Cisco Systems India Pvt. Ltd. - INSEAD 4.3/5618... · The Indian Mobile Revolution . ......

INTERNAL USE ONLY

Cisco Systems India Pvt. Ltd.: Leveraging the Telecom Boom in India

02/2016-5618-E

This case was written by Nandini Das Ghoshal, Research Associate, under the direction of Professor Paddy Padmanabhan, the Unilever Professor of Marketing and Academic Director, Emerging Markets Institute, as a basis for class discussion rather than to illustrate either effective or ineffective handling of an administrative situation. Certain facts and figures have been fabricated or disguised to preserve confidentiality.

Additional material about INSEAD case studies (e.g., videos, spreadsheets, links) can be accessed at cases.insead.edu.

Copyright © 2016 INSEAD

COPIES MAY NOT BE MADE WITHOUT PERMISSION. NO PART OF THIS PUBLICATION MAY BE COPIED, STORED, TRANSMITTED, REPRODUCED OR DISTRIBUTED IN ANY FORM OR MEDIUM WHATSOEVER WITHOUT THE PERMISSION OF THE COPYRIGHT OWNER.

This document is authorised for use only in Executive Education - BAE ALP - Cohort 4 - Module 3 at INSEAD - Feb 2017 - Jul 2017 – by LoicSadoulet (Programme Director(s)). Copying, printing or posting is a copyright infringement.

http://cases.insead.edu/

INTERNAL USE ONLY

Introduction

Vish Iyer, Senior Vice President, Advanced Technologies - Cisco (India), decided to take a break from preparing his presentation to the senior management team of Cisco (India and Asia-Pac) on the deal that he had just closed with RINGTEL (one of the largest Indian telecom operators). Vish believed that leveraging the growth in the telecommunication markets in developing economies needed new models of engagement. The RINGTEL deal was critical in highlighting the challenges for Cisco in developing new business models as well as the opportunities that it could help unlock for future success and growth in India and beyond. The question was whether he could persuade the senior management about the need for change and new ways of thinking.

The Indian Mobile Revolution

The impact of wireless/mobile telephony on the Indian telecom landscape has been dramatic. Teledensity, as measured by percentage of subscribers relative to population, had reached 1.56% in the fifty years since India’s independence (1947-1997). At the end of July 2007, teledensity was 18.56%. In a span of 10 years (1997-2007), wireless had grown from 0.34 million to 165.11 million subscribers. The total subscriber base for mobile phones in India stood at 242.4 million as of January 2008. In contrast, the number of individuals with wireline accounts had grown from 14.45 millions to 40.75 millions. With Indian telco operators are adding about 8 million new subscribers per month, even a conservative forecast from the TRAI (Telecom Regulatory Authority of India) suggested a doubling of the current subscriber base in less than 3 years time (see below). However, even if this pace continued, by 2010 the penetration of the mobile market would still be far below the current norms of a typical developed market.

India Wireless subs (March end numbers)

6.53 13.7736.25

56.99

98.78

163.00

226.00

286.00

344.00

-

50.00

100.00

150.00

200.00

250.00

300.00

350.00

400.00

2002 2003 2004 2005 2006 2007 2008 2009 2010

# M

obile

sub

s

Copyright © INSEAD 1


INTERNAL USE ONLY

One of the major drivers of growth in this market are India’s telecom operators. Indian consumers paid among the lowest rates for air time – 1 INR per minute (US$1 = approx.. 46 INR) or about US$0.02, a tenth of the cost to a US consumer. The corresponding figure in 1997 was 16.80 INR per minute Affordability was a key criterion for success in developing economies, as the Indian telco market illustrated.

The Telco Operators

The deregulation of the Indian telco market, along with constraints on entry by foreign operators till recent times (on basis of internal security considerations) meant that the market was controlled by local players. The original government monopoly had been replaced by a very competitive marketplace, where consumers could choose from 6 to 12 operators in different parts of India (or “circles” in industry jargon). India is split into 23 circles and the four major cities – Mumbai, Delhi, Chennai and Kolkata form the top tier (see Exhibit 1). The key players in the market are Bharti, Reliance, BSNL (the erstwhile government-owned entity) and RINGTEL. Exhibit-2 provides comparative data on the performance of these operators over time.

