Tackling the product-services conundrum

HCL Technologies’ $1.8-billion acquisition of certain IBM software assets is expected to be a stormy affair if the lessons from the past are any indication.

For instance, in 2016, TCS was asked to pay $940 million by a US court for the alleged theft of code by its executives from a customer.

While the fine was later halved, the case was a stark reminder for the Indian IT industry about the importance of putting a wall between the product and the services teams.

TCS now has a separate products division called Digitate, which works independently of the company’s services line and does not even have the company’s logo on its web site.

Apart from possible regulatory backlash, empirically too software and service businesses have not always worked well together. For example, HP acquired Autonomy for $10 billion and later had to split it into four units. Even the hardware and the services business haven’t worked well together, and companies such as Dell, Xerox and HP which acquired the services business of Perot, ACS and EDS, respectively, had to sell them off.

“Competing with their own IT or engineering customers will be a challenge,” said Pareekh Jain, independent IT outsourcing advisor. “They will have to build a Chinese wall between the products and services organisation. HCL will have to be careful about this, both in perception and reality,” Jain said.

A short-term gain

Jain argues that product and services are different businesses and no one has got it right at scale except for IBM. But even IBM is now divesting some of these businesses.

“These are dead assets and it makes no sense to invest money in these assets,” said Sanchit Gogia, CEO at GreyHound Research, talking about the IBM assets being bought by HCL Technologies. “For this amount, they could’ve bought a mid-mized ERP company with decent revenues. This is a short-term gain for a long-term loss. This is not an IP asset built for future,” Gogia said. However, analysts agree that building IP is the future for IT services companies but these IPs need to be built to support the services business through building platforms rather than independent products.

While HCL expects over $650 million in additional revenues from this acquisition, it needs to remember that customers bought these tools for the IBM brand and perhaps because their relationship may involve using other IBM products as well. Once the IBM brand is taken away and the contracts go for renewals, HCL is set to face a challenge.

“There will be a lot of investments that’ll go into building these products further and putting some of them on the cloud,” Gogia said. “These products have never been sold independently by IBM, and if HCL wants to do that, it’ll be a tough one to crack.”

Yet, analysts believe that HCL can turn these assets around in its favour if the strategy is executed right.

“It is a bold strategic move by HCL and differentiates it from other Indian IT service providers. It’s a risky move for sure, and success will lie in execution. But if successful, the gains could be bigger too,” Jain said.