revised December 19, 2011

case 1-428-864

Bharti Airtel (B)

Bharti Airtel was one of the most protable wireless telecommunications companies in the world even though it was based in India, one of the poorest countries on Earth. Despite the limited economic means of its customers and the lowest per-minute pricing in the telecom industry in 2005, Airtel created an innovative business model. Airtel had produced robust revenue growth and protability since its founding in 1995, and achieved strong nancial results in international performance indicators (see Exhibit 1). How did the company do it? What were the innovations that propelled Airtel to the dominant position in the ercely competitive Indian wireless market? We have broken all the paradigms of telecom, said Airtel Joint Managing Director and CEO Manoj Kohli. Airtel invented a new measure of success in the global telecom industry when it moved away from average revenue per user (ARPU) toward its low cost/high volume minutes factory model. At the same time, the company adopted an outsourcing strategy to transform itself into a lean marketing and supply chain management rm. Airtel saw these steps as necessary to becoming a low cost provider in the Indian cell phone industry. This departure from conventional wisdom in the industry could be traced to a 2002 executive gathering, where two major decisions were made. First, the Airtel management team pledged to pursue achieving the lowest per-minute cost in the industry and, second, the company decided to outsource all areas of the business that were not core competencies. To pursue the lowest pricing, Airtel introduced a health indicators graph (see Exhibit 2) that was developed in-house as a component of the companys performance dashboard. The graph plots three lines. The rst line represents gross revenues; the second, operating expenses to gross revenue, or operating efciency; and the third, revenue to capital expenditures, or capital productivity. The team adopted this new measure to replace the industry standard metric of ARPU and began to circulate it throughout the organization and externally to its suppliers and partners. In Kohlis words, Airtel has become agnostic of ARPU. Going forward, it would focus on per-minute margins. In making the decision to outsource Airtels non-core functions, the executive team rst identied ve areas that it considered fundamental to its success: Customer management People motivation

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Published by GlobaLens, a division of the William Davidson Institute at the University of Michigan. 2012 C.K. Prahalad and M.S. Krishnan. Sam Bryson, Joshua Katz and Sheel Mohnot prepared this case under the supervision of University of Michigan Ross School of Business Professors C.K. Prahalad and M.S. Krishnan.

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Financial management Regulatory management Brand management Airtel began to outsource its non-core functions in an effort to trim the company from a capital- and people-intensive business to a leaner organization. This included outsourcing the network, information technology (IT) services, retail stores, call centers, and passive infrastructure divisions. According to S. Asokan, Airtels director of supply chain, Many people think outsourcing is our strategy. However, it is, in fact, a byproduct of the decisions we made at the 2002 conclave to focus on per-minute margin. Becoming the low cost provider in a capital intensive industry presented signicant challenges, which Airtel addressed with an innovative outsourcing model. Airtel successfully negotiated a new compensation structure with outsourcing partners based on revenue sharing instead of the traditional system of upfront payments followed by annual maintenance contract payment. In effect, this allowed the company to convert much of the capital expenditures necessary to run a telecom company into operating expenditures. As perminute pricing went down, Airtel reduced the amount of related xed costs, allowing it to remain highly protable as prices decreased.

Implementation

Given Airtels reliance on outsourcing, the company had a number of overarching principles that dened its approach: 1. Ensure that any agreement is a well thought out arrangement. 2. Institute constant planning and review. 3. Adhere to transition management. 4. Create a win-win situation for Airtel and the outsourcing partner. 5. Ensure that there is skin in the game on the part of all players. 6. Ensure that the outsourcing contract motivates the partner to come up with new products and services. 7. Implement outstanding contract governance. 8. Ensure trust, transparency, and involvement of the partner at all stages of the process.