One of the key differences between Indian telco operators and their Western counterparts (Vodafone, Verizon, etc.) was growth rates. Other distinctions also had an impact on the structure as well as conduct of the market and its players.

Challenges for Telco Operators

Low per capita incomes in India meant that the majority of the subscribers of the Indian operators were pre-paid (in the sense that consumers pay in advance for a block of minutes, numbers of SMS, etc.) Industry experts estimated pre-paid to be as high as 85% of total connections.

Empirical evidence suggests a higher churn in pre-paid (as opposed to post-paid) as customers enter the market on a more frequent basis and are prone to influence by communication and promotion mechanisms at every instance. Service quality (apart from competitive prices) is key to customer retention in these environments. Survey results indicate a serious drop in satisfaction with the service quality of the operators; In fact, it had dipped below the TRAI benchmark of 90% for most of them (see Exhibit 3). Pre-paid also meant higher customer interactions for operators since customers had to contact the call-center operators for top-ups, activations, balances, plan changes, etc., with serious cost implications for operators. Hence their interest in newer and lower cost platforms based on IVR (interactive voice response) as opposed to call centers or brick & mortar facilities. In short, the challenge was how to maximize customer satisfaction and loyalty while simultaneously minimizing operational costs?

The other difference was ARPU (average revenue per user) or ARPS (Average Revenue per Subscriber). The ARPU for an operator in the West is approximately $40 per month, and for an Indian operator is approximately Rs. 400 (about $10). To put this in perspective, the infrastructure space (i.e., the hardware for their operations) is a global market controlled by global players and there are no significant cost differences in the cost of hardware equipment across markets. Growth for operators requires significant capital expenditures in infrastructure



INTERNAL USE ONLY

(networks, customer support, etc.) and the majority of operators rely on capital markets to fund these investments. Investors (the source of capital) use benchmarks such as EBITDA to benchmark operators across the world. In short, the Indian operators have another challenge – how to deliver financially superior results relative to global peers in a revenue constrained local market?

RINGTEL Cellular

RINGTEL Cellular started out in early 1992 as Maxel Communications. By 1997, it had commenced operations in four circles. Since then it had acquired/merged with regional players and won bids for additional circles. RINGTEL is part of the Navratna group, a $7 billion conglomerate operating across the world, and is now a leading player in India in the GSM market, with operations in 14 circles, and a footprint that reaches 60% of the Indian population.

Exhibit 4 shows the comparative footprint of Indian telco operators; Exhibit 5 comparisons won operational metrics. Exhibit 6 compares the proforma income statement for RINGTEL and Bharti with AT&T (USA) and Sprint-Nextel (USA). Exhibit 7 provides comparative EBITDA figures for operators across different countries.

Cisco Systems

Cisco Systems, founded in 1984 in San Jose, California, by a group of computer scientists from Stanford University, is the worldwide leader in the business of designing, manufacturing and selling networking products and services related to communications and information technology. Its products and services fall into several categories.

• Routing: Routing technology is the foundation for Internet and Intranet. Routers interconnect computer networks, moving information such as data, voice and video from one network to the other.

• Switching: Switching is another integral networking technology that is used in buildings and campuses to build local area networks (LANs), across cities to build metropolitan area networks (MANs), and across great distances to build wide area networks (WANS).

• Advanced Technologies: A more recent business unit comprising products and technologies which over a period of time have the potential to grow to become material contributors to the overall business of CISCO. These build upon CISCO’s existing competences and at the same time allow CISCO to expand the overall market for their products and services.

• Services: CISCO’s broad range includes technical support services and advanced services. The technical services are for existing products to operate efficiently. The advanced services programme supports networking devices, applications and complete infrastructure.

As of July 2007, Cisco employed 63,000 employees, of which 19,600 were in locations outside the USA. Its FY 2007 net sales were US$34.9 billion. Cisco Systems-India started in



INTERNAL USE ONLY

1995 and is part of the APAC theatre, which contributes about 11% of global revenues. Cisco India has 7 sales offices and a market presence in over 100 cities through 1500 resellers. Headcount in India is over 3000, including sales, support and R&D. Cisco India is ranked #1 in the routing and its switching market share is around 80%. Its market share in advanced technologies ranges from 48% in security systems to 20% in the PBX market (the precursor to IVR or Interactive Voice Response systems).

