The IT company has set a scorching pace. Can it sustain the momentum?
At least, the market has begun to speculate over this. “Cognizant is giving a head-on to Wipro and Infosys. Also, after TCS, Wipro and Infosys, Cognizant is the fourth company to cross the 100,000-employee mark,” says Vijay Gautam, senior equity research analyst at Jaypee Capital. Though Wipro closed fiscal 2010 with a lead of $898 million over Cognizant, in fiscal 2011, the lead in the first two quarters is just $155 million (in IT services).
Sixteen-year-old Cognizant’s rise through the ranks vis-à-vis 40-year-old TCS, 29-year-old Infosys and 30-year-old Wipro is causing a fairly disruptive phenomenon in the industry today, as Cognizant has made significant gains even against the top two. In more than two years since the April-June quarter of 2008, Cognizant has narrowed the revenue gap with Infosys from 1.69 times to 1.23 times. And from 2.23 times to 1.64 times with TCS.
In the past year, Cognizant has overtaken Infosys to become the second-largest player in the US in financial services behind TCS, according to an industry source. This area has been the forte of its competitors. The growth story is not lost on the stockmarket, where it is valued at a 30-40 per cent premium on EBITDA over TCS and Wipro, says Gaurav Gupta, managing partner (India) of Everest Group, an international outsourcing research firm.
Rivals, though, are quick to point out that Cognizant is not strictly an Indian company. Even though its inception was in Chennai in 1994 when Dun & Bradstreet Corporation, a US-based consultancy, opened a captive centre in India. But after it was spun off as a separate company in 1996, Cognizant got listed on Nasdaq, in the US. Its global headquarters was at Teaneck in New Jersey. Further, the company is 95 per cent owned by international institutional investors and mutual funds.
However, with 75 per cent of the Cognizant workforce operating from India and the global delivery head and the vice-chairman now making Chennai the base of their operations, like it or not, Cognizant will continue to be compared with India’s biggest IT companies. More so because it competes for a share of the same global IT outsourcing pie. Analysts say the key to Cognizant’s growth lies in its ability to mine clients. But the real kick may be coming from the very genesis of the organisation.
Straddling Both Ends
Before Cognizant was founded in 1994, there were two kinds of IT companies. India-based IT companies were conceptualised as offshore, trans-continental, software-development and support organisations to leverage the cost advantage, while large foreign IT companies operated onshore from the US or Europe.
Cognizant’s founders — including current vice-chairman Lakshmi Narayanan, CEO Francisco D’Souza and president and managing director of global delivery R. Chandrasekaran — saw an opportunity in straddling both the onshore (US and Europe) and offshore businesses.
“There existed an opportunity to create a company with a business model that was fairly positioned in between the Big 8 consulting companies and the India-centric players, and create a different value proposition for our clients,” says the 42-year-old D’Souza, who is based in the US. Though it was spun off as an independent IT company with a staff of 500, Cognizant continued to be US-heavy on employee strength.
While most of the top management of Indian IT companies (except, perhaps, the marketing head) operated out of India, Cognizant’s current CEO has always been based in the US. “No one from the leadership (of other Indian IT companies) lived and worked in the US. Cognizant’s CEO lives and operates out of the US. They have localised faster,” says Mukesh Aghi, chairman and CEO of Steria (India), a Europe-based IT services company.
And now, even though Cognizant employs over 100,000 people, 25 per cent of them are its international employees as against 6-8 per cent for TCS, Infosys and Wipro. TCS, for instance, now plans to prop up its US headcount by 1,000, while Cognizant has 25,000 employees on its US and Europe payroll.
Such large presence at the customer’s end continues to give Cognizant a client-mining advantage. D’Souza explains how mining delivers results. Cognizant’s relationship with US pharmaceutical major AstraZeneca began in 2004 when Cognizant provided IT support in discovery, clinical functions, manufacturing and commercial operations.
Jeff Smith, group chief technology officer at US insurance company Torus, explains why he prefers Cognizant. “We had high geographic growth plan and we needed a partner who is agile and flexible. In the past, I worked with Infosys and Wipro. The others were not as agile, cost effective and flexible.” Smith says Cognizant has increased and decreased its staff as per the project requirement.
While over 90 per cent of its revenues come from existing clients, for rivals TCS, Infosys and Wipro, the figure stands at 98 per cent, 97.3 per cent and 95 per cent respectively, according to an analyst. “Cognizant is very customer centric; an Accenture model at low cost,” says Sean Narayanan, chief delivery officer at IT services company iGate.
Up until today, Cognizant continues to leverage its consultancy lineage in what its clients consider a deep understanding of sectors. “They are customer centric, and at the same time very domain centric,” says Rohit Kapoor, CEO of India’s third largest BPO company EXL Services, which has provided BPO services to several of Cognizant’s clients.
