HCL Technologies, the fifth largest IT services firm in India, recently completed the largest tech acquisition ever for India in December last year. HCL acquired UK-based Axon in a £440 million (US$655 million) acquisition outbidding Infosys in the process. The new entity created was called HCL Axon. Brian Pereira, the head of HCL Axon for Asia Pacific, Japan and Middle East, was in Singapore in March when MIS Asia’s online editor Zafar Anjum caught up with him on the phone. A new model of governance of financial institutions is emerging and we will be a big participant in that process, he said.
Here are excerpts from the interview.
Let us start talking about the HCL Axon acquisition. What is the significance of this deal for your company, and for outsourcing in general in India or the Asia Pacific?
We’ll start with outsourcing in India, because there is an evolution that has happened or is in the process of happening around outsourcing as a competence, and where it has evolved to is the fact that not only do we want to do technology outsourcing, but we also want someone who can actually give us good business advice, who can be our partner through good times and bad times, especially now, and who can also bring a dimension of business acumen with specific business and industry expertise to help me create an advantage in my business. So that’s the evolution.
And when we move on to what value Axon brings to HCL, I think at a time where we were looking at a way to fill the gap in our transformation services with something that was very meaty, very business-capable, that brought a lot of industry specialty to HCL’s stables, that was the justification for the Axon acquisition. So what they bring for us is a business case, business benefit-driven approach to implementing SAP.
And we only do SAP in HCL Axon, and we are the largest only-SAP partner globally. So we only do business benefits and a benefits-driven approach to implementing an enterprise application, a package enterprise application.
So (from) the value of HCL, it brings that significant capability into the space for enterprise applications for us, it adds a level of vertical expertise in areas such as aerospace, in oil and gas, in utilities, in retail, in consumer packaged goods and in public sector which we didn’t have a big global presence in, and a couple of additional arrows to our bow when it comes to delivery centres. So we added a major delivery centre in Malaysia, one in Puerto Rico, that Axon has brought over to the SAP-specific.
Can you also tell me a little bit about the background of this deal, for how long has it been going on? I understand the acquisition has just happened?
It started, I believe, in August. And you’ve seen the press around Infosys making an initial bid, and then HCL coming in and starting a bit of a bidding war with Infosys; so all that sort of resulted in us signing the paperwork for the acquisition on the 15th of December.
So we’re now in week nine or week 10 of starting integration and pulling the two organisations together. So what is actually happening is that we rolled all of HCL’s SAP capability into Axon, creating HCL Axon, and this is run as a separate division of HCL with its own PNL and its own board, its own reporting line which reports into London.
Are you globally the only company that does SAP outsourcing?
No, we’re the single largest SAP-only systems integrator. So everyone else has another practice, they have a Microsoft practice—we’re the single largest SAP-only systems integrator.
Why is there such a huge growth potential in the outsourcing SAP space?
It’s an interesting question. I think one reason is because people are looking to do more with SAP. SAP is a package application. It is a complex and capable application to run your business from all dimensions, it’s easy to implement, it’s got functionality way beyond what you could imagine to run your business, it’s got business templates for specific industries such as aerospace or retail, to deal with things such as grocery and merchandising, and people are looking to do more with it now.
In this sort of marketplace, they can either try to find money through a capital expenditure process to spend on increasing their footprint and doing more with SAP, or they could actually look at organisations like HCL and HCL Axon to come in and say well, we can manage your applications for you. We can deliver a 20 per cent cost savings today on managing your applications, and you can then use that 20 per cent to increase your footprint and create competitive advantage by increasing your footprint of SAP. So that’s the value proposition, and that’s why outsourcing is so critical.
Why is the global outsourcing market seeing a big upswing? Why are more and more countries outsourcing now?
I think one reason is because there’s a significant lack of skills. You can go across the region from New Zealand to Australia to Singapore to Malaysia and find that everywhere, there’s a lack of technology skills, there’s a lack of mathematics (skills), there’s a lack of physics in most universities in these countries. The enrolments for these particular academic disciplines are going down. So firstly, there’s a talent shortage, and that’s what’s driving countries like China, Brazil, Poland, and of course India, to receive interest in terms of outsourcing because they have readily available skill sets.
So that’s one. There’s obviously country arbitrage in terms of not playing that card. There are also things like cost of living, difference in terms of equations that you could also use as justification. But the skills shortage is the biggest and greatest worry. Everything else goes up and down. So sometimes it’s a benefit, sometimes it’s not. But with skills, it’s a structural problem.
What do you see as significant growth opportunities during the recession, and why?
During this period? Significant growth opportunities. We’re very good at transformation, and we believe we’re at a point in the market globally where it’s an inflection point. Businesses are going to need to transform, governments are going to need to transform, financial systems are going to need to transform. The mechanisms we use for governance are going to transform, and I think there’s probably an emergence of a new model, and we’ll see it in the next three or four years. We’re good at that work. We’ve been helping businesses transform to be more effective and more efficient in using smarter tools for the last 30 years, so I think we’re well-positioned to actually help make that transformation.
What is this emerging new model that you just referred to?
Well, it’s a new model of governance of financial institutions. It’s a new model of banking that will need to emerge because I don’t think the current system actually works.
The system is breaking down and we are in need of a new system. Is there anything outsourcing companies like you will do to help build this new system, in terms of providing tools and all that?
I think so, I think we’ll be big participants in that.
You just referred to the lack of mathematics scholars and physics scholars in these developed countries, and how developing countries such as India and China are taking advantage of it in terms of providing outsourcing services. That’s when I was reminded of Obama’s emphasis on education in America, trying to refurbish the educational system. So I’m trying to come back to this point about US president Obama’s cessation of tax incentives for companies that use outsourcing models and outsource jobs to countries such as India. Will it have any impact on your business, or on outsourcing countries such as India?
I don’t think so. I think tax breaks is just a nice-to-have, so any tax incentives you get from any government will be a nice-to-have that you will add to your business case. I think the core fundamentals of why you outsource to offshore comes from, 1) the capability that it brings to your business, 2) the flexibility that it brings to your business, and 3) the fact that you can scale up and down without having to go through large and drawn-out processes to scale up and down, looking for skills that might be too expensive. So, I think it’s actually immaterial.
Why is it a good time for IT companies to go out and secure businesses? What advice would you give to IT companies in the current environment?
Well, I would think, one, hold on to your high performers. Two, make sure they are happy because they will generate the new business for you. Three, go out and look for good salespeople, because this is the type of marketplace that good salespeople will become available to. And four, build a robust pipeline. And IT companies or technology companies that I think will eventually succeed will be the ones that are the true partners in a business. We all talk about partnership, but few actually live and breathe the transparency and trust that is required for a true partnership. So, I think out of this will emerge the true partners from an IT partnership. The rest will disappear or become smaller.
My last question is a bit speculative. When do you expect the current economic turmoil to turn into a recovery?
God, your guess is going to be as good as mine! I’m not an economist!
What’s your gut feeling?
Reading from the economists that our experts have, there are three possibilities. There could be a quick turnaround, 12-18 month turnaround, and that’s what everyone is referring to as the V-recovery. There could be a more long and drawn-out recovery which everyone calls the U-recovery, and then there’s a W in the middle somewhere; a recovery now and then a drop later on.
I’m not sure, I’m an optimist at heart, so I’d like to think that we’ll see a fairly quick one, but I understand that the nature of this crisis is very different from everything else that we’ve experienced. So I would put my bet on a bit of a long, drawn-out recession with a slow recovery at the end, so I’m probably leaning towards the U, if you wanted my personal perspective.