The RINGTEL RFP

The RFP (Request for Proposal) floated by RINGTEL was for a total revamp of their IVR self-service operations across all their circles. Initially, RINGTEL had invested in an IVR solution from a prominent North American supplier but the system had not lived up to expectations. Additionally, TRAI (the Telecom Regulatory Authority of India) had warned them as well as other Indian operators of punitive fines if they did not improve their shortcomings on customer service and support (see Exhibit 2).

The objective of the project was to increase call completion rates in the IVR system so that transfers to live call center agents would be reduced significantly and hence reduce operational costs. RINGTEL wanted to enter into a managed IVR services agreement whereby the service provider would build-operate-optimize (B.O.O.) the customer service network so that RINGTEL could concentrate on running its core business. RINGTEL would pay the service provider on a per call basis, or a transaction-based pricing model. In short, RINGTEL did not want to shoulder the capital expenditure involved in setting up the network. It was willing to sign an agreement committing itself to the pay-as-you-go model for five years up front. RINGTEL wanted a system that could help resolve its current operations issues surrounding customer interaction, as well as scale up with its growth projections for subscriber activations in the years to come.

The IVR Market

The IVR is the first point of customer contact for any mobile service provider. Consequently, the quality and efficiency of an operator’s IVR system directly impacts their customer’s satisfaction as well as the operator’s cost of service provision. The global IVR market had largely been dominated by North America. According to a recent Datamonitor report, the US accounted for 70% of all expenditures on speech-enabled IVR systems. Consequently, most of the IVR technologies and deployments had been in the West and Cisco had considerable success and experience in this space. Typically, the North American operators financed these investments through CAPEX (capital expenditures) and took responsibility for installation, activation and systems integration.

The IVR market has been growing rapidly in Asia in recent years. One of the consequences of the boom in telco in Asia was the huge challenges for operators to keep their network and customer support interfaces synchronized with market growth. It was not unusual for operators in Asia to run their systems at utilization rates in excess of their rated capacities (e.g., usage rates of 120-150% of capacity). The inability of hardware to cope with traffic growth coupled with inadequate IVR systems had serious service quality challenges for the operators. Call drop rates of 50-60% on existing IVR systems were not unusual. By answering



INTERNAL USE ONLY

subscribers effectively, a high-quality IVR system would help the operator improve customer satisfaction as well as reduce operational costs substantially.

Moving on the RINGTEL RFP

Vish’s reaction to the RFP was a mixture of elation and fear. He knew that the boom in the telco market in India was for real and the opportunity for Cisco and its competitors was immense. The infrastructure requirements of the operators to deal with growth were huge. If successful, Cisco could easily exceed its own aggressive growth forecasts for India comfortably for the next five years.

But, the challenges for Cisco were going to be greater than for its competitors. Both Avaya and Nortel had more integration and services experience than Cisco. Cisco’s success was largely a consequence of a business model built on driving demand for its products and fulfilling it through its channel partners. In short, Cisco was a master at selling and moving boxes. The RINGTEL project required a completely new business model.

RINGTEL needed a turn-key service solution which would be paid for on a pay-as-you-go utilization-based model. This was foreign to Cisco, which was used to customers paying for the boxes upfront. He knew that legal and financial within Cisco would have serious concerns about a transaction where revenues would be recognized based on customer activations and usage. There also existed the possibility that Cisco would liable for paybacks if the systems did not perform to specifications. Operations would have concerns about being able to execute integration across RINGTEL’s networks and systems.

Despite these concerns, Vish felt that it was imperative that Cisco bid for this project. A win for Cisco would help enormously in building the competencies needed to compete successfully in this market. He was convinced that the RINGTEL model built on operating expenditures (OPEX) versus capital expenditures (CAPEX) would be the preferred vehicle for cash-constrained operators. In fact, he anticipated that this would be the route for infrastructure investments in other service sectors in India as well (beyond telecom like transportation, education, healthcare, etc.).

