over Bharti.

Finally, an additional concern with the outsourcing agreement to IBM is their delivery competency (ibid.) – particularly the lack of sourcing. Sourcing is the vendor’s ability to tap the resources needed to meet the client’s service targets (ibid.). The proposed agreement permits IBM to manage all Bharti internal IT architecture, and applications including applications provided by other vendors. IBM might not be willing to implement a third-party application that carries out an operation better than their own product. This puts Bharti employees at a disadvantage because they might not have access to new better creative applications.

IBM might not be willing to work fairly with other vendors. Software and hardware that are not supported by IBM might no longer be available. Employees may be required to learn new skills to effectively use IBM technology, this puts pressure on HR to deploy the required training and initially can lead to less productivity.

Conclusion

The two major concerns Bharti would have about entering an outsourcing agreement with IBM and with Ericsson, Nokia or Siemens are their transformation competency and delivery competency respectively (Feeny, D et al, 2005). For IBM, Bharti can solve this problem by ensuring the selected vendor has good relationship competency, this will ensure the vendor will go too far extent to cultivate a win-win relationship that will align Bharti and vendors' goals and incentives over time. For Ericsson, Nokia or Siemen, Bharti can share knowledge by codification and through domain expertise transferred from clients to vendors via employee transfer.

Question 4

Introduction

In the context of outsourcing, governance refers to the mechanisms, processes, and people that oversee and direct a business entity’s third-party contracts and relationships. (EY, 2016) The implementation of an effective information technology outsourcing governance has become an important problem for modern outsourcing companies. Efficient IT outsourcing management will ensure that Bharti's IT outsourcing strategy is in line with the business goals.

A study by (Weill and Ross 2004) shows that companies with superior IT governance achieved 25 percent higher profits than those with poor governance, given similar strategic objectives. Bharti needs an effective governance mechanism to mitigate some of its concerns and capture any outsourcing advantages identified. In the discussion, Bharti’s outsourcing concerns will be reviewed and effective governance mechanisms to mitigate concerns will be suggested by the author.

Discussion

Organizations with ineffective IT outsourcing governance suffer due to inaccurate information quality, inefficient operating costs, loss of competitiveness, lack of control, and failure of the organization itself (Schwartz 2004, Woodhead 2004). Vaswani (2003), a study to determine the effectiveness of IT outsourcing governance mechanisms, revealed that three mechanisms— an IT outsourcing steering committee, senior management involvement in IT outsourcing, and corporate performance measurement systems — have been positively linked to the effectiveness of IT governance.

Firstly, Bharti can utilize this mechanism by setting up an IT outsourcing steering committee, the committee serves as a high-level managerial team, comprised of representatives from divisions within Bharti (such as Business executives -Mittal, and the CIO- Akhil Gupta), with the main function of linking Bharti Telecom Infrastructure and IT architecture outsourcing strategy and main business strategy (Nolan 1982; IT governance Institute 2003b). Bharti can also set up a Vendor Management Office (VMO) that reports directly to the steering committee.

The VMO is responsible for constant monitoring and reporting of risk/issues and status and governance reports on a regular basis to the steering committee. VMOs also monitor the knowledge transfer process (Deloitte, 2014). Bharti VMO requires Service management and an IT service management department (ibid.). Each of these departments works with vendors in their respective areas to ensure service delivery runs smoothly. Services management manages day-to-day vendor interaction and is accountable for service delivery (ibid.). The IT service manages vendors' relationship, manages vendors' performance, track vendors' finances, provides vendors governance, adherence to agreed service levels, and facilitate resolutions of vendor-related issues (ibid.).

For Bharti, a steering committee can mitigate the concern of Ericsson, Nokia, or Siemens delivery competency– particularly the vendor's lack of domain expertise. This governance mechanism will ensure the codification and transfer of required knowledge to the vendors through the activities of the VMO.

Furthermore, one of the steering committee's duties is to oversee the implementation of the board’s strategic agenda. For Bharti to achieve this outcome, an effective performance management mechanism is necessary. In order to ensure the quality of services delivered by vendors, network capacity and IT infrastructure will be subjected to a number of quality control checks specified on the service level agreements (SLAs).

These include new application implementation delay, hotline customer satisfaction, and measure of network quality, such as the number of dropped calls, the number of incomplete calls. A penalty and reward mechanism can be set up to manage performance effectively. Such a system enables the management and the board to detect and correct any deviations and alter the strategy when necessary (IT Governance Institute, 2003b).

This governance mechanism can mitigate Bharti's concerns (such as lack of control in the Nokia/Ericsson or Siemens agreement and lack of technology exploration in the IBM agreement), this will ensure the vendor will go to the far extent to cultivate a win-win relationship that will align Bharti and vendors goals and incentive over time.

Finally, many researchers have investigated the critical role of senior management in the success of IT outsourcing governance. Senior management involvement appears to result in effective IT outsourcing planning (Rockart 1988; Schuman and Rohrbaugh 1991; Earl 1993; Cerpa and Verner 1998; and Sohal and Fitzpatrick 2002).

Bharti can involve senior management through a practice of ensuring senior interactions with vendors and also through regular meetings as per contractual agreement and through relationship alignment – i.e. annual senior interviews (Delioitte, 2014). This governance mechanism can mitigate the concern of IBM domain expertise in lack of sourcing. Senior management meetings can ensure IBM and Bharti's objectives are aligned.

Conclusion

In conclusion, for Bharti, effective governance will ensure Bharti captures the advantages for outsourcing and also mitigate some of Bharti's concerns. The governance mechanisms include the involvement of senior management, the implementation of an effective performance measurement system, and the creation of an outsourcing steering committee.

Question 5

Introduction

Outsourcing involves both vendors and clients and it is important that both parties mitigate any concerns to ensure a win-win situation. In the discussion, any major concerns that IBM or Nokia should be aware of regarding the outsourcing agreement with Bharti would be outlined and reviewed.

Discussion

Firstly, a major concern for Nokia is the risk of being stuck with a significant investment in network equipment that they made on behalf of Bharti in the event that Bharti did not use the equipment. This presents concern because according to the case study, Bharti will only pay for network capacity when the capacity is up and running and have been used by Bharti customers.

Furthermore, a concern for both Nokia and IBM is the cultural difference between the companies. Bharti is an Indian-based company with a start-up mentality, and the vendors are the completely opposite – large multinational companies. The proposed agreement states that Bharti staff presently carrying out tasks that would be taken over by Nokia be transferred to Nokia. For Nokia, this also creates a concern of managing the cooperative cultural mix and managing sudden expansion in the number of employees.

Finally, a major concern for IBM was the payment structure. The proposed agreement states that IBM will receive a share of Bharti’s revenue for its services, although IBM has to invest in Bharti immediately without any form of down payment. In a case where Bharti makes a low revenue, IBM is at a risk of losing. Also, IBM will have to forecast Bharti’s revenue growth in order to estimate how much it would get paid, this forecast estimation is often inaccurate. The governance mechanism to mitigate this is the involvement of senior management (Delioitte, 2014). Senior management meetings can ensure IBM and Bharti's objectives are aligned. IBM can also be involved in Bharti’s internal board meeting as per the contractual agreement since their revenues are tied.

Conclusion

In summary, the major concern of IBM and Nokia about entering an outsourcing agreement with Bharti is the cultural difference, the payment structure, and the risk of investing in unutilized network equipment. Some of these concerns can be mitigated through effective governance mechanisms such as involving senior management.

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