Bangalore: It has displaced stock market bellwethers, rewritten benchmarks, and made deep inroads into the information technology (IT) business of banks and financial services companies and the US market—both traditionally the preserve of Indian IT services firms such as Tata Consultancy Services Ltd (TCS) and Infosys Ltd.
But Cognizant Technology Solutions Corp., the US-based computer services firm with most of its employees in India, hasn’t been able to forge the same kind of success in Europe, and not for lack of effort.
Cognizant, which has expanded revenue faster than Indian rivals TCS, Infosys and Wipro Ltd by an average margin of 3.4% over the past 13 quarters, has been trying to reduce its dependence on US customers who account for 79.5% of its business. Already the company is within striking distance of overtaking TCS, India’s largest software services company, in terms of revenue earned from North America.
But when it comes to the European battleground for software outsourcing contracts, Cognizant lags behind rivals.
In the first nine months of this year, Cognizant increased its revenue from European customers such as UBS AG by 5.43% compared with the same period in 2011, and added less than half ($44.73 million, or around Rs.245 crore today) of what rival Infosys gained in fresh business ($109 million) from the continent. While Infosys raised its European revenue by 10.27% between January and September this year, TCS registered 17.55% growth, adding $320 million in fresh business from clients in the region.
Experts say rivals such as TCS have outperformed Cognizant in European countries because of deeper penetration in these markets and a longer presence. For a long time, Cognizant’s entire focus has been on gaining more business from banking and healthcare customers in the US.
“While customers believe Cognizant has a strong sales and marketing engine, some see Cognizant as being too sales-driven and lacking the strong engineering capabilities and advanced platforms of the Indian firms,” said Peter Schumacher, chief executive of Germany-headquartered Value Leadership Group Inc. His firm advises service providers on doing business with European customers.
“These last nine months, Cognizant’s European growth has been the weakest of all tier I firms, and even tier II firms like Hexaware and Mindtree have achieved much higher growth rates,” Schumacher said.
Cognizant said it has been pushing aggressively to expand its business in the region and that it has grown faster than its rivals over the past five years in Europe. Indeed, over the past five years, Cognizant has grown its revenue from continental Europe at compounded annual growth rate (CAGR) of 32%, higher than 20.73% (CAGR) growth in business for TCS from the region. Overall, Cognizant grew its Europe business, including UK, at 31.38% CAGR over past five years.
Santosh Thomas, senior vice-president and head of Cognizant’s continental Europe business, said the company had won software outsourcing contracts from customers including Credit Suisse Group AG, Royal Philips Electronics NV, Volvo Car Corp., Deutsche Telekom AG, AXA SA and Norway Post, among others.
“Cognizant’s go-to-market strategy is different for each country in this region based on the industries and services we focus on. For example, in Switzerland, our primary focus is on the financial services and pharmaceutical industry; in Germany our primary focus is on telecom, automotive and financial services, and so on,” Thomas said.
The numbers, though, don’t add up.
According to an analysis by Value Leadership, this calendar year, TCS’s continental European revenue will exceed $1 billion compared with about $425 million for Cognizant. In the UK, the gap is about the same, with TCS likely to achieve revenue of about $1.85 billion versus $750 million for Cognizant.
“More importantly, Cognizant has lost momentum when compared to TCS—with TCS outperforming Cognizant in terms of growth by a factor of 3 in both the continent and in the UK these last nine months,” Schumacher said.
Unlike in the US, where large banking and healthcare customers help Cognizant stay ahead of rivals by giving more outsourcing contracts, such clients are not giving any competitive edge to the company when it comes to Europe.
For instance, while Deutsche Bank AG, Germany’s biggest lender, works with TCS and HCL Technologies Ltd, many other European banks are partially owned by governments, and not as open to offshoring of software development projects. Also, European banks are not as big spenders on IT as their US counterparts.
“Many European banks are far smaller than US banks and spread across many countries. So to win scale, you need a much broader client portfolio across multiple countries,” Schumacher said.
Cognizant’s strategy of hiring local professionals to lead different country markets in Europe has not really helped it score over TCS, he said.
“While Cognizant is hiring local consultants from traditional IT services firms such as Logica Plc and Cap Gemini SA, TCS’s recruiting strategy combines mature executives with deep domain experience gained in industry with consultants. Many customers perceive the TCS approach as enabling stronger relationships and more pragmatic solutions,” Schumacher said.
Cognizant has also relied heavily on local alliances with firms such as T-Systems, an outsourcing unit of Deutsche Telekom, for gaining more business in the region. This hasn’t really worked out, Schumacher said.