When a company celebrates its 25th year, one question you’d like to ask is what it would do differently if it had a chance to rewind. That poser looks a bit out of place with Cognizant when it says that many of its choices in this past quarter century have been different from its peers’.
According to R. Chandrasekaran, executive vice chairman, from the way it reported margins to its choice of geography and vertical to focus on, to building tier 2 bases early on, to building a consulting business, have all blazed new trails.
Cognizant chose to restrict its margins to 19-20% at a time when its Indian competitors wore high margins as a badge of honour. Says Mr. Chandrasekaran, “When we went public [in 1998], most of our offshore peers reported operating margins of 28-30%. Consulting firms like Accenture reported in the range of 11-12%.
“We thought 28-30% may not be sustainable and 11-12% may not be competitive.” So Cognizant told its investors it would plough back excess profits of about 7-8% in the business and drive growth.
“Investing in consulting, expanding our geographical footprint… there were many avenues for investment. If we had not had that leverage, our growth rates would have been different. In hindsight, we feel somewhat vindicated.”
Overtaking peers
In time, Cognizant, which began life a decade or more after its large Indian competitors, was able to get past Wipro, and later Infosys in revenues.
What bets is the company making for the next 25 years? Mr. R. Ramkumar, executive director, Cognizant India says, “On the business front, in the medium term, we will grow 6-9% organic in constant currency and 7-11% including inorganic options.”
In the early 2000s, Indian firms took away business from U.S. majors with offshoring and cost arbitrage. Aren’t small firms focussed on advanced technologies now pulling the rug from under Indian IT firms’ feet?
He says, “If someone can do something, that you do, better and cheaper, you will cease to exist. You may as well cannibalise your own revenue. Very soon, many value-added services of today will start vanishing. In parallel, we need to start building other capabilities and being an integral part of customer’s business.
”10 years ago, if I talked to a retailer about e-commerce, the client would say ‘don’t treat me like an eBay, I am a retailer.’ But today, the same customers tell us that they are a technology company, who happen to be in retail.
“From a service provider’s point of view, you can’t differentiate between being a technology company and a business company? You need to have both tightly integrated in your offering.”
Asked to comment on the workplace of the future, Mr. Chandrasekaran refers to Cognizant’s Future of Work team under the strategy function. “It is our think tank. In a recent book they published, ‘What to do when machines do everything,’ the authors have estimated that 13% of existing jobs could potentially go away and 75% of jobs would be enhanced.”
On new jobs that don’t even exist today, the team has 21 predictions. A ‘man-machine manager’ is a job profile in the future. “Today, we have HR professionals in IT services firms and production and operations managers in manufacturing facilities. We are beginning to see robots working alongside humans. So there will be new roles to determine what jobs can be assigned to the robot and which ones can be done by humans.”
As to the business itself, he says, “We don’t really set long-term revenue targets. It is on a yearly basis and in a measured way. In the early stages, we were looking at incrementally where we need to be as an organisation. Initially, we were competing against the likes of IMR Global, CBSI, Silverline, etc. Then we started competing with bigger players not with a view to surpass them, but in terms of capabilities to do better and better.” Mr. Ramkumar points out, “If you look at the firms we competed with in 1998 when we went public — 80% of those firms don’t exist today.”
In its early days, Cognizant also chose to put its eggs in only a few baskets — the U.S., and the banking and financial services vertical. Says Mr. Chandrasekaran, “We ask people to focus on a limited set of things but do a very good job. There may be thousands of opportunities to pursue, but do we have the bandwidth to do everything? BFSI happened because initially we had a foothold in some of the large financial services clients outside of D&B. The second is North America where most of our clients were and we set up operations there. We could have always expanded to other territories, but it might have diluted our focus.”
Crash, an opportunity
But when the U.S. financial crisis happened in 2008, it was a sort of double whammy for Cognizant. For, at the time, about 80% of its revenues came from North America and approximately 50% from financial services. But the IT services major saw this as an opportunity.
A client had signed up just before the 2008 collapse happened. When its business started unraveling, the client asked to meet the Cognizant sales team. The sales folks trooped in to find the client with lawyers, ready to negotiate. The IT vendor assured the client that no negotiations were needed and that it would revoke the agreement and wait for the client to come back!
Says Mr. Chandrasekaran, “We increased our investments, when competition was trying to pull back. Talent acquisition was one such area. The crisis made available a number of people who were not earlier available to us. In that period, we hired some of the best talent from the market.”
“Internally we ran a campaign called, ‘Shining through the fog’. Malcom Frank, our chief strategist gave the analogy of the Tour-de-France. I remember Frank sending an email to all employees with the subject line, ‘We are in the mountains’. The separation among the cyclists in the race actually happens when you pedal up the mountains, not in the plains.” In 2009, Cognizant added more incremental revenues than three of its larger peers on a combined basis, says Mr. Ramkumar.
The crisis also brought the top management together at what came to be known as the ‘Frankfurt’ meetings. The Frankfurt team was a crisis management team. “When I was in Australia, I got a call from Frank.” He said, “The meltdown is happening faster and lots of clients are worried. So we need to regroup and figure out our action plan. So about 15 of us got together at the Frankfurt airport quite regularly. Why Frankfurt? It was easier for us from across the globe to reach quickly and reconnect as a group.”
“Every quarter, the senior management met at the basement of the Sheraton hotel in Frankfurt airport. Gordon Coburn, our then CFO did more investor meetings at the time than we did in our history. Malcom was given the responsibility of communicating to all our employees more often than we ever did. And Frank and other leaders stayed closer to our customers than we ever did.
