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HCL Technologies – Automotive, Autonomics & Partnerships Key Elements of its Future Growth

HCL Technologies’ (HCL) twitter hashtag for its recent adviser and analyst event in Sweden was #HCLBigLeap, which led us to expect to hear some big news items. The jam-packed sessions did provide an overview of many recent and current developments – but the big news item was finally disclosed in an individual blog the following day (more of which later).

We heard from many clients at the event, all of whom expressed strong satisfaction with HCL: its “relationship beyond the contract” messaging is resonating well with clients.

Mode 1, 2, 3

New COO, C Vijay Kumar, started by discussing HCL’s ‘Mode 1, 2, 3’ growth strategy for its portfolio:

  • Mode 1 - ‘Agile & Lean and service-oriented’: this describes HCL’s existing core services portfolio (applications services, R&D services, BPO) which are increasingly being layered with DRYiCE tools. HCL expects Mode 1 activities will shift from 85% (we believe closer to 90%) of its current revenues to around 60% over the next few years
  • Mode 2 - ‘experience-centric and outcome-oriented’: units including BEYONDigital, IoTWorks, cloud and cyber. These are high (20-30%) growth opportunity businesses, and will be high priorities for organic and inorganic growth investments. Mode 2 also covers newer delivery models such as Agile and DevOps
  • Mode 3 - ‘ecosystem driven’: products & platforms, where growth is most likely to come from IP partnerships. Mode 3 also includes partnership constructs such as JVs and commercializing client captives.

This is an apparently simple way of describing a journey that all IT services providers are having to undertake as they evolve to remain competitive to the new world of IT. HCL's approach includes building independent teams for Mode 2 propositions which are taken to market through the Mode 1 businesses.

As well as highlighting progress it is making in some of its Mode 2 areas, HCL has also made some major investments recently that span two ‘Mode 1’ businesses where it has particular strengths - infrastructure services and engineering services - and where it is now applying Mode 3 partnership constructs such as the deal with Volvo.

Volvo deal brings in mainframe capabilities, is also part of a broader push in the automotive sector

I got to drive the Volvo V90!

Gothenburg was an obvious choice of location for the event given the award to HCL earlier this year of a major IT infrastructure management services contract by Volvo Group involving an IT captive acquisition that serves 40 clients in the Nordics and France, and the transfer of ~2,500 personnel in 11 countries. The captive acquisition adds mainframe capabilities, local delivery presence and a pre-existing external client base, all of whom have migrated (Volvo estimates the transferred captive generates annual external revenues of ~$190m). We heard from Volvo CIO Olle Hogblom; the transition (a walk-in takeover in April) appears to have gone smoothly. Driving a major transformation in Volvo’s IT infrastructure was a key priority and Hogblom highlighted that 52 transformation projects are already up and running.

Since HCL started targeting the Nordics in earnest in 2011, the company has been very successful in the region in winning IT infrastructure services rebids, with the likes of Statoil and DNB in Norway and UPM in Finland. The Volvo deal was a big investment (media reports are of $130m) by HCL, who is now pushing for sector, portfolio and market expansion in Continental Europe.

In terms of target sectors and services, HCL is setting up an automotive CoE in Gothenburg on the back of the Volvo win. Other initiatives will enhance its capabilities in engineering services in the automotive sector. HCL is acquiring Geometrics (not including Geometrics’ 3DPLM JV with Dassault Systemes) in a share-swap deal worth around $190m. Excluding 3DPLM, the automotive sector accounts for ~47% of Geometrics revenue. Geometric generates nearly 60% of its revenues from the U.S. and ~25% from Europe (where it acquired German automotive specialist 3cap technologies GmbH in 2013). Geometrics will be HCL’s largest acquisition to date in engineering services and as such its importance should not be overlooked. HCL has also formed partnerships with the likes of sector specialists Movimento (over-the-air software updates) and Rightware (UI design software). We expect to hear much more from HCL over the next few years about its work around connected vehicles.

Will HCL Technologies be an engineering services consolidator, with additional acquisitions, perhaps specialists in other sectors?

Other obvious areas of potential interest for inorganic growth include

  • Cyber, to enhance its IT infrastructure services offerings.
  • In terms of markets, perhaps  Germany again, or possibly France.

