What Differentiates HCL: A Q&A with HCL’s Darren Oberst

Recently, on the Early Adopter Research Podcast, Dan Woods spoke with Darren Oberst, Corporate VP and head of Products and Platforms at HCL, a global systems integrator. HCL is pursuing a strategy called Mode 3 that is taking the old model of global SIs and adding new elements related to both owning and developing products and IP in key technology areas. In December, Woods wrote about HCL’s acquisition of Actian and that piece touched briefly on the Mode 3 strategy. This edited version of the conversation between Woods and Oberst delves far more deeply into the strategy, how it differentiates HCL, and how it is creating a new place for global systems integrators.

Woods: How would you describe HCL and its current place in the market for global system integration?

Oberst: You used the phrase global system integrator and we acknowledge that most companies we would be naturally compared to fall within that market. But how we think about ourselves is different. Just to set some of the basics, HCL, we’re around an $8-billion dollar a year company, we’ve been growing consistently double digits for many years now. We are typically compared with Wipro, Infosys, Cognizant, and TCS. We’re over a 40-year-old company but we started as a garage startup product business, and to a great degree that’s been the heritage and part of our DNA. We were launched in the 1970s looking to create and innovate new hardware, new software, new technologies for a nascent emerging PC market.

I assume it was a bootstrap startup that didn’t take money for a long, long time.

That’s right. So we were a bootstrap startup, very much the same type of mythology that a lot of other Silicon Valley type companies had at that time. And we stayed that way for decades. For the first 15-plus years of our history, we were focused on the Indian market with the aspiration to be the Apple, Microsoft, or IBM of the Indian domestic market. Then as that market began to liberalize and open up, companies like IBM and HP came into that market, we made a pivot and transitioned through the course of the 1990s into being a services company. But with a very different starting point.

That’s how most of the people in the IT world know you is when you arrived as another global systems integrator that was smaller and had a different perspective. So how would you describe your entry into the global systems integration market and what differentiated you from them?

What differentiated us is that we came from that different starting point which was we were a product company and then looking at how do we leverage these capabilities and maximize the opportunities for us with those capabilities. And so we formed a joint venture with Pro Systems, a joint venture with HP, very deep, close relationships with Cisco, and other large, global R&D companies and that’s where we got started. It wasn’t about traditional system integration work, implement SAP, do Y2K — that really wasn’t the sweet spot for us. It was we’ve got some great engineers who are experienced at building products and technologies, let’s off that now as a service to all of these global R&D companies who are looking to expand into India.

Are you saying that your first model was that you were an engineering enhancement to the internal teams of larger technology companies?

Yes, that’s exactly right. One of the powerful things about that business model is that it often times can start very small, being staff augmentation, or testing of the products, it could come around an older part of that portfolio or a component of that but then often times grows. Fundamentally, it’s an IP-based relationship that you’re building with those clients in that you become an integral part of their ongoing development and research and innovation strategy. Many of those relationships that we formed in the 1990s still exist today and often times they started from very humble places that now number thousands of people, dozens of products within those businesses and many innovation areas where HCL engineers are doing innovation, modernization, driving new and incremental products to market.

What is your role at HCL right now?

I joined HCL around five years ago, initially to run corporate development and around three years ago I moved into my current role which is to run on a global basis our products and platforms business.

What do products and platforms mean at the modern day HCL?

It’s the core foundation of our Mode 3 strategy which has been built around what we believe is a novel and innovative approach to building capability which is a series of IP partnerships, primarily with IBM. And now we have a very significant divestiture of those products from IBM.

