Cognizant's President & COO Lakshmi Narayanan: Leveraging the cost-arbitrage model

It is not as large as Wipro, Infosys, or TCS. Nor is it as well known. And it doesn't dabble in exotic technologies or management practices that will likely ensure it an appearance on the cover of Fast Company or Wired. As Cognizant Technology Solutions' Chairman and CEO Kumar Mahadeva puts it, "We are a business-as-usual company."

Only, when such a company issues a revenue guidance of 44 per cent for 2003-its year ends in December-as compared to Infosys' 24 per cent or Satyam's 15-17 per cent, everyone sits up and takes notice. Which is exactly what has happened in the case of Cognizant. This comes on the back of a strong showing for the quarter ended March 2003: the company's topline grew 60 per cent, and bottomline, 43 per cent as compared to the same quarter last year; Infosys' did 49 per cent and 23 per cent, and Wipro's 31 per cent and -2.5 per cent. With sales of over Rs 1,000 crore for the year ended December 2002, Cognizant is no minnow that records staggering growth on a small base. So, what's its secret?

The Fourth Generation Company

The famed Indian software cost-arbitrage model lies at the heart of Cognizant's success. The company was founded in 1994 as an offshoot of Dun & Bradstreet, which had tested the waters through a joint venture with Hyderabad-based Satyam Computer Services; not coincidentally, Sri Lanka-born BBC, AT&T, and McKinsey vet Kumar Mahadeva was in charge of that operation. The D&B parentage helped the company acquire much of its initial business: from D&B itself, and from other companies in the D&B stable, such as IMS, Managestics and A.C. Nielsen. It also influenced Cognizant's choice of verticals: financial and information services, healthcare, retail, manufacturing, and logistics. None of these, however, account for its resilience.

"Our revenue from new clients is 20 per cent-probably the highest in the industry" Kumar Mahadeva/ Chairman & CEO, Cognizant Technology

What does, is a series of strategic decisions taken by Cognizant's executive team over the past six years. The first, recollects R. Chandrasekaran, Senior Vice President, was in 1997 "when some of our Indian peers aligned businesses along geographies and technologies; we took a conscious decision to align ourselves along verticals of specialisation".

Soon after, Cognizant, like almost every other company in the space, was in the thick of Y2K work. However, rather than creating an assembly line that could crunch miles of Cobol, the company focused on building relationships with clients. These two, as much as the fact that its origins ensured that it was an American company with an Indian it back-end (and only that), helped Cognizant become what it terms a Fourth Generation it services company, one that boasts senior executive management, relationship managers, practice leaders, and change managers onsite and an it back-end offshore (See On Top Of The Chain). Such companies, explains Lakshmi Narayanan, Cognizant's President, coo, and public face in India (Chairman Mahadeva operates out of the company's New Jersey HQ) all rolled into one, come up with solutions that can transform a customer's business. "We have positioned ourselves in this niche space." Analysts like Stephanie Moore of Giga Information Group concur. "Cognizant's approach to client management and service delivery is more advanced (than that of some top tier Indian and US vendors)," she says. "Its clients have consistent and experienced client management partners responsible for ensuring the health of each project as well as spotting any opportunities for the client and Cognizant." That could explain why the company's scrip outperforms those of Infosys, Wipro, and Satyam on the American stock exchanges. In the last week of March, Infosys' scrip on Nasdaq was down 1.5 per cent over a year and Wipro's on NYSE, down 20.9 per cent. Cognizant's was up 61.8 per cent.

The Challenges Ahead

It seems strange that a company with net profit margins in the 13-15 per cent range should be considered a challenger to the likes of Infosys (net profit margins of 26.44 per cent for the year ended 2002-03) and Wipro (18.91 per cent). Still, it is worth noting that Cognizant's margins have been, over time, a lot less volatile than Infosys' or Wipro's, especially the latter.

Cognizant's lower margins are understandable given its business model. Executives in the US, especially practice leaders, programme managers and marketing pros do not come cheap. Then, says the company's CFO, Gordon Coburn, there's the fact that the company "prices for customer profitability". "We keep our operating margins at 19-20 per cent," supplements Narayanan. Cognizant proffers details of its billing rates, both onsite and offshore as evidence of its ability to communicate its transparent and reasonable billing practices to customers. For the record, according to Cognizant, its onsite billing rates have remained constant at $70 a hour for the past four quarters and its offshore rates at $24.

Cognizant faces competition from multinationals such as EDs and Accenture that are trying to build an offshore base out of India, and from Indian companies like Wipro and Infosys that are moving towards the fourth generation model of locating executive management and other senior managers onsite. "I think both Infosys and Wipro recognise the importance of locating senior people in the US," says Rita Terdiman, VP and Research Director, Gartner Research. "The challenge is to find American executives who fit into either company's culture."

Cognizant has thus far managed to retain its focus on enterprise applications, but its customers wish it to move into the Business Process Outsourcing space. Chandrasekaran says the company will form joint ventures or acquire a strategic stake "in existing call centres to which the low margin businesses can be pushed". Still, it remains a dilution of focus.

While the company claims it is a preferred vendor for contracts worth between $5 million and $30 million, it has yet to strike a really big deal; Wipro, Infosys, and TCS have recently bagged some mega orders. And in a worst-case scenario of rampant underpricing, Cognizant may find it difficult to prune its already slim margins. Like every model, the fourth generation one, has its flipside. At this point in time, though, Cognizant does seem on top of things.