The Upside Down Company

When Vineet Nayar, the 48-year-old chief executive of HCL Technologies Limited, took the stage at the company’s fifth annual global conference in April in Orlando, Fla., he signaled for some heavy Bollywood disco music and began to shimmy and shake across the stage with his best Elaine Benes dance moves. The 1,000 HCL employees and customers roared and egged him on as the evening’s festive party turned into a raucous Bollywood extravaganza, replete with actresses, dancers and a faux wedding. The $2.6 billion global information technology services firm based in Noida, India, had reason to celebrate, having emerged from the recession with stunning growth and newfound global recognition. Since 2005, when Nayar took over as CEO, revenue and operating income more than tripled, the number of HCL customers grew fivefold, attrition among the 58,000 employees in 26 countries dropped by 50 percent, and HCL was named “Best Employer” in India and Asia by Hewitt Associates.

Nayar, with a decidedly unconventional leadership style, has gained star status in the business press and academic circles for his atypical views on how to run a company. His new book, “Employees First, Customers Second,” was published in June by Harvard Business Publishing, and Nayar is suddenly in demand. His methods would be considered unusual anywhere, but for a giant Indian information technology services firm, he was well out on the fringe.

When Nayar became CEO, the company, a pioneer in India’s emerging IT services sector at its inception in 1976, was rapidly losing its luster. HCL was among India’s top five information technology companies along with Infosys Technologies Limited and Wipro IT Business. But by 2005, it had become stagnant, with slowing growth and declining market share. The company needed a shake-up, and Nayar injected new life with an overhaul of the company’s culture. His belief that putting employees at the top of the value pyramid rather than at the bottom was viewed as aberrant in India’s conservative corporate culture. But Nayar, who graduated from one of India’s top business schools and joined HCL as a young M.B.A., is a self-proclaimed “sucker for transformation,” and he had long believed that command-and-control, top-down leadership was ineffective and suffocating for employees.

In his new book, Nayar wrote, “The role of leadership is perhaps the most difficult to define in companies that compete in a knowledge economy. One of the structural flaws of traditional management systems is that the leader holds too much power. That prevents the organization from becoming democratized and the energy of the employees from being released.”

Nayar had heard many CEOs claim that their people were the company’s most important asset, but few actually walked the talk. In order to truly empower employees, “you must stop thinking of yourself as the only source of change,” Nayar wrote. “You must avoid the urge to answer every question or provide a solution to every problem.”

Taking a leap of faith, Nayar turned the organization upside down, putting employees who create the real value in the company at the top so they would no longer be hampered by the managers and executives. In this new HCL, the managers became accountable to the people who created the value.

Having grown up in a small town in the foothills of the Himalayas in northern India, Nayar has always been inspired by mountains. “You always want to climb them, and you always want to look beyond them,” he said. In this interview with Glenn Rifkin, a contributing editor for Briefings on Talent & Leadership, at the Orlando global conference, Nayar talked about looking beyond the mountains in his management philosophy and the impact of his outlook on HCL.

In reading your new book, “Employees First, Customers Second,” one gets the feeling that you have developed great insight into what motivates people. Where did that come from?

NAYAR: I’ve floundered my way into these opinions and therefore, in hindsight, the book looks impressive. In fact, these opinions are the results of lots of experiments, so the last impression I want to give is that I have any foresight on human behavior. However, I love people. And the question I ask is, “Who’s the person? Is the person someone who walks into the company?” In my own case, most of my life, the person who walked into the company was actually not me, at least not all of me. It was a very small percentage of me. I’m a father. I’m a sports enthusiast. I’m a social worker. I’m a son. I like my movies. I like to read some crazy books. And also I understand technology. And most of my life, HCL actually took only one part of me, which is the part that understands technology. And I’m very good at it. Therefore, they loved me for that. But they left the other seven elements out. So the more I thought about that, the better I understood that the more of those seven complements that we can bring inside the organization, the more beautiful the organization becomes.

Among your innovations is the way you have inverted the pyramid within HCL, making employees first. What was the most important part of that transition?

NAYAR: The real initiative isn’t employees first because most companies will get that wrong. The key is customers second. And let me explain what I mean. I see a zone of control and a zone of value. Traditionally, the zone of control — i.e., the managers, the office of the CEO — was very closely linked to the zone of value. The entrepreneur who created the company, he was an engineer, an auditing guy, a manufacturing expert, and everything that happened was linked to his expertise. The guy in control was the guy creating the value. But with the emergence of the knowledge economy, the Internet, emerging global markets, service industries and business complexity, the zone of control remained where it was, in the CEO’s office or with the managers. But the value zone has moved far away into the interface between customers and employees. Suddenly, you have an organization where the control zone and value zone are far apart. If you try to spread your legs as far as you can, there’s no way you can walk. So one of the reasons so many large companies are struggling and unable to grow is they have spread legs. And that was true with HCL Technologies when I took over.