Using these criteria, Airtel developed a unique approach to outsourcing various functional areas, such as IT services, value-added services, network deployment, customer care, and distribution. IT Services Airtel outsourced its IT services to IBM in the summer of 2004. Under the agreement, IBM was paid through a revenue sharing model or a percentage of Airtels revenue each month. IBM was guaranteed a minimum monthly payment. If Airtel revenue were to dip below a certain amount, IBM would receive a minimum at fee instead of a percentage. As Airtels revenue grew, the percentage paid to IBM decreased, which allowed Airtel to share in the economies of scale on IT costs. With the tying of IBMs compensation to Airtels performance, this essential partner was incentivized to help Airtel grow. It created a win-win
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9. Dene clear processes for escalation management, with any non-compliance, cost, or quality issues to be raised to the next senior level at the earliest.

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situation for both parties when Airtel succeeded. In addition, IBM had the exibility to choose the specic hardware and software vendors in Airtels information infrastructure to meet Airtels business requirements. The arrangement was the brainchild of Airtel CIO Jai Menon, who had spent much of his career at telecom companies in the US before returning to India, his native country, to work for Airtel. The model offered Airtel signicant cost and usability advantages. My IT shop is a buffet, Menon says. He said outsourcing was done exclusively on a revenue share basis to ensure that IT was aligned with the needs of the business. The arrangement also harnessed the creativity of both parties, creating incentives for IBM and Airtel to work together to develop new products. Menon saw the new role of IT within Airtel as building application platforms that exposed application programming interfaces (APIs) to third-party developers who would then develop new value-added services and internal IT applications, allowing the company increased exibility and cost savings. In addition, Airtel had the freedom to seek other IT partners. For example, the company worked with Wipro and Infosys. While there were many benets to the revenue sharing arrangement, it also presented some implementation challenges. Organizationally, mirror teams had to be created for specic IT components within Airtel and IBM. These teams had to interact on a continuous basis to ensure that both sides were aware of the Airtel user experience with the IT system and with any IBM technical challenges. Value Added Services (VAS) As with any wireless operator, Airtel relied on value-added services (VAS) to drive revenues. In the words of Menon, India has been on a quest for a (universal) dial tone. However, we at Airtel see dial tone evolving into information tone, meaning we get much more than a simple telephone conversation from our handsets. Airtels approach to VAS also relied on outsourcing. Through its IT relationship with IBM, the company built a service delivery platform (SDP) for VAS that exposed APIs to third-party developers. With the SDP, developers could access Airtels short-message service and application gateways, content management system, transcoding, digital rights management, and network directory server for the purposes of developing, releasing, and updating various value-added services. A planned future version of the SDP would allow access to additional functions such as commerce enablement, advertising, search, gaming, and location-based services for more sophisticated VAS. While Airtel solicited developers for specic applications that management identied from customer data, the company was also working to create a self-perpetuating community of developersthe Airtel open community. Airtel set up an extensive process for vetting potential value-added services, providing data to developers, and managing the life cycle of individual VAS, all of which utilized the companys extensive data and analytics tools. This enabled Airtel to create a true partnership-based platform with the alignment of incentives and promote better governance. In terms of security and trust, Airtels policy was to share only data that was absolutely necessary with partners. However, partners and Airtel were aligned in their desire for Airtel and VAS to succeed. Airtel did not simply purchase VAS from providers outright; rather, the VAS providers were paid based on revenue generated by their services over time. For new value-added services, a cross-functional tollgate process was set up between new product development and the marketing department. The process was aimed at identifying potential new services, which were then analyzed using marketing data to determine their viability. Once VAS products were released, the marketing team would meet monthly to review the VAS portfolio and identify high- and low-performing VAS. Based on the performance review, promotion and other product management decisions were made.