He was well aware that the seeds for the RINGTEL RFP originated in the way Bharti, the leading operator in India dealt with its equipment suppliers. Bharti worked aggressively on getting its equipment suppliers to subsidize its CAPEX so as to help it maintain acceptable EBITDAs. It would typically re-pay its suppliers subsidies on a quarterly basis, a practice that was unique in the global telco market. It was Bharti’s growth and scale in India that allowed it to work this model with its suppliers.

Vish approached INTEGRA, one of leading global players in strategic outsourcing, to get a sense of their interest in working with Cisco. Mohan Rao, his good friend at INTEGRA, was candid. There was little doubt that Avaya or Nortel would land the deal. They had three years of deployment experience in India and 50% of the market share. On the issue of working with Cisco, he indicated that he would have serious internal issues because INTEGRA had very little experience in the Customer Contact Center space and there was little time to learn the ropes. The positive news to Vish was that INTEGRA shared his view that this model had potentially wide applications for INTEGRA as well across a variety of sectors.



INTERNAL USE ONLY

Without wasting any time, Vish got in touch with Sankhya, a local systems integrator. Cisco had acquired Sankhya a year ago, largely because of its expertise in creating customized software solutions for “customer interaction management” systems. It was a niche company with core competency in the area of contact center analytics and operations and was based in Hyderabad. As he expected, they were delighted at the opportunity. Implementing a comprehensive IVR system for RINGTEL would give it a wonderful referral base as well as do wonders for Sankhya’s status as a pan Indian player.

He started working on a basic BOM document (or Bill of Materials, a catalogue of the equipment requirements for the RFP), knowing that it would be one of the hardest problems to crack. Traditionally, generating a BOM at Cisco was a fairly deterministic exercise since the basic project characteristics were well defined (e.g., network size, systems architecture, etc.). Cisco had never dealt with generating a BOM for a five-year project, let alone creating one where project characteristics such as subscriber base, calls per subscriber, etc., (which translated into hardware requirements) were forecast.

Putting it together for a project that would unfold very quickly over the 14 circles of RINGTEL added to the challenge. What RINGTEL wanted was a proposal from him for all the installed equipment, solutions, analytics and system integration that quantified the payments that RINGTEL would make in terms of Paise per call handled – every quarter (1 Indian Rupee = 100 paise, currently US$1 = 46 INR). There would be prior agreement on what would be acceptable hold times for the customer. The contract would a 5 year agreement. So if the IVR system handled 100 million calls a quarter, the solution provider would pay X paise/call times 100 million. Obviously, if the number of calls varied then the payments would vary as well and this was a paradigm shift for suppliers. Suppliers were used to hard negotiations on prices and commissions but they knew they would have their money when the equipment was off their shelf. There was no history at Cisco of uncertain revenue projections and no one-time sales payments. He knew that he would have to get buy-in from Legal and Financial for this.

It was about this time that he got a call from RINGTEL: they insisted that any proposal that Cisco would put forward had to involve a credible Systems Integrator. They felt that Cisco had no reference/experience in this space in India. They anticipated that Cisco would team up with Sankhya but they felt that Sankhya had no outsourcing experience. Vish knew immediately that (i) INTEGRA had to be part of the team, and (ii) he had to convince RINGTEL about Cisco’s seriousness about winning the deal.

The next few weeks felt like a roller coaster. Every step of the BOM process was a discovery phase for his team – from learning the solution language, figuring out the systems requirements, forging alliances and getting internal buy-in. His team was learning what it meant to move from a product orientation to a service orientation. He worked on the RINGTEL management team from the top down. As Cisco had no credible reference base in India, he leveraged the experience and credibility of the American team who dealt with 9 of the 11 major operators in that market, and had them individually involved in consultations with RINGTEL.

