HCL CEO Vineet Nayar: Outsourcing is dead, and there’s nothing innovative in cloud technology

The customer always comes first. Except when it comes to HCL, the $6 billion Indian outsourcing — make that co-sourcing — giant led by CEO Vineet Nayar, who literally wrote the book on a philosophy known as ’employees first, customer second.’ In this latest installment of our CEO Interview Series, Nayar spoke with IDG Enterprise Chief Content Officer John Gallant about how that philosophy is fueling HCL’s rapid growth and why more CIOs ought to consider adopting it. Nayar also discussed how HCL has set its sights beyond competing with other Indian outsourcers like Infosys and Wipro and is squarely targeting what he believes are the many unhappy customers of services giants like IBM, Accenture and CSC. The outspoken Nayar took shots at the ‘fear psychosis’ created by services firms in trying to peddle their offerings and used a barnyard epithet to describe public cloud computing, which he claims isn’t ready for prime time. He also outlined HCL’s aggressive plans for hiring locally in the U.S. and Europe, and defended the company’s use of the controversial H-1B visa program. In addition, Nayar talked about the new goals for IT departments in 2012 and beyond, and explained why treating mobile as a technology ‘misses the point.’

Let’s start with an overview of the current services and capabilities provided by the company’s two units, HCL Technologies and HCL Infosystems. How do they come together and what’s the set of capabilities you bring to market?

HCL Technologies is a $4 billion global services company in the business of infrastructure outsourcing, application development and outsourcing, research and development, enterprise application services and business process outsourcing. HCL Technologies is spread over 22 countries and only focused on global customers. Infosystems is only focused on Indian customers and is in the business of systems integration.

Market research firm IDC described HCL as having the most cohesive and articulate vision in the IT services sector. What is that vision and how does it influence all that you do?

At HCL Technologies, we believe that our vision should be on two axes: an axis of what we do and an axis of how we do it. A complete vision is only formed when you have a unique identity on both those vectors. Let me begin by explaining how we are different in how we do things. As was true with the Japanese automakers, who took on U.S. automakers by innovating in how they manufactured cars, rather than what cars they manufactured, in the IT services space there was a gap in creating culture as a competitive differentiator. We came up with this philosophy we call “employee first, customer second,” with the premise that the employees are the true value creators and the true differentiators that customers are looking for from any company. Therefore, the core business of managers and management in any IT services company should actually be to infuse, encourage and enable employees to create higher value for its customers, and that could really create a competitive culture which is its unique differentiation. That philosophy was the first competitive differentiator we started creating in 2005.

The second [part of the vision] is in how we look at the industry. We truly believe that in the ongoing, low-growth, recessionary environment, there are three critical strategies the customer would need. The first is that he would need a very strong vision of the digital corporation. You can call it multi-channel commerce, you can call it digital presence, e-commerce, whatever you may call it, but he needs a very strong digital presence. The second thing he needs is he needs a very strong middle office organization which is [focused on] the regulatory needs across the company. He needs better analytics, better control, better information, better integration of all his applications. And the third, and the most important, is that he needs to fund all that by reducing his run-the-business costs by 20 to 30 percent. So there are three parts the CIO needs to focus on. Change the business, the front end, converting to multi-channel commerce, digitalization of the organization. The second is to hold the middle and ensure he invests enough in compliance and regulatory needs, which are increasing, by consolidating applications. And the third is to find the funding to do the above two by markedly reducing redundant business costs. HCL’s vision is about how we can help you reduce 20 to 30 percent of your redundant business cost and redeploy that in making you more competitive in the new emerging digital world, and hence help you change how you service customers. That combination of how we deliver services to our customers and what we do for our customers is the reason we’ve been rated as number one in customer satisfaction by Forrester [Research].

Let’s explore the competitive landscape. I think people view HCL as competing with companies like Infosys and Tata, but you see your competition more along the lines of IBM, Accenture, Capgemini. Who are the competitors and how do you approach the market differently?

