Vendor Profile Series for R&D/Product Engineering Services

VENDOR PROFILE

HCL Technologies — Vendor Profile Series for R&D/Product Engineering Services

Mukesh Dialani

IDC OPINION

As HCL Technologies likes to put it, product engineering is in its DNA. Since inception of its group operations more than 30 years ago, the company has invested in creating technology products and offering engineering services to its customers. Until recently, its focus was to position itself as a "technology services provider." IDC believes that in order to scale revenue and utilize its assets more productively, the strategy has changed since the past five to six years to include other IT services offering. As a result, engineering and R&D services now contribute to approximately 26% of HCL Technologies' total revenue. IDC has made the following observations:

It is commendable to note that revenue for R&D/product engineering services has risen by 40%, while head count has risen only by approximately 24%. This indicates that HCL is successfully optimizing the use of its resources.

Among its various initiatives, its Global Risk Reward Partnership (GRRP) model is unique and does enable it to create differentiation. However, success of this partnership will be determined by analyzing customer adoption over the next 2–3 years.

HCL Technologies has created a sound and robust ecosystem consisting of partnerships, alliances with educational institutions, and manpower certification.

It has acquired more than 270 customers and its top 10 customers contribute to approximately 38% of revenue for these services. This included acquisition of an additional 37 customers in FY08 and corresponding revenue growth of $137 million.

Global Headquarters: 5 Speen Street Framingham, MA 01701 USA P.508.872.8200 F.508.935.4015 www.idc.com F.508.935.4015 P.508.872.8200 01701 GlobalUSA Framingham, Street Headquarters:MA 5 Speen

Filing Information: October 2008, IDC #214698, Volume: 1 Global Sourcing Strategies: Vendor Profile IN THIS VENDOR PROFILE

This IDC Vendor Profile profiles HCL's R&D/product engineering services, including the evolution of these services; HCL's vision, core competencies, differentiators, financial and employee data, key markets, infrastructure, certification, strategic investments, partnerships, and alliances; and some customer examples.

This document is part of a series of profiles of major vendors in the R&D/product engineering services. Other featured vendors include Accenture, Wipro, Infosys, EDS, Satyam, Tata Consultancy Services, Sierra Atlantic, Patni, and Megasoft/BlueAlly. Subsequently, IDC intends to publish all of these profiles in one major competitive analysis document.

SITUATION OVERVIEW

Company Overview

HCL Enterprise is a leading global technology and IT enterprise that comprises two companies listed in India — HCL Technologies and HCL Infosystems. This enterprise, founded in 1976, is one of India's original IT garage start-ups.

HCL had its "first" genesis with grassroots development of complete systems in the mid-1970s, an era of proprietary systems and vertically integrated industry. Subsequently, it saw a great opportunity in combining Unix with 32-bit processors to offer "open systems" that would be more powerful and cost effective compared with proprietary ones.

HCL had its "second genesis" by anticipating the inflexion and moving rapidly to adopt the technology abandoning its proprietary approach.

In its "third genesis" in the 1990s, it rode the wave of engineering innovation by shifting focus from Unix servers to networking hardware and software, positioning itself as an R&D/product engineering services provider to other OEMs and database companies.

By the time it experienced its "fourth genesis," HCL stood at the threshold of a great new opportunity of being a global design house and setting the stage for technology outsourcing.

HCL started offering R&D/product engineering services to technology companies in 1999 with the inception of HCL Technologies (see Table 1).

