HCL Moves into Software

The recent acquisition by HCL of software products from IBM has generated lot of interest. Several questions are being raised, ranging from: What is a service firm like HCL trying to do by venturing into software products? to: How does this fit into HCL’s strategy?

Background

Let’s understand the acquisition first. The acquisition by HCL is worth $1.8bn across seven IBM products. Five of these products were part of HCL’s partnership with IBM for last 2 years, where HCL already has a certain expertise or know-how of the products.

HCL believes that it has the potential to generate an additional $1.7bn in annual revenue through software business. Several of the products like Notes, Bigfix etc., are already rated among the Top 3 software products in their respective areas.

Is it a strategic good move by HCL?

The acquisition does not have natural synergies with HCL’s core business of IT services, however, it is a smart move for a company that is showing signs of turning around and diversifying its portfolio from services to software. HCL sees this as an opportunity to grow via software products, SaaS business and software AMC. With this acquisition HCL has made a jump into the software business.

HCL has played smart by first getting into a partnership with IBM enabling it to understand and run the software business; and second, having done so successfully, it has now acquired those software products.
One question being asked is why HCL, while the whole world, or so it seems, is moving to develop more digital-based technologies, is picking up software that is more legacy oriented. This re-iterates my earlier point that traditional IT services and software are here to stay. While we will go through disruption, there is still plenty of demand for traditional services and software.

Risks

The acquisition comes with its own inherent risks, of course. The biggest risk is HCL’s lack of experience in running a software business – hence the question around its ability to execute.

Software now forms a large portfolio of HCL’s business, and industry analysts will be watching HCL with a very keen eye. Management focus has to be stretched now, and the ability to generate synergies is largely dependent on execution.

Only time will tell if it was a gamble by HCL or whether this move plays to the company’s advantage!