Well move to a new pricing model

Updated: Oct 29 2007, 07:41am hrs
You cant miss the glint in HCL Technologies new CEO Vineet Nayars eyes. Seated in his swank office, he cant hide his excitement as he narrates his plans of steering the company through its second phase of transformation. His eyes are clearly set on 2010, when he is aiming to take the countrys fifth largest software and services company to value leadership. Having started as a management trainee with HCL twenty-two years ago, he has driven the company through its first phase of innovation transformation as president. He is credited with scripting the success story of HCL Comnet and hence remote infrastructure managementone of the main growth pillars of the company today.

In the second phase of his transformational journey, Nayar is now busy trying to co-create IP with partners and create value around it. In a freewheeling chat with Pragati Verma, he narrates the transformation journey till now and the goalposts for the rest of the decade. Excerpts:

You have been steering HCL Technologies as president Will we see a new transformation roadmap as you settle down in your new role

In 2005, when all the offshoring companies had virtually the same offerings, we saw the disconnect with the market. While market needs value creation, everyone was selling volumes. We began with the Blue Ocean strategy of creating niches. We will continue on our transformation journey as planned earlier. In the first phase of transformation, we focussed on innovation and focussed a lot on employees. Now in the second phase, we will see collaborative transformation and we will offer services of a different nature in the third phase.

Knowing that value cant be created in isolation, collaboration is the way forward. It is the step two of our two-year old journey. By collaboration, we mean developing intellectual property with customers, which can be tested and sold to others. We fund IP creation. The customer shares his ideas with us and tests the IP by using it. Its just like the platform we have built for Cisco where we get a royalty from platform sales.

By the end of our financial year (June 2008), you will hear us making more announcements with our vendors and customers. In our next phase, you will see our offerings being disruptive where we will offer many more services based on the output and thus move to a new pricing model. I strongly believe that customers dont do business with you because you are the biggest but because you are the best.

By when do you expect to start reaping the fruits of this transformation

Our compounded quarterly growth rate is over 9% for the last four quarters and we have grown over 8% quarter-on-quarter for the last four quarters. Attrition has gone down in the last three quarters. We have also seen our productivity grow. While our revenue has grown 43%, our manpower has only grown 25%. We started this IP creation process two years ago and right now, less than 5% of our revenue comes from it. By 2010, 50% of our revenue will come from services which we didnt offer in 2005 like IP creation leading to output based pricing, software as a service and service-oriented architecture.

Do you expect 2008 to be a challenging year for the Indian tech industry, with uncertainties in the US economic environment and rupee playing havoc

I am pretty positive. The overall global environment is very positive and the India story is quite established. Our order book is looking good. As for the rupee, we look at it from a business point of view and adopt instruments available with us to hedge for the rupee. We have hedged $1.2 billion and that will take us quite long.

You seem to have a better mix of services compared to your peers. Why doesnt it reflect in your margins

From number one position in 1999, we slipped to number five by 2005. Since then, we have been investing in moving ahead faster. Till 2010, you will see lower absolute margins than what we could have earned because we are investing back in business to create value. We find the current model, where you are paid on a per-hour basis, does not encourage efficiency. So, we will gradually move to output-based pricing, which currently accounts for only 5% of our offerings.

TCS has recently announced a $1.2 billion deal. Are you also chasing any billion dollar-plus deals Can Indian majors compete in that space

Our Dixon deal was the biggest tech deal in Indian industry till recently. It was $330 million over five years. We will see many more such deals. In the coming 18-24 months, ten-year billion dollar plus deals will become a norm. We are very clear about our Blue Ocean strategy and we are focussing on market spaces where others are not going and we can thus expect higher margins. We are chasing Fortune 200-1,000 companies and in this space, you can expect 5 to 7 year total IT outsourcing contracts, thus taking over the infrastructure, applications and BPO.