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IBM – Billion Dollar Baby masks strategic mistakes

IBM – Billion Dollar Baby masks strategic mistakes

IBM’s signing of a revamped deal with Vodafone Essar in India, deserves closer scrutiny. Forget the claimed $1Bn price tag on the new five year deal, that’s the froth on the cappuccino !

Digging deeper and you will find other more significant and important insights and even lessons for IBM’s many competitors.

Fact – no single Indian “offshore” provider has more than15% of their income derived from their home-market. So great has been the ambition, drive and focus on driving overseas business. However IBM, through its Indian subsidiary, has been slowly building its position and reputation in the marketplace and secured many household name deals, such as Indian Railways. In fact the Economic Times claims that IBM “now controls over half of the outsourcing business … in a market place that is the home to the world’s fastest growing tech firms”. If true this is a remarkable achievement and a slap in the face of the big five indigenous global players Infosys, HCL, Wipro, TCS and Cognizant.

Further, it shows a collective flaw in the Indian players’ focus, incentives and underpinning growth strategies. An assumption that the near ‘pyramid selling model’ could not falter and that the financial crisis (now three years old), American quasi protectionist restrictions and near xenophobia could have no bearing or influence on the growth strategy seems to have been optimistic at best. These influences, such as the US administration’s dramatic increase in visa fees, ostensibly as part of a bill to increase US-Mexico border security, have an “unplanned and unexpected side-effect” hitting the Indian outsourcer economics. Individual fees for H-1B visas increased more than 700%, increasing to $2,320 from $320 per visa application (visa rejections climbed some 56% after the new fees came into being) and the expected cost to Indian offshore outsourcing providers will exceed $250 million annually. Patriotism over “US jobs for US citizens” does not help either. Equally Europe has imposed many and varied restrictions on Indian visa numbers.

So the top Indian providers probably need to be challenged by shareholders for not having a plan B – for their home country, India itself ! A huge country and fast growing country where GDP growth is 8.1% (against 8.6% in 2010) second only to China. Surely this is a key market.

A serious acquisition, often lauded, such as the oft rumoured purchase of Logica, never happens despite sitting on heaps of under leveraged cash mountains, further signify that there seems to be no plan B or C.

By playing the long game, IBM is the clear winner so far.


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