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During 2009 to 2012, Airtel leveraged the VAS platform and launched a variety of value added services including entertaining ring tones, job placement services, religious prayers, educational applications, English language coaching, and mobile radio. As list of value added services from Airtel as of 2012 is in Exhibit 3. Network Deployment In early 2004, Airtel was seeing its customer base grow by 100% a year and found it difcult to keep up with network expansion. The company was frequently renegotiating contracts for its networking equipment and was having difculty budgeting for network expansion and software upgrades. The rm wanted to move from these unpredictable expenditures to a more lean and predictable model, converting capital expenditures into operating expenditures. Standard practice in the industry, which Airtel had been following, was to purchase a list of networking components from a vendor and sign a contract for installation and maintenance of the network. A company would typically purchase 30% to 40% more capacity than it needed, to keep ahead of demand and to compensate for errors in its models. Additionally, the process of planning, tendering, nancing, purchasing, and installing equipment could take anywhere from six months to a year. Airtel decided that the best way to smooth its expenses was to pay network equipment vendors for erlangsi rather than for the hardware boxes and physical equipment. This would encourage the networkequipment vendors to get the most out of their boxes, enabling maximum coverage with less waste than the traditional model. Similar to the IBM contract for IT services, the network vendors had the exibility to bring in the boxes of their choice to meet Airtels business demands. This approach also advanced the move from ARPU to a cost-per-minute focus. Under the agreement, Airtel decided when and where it needed capacity and relied on vendors such as Nokia and Ericsson to install the boxes. Payment for the network came only after the network was up and running and used by customers. Once erlang capacity was installed, Airtel owned the equipment. However, an operations and management agreement governed the maintenance and running of the network, which was done by the vendors. To align cost incentives between network equipment vendors and Airtel, the per-erlang charge to Airtel for underutilized towers was higher than those in high trafc areas. Thus, Airtel and the vendors shared the risk for the accuracy of usage forecasts. Additionally, Airtel was responsible for the passive infrastructure and, therefore, shared the investment costs. To ensure service quality, the equipment suppliers were subject to a number of quality controls specied in service agreements. The network quality was measured by the number of dropped calls, blocked calls, accessibility of the network, and voice quality, in a contract determined jointly with vendors. Ericsson was the vendor of choice for fteen geographic areas known as circles, and Nokia was the vendor for eight circles. The contracts were revised every three years. In 2007, Airtel partnered with mobile telecom players, Vodafone, and Idea to form Indus Towers Limited, an independent tower company, to provide passive infrastructure servicesthe physical towers, air conditioners, and generator setsin India. The company was formed by merging the passive infrastructure assets of Airtel, Vodafone, and Idea across 16 telecom circles in India. Airtel, through its subsidiary Bharti Infratel Limited, continued to operate its own towers in the seven remaining circles where Vodafone and Idea did not have licenses to operate. In forming Indus Towers, Bharti Infratel transferred 35,000 towers to the new merged entity, which resulted in a combined total of 97,925 towers, far more than any other telecom provider in India. The partnership was formed to allow the three companies to share passive investment in towers, which reduced infrastructure related investments while increasing operational efciency. As of
i A   n Erlang is the unit of trafc measurement in a telecom network. If there are 40 calls of 8-minute duration each, then there are 320 minutes per hour (40x 8 = 320). This divided by the number of minutes in an hour gives the erlang (320/60=5.33). This is a measure of the pattern of trafc and is used as a measure in building capacity.

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2011, the average Indus Tower had two operators sharing a tower and there were plans to increase this signicantly.1 Customer Care Airtel wanted to work with a single supplier to put a utility computing model in place, which would allow it to provision contact center technology on a cost-per-call basis and would cover all elements from simple support calls to troubleshooting across approximately 10 technology providers. We knew we needed to do something different in the Indian market; this is the rst relationship based on cost per call, said Menon. Airtel selected Nortel as the provider, which supplied: 1. A conversational interface with an interactive voice response (IVR) machine that resolved queries. 2. The technology to integrate all of the companys in-house call centers. 3. The technology to support the companys in-house customer service agents, including automatic call distribution, voice logger, and voice analytics. 4. The infrastructure for all of the above activities.