HCL’s philosophy on competition is more like the thinking around Blue Ocean [Strategy]. We truly believe that discrete outsourcing, which most of the Indian IT providers provide, is a very crowded market and differentiation is very difficult to achieve. But in the total IT outsourcing market, which is dominated by the EDS, Accenture, IBM, CSCs of the world, there is a huge discontent within the customer community on the way the services are being delivered, the lack of transparency and flexibility in the contracts. So we are sharply focused on the global IT outsourcing, dissatisfied market, which is coming up for renewal, and said that we will build our business case on transitioning from existing contracts with IBM, Accenture, EDS, CSC, Capgemini, and give the customer the cost advantage, the flexibility advantage, the transparency advantage, which he or she is really needing. We find our [market] to be the dissatisfied customer of the large global players. That’s the reason we have been so successful in transitioning some of the biggest names in the world very successfully from some of the major vendors. Having said that, we are not naïve to say that we compete with IBM or with HP. We have carved out a segment, which is the dissatisfied customers of these companies, and we compete in that segment, rather than saying that I compete with IBM and Accenture. We are, let’s say, a $4-5 billion company, where Accenture is a $25 billion company, so it’s wrong to use the word competition. We have defined our own Blue Ocean market and that market is the dissatisfied customer of the global five major companies.

Go into more depth about why these customers are dissatisfied. What are these big companies not doing for them today?

We used to sell IT products and services based on a lot of hype — there is a new technology coming in, there is a disruption coming, and you will become obsolete and be left behind. There was a lot of hype in sales, which created a skill gap, a knowledge gap, a perception gap, and based on that fear, the customer used to go ahead and sign contracts. That’s what I call the fear psychosis. The second [thing is] that most of the contracts were what I call the “trust-me contracts.” That means, I will do whatever is required to be done and you need to trust me that I will be able to execute it. Therefore, the contracts were largely one-sided. In came recession. The customers suddenly figured out that all the technology which they had bought was actually not needed, because they did not invest further in the data center and nothing happened. No companies shut down. In 2008, they suddenly figured out that vendor volumes of business went down and they wanted their contracts on IT services also to go down. They did not go down, because the contracts were one-sided. Number two, they wanted more transparency when technologies like virtualization came in and reduced the data center footprint markedly, application portfolio optimization came in where people started killing applications rather than building applications, and enterprise applications like Oracle came in where legacy platforms were killed. Whenever the customer wanted to indulge any of these or use any of these areas, he was put up against this contract, which was largely one-sided, which did not allow him the flexibility he needed to respond to the 2008 recession. That resulted in a significant amount of dissatisfaction. Unfortunately, some of the global companies did not demonstrate the flexibility which was needed and address the biggest pain point of the customer. Instead of agreeing to the customers’ calls for emergency actions, they were largely focused on their P&L and their stock price. Then these contracts came up for renewal.

Typically in our industry a contract which comes up for renewal, 95 percent of the time it gets renewed with the same vendor. Now, that [turnover] ratio of five percent has gone to 30 percent because customers are saying: ‘Now I know exactly what you stand for and I remember how you behaved from 2008 onwards, and I do not want to do business with you, irrespective of what you may say.’ A significant amount of churn has started in the market. Added to that, competitive companies like HCL have come in during this period, have successfully demonstrated that they can do the same thing, and they can do it with a more flexible contract, a lot more transparent contract, and bring about a lot bigger saving for the customer. There is a real choice for the customer. So a combination of significant dissatisfaction, thanks to how they behaved during the recession, and an alert customer who wants now to be in control of his IT budget and doesn’t want to get into what we call a “trust-me contract,” and a real innovative option in the form of companies like HCL, is forcing a behavior in the market which has never been seen before.

When you look at data which says that $48 billion worth of contracts are going to come up for renewal in calendar year 2012, and if you estimate that 30 percent of them will change hands, that is $15 billion. That is the reason HCL continues to grow between 20 percent to 30 percent year-on-year. Overall IT spend is not growing, but the churn is so high that the addressable market is very large and therefore the growth of HCL is very large.

Your fiscal 2012 second quarter results were very strong. Do you attribute that growth to this churn?

