HCL Technologies Presentation

Group Case Study

HCL Technologies

By: Emmanuel Landin, Andres Tena,

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________________________________________________________________________________________________________________ Professors Linda A. Hill and Tarun Khanna and Research Associate Emily A. Stecker prepared the original version of this case, “HCL Technologies (A),” HBS No. 407-087. This version was prepared by the same authors. HBS cases are developed solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective management. Copyright © 2007, 2008 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545- 7685, write Harvard Business School Publishing, Boston, MA 02163, or go to http://www.hbsp.harvard.edu. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise—without the permission of Harvard Business School.

L I N D A A . H I L L

T A R U N K H A N N A

E M I L Y A . S T E C K E R

HCL Technologies (A)

In January 2006, HCL Technologies’ 44-year-old president, Vineet Nayar (referred to as “Vineet”), was ecstatic to hear that his company had just won the biggest IT outsourcing deal in Indian history, yet he knew the road ahead would be long. HCL had been founded in the 1970s and by the 1980s had established itself as India’s most sophisticated and successful hardware company. But through the late 1980s and 1990s, as software and services became the trend, HCL slipped behind both Indian and multinational competitors. In April 2005, Vineet became HCL Technologies’ president at the request of the founder and chairman, Shiv Nadar. At the time, the 41,000-employee HCL enterprise had $3.7 billion in revenues and a market capitalization of $5.1 billion. While it was growing at a cumulative average growth rate of 35% (including inorganic growth), this was due largely to the momentum of the past.

Like many of his competitors, Vineet hoped to move his company up the value chain. At HCL, the plan was to accomplish this goal by providing clients with innovative, integrated services that would impact and even redefine their core businesses (see Exhibit 1). To fulfill this vision, Vineet had devised a three-part transformation strategy. In the first phase, Vineet had introduced a corporate strategy called “Employee First, Customer Second” (EFCS). EFCS was energizing employees, and the company’s financial performance was improving. At the February 2006 Global Customer Meet in Delhi, on which HCL would spend $2 million, Vineet planned to make the EFCS strategy public for the first time. He also planned to announce that HCL was going to walk away from “small time engagements” in order to focus on value-added, innovative projects. This related to the second phase of the transformation, in which HCL would form strategic partnerships to offer more value-added services to customers. In the transformation’s third stage, by 2010, Vineet hoped to pioneer a major change in HCL’s business model—one so radical it was not yet known. Vineet knew there was much transforming yet to be done. But he wanted to show the world that the industry pioneer was rejuvenating.

HCL: The Early Years

Shiv Nadar founded HCL with fellow engineers in 1976, shortly after the Indian government passed a law that discouraged multinational corporations from doing business in India (see Exhibit 1

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for timeline).1 With IBM’s departure from India, HCL, like a few other firms, received government approval to enter the hardware market. HCL started in Nadar’s garage, and with its sophisticated R&D capabilities, it quickly took the lead. To attract the right talent, HCL recruited at India’s top engineering and business schools, offering Rs. 2,000 (US $180), a monthly salary superior to Citibank’s at the time. The group had an entrepreneurial spirit, and Nadar noted, “We believed that if something was feasible but had not been tried before, you should try it. We believed you should not be afraid of failure.” This mentality led to the “golden years” of the 1980s, as HCL’s heavy investment in R&D allowed it to keep up with the latest technological trends like DOS and UNIX. An early employee noted, “We were first in the market, although we were only in India. Our computer systems came out before Apple’s, and we came up with a fourth-generation programming language before Oracle. Plus, we were led by Shiv, a true visionary. He was the first to believe that computers could be manufactured in India.”

In 1985, Vineet, a 23-year-old engineer with an MBA from XLRI, Jamshedpur, one of India’s leading business schools, joined HCL as a senior management trainee in the marketing function. He was eager to join the company given its reputation for innovation. Around this time, though, two trends affected HCL. First, the financials in the computer business were changing: as hardware became commoditized, software and services, with their financial rewards, became the name of the game. During this time Indian software companies like Wipro, Tata Consultancy Services (TCS), and Infosys came to the fore. HCL took a contrarian stance and remained in hardware, committed to staying on the cutting edge. Second, since most Indian companies were not computerized, HCL was ahead of the curve. After commissioning a McKinsey study to confirm that HCL was ahead of its market, HCL decided it was time to go global. Although HCL offered innovative products, Americans were reluctant to buy hardware produced by an Indian company, since Indian products were presumed to be inferior. Thus, in the early 1990s, HCL entered a joint venture with Hewlett- Packard.

Hard Times at HCL

By 1992, Vineet, like many of his colleagues, was frustrated and worried about HCL’s future. Vineet was thinking about leaving the company to start an entrepreneurial venture, and eventually Nadar heard about this. Nadar invited Vineet to his home for dinner. When Vineet mentioned he was considering leaving, Nadar offered an attractive opportunity: Vineet could become an entrepreneur within HCL. At the time, the government was planning to create a new, electronic stock exchange, and it was accepting bids. Vineet decided to take on this challenge, hired a few colleagues, and founded HCL Comnet, an IT infrastructure and networking business wholly owned by HCL, that would try to win the contract. The “Comnetians” worked for two years on their idea of using satellite technology—which had never been used before for this purpose—to modernize the exchange. Sanjeev Nikore, one of the first few employees of Comnet, explained, “It was the holy grail for us because it was the only chance we had. We were battling the best in the world, and the stakes were so high that we had to be innovative.” Comnet beat global majors for the deal, and the new exchange was running smoothly by the end of 1994. Soon, Comnet was one of HCL’s most innovative and successful businesses.

