The last week's biggest news in PLM, ERP and enterprise IT is undoubtedly Indian HCL's purchase of Volvo IT. The sale process started over a year ago and involved a reorganization of the company's PLM and ERP resources.
The deal, worth an estimated $110 millon, means that Volvo Group (containing Volvo Trucks, Renault Truck, Mack Trucks, Volvo Penta and Volvo Construction Equipment, among others) will divest its external IT business to HCL Technologies and enter an infrastructure outsourcing agreement with the company.
As many guessed, it was the Indian IT company HCL Technologies which drew the longest straw in the fight over Volvo IT.
The transaction is expected to close during the second quarter of next year. The Volvo Group’s operating income and net financial debt is expected to be positively affected by approximately $107 million.
The Volvo Group has an ongoing "efficiency program" which aims to cut costs by $1,2 billion. Acting CEO, CFO Jan Gurander said the deal should be seen in the context of this program.
But what exactly is HCL buying? How did Volvo avoid draining the company of the core PLM and ERP competence that used to be one of Volvo IT’s primary assets? What are the implications of Volvo’s decision to turn its infrastructure business over to HCL instead of IBM?
Volvo has been one of IBM's largest infrastructure customers in the Nordic countries, so clearly the missed deal will have repercussions on IBM’s Nordic operations.
Volvo's divestiture of Volvo IT has been expected for a long time.
“Car manufacturers such as VW and Mercedes-Benz and other high-tech manufacturers that created captives have sold them long ago, and although Volvo had some external clients, it didn't seem to make much sense for it to branch out into IT by owning an IT services company,” says IDC analyst, Charlotte Poulsen, adding that another problem was that Volvo IT didn't show strong growth or strong profitability.
A final battle between HCL and IBM
The decision to divest was finally made and announced in April this year. In addition to both Volvo Group (Trucks, Buses, Construction Equipment, Marine Engines, etc.) and Volvo Cars, it has a number of other major clients including Assa Abloy, H&M and the City of Stockholm.
Overall, this is an attractive customer base, and during the past six months Volvo IT has been courted by a number of big players in the IT industry. This reached its conclusion last week, when the final battle between HCL and IBM ended in a positive outcome for the former.
The failure to win this bidding war is certain to have repercussions for Big Blue, as Volvo has been a big part of the company’s mainframe business in the Nordic region.
“A partner that can ensure our IT infrastructure”
In some ways, the fact that HCL eventually won the tug of war over ownership is not surprising.
In Scandinavia, HCL was not one of the major players. According to analyst IDC, they were number 24 in size in 2014. But with this deal, HCL now takes a shortcut into the leading market layers.
IDC believes that it will end up on the top-ten list next year.
The company is a global IT provider with extensive experience in cross-industry projects for large international companies.
HCL focuses on what it describes as “transformational outsourcing,” with an integrated portfolio of services including software driven solutions, operation of infrastructure and applications as well as services for research and development.
“This has been a thorough process and I am pleased with the outcome. Not only will our cooperation with HCL Technologies provide significant cost-savings, we will also make a capital gain when the contract is signed,” said Jan Gurander.
He continued, “An equally important aspect is that we will have a partner who can ensure that the operation of our IT infrastructure is developed in a manner that will enable us to be at the forefront of our industry.”
What are they selling?
Those are the facts at a glance, but what is Volvo really selling? This is where it gets a bit more complex and difficult to investigate.
Organizationally, AB Volvo previously had three "clusters," companies related to its IT activities:
- Volvo IT, who worked with "short" projects stretching no more than two years into the future. Within this span of time, it had responsibility for the operation and development of existing systems and legacy systems. It also had a very important say when it came to a lot of the definition of business requirements, and most of the project management.
- Volvo Technology, which looks more toward the horizon, and is responsible for how things regarding IT (related to product and production) should look like from three years out toas far as 40 years, into the future. Their responsibility was keeping an eye on developments to ensure that Volvo would always remain at the technological forefront.
- "Regular" AB Volvo, the core business, which was responsible for everything related to business requirements; a role which was not always clear, as sometimes part of this was handed over to Volvo IT.
Volvo Group restructured a year ago
That’s approximately how the distribution of power looked, up until a year ago when all of it was restructured.
One of the reasons for the restructuring might have been a wish to sell Volvo IT, but to sell off the operation as described above would have drained AB Volvo of key competence.
Thus the restructuring was initiated to establish which parts of Volvo IT and Volvo Technology would be absorbed by AB Volvo’s Global Truck Operations and Global Truck Technology.
What remained was a Volvo IT reduced to an organization based purely around implementation and operational services.
Global Truck Operations (GTO) is responsible for everything related to production; in short, manufacturing.
Global Truck Technology (CCT) is responsible for things like requirements definition and product development.
What’s left at Volvo IT included stuff like legacy systems (type KOLA), system maintenance, responsibility for upgrades, etc.
For example, whether KOLA - Volvo’s proprietary product database and product configurator, which can be described as the "heart" of Volvo's PLM system - remains under the Volvo IT umbrella or under HCL is still unclear. But most likely this system was transferred to AB Volvo before Volvo IT was put up for sale.
Who buys the licenses?
The result of the situation detailed above is that parts of AB Volvo's PLM and ERP portfolio, as of the second quarter of 2016, will be managed by the HCL Technologies owned Volvo IT.
Whether this company will be responsible for the purchasing of the software licenses is not something revealed in the press material.
When it comes to ERP and PLM, Volvo uses of a series of well known solutions from SAP (ERP systems), Dassault Systemes CATIA (CAD software) and Delmia (digital production management), PTC (Windchill PDMLink and CREO/ProE, the latter also CAD software), Siemens PLM (TC/Tecnomatix, an MPM software) and SMARTEAM (PDM software used in VCE).
On the simulation and analysis side, they have solutions from vendors like ANSYS and MSC.
It does not seem unreasonable that if Volvo IT changes hands, it will also require (or, alternatively, already requires) that the license agreements must be transferred.
2,600 People to Switch Employers
However, what is clear is that about 2,600 people in AB Volvo will be asked to change employers.
They will be offered to go over to the HCL and continue their respective roles there, and "continue to work closely with their old colleagues.".
This means that employees who switch to HCL Technology will continue to operate in an environment where information technology is the core business, said Jan Gurander, adding that, "I am convinced that this will benefit the staff, suppliers and customers."
Volvo's press release also emphasizes the opportunities for the rebadged staff in working for a service provider with growth in the region.
“HCL has undertaken large deals with substantial staff transfers before, more recently with Alcatel-Lucent, which included the transfer of around 1,200 people. This new transfer is more than double that, showing great trust from Volvo and highlighting HCL's ambitions for growth in the region where it already has substantial presence, for instance through deals with Statoil, IKEA, Electrolux, Husqvarna, and many others,” asserts IDC’s Poulsen.
HCL's chairman and CEO, Anant Gupta, said in a statement that there is great value in helping to develop such a prominent organization as Volvo. “We are also delighted to welcome the highly skilled personnel, as well as customers and other partners in the value creation network.”