Stealing the thunder

The biggies of the Indian IT industry—Infosys, Wipro, TCS (Tata Consultancy Services) and HCL Technologies— have a lot more to worry about than just the downturn. Cognizant Technology Solutions, which has been outpacing the Big Four in terms of growth, is now set to edge past them in terms of incremental revenues, thanks to a cracking fourth quarter performance (the company follows the calendar year as its financial year).

The New Jersey-headquartered firm with a huge offshore presence in India bettered its fourth quarter guidance of $745.3 million with $753 million in revenues and closed its financial year with sales of $2.8 billion, up 32 per cent over the $2.1 billion notched in the previous year. Operating margins stood at 20.2 per cent.

The company is looking to post higher incremental revenues (the difference between FY ’08-09 and FY ’07-08) compared to Infosys, HCL and even Wipro—the last, if just organic growth is taken into consideration. Cognizant is expected to generate $589.7 million compared to $536 million for Infosys and $491 million for TCS if their guidance for the January-March 2009 quarter is taken into account. “This could well be an inflexion point for us,’’ says R. Ramkumar, Vice President, Corporate Marketing, Research and Communications, Cognizant.

Secret Sauce
But how is Cognizant succeeding in generating more cash than its peers? The key, according to Viju George and Kunal Sangoi, Research Analysts with Edelweiss Securities, lies in Cognizant’s business model and its superior relationship management with clients.

In the main, keeping its operating margins constant at 19-20 per cent and ploughing the surplus money back into business—more importantly, people—has done the trick for the company. “We have always believed (unlike Infosys) that trading off top-line growth for consistent margin growth is a more sustainable strategy,” says Francisco D’Souza, President and CEO, Cognizant. But Cognizant, unlike its peers here, does not believe in giving dividends either.

Cognizant began investing heavily in people—client partners and country heads who are locals with deep expertise and who can ably manage relationships with customers—much ahead of its peers. Besides, its two-in-a-box operational structure, in which two equally responsible managers look after each project and business unit with one managing customers and the other managing employees, ensured that the onsite-offsite teams worked as a single unit.

Advantage Cognizant Cognizant has always believed trading off top-line growth for consistent margin growth is a more sustainable strategy. Margin over growth: Keeping operating margins at 19-20 per cent is sacrosanct here. Two-in-a-box structure: Two managers for each project ensure seamless onsite-offsite coordination. First to go vertical: This has ensured specialisation in select verticals and effective client servicing. Emphasis on depth rather than breadth: This has rendered it immune to the recession.

Further, the delivery teams (employees) are helped by business analysts— Cognizant employs the largest number of MBAs compared to its peers. Then, there are the External Advisory Councils for relevant domains and verticals, which are made up of external industry veterans who bring leading edge thinking to the table, much like a company board but on a smaller scale.

Also, Cognizant was the first to go “vertical”—it verticalised back-end (delivery) as early as 1998-99 and front-end (sales) in 2002-03. This ensured that its people became specialised in select verticals and sourced and serviced clients accordingly. Thanks to this, the Cognizant team is now able to mine deeper into a client’s requirement. “The specialization allowed for resource allocation for clients who were perhaps sub-scale but of significant potential—again an early start,’’ says Ramkumar. The vertical approach is also followed in its BPO. In contrast, competitors prefer a more horizontal approach in their BPOs.

Now, the company is wellpoised to get into sub-verticals where it has already made a beginning in the last two years and it could do this seamlessly in the existing structure. In contrast, TCS and Wipro have gone in for a restructuring exercise only in 2007-08.

According to Edelweiss Research, “If companies don’t get the structure right early on, it strangulates or delays growth—and the jury is still out on the success of the restructuring exercise of both companies.’’ Invest in Depth These early investments in relationship management, developing tighter linkages with its customers through its two-in-a-box operational model and early verticalisation helped Cognizant invest in depth rather than breadth—a fact that is helping it greatly in times of recession. It derives 70 per cent of its revenues from its Banking, Financial Services and Insurance (BFSI), and healthcare verticals, this concentration is perceived as an industry risk.

Despite a difficult environment, on a run rate basis the company is adding more revenues than its peers in BFSI. “Over the three quarters since January 2008, Cognizant has added $146 million revenues in BFSI. For Infosys and TCS, the numbers stood at $54 million and $57 million, and only Wipro kept pace at $148 million,’’ according to Edelweiss Research. This is commendable given the company’s limited exposure to capital markets in BFSI and with an 80 per cent exposure to the troubled US market. Likewise, in healthcare Cognizant has almost no competition among peers in drug development covering analytics in clinical trials and submission management, in the provider segment (hospitals) and in life sciences.

But how will Cognizant fare in 2009? The company has stated cautiously that it would add 10 per cent to the topline, on a conservative basis, while its margins at 19-20 per cent would be sacrosanct. Whether it would continue to beat the industry odds remains to be seen.