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

He wrote the book on a philosophy known as 'employees first, customer second.'

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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.

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