HCL Technologies at a Glance

Category Data

Global business focus • Engineering and R&D services. Comprehensive range of R&D and engineering services to component vendors, OEMs, ODMs, and ISVs across multiple industry segments and domains

• Enterprise application services. Package and platform-led services ranging from blue printing, development, deployment, global rollouts, help desk support to application maintenance in areas such as ERP, CRM, SCM, and middleware

• Enterprise transformation services. Services in areas such as business transformation, technology transformation, application transformation, and data transformation

• Custom application services. Services ranging from custom application development, deployment, and integration to corrective maintenance, new releases management, and backup recovery management

• IT infrastructure management services. Cost-effective management of technology infrastructure across geographically dispersed locations

• Business process outsourcing. Comprehensive range of voice/Web-based contact and front office services such as order to cash, procure to pay, technical help desk, knowledge services, supply chain management, finance and accounting services, and customer life-cycle management and more

2007 global service revenue $1.4 billion

2007 global revenue for R&D/product engineering $342 million services

2007 R&D/product engineering services share 23.9%

2008 global service revenue $1.9 billion

2008 global revenue for R&D/product engineering $479 million services

2008 R&D/product engineering services revenue share 25.2%

2007–2008 R&D/product engineering services revenue 40.0% growth

2007 global head count 42,000

2007 R&D/product engineering head count 10,500

HCL Technologies at a Glance

Category Data

2008 global head count 50,741

2008 R&D/product engineering head count 13,000

2008 R&D/product engineering head count growth 23.8%

Investment in infrastructure (labs, IP creation) and $15 million (over the past two years) employee certification

Global R&D/product engineering footprint Chennai, Bangalore, and Noida (India)

Source: IDC, 2008

Company Strategy

R&D/Product Engineering Vision and Strategy

R&D/product engineering services is a core focus area for HCL Technologies.

HCL Technologies' vision is to be a complete, end-to-end service provider to original equipment manufacturers (OEMs) and software product vendors through robust, certified, and industry-specific product development processes. HCL strives to achieve this vision through a continuous cycle of new and innovative business models. One example is its joint venture with Celestica, (a leading global manufacturer offering electronics manufacturing services) to provide concept-to- manufacturing (C2M) services.

Strategy and Action Plan to Achieve This Vision

The following are key elements of HCL Technologies strategy to achieve its vision for R&D/product engineering services:

HCL has well-defined market segments in its R&D/product engineering services offering. These include aerospace, auto, medical devices, networking + telecom OEMs, software product companies, semiconductor, server + storage, and consumer + Internet. HCL has a focused investment strategy for each of these segments.

HCL will continue to invest in labs and infrastructure.

It has made significant infrastructure investments that include creating a private certification and compliance lab in India, providing a complete user experience. This EMC and durability lab is ISO/IEC 17025 accredited and offers EMI/EMC testing, environmental testing, and certification services. Apart from this, HCL

4 #214698 ©2008 IDC also invested in dedicated labs for customers. For example, for a large global supplier of end-to-end wireless solutions for wireless communications networks, HCL set up a dedicated RF and ATE lab, software lab, and Antenna lab to design and test its wireless infrastructure equipment.

HCL Technologies will continue to focus and invest in IP and solution accelerators. It believes that solution accelerators are a key differentiator for the company.

It promotes flexible and unique business models such as the GRRP to take over the complete ownership of the engineering process for a product or suite of products and getting remunerated as a function of the sales or the joint venture with Celestica to provide end-to-end integrated engineering services also called concept to manufacturing.

HCL will increase penetration with Global Tech companies by providing multiple engineering services with increased value-adds. For example, for one of the world's leading supplier of process control and yield management solutions for the semiconductor and related microelectronics industries, HCL provides systems engineering services, software engineering services, mechanical engineering services, as well as low-volume manufacturing across multiple product lines.

It also has increased alliances/360 degree partnerships to drive a higher level of bilateral relationship with global tech major customers.

Role of R&D/Product Engineering Services in Achieving Overall Corporate Vision and Goals

R&D/product engineering services is a leading business for HCL Technologies. R&D/product engineering services accounts for approximately 26% of its total global revenue. It is growing at 40% annually and continues to increase its investment in this business. These services are a core of its value proposition and helps it in providing strategic advantage to its customers and partner community.

Core Competencies

HCL provides R&D/product engineering services to its customers. It provides end-to- end solutions and delivers complex and critical products. Its competency spans across domains such as telecom and networking, medical devices, consumer electronics, semiconductor, manufacturing, aerospace, automotive, computing systems, and contract manufacturing.

