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Taking note of Cognizant

Taking note of Cognizant
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First Published: Fri, Aug 05 2011. 11 01 PM IST

By Jayachandran/Mint
By Jayachandran/Mint
Updated: Fri, Aug 05 2011. 11 01 PM IST
For journalists of a certain vintage, this writer included, the Big Three of the IT services business in India have always been Infosys, Wipro and TCS.
Even in the 2000s, when Satyam Computer Services and HCL Technologies were on a roll, they never managed to threaten the position of the three. (To be sure, there were journalists who preferred the Big Four, with Satyam coming in fourth, and it wasn’t till the much-publicized fraud perpetrated by the company’s founder Ramalinga Raju that HCL managed to catch up with it).
There was a simple reason for this—the three (or the four) were well placed to benefit from work related to the Y2K bug (remember that?) and benefit they did, scaling up business at a rapid pace towards the end of the 1990s. The work they did gave them a head start as more companies in the US started outsourcing the development and maintenance of software applications in the early 2000s, a period when the US economy grew largely on the back of IT-led productivity gains.
Companies that came after them just couldn’t catch up – or so it seemed.
By Jayachandran/Mint
Until last week, when, for the first time, Cognizant Technology Solutions overtook Wipro in terms of quarterly revenue for the three months ended 30 June. It has been clear for at least a year or more now that this was imminent, but from a 15-year perspective, it is one of those things that could have never been predicted.
I’d like to view the development as the third of a series of changes that has reshaped the contours of the Indian IT services business. The first was Satyam’s collapse. And the second was TCS’ ascension to the role of the sector’s bellwether, a position that, until recently, had been occupied by Infosys.
A lot has been written about Cognizant’s numerical milestone (and a little on why it doesn’t really matter). This writer’s opinion is that it matters a lot for two reasons.
The first is that it proves beyond doubt that Cognizant’s hybrid model works.
A little bit of history here. Large Indian IT services companies, which operate with profitability levels around 25% (or even a bit higher) follow what they term the global delivery model. Their emphasis, irrespective of what they claim, is on delivery (or on the back-end). Multinational IT services companies, such as Accenture or the software services arm of IBM, which operate with profitability levels that range from the high single digits to the low double digits, focus more on the customer side of the business. All through the past decade, the Indian companies tried to become a bit like the multinational companies by investing in marketing and industry expertise. Meanwhile, the multinational companies tried to become a bit like the Indian ones by creating large development centres employing tens of thousands of people in India. Both have succeeded to some extent (my view is that the multinational companies have probably had more success than the Indian ones).
Cognizant, which started life as the software arm of research firm Dun & Bradstreet, has always followed a hybrid model. The company is headquartered in the US, and many of its top executives are based there, but most of its development centres are in India. The company has always claimed that this allows it to be as focused on the customer as its multinational rivals are, while leveraging the India advantage to the same extent as its Indian competitors. In Cognizant’s case, the model has translated into profitability levels between 18% and 20%.
Surely, it must be difficult to move to this model? The multinational companies haven’t managed to; nor have the Indian ones, although in their defence, it can be said that a desire to keep their profitability at a higher level has prevented them from going all out. Still, whatever the case, Cognizant is where both sets of its rivals want to be and for any company that’s always a great place to be.
The second reason why Cognizant’s milestone matters is because it indicates the value of certitude. Over the past few years, Indian IT services companies have been looking for the next big thing in their quest for non-linear growth (a sort of Holy Grail in a business where revenue growth seems contingent on an expanding workforce). There’s been talk of consulting, a platform-based approach (whatever that means), and cloud-based services targeted at small and medium-sized clients. All through this phase, Cognizant has continued to focus on consulting although the result of this focus isn’t evident in the numbers yet—it will show up first in profitability and revenue per employee. That’ll be another milestone.
Write to sukumar.r@livemint.com
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First Published: Fri, Aug 05 2011. 11 01 PM IST
More Topics: Edspace | R Sukumar | Cognizant | IT Sector | Software |