MUMBAI: It is a dream turned bitter for many outsourcing vendors that signed deals with new telecom licensees hoping to replicate the phenomenal success of the IBM's outsourcing contract with Bharti Airtel, which grew into a multibillion dollar bagger for the firm.
With the Supreme Court order cancelling all licences issued after 2008, the future revenues that the outsourcing vendors were banking on to recover their initial investment and turn in big profits is now mostly just a dream.
Etisalat DB India has outsourcing contracts with Tech Mahindra that were estimated to grow to $400-500 million while Wipro has an outsourcing contract with Uninor estimated to grow to $500 million. Other than Wipro and Tech Mahindra, back office providers such as Firstsource Solutions, Spanco, Aegis and Intelenet Global Services have customer service contracts with the new telecom operators.
In 2004, telecom operator Bharti Airtel and multinational IBM inked a 10-year outsourcing deal that created business history by growing to $2.5 billion in five years. The deal also brought two more lucrative IT outsourcing contracts into IBM's kitty from Vodafone and Idea, and yet another from Bharti's Africa operations.
Wipro and Tech Mahindra, which were also in the fray in 2004, found the model too risky because it involved upfront investment from the IT vendor and revenues that were linked to subscriber growth. Several years later, hoping to replicate the same success Wipro and Tech Mahindra signed outsourcing contracts with Uninor and Etisalat DB, as did several back office providers.
Wipro's contract with Uninor was to be a showcase transformation project, helping it win global deals. On Thursday, most of these companies only issued brief statements saying they needed to assess the impact. Wipro's chief financial officer Suresh Senpaty said, "We have not studied the impact so it's early to comment on what will happen. Everyone is still trying to understand what this means."
A Tech Mahindra spokesperson said, "We are aware of this and are closely monitoring the development. At this point in time, we would not be able to offer any comment. Furthermore, as a policy, we do not comment on any details pertaining to client specific engagements."
However, people familiar with the fierce competition that went into winning some of these contracts said outsourcing firms had agreed to extremely risky clauses to bag them. For instance, the initial investment made by one of the outsourcing vendors was covered by a bank guarantee that was renewable every few months.
"The bet was the future revenue inflows would be sufficiently high to recover the costs and more," a senior industry professional requesting anonymity said. For business process outsourcing (BPO) firms that had customer service contracts for these circles, cancellation of the licences means even current revenue flows could be impacted.
The impact could vary depending on their exposure to the new telecom licences that were issued. Spanco, for instance, does work with Videocon. All of Videocon's licences, except for Punjab, have been cancelled. Intelenet and Aegis do work with Uninor and Firstsource does work with Idea in some of the affected circles. Both Firstsource and Aegis issued statements saying that the revenue impact would be less than 1%.
Fortunately for most of the BPO providers, they have large customer service contracts even with incumbents such as Vodafone, Bharti and Idea, which has 22 circles in all (nine have been cancelled). BPO contracts are typically covered by a minimum guarantee clause, which means customers have to mandatorily pay them for the minimum volume business even if it is not there.
The telecom sector, which was the largest or second largest business for most of these BPO players, it's a rude awakening. "They may now have to deploy these people in other projects. There could be a glut of people with telecom skills both in IT and BPO," said an industry executive requesting anonymity.
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