How did you address that?

NAYAR: The first thing we discovered as a team was the fact that the person in control was actually not creating any value, and the people who were creating value had no control. So we created what I call a star organization. The control pyramid remains in place because you need it for governance and compensation and important organizational structures. But we also inverted the pyramid, placed it over the control pyramid and created a star so the people who are creating the value gained control as well.

So you created a star.

NAYAR: We created a star. Now let me take it to the next level. With each passing day, you learn more. And when I was explaining this concept of employee first to a group of very young people at work, they began to debate with me. One fellow said, “You know, you are old.” And I said, “Why?” He said, “Because you think in straight lines.” And I said, “What does that mean?” He said, “Young people like us are always collaborating, so we are circles. You see it as the pyramid you have made into a star. Now you need to make it a sphere.” Which is what the collaborative enterprise really is.

Interesting take on the concept.

NAYAR: It was interesting. And by the way, none of these are my ideas. But once they told me I had to think about a sphere, I said, “Okay, so how do I create the next generation organization which looks like a sphere and there are concentric circles that are collaborating among themselves and the straight lines are gone?” These catalyst kinds of ideas have a big impact, and they allowed us to move very fast.

These ideas would be challenging anywhere, but I think they would be particularly difficult to implement in India, with its more conservative corporate culture. Did people look at you as if you had just arrived from Mars?

NAYAR: Well, the first thing is that 95 percent of our revenues come from outside of India. We have about 6,000 employees in the U.S. alone; the same number in Europe and also in some other countries. So we have a huge global work force. I was in search of an idea which had global implications and was culturally agnostic. It didn’t matter if I was Indian or European or a Swede or a German because it had to connect the whole company. “Employees First, Customers Second” has nothing to do with the control pyramid, because that is cultural. For example, the Americans would be a lot more empowered, and the Indians and the Chinese would maybe be a lot more structured and aligned. I didn’t touch any of that. I just inverted the value pyramid, so when it comes to creating value, who is the smartest? The guy in the value zone, and that goes across cultures.

And it is easy to understand.

NAYAR: It is easy to understand. If you want to make a good transformation, do not take big steps trying to lead massive transformation initiatives. Take small catalyst actions which create huge multiple impacts. For example, we opened up the 360-degree review so that anyone in the organization can see the results. Though this certainly created some concern among managers and executives, it would mean the manager’s boss would become far less powerful in the process, just one voice among many. The team in the value zone would be determining the results of the review, a significant step to inverting the pyramid, and you start running much faster than you ever did before.

Was there a moment during this transformation when you felt it was really kicking in?

NAYAR: One of the most important parts of life is to be very honest and realize that you don’t know what you don’t know. The first time I met with all the employees, I told them very clearly that I don’t know, which was true. Because we are involved with very complex technologies and have complex customers and if they were to look up to me, I knew I didn’t have the answers. I realized later that was the moment that the transfer of ownership of change started happening. I said, “You have a buffoon of a CEO who has come in, so you might as well do something if you want to survive.” A second thing I realized early was that instead of trying to convince everybody, I only had to convince what I call the “transformers,” the people who were just waiting for a conductor to call, “All aboard,” as opposed to the lost souls, who sit in meetings with frowns on their faces, and the fence sitters, the largest group, who watch and wait for something to happen. It was just a few people who were convinced this was a radical idea, and it got them excited so we could move forward.

You speak in the book about instituting the “mirror-mirror” exercise when you took over as CEO. You asked every employee to look in the mirror and truthfully and openly assess what they saw. What was the impact?

NAYAR: “Mirror-mirror” triggered the kind of honest conversation that got the company excited. These employees were suddenly washing dirty linen in public, and they had never seen this as part of our culture before. The result was that we created trust.

How did this translate into value creation?

NAYAR: I think the first logical question to ask is, “What is the business of the company?” To create value. The second question is, “Where is the value being created?” In the interface between the employee and the customer. Okay. So what should the business of management be? To maximize the value creation. How can management maximize the value creation? By being in the business of enabling, enthusing, encouraging. And not by controlling. So once we understood the logic in all of this, we were very clear that if the management focuses on the employees, the value for the customers will be created as a competitive advantage.

But it still takes more for the transformation to really take effect.