Airtel estimated that by 2010 its more than 100 million customers would be making 250 million calls a month to the call center. The IVR, which played information back to the customer, handled 60% of all incoming calls. Nortel programmed the IVR to answer the top 10 reasons for calling, such as What is my current bill? The IVR answered questions in English and Hindi as well as regional dialects. Rates charged to Airtel were on a per-call basis. Nortel was paid more when calls were successfully addressed within the IVR system, since it saved Airtel the cost of agent time. Distribution Wherever matchboxes are sold, Airtel should be sold, said Airtel CEO Kohli. This vision was nearly true, as Airtel minutes were sold at more than 1 million retailers across India with that number expected to double soon. Of these retailers, about one-third could help customers with new accounts, while the rest simply fueled the minute factory. Airtel achieved this broad reach by outsourcing the bulk of the distribution. Each of the roughly 10,000 distributors was responsible for a specic territory and was barred from distributing another carriers product. Airtel sought out distributors with established networks, hoping to piggyback on their existing distribution of other goods, especially fast-moving consumer products. The distributors paid Airtel up front for the recharge value and SIM cards, and were issued the recharge credit after the payment cleared into the Airtel account. The distributors then provided credit to their retail networks. Retailers were allowed to sell minutes and products from competing carriers. Roughly 4% of revenues that Airtel earned through the distribution network were shared between distributors and retailers. In several rural areas, the distribution channel had an additional layer to ensure the required reach. In Rajasthan in North-West India, for example, rural distributors were serviced by rural stockists, or suppliers, who had to maintain a ve day stock of product. The rural stockists employed eld service workers who were expected to service each rural distributor three times per week. Rural distributors were generally based near a tower and distributed to the small towns served by that tower. In rural areas, the revenues that were typically reserved for distributors were shared between the stockists and distributors. Both the stockists and distributors had to commit to exclusively selling Airtel mobile products. The retailers revenue was set at percentage of sales.

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Analytics at Airtel
In addition to outsourcing many functions, a key part of Airtels success was its adoption of analytics. Airtel initiated the deployment of analytics throughout the company with the goal of improving operations, customer management, and, eventually, employee performance. Analytics underpinned the ongoing review of all functions at the rm, especially performance of its outsourcing partners in tracking delivery in cost and quality parameters. All the information systems required across the units were largely covered in the IBM IT outsourcing contract and virtually all the captured data was stored in a single IBM DB2 data warehouse. The vast majority of data in the analytics database was generated by customer use. Each time a call was placed, the incoming and outgoing phone numbers, the duration of the call, and the tower locations were logged. In addition, customer details (captured at SIM-card purchase), billing information, and product use by the customer were logged. There were three primary uses of the data: 1) business intelligence, used largely to develop marketing and sales; 2) campaign management to better target advertisement and product offerings; and 3) customer churn assessment, determined either by a requested disconnect or a certain duration of inactivity. Moving forward, Airtel expected to use customer data to forecast churn (the percentage of customers that exit a service over a given period of time.) In addition, analytics would play a larger role in decision making inside the company. Both the supply chain and the human resources groups were aligned to capture and analyze pertinent data about their operations. For instance, in the IT organization, analytics was used to determine utilization rates for new applications and/or functionality requested by the business units. This data could then be used in cost-benet analyses, driving the cost control decisions that were vital to Airtels success.

