HCL to grow faster than competition: Nayar

Vineet Nayar, Vice Chairman and CEO of one of India's big five technology companies, HCL Technologies, joined the company as a management trainee in 1985. Nayar is also best-selling author of a management book which is called Employees First, Customers Second.

Given the current market environment, while most of HCL's peers were pretty cautious, the IT major added almost a USD 1 billion in new businesses. There is a lot of opportunity in the churn with about USD 40-45 billion of contracts coming up for year 2012.
According to Nayar, "I truly believe that is the mother of all battles. The market is looking at the opportunity from different lenses. The overall IT spends is going to come down or remain flat and that is why the market is worried. As far as I am concerned, I am excited because this is the first time people are open to changing hands. Tough times drive tough decisions. So people are willing to move out of the IBMs and Accentures and HPs of the world predominantly because tough times are ahead and therefore they are looking for alternate opinion."
Nayar goes on to say that he gets extremely excited about challenges at the cross roads. "We, as a company, believe that the core competence this company has is to innovate at cross roads. Whenever we see darkness on a race track, we explore because we know we will be able to navigate it better." Below is the edited transcript of the interview. Also watch the accompanying videos. Q: You took over as president in 2005. Since then the matrices that if you want to measure the company are pretty spectacular. Your revenues are up about four times, employee strength has tripled, market cap has also tripled. Whether this because of a new strategy or business model that you implemented or whether company anyway at a tipping point at that pint of time?
A: I think the company was at a tipping point, because we were facing the significant challenge. We were losing mind share, market share, talent share and therefore, we were at the crossroad. Q: Does it mean you were at the tipping point in a negative sense?
A: In a negative fashion, yes. I believe that when you are on the crossroad, if you can demonstrate courage and the ability to navigate a set of people towards a direction, the RoI on that opportunity is far higher than turning around almost a well run company. So the success of HCL from 2005-2012 is largely driven out of three principles. I think the first principle was to look at Blue Ocean Areas of opportunities, which others are not competing in. Secondly, employee first which is stepping out of the way of people who are exceptionally good in what they do and not assert yourself in and being in the business of enabling them to do what they do well and I think third is obsession about execution. Q: Let's look at the first principle of Blue Ocean. Where did you get into?
A: Our view was that the IT services global market is a trillion dollars and the Indian service providers account for only 3% or 4% of that. Therefore, we had decided that we would not compete against the Indian service providers. Each one of those companies are exceptionally good companies and then we started looking at who do we compete with? We saw the IBM and the HPs and the Accentures of the world who had what we call a weak bottom with hugely frustrated customers and that opportunity was called a total idea outsourcing market opportunity.
Nobody from the Indian service provider had dared to get into that market because it was dominated by the global players. So we said if there is one bet we need to take, it needs to be a big bet, it’s a bet which we can win and the return of that bet should be largely high. So that’s a Blue Ocean we identified and that’s where we invested. Q: So this is not the global outsourcing model that the rest of India was following?
A: That's true. Q: How is this different?
A: What really happens is that some CIOs say - take it all that means, take my application development, application maintenance and managing the data centres and infrastructure, take the whole thing and tell me how much total cost you can reduce, I don't want to know how you do it. The Indian IT service provider model at that particular point was - take this piece of it and tell me how you would do that and I will monitor you on a day-to-day basis. That model and this model were very different. Here the ownership, the risks and the rewards were much higher, but you need to have the capability and the confidence to be able to take the end-to-end off the IT shop of the customer and deliver the end benefits, which you promised without the supervision of the customer. Q: You were also first in many senses in a people first strategy. Somewhere along the line did you lose it and then you have to come and reinvent it?
A: HCL always had what I called a top end entrepreneurial culture. Therefore, there will be a handful of people who would get an opportunity to excel and do what they feel like. HCL has significantly contributed to the IT industry. But in 2005, when we looked at the whole opportunity, we were looking at leadership at the bottom of the pyramid. You were talking about 100,000 people and the entrepreneur, you can't make everybody an entrepreneur and that business model of entrepreneurship continued. But it was not adequate for us to be able to grow a 100,000 company and that is the reason the employee first culture really came in.
Interestingly, the Japanese automakers had overcome the US automakers, not on the quality of cars they produce, but how they produced it and that’s Kaizen methodology, just in time inventory came in. Q: How is this different from what your peers did – employee stock ownership plan (ESOP), great facilities, great campuses, a college like atmosphere so what will you have to do more or what would you have differently? Have you done anything different?
A: I think it is very interesting. It has got anything to do with employee happiness, it has got to do with employee engagement. If you are in the business of launching a football team in a World Cup, the question you need to ask is are you going to play or are you in the business of enthusing, enabling the team to play. In the IT service industry or in any industry, most of the CEOs and the management team make a mistake of consuming that they are the people who are playing and not realizing that it is actually the people who are playing and they are the business of enthusing, encouraging and enabling.