It offers a comprehensive range of R&D/product engineering services to component vendors, OEMs, ODMs, and ISVs across multiple industry segments and domains. HCL Technologies provides full life-cycle product engineering services, spanning from requirements definition to prototype architecture, development, testing, and technical help desk, field support, maintenance, and upgrades.

Concept to manufacturing for high-tech and manufacturing companies, including environment testing and compliance

Low-volume manufacturing and associated services, including supply chain integration, vendor management, and transfer of technology

Post-manufacturing services, including product life-cycle services and high-level technical support

Software product engineering solutions across the life cycle of a product, including new product development, testing, product support, end-of-life product solutions, SaaS, digital protection services, and Web 2.0 services

Engineering portfolio optimization (EPO)

Key Differentiators

HCL identifies the following areas as its key differentiators for its R&D/product engineering services offering:

R&D/product engineering services date back to its inception. HCL Technologies has significant experience in offering these services, and it offers a complete gamut of services that include hardware engineering, mechanical engineering, embedded engineering, and software engineering.

Its solutions (product/commercial) and solution accelerators (subject matter experts, IP, templates, etc.) effectively bridge the gap between business needs and challenges faced by customers and help its customers expand their product portfolio and market share and address new markets. Its key differentiator is its value proposition for customers to move from a "cost saving" positioning to an enabler for "revenue generation."

HCL has invested in EMC and the durability test lab that has ISO/IEC 17025 accreditation. This enables its product engineering customers to achieve product certifications faster.

Service Offerings

HCL Technologies R&D/product engineering expertise is built on a strong foundation of 30 years of investment and expertise. It offers unique integrated services that span hardware, software, electronic packaging, and value-added services to customers, especially in mission-critical, complex product engineering areas. Its investment in test labs, tools, and infrastructure, coupled with its rich portfolio of reusable components helps its customers to reduce cost and time to market.

HCL Technologies services offerings are summarized in Table 2.

HCL Technologies' R&D/Product Engineering Service Offerings by Industry

Computing Hardware/ Software/ Storage/ Other Aerospace/ Office Consumer Medical (Semi- Telecom Defense Automotive Automation Electronics Equipment equipment)

PLM services X X X X X X

Embedded X X X X X X X services

Engineering X X X X X X X design

Semiconductor X X X X X design and development

Plant design and X X X X X X automation

Software product X X X X X X X development

Source: IDC, 2008

HCL's breadth of service offerings include:

Hardware engineering. Domain-specific hardware engineering and design services in VLSI, ASIC, FPGA, and SoC engineering; board design, embedded software, mechanical engineering; and design, prototyping, and value-added engineering services such as compliance engineering, independent verification and validation, and low-volume manufacturing

Embedded engineering. Turnkey embedded systems development for new products as well as existing products, safety-critical embedded systems, embedded middleware, rich applications, and interactive GUI development for embedded systems

Mechanical engineering. Conceptual design, industrial and mechanical engineering design, CAD modeling and detailing, simulation, and analysis

Software product engineering. End-to-end software product engineering services, including changing market trends such as SaaS and emerging technologies based on solutions-focused methodologies across financial services, manufacturing, retail, and high tech among others

FIGURE 1

HCL Technologies' Product Engineering Expertise

Aerospace, automotive, Consumer Storage and Telecom/ Semi medical electronics servers networking conductor devices industrial

Cockpit/ SAN, NAS, Enterprise Fabrication cabin/body Multimedia, blade servers, networking and test subsystems, mobile phone, enterprise Systems equipment, equipment, automotive home servers, wireless, reference engineering electronics, entertainment, measurement infrastructure designs, medical and networking and control equipment components devices devices

Mechanical Structures, engineering composites, CAD, analysis, reliability engineering, industrial design, testing body parts

Storage and Engineering Consumer S/W, servers NMS, OSS/BSS, Automation and applications multimedia management IOS control software Software software engineering ISVs — enterprise products (ERP, DW/BI, CRM, SCM), infrastructure products (DBMS, OS, security), Internet portals and products, SaaS services

Source: IDC, 2008

Figure 2 highlights HCL Technologies revenue split by industry. Its key revenue engines include telecom, aerospace/defense, and medical equipment.

