With the revenues in its traditional hardware business shrinking, HCL Corp. is redefining itself once again. But will Chairman Shiv Nadar's final vision work?

By Anshu Tandon

As the strategic shift becomes clear, the logic too does. Finally, the hardware giant HCL is putting its chips on software, a transition that has, practically, put paid to the Rs 2,400-crore HCL Group's grand plan of becoming a Rs 10,000-crore entity by 2001. Even as it starts with a clean slate, software's newest entrant realises that it could never have become a global player in hardware; that technology is opening up a host of opportunities in software; and that it can leverage its capabilities as a manufacturer to build its new business.

All that should have been visible to HCL's visionary Chairman, Shiv Nadar, 52, yesterday. After all, if hardware has helped him understand his new customer, it should have also sent him the alarm-signals on time, helping him to manage the future smoothly. Indeed, HCL's about-turn has a lot to do with a poor estimation of its strategic prowess-economies of scale-and its obsession with non-core businesses, like telecom and power. As HCL swerved away from its core business, it stifled growth, raising questions about the corporation's survival.

Despite being a software sophomore, HCL sees enough opportunity in the business to succeed. That alone, if nothing else, should secure HCL's future. And Nadar knows that only too well as he crafts a strategy to make up for lost time. To drive the group through a paradigm shift, he is reversing HCL Corp.'s fractal state, where new businesses were spun off to foster growth. ''The fractal is a market adrenal pattern. This could change,'' explains Nadar.

It is clear that HCL Corp.'s days of dominance of the hardware business are numbered, notwithstanding its manufacturing capacity of 1,80,000 units. Not only are the margins in hardware down to a wafer-thin 8 per cent, the competition-from the $32-billion Compaq and the $74-billion IBM et al-is fierce. Admits Nadar: ''Our biggest aspiration was to become a mass manufacturer, and that we are doing today. But it is still not mass manufacturing in the real sense of the word. It is only manufacturing of a certain level.''

Nadar's biggest challenge lies in his ability to seamlessly mesh skills in hardware into aspirations for software. Five years ago, Nadar told BT of his desire to address the global systems-integration market: putting hardware, software, and networking all together, and making it work. But this is just one part of his theme to make HCL Corp. a global behind-the-scenes software and services company.

This new tack is already delivering results. In 1997, the group's software and services businesses contributed 62 per cent-Rs 1,483 crore-of HCL Corp.'s revenues. And software exports have grown by 82 per cent: from $160 million (Rs 640 crore) in 1996 to $247 million (Rs 990 crore) in 1997. In a span of 4 years, HCL has managed to virtually reverse its ratio of hardware to services turnover from 90:10 (in 1994) to 38:62 (in 1997). By end-1999, Nadar plans to bring it down to 30:70.

Steering this directional change is the fact that the group's fortunes have been depressed. Flagship HCL Infosytems-which vends PCs and servers-saw its revenues shrink from Rs 672 crore in 1996 to Rs 643.12 crore in 1997. And its net profits plunged from Rs 11.80 crore to Rs 5.09 crore. Over the past 3 years, Nadar has also dabbled in businesses as diverse as telecom, power, and lighting-only to abandon them later. Says Ashok Jain, 47, President and CEO, New Initiatives, HCL Corp.: ''We are focusing on skills that we will need to survive globally, and are building on a core competency that is feasible for our company. Manufacturing and telecom are definitely not.''

Such a consolidation has been facilitated by the changes in HCL Corp.'s top management team. For one, Arjun Malhotra, 49, the Vice-Chairman of HCL Corp., plans to sell off his 20 per cent stake in HCL Infosystems, the company he set up with Nadar in 1975. Actually, Malhotra is the third of HCL's 6 original promoters to opt out; a fourth, Subash Arora, 52, is planning to sell out as well.

That leaves Nadar and Ajai Chowdhry, 45, CEO, HCL Infosystems. Says Manpreet Singh, 35, Managing Director, Multiple Zones, who until recently headed HCL Infosolutions: ''Often, changes are too swift, and a business rarely gets a chance to flourish. The combination of a fast-moving organisation and the lack of processes can be heady-or disastrous.'' Either way, Nadar is quickly consolidating his hardware business in HCL Infosystems, which will cater to the domestic market as well as set up subsidiaries abroad to sell systems-integration services.

His investment companies recently made an open offer to buy back the shares of 3 loss-making group companies: HCL OA (the original HCL, in which the promoters have a substantial stake), IDM, and Network. All three will be merged with HCL Infosystems, which has already absorbed HCL Infosolutions. And BT learns that HCL-General Instruments and Comnet will be next on the merger table.

Nadar is also bringing his software business wings under one umbrella. He has set up a holding company, HCL Technologies, in the Bahamas. Its subsidiary, HCL Technologies America (as HCL America will be renamed) will be the holding company for HCL Consulting, the group's 4 joint ventures, and the other HCL Corp. subsidiaries across the globe. Finally, the Rs 327-crore NIIT will continue to retain its individuality, and manage its own subsidiaries abroad.

