BENGALURU :On 7 December, the then Cognizant CEO Brian Humphries addressed the Global Tech, Media and Technology Conference in New York City, organised by the Swiss investment bank UBS. Responding to UBS Securities analyst Rayna Kumar’s questions, he said: “I think our strategy now is more stable. And so I’m looking forward to a year (2023) where we have less change, frankly, less attrition and that will, in my mind, hopefully, be (against) a better macroeconomic backdrop."
On 7 December, the then Cognizant CEO Brian Humphries addressed the Global Tech, Media and Technology Conference in New York City, organised by the Swiss investment bank UBS. Responding to UBS Securities analyst Rayna Kumar’s questions, he said: “I think our strategy now is more stable. And so I’m looking forward to a year (2023) where we have less change, frankly, less attrition and that will, in my mind, hopefully, be (against) a better macroeconomic backdrop."
Earlier in November, Humphries was in Mumbai, and consulted country leadership about the preparations for the fourth quarter board meeting slated for February, for which the board members of the New Jersey-headquartered tech firm were travelling to India.
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Earlier in November, Humphries was in Mumbai, and consulted country leadership about the preparations for the fourth quarter board meeting slated for February, for which the board members of the New Jersey-headquartered tech firm were travelling to India.
Unbeknownst to him perhaps, some of those board members were running out of patience with him.
In a surprise move, on 9 January, the board asked Humphries to step down.
Three days later, on 12 January, it appointed former Infosys executive S Ravi Kumar as the boss, effective immediately. Just three months ago—in October—Kumar had joined the company as president of the firm’s US business. The board also entrusted Stephen J Rohleder as the chairperson, replacing Michael Patsalos-Fox.
Rohleder, a former Accenture executive who joined Cognizant’s board in March last year, played a pivotal role in orchestrating the CEO switch, according to three executives privy to the developments, who asked not to be named. The swiftness and secrecy with which the board acted caught Humphries by surprise. He did not even get a chance to write a farewell note to the employees he had led as CEO since February 2019.
Humphries penned a farewell note on LinkedIn. But a torrent of harsh comments from current and former employees poured down on the post. Later, the outgoing CEO disabled comments on the post.
It is quite rare for a company of Indian heritage—nearly three-fourths of Cognizant’s 350,000 employees are stationed in the country—to replace both the CEO and chairman. Unlike most of its homegrown rivals, nearly 92% of shares in Cognizant are held by the public and it does not have significant promoter ownership.
Mint spoke with seven executives to stitch together this account of what led to the ouster of Humphries and the challenges that face the new CEO as he goes about reviving the firm’s fortunes. All of them asked to not be named as they are not authorized to speak with the media. Cognizant did not respond to queries.
Forecast downgrade
The straw that broke the proverbial camel’s back was Humphries’ briefing to the company’s board in the first week of January, according to two executives privy to the development. Humphries shared with the board that Cognizant would grow in “low single-digits" in 2023. Further, he wanted the board to lower the earnings per share (EPS) outlook for 2022. This was because the company had to incur higher capital costs for servicing a large contract from New York-headquartered healthcare client, EmblemHealth.
These two developments sealed the fate of the incumbent at Cognizant, which follows a January-December financial year, and paved the way for the dawn of the Ravi Kumar era at the technology services firm. The compensation for the role gives a sense of how high stakes this decision is for the board. Humphries made $19.7 million in 2021. Cognizant ended 2021 with $18.5 billion in revenue and expects to grow 5% in 2022. It will declare its fourth quarter and full-year results on 2 February.
“The majority of the board was disappointed that after three downward revisions in revenue outlook made during the year, the CEO was now sharing that even the profitability would be lower than what the company had outlined in October. Most members concluded that there was no merit in giving the incumbent more time and it was time for a new CEO," said the first executive.
Cognizant won a $1.2 billion deal from health insurer EmblemHealth in 2016. This contract came up for renegotiation last year. The client sought more savings, according to one executive familiar with the development, and the deal was renewed at a lower value. While that is routine, Cognizant has had to write down some costs associated with servicing this contract.