That is correct. We not only announced strong growth, we also announced that in the last [reported] quarter, which is October, November, December, we did a billion dollars of large transformation transactions, moving them away from the global five. That was a huge quarter, given our size and scale. Unlike the commentary of a lot of our colleagues in this industry, our view is that for innovative vendors who are offering solutions to customer pain points, the opportunities are immense. If you take a race car driver, he sees an opportunity on a turn or a bend. He doesn’t see an opportunity when there is a straight drive, and that is what at HCL we see. We see a bend there and we see a significant opportunity when customers are seeking out innovative vendors who are going to work in the fashion in which they want to work rather than work in a fashion which historically the vendors are used to working.

When we talk to CIOs today, we know that the big things they wrestle with are these major transitions around cloud, mobility, consumerization of IT. How is the HCL portfolio changing to help customers deal with these big challenges and these big trends?

I do not believe public cloud to be a strong enough proposition for G500 [global 500] customers in the near term, predominately because the technology is available in the private cloud in the form of virtualization, so they can get the same cost benefits. The security concerns in public cloud have not been addressed to the satisfaction of the G500 customers. So with no economic gain and security concerns, the public cloud adoption is only in the periphery of the company rather than in the core applications of the company.

I’m sorry to interrupt, Vineet, but I’m told that you have said that cloud is bullsxxx. Is that true?

That is true.

That’s a pretty strong statement.

The reason I am saying that is that every time we hype up technology or hype up a trend and try and create a market out of something, the CIO is inundated with requests from the board in terms of ‘why are we not on the cloud?’ If you truly look at cloud, it has two axes to it. The one axis is technology, which is largely to do with virtualization, which is available for you to do it in your own data center. You can virtualize your own data center. Second is the funding of it: That is, it is on-demand funding. IBM tried on-demand for many, many years, so the concept is nothing new. If you remember that all the ecommerce data center companies which were opened which were offering services on demand, have virtually died.

So therefore, my statement is the fact that there is nothing innovative in the technology so far. The innovation is only when salesforce.com kind of companies come in with largely peripheral applications. I have not seen anything on the cloud, either from a technology point of view or a cost point of view or an application point of view, where people will put their legacy on cloud or Oracle on cloud. I’m talking about G500 customers. Cloud adoption will largely be with cash-strapped SMB customers or with peripheral applications where the CIO of a G500 doesn’t believe it to be strategic and is okay with adopting something on the periphery, which is salesforce.com or Workday or any of these applications coming. I truly believe for anything big to happen, like e-commerce or multichannel, there needs to be a huge demand from the customer and a disruption in technology and cost for a massive adoption of that trend. That’s why I made that comment.

Okay. So in terms of these other forces that are driving changes in the IT shop, how are they changing your portfolio?

Right. So first is on cloud, let me complete it, we are amongst the biggest on converting our customer applications to private cloud. Data center virtualization and adoption of private cloud, and converting applications around the service bus, we are amongst the biggest in consulting and helping our customers do that.

The second big trend is around mobility. I think there are two trends in mobility. Number one, companies are becoming digital in their presence and digital companies are largely apps on taps, which are all your mobile apps. Therefore, it is not just a technology question anymore of how can you convert applications into mobile or how [customers] can get access to my website on the mobile. I think the critical question is what is the innovation on a mobile app which you can get from me and therefore experience my company distinctly and differently compared to how you will experience my competitor? The moment we treat mobile as a technology [shows] we missed the point. I think it is an experience issue. The solution to mobile is not a technology answer, it is a combination of business and technology sitting together and creating a unique experience for a customer in the digital world with apps on taps. That’s where we are going on mobile. We have a huge mobile presence and we have a lot of non-IT professionals helping customers build mobile.

The third focus is the multi-channel commerce, which is where HCL has made the biggest investment. We truly believe that we have moved into an era where people are wanting more from each customer rather than more customers. To do that you should be able to listen to social networks, do analytics and trend lines of the customer who is visiting your site and beam him content and beam him campaigns so that he can get more from you. So, a combination of chatter on the Web, a combination of analytics on the customer, a combination of real-time response and a combination of experience and an ease of transacting with you on the Web, and giving a unique identity experience to the customer is where the whole world is moving.