NAYAR: Right. Once we were very clear that it’s not about the love for employees but the love for growth, that brought employee-centricity to the forefront as a strategic initiative for competitive differentiation. But once you are zoned in, the question is, “How do you make the transformation happen?” Step one of the transformation is learning from the past. When you think about great leaders, heroes like Gandhi and Nelson Mandela, what they did was they created dissatisfaction with today. There are lots of companies which are not growing, but I don’t think they’re unhappy with themselves. So the first thing you need to do is make them unhappy with themselves, and then you need to create the romance of tomorrow, where you can be free or you can be great or you can be number one. And then you must tie those strategies together. And that’s what the “mirror-mirror” exercise is all about. Thus, unless you become uncomfortable with who you are, you will not stop being an ant. You can be a fast ant, you can be a rich ant, but you’re still an ant and you’ll never be a butterfly.

And that is just the beginning of the transformation?

NAYAR: Yes. One thing I saw early on was that we didn’t do a good job of having a transparent, trust-based relationship with our employees. So the trust quotient between the employees and the management was very low. On the other side, the complexity of business was very high. You need to transform, you need to go to emerging markets, you need to drop your price, you need to compete, and for all that, you need employee innovation. In this era of the pink slip, you now have disenchanted employees because of the way you behaved, not with the people you fired but with the people who remain. You are putting them in uncertain situations, and every time they come to the office, they wonder if a pink slip is waiting. The employee doesn’t trust you, and so you’ll have maybe one-tenth of that employee coming to the office. You have to create a culture of trust, and that can only happen by pushing the envelope of transparency.

This is a lot tougher than you make it sound.

NAYAR: The last part, which is extremely important, is to transfer the ownership of change. Once you do that, beautiful things happen. This is how revolutions happen. Nelson Mandela is a great example. He is no longer the president of South Africa, but the amount of transformation and influence he has brought there is significant. When he had the opportunity, he kept himself behind the scenes rather than out front. Nobody else could have done what he has done.

This all sounds fine on paper, but I suspect some skeptics will ask, “Can this work for my company?” A lot of corporate leaders are just not comfortable letting go in the way you are suggesting.

NAYAR: This book is not meant for the CEOs. This book is meant for managers. The question is, “Why do you have to depend on your CEO to change anything?”

Because he gets paid $10 million a year plus bonus.

NAYAR: Forget it. You have to ask yourself, “Are you in the business of making your company better or evolving as a better manager?” That’s the first question to ask. The second is, “Because there are so many skeptics, is there an opportunity?” If everybody gets it, everybody can do it. So what’s the competitive differentiation? There is an opportunity to translate this into competitive advantage because there are so many people out there who don’t get it. Because it needs more than intellect. It needs application. It needs you to take the leap of faith. So if you are a person who gets it and has the capability to take the leap of faith, you actually will outperform everybody else as a team leader. You will be able to galvanize the entire team, and you will grow much faster.

You say your role as a father taught you lessons?

NAYAR: The family unit has always been about command and control, but it has to evolve. When my dad told me to do engineering, I did. When I told my son I did engineering, he said, “That’s what I will not do! Why? Because that’s what you did!” So if the family unit is to survive, it’ll move toward collaboration. I now tell my children, “I want to be a friend of yours. When you have your first girlfriend or boyfriend, I should be the first to know.” As a father, you learn a lot. Today, the kids’ aspirations are different, their attitudes are different, their way of collaboration is different and the world is very different, and unfortunately, today, our structures make them square pegs in round holes. Thinking about this got me hugely interested in the “how” of running companies rather than the “what” of running companies. So as the family unit is changing, you must understand that these young people are coming into the companies, and they too need to change.

Gen Y?

NAYAR: Yes, Gen Y is coming to the company. So how can you maintain the old management style? There is a fantastic opportunity for young managers to adopt a new management style, maybe this, or maybe something else. I hope this book acts as a trigger of thought and experimentation. With the Facebook generation, you have to get deep into what they are thinking and transform your management style to galvanize them. Your ability to deliver transformation is based on this.

How then would you define leadership?

NAYAR: It’s very difficult to say. In a Facebook culture, the concept called “leadership” doesn’t exist. We have an obsession with the word leadership. I believe in a collaborative enterprise like Facebook. Who’s the leader? If I want to buy a skateboard, you may be the leader, or if I want to find a good restaurant, someone else might be the leader. Worldwide, 50 percent of the population is less than 25 years old. For them, who’s the leader? There is no leader. They have role models for what is relevant. And everybody has maybe 10 or 15 role models. Some in music. Some in video. Some in social enterprise. So when somebody asks me what kind of a leader I am, I shudder to think because I don’t have the answer. I don’t truly believe in the concept called “omnipresent leader.” Leadership should be finding role models and connecting them with the people who need those role models.

Not everyone is comfortable with so many choices and so much freedom. Are there people who would not be comfortable at HCL, so you simply do not hire them? Can you know that about people when you are in the hiring process?

