|"We don't measure too many things,
but what we measure, we think are very important to business"
N. Lakshmi Narayanan
too long ago, on December 31, 2005, Cognizant Technology Solutions
(CTS), an Indian-American it services company-that should actually
read American Indian company, but that term can be misleading;
it is an American firm, with its corporate HQ in Teaneck, New
Jersey, but founded with the intent of leveraging the India advantage-reached
revenues of $1 billion (Rs 4,500 crore at the current exchange
rate) on a run-rate basis (the company's financial year ends in
December and by its own guidance, it expects to have ended the
last quarter with revenues of $252 million or Rs 1,134 crore and
an operating profit margin of 19-20 per cent). That term, a preferred
one in cricket-crazy India simply means that were the company's
revenues for the quarter ended December 31, 2005, be quadrupled,
they would exceed $1 billion. And by March 31, 2006, it expects
to be a 'true' billion-dollar company.
There is something magical about that $1-billion
number for it services companies. In one way it is a coming-of-age
indication, a sign that the company in question has reached critical
mass. In the language of economics, that would roughly translate
as the ability to increase the revenue productivity of employees.
An it services company with revenues of $1 billion would employ
around 24,000 people; one with revenues of $10 billion (Rs 45,000
crore), around 100,000. At another level, an it services company
with revenues over $1 billion stands a better chance of being
taken seriously by customers, especially for outsourcing deals
involving large sums of money. And at still another level, the
market value of a company that has reached revenues of $1 billion
is likely to be enough to fund acquisitions that are becoming
so critical for growth (CTS is listed on NASDAQ and its market
capitalisation, on January 18, was $6.97 billion or Rs 31,365
The thing is, Cognizant is hardly the first
Indian it services firm (loosely speaking), to touch the $1-billion-in-revenues
mark. It is the fourth, after TCS, Wipro, Infosys and Satyam Computer
Services. It will, however, be the company to have done so in
the shortest time, 12 years; it took TCS 35, Infosys 23 and Wipro
25. In terms of quarterly revenues, CTS is already ahead of HCL
Technologies and breathing hard down the neck of Satyam. In terms
of growth, it is second to none. And in terms of revenue per customer,
it is already ahead of HCL Technologies, Satyam, even Wipro. That's
some achievement for a company that started life as the outsourced
it arm of Dun & Bradstreet, and a JV with Satyam.
There's Something About Cognizant
On the basis of numbers alone, Cognizant's
amazing success story can be ascribed to the fact that it has
scaled up at the same rate as industry-benchmark Infosys after
accounting for size (that means CTS has grown faster). The company's
CEO N. Lakshmi Narayanan-he was part of the founding team, was
initially head of the company's Indian operations, then President
and CEO; his elevation to the post of CEO is another thing that
burnishes the company's Indian-American status-believes an emphasis
on basics is behind the company's success. "We don't measure
too many things," he says, "but what we measure, we
think are very important to business," going on to add that
customer and employee satisfaction number among these things.
Both are fair assessments of the reasons behind Cognizant's success,
yet neither tells the entire story.
In many ways, Cognizant's phenomenal ride
is built around the fact that it is as American as the large companies
in the consulting space (think Accenture, Cap Gemini) every Indian
it services firm wants to be like, yet as Indian as Infosys, TCS
or Wipro. "Cognizant, arguably the most westernised of Tier-I
Indian vendors, has taken a lesson from the former Big Five firms
in that it creates revenue opportunities for itself by proactively
architecting strategic solutions for clients and prospects rather
than responding to requests for proposals," says Stephanie
Moore, an analyst with Forrester Research.
That-being both Indian and American-sounds
easy on paper. In reality, it is a strategy that was fraught with
financial and marketing risk in the early years. The costs of
an American, even half-American it services firm, were higher,
and consequently, the net profit margins lower than those of Indian
ones. Thus, even five years ago, Cognizant's net profit margins
were 12.94 per cent, as compared to Infosys' 33.47 per cent. Cognizant
reasoned (rightly, it emerges in hindsight), that its margins
would improve with time (and more business); its net profit margin
has increased from 10.4 per cent in 1998 to 16.8 per cent in 2004
and an estimated 17.7 per cent in 2005. Around the same period,
Indian it services firms have seen their own net profit margins
come down from the stratospheric 25 per cent-plus and 30 per cent-plus
levels, a consequence of having to 'westernise' their operations
and invest in marketing.