He plotted the approach to INTEGRA carefully. They had chosen to be fence-sitters despite their awareness of the market opportunity as well as future growth prospects in the Contact Center space. The only reason he could think for their actions was that they were unsure of



INTERNAL USE ONLY

Cisco’s ability to deliver due to the lack of experience. He carefully cataloged the size and growth of the contact center business in America over the years, and Cisco’s footprint as the leader in contact center solutions for large operators there. If the Cisco-Sankhya-INTEGRA consortium won the RINGTEL bid they would hit a 17% market share in a single deployment relative to the zero share currently. The growth projections for the contact center space in India were much steeper and they would have enormous credibility going forward. While INTEGRA would have a steep learning curve to climb, Cisco+Sankhya would take care of the hardware and integration pieces.

Finally, he offered INTEGRA the opportunity to leverage their INTEGRA-Centel Call Center Operations (INTEGRA had acquired Centel in 2005 for $175 million) in the deal. His proposal was that all calls that landed at the Cisco IVR network for RINGTEL would be routed to Centel operators, which would mean a completely outsourced customer service solution for RINGTEL. As he laid out in his presentation, this was a win-win for RINGTEL as well as Cisco+Sankhya+INTEGRA.

Once INTEGRA agreed, things started moving fast. He soon got used to the fact that things never seemed to be under control. Getting the math right was a challenge, getting the buy-ins across three organizations was a bigger one. There were times during the process when the innumerable iterations, debates and roadblocks had him wondering whether the deal was worth the chase. It was madness but some order seemed to emerge always at the end. He knew he owed his American colleagues a great deal. They delivered credible references, flew down to India to meet with the RINGTEL executive team, and offered critical inputs on the technical challenges.

When Vish got the call from RINGTEL that his RFP had won, he was simultaneously elated and drained. RINGTEL told him that one of the key reasons for their selection was they felt the Cisco+INTEGRA+Sankhya consortium meant that they were getting the best-of-breed from the leaders in each of the critical building blocks of the IVR architecture (state-of-the-art technology and architecture capabilities, leading edge outsourcing and process competence and best-in-class IVR diagnostics/analytics) which could not be matched by integrated providers like Nortel, who were great in some parts but not in others.

The hard part was in getting the execution done seamlessly. RINGTEL wanted the deployment to go live in the first circle in January 2008 and they would start paying as soon as priming and activation met the system specs. Cisco had agreed to indemnify the risks of the first circle deployment. INTEGRA agreed to pick up the risks in the remaining circles as their share of the revenues for the consortium was the largest. All partners still faced the risks that RINGTEL would not meet their subscriber growth and call volume projections.

Moving beyond RINGTEL

The issue that Vish wanted senior management to discuss and debate was “What are the implications for Cisco of its successful deal with RINGTEL?” As far as he was concerned, he had demonstrated that it was possible to leverage growth with a new business model. But it was also the case that he had to use all his capabilities and resources as an individual in the system to deliver the deal. If Cisco had to replicate this, it was going to be difficult without changing the way the organization viewed the Indian market and its engagement models. His



INTERNAL USE ONLY

challenge was to distill his experiences over the past 9 months to the key points that needed to be highlighted for the senior management debate.

He wanted senior management to grapple with the internal implications as well. Like everyone in the sales organization at Cisco, he was compensated on the ability to hit and exceed quotas based on box sales. The RINGTEL model, which postponed sales realization up-front for revenues over time, was inconsistent with this incentive. He had pushed the RINGTEL deal because he was convinced that it made sense and he wanted to demonstrate its power to Cisco, but personal pride and drive could only go so far.

He also felt that this model could work well outside India. His meetings with his counterparts in developing economies (Latin America, S.E. Asia, Africa and Eastern Europe) suggested that they were hitting similar roadblocks. For some reason, Cisco’s success in the IVR market in North America had not translated to these markets. What were the reasons? Would the RINGTEL model help? When was it a good idea to replicate? When would it not make sense?



