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Indian offshore provider sees profit double as 'business value creation' approach pays off

The millennium bug was the catalyst that set the Indian IT outsourcing industry’s miraculous growth in motion. Forced to change millions of lines of code at short notice, Western businesses had no choice but to engage India’s voluminous IT workforce, and the psychological and cultural bonds that had held IT offshoring back were broken.

But one company came to the party too late to enjoy that pay bonanza. Back in 1999, Hindustan Computers Limited was India’s best-known hardware manufacturer and was coming to the end of a five-year joint venture with Hewlett Packard that had helped that computing giant dominate India’s domestic PC market.

Only in 2000 did HCL spin off its research and development, application and networking units to become HCL Technologies (the hardware manufacturing component is today known as HCL Infosystems).

According to Rajeev Sawhney, HCL Technologies’ European president, the company’s late entry to the market forced it to adopt an innovative service offering. “We were the Johnny-come-lately who had to do something different to stand out,” he explains.

Realising it would be impossible to break into the already-saturated offshore application development and infrastructure markets, HCL chose instead to sell its services as ‘business value creation’ offerings, Sawhney explains. This means billing its customers according to the value created for them – be it cost taken out of a certain business process, or customer satisfaction increased. “We put some skin in the game,” he says.

Sawhney provides the example of Boeing, for whom HCL Technologies’ engineering division designs certain aeroplane parts. HCL is paid according to the number of parts sold, not the number of man-hours its employees put in.

The ‘business value’ approach is one that many of HCL’s fellow Indian IT suppliers have since adopted. Mahindra Satyam, to give just one example, has a similar aeroplane part manufacturing contract with Airbus.

There is good reason for this. Having all but commoditised their own services by providing IT skills at staggering volume, the Indian IT providers now need to improve their margins. By offering ‘business value’ services, those companies can recombine their existing commodity services as unique and therefore more profitable offerings.

At the same time, such contracts allow the supplier to slash cost from their operations without reducing revenues. When contracts are billed on the basis of headcount or man-hours, by contrast, it is not in the provider’s interest to improve efficiency.

Proof of this argument comes from HCL’s financial performance. The company has grown its revenues three times over in the last four years. Despite the impact of the credit crunch, especially in the financial services industry which HCL considers one of its core markets, the company grew revenues by 40% in the year ending June 30 2009 to $2.2 billion. And, most impressively, net income for the final quarter of the year rose 110% year-on-year to $69 million.

Sawhney says these figures are explained by the simple fact that businesses like value-based service offerings. The company has therefore continued to win businesses while others have floundered, he says.

HCL’s success challenges the idea of a “first mover advantage” in technology markets; the company’s slow start forced it to take an innovative approach that appears – at this moment in time – to have surpassed its predecessors.

Now that competitors are not only adopting the ‘value creation’ model themselves, but are also pioneering still-fresher approaches, HCL’s challenge is to hold on to its innovative edge.