So we asked ourselves three fundamental questions. First, what is the core business we are in? The answer to create differentiated value for customers. Second, where does this differentiated value get created? Our answer is in the interface of our employees and our customer employees. Hence the most important question – what should the business or managers or management be? Our answer is that business of managers and management should be to enthuse, encourage and enable the employees to create their value. Q: How do you do that in the industry because one of the weaknesses that we hear about the industry is that you have to keep your employees happy. How were you able to turn that on its head?
A: The question we asked is- why would people on a Sunday pay for their petrol, pay money go out to a church or a temple or a mosque, feel happy about it, come in and get paid like monkeys and feel bad about it on Monday into companies. So it has got anything to do with money and by equating happiness or an engagement to money, we are making a big mistake. I think what we are looking for is an opportunity, recognition, consultation.
For example, the first is my appraisal currently is being done by 88,000 employees. 6500 are my colleagues and are participating in that similar appraisal which has been done by the 88,000 employees. The result of which will be published on the web for all employees to see. So in one stroke, seven years ago, we did this and we said as management team we are accountable to the employees, the behaviour changes, suddenly the employee believes that if the management and the CEOs is willing to humiliate himself or herself in public. Q: Isn't there a danger that could slow down in decision making because as a CEO you have to take tough decisions? Isn’t there a danger then you start looking for a constituency rather than what needs to be achieved?
A: The trap is that the CEOs assume that the employees are not interested in the company. You have to involve your people to make a difference because at the end, it is the people who are making all the difference. To involve them we have to give them space, recognition, opportunity, money. But money is not the only thing and you have to be accountable, as accountable to them as they are with you.
A thought leadership programme in any company captivates the imagination of the people. They work for the company because they belong to an idea. Employee first is that idea where the management is saying we are in the business of enthusing, encouraging, enabling the employees to create the value to try faster. If you look at HCL performance faster, grown faster than everybody else and you eluded to that in the beginning of the programme. HCL does nothing different other than the fact that we have unlocked the imagination and energy of this employees not by giving them more money, not by giving them more ESOPs but giving them more opportunities, more respect, accountability of the management to the employees. By doing that, we have increased the energy level of the organization therefore employees work hard. Q: How much of your new initiatives actually have come from the bottom?
A: All of them actually. Q: Looking at new markets, are there innovation ideas or are they actually strategizing ideas?
A: It is an interesting question. There are two things which are important. For a service company, innovation is all on the ages. There is nothing called an iPod being launched and therefore you have a big idea of innovation which will go away. Number two. I have to understand my incompetence, I understand that my inability to be able to understand what is happening in the interface of technology in our company, of retail company and our company, of financial service. There is a team out there who understands it better so instead of being "Mr Strategist" who gets it all right, I might as well look at my incompetency. I have no idea, and therefore, my business should be to make sure those teams get it right. Therefore, in HCL, we ask the question- what can I do for you to succeed rather than this is what you should do to succeed. The answer to that question is the difference between one company and another. Q: Going back, when you took over as President in 2005, Shiv Nadar, the founder of the company continued as CEO. Did you feel crowded in because CEO is still the more executing authority than the President?
A: I think Shiv Nadar is a visionary and if Shiv Nadar had continued running HCL, I think we would be far ahead compared to where we are today because of the experience and the thought he brings to the table. He decided to focus more on philanthropy and that is the reason I came in. I was not a willing customer to come in because I love these smaller companies and didn't like the larger companies. Therefore his guidance at that particular time, the company was big, the stakes were high was very essential in the success of the company. Q: HCL started off as a products company then you went on to Sunnyvale, California to set up a plant and try and sell computers in US. But in your own words, "we fell flat on our face, nobody in the US wanted the world’s fastest and the best computers from an Indian company." Does that still hold true or has the attitude towards Indian companies changed?
A: It has dramatically changed. Today, we have 18,000 people developing core technologies for large corporations worldwide, the Boeings, the CISCOs, the Microsofts of the world and we are filing patents. I think India is celebrating intellectual power in the world. Q: Could we be at a stage where Indian products will be accepted and are Indian companies looking at that or is it much easier to do what we are doing at the moment?
A: Yes, if Chinese are then Indians are also. People today are more value driven than brand driven. At that particular time, when HCL failed to capitalise on the opportunity, it was because people were brand buying and not value buying.
Would that be the next right step for the Indian companies? My personal answer is no. I think the product stage has already been by very innovative Bay Area companies which are exceptionally good. The talent is there, the financial engine is there, the whole funding is on probability based, we are more assured, less risky here.
But with cloud coming in and multi channel commerce coming in, with so much turbulence happening in the market space, it is opening itself to what we call a combination of Product Service Company. Therefore, new generation of companies like salesforce.com, you cannot call it a product company, it is a combination of product service and there is where the sweet spot of India is. Its dominance on service, and product development, it can partner on innovation and create product service companies, which I think is the nextgen company.