DRYiCE autonomics portfolio continues to expand, newer AI components

DRYiCE, HCL’s brand for its orchestration, operations analytics, automation and AI suite of modular components, has been expanding and now comprises 40 micro apps (both third party and proprietary) that between them support all of its service lines. DRYiCE includes well-established IT operations tools and newer RPA, AI, NLP, machine learning and analytics technologies. It has six layers:

  1. Sense and act, e.g. monitoring tools
  2. Prevent & heal, e.g. automated patch management
  3. Ideate & create, e.g. to support automated testing, smart releases etc.
  4. Engage and collaborate, e.g. Satori, an open source KI collaboration platform
  5. Visualize and insight e.g. MyxAlytics predictive analytics
  6. Orchestrate and choreograph.

HCL highlights its approach with developing and implementing DRYiCE modules as being one of “pragmatic automation”, namely real world, use-case driven (and thereby clearly outcome-focused).

The latest addition to DRYiCE is ‘Lucy’, a Watson-powered Level 0 service desk cognitive agent launched last quarter (also uses ServiceNow), and currently in pilots with four clients. Early uses are in chat; voice will surely follow as other use cases are found.

HCL claims that some elements of DRYiCE (we never found out if it is an acronym) are in use in over 50% of its accounts, not surprising given that some of the modules are well established. Its current push is to increase the level of automation in software and product testing services, very much in line with market trends (see NelsonHall's research on software testing).

HCL articulates the attributes of DRYiCE clearly, and is also ahead of many vendors in indicating what lies under the hood. Doubtless the suite will continue to expand, including in analytics and cognitive applications.

IoT, Small but Growing Practice, Leveraging Engineering Services

At the beginning of the year HCL launched a standalone IoT practice with ~100 people. The unit is now being augmented with the smart product development capabilities from its large engineering services practice. HCL’s current client credentials in IoT are mainly longstanding engineering services clients such as ABB and Xerox. Obvious sectors for expansion for HCL are automotive and aerospace.

Partnerships Key to Mode 3

HCL is looking to develop a products and platforms business through what it calls innovative IP partnerships.

The first of these was with CSC. It is over two years since HCL and CSC struck up an innovative partnership with the Celeriti Fintech JV, whose primary remit is to modernize CSC’s financial services software (see our blog here). We were not given an update on progress at the event, even though HCL has increased its investment in the JV. Given the CSC/HPES merger, the relationship will not now expand beyond the actual JV, and a go-to-market push is likely to be less than initially envisaged.

HCL’s newest significant partnership was alluded to in its last quarterly earnings call when it referred to making a $350m investment over two years in a 15-year partnership with a “global technology vendor”. HCL could not publicly comment on this partnership at the event, but it has since become evident that the partner is IBM (with whom HCL is also collaborating on IoT, setting up an IoT incubation center in Noida). In short HCL appears to be buying IBM Tivoli systems management tools and the Rational software modelling and development middleware in a deal that also involves personnel transfer – so in many respects it looks like a straight outsource (IBM is doing something similar with Persistent Systems). While HCL and IBM will work together on future product roadmaps for Tivoli and Rational, HCL will be responsible for ongoing product development and support. Clearly, the deal plays to HCL’s strengths in software engineering. Beyond this, further details, for example of the go-to-market arrangements, are not yet clear. In the short term, HCL will earn annual revenues of $30-40m from the deal. Longer term, there could also be broader opportunities for HCL in going to market directly with Tivoli and Rational products.

Notable by their absence: BPO and SaaS

  • HCL’s BPO business (now under 5% of revenues and declining) is looking increasingly non-core. The only way that HCL is going to build a new BPO business is through acquisition: outside a captive buy, this does not seem likely in the short term
  • Another area where HCL does not appear to have strong credentials is services around the major SaaS products. As it seeks to mitigate the cannibalization of cloud on traditional ADM activities and the reduction in large ERP projects, HCL does not seem to be looking building up large enterprise apps SaaS practices.

Playing to its Strengths

In short, as it works on evolving its portfolio to align to new and emerging market opportunities, HCL is being bold but also playing to its core strengths in engineering services and IT infrastructure services. This is a story of renovation, rather than one of radical reinvention.

Note: in the NelsonHall Vendor Intelligence Program:

  • HCL Technologies is one of ~20 vendors individially profiled each quarter in the Quarterly Vendor Update Program
  • In future, HCL Technologies will also be included in the Key Vendor Assessment Program.
  • ​For details, contact [email protected]

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