Second coming

IN 2005, HCL TECHNOLOGIES was going through trying times when chairman and founder Shiv Nadar asked Vineet Nayar to move from HCL Comnet, the infrastructure services division, to head the company as its CEO. Nayar decided drastic changes were required at the IT services company and started off with his ‘Employee First, Customer Second (EFCS)’ concept. Hugely lauded now, the concept wasn’t easy to implement then. Nayar had a lot of explaining to do, especially to customers who wanted to know what exactly he meant. Nayar’s focus seemed daringly contrarian at a time when management gurus were emphasising customer focus or shareholder returns. But with increased revenue and profits and a steady rise in share value (see charts), Nayar was vindicated.

And now, as Nayar finds himself in the midst of an economic slowdown in the U.S. and Europe, he prepares to roll out the second phase of his EFCS concept. In an interview with Fortune India, Nayar talks about how the “centre of gravity” of HCL will shift westwards as the company prepares to wrest market share from global giants such as IBM and Accenture. Edited excerpts:

Q: How will the next phase of your EFCS concept power HCL’s growth?

A: With employees getting younger and HCL becoming more global, our future investments will ride on EFCS 2.0. This means a shift in the centre of gravity—a cultural and power shift—from India to the U.S. and Europe, where we will create 10,000 jobs by 2015. We will be a socially responsible company, and we will be more focussed on creating jobs there than here. HCL’s impact on society will be the reason why people will want to do business wi th us. Our first area of investment will be redefining the meaning of ‘Employee First’ and creating a social architecture that will drive innovation.

Q: By creating jobs on site, the industry seems to have become more sensitive to problems in the U.S.

A: The model is similar to sustainability and green [issues]. Three years ago green was good, but not necessary. Today it’s essential even if it increases costs. I predict that tomorrow companies will do business only with the socially responsible. Whether it is the Occupy Wall Street movement or the distrust between employees and customers, the fact is that the world is revolting against stock market dominance over organisational behaviour. The solution lies around employees’ issues, jobs and, hence, society, sustainability, and environment. HCL is way ahead when it comes to employees and sustainability. Now, we want to be the most socially responsible organisation. So, we will create jobs in countries we operate in and not treat this issue like a problem, but a necessary condition for our existence.

Q: Won’t it change the way your deals are structured?

A: Yes, it will change our business model and we have to convince our customers that cost is not everything. Why not be socially responsible? Use tools and technologies to bring down costs and co-invest [with HCL] to create jobs? Our anchor customers, such as Xerox, Rochester, and Microsoft are helping us in building these centres overseas and in joining hands with educational institutions to build an environment for creating more jobs. Our proposition to customers will be that you will be dealing with the world’s most socially responsible organisation. That’s where HCL wants to be.

Q: Won’t that add to the costs of doing business? How will you balance it with benefits for customers?

A: The trick of the trade for Indian IT was to capture fresh engineering graduates, train them for six months, and deploy them on projects. This gave us talent at low costs. In the U.S., we hired people with experience. This time, however, we are going to colleges in the U.S. and the training will begin right there. Because they are near-shore, we save on telecom bandwidth. The reduced onsite-offsite time difference will cut management costs. Then we will build automation tools, change process architecture and employ 80 people instead of 100. The overall cost per employee will only be marginally higher—a small percentage, not 300%. That can be explained to the customer, who will be willing to pay it to be more socially responsible.

Q: Are clients comfortable putting projects in fresh hands when they are used to HCL’s experienced teams?

A: Earlier, we leveraged experienced people to create a better experience—that was a strategy to get through the customer’s door. Now we are offering an alternative co-investment strategy.

The experience won’t be the same, it will be costlier, but I don’t think they will refuse. They can go back to society and say they helped create 10,000 jobs. There is no choice anymore but to be socially responsible. In India, the situation is different. Costs have risen, while it’s negative in the U.S. and Europe. A balance is required.
Will this affect the organisational structure of the company?
There is something I call the spherical structure—a matrix with many-to-many connections and communications rather than the traditional pyramid structure. HCL’s organisational structure will change to incorporate such many-to-many collaborations over a digital network like Facebook. This is another area of our investments. By 2016, HCL’s social architecture will revolve around a digital network. And with customers, HCL employees’ engagement will be based on trust and flexibility.

Q: How will these innovations drive HCL’s growth?

A: We have to talk about growth in the context of the slowdown in the U.S. and Europe, and India and China not pitching in to help them. Customers aren’t certain whether they should invest in IT. And yet, the opportunity is large mainly because the consumer and emerging markets are changing. These are the contours of a perfect storm, which is the new normal. It is like an F1 race driver having to press the accelerator and brakes simultaneously. But companies are not used to this model of simultaneous acceleration and braking. Some see it as a threat, we see it as a great opportunity.

Q: How has the recession affected the IT industry?

A: The top 10 global and Indian players have bagged IT orders worth $24 billion in the past two years—the top five Indian players have 45% of this. This means there’s a massive shift towards Indian service providers. Second, when a multinational contract is renewed, 30% of the contracts goes to a new vendor, in comparison to 5% earlier. This is because of dissatisfaction with the existing vendor. Third, the number of vendors per customer is coming down drastically. Fourth, customers are looking at partnerships based on risk sharing, rather than best performance. Add another trend of digitisation of the organisation to drive transformation.

