HCL today announced the acquisition of nine IBM software products for $1.8 billion which will give HCL a revenue run rate of $650 million from second year onwards. It is a part of its product or Mode 3 strategy and a logical progression of its IP partnerships with IBM to complete ownership of few product lines. Will it be successful? While full details are yet to emerge, a quick take on three pros and cons of this strategic move.

Three pros or why it can work?

  1. Channel: It creates a sizeable channel of selling software products for HCL to customers all over the world. The biggest issue, new software product firms face is access to channel to customers. Here HCL gets it in one go. It can leverage it to sell its own products, and also use it to sell products from future acquisitions of other ISV firms and niche startups.
  2. Relationship: HCL gets 5000 customer relationship with customers in different geographies which it can leverage for selling its other services from apps, infra, engineering, IoT, BPO, digital and others.
  3. Expertise: HCL will gain firsthand expertise and strong credentials of owning, developing and transforming these products which it can leverage it in growing its software product engineering business.

Three cons or why it wouldn’t work?

  1. Never worked: Software and service business together don’t always work together. HP acquired Autonomy for $10 billion+ and later had to split it into four units. Analysts and insiders are also talking about way forward for IBM is to split its hardware, software and services divisions. Even hardware and services business don’t work together and Dell, Xerox, HP, etc. who acquired services business of Perot, ACS and EDS had to sell it off.
  2. Utility of products: The long-term potential of these products is uncertain, and that’s one of the reasons that IBM is divesting. Will HCL be able to transform and create future of these products?
  3. Brand name: Customers purchased these products from IBM in the days where you can’t be fired to use IBM products. Will these customers be equally comfortable in now HCL products?

Bottom line: ” It is a bold strategic move by HCL and differentiates it from other Indian IT service providers. It’s a risky move for sure, and success will lie in execution. But if successful, the gains could be bigger too. “


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