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Corporate Apr 19, 2013

It’s all about employee metrics: Paradox of HCL Technologies

By Ramnath

HCL Technologies, founded by Shiv Nadar, has often been called the dark horse of Indian IT.

It's also in some ways a paradox. And that came to the forefront when several fresh engineering graduates who received offer letters but no jobs from the company, went on a protest. The protests were in stark contrast to both its financial performance in the recent years and the 'Employees First, Customers Next' philosophy it propounds.

Consider, its revenues have been growing faster than the industry average, when companies such as Infosys and Wipro are struggling with growth. Its profitability has gone up in the recent quarters, surprising many industry analysts. While its peers are struggling with huge bench, its employee utilisation rates are around 80%. As a result, its employee productivity, measured by revenue per employee, has been going up. (For others it has been coming down).

The market has responded positively to all this. In the last one year, HCL Tech has done better even than TCS in NSE. On the top of all these sits its philosophy of 'Employees First', also the title of a book written by its former CEO Vineet Nayar.

A story in the latest issue of Forbes India argues that a closer look at the performance and the philosophy gives the answer to this paradox. While HCL has been growing faster than the industry, the growth has been primarily driven by Infrastructure management, which has a different business model compared to regular IT Services and requires different skill sets. (Even the designations are different.)

The key question about HCL Tech is not whether it's getting more contracts in infrastructure management, but whether it has anything beyond infrastructure.

The key question about HCL Tech is not whether it's getting more contracts in infrastructure management, but whether it has anything beyond infrastructure. Reuters

Similarly, while 'Employees First' philosophy gives an impression that the company gives primacy to employee satisfaction, it's in fact about employee contribution. The philosophy came out of the recognition that a company creates value in the zone where an employee engages with the customer. Employee first approach is about helping employees to create that value. So, there's no point in hiring an employee, when he will have no job to do, or for that matter keeping an employee in the bench.

HCL's recent results were in line with this analysis. Its growth continued to be driven by infrastructure management. (And software services segment grew only marginally - by 1% compared to previous quarter, and by 4.8% compared to same quarter last year.) Its headcount addition is minimal. Its attrition rates are high. But, its revenue per employee numbers shine.

Is it a good thing? In one way, it is. After all, it's not just HCL Tech, but the entire IT Services industry is trying hard to move to a non-linear model. IT managers across companies believe that linear growth (where hiring goes up in proportion with revenues) is unsustainable. Now, HCL Tech's numbers show it's able to get more revenues with less number of people.

While that seems to answer one question, it raises the bigger question of whether it's sustainable. Kotak Securities is among the firms that are skeptical about this. In a note it wrote to its clients just after the results, it said: "We remain cautious on the company's business model and find the profitability of the company unsustainable. Seemingly inexpensive multiples have to be seen against the backdrop of high risk business model and unsustainable margins."

The key question about HCL Tech is not whether it's getting more contracts in infrastructure management, but whether it has anything beyond infrastructure. It's in this context that employee metrics are important.

by Ramnath

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