For Francisco D?Souza, ?seeking the new? has been a characteristic trait since childhood. The son of an Indian diplomat, D?Souza, the 44-year old CEO and co-founder of Cognizant Technology Solutions, has lived in nine different countries. Now, it?s his company that?s going places. The software services firm grew its revenue from $1.4 billion to over $7 billion in the five years that he has been at the helm. He became the company?s CEO at the age of 38. Last year, Cognizant pipped rival Wipro in quarterly revenue earnings and now it has edged past Infosys to become India?s second-largest IT company by revenues. This year, the New Jersey head-quartered software services major is confident of meeting its revenue growth target of 20% despite the challenging macro-economic environment. In an interview with Darlington Jose Hector and Debojyoti Ghosh, the Kenya-born CEO talks about the company?s differentiated financial and operational models as also its deep vertical knowledge.
Cognizant has been the talk of the IT town for the last one year, ever since the company went past Wipro in quarterly revenues last year. This year, it has toppled Infosys. In an environment where most IT companies are struggling to meet expectations, how is it that Cognizant is able to achieve stellar earnings?
Our success is largely driven by our differentiated financial and operational models and the meticulous delivery and execution against them. We owe our industry-leading growth to three key aspects of our strategy: our client-centricity and obsessive focus on helping our clients build stronger businesses; our disciplined focus on core industries, services, and geographies; and our reinvestment of excess non-GAAP operating margins above the 19-20% target range back into our business.
Our unique reinvestment approach has allowed us to build unparalleled domain knowledge, intimate relationships, deeper differentiation, industry leadership and a comprehensive services portfolio. Irrespective of the market cycles, we have consistently adhered to our reinvestment philosophy in order to offer our clients the best solutions available to help them transform their businesses efficiently and effectively. This has enabled us to differentiate ourselves in the marketplace in terms of winning and growing new clients, expanding our service offerings, and strengthening our geographic presence. To us, what is most significant is that we continue to take market share and grow faster than our peers.
Cognizant has always adopted a lower margin strategy. People say that this is your biggest strength. But we are sure Cognizant has not come this far on the back of this alone. What are its other intrinsic strengths?
The reinvestment strategy has worked consistently and delivered results. We have maximised this strategy by balancing investments across short, medium and long-term horizons to ensure we capitalise on near-term opportunities without losing sight of sustainable future business growth. As a result, we are well aligned to help clients with reducing costs while innovating for growth and competitiveness. Clients no longer want to choose between a strategic partner and a cost-effective outsourcing provider; they want strategy and efficiency combined.
You are correct in stating that we haven?t come this far on the back of our reinvestment strategy alone. We also owe our success to strong client relationships and deep vertical industry knowledge. Cognizant has always focused on providing solutions to business problems by leveraging technology, rather than through mere technical capability. Viewing technology solutions through a business lens requires us to understand our clients? strategies and needs. Armed with insight and an understanding of the pulse of the market, we can quickly innovate and bring new services to market.
Our ?Two-in-a-Box? engagement model is also a key differentiator. At every level of a client engagement, two people (one on site and another offshore) jointly manage the account. Each pair of employees has joint accountability and their performances are assessed based on the same set of metrics. In this model, the centre of gravity is not geographic, but vested in a team of people. Every employee feels individually and jointly accountable, empowered and responsible for the success of the engagement. Together, they define the success of the client relationship.
Traditionally, Cognizant has been a BFSI bully. The healthcare vertical is doing great as well. However, close to 80% of the revenues come from the Americas. Isn?t this a sign of weakness?
We are not everything to everybody. We focus on a limited number of industries and geographies, and channel all of our energies into helping clients in those industries and geographies build stronger businesses. This focus has helped us establish leadership positions across many markets and provide the most sophisticated solutions to our client base. The markets in which we operate?specifically the US and Europe?are large and under-penetrated and continue to support a sizeable addressable market.
We maintain a focus on the North American market because it is the largest IT market in the world. Organisations in North America are traditionally aggressive adopters of technology and generally have more mature global sourcing programmes. Having said that, we are also investing in several other geographies. Europe remains an attractive long-term market for us and we continue to make investments in that region. Our growth in the rest of the world (ROW), although over a somewhat smaller revenue base, remains exceptionally strong. Our second quarter 2012 revenue from ROW increased 16% sequentially and 45% year-over-year. We are particularly pleased with our performance in Singapore, India and Australia.
We are actively expanding our presence in Latin America by complementing our existing delivery centre presence with senior client-facing teams to offer our deep domain experience and global scale to clients in the region. In Brazil, the largest market for our services in Latin America, we have established a strong local leadership team and built a delivery centre for domestic companies, which has allowed us to attract a number of important new local clients.
Most Indian IT firms are still on a linear curve. How is Cognizant positioned to take advantage of the non-linear momentum?
Variable pricing models are gaining a lot of traction, as they allow us to maintain delivery excellence while providing superior levels of risk management. Our track record of high client satisfaction enables us to meet our clients? growing interest in new, outcome-based pricing models that align price with core business strategies and minimise operational and financial risks.
In terms of new delivery models, we continue to invest in proprietary platform-based solutions, including business process as a service (BPaaS) and software as a service (SaaS), which allow us to deliver the entire service stack: infrastructure, applications, and processing. We currently own a portfolio of 10 platform-based solutions actively in use by our clients. Our Cloud 360 software offering?licensed by more than a dozen leading corporations?provides a cloud-based operating system to manage multiple virtual, private, and public cloud platforms from a single consolidated management console. Additionally, our hosted digital asset management platform, assetSERV, was recently deployed to more than 14,000 global users at one of the world?s largest automotive manufacturers. We are also actively building solutions that utilise newer technology architectures such as social, mobile, analytics and cloud (SMAC) that support business flexibility and efficiency.
Do you plan to get listed in India any time in the future?
At this point in time, we have no plans to get listed in India.
Cognizant has been an acquisition-happy company. Can you dwell a bit on your inorganic strategy?
Our definition of tuck-under is up to $200 million in target company revenue with the sweet spot being between $20 million and $80 million. Our tuck-under acquisition philosophy is driven by three objectives: to expand our geographic footprint, to strengthen our solutions offerings, and to enhance our domain, consulting, or analytics capabilities. Central to our acquisition philosophy is our strategy of acquiring for capability rather than capacity. With more than 145,000 employees and operations on five continents, we believe that we can deliver to almost any client need at scale. Additionally, through our proven recruitment and talent management programmes, we believe we can grow faster organically, with higher quality and lower risk, than we would through large-scale acquisitions.