These are the three big bets which we are taking and have significantly invested in all three of them.

I want to go back to the philosophy that you mentioned early on — employees first, customers second. Can you tell me how that really translates into day-to-day action? What does it actually mean in the way that you work?

Let’s say that we are doing an SAP implementation for our customer, or we are doing a supply chain or a multi-channel commerce implementation for our customer. There is a group of 150-200 people who are working on a customer project. Now the customer bought that service from you with a vision that these 150 people are going to think on their behalf and drive innovation for him in his unique fashion. HCL is in the business of enabling, infusing and encouraging those employees and giving them knowledge, training, best practices capabilities, so that they can create magic for the customer. Most companies are actually organized in a very different way. They are not organized to deliver value. They are structured around profit maximization and multiple divisions, and when they come together at the customer they are actually focused on profit maximization for their respective divisions. Eventually, [the customer is] what I call “in the hand of God.” Either finance or HR or the boss will tell [the service provider employee] what not to do, even if it is not in the interest of the customer, because the hand of God is too far away from you, the customer.

We saw that as a great opportunity. We said that if we actually reverse the organization and make the management accountable to delivering value to the customers, and have the managers and the management and the CEO’s appraisals done by the employees, then the behavior of the company will change. It will enthuse and enable the employees to deliver the value which the customer bought from us. At HCL, my appraisal — along with 6,500 of the managers — is done anonymously and the results of that appraisal are published on the Web for all employees. That changes the culture, where the business, the managers and management suddenly is not the ‘hand of God’ business, but in the business of enthusing, encouraging and enabling employees to create differentiated value. The customer sees the unique set of employees, who are highly energized, highly enabled, highly intuitive, and have access to all knowledge within the company, and therefore can create a higher value. That’s why in Forrester’s employee satisfaction survey, what you will see is we have been rated number one on customer satisfaction, are better than IBM, Accenture and all the other Indian providers.

One element is cultural alignment with customers. The employees are aligned with customers, significantly more than aligning with the company, and we believe by aligning more with the customer, the company will automatically gain. And we were right. If you look at our growth trajectory, we are growing at a much faster rate than the industry average.

Do you think that’s a philosophy CIOs should embrace within their own organizations?

The CIOs are embracing it. We have held 86 one-day workshops because after I wrote the book, Employees First, Customers Second, we had a lot of requests from the CIOs to [learn more about] the philosophy and some of the tools which we have implemented. A lot of CIOs are adopting these tools in their own way and helping organizations move toward getting more out of their people. Right now we are only talking about CIOs, but if you really ask CEOs their biggest challenge is how to get the most out of the human capital they have. And they are not happy with what they are getting. So this is a big, big ticket item for them. And the reason we are [seeing interest in] these sessions we have created, these workshops we have done for our customers, is that all of them are trying to understand 1) how can we get more out of people, 2) how do we align our people with our vision, and 3) most important, can culture or how we run our company be the core competitive differentiator in years to come? There’s a lot of interest across the world on this philosophy and a lot of CIOs are in various stages of adoption of this.

There’s a lot of focus within IT shops on automation today. Does automation in the data center obsolete outsourcers ultimately?

I don’t think so, but it’s a very interesting question. The traditional outsourcing companies have always believed that their core business is manpower outsourcing — they can take out your expensive manpower or less-talented manpower and give you cheaper manpower and more talented manpower. Innovative outsourcing companies like us, are actually redefining the word to ‘co-sourcing’ rather than outsourcing. We believe it is more about tools, processes and industrialization. So what we are offering our customers is that by industrialization, implementation of ITIL, implementation of tools, with our competence and capability in these areas, we would be able to reduce costs between 20 to 30 percent offshore-to-offshore or nearshore-to-nearshore. Without changing the location or the country of the employee base, we can take off 20 to 30 percent because of our own IP, our own toolsets, our own dashboards and our own expertise in use of these things. That is a competitive advantage. Therefore, the traditional IT outsourcing companies, including [Indian companies], are seeing a slowdown, and the innovative IT companies, which are leveraging tools and technologies, are seeing fast growth.

