Provide Issues/Problems within HCL

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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 the company had slipped. I had taken more than I could chew, but that brought the extremity to me. The company needed more than a band-aid; it needed a tourniquet. Within a few weeks, I stopped being polite.”

During May, Vineet formulated a plan for the company. To keep up with market demand, Vineet knew that like all Indian IT companies, HCL had to differentiate itself. He concluded that the company should move up the value chain and start going after larger, more complex engagements. In order to execute this strategy, Vineet knew the company had to improve its operational efficiency as well as become ever more innovative. The systems and processes had to become more consistent across the global operations (see Exhibit 4). Most of all, Vineet realized that HCL’s employees needed to abandon the “it’s okay to lose” mindset and proactively add value for customers. Vineet commented:

4 The nature of the services industry was changing. The business model of the past—in which IT companies used a “Time and Materials” model to bill customers based on the number of employees, resources used, and length of engagement—was starting to move, albeit slowly because of contractual complexities, toward a model of outcome-based pricing. Outcome-based pricing involved techniques like pay-per-service use and royalty-based revenue-share arrangements. Very few engagements to date involved this type of pricing. Some of the new services were driving this change. Software as a service, for example, was a new trend in which software was provided as a service rather than a product for which customers would pay licensing fees. Tool Automation was improving the productivity of software engineering through office automation, which delivered more value with less cost and effort. Open Source was a trend in which source code was freely available and instead of license fees, customers were charged only for services used.

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I began an initiative called “Mirror, Mirror,” where in my interactions with employees, I held up a metaphorical mirror which revealed that HCL had been pretty for 25 years, but we had not been for the past five. I was trying to get at their inherent hunger and desire to win. I’d say things like, “Right now we’re poodles. Is that what you want to be?” There was no soft landing for anyone. I was holding up a mirror to the entire company. We had to transform from the inside out, and I was hoping that the employees really wanted to do the same.

In June, Vineet set up a communications and marketing team of about 30 “Young Sparks,” some of whom had transitioned from Comnet. He also brought over the heads of Systems, Sales, and Talent Development. Sanjeev Nikore, from Sales, noted, “I could quickly see that the Technologies employees were very technically skilled and creative, but the company lacked unity. HCL had done a great job of promoting intrapreneurship—however, this led to people working in silos. We needed integration, and we needed to be working for the same goals.” The company’s decentralization created an urgent dilemma for Vineet, as he found himself with 85 direct reports. Vineet informed employees that he would be reducing his reports to 12 in short order. Some senior people left, unhappy that Vineet was going to centralize the company. Some did not believe his talk of “transformation.” Vineet marshaled on and created two operating groups: a seven-person Management Consult for Delivery and a five-person Management Consult for Sales. He planned to meet with each group separately every month, and together twice a year.

Vineet located his marketing team on his floor of HCL’s headquarters in Noida, a suburb of Delhi. He met with the team frequently to plan the launch of an internal campaign to engage employees. Vineet wanted to change how employees experienced HCL. A Young Spark noted, “It was really exciting to be working so closely with the president. We were all under 30 and this was a critical project. We were under a lot of pressure.” Suresh Sundaram, vice president of Marketing, said, “Vineet wanted us to come up with a tagline and an intranet portal that had the theme ‘Employees First.’ After much deliberation we came up with ‘Employee First, Customer Second’ because it had shock value and showed we were doing something radical.”

Laying the Foundation

Setting the Strategy

In early July 2005, Vineet convened a three-day Blueprint meeting of the company’s top 100 managers. At the meeting, Vineet announced a new strategic direction for the company. He asserted:

I made it clear that HCL, in order to survive, needed to change the way it approached customers. Rather than do small, project-based work, we needed to go after big deals. To do so, we needed to differentiate ourselves and offer multi-service, unique propositions that [would] transform customers’ businesses. In order to be able to do this, we needed to remove the silos and encourage collaboration across the company. I said that we were going to start competing against global majors like Accenture and IBM, so it was critical that we get our house in order.

Upon hearing the new “big deals” strategy, some attendees were skeptical, wondering how they could ever win against global majors, let alone successfully execute sophisticated engagements. Vineet commented, “To the skeptics I said, ‘I’m coming from Comnet where a big deal started the company.’” One attendee noted, “Vineet was very open to discussion and we were encouraged to express dissent. But he was also quite clear and said, ‘We are not going to be a me-too player.’” Vineet announced his three-phase strategy, focused on value-centricity, at the Blueprint meeting:

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In the first phase, which would be two years, we’d get our house in order by rejuvenating employees and improving operating efficiency. In the second phase, we’d form strategic partnerships with other companies so we could jointly offer more value and end-to-end services for customers. The third phase, which I planned to complete by 2010, would be a radical shift in the HCL business model. With the industry changing so rapidly, I did not have a firm vision of what this would look like, although I planned that 50% of our revenue would come from services that did not exist in 2005.

