The Hindu Business Line : `We are trying to dominate the multi-service space'

We are changing our people policy, customer policy, the way we do services and customer acquisition. There are 63 initiatives on which we are changing, simultaneously. VINEET NAYAR, PRESIDENT, HCL TECHNOLOGIES

Does clarity of thought have anything to do with coming up the ranks? Looks like it does.

Mr Vineet Nayar, President, HCL Technologies, joined the HCL group in 1985, soon after his studies. His chairman, Mr Shiv Nadar (in the accompanying interview), talks fondly of Vineet going through an accelerated course to become the President from ground up in 20 years. Just back from a vacation — rare for a CEO in this industry to compartmentalise his life well — Mr Nayar spent over an hour with Business Line to dwell on HCL Technologies' focus on differentiation through a Blue Ocean Strategy (conceptualised in a best selling book "Blue Ocean Strategy: How to Create Uncontested Market Spaces and Make Competition Irrelevant" by two INSEAD professors, W. Chan Kim and Renee Mauborgne) in a software services market already crowded with Indian heavyweights.

Excerpts from the conversation:

We saw five quick, large deal announcements from HCL Tech recently. What is the strategy behind acquiring large clients quickly?

You will see our growth from three tracks — single services, new services and multi-services. This is true for everybody but for us the focus on multi-services is significantly higher compared to a TCS or an Infosys.

If you put chips on the block — the difference between the others and us is that our chips on multi-services are the highest, those on unique differentiated services are the second highest, those on other services are the third. For the others, the chips on single services are the highest.

We said we wanted to be in the annuity business. Such as businesses that are long-term contracts, recurring in nature... What are those? Multi-services. Signing multi-year multi-services contracts makes the barrier to shift too large for such a client. Does this ensure higher growth compared to competition? No. But, let's go to the industry's history for the issue of growth. Why did we not grow as fast as Infosys or Wipro or TCS?

The answer is this: If 35 per cent of our business was technology services, and technology services grew only 10-12 per cent per annum, then HCL could not have grown faster than the industry. Let me swing the coin around for the next five years. If Gartner, IDC and the like have said that the application industry is only going to grow at 15-20 per annum, maybe someone else could face in the next five years what we faced in the last five. If the industry of application development slows down, what do you do? Then HCL is an interesting alternative.

Does a multi-service offering compromise on margins? We hear that in large deals, margins could be hit 1-2 per cent in a multi-year engagement...

Not true. There is what I call the `head in the sand' approach. It is true that, like ostriches, we had our heads in the sand believing that business would come without competition, believing that there is more business out there than there are engineers, because of which we got attractive billing rates.

Two or three things have happened since. People have set up captives. They know about Indian costs. People have adopted multi-vendor strategies so they know competitive rates. And they have understood the whole issue of migrating business, because Indians are good at documentation.

The right question to ask is: Will a single service commodity RFP of large ($500m) size get you a larger margin than a multi-service $500-million deal? The answer is obvious. The latter would.

Would your entry strategy have been different two years ago? What with the technology meltdown, when you said you would go after enterprise deals, you went the way of Infosys and Wipro. In 2002-2004, probably the access you had there was minimal. Since then, you have articulated it differently.

Historically it is true that rate of growth has not been as high... factors for that are the tech meltdown and lack of articulation (of the strategy) internally. Now if you see the deals around, tell me one multi-services deal that others have announced, other than ABN Amro. No one has announced anything. We have announced five already. Next week or so, you will see more deals.

What kind of inhibitors have you already built, through which others cannot step in and challenge you?

We are trying to dominate the multi-service space, trying to dominate mind-share. When you think offshore think of HCL (for multi-service deals). That does not mean that I don't do anything else. This is not sharply defined for the (rest), not occupying that mind-share in one particular market space.

How do you think margin kickers will come in?

I don't think they will. You must understand that we are in an industry that is $24 billion, that gives 50 per cent gross margin. Not sustainable. All you have to do is put a strategy together so that you can predict your margins. For, renegotiation and transparency in costs are the themes of the day. To protect your margins is the big challenge. Expecting margin expansion is not on.

In the next three years, what is sustainable growth?

I don't think HCL is ready to answer that right now. For everybody 90 per cent is repeat business. Only 10 per cent is new. For us, it's 80:20. Therefore, our growth rate can vary widely. What we are doing is just holding any definition of the future till we get our strategy right. On top of this we will have acquisitions this year. Last year we had stopped acquisitions to ensure that we become a high-performance organisation. This is the single largest transformation anywhere of this size. Nobody at $1 billion changes course.

We are changing our people policy, customer policy, our strategy, the way we do services and customer acquisition. We have 63 initiatives on which we are changing, simultaneously.

You had earlier talked of output-based pricing and that deals of value $100 million had been signed. Any update now...

Why bet on yourself? Bet on the customer. The Cisco deal (based on royalties) was announced after our meeting. We have had some three-four deals after that. We are on that path. The only way you can prevent downturn in your business model in the technology services area is output-based pricing.

We have looked at each business area and converted it. If your output-based pricing is based on products sold, the revenue model is consistent, even in a downturn. In a downturn for a communications company, the number of products sold does not go down. Growth might slump but it's still growth. We link our billing to their revenues than to R&D. We don't yet want to give you numbers...

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