As the global economy slows down, demand for the services of Indian IT firms should shrink. But for Vineet Nayar, CEO of New Delhi-based HCL Technologies, one of India’s largest IT firms, the slowdown does not signal a need to “step on the brakes.” Instead, Nayar believes the way out of the recession lies in aggressively increasing investment, opening new offices and offering new services. “At HCL, we are stepping on the accelerator,” he told India Knowledge@Wharton in an interview at the HCL Global Meet in Florida in mid-November.
An edited transcript of the conversation appears below.
India Knowledge@Wharton: How has the world financial crisis affected the Indian economy, especially the IT sector?
Vineet Nayar: As I see it, business is moving East, as it has during the past five years. As global businesses adapt to this reality, you can see that GDP growth rates in China and India are significantly higher compared to those of most developing economies. As a result, we see a slowdown on one side and a partial slowdown and growth on the other. In a global economy, the short-term impact of what happens in one part of the world will be felt in other areas.
The global economy is resilient, however. Demand will be high in the emerging Asian economies. The global economy should be okay overall, though not on a country-by-country basis. In India, the economy is resilient for three reasons: First, the regulations on stock exchanges and funds coming in and going out of the country are prudent; second, the domestic economy and consumption are strong growth drivers; and third, India is a land of entrepreneurs. Entrepreneurs are opportunistic in the way they capitalize on opportunities. In India, we view the present environment as an opportunity rather than as a threat.
India Knowledge@Wharton: How has the IT sector been affected?
Nayar: In the short term, the IT sector will have to participate in the customers’ pain. If clients want to cut spending, the IT sector will have to help do that. Therefore, in the short term, there may be slower growth. In the medium- to long-term, though, India’s IT sector — including HCL — offers services that impact business performance. They help cut the cost of doing business, reduce cycle times and take out hundreds of millions of dollars in costs from business operations. We work with companies to resolve their current challenges. As a result, the number of deals that HCL has signed over the last few quarters is higher than we have ever seen before. I believe we will face challenges, but these will be the engine for growth for the Indian IT sector and HCL during the next decade.
India Knowledge@Wharton: ‘Kris’ Gopalakrishnan, the CEO of Infosys, was at Wharton a few weeks ago. He told Knowledge@Wharton that growth at Infosys was 35% a year for the past several years, but this year it will be 13% to 15%. What is HCL’s experience?
Nayar: At HCL, we do not look at the short term. HCL is an entrepreneurial company. If you are in a car race and you see a bend in front of you — which is what we are seeing now — you do not know whether there is a road after the bend or a dead-end. A typical, bean-counter CEO would step on the brakes because he believes there is a 50% chance that a road is behind the bend and a 50% probability of there being a dead end. At HCL we would say that if you were to look back at the recession of 2001-2002, and the research McKinsey did about it, that study showed that the 1,000 companies that emerged successfully from the downturn were those that used their cash, did lots of mergers and acquisitions, and stepped on the gas pedal or accelerator.
At HCL, we are stepping on the accelerator. We are investing more than we did before. We are increasing our sales headcount. We are reaching out and opening new offices. We are adding new services that we hope will accelerate our pace of generating revenues. Our short-term revenues are irrelevant, because these will change in proportion to what our customers want to see immediately. But in the medium- to long-term, what I am hearing the customer say is, “HCL, you are the answer to the problems I am facing.” That is why we are stepping on the accelerator.
India Knowledge@Wharton: British Telecom recently announced massive layoffs. This implies that following the problems in the financial services sector, capital-intensive industries such as telecommunications are starting to run into trouble. Where do you think problems will emerge next? As you step on the accelerator, what are you doing to prepare HCL for these risks?
Nayar: What is clear now is that all bets are off. The “favorite-son” attitude of the past is out of bounds. Everything is discussable. In the past, most companies were focused on reducing IT costs. Unfortunately, IT costs represent only 3% to 10% of total company revenues. Those who are trying to cut such costs are looking at the wrong end of the stick. You have to look at how you can reduce business costs by hundreds of millions of dollars — through the use of IT. Companies that have this attitude will get it right.
We have been saying this for a while but in the past people did not listen. In part, the reason was that we were the sole voice; moreover, since the going was good, nobody bothered about costs. Now our argument has changed. When we say we are willing to participate in our customers’ pain, we mean that we will help them develop new solutions that will reduce their business costs significantly. We will develop solutions on our balance sheet, without our customers paying anything, and we will take a percentage share of the business that accrues to our customers. We will share in our customers’ risks and rewards.
We are using this opportunity to accelerate along a very different track. Initially we were a company to which you could outsource work, and we were rewarded based on our efforts. Now our business model has changed. We tell our clients, “Let us create the value and the intellectual property, and let us share the revenues.” We are transforming HCL, and our customers.
