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We Donít Make All The Profit We Can

A decade ago, Cognizant Technology made a curious decision to keep its profit margin lower than its peers. Today, the strategy is paying off

Published: Jul 10, 2009 09:00:00 AM IST
Updated: Jul 8, 2009 01:30:07 PM IST

The decision to stick to a 19-20 percent operating profit margin was a strategic choice. We started as a captive shop for Dun & Bradstreet in 1994. When we wanted to take our company public a few years later, our challenge was to differentiate ourselves from the other 600 to 700 offshore companies in India.
We did a fairly detailed analysis of the marketplace. We found that, from a customer viewpoint, there were traditional Indian offshore firms that were good for low-end, repeatable tasks. And there were traditional technology consulting firms [Big Eight], good for high-end transformational work that required deep domain and industry expertise and frequent interaction with business users.
We said to ourselves, if we could provide our customers with experience that was equivalent to the Big Eight but with the global delivery capability of an offshore company, we could differentiate ourselves. In those days, the Big Eight were operating in mid-to-high single-digit operating margins, and the offshore companies were in the very high 20s and 30s. We chose an operating margin that was in the middle of those two.
When we went for IPO we hadn’t achieved 19 percent. We told our investors we had a reasonable game plan to bring it to 19 percent. But we also said that it was part of a trade-off.

Cognizant would use a cushion of 5-6 percent margins to reinvest in the business to deliver higher growth. So, we told them we will grow faster than our competitors. Shortly after we went public, in three or four quarters, we were able to demonstrate that higher growth rate. Once we did that investors were more comfortable with that trade-off.
These investments go into many things. The key is to think ahead and get ahead of market trends. Let me describe just two.

In 1998, the first major investment we made was in our client facing organisation. In today’s environment, that team of people, now 700 strong, is one of the key reasons that we are able to navigate so effectively through this difficult economic environment. As our clients face a difficult economic environment, we have people at customer locations every day talking in customer shoes so that we can understand pressure points and respond.
Another such investment was in 2003-04-05. Our company and our industry were poised for rapid growth and we said the best way to capitalise on growth at that time is to have a best team of people at short notice for our clients. We brought [staff] utilisation to lower levels.
If we encounter a quarter where we are faced with some expenses that we did not expect, we regulate our investment in that quarter, so that we still deliver the 19-20 percent.
At this point, we are comfortable with a 19-20 percent operating margin. In the last one decade, there were changes around pricing, cost structure, and the exchange rate. Yet we were able to maintain 19-20 percent. So going forward, it will have to be something very fundamental and far reaching which would cause us to look at the margin and say 19-20 is no longer the appropriate range. Ours is still a nascent market. I believe, penetration being low, growth rates and therefore margins can still continue to be healthy.

As for future growth, there are a lot of white spaces that Cognizant doesn’t occupy today. Our presence in Asia is small. We will do market studies in Latin America and the Middle East. We will continue to invest in our BPO services, our IT infrastructure services and analytics. And there are industries in which we have limited footprint. We will invest in those.
I don’t think it took a lot of brilliant strategy to come up with this model of being positioned in the middle.

What we did extraordinarily well was execution. I always say that strategy without execution is simply conversation. Conversation about the things that you would like to do and you would do, but if you don’t execute well, it’s meaningless. We picked a strategy and then we just stuck with it through the good times and the bad.
Now it was not a dogmatic conviction that it’s always the right strategy. We have a healthy discipline in Cognizant of always second guessing ourselves. Market will and can be brutally honest with you.
You have to be prepared to make mid-course correction.

 As told to N.S. Ramnath


The Firm Cognizant Technology Solutions, ranked 7th in the Forbes List of 25 Fastest Growing Technology Companies in America
The Boss Francisco D’Souza, 40, CEO
The Gamble To sacrifice some profit and reinvest it in growth
The Risk Investor discontent at lower returns
The Reward Among the least hit by the slowdown, growth intact
Track Record Five-year average revenue growth 48 percent, net profit growth 46 percent
Future Projects 10 percent revenue growth in 2009 vs. industry growth in single digits for 2009-10

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(This story appears in the 17 July, 2009 issue of Forbes India. To visit our Archives, click here.)

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