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The main problem Bharti Airtel Limited facing is How to manage its capital expenditures for its

operations and how to face the expected exponential growth and a competitive environment. The

challenges that the company is facing are

1. Keeping pace with expansion:

Bhartis customer base is growing at 100% per year. It has its mobile operations currently in 15

circles out of 25 in the country and its fixed line operations in 6 circles. So it is a huge challenge to

keep pace with the expansion.

2. Capital expenditures and the risk:

They are facing a severe capital expenditure problem. They couldnt run new software on the

equipment they purchased 2 years ago and it is no longer useful. They require a reliable, predictable

usage linked cost structure. They want to buy fewer boxes but get maximum capacity and coverage

to stay competitive.

3. IT Requirements:

They need an IT network that could scale up to match the size of the organization it projected to

become in few years. There is a problem of scalability in their system. Their IT infrastructure is further

complicated by incompatible IT system it has inherited through acquisitions and as a result it is facing

need of huge IT investment to get things in right place.

4. Human resources issue:

It is becoming difficult for the company to hire more and more people and retain the best and the

brightest of them.

5. Staying competitive:

By 2002-03, Indian market has grown highly competitive. Due to fall in ARPU (average monthly

revenue per customer unit), players fought to capture new subscribers. With industry consolidation,

the focus is switching from having a national footprint to the ability to provide value-added services.

Operations need 2.5G or 3G technologies and this transition requires a major capital investment.

Other players like Tata and reliance had competitive advantage of having strong capital resources over

other operators.

6. Focusing on core competencies:

Their core competency is in operations and not in IT design. They look increasingly to its vendors to

provide expertise in integrated systems design.

By analyzing the above problems, the position statement on the main problem they are

facing is derived.

(b). Decision Essay:

The decision that they are facing is whether to go for outsourcing or not. The decision I recommend is

that they should outsource their telecom network equipment and IT equipment management to their

vendors.The arguments that support the decision are

Telecom network equipment management outsourcing:

The Industry practice is to purchase about 30% to 40% excess capacity in order to keep one

step ahead of customer demand and to compensate for the estimate error of models. For Bharti, this

would actually represent $300 million to $400 million. Financial requirements were not Bhartis only

concern; there is also the delay, which the firm could ill afford given its rapid growth, between the

time that the need for additional capacity is identified and the time that the additional capacity could

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be up and running. The process of planning, tendering, financing, purchasing and installing would take

anywhere from six months to a year.

IT equipment management outsourcing:

Bharti has contracts with IBM, Sun Microsystems, HP and oracle for business support software

and hardware and customer management systems. It is further complicated by the fact that they

inherited other IT systems through acquisitions. As a result they were facing huge up-frontinvestments in IT in order to get the right architecture in place and ready to support its growth over

the next 10 years.

One of the main purposes of the network management outsourcing is to have suppliers

assume certain classes of investments and risks, such as Demand variabil ity. So the above arguments

recommend the outsourcing of their operations to cope up with the increasing customer base and

increasing upfront investment.

By entering into the deal they can obtain the following advantages pertaining to the above

issues and requirements:

1. Cost control and reduction:

Bharti would pay the vendor a fee according to the amount of erlang capacity installed. The

actual payment for network capacity will be made only when the capacity is up and running and hasbeen used by customers. This overcomes the immediate demand for capital. This also excludes

payment for unused capacity at any point in time.

2. Transfer of asset:

The asset is transformed to the Bharti, after completion, which increases the asset value

that the company is holding in balance sheet.

3. Access to new expertise and technologies

The firms that outsource are able to fully utilize the external suppliers investments,

innovations and specialized professional capabilities to their advantage.

4. Quality control:In order to ensure the quality of Bhartis service to its employees and end customers, the

vendors services will be subjected to a number of quality controls specified in the service level

agreements (SLAs). Also because of penalty and reward linked to quality, vendors will ensure quality

level which otherwise would be burden of Bharti.

5. Competitive advantage:

By handing over all the responsibility of managing the IT equipment and Telecom network

equipment, they can focus on the areas like marketing, operations and increase their efficiency. Well

developed core competencies provide formidable barriers against future and present competition.

6. There is no need to hire human resource for telecom network and IT equipment management,

which is a financial burden for the company.

The other option available for Bharti is to continue on its own and deal with the situation of

expanding customer base. But this may be possible for some time and after crossing certain limits, it

may become difficult for the company to operate and may lead to decrease in the expansion or the

growth. One more option is outsourcing of only one of the IT equipment management or telecom

equipment management. This may result in the problem of good coordination. So they should go for

outsourcing of the both equipment management.

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There can be some disadvantages of the proposed decision like:

1. Both the buyer (the firm) and the seller (the outsourcing contractor) entail some risks with respect

to price, quality, time or other key terms of the contract.

2. The risk of the excessive dependence upon the vendors may be there because the company may

loose any other better opportunities that they may come across in future.

3. Since the vendors are bigger and international companies, the cultural differences may arise.

4. Since hardware and software applications are provided by different vendors, getting intoagreement with one only vendor may lead to no longer have access to certain creative new

applications.

5. Because there is no priority of any such deal, it will be difficult to arrive on feasible cost of deal

and revenue sharing model.

These can be mitigated or reduced by including them under some clauses there by

providing flexibility. The quality of the service can also be controlled by including them in Service Level

Agreements (SLAs). For example: Bharti agrees to pay IBM a share of its revenues and this

percentage of revenue shared will decline as the overall revenue increases.

(c). Action Plan:

The deal should ensure the following outcomes and should follow the steps mentioned in order toachieve them:

1. The deal should include clauses to avoid risks and should assure all the advantages

mentioned above.

2. Quality control: Detailed Service Level Agreements (SLAs) covering every aspect of outsourcing (for

both IT and telecom) with associated penalties for non-conformance provided a framework for

monitoring. If any of the measurements fall below/ above certain threshold levels as indicated, there

are penalties/ rewards as appropriate.

3. Cost reduction: Along with SLAs, it should also define Key Performance Indicators through which

the performance of vendors were monitored and measured. By going for long term partnerships with

select vendors of repute with detailed SLAs, Bharti can reduce the explicit transaction costs with the

external vendors, thus making it a viable business model.

Thus, by monitoring the SLAs, key performance indicators, it should ensure that thevendor fulfills its obligations and guard itself against potential vendor opportunism.

4. Final step is to arrive at the cost model of deal. Cost model of deal should be such that it is

beneficial for both sides ie Bharti and vendors.

The above are the outcomes and the steps that are required to be addressed while coming to deal

with vendors. The Proposed idea, looks satisfactory in meeting the outcomes. One thing that should

be ensured is that they should incorporate the clauses pertaining to risk in the plan.

(d). Conclusion:

To stay competitive in the fast growing Telecom sector in India, the firms should be efficient and

able to retain customers by reducing the cost of service. This can be achieved by better managing itscapital expenditures. One of the options available for the Bharti is to go for strategic outsourcing. The

case illustrates the innovative approach to gaining competitive advantage through outsourcing and

also discusses the pros and cons of outsourcing. If the deal is successful, Bharti can reduce its capital

expenditure and can grow with the growing customer base, and can effectively reduce the costs.