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Yet, in some ways, this feat should surprise us. Cognizant came late to the race. Infosys was founded in 1981, and Cognizant in 1994. Cognizant was incubated by Satyam (remember that company?) and Dun & Bradstreet. Around that time, Cognizant looked up to Infosys. Venetia Kontogouris, who was with Cognizant since its inception, and was on its board till 2006, once told us that she visited Infosys campus in the 90s, and felt nothing but admiration. After all, Cognizant was merely a captive centre of Dun & Bradstreet then, struggling to get business from outside customers. Infosys was a master of that game already.
Now, how did an upstart like Cognizant overtake an established player like Infosys?
The traditional answer to that question attributed the reason to Cognizant’s reinvestment strategy. Cognizant made only 19-20% in operating margins, a good 8 to 9 percent lower than Infosys, and reinvested that on the front-end. The lower operating margins shows up in higher sales expenses, and to the chagrin of Infosys, Cognizant's faster growth.
The only problem with that explanation is that it doesn’t explain how Infosys could manage both high margins and industry leading growth till a few years back, and it does not explain how TCS, without the benefit of that strategy, seems to be doing well too.
In fact, reinvestment alone doesn't explain how Cognizant went past Infosys. For that, we have to look at the engines of growth. Cognizant has three of them running. One, getting into new areas, and putting the full force of organisation behind it. Two, using acquisitions in key spaces to achieve scale or to access customers faster. And three, being clear in the fact that it's a market-share game. Infosys, on the other hand, relied mostly on a single engine - the robustness of its underlying market.
Let us see how.
Elevators of growth
When my colleague Mitu Jayashankar and I did our first long story on Cognizant in the magazine, Viju George (then, an analyst with Edelweiss, and now with JP Morgan) told us: “If you ask me what Cognizant missed, it missed every opportunity. But the beauty of Cognizant is they play the catch up game very well”. He cited ERP, BPO and Infrastructure management as examples. To all these, Cognizant came late, but caught up fast.
That's one way of looking at it. The other way is: Having come a little later than Infosys to the business, Cognizant has been more keen than Infosys in adding more chicken to its coop, and feeding them to the brim. In other words, Cognizant has been constantly adding more businesses to its portfolio - in terms of new industry verticals, in terms of new solutions and new markets, and has been pulling all punches to scale them up fast.
When Lakshmi Narayanan became its CEO in 2003, areas such as ERP, testing and BPO - all put together accounted for less than 10% of Cognizant's revenues. When Lakshmi stepped down three years later, together, they were contributing close to a third. Similarly, when Francisco D Souza took over, its European business was in low single digits; its consulting business was nascent and its remote infrastructure management (R.I.M.) business had just started. Now, despite a slowdown there, European business accounts for about 15%. Its consulting practice is big - with over 3000 people.
How did they achieve this? When Cognizant decides to scale up a new segment, it puts the entire force of the organisation behind it. It recruits the best talent from outside - offering more money, and more than money, an opportunity build a business and a lot of freedom to do that. We spoke to one such executive, who was brought in from outside to build Cognizant’s infrastructure business. He seemed to be delighted at the way things moved in Cognizant. R.I.M. buisness, he said, needed a different kind of skill sets, roles and pay scales compared to a typical software firm that Cognizant was. He just had to ask for it. The speed with which organisation complied to his requests surprised him. It shouldn’t have. The pressure to be that way comes from the top. When Francisco wanted to give European business a push, he shifted base from New Jersey, and stayed in London for a few months.
When companies want to get into a new area, they typically move to what goes by the jargon ‘adjacencies’ - segments that are very similar to the one that they are already strong in. It’s a useful strategy because there is the comfort of not straying too far from your core areas of strength, and the possibility of using your existing network of people, who will put you on to others. That’s how Cognizant grew too. (R Chandrasekaran explained this to us by drawing a matrix on the whiteboard, and pointing to clusters of boxes as focus areas.)
But, often, when a new market opportunity came up, Cognizant did not spent too much time thinking about whether it’s adjacent to an area it was already strong in. Areas like consulting or remote infrastructure management were several boxes away from the core areas of Cognizant. It simply asked: Will it give us the growth?