Let’s do a quick timeline for people who aren’t as big IT nerds as we are. In 2018, HCL bought a company called Actian which was in the operational data warehouse space. I’ve been following them for many years and they are a conglomeration of some excellent technology, and then underneath that is an excellent integration technology called Data Junction. During the pervasive days, they created a really nice technology called DataFlow which was able to take advantage very efficiently of parallel processing and adapting—it was like a parallel program generator that would then be optimized for whatever hardware you had around. And then they had VectorWise and these super high performance databases. HCL bought them and decided that you were going to run them as independent companies. Now, there’s a whole portfolio of technology you bought from IBM and I assume you’re going to take the same approach with those companies. Those are going to continue to run as independent technology businesses seeking to sell themselves in the market. The puzzle of the Mode 3 strategy then isif you are going to buy products, why bother buying them, why not just use them? How does the Mode 3 strategy of services, intellectual property, and developing products combine to benefit the customer?

Let me make one preface because I think it comes back to one of the things you’ve asked, how do all of these different pieces fit together, how do they not fit together and what’s the logic to the extent they aren’t fully integrated? Every company has a DNA. Before HCL, I spent ten years at IBM. Part of IBM’s DNA for the brilliance of an IBM is everything comes top down, it works as a beautiful, integrated whole. The brilliance of HCL is fundamentally different. We are an entrepreneurial company at our core and from the very beginning, we’ve generated dozens if not hundreds of HCL leaders who leave the company and go off to start other businesses or become CEOs. That’s part of the DNA of the company. We are an entrepreneurial company, we are a bottoms-up company. We celebrate and encourage that. So as we think about how we move into some new market segments, our approach is let’s not drive a single top-down strategy. A big part of the way that we hope to move into a new market is to diffuse some of that risk with different experiments, and a few different operational models in place and a few different ways that we’re pursuing it. Again, that’s the way we’ve built our company, that’s ultimately where we’ve had success.

So one of the reasons you buy and operate the companies as independent units is so that you can learn from their genuine sales interaction with the market? So you could learn and have intimacy and learn what’s going on. I get that. But now the next question is you’ve got these companies, they’re generating ideas, you’re learning from them, you’re at the portfolio company, you’re now talking to one of your clients who is a large financial institution, and they say, “Yes, I want to talk to that Darren guy, he knows all this stuff going on at HCL, but, Darren, how am I going to learn from this portfolio? How am I going to know that you’re going to select the best technology for me, not the one that just happens to be in your portfolio? I’m a little nervous about that.”

When we formulated this strategy it was with a lot of recognition that most of the time, whether it’s a services company, whether it’s a software company, whether it’s a retailer, in almost any industry, when a company tries to move from the market segment that it’s in, where its core competencies have been, its heritage has been, its processes, its expertise, its brand, permission have been, when you try to move into an adjacent market it usually fails. And we spent a lot of time really thinking through why is that the case? What are all the things that can go wrong? What are the things that we can learn from the missteps of so many other services companies that have tried to move into the software space, broadly defined?

And there a few common pitfalls that we found. One of them is this attempt to pretend that you can and that that’s what a customer wants. Generally speaking, that’s not true. Customers want best of breed, they want solutions to their problems, they generally don’t want to just have a single vendor that they buy everything with. You have to have some flexibility in your business model and some recognition of that.

Companies seem to want a platform so that their businesses feels like the leaders, where it’s a very integrated platform experience and all that integration works to create leverage and multiple forms of leverage. But it has to be a platform that’s usually based on products. Most companies are going to use a CRM on ERP. But then making those all work together in a way that really creates harmony and power. But how do you help companies integrate those products?

Again, I think coming back to HCL’s DNA, what we do really well is stay focused on our customers, on what they need and how we can best serve those needs. I don’t think there’s going to be a one-size fits all, I don’t think there’s going to be this is the HCL message that every customer we go to, “Here’s the big stack and buy this whole stack from us.” I think it will be mix and match. There will be times when our services teams will continue to operate in a ground up entrepreneurial way, aligned to what the needs of their customers are. And sometimes that will mean they’ll be recommending a competing product and conversely for some of these products, these products will be used by other system integrators. We recognize that.