You’re doing a lot of hiring in the United States. Why the expansion and what roles are you hiring for?

When we started looking ahead, we asked what would be a competitive differentiator for HCL in 2015? What we discovered was in 2015 there will be lots of people whose nephews, sons, daughters would not have any job when they graduate from college because the state of the economy doesn’t seem to be getting better, especially in the U.S. and Europe. The scenario we painted for ourselves is that in 2015 lots of buyers will be more socially aware and responsible [about hiring] than they may be today. A similar thing happened when we talked about “green” a few years back. Green adoption five years ago was optional. Today if you are not green as a company, a lot of customers will not buy goods and services from you.

By 2015, if you do not demonstrate yourself to be socially responsible in the communities where you do business and you’re not in the business of creating jobs in the community, the customer base is not going to do business with you. Having decided that we would be in the business of creating jobs, we [then determined] how we can create jobs despite the cost difference between the U.S., Europe and India. That leads me to your previous question [on automation]. We developed and invested significantly in tools and processes and industrialization, and joined hands with the local community colleges and colleges, so that we can train the engineers while they are in the final year of college. We joined hands with the local governments, local councils which are interested in creating jobs and created a business model in which we believe we can deliver IT services from near-shore at affordable cost. Not at the Indian cost, but still at affordable cost. We believe as we mature this model by 2015, we would have a very compelling proposition for our customers at affordable cost and will be seen as a socially responsible business which has created jobs in the community and that will be a competitive differentiator for HCL, just as ’employee first’ is today.

HCL is one of the top users of the U.S. H-1B visa system. How do you respond to critics who say that outsourcers are abusing that system and that that ends up costing U.S. IT workers their jobs?

First, amongst the Indian players and the global players, HCL is amongst the lowest users of H-1B because we do a lot of local hiring. That’s correcting your facts. Number two, unemployment in the IT workforce in the U.S. is 3.8 percent, so there is a significant skill shortage in U.S. We have only two choices, to either invest in creating a skill pool, which is what we are doing under our socially responsible initiative, or you have a visa regime in which you can bring in the talent pool. You must understand that IT is now all about survival and competitive differentiator, and it is not about cost reduction. The answer to the critics is that, number one, IT unemployment today is only 3.8 percent, so we should not [confuse] it with the overall unemployment rate of 8 or 9 percent. Number two, if there is a skill shortage, there will be a competitive disadvantage which companies will face. Number three, we are working very hard to expand the skill base within the U.S. and European geography so that we hire more locally. Number four, the reflection of that is the lowest usage of H-1B by HCL compared to some of our colleagues in the industry.

Vineet, HCL is listed as number 8 on the top 10 list of H-1B visa approvals by the Citizenship and Immigration Service. That’s where my data is coming from.

Once again, most of our colleagues in the industry are above us. We are eight because of our size and scale.

I wanted to switch over to look at the market in India. How significant are the hiring, wage and skill acquisition pressures that you face in India today?

I think it’s a very interesting question. In India, there is an abundance of engineering colleges and a lot of workforce joining the IT services pool every year, and therefore the supply is significantly higher than demand. I think the IT industry is not hiring more than about eight percent or nine percent of the total engineering pool which comes into the market. However, most of this engineering pool is not employable, predominately because of the quality of education. Some of these education institutions are not something to write home about. What the industry has done uniquely different in India, which is what we are attempting to do in the U.S., is to go back and invest in educating those low-quality engineering colleges and improve the standard of education by investing in back-to-school programs. With the back-to-school program, the industry has taken charge of this issue and, therefore, there is a surplus of people available as long as we keep investing in that program. There has been no salary increase at the entry level, it’s marginal, for the last 5-7 years, predominately because the industry keeps on expanding the pool of available skills resources, which is what our intention over a long period of time in the U.S. and Europe is.

What do you think the future of outsourcing holds? What would we expect HCL to look like in say 3 years from now?

