India Knowledge@Wharton in conversation with Vineet Nayar
HCL Technologies CEO Vineet Nayar responded to the recent global recession by placing employee satisfaction ahead of customer satisfaction. The result was a bounty of winning ideas that translated into more business at the expense of competitors. In an interview with India Knowledge@Wharton, Nayar shares his insights into how companies can innovate as buyers’ preferences are changing, among other topics.
An edited transcript of the conversation follows.
India Knowledge@Wharton: Vineet, thank you so much for joining us today.
Vineet Nayar: Thank you.
India Knowledge@Wharton: When we last spoke in November 2008, you had said that HCL’s strategy to emerge from the downturn would be for you to step on the accelerator. In retrospect, how well did that strategy work for HCL in the past two years?
Nayar: I said two things. First, we would step on the accelerator. The second thing I said was that a recession was not an excuse, but an opportunity.
First the results and then the strategy. The results are in calendar year 2009 over calendar year 2008, which is a full reflection. In that recession we grew 21% year over year in operating profit and revenues. We are one of the very few companies in the world that grew. In calendar year 2009 we were rated as No. 1 in employee satisfaction. Our customer satisfaction [rate] went up by 43%. So when I said that it is a great opportunity for us to press on the accelerator and it is not an excuse, I was right in terms of the results.
India Knowledge@Wharton: How did this happen?
Nayar: The philosophy is very clear that whenever there is a plate shift in the world economy, the existing players have a great opportunity of stepping on the brake. The moment they do that like handing over pink slips, putting people in zones of uncertainty, suddenly going for cost-cutting in a bigger way than they should, you end up being in a situation where you create panic inside the organization and you translate the stock market panic into an organizational panic. There are always two distinctions. The way the stock market panics is not necessarily the way the organization is panicking. However, the stock market drives our action to such an extent that we go to the other extreme both on cost-cutting and the way we deal with employees.
So we said, ‘Why don’t we turn the conventional wisdom upside down and say employees first and customers second?’ which is our big mantra which has been followed from 2005 and stayed true to that. So we went and talked to all our employees and said, ‘You know what? We are in deep [trouble]. We have a problem. A recession has hit. We need your help. Tell us the ideas.” So we came up with a lot of ideas. The ideas were built out of consensus with the employees.
We launched the cost-cutting exercise throughout, but most importantly, the employees believed that they are part of the solution. They were not looking up to the management for solutions. Therefore, they went and increased their share of wallet in existing customers by the passion and the value they demonstrated. The total budget of a customer went down. Our share went up. We ended up growing while our competition ended up going down. No new service. No new geography. No new product. The magic of employees made the recession a great opportunity for us.
India Knowledge@Wharton: If you look at the U.S. economy today, one of the things that people are still worried about is why the jobs aren’t coming back, which relates directly to employee participation in companies. What can U.S. companies or Western companies in general learn from the way you have used your philosophy to turn their companies around during this downturn?
Nayar: I am not very sure I have all the answers, but I will give you assumptions. You have great brains in this country to think about what is good for them. But it looks like growth is going to come [from] emerging economies. Therefore, the products and services being consumed in emerging economies are going to be very different than what they are in the U.S. and Europe.
The second [assumption] is the demographic profile of your customers is going to materially change in terms of age. In the world now, 50% is less than 25 years old. The culture and heritage, because of the emerging economies, is going materially change.
The third is the way the buyers buy is going to change because this recession was also about a slowdown in buying rather than just an economic recession. Therefore, the buyer is going to be more skeptical and less concerned about bells and whistles and ask you very fundamental questions [about] the value you are creating. Now, if you want to solve this business problem, the only way it can be solved is by unleashing innovation. Right?
Therefore, how do you innovate? And who innovates? And where do you innovate? The complexity is so high that on one axis you have an emerging economy. It is a geographical expansion. On the other [axis] you have products and services. The third is the cultural dimension. And there are too many factors out there to innovate. So there is not one Google idea, Amazon idea, Dell idea or Microsoft idea. There are thousands of ideas, which need a little innovation at every point for you to be able to grow.
Now that can only happen if you believe that the true innovators are in the value zone, which is your employees in the interface with their customers. If the value zone [is] where employees are creating value, then the question you need to ask is what business should you be in? You should be enabling [and] enthusing those employees [that are] creating the value, whether they are based in America or in China. Once you recognize that, you will move away from what I call a command-and-control orientation in taking ownership of the result of the company and aligning your philosophy and thinking around valuing the talent that exists.
Once you do that and innovation starts coming in, new business ideas start coming in, obviously the employment increases, job rolls increase. My personal philosophy — and I may be wrong — is we are currently trapped in a mindset of a chicken and an egg. Is it a fact that new jobs cannot come without innovation? America is known for great innovation. If you lose that innovation edge, how can jobs [get] created? So the first thing we need to fix is to change the management structure and the management intention to try and create mass innovation, which is a little innovation happening in multiple places by changing the work style, which is what I call employees first and customers second.