“The details of our engagement with Cognizant are confidential. So we cannot offer further comment," a spokesperson for EmblemHealth said in response to an email seeking comment. Cognizant issued a profit warning in this regard on 12 January, without naming the client.
“The Company now expects full-year 2022 Adjusted Operating Margin of approximately 15.3%, compared to prior guidance of 15.6%, and full-year 2022 Adjusted Diluted EPS of approximately $4.38-$4.40, compared to prior guidance of $4.43-$4.46," reads a filing made by Cognizant. “This updated guidance includes a negative impact on Adjusted Operating Margin of approximately 30 basis points and Adjusted Diluted EPS of approximately $0.08 from the impairment of certain capitalized costs related to a large volume-based contract with a Health Sciences customer. The impairment is principally driven by the Company’s expectation of lower volumes."
There was more worrying news from some of its marquee clients.
Twitter had decided to end its $60 million annual business with Cognizant although much of this was on account of the social media company looking to cut its expenses, according to a second executive.
Google’s parent Alphabet, which is Cognizant’s largest client, accounting for some $600 million in annual revenues, was cutting back some business. Ditto for JP Morgan Chase.
“There was no single event that led to these leadership changes but it was all building up over the last year," said the second executive. “Some of the board members were questioning Humphries’s leadership. Industry-leading attrition, years of underperformance, and a low growth outlook for the next year (2023) finally made the board act."
A divided board
But it was not that simple as Humphries had the backing of chair Michael Patsalos-Fox and many other independent members.
After a review of Cognizant’s performance in the first three months from his induction on the board in March, Rohleder realized that the company would need a new leader.
But he was in a quandary as Cognizant did not have an obvious internal leader who could succeed Humphries.
Meanwhile, Eric Joseph, a Washington-based partner at executive search firm Heidrick & Struggles, who had helped recruit Humphries in 2018, had identified another senior executive for Cognizant.
Sometime in the summer of 2021, the search firm had shortlisted Kumar as an executive who could join Cognizant as a deputy to Humphries, to strengthen the management ranks.
“The first time I met Ravi, and started a dialogue with him, was over 15 months ago. So, this was a long gestation period to try to wine and dine and talk about the possibilities of us working together and what it could do for us here at Cognizant. So he’s been the President of Infosys for six years. They run a very good playbook and I think he brings a very strong growth agenda to Cognizant, which will really help us in North America, which is about $15 billion of our revenue. So, getting more growth in what is three-quarters of our business ultimately helps overall company growth," Humphries explained the rationale to hire the Infosys executive at the UBS conference in November last year.
As it happened, in May last year, Infosys gave a second five-year term to chief executive Salil Parekh. This move implied that Parekh was assured of running the company until March 2027.
For Kumar, 51, this meant that his next shot at the CEO job would be a while away, if at all. Even if he decided to wait, there was no guarantee the board wouldn’t bet on a younger candidate in 2027. By August, he made up his mind to leave Infosys, according to one executive. He met with Rohleder and the Cognizant board member was impressed with Kumar.
On 17 October, Cognizant announced that Kumar would join as president of its business in the US, starting 16 January.
But a month later, when Cognizant declared its second-quarter earnings, Rohleder was not the only board member who was losing faith in Humphries. At least four other board members, including Maureen Breakiron Evans, Joseph Velli, Leo S Mackay Jr. and John Dineen were questioning Humphries over the company’s underperformance.
Together, the five board members finally managed to triumph over Fox, Vinita Bali, Sandra Wijnberg, and Archana Deskus in the fortnight leading up to the 9 January board meeting.
It is important to mention that four of the five board members who were not happy with the company’s performance were on the board before Humphries was hired in 2019. Bali, Wijnberg and Deskus were inducted on the board over the last three years.
Mint independently could not ascertain another independent director Zein Abdalla’s view.