1 The Foreign Exchange and Regulation Act in 1974 disallowed foreigners from holding more than 40% equity in any firm in India and also dictated that source code for all computer products had to reside in India. IBM chose to leave the Indian market. See Parthasarathy, B., “Globalizing Information Technology: The Domestic Policy Context for India’s Software Production and Exports,” Iterations: An Interdisciplinary Journal of Software History, May 2004.

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However, several trends kept HCL lagging behind competitors (see Exhibit 2). First, as the Indian government began to deregulate, multinationals like IBM returned, adding more competition. Second, customers were increasingly demanding integrated IT services that could give them competitive advantage; as such, global IT leaders were transforming themselves into service delivery businesses. Third, companies were increasingly off-shoring re-coding and application development work to India to take advantage of lower costs. In particular, the Y2K (year 2000) problem sparked a rush to India for IT support.2 Nadar’s philosophy was to avoid competing on price, and thus he decided not to participate in the Y2K remediation. This proved costly for HCL since many of the Indian software companies did take this work and built strategic relationships with top leadership at global companies.

Nadar concluded that it was time for HCL to move aggressively into a new strategic direction, and he ended the relationship with HP in 1997 to facilitate HCL’s move into services. He changed the management team and in 1998 reorganized HCL into two companies: the Indian-facing HCL Infosystems, a company focused on hardware and on software integration, and HCL Technologies, a global IT services company that would provide software-led IT solutions, remote infrastructure management services, and business process outsourcing (BPO). In 2000, Nadar led HCL Technologies through the largest IPO of a domestic IT company at the time. Still, HCL was lagging. An employee noted, “HCL was no longer the place to be. When people thought of Indian companies, they thought of places like Wipro, Infosys, and TCS, not us.” HCL’s growth had been attributable to its past success, and its attrition rate rose to 30%, much higher than the industry average. An employee noted, “The 1990s was really an ‘opportunity lost’ phase for HCL. Our bet was on selling more and more computers, but other IT companies were moving into services. That was the new game, and we entered late.”

Searching for a New Leader

By 2004, Nadar3 was thinking seriously about appointing a new leader for HCL Technologies. Vineet (see Exhibit 3) was an obvious choice because of his success at Comnet, which by this time had close to 1,000 employees, had won many high-profile deals, and had successfully gone global in 11 countries. It had also developed a distinct culture within the larger HCL organization. Anant Gupta, Comnet’s COO, noted, “At heart we were all entrepreneurs, and we were constantly transforming our business to adapt to market dynamics. We called ourselves ‘The Force of One’ because we wanted each individual to be empowered to bring value to the customer, but behind that individual was the muscle power of the whole organization.” To remain a cutting-edge and rewarding place to work, Comnet had instituted an extensive talent development program and leveraged its intranet as an efficient communication tool and key resource for operational efficiency.

2 There was widespread concern in many industries, like finance and government, that computer systems would have trouble processing information on and after January 1, 2000, because most systems had only been designed to work until 1999. The fear was fueled by government reports, media speculation, and press coverage. In response, many companies worldwide upgraded their computer systems.

3 Nadar, by then a billionaire, was receiving international recognition for his ability to spot technological trends early and capitalize on them. For example, many articles and awards committees cited his ability to see a future for the IT industry in India, and to realize that collaborations with global players were needed to improve manufacturing quality in India, as well as to allow India to gain credibility in the global landscape. In 1987, the body representing the electronic industry in India nominated Nadar as Man of the Year. In 1995, he was nominated the Dataquest IT Man of the Year. In February 1997, TIME Magazine wrote: “The world has caught up with Nadar's vision of a networked future, and the results are shaking up enterprises, economies and governments around the world.” (Source: HCL website, profile of Nadar, at www.hclbpo.com/ aboutus/nadar.htm, accessed January 24, 2008.

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Nadar reflected, “Part of what made Vineet a success at Comnet was that he had unreasonable expectations. He was constantly bringing the company forward. He had the energy and the capacity to lead HCL into a new era.” To Nadar’s dismay, at first, Vineet did not agree. Vineet explained, “I liked small, innovative companies. I was happy at Comnet and I was not sure I had the skills needed to run a huge company.” Nonetheless, when Nadar once again asked Vineet in 2005, he finally agreed. Vineet stated, “I told Shiv that running a big company was not my preferred job but I’d do it under one condition: that I could do things my way. I wanted to make drastic changes that had never been made before. It was risky, but Shiv said okay.”

In 2005, the Indian IT industry had an estimated $36 billion in annual revenues and was growing 28% annually. It employed only 300,000 people in 2000, and by 2005 it had over one million. Technological trends—like software as a service, Open Source, and Tool Automation—were changing the game once again, and India was no longer seen merely as a low-cost destination.4 While HCL had begun strengthening its Applications and BPO services at the turn of the century, it was ranked fifth place in India’s IT market. Building a brand as a services company was not easy, given HCL’s legacy.

Leading a Transformation: Vineet Nayar as HCL Technologies’ President

On April 5, 2005, Vineet began his tenure as president of HCL Technologies. The company had both software and infrastructure services businesses. Vineet spent his first weeks traveling around India to HCL’s 300 locations to speak with its thousands of employees—96% of whom were Indian, although they were dispersed throughout 11 countries worldwide—and dozens of customers. While he had known that HCL had work to do, Vineet had not appreciated the gravity of the company’s problems. On his first day at work, two customers cancelled their contracts with HCL, and on his fifth day, another did. Vineet also realized the huge challenges in the Sales and Delivery groups. He knew he would probably have to reorganize them. Vineet observed, “I had been running my own little shop inside HCL and did not realize how much

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