HCL Technologies' R&D/Product Engineering Services Revenue Share by Segment

Other (semiequipment) (8%) Telecom/ networking (38%) Medical equipment (12%)

Consumer electronics (7%) Computing hardware/software/ storage/office automation (10%) Automotive (5%) Aerospace/defense (20%)

Total = $479M

Source: IDC, 2008

According to HCL Technologies, new services will be significant growth drivers in R&D/product engineering services business and will be at the forefront of adoption of new tech trends. Mobility, convergence, SaaS, SOA, unified communications, social networking, green, virtualization, and so forth are some of the big trends that will become mainstream in the next two years and will provide new areas for growth.

Addressing Customers' Intellectual Property Concerns

All employees of HCL Technologies sign a confidentiality and nondisclosure agreement (NDA). This is to ensure that any business information and knowledge acquired during the course of project execution remains confidential and is not shared with anyone other than those associated with the project. It is duly appreciated by HCL that information pertaining to customer-specific applications and business is essentially a tool for maintaining the competitive edge and hence the need to ensure that it is not disclosed:

Nondisclosure agreement. The NDA could be specific to the ODC. The objectives of the agreement are as follows:

Generation of nondisclosure agreement document for each customer

Generating awareness among team members periodically

Inter-company nondisclosure and intellectual copyright protection agreement will be signed to ensure integrity

Nondisclosure signed by each employee working on the project

Non-compete clause for the marketplace signed with customers where relevant

Leveraging Investment in Labs and Certification

Tables 3 and 4 provide some examples of HCL Technologies' investment in labs and certification.

TABLE 3

HCL Technologies' Investment in R&D/Product Engineering Labs

Location/Year Skills Offered Employee Labs Lab Type Scope of Lab Work Inaugurated (Specific to Lab) Count

Lab 1 EMI/EMC lab General Chennai, India/2006 Electromagnetic 15 interference and compatibility

Lab 2 Durability test lab General Chennai, India/2006 Environment tests 10

Lab 3 Embedded systems General Chennai, India/2003 Feasibility study, 40 lab architecture, modeling and design, development, compatibility and interoperability, compliance testing, and regression testing

Lab 4 RF lab Customer specific Chennai, India/2004 RF circuit and system 7 design for wireless, microwave and medical devices

Lab 5 On-demand software Consumer specific 2008 Test automation, 5 test lab Domain specific test, security testing, and certification

Source: IDC, 2008

HCL Technologies' Investment in Certification

Head Count with Certification Skills Vertical This Certification

NARTE certification Independent compliance testing and verification NA 15

SNIA certification Storage networking Storage 75 networking

Security integrity level (SIL) Highly secure hardware design skills for Security and 10 certification products to be installed in inflammable surveillance environment

DO-254, design assurance Standard for complex electronic hardware Aero 200 guidance for airborne electronic development published by RTCA Inc. hardware

AS9100 Incorporates the entirety of the current version Aero 1500 of ISO 9000, while adding additional requirements relating to quality and safety

ISO13485 Comprehensive management system for the Medical 1000 design and manufacture of medical devices

Source: IDC, 2008

HCL Technologies has created an alliance ecosystem with many educational institutions. A sample list is provided in Table 5.

HCL Technologies' R&D/Product Engineering Educational Institution Alliances

Year Alliance Nature of Skills Sourced from Name of Educational Institution Location Formed Alliance/Focus Area Institution

SSN College of Engineering, Chennai, India NA NA Electronics, civil, Chennai mechanical, computer, biomedical

SRM University Chennai, India 2008 SPC with specific Analytics focus on multivariate analytics

IIT Chennai, Delhi 2001 Partnership for core Electronics, computer R&D projects for science, mechanical technology incubation

University of Columbia United States 2008 Joint product None development to aid the learning experience of the students

Sri Venkateswara Engineering Chennai 2007 Industry-Academia CSE, IT, ECE, EEE, College Partnerships EIE