Partnerships

In addition to harnessing internal capabilities and outsourcing non-core functions, Airtels model relied on establishing strategic partnerships with other organizations. One partnership that was aimed at expanding Airtels footprint in rural India was with Nokia. Airtel and Nokia piloted a program in which 85 vans traveled to rural areas, educating people about mobile phones and offering a basic Nokia 1200 series phone bundled with an Airtel SIM card for 1,500 rupees (30 USD). The Airtel and Nokia representatives drove into the villages, attracting crowds with prizes and entertainment. Many rural customers were not literate
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Similar to the fundamental shift from ARPU to the minute as a measure of success as described by Kohli, Airtel introduced a paradigm shift in the governance of supplier contracts from input-based measures to Airtels business outputs. For example, the incentives for IBM or Ericsson were based on the number of minutes sold by Airtel. This was in contrast to the normal practice of IT service vendors being compensated based on the quality of services they provided. These contracts ensured that Airtel was operating near the best service levels and cost structure in the industry for these services, and allowed its suppliers the exibility to choose the appropriate equipment and subcontracting partners. These contracts were initially set for ve or seven years and were open for renegotiation based on any concerns on either side. The winwin for both parties was clearly dened with various scenarios of future growth in Airtels business (i.e., 20%, 30%, 50%, etc.), leading to more vendor payments in proportion to Airtels revenue growth. The exit clauses for both parties also were clearly dened, such that Airtels business was not overly dependent on the vendor and Airtel could opt for an alternate vendor if the need arose.

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Governing Win-Win Supplier Contracts

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in English and had limited experience with technology, so the representatives also taught them how to use the phone. The instructions included the basics, such as pressing the green and red buttons to start or end a call, and how to navigate the menus by memorizing rather than reading. The pilot was a success and Airtel planned to add 800 vans to the program. Airtel and Nokia went on to signicantly expand their partnership, especially in rural India. In February 2010, Airtel signed a $700-million network expansion partnership contract with Nokia, which would aggressively expand its presence in rural India. Rural customers accounted for 60% of Airtels customers.2 Airtel also partnered with Indias largest micronance group, SKS Micronance Limited, to help customers obtain loans to buy a Nokia phone on a 25-month installment plan of 85 rupees per month (1.5 USD). Airtel also became one of the largest sellers of digital music and ringtones in India. Sales of ringtones and songs on phones accounted for 30% of the annual 7.5 billion rupees (168 million USD) spent in the Indian music industry. In 2009, Airtel customers completed more than 200 million downloads on their mobile phones. According to news reports, Airtel retained a signicant part of this revenue.3 To target farmers, Airtel partnered with the Indian Farmers Fertilizer Cooperative Limited (IFFCO) to allow IFFCO to sell IFFCO/Airtel-branded SIM cards through its retail outlets. Airtel created a value-added platform to offer voice updates on market prices, farming techniques, weather forecasts, and fertilizer availability. IFFCO customers received three free voice updates per day.

Global Expansion and Challenges Going Forward

Airtel then operated in 17 African countries: Burkina Faso, Chad, Democratic Republic of the Congo, Republic of the Congo, Gabon, Ghana, Kenya, Madagascar, Malawi, Niger, Nigeria, Rwanda, Seychelles, Sierra Leone, Tanzania, Uganda, and Zambia. Airtel faced several challenges in Africa that countered its risksharing vendor partnership strategy. For example, fragmented government policies across different countries in Africa presented challenges in importing telecom equipment and taxation problems. In addition were challenges to build a centralized vendor model and investment of more time and resources to work with different vendors. The shared infrastructure model across various technology providers that worked for Airtel in India was not applicable in Africa due to the limited overlap in coverage footprint across various service providers in different countries.
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Following unsuccessful attempts to buy MTN, a major telecom service in Africa, in March 2010, Airtel struck a deal to buy mobile operations from Zain) (a Kuwait rm) in 15 African countries. The 10.7-billion (USD) acquisition made Airtel the worlds fth-largest wireless carrier by subscriber base. For the fourth quarter of 2010, Airtel reported its revenues from the Zain Africa division were 911 million (USD), contributing 28% of the total revenues of 3.2 billion (USD).

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Kohli saw two main challenges to Airtels success going forwardkeeping the companys culture intact and satisfying customers. You cant Xerox your culture, said Kohli. The challenge is to retain the culture of a small company as we become a big company. We cant become complacent or arrogant. He described the company as having middle class values, specically, a willingness to work hard, honesty, humility, and cost consciousness. As long as Airtel remained committed to these principles, it could remain competitive. With regard to customers, Airtel made an important qualication to the typical customer satisfaction mantras: Service should be commensurate with pricing levels. As the company continued to grow, the board of directors and management team would be actively involved in the company transformation into a professionally managed rm. The ongoing challenge, therefore, was to strengthen its business model through rapid expansion and continue to deliver superior results.

