In 2008, HCL Technologies acquired the UK-based systems application integrator, Axon Global, in what was the largest ever buy by an India-based service provider.
Steve Cardell, CEO of HCL Axon, spoke to Pallavi Aiyar about why, despite the reservations many analysts had, the move appears to have paid off for both entities. Edited excerpts:
HCL bought Axon for a hefty $658 million. At the time, many analysts questioned whether this made financial sense. Fifteen months later, how would you assess the decision?
Yes, at the time, a lot of people questioned whether it would work. They questioned if it would be a comfortable fit, if the strategic rationale would work and the investment itself.
Fifteen months on, I would say at the raw level it has worked. The people stayed and our retention in the year, post acquisition, was actually better than before the acquisition.
We have announced some deals that would not have been possible for Axon to win and could not have been possible for HCL to win on their own.
One of them being GSK, one of the world's largest pharma companies, where we are now their strategic partner for enterprise work across the globe.
More recently we've just displaced Accenture at Vodafone.
So, recognising the fact that last year was particularly challenging in our market, it's amazing that HCL was the only Indian offshore player to grow, in recession.
So, while it's still too early to say everything is perfect, at a base level it has worked.
What key areas do you still have to work on?
We are not totally there yet when it comes to making the integrated delivery model work.
We started with a set of accounts, saying here are a set of 10 accounts which are going to make this work. But, we still have pockets of clients where our delivery continues to look very much like the old Axon model, and other pockets where it looks like the old HCL model.
The integration component is still a challenge.
What were the benefits of the acquisition?
What we did with the bringing together of Axon's business and HCL Enterprise's business was, we created a different proposition in the market.
So, on the one hand you have the other regular offshore players like Satyam, Infosys, Congnizant, Wipro, etc, who offer a certain proposition to the market.
Then you have the global players like Accenture and IBM, who offer a certain proposition to the market.
The first group works on the idea of cost arbitrage. That is, to take a component of work and effectively do that work in a lower cost location. Now, there are a whole set of risks that come with that.
Challenges around cultural fit, in-country working models, etc, so when you take work that happens inside the walls of a company outside the walls and then outside the country, certain risks arise.
Of course, the costs are lower and that works well in some cases, but particularly in enterprise application, it doesn't work well at all.
But, the Accentures and IBMs have incredibly high structural costs. They come from an all-partnership structure and that's like a tax, so that on every deal, you are funding the all-partnership model.
Those organisations cannot make global delivery work.
The whole point of HCL Axon was to take the best of the Indian model of cost arbitrage, the ability to scale, and growth potential with an understanding of the in-country issues and the working practices that are different from country to country, and truly blend these into a global delivery model.
I think HCL Axon is the first company to actually make global delivery work.
Do you think your model is a precursor of things to come?
Yes, I think so. We will see the other Indian offshore players make their acquisitions soon. Cognizant, for example, recently acquired PIPC, a company in the consulting market.
They are trying to move up the value chain and get in-country skills, like we have.
Europe and the US comprise roughly 40 per cent each of HCL's business. How do you compare the two markets?
The US is more open and accepts innovation more readily and there are less structural barriers. In Europe, the UK is relatively open.
But, there is more conservatism, particularly in the central European economies, where employment laws require them to be much more careful around any change to workforce practices.
But, the continent is growing for us. Compared to our competitors, we employ 4,500 European nationals in Europe. So, we can credibly say we are not about taking jobs out of Europe.
Will you be looking at further acquisitions?
Yes, we will continue to look at acquisitions as one of our growth paths. Axon was a transformative acquisition for HCL. But, our general preference in acquisitions is based on the string of pearls idea.
You buy for the leverage and we continue to be on the lookout. We need companies who think like we think.
HCL promotes the controversial 'employee first' concept. How did that play out for Axon?
It was something completely new. First, we have to explain it to our customers, who might feel they are not the most important any more.
But, of course, saying employees first is not at all saying customers are not important. This is our thinking: where does our innovation lie in our business?
It comes from our front line. So, how do we enable creativity for our customers? 'Employees first' is about releasing the employee to be the place of innovation and the consequence of that is that our customers will receive the best service.
But, if you start from the customer and simply tell the staff what to do, you strip them of creativity.
Image: Steve Cardell