At the Blueprint, Vineet also had the executives set goals for their groups for the coming year. Vineet observed, “In truth, it did not matter what the specific goals were. Eventually, I planned to run the company by comparison, whereby everyone could see how other groups were doing. Also, it was just important to instill the discipline that setting and striving for a goal afforded.” Vineet did mandate one guideline for goal setting, however: Sales would have revenue goals for the coming year, while Delivery would have both revenue and profitability goals. Vineet explained: “We had different challenges at the Sales and Delivery ends. Sales had to start delivering accelerated growth and increasing market share, while Delivery had to build execution excellence. I needed to focus them on separate goals and I needed to ensure that Delivery got its house in order—particularly before holding Sales accountable for profits. I needed them to feel confident; I did not want to handcuff them.” He also informed the employees that later in the year, 360˚ developmental reviews would be introduced.

As he closed the meeting, Vineet extended a challenge: each person had to figure out how they would help HCL win multi-year, multi-service, multimillion-dollar co-sourcing partnerships. DSGi, a European electrical retailer, emerged as one such opportunity. In May, DSGi had announced that LogicaCMG, a European IT services company, would outsource its internal IT support. But the board had pulled out of the deal at the eleventh hour because of concerns over cost and complexity. The Dixons CIO left as well over the fiasco.5 Putting together a proposal would take months. Vineet noted, “The deal could turn around everything for HCL, it could be a rallying point.” Somnath Mallick, head of HCL’s Australia and New Zealand business, noted, “The large-deals space was really dominated by the traditional firms, and for HCL to win, we really had to change the rules of the game. The idea of offering multi-service in an integrated fashion from offshore by bringing together different groups in HCL was a powerful proposition.” The senior managers left the Blueprint meeting understanding the problems, but energized about the future. Some, however, were skeptical that a transformation would happen. One attendee noted, “Vineet wanted HCL to be five times as successful in five years. That seemed pretty bold.”

Setting the Structure and Systems

As July progressed, Vineet made a number of changes designed to align HCL’s structure and systems with the big-deals strategy. First, he organized the company around five lines of business (LOB), instead of around geography. The LOBs were applications, enterprise consulting, technology, infrastructure, and capital markets. Vineet appointed heads for each LOB, all of whom were obvious choices. Each had about 7,000 employees and operated in HCL’s verticals—essentially industry sectors—which included Hi-Tech & Manufacturing, Life Sciences & Healthcare, Media & Entertainment, Financial Services, Retail, and Telecommunications. Vineet noted, “I used brute force in making these changes. I wanted every single person focused on implementation; I did not want to debate [whether] it was good or bad. We were collapsing walls so we could build a company together.” Stuart Drew, a senior manager in the UK, commented, “Vineet wanted HCL to have a

5 McCue, A., “Dixons Moves on from Logica Fiasco,” www.ZDnet.co.uk, January 20, 2006.

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single theme and the benefits seemed clear to most of us. After all, he had consulted with all of the top managers during his first weeks and he saw that we wanted, and needed, change. ”

Second, Vineet met with Sandip Gupta, Comnet’s head of Finance who had been with the company since 1998, and asked him to start a second Finance group that would directly participate with Sales and Delivery on bringing in value-added business. Gupta started the conceptual thinking for a Business Finance department in late July. He noted, “I had been in finance all of my life, but this was finance of a different sort and was critical to the success of the company. At first I had a lot of difficulty and sleepless nights wondering if I could handle the work.”

Third, Vineet laid the groundwork for the Multi-Service Delivery (MSD) Unit, which he conceived as a separate organization with 200 of the brightest engineers in the company. Human Resources led the rigorous selection process, which considered technical capability and business acumen, as well as how an engineers’ personality profile mapped onto the job. The MSD Unit would focus exclusively on winning and delivering big deals, then integrating their learning back into the organization. Vineet noted, “Going after big deals was a huge financial risk. In putting this group together, I was hoping to put HCL’s best foot forward. Also, scalability was a key concern. With cross-functional groups designed to execute special projects with specific targets and time frames, we were able to grow organizational capacity across borders.” This strategy did have risks, however. Going after a big deal entailed making a US$8 million investment, as well as the possibility of facing even slower growth going forward. Vineet explained his logic: “We needed to grow and I knew that business-as- usual would not lead to the disruption in growth for which we hoped. We had limited time to pull ahead of competition, and this was an idea that no one else had tried.”

Fourth, Vineet began the implementation of consistent systems and processes across all of the LOBs. Given the scale of the global company, he automated as many processes as possible. By coupling automated processes with a sophisticated, colorful, employee-friendly intranet, HCL employees around the globe would have consistent, relevant information in a timely manner. Since many of the members of the Communications team had come over from Comnet, they quickly migrated and refined useful pieces of Comnet’s intranet for Technologies. Vineet stressed that automated processes and the intranet would be used to enhance transparency. For example, in July, HCL employees had their annual reviews on the same day using the same electronic form.

Making “Employee First, Customer Second” Real

By the end of July 2005, the Young Sparks, many of whom were working virtually from around the globe, had launched a campaign that introduced “HCLites,” as they decided to call HCL employees, to the Employee First, Customer Second (EFCS) strategy. Dilip Kumar Srivastava, head of Corporate Human Resources, noted, “We had four strategic objectives with the Employee First initiative: to provide a unique employee environment, to drive an inverted organizational structure, to create transparency and accountability in the organization, and to encourage a value-driven culture. We wanted all of our communications to reflect this, and we wanted to use the power of the intranet.” A Young Spark noted, “We wanted an icon to represent HCL, something that symbolized the importance of the individual but also the power of the collective.” The brand identity they came to favor was that

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