Even as everyone was all set to bury Indian PC brands, HCL Insys came out with a stellar performance last year that proved that Indian brands still had the ability to win on home turf. There’s a lot that other Indian players could learn from HCL Insys’ strategy in PCs and other segments. Gaurav Patra explains what this IT major got right, and analyses future prospects in the light of shifting trends in the business

The HP-Compaq merger could turn out to be an advantage for HCL because one-plus-one never equals two in this business, says George Paul

Just when the whole PC industry was in the throes of a recession and analysts were screaming negative growth rates, HCL Infosystems surprised quite a few when it registered a 27 percent growth rate over the last year. The company gained the No 1 PC desktop vendor ranking for the year 2001, with a market share of 8.6 percent. In fact, today it is one of the few Indian brands that continue to hold their own against the MNC brigade—Zenith’s the only other name that comes to mind. From a company that used to sell boxes, HCL Insys has now emerged as a leading systems integrator, selling solutions, while also offering IT services and consulting services.

It is interesting to trace the transformation of a company that was earlier identified by the ‘hardware’ tag to an ‘end-to-end solutions provider,’ with interests across domains such as software, networking and consulting. A look at the strategy followed by HCL Insys throws interesting pointers for the rest of the industry. The number one tag on the PC front (with the HP-Compaq deal, HCL goes back to No 2 now) has come as a result of clever marketing strategies, and aggressive expansions. HCL has always been very strong on the government front. But when things started going bad on other fronts—for instance, when the metros were showing stagnation rates, HCL Insys went ahead and expanded aggressively in B&C class cities to boost volumes. In addition, the company initiated schemes like consumer finance to lure the reluctant PC buyer.

Different strategies for different segments
But the strategy to gain market share in difficult times and reap benefits when the industry recovers has come at a cost. For instance, industry analysts say that HCL has given massive discounts in the products business to gain market share. Evidence lies in the fourth quarter (AMJ 2002) performance of the company, where though the products and related services business contributed 95 percent of sales at Rs 382.94 crore, profits before interest and tax stood at just Rs 7.24 crore—56 percent of total profits before interest and tax (PBIT). The profit before interest and tax margins were dismal at 1.9 percent as compared to 4.4 percent during the quarter ended March 2002.

In addition to the PC segment, the company also took several innovative initiatives in other sectors to boost revenues. Take for instance the strategy of the company in the notebooks segment. The move to enter newer segments like education and consulting in the notebooks business has yielded great results. Proof of success lies in the fact that HCL Insys has already bagged big orders from the Indian School of Business and PricewaterhouseCoopers. The second part of the notebooks strategy has been to aggressively woo the SME segment with newer, cost-effective models.

The telecom business has also recorded impressive growth. For instance, the company bagged telecom equipment orders from IIT Kanpur for 5,000 lines of MD Ericsson EPBAX and 500 lines of an ADSL solution. Looking at the robust growth from this segment, the company has set up the India remote support centre for providing support services to all HCL Infosystems’ customers.

And while there have been doubts on the long term viability of the retail ISP business, HCL Infinet, the fully-owned subsidiary of HCL Infosystems, is betting big on its technical expertise to boost revenues. Positive indications can be seen in the fact that the subsidiary has acquired 30 new corporate clients for VPN implementation. These new clients come from different verticals such as manufacturing, finance and the FMCG industry. Company officials are also betting on the VoIP segment, which has recently been opened up to ISPs for Net telephony, but there is still doubt on whether this sector will generate enough volumes for any ISP, leave alone HCL Infinet.

To take advantage of the boom in the call centre business, the company has also started a unit that it terms as ‘call centre consulting’. Under this initiative, the company will help prospective clients wanting to enter the call centre business with its knowledge base of hardware and systems integration, and experience in call centre operations itself.

Software services
Though the majority of HCL Insys’ revenues continue to come from hardware sales and related services, the relatively small software services portion could be a surprise packet for the future. For instance, though the software services part contributed just 5 percent of sales, margins have zoomed from 6.5 percent in the quarter ended March 2002, to 29.4 percent in the quarter ended June 2002. The company has a good de-risking model through this segment, and has spread its business over different geographies. Going forward, the company expects 40 percent of revenues coming from the domestic and export services, about 30 percent from products and system integration and about 30 percent from software exports.