The implication of what you just said is that if I’m in the global systems integration services business, I would suspect that I’m not going to get comped for sales of your own product companies. I wouldn’t get rewarded for selling a financial institution Actian. What I’ll get rewarded for as a services person is getting more services business from that client and making them happier. Is your compensation structured around avoiding these conflicts?

In short, yes. There isn’t going to be an artificial push where somebody walks in from HCL and it’s their customer and says, “Look, this is the HCL solution, this is what you have to buy.” It just isn’t how we work. Again, we don’t abide by one-size fits all for every customer or for every product that’s in our portfolio; it’s finding those synergies at a detailed level where it truly creates incremental value to the customer.

For Actian, it’s obvious that the data supply chain is going to be crucial in almost every dimension of creating a new company. You’re going to need it to make AI and machine learning better, you’re going to need it to make your applications better, you’re going to need it to be able to harvest from you’re learning from your application. It’s no longer a one-way trip to a data warehouse and then a trip out to the analysts, it’s this massive, complicated, multi-node, multi-repository, lots of data logistics sort of world and the better you are at that, the better your everything else is going to be. So what is the nature of the companies that you bought from IBM and how do they play into this modern world?

The phrase global system integrator, part of what that suggests is that we’re very broad-based, we work across multiple vertical industries, we work across almost every part of the IT solutions stacks. So I know this is a discussion primarily focused on the 3, but that’s what our Mode 1 and our Mode 2 businesses are, a variety of different service lines. Our infrastructure outsourcing is one of those, our outsource product development is one of those but we also have in data and analytics, in security, in digital marketing, in commerce, in IoT and a whole set of futuristic and emerging categories. So everything that we try to do in our product strategy maps against that. The unifying principle is does this map to where we have service offerings and where we’re trying to bring solutions to customers. If it maps to our services business then it’s an area that we want to look at.

What were the kind of companies that you bought from IBM?

IBM will be divesting of seven products, five of these products we already had an IP partnership in place with.

When you say IP partnership, you mean you were helping build the products or you had licensed the products?

Actually both. The way that these IP partnership transactions work is they really have three components to it. The first component was a licensing transaction in which we actually licensed the source code of the product. The second component then looked a little bit like an outsourcing deal in which there was a carve out and a rebadging of a lot of the key people associated with the product into HCL. And then the third part of it is we would go off and develop all of the future versions of that product, ship it back to IBM and we had a revenue share and then we also had the rights to take those products, brand them and sell them through our own channel. When we did that we had a revenue share back to IBM.

We entered into 14 IP partnerships with IBM. For five of those IP partnerships, including two additional products, IBM is now completely exiting those products. Now, of those seven products, they fall into three major market segments and there are actually different hypothesis that we have on each of those three.

The first segment is security: two of the products, BigFix and Appscan, play into the IT security space, and both of them are Gartner Magic Quadrant kinds of products, and market leaders in their respective categories. We look at those products as products that are clicking on all cylinders, offer a lot of potential growth just in their core businesses, and give us lots of room to continue to innovate at a product level.

The second hypothesis and the second category are three products that are in the digital marketing and commerce area. One of them, WebSphere Commerce, an incredible product, was really the first enterprise-grade e-commerce platform. It would compete with SAP Hybris or the other e-commerce platforms, 500 plus customers, a market leader in production, large B2C retailers all over the world. The second product is a product that was an existing IP partnership, a product called Unica, which is campaign automation and customer segmentation. And then the third is IBM WebSphere Portal and IBM Content Manager, again used for a lot of really high-end B2B, B2E types of websites. So three products, and each of them brings between 500-1,000 enterprise-class customers, the who’s who typically in B2C retail banking, retail insurance — those are the companies that use these products.

Part of this product strategy is that you have existing customer relationships and now you have a much better reason to talk to them and understand what they are and then see if there’s an opportunity. So there’s a relationship mining aspect to this?

Absolutely. The products that we’ve bought upon closing, the products, the people, the sales, the customer contracts, end to end, 100% will become part of HCL, period, full-stop. So it is a different model than Actian. This is 100% HCL.