Once that happens I can guarantee jobs will be created. We hired 1,500 people in the U.S. and U.K. in 2009, so we were net job creators. Why? Because we believe that the innovation has to be created in the value zone. They created it. Our business grew. Of course we have to hire then.
India Knowledge@Wharton: Speaking of restructuring of management, how have your clients restructured themselves as a result of the economic downturn? How has that affected the way they look at IT services?
Nayar: With the increase in complexity, the CIO (chief information officer) has actually been on center stage, because for everything now, technology has a solution. [You may] want to launch an e-commerce engine, which a lot of companies are doing. Insurance companies are becoming e-commerce companies. Product distributors are suddenly using e-commerce engines. Publishing companies are becoming more digital asset companies. So whatever you are trying to do in terms of reaching out to new customers, technology is the center zone. Until now the CIO was very happy being in control of his budgets. As long as the lights are on the CIO is happy.
The requirement of a CIO is very different [now]. One CIO told me [that] during the recession his budgets went up, not down. When I asked him why, he says, ‘My company has figured out [and] my boss has figured out that the more I spend on IT, the more I save on SG&A (selling, general and administrative expenses) and other operations.’ More and more companies are realizing that. The CIO is being reincarnated not as a guy who runs the business, but as a guy who will enable you to change the business. He will help you innovate and reach more customers than ever before. And he will add the experience dimension to your business, which you don’t have.
India Knowledge@Wharton: What is the right way for CIOs to be taking on that strategic role?
Nayar: First, let us talk about two shock waves. The first shock waves were in 2000 when we overspent and created a data center with an assumption that dot.com is the best thing that is going to happen. Then there was a recession and nobody bought anything and the world did not come to a halt. [That] means that the CIOs had overinvested in infrastructure. That was shock wave No. 1.
Shock wave No. 2 is this recession. In this recession a lot of CIOs did not invest. They did not change their licenses or refresh their assets and we thought that the world will come to an end. Nobody came to an end. We have not seen a single disaster being reported anywhere because of that happening. Through these two experiences, the CIOs are very clear that the technology firms are all about selling more gear with more bells and whistles. Some things they need and some things they don’t need. So they are very sharply focused on return on investments.
Now return on investment has taken a different form, which is what I call ‘business benefits’. The way we are proposing our services is that we will guarantee business benefits from the costs of the project you implement. Let’s say that a new SAP [project] is supposed to save you US$500 million. You know what? We are going to guarantee US$400 million of savings and, therefore, we will manage the change management of that. If the US$400 million doesn’t come then give up 50% of our fee or something like that.
India Knowledge@Wharton: Our last conversation was soon after the Axon acquisition and you had been very optimistic. (HCL bought Axon Group of the U.K. for US$658 million in 2008.) How has that worked out for you?
Nayar: Fantastic. Although I have given the credit for growth to the employee-centricity of HCL, if you see the fact that you press the accelerator and expended money on acquisitions, [it] sent a huge positive signal to our customers and to our employees. Suddenly the customer said, ‘You have new capabilities in SAP — bring them on.’ We suddenly had more to sell to our customers and we had more to tell our employees. A recession is a great time to do acquisitions because integration is much easier. If God had given me an opportunity of creating a recession, I would have chosen that time.
India Knowledge@Wharton: If you look at the global economy today as it is emerging from recession, it is almost a scenario of two worlds. On the one hand you have the Eastern economies — India and China — that have high growth, but low per capita income. On the other hand you have the Western economies — the U.S., Europe — with slow growth, but high per capita incomes. What implications does this have for the supply chains of your customers? And what strategy would you advocate to navigate in this emerging world?
Nayar: I can spend a day answering that question. The reason I am saying it takes a day is because it is a fundamental truth of our world that the markets are in emerging markets. The customers are in emerging markets. The growth is in emerging markets. The supply chains are in emerging markets. The innovation is here.
There are multiple aspects to it so I am just going to focus on one aspect. If you as an organization do not understand the global workplace and global work and convert this problem only as a supply chain problem in terms that ‘I will buy from China and sell in U.S., or I will buy in China, use my plan and sell in China,’ you’ve got it completely wrong. The cultures are different. The consumption patterns are different. Our experiment with Nokia in India has proven it. We were the first to launch low-cost cell phones. The whole market exploded.
People have to invest a lot more. I love Cisco and [its chairman and CEO) John Chambers when he put Wim Elfrink in India because he is saying that we need to understand what emerging markets are all about (Elfrink is Cisco’s chief globalization manager based in Bangalore). My short answer to that very big debate kind of a question is the fact that people are underestimating the questions you are asking and I do not think we have explored all dimensions of organizational changes that are needed. It is not a technology question. It is not a supply-chain question. It is not a balance of per-capita income. That is your future. Whether you like it or you don’t like it that is it. That is the truth. The question is, what are you going to do about it?
