The Hindu Business Line : Towards value

How is HCL Technologies striving to position itself competitively among the Tier I tech services companies? What are its focus segments? Suresh Sundaram, VP-Marketing, throws light on strategic aspects of HCL’s growth and also shares his views on the evolving technologies in the industry in this conversation with eWorld. Excerpts:

What is HCL’s approach to multi-year, multi-service, multi-million contracts?

Essentially, we are seeing two things happening in the market place. One, we are seeing large Fortune 500 companies, many of whom have outsourced or offshored to India, who have already gained certain benefits because of factors such as cost-arbitrage. They have been working with multiple vendors. Today they are looking at consolidation.

There is another segment, what we call large medium enterprises (LME), typically in the $1-5 billion range. That is a market that is not being very well addressed by the local companies. There we are seeing businesses taking key positions, driving IT outsourcing, creating competitive advantage using IT. Here they are looking at a single service provider who can meet their business objectives. Our objective is simple. We believe the days of cost-arbitrage-based outsourcing are over. People really look for more value and this is one industry that has been running on input-based pricing. This is not a sustainable business model because: Customers will not see any value in it beyond the initial benefits; It is just related to linear growth in headcount. We saw this two years ago and decided our focus should be to create more value to customers.

How do you achieve this value centricity?

In a services organisation, value is created by employees. Not by a few people from senior management, but it is the people on the ground — the project leader, project manager — the people who are engaging customers on an everyday basis. We decided if we could create a unique environment for employees, which gives them engagement and empowerment, then we would be able to unleash new focus towards creating customer value. Instead of ‘customer first’, we decided that it would be ‘employee first’. A second way to create customer value would be in integrating multiple services. For example, we have the application services. If I combine applications with infrastructure services, I can create new value points.

When I looked at applications, the way operations were managed, application support and infrastructure support were separate. Now, we have integrated these and we will have common processes, a single help desk. By integrating, we provide a lot more value than by providing discrete services. Another way we create value is through committing to some kind of shared output/outcome with the customer. The questions we put to customers are:

Do you wish to reduce your IT intensity? Do you want to reduce your IT costs? Do you want to increase IT flexibility or do you want to improve IT alignment with your businesses? Let us see how we can work together to achieve these objectives. Let us not link it to some engineer A or engineer B! You need not be worried about my time-sheet, but rather on the impact I create and how we could achieve objectives together. In the LME segment, people were very willing to listen to this argument. They were wanting IT to make a difference and they were looking at a single provider who could do all this. This is a sweet spot that we got, which nobody else had looked at. Now people are talking about value, outcome/output based pricing. Our pricing was not linked to the dollar. Today, the dollar is at 39.3 and people are waking up! But this exercise is not easy, it takes time. Why should a customer believe what you say? You need track record, execution experience. That we have today.

What is the status of your multi-year, multi-service, multi-million contracts ?

Many of the transformational deals that I talked about have all moved in to steady state. Some of these large deals — Autodesk, Teradyne, Skandia, which were won over the last 18 months, have all moved to steady state. We have learnt how to execute these kinds of deals, built best practices. The biggest challenge that people have in these kinds of deals is transition (of processes offshore). The time associated with it, the cost associated with it, the risk associated with it is very high. We focussed on transition, on processes that will give comfort to customers.

Do customers respond well to value-based pricing? What is the level of such pricing in your contracts?

You are right in asking how readily do customers accept that you might add value! Why should a customer accept what you say, what is your legitimacy? To give you an example, today I can go and tell a customer that we have been working with other customers, we could reduce their IT intensity (cost of IT over revenues), it was at 16 per cent before we came and after we collaborated it was brought down to 12 per cent, which compares well with the benchmark.

One scenario would be that a customer would have a very large complex IT division. Over time they have built a huge number of applications, they have become inefficient, they don’t talk to each other, the processes don’t integrate. So you are dealing with a messy/complex IT infrastructure/application portfolio, redundant functionality etc…it’s like a zoo! My focus is on how do I integrate, simplify and consolidate applications and infrastructure. That could be a starting point.

