Tech Mahindra keeps eye on open RAN prize as costs mount

There are few signs of industry affection for systems integrators. To hear it from some telco executives, they are a necessary but unpleasant fact of life – rather like energy companies or those grubs that eat rotting flesh.

When Vodafone last year announced plans to add another 7,000 software engineers to its ranks, one of the reasons it gave was to be less reliant on systems integrators.

"You only have to look at Amdocs, Accenture, TCS, IBM and look at their service provider revenues," complained Scott Petty, Vodafone's chief digital officer, almost a year ago.

"Service provider for them is probably their biggest sector next to banking."

BT, Vodafone's big UK rival, sounds equally unhappy. By hiring another 2,800 employees in product management, software engineering and related technical activities, it aims to "reduce its use of subcontracted labor," it said in July.

None of which sounds ideal for Tech Mahindra. A part of India's Mahindra Group, it pops up routinely on telecom projects and currently derives about 40% of its revenues from the communications, media and entertainment (CME) sector, said Manish Vyas, the CME unit's president.

That all makes Tech Mahindra a market leader in the telecom sector, he told Light Reading at the recent Digital Transformation World event in Copenhagen.

Figure 1: Tech Mahindra's share price (Indian rupees) (Source: Google Finance)

Yet Vyas is generally upbeat about his unit's outlook. Sales rose 17% in 2021, he points out, and Tech Mahindra's last earnings update shows they grew by 19% year-on-year during the first quarter of this fiscal year (ending in March), to about $659 million.

While that performance was fueled partly by takeover activity, Vyas boasts prominent customers in 30 or 40 countries worldwide and can rattle off some high-profile names. Japan's Rakuten is among them. Dish Network, in the US, is another.

Linking those two is an enthusiasm for open RAN, words that flash up dollar signs for Tech Mahindra. Take any mobile site today and the chances are that all the components and software came from one big vendor – probably Ericsson, Huawei or Nokia.

Open RAN is an attempt to smash up this oligopoly. It brings new interfaces allowing products from different suppliers to be more easily combined.

But someone still needs to piece all those parts together like a child building Lego. And that's where Tech Mahindra comes in.

Fending off the critics

How much Vyas can profit from open RAN depends on a few things. The first is the size of the market.

Today, open RAN accounts for a tiny percentage of the overall radio access network market and even the most bullish analysts doubt it will generate more than a fifth of industry sales by the mid-2020s. This would probably value it at about $8 billion in terms of annual revenues, potentially split among dozens of players.

Another consideration is what percentage of operators attempt to insource integration as Vodafone and BT are doing. A possible concern among telco executives is that external systems integrators otherwise become the new choke point, replacing the giant kit vendors as a different form of "lock-in."

"I have not heard that," insisted Vyas.

"I think we operate in a multivendor scenario. By the nature of the DNA we bring, we have operated in a very hybrid model for the last 32 years and, in many cases, we don't even need primary responsibilities. We can be the captain or the vice-captain."

But other vendors have previously voiced unhappiness about the control that systems integrators have, and Tech Mahindra has been singled out for criticism.

Just two years ago, Parallel Wireless, a small vendor of RAN software products, said Tech Mahindra had refused to partner with it on a project, insisting the customer instead use Altiostar, a Parallel Wireless rival in which Tech Mahindra then owned a minority stake.

Mavenir, another US software developer, has also grumbled about systems integrators, without naming Tech Mahindra specifically.

"They are running around trying to grab a piece of the market share and I don't see where they fit because we can project manage," said John Baker, Mavenir's senior vice president of business development, in late 2019.

"Unless they are bringing financing, all they are doing is margin stacking, and we are trying to take away margin stacking."

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The Altiostar problem has at least disappeared. Last year, Rakuten, another investor, took full ownership of the business, ejecting Tech Mahindra and other minority shareholders from the boardroom.

"We were never in that business to own it," said Vyas.

"The strategic part was simple – I needed a seat at the table to understand this business. As soon as we learnt it and there came an opportunity to monetize it, we sold. We never wanted to be a RAN company."

Proof Tech Mahindra is happy to work with anyone has come on the project with Dish Network, where the Indian firm is now collaborating with both Mavenir and Samsung on the RAN software side, according to Vyas.

Yet Mavenir denies it has yet had anything to do with Tech Mahindra on the Dish project. "In Dish, we are not working with techM as system integrator," said Pardeep Kohli, Mavenir's CEO, answering questions by email. "Dish is system integrator."

Outside open RAN, Tech Mahindra's ownership of Comviva, a developer of business and operational support systems, represents another possible conflict of interest. But Vyas says Tech Mahindra is working on more projects with Comviva rivals than it is with Comviva.

Talent wars and lab investments

When it comes to open RAN, a third concern for systems integrators is that integration becomes less problematic, leaving them with less to do.

Today, open RAN seems to involve a lot of backbreaking effort to align different parts. In future, the hope is that it will be more "plug and play." But this is unlikely to happen quickly, if at all. And Vyas points out that any RAN work at all is new business.

"In RAN integration, systems integrators never had a role," he said.

"It was non-existent business for people like us."

It explains why his company is now investing heavily. "We have 12 labs worldwide that are integration and interoperability labs for the open network. We have invested millions of dollars."

It has also spent heavily on takeovers, splashing $1 billion on 17 companies in the last two years alone. Describing them all as "digital natives" with cross-sector capabilities, Vyas says the smallest was generating about $15 million in annual sales, while the largest made no more than $65 million.

Gaps he still wants to plug include network automation and data insights, but he rules out deals that would bulk up Comviva.

"It is never going to be about revenues," he said. "It is always about capability."

Competition for talent is now intense, he says, and comes not just from Internet companies and banks but also the startup sector. It largely explains Tech Mahindra's takeover strategy, and yet costs are rising as headcount soars.

For the quarter that ended in June, nearly 7,000 people joined the company, giving it a total headcount of more than 158,000 employees, and employee expenses were 27% higher than a year earlier. Despite company revenue growth of 22%, to more than 127 billion Indian rupees (about $1.6 billion), pre-tax profits fell 17%, to INR14.9 billion ($180 million).

Efforts to keep a lid on costs and beat rivals in the war for talent mean Tech Mahindra is now looking more seriously outside India for staff.

"We are investing a lot in Mexico," said Vyas.

"A lot of our cloud-native engineering is happening there." With tech companies and telcos all chasing the same skills, and wages on the rise, the next few years could be expensive.

Update: Mavenir subsequently denied it had worked with Tech Mahindra on the Dish Network project. The story has been changed accordingly.

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— Iain Morris, International Editor, Light Reading