India Knowledge@Wharton: If that question were to be posed to you in terms of your leadership of HCL, what implications does it have for your growth strategy going forward?
Nayar: The question is that we cannot be a U.S. company, a U.K. company, a Swedish company, a Chinese company, or an Indian company. We have to be a global company. We have to understand the tools, processes, frameworks and ways of working that are going to dominate our thinking. If we cannot implement it across cultures, across price bands, across time zones, we might as well shut our business today. So the opportunity of saying high-quality, low-cost delivery from India as the core value proposition is obsolete. The question is, can I do something of value in Finland, Latin America [and] China, use the mathematical skills of Russia and use something out of India, and put all that together in multiple time zones and deliver value to you which you have not seen before. That is the value proposition that I see, [and] we have hugely invested in, and that is our future.
India Knowledge@Wharton: Today about 50% of HCL technology revenues come from the U.S.
Nayar: [It is] 60% to 65%.
India Knowledge@Wharton: If you were to look out five to 10 years how do you see that shifting? And what implications does it have?
Nayar: The implication that would have is what U.S. companies think their businesses to be. I am a U.S. company, I would see emerging market opportunities exactly the way Cisco and Microsoft are thinking about them to be the biggest growth opportunity they would ever have. And, therefore, our business in the U.S. will continue growing because of Cisco’s and Microsoft’s rewards. However, if people are going to believe that [they are] not going to step out of the U.S. and not going to globalize and not going to go to emerging markets, then [HCL’s] revenue from the U.S. will reduce because the growth is in emerging markets.
I am making a distinction between growth in emerging markets and who will be the market-share leader in emerging markets. I think innovation will lead. In India Coke and Pepsi still dominate cold drinks. In India the biggest brands are U.S. brands. So who is dominating the Indian market space on retail and consumer consumption? It is Sony and Samsung and GE. There are no Indian brands. So the emerging market of India has been actually captured by the global companies. Now if that trend continues 65% will remain 65%. But we hope our customers think of emerging markets as the greatest opportunity and re-innovate themselves to be able to meet that opportunity.
India Knowledge@Wharton: How do China and India factor into HCL’s future plans?
Nayar: China is very important for us. We had gone there three years ago. It is important [not as a] global delivery center. It is important because it is going to be a destination for future growth for all companies. The way HCL has adopted a China strategy is that we need to go there and understand China. We need to be Chinese in China. So it is just ‘wait and watch’. That is the simple mandate for us, which is what we did in Japan for 15 years. And today we are dominant leaders in Japan because we are Japanese in Japan.
I am very bullish about their market. But the rules and regulations of the market are going to be very different. The whole thing about China is the moment you say, ‘These are the rules and China doesn’t fit into those rules and … behaves very differently’ — you are fooling yourself. It is a very large economy. Obviously it will define its own rules in the way it wants to conduct business.
India Knowledge@Wharton: How much of your growth do you anticipate coming out of India itself?
Nayar: If you had asked me the question last time we met I would have said very little. But there is a fundamental shift in India. In the power sector, we have won quite a lot of contracts. The banking and financial [services] industry is just booming. India is busting at its seams in these sectors. But if you take the typical retail, manufacturing, media and entertainment sectors, [they are] still small. But [opportunities in] public services, the government, telecom and financial services [are] becoming very big.
India Knowledge@Wharton: At the recent Wharton India Economic Forum in Philadelphia, several Indian CEOs referred to the so-called Maoist activities in India and the law and order situation they are creating. How serious a problem do you think that is? What do you think can be done about it?
Nayar: I am not an expert on that subject. Therefore, I don’t have a view on that issue. The only thing that I would like to say is when you have 1.2 billion people living in multiple streams for centuries [where] some people are locked in the past, some are aspirationally in the future and some people in the middle, you are bound to have some tensions. Those tensions will show up in different shapes and forms at different times. They are [now] showing up in the Maoist way. This is part of a growing society. We have to learn to deal with the evolution of such problems and resolve them.
India Knowledge@Wharton: You have just written a book — could you give a few main highlights of what you would like your readers to learn from it?
Nayar: It’s a book of experiments. It is a book for young aspiring managers. The book is titled “Employees First, Customers Second: Turning Conventional Wisdom Upside Down.” The core theme of the book is simple in that there are a few smart people who can create Amazons and Googles and Apples of the world. However, there can be smarter people who can bring about cultural transformation in the way they run their companies [with] blue-ocean strategy differentiation. This book is a story of 55,000 employees at HCL who walked the “how” rather than the “what”. The resulting transformation is an accelerated growth of the kind the world has not seen. It is a book about the experiments we conducted within HCL. Some succeeded. A lot of them failed.
It should be treated like a workbook, which should provoke thought. It is not preaching, because a lot of things didn’t work.
India Knowledge@Wharton: Thank you so much for your time.