There’s one big area of the chess board we haven’t talked about and that is the IP aspect of your strategy. I understand what you’re talking about in terms of creating a portfolio but not having it be a portfolio. You are going to use these companies to accelerate your ability to solve problems. Now, in addition, you’re also developing in greenfield ways, new intellectual property kind of like government or scientific research. But how does that IP end up ever being monetized? Is it being put back into the products or does it create new startup-type companies that you get funding for from external sources or fund yourself?

I think all services businesses, all businesses that fundamentally come down to people, I think at some point in their evolution look to become more IP-based. And that IP can take a variety of different forms.

Right, but as a sophisticated observer of the global SI market, there’s the BS IP and then there’s the real IP. How is your stuff going to be the real IP not the BS IP?

Fair enough. It goes back to we looked at all the services companies moving into software that failed in the past. And one of them, the BS IP, the IP that looks good on a chart or maybe it’s good for a demo to help you sell, those service companies that think that they can build a world class software business on the back of that are kidding themselves. And services company after services company has failed when that’s all that they rely upon. One of the big learnings for us and the way that we’ve gone about this over the last couple of years is to understand the difference between a few people hacking together a piece of code and actually building a commercial-grade enterprise-class software product. There’s a whole set of things that go into it. It’s how the product is developed and tested and the richness of the functionality. There’s also a lot in terms of the packaging of that product and that’s everything from the commercial licensing arrangement around it to how you embed and build that into the product. Pricing constructs that you build, lifecycle commitments that you make to customers, support commitments that you make to customers, a long-term roadmap instead of investments, support for built-in customizations, integrations, plug-ins to a variety of other systems, how you build and design for scalability, for performance, for the real world of a large CIO shop where they have all kinds of exotic platforms running and legacy platforms, how you work in those environments. The view I’m trying to give is that when we kicked this off three years ago, I think we tried to do it with our eyes wide open, that there were a lot of pitfalls and most of the time when a services company tried to make this leap, they failed. And so we have purposefully gone after this in a multi-pronged way, with a few different models.

But what piece of IP are you developing a green field or are they all secret, do you not talk about them? They’re creating new IP, new software, new algorithms, new data science techniques, new engineering perhaps, even hardware to solve problems. And then somehow that’s going to be either a benefit to the customer, to the services business, to the existing Actian-style products or to the portfolio products. So I still don’t understand that. How will that work?

We have within our CTO’s office a team that really emerged out of our outsourcing business on how do we build IP-based solutions and innovation that we can bring to our outsourcing customers? And that team has incredibly deep domain expertise in many dimensions of how a data center is run and managed, the autonomics, the changing technology landscape and they’ve been building a set of IP that actually is in production and delivering a lot of value and working. And so one of the areas and one of the paths we’ve been pursuing is how do we take and how do we start to harvest some of that learning? And I wouldn’t call this “BS” IP but it was the starting point of some products. How do we begin to take some of those starting points with real learnings in production with large customers, how do we start to take that and little by little, move it down a path of becoming a fully-fledged product?

With the IP partnerships that we’ve done, one of the things that it’s brought to us is a lot of the learning, at one point it was 50 distinct process workstreams that we had just to get to the release of a product. All of that is organizational learning, it’s capability, it’s systems, it’s processes that have to be built and put in place. So we’ve created a lot of that foundation. Now, with IBM’s divestiture of these seven products, we’ll be taking over the customer contracts and the end customer relationships for over 10,000 customers around the world. We’ll have hundreds of additional sales teams coming in. So you can start to see the contours of the end to end value chain coming into place and for those IPs that are the starting points where we want to little by little start applying those learning lessons to move them down that end to end life cycle of becoming products and then bringing them to the customer base that we’ve just acquired.

The idea is that that IP will show up in the internal HCL product portfolio?

Absolutely. I think there are two or three different ways that that IP can be exploited and the way it was derived was as part of our existing outsourcing operations to bring value to customers, pure and simple.

