Mumbai: The playbook for India’s technology outsourcing industry is being rewritten by a company based in Teaneck, New Jersey.
Cognizant Technology Solutions Corp. is outspending competitors to win more business from clients such as Royal Philips Electronics NV, with 22% of revenue going on costs that included higher wages and putting more people into customers’ sites in the US and Europe. That’s more than double the proportion at closest rival Bangalore-based Infosys Ltd, the annual financial reports of both companies show.
Even Tata Consultancy Services Ltd (TCS) is taking note. India’s information technology (IT) outsourcing leader has also increased spending as revenue more than doubled in the past five years with firms such as Citigroup Inc. and Volkswagen AG giving more work. While Cognizant and TCS bolster sales teams at client locations, Infosys has ceded its mantle as industry standard-bearer: revenue fell behind its US rival for the first time in the quarter ended 30 June.
“The Indian IT services guys have come across a wall, and that wall is essentially your ability to sell into higher echelons of an organization,” said Daud Khan, head of IT and software research at Berenberg Bank in London. “Cognizant has managed to overcome that, and it’s because of their onshore presence relative to the likes of Infosys.”
Cognizant’s US shares have jumped 18% since the end of June, compared with 6.9% for the American depositary receipts of Infosys. In dollar terms, TCS’s India-traded stock is up 14%.
The US company’s selling, general and administrative expenses as a proportion of sales increased from 21% in 2010. The level at Infosys was little changed at 11% in the year ended 31 March. TCS increased sales spending about 350 basis points to 20.5% of revenue between 2001 and 2008, according Ankur Rudra, an analyst at Ambit Capital Pvt. Ltd.
“The market has changed in a way to favour Cognizant’s model more than the Infosys model,” said Pralay Kumar Das of Elara Securities Ltd in Mumbai, the top-ranked analyst for Infosys and who advises investors sell the stock.
“The main reason for Cognizant’s growth is aggressive investment in the sales force and aggressively pursuing deals,” said Manoj Behera, an analyst at Equirus Securities Pvt. Ltd in Ahmedabad.
Cognizant completed 14 acquisitions in the past decade, focusing on software, computing and consulting services, according to data compiled by Bloomberg. Infosys meanwhile has announced 12 acquisitions, including outsourcing back offices of Citigroup and Philips, and the consulting firm Lodestone Holding AG. Rather than raising the share of revenue from consulting, Infosys has set a goal to expand revenue by selling software products.
“That’s a risky focus for Infosys,” according to Rod Bourgeois, an analyst in New York at Sanford C. Bernstein and Co. “If Infosys were thriving better in its core services businesses, it would have less need for products and platform- based growth,” he said last month.
Worldwide demand for consulting services is expected to remain high, Gartner Inc. said on 9 July. Global spending on IT outsourcing services will climb 2.1% this year from $246.6 billion in 2011, led by growth in Asia, the Stamford, Connecticut-based research company said on 7 August.
Even as Indian IT companies remain the go-to providers of low-cost operations such as call centres and basic software maintenance, Cognizant says demands of clients are changing.
Customers now want consultants to advise them on the best use of their technology budgets and to offer specialized services specific to a company, said Gordon Coburn, president of Cognizant, whose employees are mainly in India. Bloomberg