HCL Technologies, the Shiv Nadar-owned software services firm, will accelerate investments in frontier technology capabilities such as artificial intelligence (AI), deep learning, Internet of Things (IoT), blockchain, augmented reality and cybersecurity in the current financial year. Such capabilities, internally dubbed Mode 2 services, accounted for 17%—or $1.4 billion—of the Noida-based firm’s revenue in the last financial year.
Yesterday, the Noida-based company reported revenue for the financial year ended March 2019 at $8.63 billion, shooting past Bengaluru-based rival Wipro to become the third-largest software services firm in the country.
“Our Mode 2 part of the business grew 28.5% for the fiscal ended March 2019. We will continue to invest in Mode 2 as we expect it to drive a significant portion of our revenue for the next fiscal, along with Mode 3 (product and platform-driven services),” Anand Birje, corporate vice president and global head of digital and analytics at HCL Technologies, told TechCircle in an interview.
The company has invested around $250 million in developing its Mode 2 set of services. This is in addition to several acquisitions it has made over the past couple of years to build capabilities in those areas.
During the fourth quarter of the last fiscal, it acquired Strong-Bridge Envision, a digital transformation consulting firm which will become part of HCL Technologies’ digital and analytics business. In December last year, it acquired software maker Lotus Development Corporation for $1.8 billion. Earlier in 2018, it acquired information technology and engineering services provider H&D International Group. Before that in April, it acquired hybrid data management, cloud integration and analytics solutions provider Actian for $246 million.
Birje said HCL will make investments in the current fiscal to develop in-house capabilities around frontier technologies, building labs, strengthening the leadership and forming a new partner ecosystem that will help the company push its solutions into the market. The company has already set up labs in cities such as Dallas, Sydney and in Silicon Valley.
Birje expects digital transformation at enterprises to be the primary source of revenue for the company when it comes to Mode 2 services. “Enterprises started spending on digitalisation two years back but it is gaining momentum now. We expect to see it grow rapidly in the next five years before it reaches a threshold,” he said.
Digital spends now account for 22% of the total expenditure at enterprises and will grow to 40% of overall budgets in coming years, he said. “The market opportunity is close to $200 billion by just considering the organised services segment,” he added.
While HCL has made some acquisitions to boost its Mode 2 capabilities, organic growth will be more the norm going forward. “We might just look at small acquisitions but not for adding capabilities,” he said.
In terms of geographical focus, the company will focus on zones such as the US, Europe, Australia and Singapore for its digital revenue. These markets have large legacy enterprises which are just starting to understand the importance of digital transformation. “We see growth coming out of these zones for the next three years in the minimum,” he said. The company, however, does not see the Indian subcontinent driving a lot of revenue growth for Mode 2 services and will continue to largely operate as the primary delivery centre for its services.
The top sectors for revenue from Mode 2 services are banking and financial services, retail, telecommunications, pharmaceuticals and healthcare, consumer-packaged goods and manufacturing. “We are now seeing B2B (business-to-business) companies trying to undergo digital transformation. Manufacturing is one sector that is looking at using newer technologies to its benefit and this is getting a boost because of 5G deployment across zones,” he said.
Like most other players in the software services universe, HCL Technologies is also working with startups as part of its efforts to create new partner ecosystems. Birje said the company has invested in Silicon Valley-based venture capital firm Morado Ventures and has been working with startups in its portfolio.
“These startups are working in areas such as AI, machine learning, deep learning and drones amongst other technologies,” he added.
Elaborating on the company’s Mode 3 services, Birje said the company will focus on the seven products it acquired from IBM in the coming fiscal year. Mode 3, which is more products and platform-driven, explores the areas where it can enter into innovative IP-based partnerships, targeting specific next-generation opportunities. It includes the external IP partnership with IBM extending now to half a dozen products.