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Bharti Airtel (B)

case1-428-864revised December 19, 2011

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.

Bharti Airtel was one of the most profitable 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 profitability since its founding in

1995, and achieved strong financial 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 fiercely

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 firm. 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 outsourceall 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 first line represents gross revenues; the second, operating expenses to gross revenue, or operating

efficiency; 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 first identified five

areas that it considered fundamental to its success: Customer management

People motivation

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Bharti Airtel (B) 1-428-864

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, informationtechnology (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 significant 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 per-

minute pricing went down, Airtel reduced the amount of related fixed costs, allowing it to remain highly

profitable as prices decreased.

Implementation

Given Airtels reliance on outsourcing, the company had a number of overarching principles that defined

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.

9. Define clear processes for escalation management, with any non-compliance, cost, or quality issues

to be raised to the next senior level at the earliest.

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 ServicesAirtel 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 flat 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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situation for both parties when Airtel succeeded. In addition, IBM had the flexibility to choose the specific

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 significant 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 ofthe 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 flexibility 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 benefits to the revenue sharing arrangement, it also presented some

implementation challenges. Organizationally, mirror teams had to be created for specific 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 specific applications that management identified 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 productdevelopment 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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2011, the average Indus Tower had two operators sharing a tower and there were plans to increase this

significantly.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 dosomething different in the Indian market; this is the first 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 specific territory and was barredfrom 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 five day stock of product. The rural stockists employed field service workers who

were expected to service each rural distributor three times per week. Rural distributors were generally basednear 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 firm, 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 IBMIT 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-benefit analyses, driving the cost control decisions that were vital to

Airtels success.

Governing Win-Win Supplier Contracts

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

flexibility to choose the appropriate equipment and subcontracting partners. These contracts were initially

set for five or seven years and were open for renegotiation based on any concerns on either side. The win-

win for both parties was clearly defined 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 defined, such that Airtels business was not overly dependent on

the vendor and Airtel could opt for an alternate vendor if the need arose.

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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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 significantly 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 microfinance group, SKS Microfinance 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 significant 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

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, specifically, 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 qualification 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 intoa professionally managed firm. The ongoing challenge, therefore, was to strengthen its business model

through rapid expansion and continue to deliver superior results.

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 firm) in 15 African countries. The

10.7-billion (USD) acquisition made Airtel the worlds fifth-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).

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 risk-

sharing 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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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 1.23

Total capital expenditure 21,743.6 million

Capex/subscriber 122.88

Number of subscribers 176.95 million

Book value of debt 11,990.2 million

Book value of equity 9,753.36 million

Net FCF (1,787.27) million

All monetary figures are in US Dollars

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)

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

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Exhibit 3

Airtels Value Added Services

Value Added Service Description

JobsJob alert for mobiles based on profiles and powered by Naukri.

com, Monster.com, and clickjob.com

Hello TunesEnables callers to hear the customers favorite tune instead of

standard dial-tones

Airtel Radio

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

Night RadioOffers music services across various radio channels from 10

p.m. to 8 a.m.

Friendz Chat Enables chat with unknown people and make new friends

Special 5

Enables special connection with five closest friends, lowering

the call charge to a per-day per-number basis rather than

regular per-minute

Voice Search and RequestsEnables a caller to speak out requests and searches.Subscribers can download ringtones, dedicate songs, check

scores, etc.

Speak English Helps to learn spoken English based on Indian user contexts

Missed Call AlertsProvides updates on all missed calls if phone is switched off

or unreachable. An SMS notification is provided

Voice SMS Helps to send a recorded voice message for 30 seconds

Audio CinemaHelps to hear the audio of any movie for a total of 60 seconds

with forward or rewind facility

Cricket UpdatesComes with different plans based on the schedule of national

and international cricket series

Jokes Enables download of jokes from Airtel menu on variety oftopics

Devotional ServicesE.g. Quran services with quotes sent per day or at different

times

Matrimonial Enables finding a suitable match based on specific preferences

Live Aarti on Mobiles

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

Astro LiveEnables horoscope reading, future telling, etc., by qualified

astrologers

Shayaris

Enables download of various type of shayaris (poems from

renowned Urdu poets)

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

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Endnotes

1 Indus Towers. Indus Towers to Add 5,000 Towers This Fiscal Year. January 2011.

2 Airtel. Bharti Airtel awards USD 700 million network expansion contract to Nokia Siemens Networks. 11 February 2010.

3 Mobile, Not Net, Drives Indian Music Sales. The Wall Street Journal.22 Oct. 2010

4 Philip, Joji Thomas. Bharti Airtel may merge India & Africa operations by mid 2013.15 October 2012. Economic Times.

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