Posits Nadar: ''We are looking at a $1.30-trillion market, of which only a fraction is being addressed today. With Y2K, the Euro, and the Net hogging most of the energies, there is a whole lot of redevelopment work to be done that no one will even touch.'' Thus, the group is leveraging its dominance in the Indian market and its presence in East Asia to forge alliances with companies that have too much on their plate. In the HCL Group's kitty are joint ventures with the $800-million Perot Systems, the $1.89-billion Deluxe Corp., the $7-billion CSK, and the $100-million James Martin. Says Nadar: ''We are the largest infotech company in the country, and are well-entrenched in South East Asia through our subsidiaries and NIIT. That is the market that our partners are going to get access to.''

Thus, a 50:50 joint venture, HCL-Deluxe, gives HCL Corp. access to the $4-billion electronic-fund transfer business, which is growing globally at the rate of 20 per cent. Similarly, HCL-Perot Systems will target another booming market: outsourcing. While HCL will pitch for business in India and the ASEAN, Perot will use HCL's software resources for a client-base that includes the $75-billion AT&T and Swiss Bank (1997 income: $16 billion). Says R.S. Pawar, CEO, NIIT: ''They need access to our market, and we need access to theirs. So, we are bringing the two together.''

To see how this works for HCL, consider the company's relationship with the $50-million Concilium, a company with a niche Enterprise Resource Planning application for semi-conductor manufacturers. HCL not only develops the software, it also offers marketing and after-sales support to Concilium in its ASEAN offices. Says HCL Corp.'s Jain: ''We have no equity. It is a local Valley company with global customers, but does not want to set up a global support organisation. We have no intention of getting into products, which makes Concilium comfortable. And its cost and time-to-market is cut by working with us.''

Moreover, HCL's software services portfolio-technology development, software development, and professional support services-also reduces the group's exposure to risk. Explains HCL Infosystems' Chowdhry: ''We will not own the products. We will only provide assistance in making them. Even if the product and the technology are not successful in the long run, we will earn our income from development work.''

While it is clear that Nadar has lost interest in the hardware business, he is aware that HCL needs the reach of the domestic hardware business to market the services of its joint venture partners. Says Gus Blanchard, 55, CEO, Deluxe Corporation: ''We sought an Indian partner which, in addition to infotech strengths, also possessed the nationwide credibility to enable our partnership to be taken seriously.''

Strategically, however, HCL has shifted its focus to services such as maintenance, networking management, asset management, and systems-integration. Says Chowdhry: ''Services will bring in profits even if hardware sales are low.'' Adds Abhishek Mukherjee, 47, Managing Director, Compaq India, HCL's biggest competitor in the PC segment: ''HCL is equipped to handle large networks within a budget. That should be their USP in the global market as well.''

Similarly, HCL Comnet-whose growth has been stunted by a stagnant v-sat business-is changing tack from the networking business to becoming a service-provider. And so, charging clients per transaction instead of on the equipment sold. Says D. Ashok, 41, Executive Director, Coopers & Lybrand (C&L): ''More organisations in the West are outsourcing network management services as they did in the case of software development. This business is, definitely, more lucrative than the software business.''

Traditionally, HCL has been a marketing savvy group-not a quality-conscious or customer-friendly entity. Says Neelam Dhawan, 37, Vice-President (Personal Systems Group & Channels), Tata-IBM, who worked with HCL for 15 years before leaving in 1996: ''HCL is great at getting the big orders, but its problem has always been execution.'' In fact, when HCL tied-up with Hewlett-Packard (H-P) in 1990, Nadar used the opportunity to imbibe H-P's processes in all his companies.

NIIT was the biggest gainer. At present, 3 of NIIT's software factories have SEI Level 3 certification, and they expect to get SEI Level 5 by 1999. These will be crucial in making global clients comfortable with the HCL Group's off-shore projects. Agrees C&L's Ashok: ''Quality certifications carry weight if you are doing business in Europe, especially if your customers are large corporations, and a large chunk of the operations are being done off-shore.''

Nadar is also banking on absorbing his joint ventures' systems and processes to catapult his companies to international quality standards-something that will be crucial for HCL Corp.'s software and systems-integration projects. And would have otherwise taken him years to develop. Says Charles Aird, 52, Director, Global Client Consulting, Ernst & Young, who set up HCL Consulting: ''Normally, mutual market access is the most privileged partnership to have. HCL will borrow systems and procedures from its partners, which it will get because it is an equal partnership. That's why joint ventures are crucial for its future.''

And manpower? Here, NIIT will come to Nadar's rescue. Explains NIIT's Pawar: ''For routine jobs, such as Y2K, we deploy our GNIIT students. As and when projects come up, the HCL companies will borrow professionals from each other.'' But a shift system in its software-development centres-dubbed factories-could have repercussions. Warns Pawan Kumar, 49, President, IBM Global Services: ''The shift system does not work too well because software professionals do not like being treated as blue-collar workers.''

One final peg in Nadar's gameplan is the use of M&A for growth. Says he: ''We expect to see a quantum growth from friendly acquisitions.'' Financially, at least, Nadar doesn't seem to have any problems, with HCL America and HCL Consulting heading HCL Corp.'s structure. And a $500-million initial public offering for HCL Technologies will be floated later this year in the US.

Sums up Suresh Rajpal, 52, President, H-P India: ''Shiv has the vision. Financing will not be a problem. People abroad will finance a guy like Nadar, and will be looking for a spread of talent, which he has.'' However, as the HCL Group reinvents itself-yet again-Nadar is aware that he is a late starter. Moreover, if it doesn't work, there may be nothing to go back to the drawing-boards for at HCL.

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