HCL update

(By Anthony Miller – Wednesday, 22nd April 2009 8:30pm). It was of course Axon that boosted HCL’s revenues last quarter, adding some $75m to what would otherwise have been a 4% revenue decline much as for TCS, Infosys and Wipro. Nonetheless, this is below the $95m figure the company mooted for Axon last quarter (see HCL playing the game differently), which I guess is symptomatic of the poor state of the market and the perils of counting ‘contracts in the bag’ before they have hatched, if you’ll pardon the mixed metaphor. But Axon is still a two-edged sword for HCL, costing it 138bps in margin – though on the bright side, the company was expecting a hit nearer 200bps.

I had been sceptical about whether this acquisition would work, but the more I hear, the more I like! Recently I met up with Mark Wyllie, previously Axon COO and now HCL-Axon Corporate Development head. He told me of prospects that Axon had previously lost because it didn’t have the global coverage or sufficient offshore leverage. Some of these prospects are now back in the frame, and cross-selling is really starting to work. Indeed, over 25 HCL customers are now being targeted for Axon’s services and 10 the other way round, with three deals already in the bag. What’s more, Axon had apparently spent $900m partnering with other IT services firms over the past ten years to provide a full service line for some of its larger deals; now HCL-Axon can go after the whole piece alone. OK, it’s still early days, and there’s a whole lot of margin to recover, but they seem to be off to as reasonable a start as you could hope for in current market conditions.

It’s a bit harder to be sanguine about HCL’s other recent UK acquisition, Liberata Financial Services (LFS), which to be frank I had written off as a basket case. Well, there’s still a pulse and HCL is very much in resuscitation mode. Indeed, HCL CEO Vineet Nayar said LFS is shortlisted on a couple of deals which should resolve this quarter. Whether HCL can raise this Lazarus from the (near) dead is still moot, in my mind, but I hope they can if only to make the UK Life & Pensions BPO market less of a one-player game (as much as I think Capita is great etc etc).

Perhaps the main note of caution that Nayar struck about business overall was the dramatic decline in outsourcing deals last quarter. He said this was of great concern both in terms of the number of deals and also the TCV (total contract value). HCL has been relying heavily on new outsourcing deals to take up some of the slack from the drop off in work with existing clients. As if on cue, outsourcing advisory firm TPI had just reported exactly that trend in commercial (private sector) outsourcing deals in its excellent quarterly conference call. What’s more, they expect a similar trend this quarter. This really doesn’t bode well for HCL, but there again it’s no different for other players either.

And hats off to HCL again for its continued ‘glasnost’ on the numbers and indeed the management commentary which is refreshingly frank even when there’s bad news. Long may it last (the glasnost, not the bad news!).