“After Humphries was asked to step down, Michael Patsalos Fox realised his continuation as chairman was untenable. This was because he had prevailed upon Francisco D’Souza to appoint Humphries as his successor and not Rajeev Mehta, as suggested by Frank (D’Souza)," said the second executive cited above. “Micheal was Brian’s biggest supporter over the last three years."
D’Souza is the Indian-American founder of Cognizant who served as CEO and vice chairman prior to Humphries.
The scorecard
So how did Cognizant fare under Humphries and was the board right to abruptly end his tenure after he was announced as the first non-founder CEO of the company in February 2019?
Three metrics tell us the story.
First is Cognizant’s industry-leading attrition.
When Humphries started at Cognizant on 1 April 2019, the company had 288,200 employees. The company ended on 30 September with 349,400 employees.
During these 14 quarters, Cognizant saw 293,321 employees leave the firm, according to a Mint analysis of the quarterly annualized attrition rates.
Put simply: Under Humphries, Cognizant saw one complete round of headcount leaving the firm in less than four years.
“Such large attrition essentially makes clients sit up and take note and question a company. No client is comfortable where there are new faces every three months or so," said a fourth executive. “A higher churn starts impacting your ability to keep up with your client’s needs. What will a client do? The client will start working with another IT firm"
Second is the underperformance of Cognizant and this can be best explained by drawing a comparison with Infosys.
Cognizant ended with $4.11 billion in revenue in the January-March period of 2019. Its market cap totalled $42 billion as of 1 April 2019.
Then, Infosys ended with $3.06 billion in revenue while it was valued at $46.5 billion.
Cognizant expects to end with $4.8 billion in revenue in the October-December period, while its market cap declined to $32.6 billion as of 17 January. Infosys ended with $4.66 billion in the third quarter while its market cap jumped to $79 billion.
On an annualized basis, Infosys managed to cut its gap with Cognizant from over $4 billion at the start of 2019 to $560 million by the end of 2022.
Finally, Humphries struggled to build a stable senior management team: 17 of the 18 senior executives listed in the 2019 annual report have moved out of Cognizant since he took over while over the last 10 months, even senior executives hired by him were heading for the exit.
All this eroded investor sentiment as Cognizant shares underperformed tech-heavy Nasdaq: Cognizant shares were down 16% even as the Nasdaq returned 50% between 6 February 2019 and 11 January 2023.
The new leader’s path
So can Ravi Kumar script a turnaround at the company?
It won’t be easy—for three reasons.
First is because Kumar has joined a company that appears to have a divided board.
“It is never a wise decision for a leader to join a company that has a divided board. My sense is that the board could see more changes in the coming year with Michael Fox expected to move out of the board in the summer," said the second executive cited above.
Another unfavourable factor is that he has not been in charge of a business unit or a service offering. At Infosys, Kumar was the president and over the last few years was in charge of the delivery of software services to clients.
“It is not easy to lead a company that has been completely grounded. But the good thing is that even if you take a single, it will be cheered by the people in the stadium," said a fourth executive.
But the most tricky issue faced by Kumar would be in building a senior management team. Kumar, 51, has been with Infosys for over two decades. Many believe Infosys would have green-lighted his move to join a rival company only after he would have agreed to sign non-solicitation clauses.
“We need to see if Ravi can attract talent from outside Infosys. Infosys would not be very pleased if he takes people from the company and my sense is he would be under scrutiny from his earlier employer. Don’t forget he is also privy to a lot of confidential processes and business decisions at Infosys. So if he seeks to set up development centers for Cognizant in the US, will that classify as a breach of confidential clauses signed with Infosys because he did the same for the company in the last four years? It is subjective and so Ravi will be very careful not to make Infosys upset"
“For this reason, I believe it will be an interesting dance between Infosys and Cognizant," said the fourth executive.
For now, Kumar is excited.
“For the first time in my life, I’ve barely slept and I’m more energized than ever," Ravi Kumar wrote in a note after he landed in Abu Dhabi for the company’s annual three-day strategy meet which will be attended by nearly 1,100 senior leaders. “It’s because the opportunity I see before me is incredible. I believe Cognizant’s potential is unlimited."
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