NAYAR: In the end, basically, you join a company to be successful. If “Employees First, Customers Second” makes you successful, you’ll adopt it. If it doesn’t, you’ll resist it. It doesn’t matter if it is a corporate culture or written in blue or red. Does it work? In HCL, in these five years, we have role models who have adopted this and it made them successful. So new employees are not adopting it because they are convinced about it; they are adopting it because it is going to make them successful. We are not in the business of brainwashing you.

Are your reward systems tied to all this? Are there incentives for employees to adopt your methods? Do you pay more than your competitors?

NAYAR: I think there are two very important fundamental issues. Number one, HCL pays as much as it was paying in 2005, when I took over. So there has been no compensation policy changed. The basis of your question is, “Is reward important or recognition important?”

Yes.

NAYAR: Both are, but reward without recognition is a single boring line. In fact, in our 360-degree review, when someone gets great scores and everybody in the company sees them, what do you think happens to you? You get extremely motivated. You get recognized. And when employees send a message to the manager that a thousand of us think you are very great? You walk on water that day.

But eventually, you want to buy your house and pay for your kids’ college.

NAYAR: I’m saying we are liberal in our compensation. It’s not an issue. But compensation is table stakes; it’s not the differentiating factor.

A key part of your concept is reverse accountability. You talk about the fact that employees are accountable, not only to their immediate managers but also to enabling functions like finance, HR, quality assurance, service, etc. How do you turn that around on itself?

NAYAR: We used to believe that our kids were accountable to us, and we were not accountable to them. But nowadays, many parents feel accountable to their children: that their actions, inactions, behaviors, ideas play a big role in influencing their children. How does that apply within an organization? Employees must be accountable to you because you believe control, governance, all that with which we surround ourselves in organizations is very important. So we said, “Okay. Now how can we invert it?” Keep in mind, the enabling functions like HR and finance create no value in the value zone; they enable it. But because of SEC regulations and other factors, they suddenly became very important. They control the value zone without adding any value to it. So I said, “How can we make them and the managers accountable to this value zone?” We created what we call a “Smart Service Desk,” which allows any employee who has a problem to open a trouble ticket on any of the enabling functions. It is similar to the process we use with customers. The open ticket allows a problem to be tracked from the outset until it is resolved. By instituting a similar process internally for employees and the enabling functions, we were able to create a transparent, efficient system for resolving internal issues. The employee who opened the ticket determines when the problem is sufficiently resolved.

How about the managers?

NAYAR: When you are in trouble, you go to your manager and he or she picks up the phone and makes a call to a friend and fixes things for you. I call that “the hand of God” role. That’s the manager’s value add — not in solving your problem or empowering you or doing anything. It’s just this hand of God role. If the call isn’t made, you don’t get your bonus or something bad happens to you. The manager is not creating value for the value zone. And if information is available to everyone and access to services is available to everybody, the manager is no longer the hand of God. Instead, we will measure those managers by the value they are creating for the employee, and everyone will see that value through the 360-degree evaluation. Through this, we created reverse accountability.

Of course, this requires a tremendous amount of transparency, which could be potentially dangerous, especially in the financial sector or pharmaceuticals or businesses where information is so crucial.

NAYAR: If you become fearful of your competitors, are you also afraid of what happens when two of your employees working on the same project don’t know what is happening in the project? Which is worse? We have most HCL people in synch, marching in one direction. But does some information leak? Of course it does. But it would leak anyway. I think the power of collaboration through transparency and the trust it creates is a significantly higher gain than the potential negatives. And there have been negatives. We’ve had a lot of information leak out which put us in very embarrassing positions. But that’s fine. You make choices in life.

Is there an example of a negative impact?

NAYAR: When a team knew that it was not doing well, it caused demotivation. And if the manager is not capable of handling that demotivation, we have attrition. People don’t want to be working on failed projects or failed businesses.

So you lost some people?

NAYAR: We lost some people. And there were also instances where it didn’t work when things were going extremely well. People became lazy. But here’s what happened. Those projects which were not doing well suddenly attracted a lot of transformers and they said, “Vineet, give me a chance. I’ll turn it around.” They motivated the team by saying, “Hey guys, we are not doing well. Here’s an opportunity of turning it around.” And you know what? The organization notices turnaround more than it notes happy projects. So suddenly you attracted the right talent to turn around a bad business. And in the end, it turned out positive.

The transformation at HCL is a continuing metamorphosis, a work in progress. What keeps you up at night when you think about the future?

NAYAR: Sustainability. I think the experimental journey we have begun has worked for the last five years. But I still believe that I’m standing on the ledge of a burning building predominantly because I don’t think we have even started understanding how to involve the human being. My book is really all about putting the human being back in business and involving the whole person rather than one part of the person. I do not think we have done justice toward that objective. We have just taken one step forward.