The Hindu Business Line : `Consolidation is absolutely imminent'

In the next five years, there won't be just one but a few big bang acquisitions. If you believe in the Rule of Three, that will happen here. It's going to take place globally. MR SHIV NADAR, CHAIRMAN AND CEO, HCL TECHNOLOGIES

It is not often that the chairman and CEO of a nearly billion-dollar enterprise gives you time and then follows it up with a phone call to finish the conversation. Mr Shiv Nadar of HCL Technologies (part of the nearly $3-billion HCL group) did just that with Business Line recently. His point is, since he so rarely talks to the media, he might as well go the whole hog. In a freewheeling conversation, Mr Nadar dwelt on the past, HCL's mid-course correction post 2000-2001 meltdown, the company's multi-service strategy, acquisition triggers in the software services arena and his retirement.

Excerpts from the interview:

On multi-service strategy

How would you articulate your Blue Ocean strategy of multiple services for Fortune 500 clients?

We have a transformation-led strategy. We take a client and if they want to transform, which is what many companies will have to do over the next 10 years, they will have many parts that would need complete re-engineering.

Infrastructure, BPO, R&D, engineering processes, applications — opportunities will exist across all these areas. We may just speak to the IT dept, take up some of the operations part, realistically cut it into pieces, relocate and make it the most efficient in terms of cost as well as process rigour.

Take our work with Deutsche Bank, for example. In 2001, they said that if they did not bring down headcount sharply, they would be dead-meat in three years.

Now they are looking at a different number (for headcount). I know the current goal but it's not public. They have a superb rate of return of 25 per cent. As a global company they are brilliant, but it's all because of transformation.

Are the pockets of differentiation that software service companies enjoy shrinking all the time? Someone tries to differentiate and then the window of opportunity tends to close...

It exists vastly now. In our global customer meet, we articulated 20 solutions. They don't talk about application services, but about solution offerings.

Companies claim that they would wait it out...

We will go to a different destination. Ours is different compared to where Accenture and IBM are going. We are going towards solution-led strategy. They are going to the services-led strategy.

IBM, for instance, is also talking in terms of solution sets...

That's on the application side. I am talking more on the technology side. IBM is present everywhere. HCL will work with or partner with IBM.

There are areas where IBM wants to work only with partners and we are considering working with them in those areas.

On acquisitions

Has the industry reached a stage where a big bang acquisition could make a significant difference to how it matures?

In the next five years, there won't be just one but a few big bang acquisitions.

Has the EDS-MphasiS acquisition offered the trigger for the industry to move in that direction? Does this set the context for consolidation in the Indian space?

If you believe in the Rule of Three, that will happen here. It's going to take place globally. You can't have 50 people here. It would finally have to be one GM, one Ford and one Chrysler. Likewise in products, there is IBM, HP and there is Dell.

Has software services reached a point where consolidation is imminent or...

Absolutely imminent. A series of consolidation moves over the next 10 years...

Services acquisitions are very difficult to integrate...

People have said this of every industry. They have said that retail is so niche, that footwear specialty is different from a ladies' garment specialist and all that. Finally, you find that retail has seen the maximum number of divestments and mergers.

Has valuation been an issue for HCL to consider acquisition-led growth? When do you think valuations would be compelling for companies to think along these lines?

I would never wait to time the capital market. I would look at companies' maturity to have that offering. We have not done it not because our market capitalisation is not good, (but) because we are not ready. We will be ready in a couple of years.

In the case of Wipro, it has stuck to a string of pearls, as it calls it. Infosys is averse to it. TCS is doing it in certain niche areas. Do you think IBM or Accenture could accelerate the process?

It's the global compulsions that will begin this major process.

On supply side constraints

We would like your view on the supply-side constraints.

For companies like us, that is not a constraint.

Even with wage inflation, attrition, quality of workforce...

If you take the average cost of employee across companies in this sector, no one's cost has gone up. We have all managed to keep that advantage. Can we keep it for the next five years? Looks like we can.

The cost per employee has been growing faster than the revenue per employee...

That is because there are more marketing (and branding) efforts to keep the rate of growth where it is. It is one thing to grow 30 per cent when you are $100 million and another to grow 30 per cent when you are $1 billion. Cost per software development employee has not come down but remained stable.

What could the return triggers be for HCL Technologies, given that operating margins remain where they are or are probably trending downwards?

We would arrest operating margins trending downwards by the solution-led strategy and outcome-based pricing.

That means you hope to stabilise margins and push them up...

We won't let them go down. We won't go down in margins. The talent that is managing these companies is very good.

On retirement

How would you articulate your vision for the next three to five years?

I will tell you what I would like to see — that is, what I would like to retire with. I would love to see the company with half its income from outcome and not input-based pricing. Of course, it is a broad statement but it is already being broken into different pieces.

We talked of a five-year time-frame. You talked about retirement. What do we read into it?

Five years later, I would definitely not want to be the CEO but would want a younger CEO. As it is, the BPO business is run by Ranjit (Narasimhan), a president, who just turned 50, and the other president, Vineet (Nayar), is 44.

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