When we were reporting on the cover story on Francisco, Mark Livingston, head of consulting told us that whenever a new business opportunity was taken to Francisco he tends to ask three questions:
One: “What are our competitors doing in that space? What are Deloitte, Accenture and IBM doing?”
Two: “What’s the total dollar opportunitiy in the market place. Is it 5 billion or 20 billion? How much do competitors already have? How much of a space do you think we can get?
Three: “What is going to differentiate Cognizant?
“Those are to me the standard Frank questions” Mark said. “The discussion always comes down to how much money you can make.”
Listening to Mark, I felt these questions could well have come from a venture capitalist or a private equity player. The focus is on growth and returns, and not so much on whether one has the talent to build it. That can always be hired.
So, later, when Francisco told us he was trying to build a VC-like structure within Cognizant to tackle emerging business, we weren’t too surprised.
Now contrast it to Infosys. Infosys is in all the markets that Cognizant is in, and in fact it was there before Cognizant got in. But there are two differences.
One is in the approach. Cognizant did everything as a part of the company, and was more than willing to tweak the existing structures to accommodate new ones. Infosys was reluctant to change the existing structure. Its BPO business was started as a separate company, and in fact, it went under a different brand name - Progeon. Infosys Consulting was set up as a separate company, a 100% owned subsidiary of Infosys, and only recently did it merge the two. Even last year, Subhash Dhar, then a front runner for the top job, spoke to The Times of India about the possibility of forming a different company for its emerging technology businesses such as cloud, mobility and analytics. It speaks of the reluctance to change the existing structure.
And, here’s the more important point. Infosys has a greater need to look beyond adjacent areas, beyond the comfort zone, than Cognizant. It’s for one simple reason. While Cognizant has promised the market a lower margin compared to its peers, in return for higher growth, Infosys' promised industry leading growth and industry leading margins. Such opportunities might not happen always in the adjacent areas or within the comfort zone. Which means, to find such opportunities, it has to look far beyond its existing portfolios. To be fair to Infosys, its Infosys 3.0 is one such attempt. But the problem is it might take some years for that to kick in. Meanwhile, Cognizant simply ran past Infosys.
Love Marriage ya Arranged Marriage
In the last six years, Cognizant made ten acquisitions, and Infosys made three.
Earlier, Cognizant's preferred strategy was to buy small companies to get specific skill sets fast, or to get an entry into the house of a must-have customer. Once it bought them, it 'tucked them in', merged into one of its business units.
Now, it has grown more confident. Till a couple of years back, its biggest acquisition was marketRx, a company in analytics space. Number of people who came in: 400. Last year, it bought Corelogic's India operations. Headcount addition: 4000 people, ten times more. In fact, Cognizant’s definition of tuck-in acquisition has changed. “Our sweet spot is probably from 20 to 80 million dollars, but today we will be comfortable with $200 million acquisition,” a senior executive said.
In contrast, Infosys has been dragging its feet on acquisitions. There seems to be no apparent reason why it should. It has plenty of cash - over $4 billion. It’s presumably good at managing cultural issues that come up in an acquisition. Consider: it has been hiring several thousands of new employees every year. Last quarter alone it brought in over 9000 people. It has done complex deals before. The Philips deal is a classic case. And most importantly, Infosys has been always been saying it’s constantly looking out for acquisitions, and in fact one of the reasons its holding so much cash in hand is for this purpose.
So, why doesn’t it make acquisitions then? One answer could be in the way Infosys looks at acquisitions. It wants to "feel right" about an acquisition. “M&A is like falling in love. There is no plan like falling in love!” SD Shibulal said during a Reuters event last year.
There lies the problem. Many fast growth companies tend to look at an acquisition not as 'falling in love', but as arranged marriages. They go to brokers, find a partner, and plunge into a relationship even if they don’t feel all that comfortable at first. Things often work out.
The market share game Cognizant came late to the party, and so, it had to tell a more compelling story to the investors to get their attention. The story it told was: “We will have lower, but stable, margins but we will grow faster than the industry”. In other words, we will keep increasing our market share, come what may. We will eat into others' pie.