Q: How is HCL responding to these changes?

A: HCL is watching the global five [IT companies] and their market space. Focus on their contracts which are coming up for renewal. Invest in tools, technology, and processes that deliver an outcome—in other words, a business benefit to your customer. Create a governance structure with customers based on trust, transparency, and flexibility. These are missing among the global majors, causing dissatisfaction among customers.

Be exactly the opposite, then invest significantly in transformation and run the business for the customer to save cost. The money saved can be used by the customer to transform too. A customer wants cost reduction to fund innovation, without which he is obsolete. We are already doing this in our partnerships with Merck, Deutsche Bank, and Cisco, among others. If you follow this model, you can end up being the customer’s revenue partner, not a cost partner.

Q: But won’t the churn also hit HCL?

A: Our outsourcing business picked up post-recession and the renewals will come 2013-14 onwards. The pre-recession contracts of most IT players were written with an assumption of revenue growth and during the recession customers became unhappy. Our contracts were based on the assumption of a slowdown. So when they come up for renewal, I assume they will follow the 5% pattern [of opting for a new vendor], and not 30%.

Q: Will your competitors allow you to walk away with the spoils?

A: Our margins leave us well-placed. We are a 14% margin company, not 30%. We believe in high-growth, medium-margin. Shareholders are happy with this, though analysts may have different views. We are mavericks, not what analysts want us to be. The investor is concerned about higher earnings per share [EPS], not margins. We have consistently delivered high EPS.

Q: In the new environment, will the profit vs. growth debate get muted?

A: HCL will not increase margins. Given all the data, our margins will remain the same unless something drastic happens. And we will be reinvested in new businesses and ideas, such as creating onsite jobs.

Q: With IT spends flat across the world, where will growth come from?

A: When the IT budget is flat, we have to eat someone else’s lunch to keep growing. We see an avenue of growth in the customer churn. Second, our industry has not been able to reduce costs and increase efficiency rapidly. If a service industry like airlines can reduce costs, why can’t we? Between 2000 and 2010, the Indian IT industry surprised the world by introducing a different cost level. The same innovations may not survive in the next decade, but cost reduction of IT service is an area of huge investment at HCL. It will subsidise our onsite job creation.

Q: Has Axon [a British firm HCL bought] taken a hit because of the eurozone trouble?

A: Axon’s area of operation is managing the transformation agenda of customers, in which few are continuing now. HCL has been able to mitigate the slowdown in Axon through accelerated growth in the infrastructure and application outsourcing business. Once the customer churn is over, the transformation budgets will be back and contribute to HCL’s growth.

Q: Axon was charging a premium for its services. Has that changed?

A: Customers are paying Axon exactly what they used to as it is seen as a separate brand.

Q: HCL seems to be slow in India and the Southeast Asian market. Why?

A: In India and Southeast Asia, customers want fully integrated solutions at a fixed price. It is called system integration. To develop this capability we need to participate in a few verticals aggressively. We are doing it in financial and public services. Unlike some firms, HCL does not see India as a market, but as an opportunity to build new capabilities—as the launching pad for the future of world IT. When we implement a solution here, it’s for a large number of people. The West is seeing cost benefits never seen before. This is where reverse innovation starts. Airlines, real estate, utilities, and public services are some areas of emphasis for us, not just revenue growth. In India and Southeast Asia, we have a sharp focus on mass consumer-based deployment of IT solutions.

Q: What’s the outlook for China?

A: We have been in China for five years but we don’t understand how to do business there. I think it will take the next five years and $1 billion of business in China to learn. We have to establish relationships, understand the culture, and do business the Chinese way, not the Indian way. Countries such as India and China will never behave like the U.S. or Europe.

Q: Why has HCL been neglecting its BPO business?

A: In the next three to four years, BPO will become very important for HCL. In hardware, we cannot beat IBM or HP, and in product development, there already are many companies. That leaves the services component, and if it is only about implementation and support, it is a very small percentage. But a complete business process stack creates something of higher complexity. The big five may not think on these lines as they look for more standardisation, but we think customisation and, therefore, we have higher chances of survival.

Q:Is HCL biting off more than it can chew on the bigger deals?

A:When we bagged our first deal in 2005, AMD’s total IT outsourcing, some analysts wrote us off and said litigation would kill us. We are still alive. In 2006, when we did Dicksons, followed by Reader’s Digest and Nokia, they said HCL was very aggressive and taking a lot of risks. There is no litigation, we have not lost a single customer. We defined our playground in 2005 and our marketshare grew 14.9% now from 11.9%.

Q:How do you plan to use HCL’s $500 million reserves?

A:Given the success of the Axon acquisition, we are looking for more such deals. They are going to be based on capabilities such as mobility, data analytics, cloud computing, multichannel commerce, and other mega trends. We are not going by scale, size or customer access. We have not decided on the size of the acquisition. Anyway, size does not scare HCL.