This IP isn’t being created in a lab, it’s being created in customer engagements?

A combination of the two. One of the beauties of outsourcing is you build these very deep, very sticky production-grade relationships with customers. The teams we have working on that are really looking at what are some of the common patterns that we see and what are some of the opportunities to generate autonomics and other process improvements using it. So it’s a mix but it tends to be more closely aligned to that what are the needs of our existing customers.

What are Mode 1, Mode 2 and then what is Mode 3?

Mode 1 is our bread and butter, it’s our core services businesses, it really comprises four major service lines. It’s our infrastructure outsourcing business, it’s our outsourced product development and R&D, we call it ERS, it’s what we call our apps and think of it as sort of an SI business and then it includes our B-serve business which is our BPO business. It looks very much like a global system integrator model.

Mode 2 are all of the new, high-growth service lines that typically have some different characteristics in the way they need to be managed, different talent, different focus. And that includes our digital business and a lot of digital marketing. It includes analytics, IoT, security, and our cloud services business. It’s our emerging technology services.

Now, Mode 3, to use that old Monty Python line is, “And now for something completely different.” And it’s where I think we want to draw a very different stake in the ground. I don’t think any of our traditional competitors are trying to reconceptualize our business in the same way. Mode 3 are our portfolio of IP and software-based businesses. And that will have multiple flavors to it, it will be bottoms-up and come from a very HCL entrepreneurial kind of innovative approach. Mode 3 encompasses a few distinct strategies that have been our initial forays into building a software business. What we’re trying to do and the fact that we are pursuing this in a multipronged way with different operating models, different approaches, different segments, I think is a marker about we truly want to build a long-term, fundamental, sustainable software business as part of our portfolio.

And I think it actually comes back to the very first part of this discussion which is at our core, we don’t see ourselves as a GSI. At our core, we see ourselves as a technology company.

So Mode 3, another way of saying it is we’re not satisfied to let all the services we use be created by Amazon, Google cloud platform, and Microsoft Azure. We want to be in the business of creating great services and delivering them for people as products because we believe that the productization is where a huge amount of value is created and captured. You’re confident that this large, 1, 2, 3 strategy creates institutionally the ability to tell a much more sophisticated story and then deliver on it.

I might say it a little differently but I think conceptually it’s not that different from what you said. What we’re really good at and when we’re successful is when we’re laser-focused on our customers. That’s our strength. We have good bottoms-up innovation, we’ve got a lot of talent, we focus on technology and we listen to our customers and we do whatever we can to support those customers where they are today and where they’re going in the future. And what we see from our customers is that a lot of the traditional business models, they really are blurring. And we shouldn’t try to force it artificially, we shouldn’t try to promote technology at the expense of what our customer is trying to do. But the fact is, a lot of these lines are blurring between cloud, between software and automation, between people, business process and I think we want to position ourselves for the future, five years from now, ten years from now, that we can deliver the most value to our customers and we can solve their problem. And whether that problem takes the form of software, SaaS or cloud or people or any combination thereof, we want to be, again, the best, highest value solution provider to them.

It seems clear that this is a lot different than the models we’ve seen of rolling up companies and mining their cash flows like we’ve seen from computer associates or, even Oracle doing that to some extent. This is not a financial play correct?

Oberst: Absolutely. Yes.

Can you give me an example of the most Mode 3 engagement that you’ve had with a customer where they understood, “Wait, I want to go beyond even a Mode 1 or a Mode 2 services-based or emerging tech-based relationship and I see how two or three of the products that you are offering might be helpful”?