India Knowledge@Wharton: Could you give an example of an HCL client, such as Boeing, and explain concretely how this model works?
Nayar: The Boeing example is interesting because the company wanted to build a complex airplane and they did it by involving partners. Boeing was like the technology architecture — and every partner interfaced with it. We participated in about 36 components. Some of them are on the risk-reward arrangement I described above; others will be paid for after the airplane is successful. So that was one experiment we conducted.
Another similar experiment was with Cisco Systems, where we took over an existing product, Cisco Works, a network management platform. The intellectual property still belongs to Cisco, but we took over its operation. We will add bells and whistles to Cisco Works, clean up the bugs and make the product more sellable. We believe that because we will deliver better services to Cisco’s customers, revenues will increase. We provide this service at a fixed cost, combined with a revenue sharing arrangement. Product revenues jumped up after HCL did this deal, mainly because we were focused on making the product more usable and obviously the usage increased.
A third deal we did was with Computer Associates, which had a security product that was not doing well. We took it over, took over all the people and started developing new features and functions for the product. We started delivering better services to the customers. Again, this was a revenue-sharing deal.
All these are examples where such partnership arrangements are working wonders.
India Knowledge@Wharton: HCL Technologies recently raised some $800 million, much of it devoted to the takeover of Axon, the SAP consulting firm whose acquisition you just announced. Could you explain the rationale behind the acquisition and how it fits into your strategic vision for HCL?
Nayar: Our strategic vision is that most IT companies more or less sound like people who capitalize on technology complexity, whether it is ERP, servers or SOA [service-oriented architecture]. You can use these acronyms and make things sound so complex that the customer believes he needs an expert. Then you position yourself as the so-called expert, and you try to solve the “technology problem.”
I believe HCL cannot be in the business of solving technology problems because technology itself tends to get obsolete. We saw this in our hardware vendor days. If you are in the business of selling technology, you force obsolescence by launching products that your customers don’t need. Over time, your credibility gap keeps widening. After a while, you become irrelevant.
We decided that instead of trying to solve technology problems, we should be in the business of using technology to solve business problems. In order to become solvers of business problem what does one need to do? First, we need to be able to understand the customer’s business, which I call domain knowledge. Second, we need expertise in mapping business processes. And third, we need expertise in realizing business value through implementing IT strategy. These three components are critical. There is an additional component of which technology you use to implement your solution — but to my mind that is irrelevant.
We looked at the IT landscape and decided this is what we want HCL Technologies to do. We wanted to go to our customers and say, if you are in pain, let us come in and help you reconfigure your business processes. Let us help make you more competitive, reduce your costs and increase your revenues. That is the kind of company we wanted to be. We looked at HCL’s capabilities in relation to this strategic vision, and we found that while we had tremendous technology skills, we did not have enough knowledge about business consulting. That is where Axon came in. They have business consulting capabilities that they have implemented in one technology area — SAP consulting — and we found it very attractive.
Once we had made up our mind to acquire Axon, we had to decide about the funding and financing. Today’s markets are interesting. For your own cash, in India you can earn a return of 11%. You do not want to use it. If you have cash in the company, you should pay it out as dividend because the investor expects a 30% return. If you can borrow money at 6%, 6.5% or 7%, then you should be taking a loan. We are a AAA credit company, and that is why we went out and borrowed the money to finance the Axon acquisition. That was a smart way of doing it. It reduced the acquisition cost and leveraged our balance sheet well. Our shareholders are happy, customers are happy, the acquired company is happy, the bank is happy, our employees are happy, everybody is happy.
India Knowledge@Wharton: One of the toughest challenges after a merger is post-merger integration. How much do you plan to integrate Axon into HCL’s operations?
Nayar: The culture of HCL has three tenets which are critical. Our first tenet is employees first, customers second. Employees are the soul of HCL. The second tenet is trust, transparency and flexibility — we believe in creating trust through transparency and then demonstrating flexibility. The third is value centricity — our business language is all value-centric.
With the Axon acquisition these are the only three things I want to do. I do not want to make them HCL-ites. It serves no purpose. I want to have employee policies that are employee-centric, which is good for the acquisition. I want to deal with their employees and their business and their customers and create trust through transparency and flexibility. It can only be good. And I want to have a conversation that is focused on creating incremental value.
The reason acquisitions go wrong — and I am not saying this will not go wrong — is people get obsessed with C-category issues. By C-category issues I mean questions such as, “How do we integrate them into our culture?” What culture? The culture is transparency, trust and truth. What other culture are you talking about? How do we integrate offices? How do we integrate back offices? Those topics are not relevant.
