Highly skilled but modestly paid Indian technicians gave the U.S. software consulting firm a toehold and helped increase its share price ninefold. Now it has bigger ambitions.
By Jacqueline S. Gold
August 2001
Institutional Investor Magazine
While most tech stocks are sputtering, shares of Cognizant Technology Solutions Corp. are flying - up more than 20 percent this year through late July and more than ninefold since the Teaneck, New Jersey-based software consulting firm's IPO in June 1998. That largely reflects CEO Wijeyaraj (Kumar) Mahadeva's strategy of relying on talented software writers in Calcutta rather than in Silicon Valley. The programming is at least as good, he contends, but the cost difference is substantial: Programmers in India earn about one fifth as much as their U.S. counterparts.
Last year Cognizant earned $17.7 million on revenues of $137 million. In this year's first half, earnings increased 53 percent, to $11.4 million, on a 51 percent increase in revenues, to $88.8 million.
Dun & Bradstreet Corp. set up Cognizant in 1995 as an in-house business to serve D&B divisions with strong processing needs, such as IMS Health and A.C. Nielsen Co. Cognizant was soon performing Y2K work and systems maintenance for outside customers. As the unit grew, its engineers and managers began to clamor for equity. Pressure to part company with D&B fit nicely with the parent's plan to refocus on its credit reporting business. Cognizant was initially spun off in 1996 as part of IMS Health. It went public in 1998, raising $34 million. Mahadeva says most of that money is still in the bank.
Cognizant's business model is hardly unique. Infosys Technologies, Wipro and Satyam Computer Services are just a few of the software consulting firms that capitalize on India's technical skills. Indeed, competition from such firms has pushed Cognizant into bidding on larger, more complicated projects. UBS Warburg technology services analyst Adam Frisch says the company's diversified revenue stream - a mix of systems management, software development and e-business - should allow it to outperform many of its peers. His 12-month target for Cognizant shares, now trading at about 45, is 54.
Mahadeva, 49, was born in Sri Lanka, where his father headed the civil service. He received an electrical engineering degree from the University of Cambridge in 1973 and, after three years in R&D at British Broadcasting Corp., headed to Harvard Business School. There he was recruited by McKinsey & Co.; he spent seven years at the consulting firm, helping to build its technology practice.
In 1985 Mahadeva left McKinsey to join a client, newly deregulated AT&T Corp., which was aiming to take on IBM Corp. in computers. But four years later, frustrated by the corporate politics at AT&T, Mahadeva moved to Dun & Bradstreet to head up its foray into Asia. He didn't do much business, but he discovered India's software engineers.
Mahadeva recently spoke about Cognizant's prospects with Institutional Investor Senior Writer Jacqueline S. Gold.
Institutional Investor: How do you win customers away from bigger consulting firms?
Mahadeva: Accenture charges $200 an hour, and our vendor billing averages $60 or $70. So we provide a tremendous savings. Not only that, we think our quality is better. We've gotten an SEI Level 5 rating from Carnegie Mellon University. It measures the maturity of the software process. Five is the highest level. We also exploit the time difference between India and the U.S. We can do the coding overnight in India and have it ready here the next day.
Are there differences between U.S. and Indian software engineers?
The one big difference we notice very often is that software engineers in the U.S. want to do their own thing. They're very individualistic, so they don't necessarily want to follow a process. What we've done to get the SEI Level 5 is to get the engineers to follow a process. This is easier to do, because of the culture in India, than it would be here. Also, software is the glamour profession in India, and the best people go into it, so you can get good talent. In the U.S. engineering and technology have the nerd factor. It's not as attractive a profession here.
Where do your revenues come from?
Fifty percent of our revenues and profits come from what we call application management, which is really the reengineering and maintenance of legacy systems. Ideally, organizations spend about 60 percent of their technology dollars on this. We're effectively managing their systems. It's a form of outsourcing. E-business represents another 36 percent of our revenues. There we chose to focus on the back-end part of the business rather than just building a Web site, because we saw that was really where the action was going to be.
Could you walk us through a project?
One good example is what we're doing for a company called CCC Information Services in Chicago. They're the leading collision estimation company. What we're building for them is a complete infrastructure for the supply chain of the insurance industry. If you have an accident in your car today, the average time to get you back in your car is 31 days. What these guys want to do is link up insurance companies with the body shops and the part suppliers so that the entire process can be compressed into about ten days. The idea is to save money and transactions and time. We're building the technology infrastructure that serves the body shops and links into the insurance companies to make this possible.
Where does the remaining 14 percent of your business come from?
That's building new systems but using what used to be called client-server technology, as opposed to the Internet.
You talk about "moving up the food chain" in bidding on bigger projects. That sounds risky.
I don't particularly view it as risky. It allows us to enter the competition at an earlier stage and charge higher rates. We would be delivering a more complete solution and more value to the client.
How did your years at McKinsey influence you at Cognizant?
Making a strong sort of core culture is very important. It's a very can-do attitude. People consider themselves the best and brightest because we recruit out of the top universities and technical schools in India. They are very client-focused. We also have extensive training - not just technology training, but also about the way we do business, how we deal with clients, how we make decisions.
IMS Health is not only your biggest customer; it's also your biggest shareholder, with 60 percent of your stock. Is that a problem?
No. They've really left us entirely alone in terms of managing the company. What they've basically said - and they've been very open about this to the Street - is that they see themselves as passive shareholders and that in time they will divest themselves of their position. They were prepared to divest some 20 percent of their holdings when the market fell apart in late 2000. So they've delayed the process. But they don't view themselves as running the company. They just view themselves as shareholders.
How do you attract and keep high-quality Indian engineers when many of them want to move to the U.S.?
One of the things that people from India really like about working for Cognizant is that they get this flexibility about moving back and forth between India and the U.S. We have 2,000 software engineers at various locations in India. We have another 900 engineers in the U.S., at client locations and our own facilities. We like to have people work for two or three years at one of our centers in India before we'll bring them to the States. But if they do want to go back to India, they have the flexibility to do that.
Is Cognizant involved in any venture capital investing?
We have a partnership with Trident Capital. One of their partners is on our board, and we've done so far just one investment with them. We put in $2 million, and they put $7 million or $8 million into an e-appliances company. The idea is that if there's something wrong with one of your appliances, like your refrigerator or your dishwasher, there's a chip inside of it that will call a service person and get it fixed. That's the next wave of the Internet: having appliances actually talk to each other directly without their owners even knowing it.
Do you see any acquisitions in Cognizant's future?
In order for us to effectively compete with an Accenture, we need more vertical market depth. But it is not going to be a big bet at all. We're looking for small acquisitions that will move us up the value chain, most likely in the U.S. or Europe. There are firms that help HMOs and their clients with engineering the business process and building technology for that. It's what we consider the next tier of management consulting.
