Orbit Change Conversations

Today’s Economic Times reports that Francisco D’Souza has taken over as Cognizant’s CEO from Lakshmi Narayanan. By itself this isn’t special as this transition was announced a few months back. Yet the fact is, Cognizant is one of the few mid-sized firms that has broken out of the pack in the competitive IT services space. I have been following them for a few years and I believe that their organizational model has given them the edge.

Cognizant stands out
It has grown its revenue by over 50 percent for several years in a row with the operating margin in consonance with revenue growth. It now has annualized revenue run rate of about $1.5 billion.

Its headcount has grown from approximately 9,000 to 14,000 to 24,000 in the last three years, and is slated to cross 38,000 in 2006.

It has had some good customer wins that have positioned it strongly in the pharmaceutical industry (I believe 7 of the top 10 are its customers), healthcare industry and even the telecom industry.

All this has given it the highest P/E ratio in the IT industry globally; in fact it is at least 20 percent higher than its comparable Indian peers. Perhaps worryingly, recently Cognizant’s forward P/E was even higher than that of Google, itself known for its rich valuations.

Many analysts attribute Cognizant’s performance to its willingness to settle for operating margins of 18-20 percent compared to 30+ percent favored by Infosys and the like. While this has given it some competitive leverage in the marketplace, there is more to its momentum than just that.

Corporate model has been a competitive advantage
The space is quite competitive with everybody trying to offer a “Big 5 experience at offshore price points”. To break-out of the pack, Cognizant took a different approach in 1996. It placed the practice leaders’ in-market (i.e. in North America) and the delivery leaders in India. This “hybrid” corporate model is a simple concept but until recently nobody else was following it. Infosys, Wipro and TCS had both their practice leaders and their delivery leaders in India, and the global MNCs such as IBM and Accenture had both their practice leaders and their delivery leaders in North America or Europe,

Today, both categories of competitors are moving in either direction to get to Cognizant-like hybrid corporate model. As a result, some of the edge that Cognizant has enjoyed since 1996 is fading. But the last many years have given it the best-of-both-worlds. On one side, it was able to better understand the pulse of the market and establish tighter customer relationships than its Indian peers. On the other side, it was able to better scale its operations than its global peers.

Cognizant played this hybrid model to the hilt. While most of its Indian peers got publicly listed in India, Cognizant set the trend and got itself listed in the US. This decision to list on the NASDAQ helped it become more visible in the marketplace, and very soon, its Indian peers followed suit one after the other.

History of good strategic decisions
This bet on the hybrid corporate model has clearly paid off in breaking out of the pack. Somehow they have had a good track record of strategic decision making. I remember how Cognizant was the first among the big Indian firms, in1998, to align itself along the vertical industries. Till then everybody followed the convention of aligning along geographies or technologies.

It’s now becoming clear that Cognizant made the right bet of keeping its consulting and BPO practices within the Cognizant brand and incubating them within its industry verticals. Infosys and Wipro had set them up as separate units but have now changed tack. They realized that keeping them separate created channel conflicts and made unified offerings really hard to do.

All in all a good break-out story that illustrates how a good organizational model can make a big competitive difference.

[Sometime back I wrote an article for Silicon India/Smart Techie magazine, “Breaking Out of the Pack”, that might also be of interest to you.]

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