INTERNAL USE ONLY

Exhibit 1 The Indian Telecom Service Areas



INTERNAL USE ONLY

Exhibit 2 Comparative Statistics

2004 2005 2006 2007 2008E

Subscription TOTAL Subscriptions (000) 48,010 75,920 149,694 233,625 326,357

BSNL 8,895 14,800 26,600 36,805 49,738 Bharti 9,826 16,327 31,974 55,163 78,559

Reliance 10,146 14,680 29,980 40,964 55,176 Hutchison 7,180 11,413 23,310 39,865 56,608 RINGTEL 4,696 6,474 12,440 21,054 30,099

Subscriptions by Type of Package

Prepaid 35,845 59,754 125,352 203,482 289,702 Postpaid 12,165 16,166 24,342 30,143 36,655

Average Revenue Per Subscription (ARPS) – US$ per month

Average ARPS across all Operators $10.50 $9.06 $8.11 $8.06 $8.01 BSNL $9.38 $8.05 $7.00 $6.80 $6.87 Bharti $11.45 $10.77 $9.65 $9.19 $8.92

Reliance $9.93 $7.94 $7.95 $8.78 $8.80 Hutchison $12.69 $12.02 $8.85 $8.59 $8.90 RINGTEL $10.06 $8.16 $7.75 $7.40 $7.50

Average Annual Churn Rate

Churn Rate (%) 112% 84% 60% 55% 49%

Source: Pyramid Research – June, 2008



INTERNAL USE ONLY

Exhibit 3 Satisfaction levels with Mobile Operators since 2005

Satisfaction Scores by Activities

Source: VOICE & DATA Mobile User Satisfaction Survey 2007

2005

2007

Network Quality

89.4

93.0

88.6

93.7

92.6

93.3

85.4

95.7

90.7

94.4

Tata (indicom)

Spice

Reliance

MTNL

RINGTEL

Vodafone

BSNL

BPL

Bharti Airtel

Aircel

86.7

84.8

81.4

88.9

88.1

85.6

91.9

87.7

90.5

91.4

66.1

51.7

72.4

92.2

76.0

85.4

86.8

92.0

83.5

93.0

83.3

70.7

88.4

97.6

93.0

89.5

89.8

94.8

90.3

93.5

77.0

78.4

81.9

83.6

62.0

84.9

76.2

89.4

83.8

88.8

Sales & Pre-sales Value Added Service Customer Care Billing Integrity



INTERNAL USE ONLY

Exhibit –4 Indian Operators Footprint

Operator Presence (number of circles)

Bharti 23 Reliance 21 Others 9 - 18

Exhibit 5 Mobile Business Estimates

September 2007 QoQ YoY Bharti

Revenues EBITDA

EBITDA margins

51,453 21,096 41%

9.5% 10.5% 0.4%

55.8% 73.2% 4.1%

Reliance Revenues EBITDA

EBITDA margins

37,462 15,172 40.5%

11.1% 13.3% 0.8%

45.5% 63.2% 4.4%

RINGTEL Revenues EBITDA

EBITDA margins

16,073 5,847 35.0%

13.1% 14.0% 0.3%

75.9%

NA NA

Source: Credit Suisse, 2007



INTERNAL USE ONLY

Exhibit 6 Comparing Proforma Income Statement of Indian and American Operators

Bharati Airtel (India)

2007 2006 Revenues 100% 100%

Operating Costs 60% 63%

EBITDA 40% 37%

Operating Income 27% 24%

Profits Before Tax 26% 22%

Profits After Tax 23% 19%

RINGTEL (India)

2007 2006 Revenues 100% 100%


EBITDA 34% 36%




AT & T (USA)

2007 2006 Revenues 100% 100%


EBITDA 35% 32%




Sprint Nextel (USA)

2007 2006 Revenues 100% 100%


EBITDA 25% 29%

Operating Income -72% 6%

Profits Before Tax -75% 4%

Profits After Tax -74% 3%



INTERNAL USE ONLY

Exhibit 7 EBITDA Comparison Across Countries

Country EBITDA

Malaysia 48.2 Singapore 43

Canada 42.5 New Zealand 41

Italy 40.2 China 39.7 India 37.5 USA 32

Australia 30.5 Japan 25.9 UK 25.6

Source: The Economic and Political Research Foundation – India



Cisco Systems India Pvt. Ltd. - INSEAD 4.3/5618... · The Indian Mobile Revolution . ......

Documents

Transcript of Cisco Systems India Pvt. Ltd. - INSEAD 4.3/5618... · The Indian Mobile Revolution . ......