Other strategies
In line with offering competitive pricing keeping in mind the price-sensitive nature of the Indian market, HCL Insys has made significant investments in the Professional Services Organisation (PSO), the Support Services Organisation (SSO) and in its manufacturing plants at Noida and Pondicherry. The build-up of the services business (both PSO and SSO) enables HCL Insys to offer complete solutions as well as raise manufacturing volumes in line with international standards. The increasing focus on integrated enterprise solutions has also strengthened HCL Infosystems’ SSO’s capabilities in supporting installation types ranging from single to large, multi-location orders. The SSO, which comprises of a direct support force of over 800 members, is operational at 150 locations across the country and is the largest such force in the IT business.

One more important arm in HCL Insys’ strategy has been the Frontline division that markets national and international brands of computer systems (including Toshiba notebooks) and peripherals within the country. With its extensive network of 800 resellers across 300 cities, the division actively promotes the penetration of PCs in the home and the small office/home office (SOHO) segments.

The competition
The fact that the company has not only withstood the MNC attack but has actually managed to upstage them speaks volumes about the effectiveness of the company’s strategies-and this, all the more when you see the performance of other Indian brands slipping away. A three-pronged approach has helped the company to keep the MNC attack at bay. For instance, for the home segment, the company has tried to woo the consumer with multimedia-rich PCs. For the commercial segment, there is the Infinity range packed with features that any office would require.

The third part of the strategy is to totally focus on Intel servers. HCL works very closely with Intel in this area, and was the first to offer an Itanium-based server in India. Intel’s game plan is to dominate the lucrative high-end 64-bit space where the enterprise moolah lies, and HCL has cleverly ensured that it will get a piece of this action too.

Impact of the HP-Compaq merger
The HP-Compaq merger is one of the greatest factors of concern for the company—for that matter, for every hardware vendor. This is because of the change in market dynamics thanks to this merger, which is expected to help HP-Compaq become the next hardware powerhouse. But HCL thinks this development also has some positive aspects for them.

“Any development has two sides. In this case, the plus side is that there is one competitor less to deal with. Because of the HP-Compaq merger, today there is only HP and IBM for us to compete with,” says George Paul, associate vice president, Marketing at HCL Insys. Further substantiating his statement Paul adds, “We believe one-plus-one is never two in this business. So, this merger will not have that much of an effect on the Indian hardware industry.”

However, as many analysts have pointed out, the other positive aspect of the merger is that the new entity has the Compaq brand of PCs and HP printers under one umbrella. However, Paul terms it more as a ‘logistical advantage’. He says he is confident on this front because of HCL Insys’ established presence in the market with countrywide outlets and so many products to serve the Indian market, which no other player has. “We feel that we will actually gain from this [HP-Compaq] merger,” says a confident Paul.

Customer’s the king
In a market like India, where customer relationship management is still emerging as a niche segment, HCL Insys has set examples for others. The company today boasts of being able to retain more than 60 percent of its customers.
To achieve this figure, the company adopted a three-tier approach. The most important strategy as far as customer satisfaction is concerned, is the technology strategy. Over the years, HCL Insys has ensured that it came out with latest technologies for Indian customers. Thanks to this philosophy, HCL simultaneously releases technology in India as and when it is released overseas.

Another strategy that the company uses is ensuring it reaches the customer where he is. Today, HCL has built a 900-strong partner reseller infrastructure, apart from its 150 retail outlets. These are the two channels used to reach the customer. Using this structure, the company has direct sales and the commercial space strategy in place.
The third part of the strategy is the services strategy. Over the years, the company has put in place a support infrastructure that spreads out across 150 support locations in the country with principal support engineers stationed at these locations. Services support is also extended through partners. The company has also set up a number of call centres for the services business. In almost every state in India, HCL Insys has call centres, and in some of the larger states, there are multiple call centres.

And towards becoming a dominant player in providing global IT services HCL Insys has plans to further consolidate its hardware and services businesses. It has set up overseas subsidiaries in the US, the UK, Singapore, Malaysia and Australia.

The bottom line
While the real effects of the HP-Compaq merger will only be evident with time, HCL Insys has definitely ensured that it won’t just simply disappear, as so many Indian PC vendors have done. Rather, by using innovative strategies, entering new business areas to de-risk the box business, and spreading its tentacles as far as possible in this vast country, HCL Insys has ensured that it will remain a potent force even in the future. And again, while only time will tell if HCL will regain the No 1 tag from HP-Compaq, it has definitely ensured that it remains within striking distance. That’s more than what can be said for many other Indian players.