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BEST OF B&E 2011 "COGNIZANT: Q2 RESULTS – PUBLISHED IN B&E ISSUE DATED OCT. 13, 2011"
Incorrigibly cognizant!
Cognizant’s ability to consistently achieve astronomical revenue growth has surprised many. Will it’s new strategic outlook be able to keep the ‘shock & awe’ coming?
Issue Date - 19/01/2012
 
While debating on a particular strategy related to employee & customer orientation in a technology company with a top CEO, I gave the logic that works best when you are trying to escape an argument – the proof of the pudding is in the eating, and the particular company was doing well. The CEO smiled at me and nodded his head, saying that even the most unconventional strategy looks great when someone successfully applies it. The whole world then analyses why the strategy worked for that unique organisation and we feel we have got collectively smarter. The fact is, perhaps next time too, we will only identify the merits of an unconventional strategy when it has met the benchmarks of success.

Though Cognizant is not the company I was discussing, there is no doubt that the successful rise of this company has become the flavour of the season in the IT space. Cognizant, which beat Wipro in terms of revenues to reach the number 3 position among Indian IT players in the quarter, saw revenue rise by 34.4% yoy to reach $1.48 billion and net income reach $208 million, a growth of 20.78% yoy. And the surprising part is that IT experts weren’t really counting on the company delivering these numbers, as it still got 77.8% of its revenues from North America, a region that the IT world is looking to slowly derisk from. Annually, the company is showing a growth of 40% on an average over the past five years. It makes sense to understand what makes the company stand amidst this environment, and whether the growth is indeed sustainable.

There were a number of things that Cognizant, a relatively young upstart did since it commenced operations in 1994 as the IT development and maintenance services arm of Dun & Bradstreet. The first was its initiative to shift headquarters to the US within two years of commencement of operations and ensure that its top management was where its clients were. It also pioneered and trademarked the ‘Two-in-a-box model’, which combined the global delivery model with the relationship manager onsite to give clients a differentiated experience.

Cognizant is extremely dependent on employees in India, which account for over 75% of the workforce. In that sense, it ensured an effective utilisation of both worlds, and other Indian companies, even though their business is also largely driven by US and Europe, developed a global positioning much later. In fact, Cognizant is also lobbying for change in H1B visa norms, and CEO Francisco said at the CEO Council recently on outdated immigration laws, “Millions of foreign skilled professionals are in legal limbo due to a massive backlog for permanent resident visas, hampering their ability to fully contribute to the US economy...”

One critical decision that Cognizant took in 1998 when it went public was to retain lower margins in favour of stronger growth and differentiation in organic terms as compared to its peers. However, it does have a cash reserve of around $2.2 billion and no debt on its balance sheet. Even when you look at net profit for the quarter ending June, Cognizant lags Wipro, whose net income was $295 million for the quarter. But the reinvestment approach has done a lot for the company, which has developed an extensive portfolio of offerings in areas like ERP, testing, IT infrastructure services, et al.

 
When you look at the metrics in terms of verticals, Cognizant has a relatively huge dependence on financial services, for which revenues grew by 7.5% q-o-q and 30.1% yoy and contributed 41.3% to the total revenues in the quarter ending June 2011. Healthcare contributed 26% and revenues grew by 36.9% yoy in the quarter and this is a major leg up for the company in the coming quarters. Manufacturing & retail grew even more strongly by 44.9% yoy and contributed 19.8% to the total revenues of the company. Rod Bourgeois, Senior Research Analyst - Computer Services & IT Consulting, Sanford C. Bernstein & Co., LLC commented to B&E that the discretionary spending that grew after a 2-year lull in the US benefitted Cognizant in particular along with TCS. This is evident from the fact that development-oriented revenues (also termed as consulting revenues), which contributed 51% to the total for Cognizant, grew by 44.2% yoy while the maintenance part, which contributed 49%, grew by only by 25.5% yoy. It seems that the company is hardly affected by macroeconomic issues being faced by some of its peers, at least so far. Rod reiterates, “Cognizant’s (and Accenture’s) distinctive onshore relationship management and domain expertise make it better positioned than other offshore players to win transformational deals and to cross-sell a broad set of services to existing clients.” The company was able to leverage opportunities in areas like rationalizing complex back office infrastructure, virtualising servers and modernising legacy applications, implementing or upgrading package software to support efficiency and effectiveness in the middle and back office, et al. However, this growth may be a one off since it happened after a gap in time.

Going forward, the company will continue to rely on its ability to serve clients with both the offshoring price advantage as well as the benefit of a vendor that can partner and provide strategic consulting. R. Chandrasekaran, President & MD, Global Delivery, Cognizant, comments to B&E in an exclusive interaction, “The focus is on services firms that have deep domain expertise, strong onsite presence, and well-honed relationship management skills...” The company has now pioneered a “Three-in-a-box” model, which is very basically about adding a consulting partner to the “Two-in-a-box” hierarchy. It now has a team of 2800 consultants globally, who are now designing solutions tapping into CXOs as opposed to just CIOs and sees further opportunities in the transformations happening in the world like cloud computing and social networks. There is a definite unrest in companies, according to Chandrasekharan, as they seek better ways to organize teams (especially with the millenials), cultivate innovation, allocate resources, and reinvent knowledge processes. And just as before, the company seeks to leverage its reinvestment-oriented strategy to be able to build deep (into high potential verticals) and strong business expertise that brings lasting competitive advantage. Recently, it acquired Zaffera, a SAP retail Consulting major. The acquisition is expected to bolster its capabilities in terms of helping retailers deal with increased competitive pressures and thinning margins in a connected market place.

          

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