Thiagarajar Engineering College Madurai 2007 Industry-Academia CSE, IT, ECE, EEE, Partnerships EIE

RV College of Engineering Bangalore 2008 Industry-Academia CSE, IT,ECE, EEE, Partnerships EIE

PES Institute of Technology Bangalore 2008 Industry-Academia CSE, IT, ECE, EEE, Partnerships EIE

VIT University Vellore 2008 Industry-Academia CSE, IT, ECE, EEE, Partnerships EIE

Stella Maris College Chennai 2007 Industry-Academia CSE, IT, B.Com, BBA Partnerships

Source: IDC, 2008

Table 6 provides an insight into HCL Technologies' joint ventures.

HCL Technologies' Joint Ventures

Name of Joint Venture Year Company or Acquired Acquired Service Offering/Skills Industry Focus

Celestica Joint venture 2005 Concept to manufacturing Full life-cycle product engineering for high-tech OEMs and technology companies

NEC Joint venture 2005 Embedded, ASIC,VLSI, Product engineering and product support Mobile

Source: IDC, 2008

Tables 7 and 8 provide insight into HCL Technologies R&D/product engineering customers.

TABLE 7

HCL Technologies' Customer Summary

Planned/Projected for Next Last Fiscal Year Current Fiscal Year Fiscal Year

Total customers 242 279 NA

Top 10 customer revenue share (%) 37.3 38.2 NA

Top 5 customers revenue share (%) 28.4 26.7 NA

Source: IDC, 2008

HCL Technologies' R&D/Product Engineering Customers

Geogra- Length of phies Customer Size of Contract Contract Covered Brief Description

Leading Japanese 25 million 5 years Japan, Maintenance and sustenance of company in printing and United multifunction printer products imaging States, Europe

Leading wireless product 25 million 2 year United Product development from concept to vendor States manufacture of a networking product

Leading vendor in fire 7 million 5 years United Product engineering and value and security States engineering

Leading Japanese 3 million 3 years Japan Embedded SW development semiconductor manufacturer

Computer associates risk reward Indefinite United Complete ownership of threat sharing States management suite

Source: IDC, 2008

FUTURE OUTLOOK

Having acquired more than 250 customers and with relevant infrastructure and experience to services multiple verticals, HCL Technologies continues to consolidate its presence for these services. However, there are other outsourcing and offshoring vendors that offer these services, and HCL Technologies needs to put in additional efforts to differentiate itself from its competitors. Although the GRRP model described previously is a good step in this direction, customer adoption will be key.

ESSENTIAL GUIDANCE

Advice for HCL Technologies

Increase marketing efforts, especially in the Americas, to improve brand image and perception.

Improve net revenue realization per head count for these services. This can be achieved by increased automation and creating and reusing IP components.

Add a couple of delivery locations either near-shore or onsite to its strongest customer base because currently delivery locations exist only in India.

Related Research

IBM: Harnessing the Global Ecosystem to Accelerate Time to Market — But Is There More to Do? (IDC #lcUS21472908, October 2008)

Outsourcing Research and Development/Product Engineering Services — Is a Hybrid Strategy the Way to Go? (IDC #211835, April 2008)

Outsourcing Research and Development — Customers Want to Cut Costs, and Vendors Are Reaping the Benefits (IDC #209385, November 2007)

IDC's Worldwide R&D Product Engineering Services Taxonomy, 2007 (IDC #209093, October 2007)

Research and Development/Product Engineering Services — A New Frontier of Opportunities (IDC #208397, August 2007)

This IDC research document was published as part of an IDC continuous intelligence service, providing written research, analyst interactions, telebriefings, and conferences. Visit www.idc.com to learn more about IDC subscription and consulting services. To view a list of IDC offices worldwide, visit www.idc.com/offices. Please contact the IDC Hotline at 800.343.4952, ext. 7988 (or +1.508.988.7988) or [email protected] for information on applying the price of this document toward the purchase of an IDC service or for information on additional copies or Web rights.