Cognizant more or less stuck to that line. In 2009, when we spoke to Francisco D’Souza, after it became clear that Cognizant continued to grow even in a bad market, he said it did because it continued to invest in growth. His only regret was that, he said, he did not invest even more aggressively and grow even faster.
In the context of Cognizant, it meant putting more people on the ground; getting them to spend more time with specific set of must-have customers, disproportionate to the revenue they might account for at that specific point of time; taking on projects which might not give high margins initially, but might eventually become big; investing more resources on a specific project compared to what peers do and so on. All these meant, Cognizant was constantly grabbing more market share.
Contrast this with Infosys. In the last few quarters, it has been growing slower than the industry. And in the last two, it has not been able to keep even with the real GDP growth. (Its performance against nominal GDP, which includes inflation and is a better measure to compare a company’s revenues against, shows Infosys in even a poorer light).
Growing slower than the industry will eventually tell on a company’s ability to grow for many reaons. The lack of momentum will cause a drag, even after the market picks up. There will be lost growth opportunities from the organisations it did not gain a foothold in. On the supply side, a slow growth company will find it difficult to attract good talent.
Cognizant had more elbow room to get the market share, and it used it well. Infosys was too constrained by a compelling need to maintain margins.
In short, Cognizant was firing on all cylinders - on the basic robustness of the market, increasingly bold acquisitions, and ability to grab market share. Infosys was relying on just one - the robustness of the market. And when that failed, it simply let Cognizant run past it.
Now, what’s the way forward?
Marathon: What to do when you hit the wall
Shibulal likes to use the analogy of marathon Vs sprint to explain why it’s not running as fast as the investors expect it to. Marathon runners don't sprint, because they are in it for the long haul. The only problem with that analogy is that its competitors are running marathons too. (Ask N Chandrasekaran, TCS CEO).
Still, Shibulal’s analogy is singularly apt for Infosys because of one big reason. Infosys is probably going through a phase which marathon runners call ‘hitting the wall’. This is how John Brenkus of Sports Science explains the phenomenon in a superb book called Perfection Point.
When there is plenty of oxygen available for metabolism, glycogen is easily broken down in a process called aerobic metabolism to create ATP which keeps you happy and moving.
But there’s only so much glycogen you can store up, and when you start running low, you start relying on fat. Fat takes more oxygen to produce energy than glycogen does, and even then, it will only do it if there’s still some glycogen left. If the glycogen gets too low and there’s also not enough oxygen available, you start producing lactic acid instead of ATP.
Lactic acid is not good. It hurts. Beyond a certain threshold fatigue sets in and, even worse, glycogen starts breaking down even more quickly into lactic acid, creating a self-perpetuating cycle of progressive awfulness. Among marathoners, this is known as “hitting the wall,” and it typically happens around the twenty-mile mark.
Judging by the speed, Infosys seems to have hit the wall. So, how do the marathon runners get past this. Brenkus explains.
It’s possible to get past the wall, but only if you somehow kick-start the metabolism of fat. One popular way to do that is by loading up on easily absorbed carbohydrates from little foil gel packs. For many people, knocking back a few cups of chicken broth accomplishes the same thing.
Infosys might have hit the wall, but in fact has two big stores of energy to rely on.
The first is the high margins. If it wants growth, it can make use some of the additional 8-9% available with it to get more flexible on pricing, and grow faster. Infosys has this cushion, and Cognizant doesn’t.
The second big store of energy is its cash pile. It can use some of it to make an acquisition - something Infosys says it wants to do but hasn't - to run past its competitors.
But here’s the problem. In marathon, metabolism of fat doesn’t kick start automatically. It needs some conscious change in the behaviour of the runner, a willingness to stop by an aid station to 'knock back a few bowls of chicken broth'.
And then, it kicks in.
The question is whether Infosys is ready to do that. If it is, the marathon race might get as exciting as sprint. Otherwise, don't be suprised if you see yet another competitor getting past Infosys sometime in the future.