Overnight, we can’t change business-mix and say x percentage will be value-based pricing. But clearly we see direction towards that end. Even in large engagements, that is becoming a part of our conversation in our executive/steering committee meetings with customers. But we are still in early stages. It will take two-three years to become more prevalent. By 2010, you will see a very different revenue mix from HCL. Now, the front-end part of the organisation, the consulting organisation, the delivery organisation, who used to talk different languages, are talking the same language. In this global meet that is going to be held soon, HCL is not making a single presentation! Only customers are going to speak! We want practitioners and thought leaders to talk, and genuinely want to understand customers’ business problems, see what solutions we can develop and become customer-centric. We are spending a couple of million dollars on that.

About HCL’s ‘asset-light’ approach to Infrastructure Management Services?

If you analyse infrastructure contracts over time, the non-asset part is steadily increasing. The cost of hardware has come down, it is cheap, the cost of software has also come down. But cost of people has gone up and is quite expensive.

Labour is also the place where we can show maximum value. If I look at hardware/software, there may be some cost cutting by negotiation. With harder negotiation we can save a bit more. But that is not an area of significant value. But with the labour part, I provide a lot more value, in terms of adhering to service level agreements, reducing downtime, streamlining processes, etc.

Third, our biggest strength is that we are unbiased. I don’t have hardware to sell. I don’t have software to sell. I don’t have bandwidth to sell. So I can be truly neutral and truly look at customer interest. If I have hardware, then the whole problem changes. Incremental margin on hardware is much lesser. Let the customer control the assets. We will focus on managing services. But where people want ‘assets’, as in a data centre, we have partnerships with vendors. We will take single-point ownership.

How far have you progressed on adoption of SOA, SaaS and Web 2.0?

Briefly, we have very strong points of view, especially on SOA (services-oriented architecture) and SaaS (software as a service). Web 2.0 is still in early stages, with adoption seen more in Internet Services companies. We are using SOA essentially for business process integration. I have a particular business process, served by multiple applications and use SOA as a way of seamless integration. We are using this for integration and process transformation. We believe that it will have significant impact. This area for us has been growing at over 100 per cent. With respect to SaaS, it is a matter of time but will happen. But the business interest is very high for this. Why should I buy software from you if I can pay on usage basis? It makes a lot of sense. We believed that a lot of software can be sold as service. We believed that this would fully impact the size of the business. Once you have software as a service, there is no service. Look at salesforce.com. We understood how to re-architect and re-engineer products, so that it can be metered and delivered to customers. We have strong operations and infra capabilities. We have been able to partner with three of the top ten product companies and tailor their products for specific business processes.

Which verticals have highest potential?

All verticals have contributed over the past six-eight quarters. Hi-tech is our largest vertical, financial services is our second largest and also the fastest growing one. Emerging areas, such as Aerospace, Retail and Life Sciences are seeing stupendous growth. In a market like financial services, we were very late entrants. Because of our technology company heritage, we really did not have any play. As late as 2002, we had one account, Royal Bank of Scotland, and that because we were doing Y2k remediation and maintaining their IBM assembler! We supplemented that when we acquired the DSL facility and then started focussing on retail and corporate banking sectors. Now we are growing faster than others.

Comments on your geographical spread…

< p>We already have very low dependency on the US, less than 16 per cent. We were late in the US, not so much in Europe. All our large engagements are coming from Europe. We will soon announce a telecom deal. But most of the engagements are coming from financial services. Europe is still a huge market. The UK so far has been the main market, but the continental story is about to emerge. We see a lot of growth happening outside of the US.

The impact of the sub-prime crisis and the US slowdown on your operations?

We have nothing to do with it! Our financial services exposure is smallest among top IT companies. Even within that our exposure to US financials was the lowest! We have much higher such business from Europe and APAC — Australia, Hong Kong, Malaysia, where there has been no sub-prime. We have had near-zero impact. On the US slowdown, right now at this point in time, we don’t see any slowdown.

Is there scope for higher utilisation levels?

Beyond 80 per cent in offshore is difficult. It is a balance and a tight-rope walk. If we try to match onsite utilisation, it will be at the cost of growth, attrition may increase.

venkat@thehindu.co.in

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