First, outsourcing is dead. Co-sourcing is the only way to go. The customer has to be in control of their destiny. It is impossible for somebody else to control the destiny of the customer, and therefore you will not hear the word “outsourcing,” you will hear the word “co-sourcing” going forward. The second aspect of co-sourcing is going to be that the customer is going to be more concerned about revenues than cost, more concerned about innovation than cost, and therefore unless the co-sourced vendor has an answer to what innovation and what revenue increase ideas he brings to the table, and how he funds it by reducing cost of running the business through industrialization, he will be out of business. Now, that is very different to our current offering, which is still about on-tap, high-skilled resources, low-cost resources — it is all embedded around resources. And I think that is going to dramatically shift around innovation, around service delivery, around industrialization and around revenue increase.

It’s an election year in the U.S. How big an issue do you expect outsourcing of U.S. jobs to be in this election and how concerned are you about any potential backlash to that?

I think it is going to be a big issue, as it has been a big issue in all elections, and for the right reasons. Jobs are important in any community. And a debate on jobs is the right thing to have and if you are a politician not addressing the concerns which people have around jobs [you’re] not doing the right thing. Having said that, I truly believe that a lot of people in the U.S., Europe and India understand the correlation between growth and jobs. Let me take you back to India. A lot of Indians, for a long time, believed that allowing foreign investment or allowing any of the global competitors to come to India will take away jobs, and therefore we would not allow Coke and Pepsi and IBM or anybody to come into the country because it would take away jobs. Over a period of time, the population matured in thinking that actually by encouraging investments to come in, we created a global, connected country which gains far more and will become globally competitive.

I think that getting the best and brightest to work for U.S. companies in the U.S. will create a competitive advantage for you, as is slowly being understood by a lot of the mass community within U.S. and Europe. Some leaders will run ahead of other leaders in connecting the dots, especially because the [IT] unemployment is only 3.8 percent and the customers are screaming for a higher skill set, and that is the competitive advantage. I believe in this election you may also see some smart people connecting the dots and talking about making America more competitive than it is, and people will understand it. I’ve seen that change happen in India. And so the debate is right. I think the tenor of the debate will change as people understand the issue more and more through forums like yours, where you educate people. More debates will happen, but I am okay with debates. I’m okay with all kinds of debates because they help us reach the right conclusion. In the end, we have to be creating jobs for local communities where we do business. I’m committed to that.

If someone in our readership base today is a customer of IBM or Accenture or Capgemini or CSC, what do you want to say to them from HCL?

They are extremely good companies. However, if you believe that you are not getting what you want for your competitive advantage, both in the form of flexibility, innovation and cost, we would be happy to work with you in a co-source model to deliver flexibility and innovation at a cost which is much lower than is what you are currently spending.

Is there one key question that those CIOs ought to ask those companies?

I think the one key question they should ask themselves — is the vendor aligned with your goals? Is the vendor behaving as if he is aligned with your goals? And is the vendor demonstrating in every day behavior that he is aligned with your goals? If the answer to any of the above questions is no, then it is better for you to think about change today when the growth is not there, rather than think about tomorrow when you really need all your partners to be 100 percent aligned with you.

Vineet, is there anything that I didn’t ask about that you think is important for us to understand about the company or the market?

There is only one thing that I think we didn’t cover, which is that most of our customers’ answers to recessionary growth in developed economies is to focus on emerging economies and expand their business in the emerging economies. If the emerging economies also shut their doors, saying they are not open for investments from American and European corporations, we will have a crisis on our hands across the world. Whenever we look at things like increasing the hurdles for entry, either through visa regimes or through barriers for entry through regulation, we should be careful. The world is an interconnected economy today, not an isolated economy, and therefore we can logjam it very easily. In this world economy innovative companies need to go to emerging economies so that the consumers gain from their innovation. Same is true with emerging economy companies’ ease of entry into [developed economies] so that the economy keeps moving forward. If we raise trade barriers in this environment, we will lock the global economy into gridlock and I think we will see recession for a longer time than possibly we should.