"We don't measure too many things, but what we measure, we think are very important to business" N. Lakshmi Narayanan CEO, Cognizant

Not 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 crore).

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)" R. Chandrasekaran MD, Cognizant

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 sauce".

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 Amsterdam-based

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.