Cognizant Technology Solutions may well be sacrificing its margins to gain market share over its India-based software peers. Its margins are the lowest when compared to the top four Indian software companies in the December quarter.
The US-based software major, which is the number two software company in India, has managed to keep operating margins within a range of 19-20 per cent. By doing so, it is taking those dollars to reinvest for long-term growth.
Investment in driving revenue growth over margin expansion, coupled with the ‘Two-in-a-Box (in which a relationship management team and deep industry expertise are assigned to a client) strategy, has helped Cognizant inch closer to Tata Consultancy Service in terms of revenue per quarter, said Erin Hichman, Analyst, Professional Services Practice, Technology Business Research, Inc, US.
For instance, Cognizant’s $1.31 billion in revenue was 61.1 per cent of TCS’ $2.14 billion in 4Q10; in 4Q12 the metric increased to 66.1 per cent and TBR expects Cognizant to continue to make incremental gains in 2013 and 2014, she said.
Marketing spend
Cognizant, which employs a large number of people in India, has always spent heavily on its sales and marketing personnel. “It well understood the need to be closer to its clients and has, therefore, good presence in the US. This has kept the margins lowers and helped the company win more deals,” said Rajat Juneja, Practice Director, Everest Group, a research firm.
Of late, even HCL has gained share in the market. It has also kept its margins lower on account of an aggressive pricing policy. However, now even Infosys is moving away from its traditional approach and being aggressive in bidding deals. Both Infosys and Wipro are now offering upfront cash payments while bidding for large outsourcing contracts. This is likely to help these companies win more contracts but at the cost of margins, he said.
“When we took the company public in 1998, we made the decision to keep our margins lower but stable, and take those dollars and reinvest them for long-term growth, industry leadership and deep differentiation,” R. Chandrasekaran, Group Chief Executive, Technology and Operations, Cognizant, told Business Line .
Cognizant believes that there are two very legitimate models in the industry — maximising margins and maximising revenue growth/market share. “We adopted the model of maximising market share as we believe we are in a recurring revenue business and we are still in the early stages of market penetration,” he said.
“We are able to invest that difference back into business in a number of different ways,” he added. This includes investment in client-facing teams - Cognizant today has well over 1,000 Client Partners and Account Managers servicing 821 active clients.
Consulting practice
It has created Cognizant Business Consulting, the consulting practice, which over 3,300 consultants responsible for business, strategy and operations consulting. This investment has helped increase its mindshare with clients, thereby driving market share, and also win and execute large-scale transformation programmes.
It has also invested in newer services such as SMAC (Social, mobile, analytics and cloud). “As we took inventory at the end of 2012, we found that we were delivering SMAC stack related work for over 60 per cent of our top 100 customers, as our clients seek new business opportunities through mobility, big data and the cloud. These services are gaining traction faster than we expected,” he said.