How does the company see the next 25 years shaping up? “One of the big shifts we will see in the next 25 years is going to be organisations transitioning from being a business enterprise to being both a business and social enterprise. That is, how an organisation could take on a larger purpose and be more relevant to society through the work they do through. For us to be a truly social enterprise, we need the skills of our employees to be enhanced so that everything that they do impacts both business and society and try and bring in the culture of social consciousness among our employees. That is the reason why our employee volunteering base, Outreach is so important. Most organisations who are socially conscious do better in their business.
On doing things different, the company’s approach to the BPO opportunity has also different. “We were not really going after scale. In the nascent BPO period for the industry, it was all about call centre work. We were not sure how long that would stay,” says Mr. Chandrasekaran. “Having built deep capabilities in verticals, we had the confidence that we could add value to the client by taking some of the processes and adding a technology flavour to the business. Both of them go hand in hand.”
“Let me give you an example. In one of our healthcare clients, any claim under $100 would be auto adjudicated. We brought in medical professionals to look at those claims. Because of the business knowledge we brought into the process, we were able to auto adjudicate only bills less than $50 and the client could contest the rest and not pay. We were able save million dollars of dollars for that client.
“Then with process automation, we started developing bots. We are today applying artificial intelligence to business processes with self-learning software which increases accuracy, brings down disputes thus making customers happy. That’s why we waited for the right opportunity to enter the BPO business. Today, our BPO business is much larger than stand-alone BPO companies and is growing much faster. It was also our belief that BPO had to be an integral part of organisation. So we did not set up a separate entity.”
Cognizant was also among the first to build a consulting team. It is 6,000-strong now. The bet was that with consulting entering a pitch first, downstream revenues for services would be that much more. How did that work for Cognizant? Says Mr. Chandrasekaran, “If you’re a financial services consultant, then you remain part of the BFSI team and they go together for pitches to talk about the banking scenario changing and they identify some white space for us to create opportunities.”
It is not like business was flowing. It was early days for offshore those days. “Clients wouldn’t even give us a testimonial. We had to build that trust. We had to work with the customers very closely and make sure the offshore team is given the right inputs. That’s why some kind of a customer front-end management and back-end delivery was important and we created a unique model.”
The IT services major started what is called the Technology Architecture Strategy Consulting (TASC) in the early 2000s. “That’s how consulting originally came about building on our technology strength. Then we built rich experience of bringing together business and technology. Then it became Business Technology Consulting, then Cognizant Business Consulting and now it’s Cognizant Consulting. If you look at the evolution of consulting alone, you can see that we understood the demands from a technology side, integrated business and technology, later strategy and management consulting.”
The contrary stance that Cognizant took had also taken it to tier 2 cities earlier that its competitors, says Mr. Chandraesekaran. Its Coimbatore centre, which now hosts 14,000 people, has seen high loyalty. He says, “The intellectual talent available in Coimbatore has seen much lower attrition than the average. Coimbatore was a fertile ground for us to hire talent. Plus, Kerala was not well-known for IT at that time; Cochin was yet to develop. So we were able to attract lots of people from Kerala. Second, Coimbatore being an entrepreneurial place, we could try different models. We wanted to really try a factory model and see how we can bring down the cost of delivery, We actually developed a niche set of processes to deliver services using those factory models. The overall experience has been good.
“We have completed 12 years in Coimbatore but we should have been close to 30,000 people there by now. We thought we would be the torch bearers in terms of building the ecosystem there but the industry didn’t really develop that well. Other than Bosch, there are no large players. We are happy but we could’ve done better as an industry.”
The Indian IT services industry has also surprised investors with its ability to build scale, consistently over a period exceeding two decades, and without prior experience. Says Mr. Chandrasekaran, “I have to say it’s all being there at the right time and providing clients the right value. It started with clients looking for efficiency and cost savings. There were lots of benefits for the client and that’s what opened up the market. There was enough space for everybody so it’s not like we were fighting for each other’s lunch. Those who played their cards right won.”
But has the company done something it didn’t imagine it would, 25 years ago? Mr. Ramkumar says, “About five years ago, we were not working with any born-digital companies — these are the largest of Silicon Valley companies. Now, we have publicly stated that we work with four of the top five born-digital companies. More recently we said that two of them are amongst our top ten clients today.
“For many of these organizations, their business model is the underlying technology platform. So when business and technology are probably two sides of the same coin, if you don’t understand the business, then you are no longer relevant in the market.”
“Making this transformation was not easy. The capabilities that we need, our entire delivery engine has to be adapted to deliver value to them. Be it agile, full stack developers, polyglot engineers, and the like. So unless you are evolving and transforming the company, relevance is not guaranteed.”
He added that Cognizant is enabling both clients and communities address some of the toughest problems in the marketplace. “For a large company that is focused on agriculture, we are helping them apply next-gen technology such as IoT and artificial intelligence to increase crop yield while reducing water consumption. We helped a pharma company in their clinical data management to accelerate the first human vaccine for H1N1. We are working with the Department of Health in the U.K. to use big data for gene sequencing to find a cure for the rarest of rare diseases such as cancer. For the University of New Castle in Australia, we are using augmented reality to help students of midwifery learn neonatal resuscitation in high-pressure ICU environments. The next-generation technologies of today help us impact larger societal issues. This will get accelerated the coming years.”
And Cognizant believes that the nature of client engagement has itself changed in the past quarter century.
Mr. Chandrasekaran says, “ Earlier, client engagement was about coordinating delivery and ensuring that we live up to our promise. Today, it is about deep understanding of the customer business, bringing in thought leadership proactively in any line of engagement and identifying opportunities that can lead to downstream revenue opportunities. Earlier, a client partner was only expected to manage client relationship; now that role is tagged with creating opportunities for engagement.”
