The momentum in HCLT picked up in early 2005. This coincided with S. Raman, managing director and CEO, taking early retirement and Vineet Nayar, formerly head of HCL Comnet, taking charge as president. The business was churning out $500 million in revenue at that time. When Nayar came on board in April 2005, the company was re-aligned along three clear lines of business: infrastructure management, BPO and ADM services (or what HCLT refers to as technology services). This was the beginning of what Nayar called HCLT’s ‘sidestep’ strategy informally and the ‘Blue Ocean’ strategy formally.

“The only way of coming out of the situation is to sidestep the market rather than engage it head on,” he explains. So, the company identified micro-verticals in each dominant market segment in IT outsourcing. In ADM, in terms of verticals, it decided to focus on capital markets, aerospace, life sciences, telecom services and automobiles. “That did not give us a position of leadership in ADM, but it gave us growth at industry rates,” he says. Then it picked out micro-horizontal niches — testing, legacy migration, content management and packaged software services.

The second leg of the strategy was to focus on service lines that had huge potential but did not have a large presence in India yet. Remote infrastructure management is one of those opportunities — it is pegged to become a $14-billion industry by 2010. Finally, there was BPO. Though the business currently accounts for 14 per cent of HCLT’s revenues, Nayar says its real value will become visible when BPO and IT contracts begin to converge. He sees that happening within the next 4-5 months.

The Game Plan
When HCLT closes its books for fiscal 2005-2006 on 31 July, its revenues will be well over $1 billion. The last fiscal has also been quite exceptional in terms of its overseas deals, when it won outsourcing contracts worth close to $500 million. The remote infrastructure business now accounts for 12 per cent of revenues, BPO accounts for 14 per cent and ADM is 74 per cent. If HCLT continues to grow at an average of 35 per cent year-on-year, by 2010 it will hit a little over $2 billion in revenues. Clearly, the incremental pace of growth will not be enough to catapult it into the big league.

So, what is HCL banking on to make the big leap? Primarily, it is the company’s ‘differentiated’ value proposition. Nadar says that in five years, more than half the company’s revenues will come from high-value services — the ones that have emerged through the ‘sidestep’ game plan. This implies higher billing rates — he hopes to cancel out the eroding billing rates in ADM ($15-$20 per hour) with higher rates in areas likes infrastructure and packaged software ($30-$35 per hour). “In infrastructure management, we want to get paid on the basis of the number of devices we manage. The number can be improved by using technology to drive efficiency,” says Nadar. But it’s a tough target to meet — till March, ADM services as a category accounted for 70 per cent of the company’s revenues. To reverse the ratio, HCLT will have to gain a foothold in at least five or six big-ticket, $1 billion-plus infrastructure contracts over the next five years.

That’s easier said than done. Simply because the competitive landscape for remote infrastructure management has gotten uncomfortably crowded in the last 12 months. TCS joined the fray in a big way last year, and now has almost 3,000 people deployed in this segment. Wipro, which entered around the same time as HCLT, has overtaken it in terms of number of clients and people — 165 and 7,000 respectively. But HCLT’s biggest problem is IBM Global Services — it has ramped up its infrastructure management team in Bangalore to nearly 5,000 people. According to sources, it is now looking for an inorganic push to ramp up the business.

Even HCLT’s differentiation in terms of its ‘collaborative outsourcing’ model, whereby it manages infrastructure but lets the client retain control of technology, is under threat. The model is now used not just by Wipro and TCS but IBM as well. The advantage that these players have over HCLT is size. It affords them the luxury of being able to sink in bigger investments and grow faster.

What emerges is that while HCLT has hit upon the right strategy, that is, differentiation, so has everyone else. As a result, most players have pretty much converged on the common emerging areas of opportunity — consulting-led solutions, remote infrastructure management, packaged software services and BPO. As the competition gets more intense, the big battle will be fought on one platform alone — manpower.

Nayar wants to recruit over 60,000 people in the next two years to fill up the six brand new campuses HCLT is building across the country. He has to build HCLT into a strong enough brand to do that and he doesn’t have much time — the multinationals will alone hire close to 50,000 people this year.

But that’s not his biggest problem. Nadar has indicated that in five years he’ll be ready to throw in the towel. That he can do, provided he puts HCL at par with its peers by then.
 

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