As for remaining American enough, CTS is
part of the nasdaq 100, has a stock that has outperformed those
of Indian it firms on the us exchange, and has always had a CEO
based in its HQ in New Jersey. And so, Indian-American it was
and Indian-American it is.
|"Training and deployment of
new employees takes time, which is why we start training them
even before they graduate (and after we hire them)"
Masters Of The Universe Redux
Not too many it services companies in the
world would claim that they owe more part of their success to
those employees that are MBAs (read: people who have graduated
from B-school) than those that are coders. Cognizant, which boasts
one MBA for every 35 employees, does. Some of these MBAs are on-site
relationship managers, domain experts, or consultants of the kind
Accenture and IBM have been known to employ. Others are experts
in business analytics, a nuts-and-bolts heavy analysis of just
what makes a company tick. Both kinds delve well beyond a customer's
or prospect's organisational structure. They become experts that
can predict industry trends. They become champions of best practices.
They become specialists that can look at a company from the perspective
of both technology and business processes. They crunch financial
statements, audit management teams, and essentially do the things
companies have come to expect from new-age masters of the universe.
Forrester Research calls these MBAs the company's "secret
Cognizant can do with some of that. It lacks
both the geographical reach and the diversity of service offerings
of companies such as Infosys, Wipro and TCS. And it still remains
heavily oriented towards the financial services and healthcare
industries with more than 50 per cent of its revenues coming from
the two. Lakshmi Narayanan would like to look at that differently.
"Our focus is on working with a limited number of customers
in our area of specialisation, which is business applications
for the enterprise customers," he says, adding that Cognizant
works with the "top healthcare company, the top insurance
company, the top life sciences company, the top bank, the top
internet company and the top automobile company in the world".
And R. Chandrasekaran, Executive VP and MD, while defending the
company's bias towards two industry segments, is busy developing
other areas-independent validation and testing, data warehousing
and business intelligence, and high-end BPO services. Cognizan't
revenues, too, when sliced, look different. Its revenues from
maintenance and support, application development and system integration,
and consulting "are in the ratio 50:45:5", while it
is around 70:20:5 for most large Indian companies.
Cognizant's balance sheet allows it the luxury
of acquiring companies should it want to. Its current market capitalisation
of $6.97 billion (Infosys' is $19.56 billion or Rs 88,020 crore)
is built around 25 quarters of out-performance (of its guidance).
It has cash and cash-equivalents of $368 million (Rs 1,656 crore)
and that combined with "no debt provides Cognizant with the
financial flexibility to pursue acquisitions", according
to Cynthia Houlton, an analyst with us-based RBC Capital Markets.
The company has done a few of those. In December 2003, it acquired
Infopulse, a $6 million or Rs 27 crore company
that is already helping the cause of growth in continental Europe.
In February 2004, it acquired Indian company Ygyan to gain a toehold
in the sap (an enterprise software) implementation market and
in April 2005, it did New York-based Fathom Solutions to beef
up its telecom practice. Lakshmi Narayanan insists that future
acquisitions will follow the same trend.
There can be no doubting the fact that Cognizant
will continue to grow in 2006. "We believe that Cognizant
will provide a unique offshore value proposition for clients,"
says Ed Caso, an analyst with us-based Wachkovia Securities. Yet,
the company, which has set itself the goal of becoming one of
the top 10 companies in its industry in the world, will soon realise
that Tier-I is an entirely different ball game with companies
boasting almost a similar spread of services (consulting to business
process outsourcing). Cognizant could well realise that what has
brought it thus far may not be enough to take it further. Or it
could find out that the model continues to work for it. Right
now, though, it is simply time to celebrate the emergence of another
Indian (fine, Indian-American) it services powerhouse.