'We acquire for capability, not capacity'

MUMBAI, INDIA: 'Forces of the future of work' is the core business philosophy that defines Cognizant which distinguishes it from other IT firms. Here in this interview, R Chandrasekaran, Cognizant's group chief executive — Technology and Operations, talks to CIOL on the company's perspective on US and Europe economic crises, its philosophy, the business model of low margins-high market share, share business and the acquisition plans for India. Excerpts:

CIOL: How do you see the current state of US economy and Europe crisis? Given this, do you see any trends in the behavior of IT services and BPO companies' functioning and their business strategies?

Chandrasekaran: We recently announced solid fourth quarter results for Cognizant that capped very strong 2011 performance. We closed the year 2011 with revenue to $6.12 billion, a 33.3 per cent growth over the previous year.

We look to our future with a sense of optimism. While the macro environment, especially in Europe, will remain volatile in the coming months, we are convinced that our value proposition is more relevant than ever.

Our 2012 revenue outlook is based on what we see with our client base across industries and geographies. When we look at spending patterns for 2012, we continue to see normal budget cycles in North America and Europe. Our view remains that the 2012 IT and operations budgets will remain flat with a slight upward bias in the US as the recovery continues.

While Europe remains attractive over the long-term, especially as economic pressure creates additional demand for our services, we have assumed that growth could remain muted during 2012. In light of these assumptions, we are confident of our ability to deliver at least $7.53 billion for the full year 2012, an annual growth rate of at least 23 per cent.

CIOL: At Cognizant you have the philosophy of 'Forces of the future of work'. Can you explain this philosophy and how is it getting transformed to drive the company's business growth ?

Chandrasekaran: The foundation for “a new normal” is built on three pillars: A new generation of highly distributed and virtualized business models; a new generation of IT architectures such as cloud and mobile technologies; and a new generation of born-digital workers and consumers, the so-called Millennials.

In this virtualized, globalized environment where new technologies like cloud computing and social networks intersect with the millennial generation, clients are looking for better ways to organize teams, cultivate innovation, allocate resources, and reinvent knowledge processes.

Cognizant is already helping clients cope with these industry shifts that are shaping the fundamental nature of work itself. We’re working with clients to develop industry-specific strategies around fully globalized business models and leverage social computing principles, while re-architecting their organization to appeal to a new generation of consumers and employees.

Clients are becoming increasingly comfortable using a global delivery model to execute these large, complex transformational engagements. They are increasingly looking for a partner who not only understands the technical aspects of a project, but also brings deep vertical, consulting and business knowledge.

We see increasingly robust growth opportunities on multiple horizons. Firstly, our core business of application development and maintenance, which presents significant growth potential through deeper penetration of the offshore model and expansion into emerging geographies.

Secondly, new services around areas such as Consulting, BPO, and Infrastructure Services, or ITIS, which are helping clients redefine and focus on their core business.

And thirdly, emerging capabilities, such as mobile, cloud, and social computing, that address changes brought on by the future of work. Together, these three horizons illustrate the complexion of market demand and highlight the benefits

of our diversified business mix and our strategy of re-investment. Success in the market today requires that we make the investments, build the capabilities and execute successfully across all three horizons simultaneously.

Our operational and financial model has lent itself spectacularly well to this mandate all along, and we think Cognizant is well positioned to take advantage of the existing and emerging opportunities. Our recent performance gives us the confidence that our model is resilient and that our value proposition for clients remains robust.

CIOL: Over the years Cognizant has maintained low operating margins compared to other IT companies and yet has registered huge growth and profits. So what's the rationale behind it and how does it work in driving good numbers?

Chandrasekaran: We believe that there are two very legitimate models in the industry — maximizing margins and maximizing revenue growth/market share. We adopted the model of maximizing market share by keeping our margins lower but stable, as we believe we are in a recurring revenue business and we are still in the early stages of market penetration.

We manage our non-GAAP operating margins within a range of 19 to 20 per cent and invest the excess back in to our business in a number of different ways: in strong client-facing teams; in providing superior customer intimacy and an enhanced relationship experience; in further strengthening that experience through investments in consulting teams and program management resources to drive large-scale organizational transformation. We also invest in new service offerings to stay on top of our clients’ evolving business and technology needs.

In the over thirteen years of our listed history, we have not missed a beat on presenting operating margins within this range despite changes in the external environment. Our goal is simple. We want to be the Number 1 in the minds of all our clients and employees. Our belief is that if we do it, we will be able to continue to post industry-leading revenue growth.

CIOL: What kind of investment and acquisitions plans are you looking over the next few years and anything specific on India front?

Chandrasekaran: Central to Cognizant’s acquisition philosophy is our strategy of acquiring for “capability” and not capacity. Our acquisition philosophy is driven by three objectives: Expanding our geographic footprint (for example, our acquisition of Galileo), filling in gaps or strengthening our solutions spectrum (for example, our acquisition of UBS, CoreLogic), and strengthening our domain, consulting or analytics capability (for example, our acquisition of Fathom, marketRx, SVC, PIPC).

Our approach is to look at small 'tuck-under' acquisitions that add capability in specific areas. When we think about the size of Cognizant today and we think about what a tuck-under acquisition means, our sweet spot really is probably in the $20 million to $80 million range, maybe going up to $200 million in target company revenue, but really $20 million to $80 million is our sweet spot of revenue for an acquisition.