HCL Tech acquires Volvo's external IT business

Deal to fetch $1.75 billion in revenues over next 5 years

HCL Technologies, India’s fourth-largest information technology (IT) services company, has said it has acquired the external IT business of Swedish auto maker Volvo Group for $138 million (Rs 895 crore). The potential revenue opportunity from the deal is estimated to be $1.75 billion over the next five years, which makes it one of the largest contracts in recent years.

The letter of intent for this acquisition was signed in October 2015.

The deal also mandates HCL Technologies to take over 2,500 employees of Volvo Group globally including 200 in India who are working with its IT business unit.

Volvo’s external IT business, which serves around 40 customers in the Nordic and France regions, fetches revenues of around $200 million a year. Apart from gaining access to the IT outsourcing works from external clients, HCL Technologies would also provide services to the Volvo Group as the sole global vendor, which is estimated to fetch the company around $750 million in revenue over five years.

“The Volvo Group employees and consultants will add great value for our customers with the skills and expertise that they bring,” said Anant Gupta, president and chief executive officer of HCL Technologies.

While HCL did not comment on the contract size, the company termed the deal one of the largest IT agreements signed by any Indian IT firm, and a first in the sector to use the principles of ‘vested sourcing’. Vested sourcing is a business model in which both the outsourcing company and the service provider focus on shared values and goals to create an arrangement that is mutually beneficial to each.

According to HCL Technologies, it would deliver on a technology transformation roadmap spanning 3,500 applications, 20 data centres, 11,000 servers, 12 petabyte of storage, 20,000-plus MIPS (microprocessor without interlocked pipeline stages) of mainframe capacity and 15,000 network devices. As part of this roadmap, HCL would also provide 65,000 end users of Volvo with access to productivity and user enablement solutions such as Microsoft Office 365.

The relationship will enable HCL to create an automotive Centre of Excellence in Gothenburg, based on the domain expertise of the Volvo team, to serve HCL's global automotive and manufacturing customers.

“Combining the strengths of HCL with those of the transferred parts of Volvo IT will result in an organisation with formidable capabilities and an intimate understanding of Volvo Group needs and opportunities. This, and the cultural fit between our two organisations, is the foundation for a partnership that will provide long term and strategic benefits for the Volvo Group,” said Olle Högblom, chief information officer of the Volvo Group and president of Volvo IT.

According to industry experts, HCL Tech’s engagement with Volvo is a classic example of how global majors are outsourcing their entire IT operations to third-party service providers to focus on their core businesses. Such deals always come with an ‘employee rebadging’ clause wherein the service providers take over the employees of clients and rebadge them onto their rolls.
 
In 2014, Wipro, India’s third-largest IT services company, had also bagged a similar contract from Canadian company ATCO Group.

Wipro acquired ATCO I-Tek for $195 million (Rs 1,176 crore) and secured committed outsourcing contracts of $1.2 billion over 10 years.
WHAT IT MEANS FOR HCL TECH

• Acquires 2,500 employees from Volvo Group
• Gets assured revenues of around $200 mn per annum for 5 years
• Gets the status of sole IT vendor for Volvo
• Volvo’s internal IT works estimated to fetch it around $150 mn for annum