I’m going to take a counter example which is an IBM or an HP, that for many years tried to be and probably still aspire to be in IBM’s case, kind of the supermarket, the Costco, “Come here and you can get everything. You can get technology from us, software, hardware, services, we’ll give it to you all in one box.” I think what they’ve learned in some cases and the hard way, and also a lot of services companies learn, is there’s no magic to just saying, “You can get it all in one invoice, you can get it all from me.” There’s no real value to that because the customer always has the ability to go out and say, “I’ll pick this from Oracle, I’ll pick this from HCL, what’s the value to me of just buying A and B from the same company?” It’s incumbent on us, to be successful in this strategy, that we have to find smart and creative ways to deliver incremental value to customers because if not, it doesn’t work, there’s no point in doing it. So your example of a customer success, I’ll point to a couple of simple ones that I think have been kind of a good validation of this strategy. And that’s actually in software testing. And it’s a huge part of the services market, whether it’s HCL or whether it’s any of our traditional competitors because it is such a large market segment, it can really come down to just a price discussion, “How many testers can you give me at what price per hour?” We have the ability to go in with a combination of our own software tools, people that are trained on those tools and the ability to bring in those tools fully integrated into our commercial construct and say, “We can come in and we can do it better, cheaper and faster and simpler because we have the ability to combine the tools and to combine the people. And because we’re looking at it through the lens of an end to end solution, we can enable your people to use some of these tools, we can give you templates and other IP. We can give you best practices and we can commit to better outcomes.” And that’s something, again, you might not look at it as the grand platform solution that’s going to change the world but it’s a clear and differentiated value that we can bring to our customers.

This is where you go beyond having the BS IP to having the real IP. The idea is that we’re going to bring you a product, we’re going to bring you people trained on the product, we’re going to bring you processes to use the product and then we’ll adapt those into your working environment. And so that over and over around a variety of products, then there’s no reason you couldn’t say, “Well, we have three of these stacks that we then can integrate together. Well, now we have meta-stacks and now we have two meta-stacks we can integrate together,” and in this way you get this product-based platform that’s surrounded by a halo of implemented processes and services and that is what you feel these people are going to pay for?

In a lot of these areas and around a lot of these software tools, as the tools mature, the way the customer is thinking about it is, “I just want a solution. Solve it, make it work. I do need some people wrapped around this, I might need a broad set of different skills people hosting cloud relationships, just solve it.” We see a lot of opportunities for that but, again, I think the key is that the devil is in the detail, if you try to over-engineer it at a big picture, macro corporate level in a boardroom where we’re sitting, you usually get it wrong because you lose sight of are we really solving a problem for our customer, are we really creating incremental value? And where that incremental value comes from is all in the details, it’s in the details of how you assemble the people, the software, the commercial construct around it, the outcomes and SLAs that you’re prepared to commit to, it’s in those details, that’s where the value comes.

What you’re saying is that the new enterprise software product isn’t layers that are evolving independently, it’s technology, processes, services that now are in one container delivering this outcome that you can buy and be confident in. You end up not just being a company that is playing at a layer, you end up being a company that’s got a much more vertical orientation.

You think about what SaaS really means and one of the common things we all hear in kind of our world is, “Everybody just wants SaaS, the whole world is moving to SaaS.” And I think it’s important to decompose what’s really behind that because I think it’s a lot less about multitenant SaaS, single-tenant SaaS, or is it hosted. What it is, is a response from customers saying, “We’re tired in many ways of doing business in the old way. We’re tired of those mega-projects where we pay a whole bunch of vendors upfront and then we bear the risk of whether it actually works.” I think a lot of CIOs saying, “I’d like to start small and grow. I’d like my vendor to be aligned to my success and I’ll pay them and I’ll pay them more as I am actually getting the value out of the product.” For large customers of services companies, they’re saying, “Don’t just tell me about your billing rate, don’t just tell me about how many people you can throw at this. I want ideas and IP and not just kind of that light-weight little demo thing, I want more than that. And I expect you to be delivering more than that.” I would summarize by saying this is a big step for us, it is a big marker that fundamentally we are trying to create a very different kind of company and it’s in response to the large-scale forces that we see happening on our industry and really positioning ourselves for the future to be a premier technology solution provider for our clients.