We are moving towards the product is not a differentiator, it is actually the value delivered which is the differentiator. So if you add the product you can buy it. You can co-innovate it or you can innovate it. You combine that with service or a financial package and then you deliver the value to the customer that is of more value to the customer than the gizmos the customer has been buying. Q: Taking a look at the current market environment, while most of your peers were pretty cautious your last quarter was much better than others, you have added almost a USD 1 billion in new businesses. You see a lot of opportunity in the churn that is happening; it is about USD 40-45 billion of contracts are coming up for year 2012. How much of that as a percentage can come to Indian companies?
A: I truly believe that is the mother of all battles. So the market is looking at the opportunity from different lenses. The overall IT spends is going to come down or remain flat and that is why the market is worried. As far as I am concerned, I am excited because this is the first time people are open to changing hands. As I said, tough times drive tough decisions. So people are willing to move out of the IBMs and Accentures and HPs of the world predominantly because tough times are ahead and therefore they are looking for alternate opinion. Q: I am sure the IBMs and HPs of the world are also aware of that?
A: That is true. Q: So won't they be ramping up or scaling down?
A: The question in any strategy is before the giant wakes up, can you go in and clean up the shop and go away, and when the person wakes up, there is nothing left. Q: Are you saying the opportunity is USD 45 billion?
A: I think the opportunity is USD 45 billion and statistics have shown that it initially was only 5% of USD 45 billion. Now at this juncture, it is 30% of USD 45 billion and I can guarantee in three-five years’ time, it should be 100% of USD 45 billion. Q: Who will the competition be for that – Indian companies?
A: I think very innovative companies. There will be US companies, European companies, Indian companies everybody will because this size is too big. HCL has shown it can be done. When we did Nokia, Reader Digest, when we did a lot of these deals which we have announced people believed it could not be done. Now we have done it, we execute it and we have renegotiated the contract and renewed the contract now people are taking it seriously so everybody will follow. Q: Whenever you follow, it will get little more difficult for HCL. Will your margins come under pressure and will you go for margins or go for revenue?
A: There are many questions so let me split that. At HCL, we get extremely excited about challenges at the cross road, predominately because we as a company believe that the core competence this company has is to innovate at cross roads. Whenever we see darkness on a race track, we explorate because we know we will be able to navigate it better so more the competition we will vacate this place and go somewhere else and we are very innovative in doing that. Q: You will always find Blue Ocean?
A: We will always find Blue Ocean. Our whole mantra is not to complete. We are not in the business of competition. Q: What point would you look at – is it margins falling down, at what point do you say that this business is not worth it, let me go?
A: The competitive differentiator. So when we go in to our customer win situation and do not create a WOW (Wealth out of Waste) for the customer and the customer says all of you are equal and now I will look at the price that is the time to exit that business and we are ruthless about exiting a business. Right now, in total IT outsourcing, we are creating a WoW because we have automated systems and processes.
Let me come to your questions on margins. That is an excuse. A lot of sales personnel will give their respect to the companies that they will lose deals to HCL because of price, that is not true. No customer, even if National Stock Exchange were to outsource its running will it outsource based on competence or will it outsource based on price. That is the fundamental thing people don’t understand. Q: Given a standard level of competence, will price come into play?
A: We believe that at 15% margin, we have taken a decision we will be able to grow faster than the competition because we have chosen market space which lends itself to a 15% margin not the discreet space which lends itself to a 25% margin. That is the strategic choice we have made.
I am very confident of retaining this margin. I am very confident of us expanding as we go along because you must remember we have signed 2.5 billion dollars in the last 6 months. USD 2.1 billion is in Fortune 500 companies. Once you are inside the door then you can do Tandav Nritya. That is what HCL strategy is - you get inside the door and then the customer will start spending on transmission or analytics, multi channel commerce, on SAP implementation. Therefore, all the market share you have an opportunity to get it, you have an opportunity to expanding the market share, the margin share everything you have an opportunity. Today the turbulence is happening how will you create market share, how will you create margin share, how will you do anything. That is the reason I believe that till 2014 a lot of turbulence is happening in the market space. This is the right opportunity of HCL to step inside the door and then expand and that is what we will do. Q: What are the verticals that excite you? Is it financial or manufacturing, is it the whole mobility where we are seeing people using small instruments to access the net?
A: I think HCL's vision is that at the end, the market is going to move towards spending on revenue creation through technology and that is going to come in the digital world, whether it is coming to mobility or multi channel commerce. Therefore, which industries will adopt that? Retail, financial, manufacturing and utilities will adopt that – these are four industries which will earlier adopt us otherwise they will go extinct. Therefore, our belief is to try and get in to these industries, in the Fortune 500 or the global 500 of these companies very quickly and then try and get a higher and higher share of the transmission budget; that is the whole strategy. These are the four verticals which are very-very exciting.