My view is that the reason the post-merger integration at HCL has a higher probability of success is because we are focused on creating incremental value. We are focused on our core culture of trust, transparency and flexibility, and we are focused on the fact that we are going to take care of the employee. If the post-merger integration focuses only on these three things, then the rest is irrelevant.
India Knowledge@Wharton: Are there any other gaps between your strategic vision and your capabilities that might lead you to make more acquisitions in the future?
Nayar: The answer is yes. HCL today is a respected company because of how it does things. Most IT companies in the world are known for their size or for the year they started, or because they come from India or Mexico or China. They are not known for the way they do business. HCL is the only company which is known for how we do business — which is the employee-first policy, reverse accountability, 360 degrees, all that stuff.In my belief, these core capabilities have created soil in a field for multiple plants to be planted. Those three elements are the core. Hence the stage is set for multiple entrepreneurs to join this field together.
We have already done control point acquisitions. We have done a couple of capital stream acquisitions, and hopefully soon we will complete the Axon acquisition. These are what I call multiple plants in the field. We will hopefully do three or four more acquisitions, because for the first three years of this transformation we created a field which was ready to germinate seeds and encourage entrepreneurs to join us in our common vision.
India Knowledge@Wharton: Let us talk about your personal leadership journey. Could you tell us about your career and how it led you to become the CEO of HCL Technologies?
Nayar: My career is short and sweet. I joined HCL in 1985. That was my first job out of college. The reason I joined HCL — and HCL was about $4 million in size then, and it is about $5.5 billion now — is that I was fascinated by computers. I was fascinated by what computing could do for the world. At that time the computing industry was very small. I stayed in the computing world for about six or seven years and then I decided I did not want to be an employee. I got an opportunity within HCL in collaboration with [HCL co-founder] Shiv [Nadar] to start a networking company because I was fascinated by the fact that the network was the computer of the future.I worked my butt off in the networking field and created COMNET, which is the Communication Networking unit of HCL, as well as the organization that does remote infrastructure management. In 2005, I got an opportunity to integrate both these offerings and bring about a transformation within HCL. That is the reason I am here.
India Knowledge@Wharton: If you think back on your career, what is the biggest leadership challenge you have faced? How did you overcome it, and what did you learn from it?
Nayar: I think my biggest leadership challenge came the day I realized that it is okay to not know everything. The more honest you are and share your vulnerability with people, the more they will rally around and fill the gaps. If you project yourself to be somebody you are not, you end up misleading people. People will not be able to fill your gaps. Therefore, when 1 plus 1 gets added, it actually becomes 1.5 because you have lied about yourself.
My biggest leadership lesson over all these years came the day I transitioned from projecting myself to be a leader to saying that I do not know how to lead. I have many inadequacies, and I tell people very clearly what I am not good at — and I have found that sharing with them my fears, my uncertainties, my doubts, helped attract the right kind of people.
Therefore, the success of HCL from 2005 to the present is not my journey, it is not my success. It is just the fact that the right kind of people rallied around HCL because they saw a leader who was not capable of doing what they have been able to do. It energized them, activated them, motivated them and gave them a blank slate to do something they did not have an opportunity to do. When more and more people join a revolution like that, you become a backroom leader who instigates people to do what they think is right for the company. And they create magic. That is what I learned about leadership over the last few years.
India Knowledge@Wharton: Collectively, what is your vision for HCL?
Nayar: The vision for HCL is very clear; it is to be the most valued company in IT services in the world. HCL has no ambition to be the biggest, because I hate being big. Big is slow, big is lethargic, and big is arrogant. I do not want to be any of this. I want to be quick; I want to do a few things for a few customers but create significant value. I want HCL to be the most valued company in the IT landscape.
India Knowledge@Wharton: What do you think is the hallmark of the emerging Indian multinationals? Do they have anything to contribute to the field of management science?
Nayar: Their first contribution is adoption of a multicultural workforce. I spoke in the beginning about the fact that the West is not going to be the only market. It is going to be West and East and therefore people will have to adapt to time zones, to multiple cultures, multiple currencies, multiple pricing. The ability of leaders of Indian multinationals to adapt this cross-culture, cross-currency, cross-product, cross-time zones reality to the new global workforce is significantly larger. I think insights into how to run a global corporation will come out of the Indian multinationals.
Number two, Indian multinationals have contributed to the creation of repeatable processes of very high quality. Third, how do you create skills? How do you take a complex job and de-skill it? The art of converting complexity into simplicity is something that Indians know very well. And to convert that into an industry is one thing we have done. Hopefully, the fourth thing, and I think it is the biggest contribution to the industry, is going to be the philosophy of employee first.