At Cognizant, high attrition and a CEO under siege

"We maintain our Outperform rating on CTSH despite a host of ongoing execution challenges, leading to the company's significant relative underperformance (growth rates) vis-a-vis its peers, during a time who some would categorize as the best IT spending environment since Y2K, as we believe, that ultimately The Company's Board is bound to act upon these issues, leading to leadership changes at the helm," said Moshe Katri, Managing Director, Equity Research, Wedbush Securities, a Los Angeles-based investment firm, in a note dated 29 July.

This is a rare rebuke from the analyst who has covered the information technology services sector for over two decades.

"At its current form, Cognizant is probably one of the most under-appreciated platforms in the sector. During the past few years, and under the leadership of Brian Humphries (since April 2019), we witnessed a number of troubling trends, including: 1. The loss of important senior personnel; 2. An inability to recruit senior personnel formerly with technology/growth companies; 3. The decision to stay away from large deals/transactions; 4. An inability to appropriately staff its bench, depressing revenue growth and likely resulting in competitive losses; and 5. Significant, relative underperformance in growth rates vis-a-vis Tier I offshore and global peers (INFY, TCS, Accenture). 3 years into the incoming CEOs so-called restructuring plan, we believe The Board will address these ongoing execution/strategy challenges," said Katri.

Wedbush said that there “is an inevitable, imminent urgency of addressing these issues" as Cognizant's current "strategy of avoiding/not competing" for large deals is "unprecedented" since every IT services firm is competing for multi-year multi-million work from Fortune 500 clients.

In addition to the issues flagged by Katri, your writer believes that the most worrying aspect of Cognizant’s underperformance is the high attrition. Five straight quarters of more than 30% quarterly annualized attrition at Cognizant and about 33,000 graduates hired during this time means that nearly half of the staff (it could be more), on average, have been with the technology services firm for less than a year.

This striking number is disconcerting and is at the heart of the poor growth as it reported another disappointing performance when it declared its second-quarter earnings last month.

The story only gets worse when the company’s performance is analyzed over the last three years since the time Humphries took over.

According to an analysis by Twich+, about 77% of employees on average at Cognizant have been with the company for less than three years.

Ideally, if a company had an attrition rate of mid-teens, it would take about six years for a company to see a complete refresh or the number of employees to have left the firm from the date at which an incumbent CEO started.

When Humphries started at Cognizant, the company had 2,88,200 employees. During the last thirteen quarters, Cognizant has seen 2,62,749 leave the firm.

Another quarter of over 30% attrition and Cognizant would have seen close to 2,90,000 employees move out by the end of the September quarter.

Put simply: Under Humphries, Cognizant would see one complete round of headcount leaving the firm in less than four years.

Cognizant’s high attrition rate is at least seven percentage points more than the average attrition rate of the five biggest IT services firms over the last year. (All technology services companies over the last 12-18 months have struggled to retain employees.)

IT services business is a people-led business. There is not much difference in the services offered by say Tata Consultancy Services Ltd or Infosys Ltd when compared to Cognizant.

Beyond price discounts, the way IT services companies win over business depends a great deal on the strength of the individual relationships their sales executives develop with the clients.

Therefore, the question of why more employees leaving Cognizant becomes important.

Last month, consultancy firm McKinsey & Co, found that 41% of the participants in a survey it had done blamed lack of career development and advancement as the reason for quitting a job. Another 36% said that their decision to move was on account of inadequate compensation. A third of those polled said uncaring and uninspiring leaders were the reason for leaving.

Cognizant’s poor growth over the last three years suggests employees see few incentives in hanging on in the company. Things get more challenging especially, as Humphries has struggled to build a stable senior leadership team at the company. Of the 18 senior executives that were listed in the 2019 annual report, 17 have already moved out of Cognizant since the time Humphries took over.

The churn on the top also appears to have set off a cascading impact, leading to more employees leaving the firm, raising questions about the DNA of Cognizant and the fallout on growth.

It’s not surprising then that since 2019, Cognizant’s revenue growth has been less than half of that at TCS, Infosys and Wipro. This year will be no different. The growth difference between Cognizant and its rivals is likely to only widen.

At the start of the year, Cognizant’s guidance put its full-year dollar revenue growth between 7.8% and 10.8%. Six months after that, with two back-to-back downward revisions in guidance in the intervening period, the management has said now that it expects revenue to grow 7.3% at best.

TCS, Infosys, and Wipro expect to grow in double digits in the current year.

Last month’s note by Wedbush could make other analysts and investors take note of Cognizant’s underperformance.

A spokesperson for Cognizant has shared the statement below in response to this story.

“The assertions in the report are speculations at best," said a spokesperson for Cognizant. "While the analyst maintains an “Outperform" rating on Cognizant’s stock and has a $95 price target, the report neglects to document that Cognizant is successfully executing on its strategy. We are driving strong growth and maintaining strong positions in key business areas. We will continue to target large deals that make sense from a country and industry perspective. In fact, we have recently announced several large deals, including Zurich Insurance in Germany, a major global insurer, AXA in the UK and Ireland, and National Insurance Company Limited in India. Cognizant’s trailing 12-month bookings of $23.2 billion represented a book-to-bill of approximately 1.2x as of the most recent quarter, reinforcing our revenue growth expectations. We consider this to be an industry-leading book-to-bill ratio. We have expanded margins by 30 basis points year-over-year, and 50 basis sequentially due to an increase in gross margins, at a time when many of our peers are experiencing margin decline. This was driven by progress on pricing and continued focus on delivery efficiencies. We returned more than $1 billion to shareholders through the first half of the year. We have promoted and recruited several senior executives that bring deep experience, right skills, and expertise to continue to drive our transformation and unlock value for our shareholders. Our global headcount has increased to 341,300, our largest ever. We have also invested record levels in compensation, doubled the number of job promotions in H1 2022 vs H1 2021, and trained over 150,000 associates in future-ready digital capabilities in 2021. Our Board fully supports our strategic direction and our management team."