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However, Airtel was taking its time to repeat the strategy that worked in India. It engaged global and local outsourcing partners such as IBM, Tech Mahindra, Ericsson, Spanco, and Nokia. Airtel overhauled its distribution and launched a new channel partner program to align incentives of dealers and retailers. It also planned some major restructuring to leverage the synergies across various markets. This included the extension of the One Airtel concept to all geographies globally to facilitate decision making.4 While some of the results from these initiatives were positive, it was still an open question how long Airtel would need to replicate its impressive growth in India to opportunities in the growing African economies.

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Exhibits
Exhibit 1

International Telecom Performance Indicators

Airtel Net debt/Equity Total capital expenditure Capex/subscriber Number of subscribers Book value of debt Book value of equity Net FCF
All monetary gures are in US Dollars

1.23 21,743.6 million 122.88 176.95 million 11,990.2 million

Source: Bharti Airtel Annual Report 2011. http://www.airtel.in/AnnualResults/Bharti_Airtel_annual_report_ full_2010-2011.pdf

Exhibit 2

Airtel Three-Line Graph (Health Indicators)

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Source: BhartiAirtel Annual Report 2011 http://www.airtel.in/AnnualResults/Bharti_Airtel_annual_report_full_2010-2011.pdf

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(1,787.27) million

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Exhibit 3

Airtels Value Added Services

Value Added Service Jobs Hello Tunes Airtel Radio Night Radio Friendz Chat Special 5 Description Job alert for mobiles based on proles and powered by Naukri. com, Monster.com, and clickjob.com Enables callers to hear the customers favorite tune instead of standard dial-tones Enables a user to hear favorite songs all the time with a monthly subscription of Rs. 30. Available are 20,000 songs in 17 languages Offers music services across various radio channels from 10 p.m. to 8 a.m. Enables chat with unknown people and make new friends Enables special connection with ve closest friends, lowering the call charge to a per-day per-number basis rather than regular per-minute Enables a caller to speak out requests and searches. Subscribers can download ringtones, dedicate songs, check scores, etc. Helps to learn spoken English based on Indian user contexts Provides updates on all missed calls if phone is switched off or unreachable. An SMS notication is provided Helps to send a recorded voice message for 30 seconds Helps to hear the audio of any movie for a total of 60 seconds with forward or rewind facility Comes with different plans based on the schedule of national and international cricket series Enables download of jokes from Airtel menu on variety of topics E.g. Quran services with quotes sent per day or at different times Enables nding a suitable match based on specic preferences Enables virtual participation to live Aartis at Siddhivinayak temple and Tirupati. The cost increases by folds per addition of shrine and the count of Aartis Enables horoscope reading, future telling, etc., by qualied astrologers Enables download of various type of shayaris (poems from renowned Urdu poets)

Voice Search and Requests Speak English Missed Call Alerts Voice SMS Audio Cinema Cricket Updates Jokes Devotional Services

Matrimonial Live Aarti on Mobiles Astro Live Shayaris

Source: http://todayontech.com/airtel-value-added-services-start-stop-and-info-guide/

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Endnotes
1 2 3 4

Indus Towers. Indus Towers to Add 5,000 Towers This Fiscal Year. January 2011. <http://industowers.com/indus_news.php> Airtel. Bharti Airtel awards USD 700 million network expansion contract to Nokia Siemens Networks. 11 February 2010. Mobile, Not Net, Drives Indian Music Sales. The Wall Street Journal. 22 Oct. 2010 Philip, Joji Thomas. Bharti Airtel may merge India & Africa operations by mid 2013.15 October 2012. Economic Times.

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