According to Kolkata-based B2B e-commerce company mjunction, Cognizant has been able to look at their business not as an IT provider, but more from the eyes of a strategic partner who understands business. Says its managing director Viresh Oberoi: “When we took Cognizant on board for our B2C business, we did not even know which software to use. They suggested (that to) us. The company has the ability to sit on your seat and see the business,” says Oberoi.
As much as Cognizant was outward looking for new business, it has been inward looking when it came to investing in its own business. One of its guiding principles, according to Narayanan, has been that the management would keep operating margins lower than the industry, at 18-19 per cent, while cash is reinvested into the business in the form of employees, sales and marketing, and building domain capabilities.
Cognizant claims it hires more MBAs than any of the top three IT companies. This has helped the company understand the business model better. “The MBAs become part and parcel of any engagement — how do you understand the customer’s problem and convert it into a project definition or an electronic definition,” says Chandrasekaran.
Gordon Coburn, chief financial and operating officer at Cognizant, explains: “Our competitors look at maximising margins. Our focus has always been on the top line, though looking at a stable but lower (operating) margin.”
While Infosys operates at operating margins of more than 30 per cent, TCS operates at 25-30 per cent and Wipro at about 25 per cent. Coburn says Cognizant’s mantra has been to grow faster than the competition. Key to that has been what Cognizant calls its two-in-a-box model, where it has two business heads — one at the delivery end and one at the sale and customer end.
“This model is something many have, but they (Cognizant) have over-invested in sales,” says Everest’s Gupta. “During the downturn, they never stopped the pitch while others did. They never stopped the dialogue,” says Ashwin Shirvaikar, chartered financial analyst and director at Citi Investment Research.
But an area the company obsesses over is integrating its BPO with its IT services. Chandrasekaran feels it is important to have a parallel go-to-market strategy where BPO forms an integral part. Cognizant, for instance, did not have BPO delivery capabilities until it bought UBS’s India service centre in 2009. But even UBS’s 2,000-seat centre does not provide the company the scale it needs. It is widely believed that Cognizant has been in discussions to buy India’s largest BPO company Genpact for the past 6-7 months.
So, what will BPO bring to its stable? “It was a different service line. People were looking at it — voice or data entry. But as IT and business operations are coming together, it opens a lot of business opportunities in the adjacent areas. Now, we are able to look at complex business processes,” says Chandrasekaran.
But integrated delivery is not the most unique strategy. And the company might find it tough to bring in the differentiator as both IT companies and BPO companies are looking at integrated models. Wipro, for instance, is integrating its IT services with BPO.
Ashutosh Vaidya, president of Wipro BPO, says though 95 per cent of the business is still independent from each other, “the trick is to do IT services and BPO for the same business outcome. One must understand the process to make services and understand BPO to make the process work better”.
The Chinks In The Armour
Analysts wonder whether Cognizant can continue to grow at this pace if it cannot address two of its weakest points at the earliest. Especially, whether its biggest strength —the US — is also its biggest weakness. Cognizant earns 78 per cent of its revenues from the US, against 52.8 per cent for TCS, 65.8 per cent for Infosys and 58 per cent for Wipro.
Europe contributes just 12.2 per cent of Cognizant’s revenues. Indian companies have learnt the lessons of US dependence the hard way in the dotcom bust of 1999-2000 and during the telecom meltdown soon after.
Dependence on the US, though, is a necessity as the country accounts for 42 per cent of the world IT market. “It is not necessarily that we have missed these markets (outside of US). We will expand them slowly. We have expanded in Continental Europe and Asia,” says Coburn.
Cognizant recently expanded presence in Benelux (Belgium, Netherlands and Luxembourg), Germany, Switzerland and France. Asia is the next focus of the company’s investments and is growing at above-average rates (72 per cent y-o-y in CY09), according to JP Morgan analysts Tien-tsin Huang and Puneet Jain.
Second, while the consulting background and client mining may have given Cognizant a huge uptick in financial services (42.9 per cent of revenues) and healthcare (26.3 per cent), the two verticals together contribute nearly three-fourths to its revenues.
Manufacturing, logistics and retail represents the other big segment with 17.2 per cent. “The revenue is concentrated in financial services and healthcare, but this is not a threat in near time as BFSI (banking, financial services and insurance) will continue to be one of the largest revenue generators for the (IT) industry,” says Jaypee Capital’s Gautam.
Analysts say the company was lucky that during the downturn it was not affected even though the banking sector in the US crashed. “Their bank and the financial services clients were better than the competition,” says Citi’s Shirvaikar. “The two verticals where we are making investments are energy and utilities, and the hospital (provider) segment within the healthcare vertical,” says Chandrasekaran.
It may be in the long term interest of the rising star of global outsourcing to plug the strategic gaps in its portfolio so that it can ride the next phase of growth without any hiccups. And if it does that, whether or not it is considered an Indian company, Cognizant may continue to give nightmares to Indian IT’s Big 3.