Challenges of attracting and retaining highly qualified personnel resulted in higher compensation costs for Cognizant Technology Solutions in 2022. The company saw its cost of revenue (CoR) increase to $12,448 million versus $11,604 million in 2021, an increase by 7.3 per cent or $844 million. In other words, CoR as a percentage of revenue increased to 64.1 per cent in 2022 versus 62.7 per cent in 2021.
The CoR consists primarily of salaries, incentive-based compensation, stock-based compensation expense, employee benefits, project-related immigration and travel for technical personnel, subcontracting and equipment costs relating to revenues, says Cognizant’s 2022 annual report.
The increase in CoR, as a percentage of revenues, was due to higher compensation costs for delivery personnel (including employees and subcontractors). There was also a 30 basis point negative impact due to the impairment of certain capitalised costs related to a large volume-based contract with a Health Sciences client, partially offset by delivery efficiencies and the depreciation of the Indian rupee against the US dollar.
Cognizant had approximately 355,300 employees at the end of 2022, with 258,500 in India, 41,100 in North America, 18,200 in Continental Europe, 9,200 in the UK and 28,300 in various other locations globally. This represents an increase of 24,700 employees compared to December 31, 2021.
It also utilises subcontractors to provide additional capacity and flexibility in meeting client demand, though the number of subcontractors has historically been immaterial relative to its employee headcount.
Lower attrition
For the three months ended December 31, 2022 and 2021, Cognizant’s annualised attrition rate, including voluntary and involuntary, was 25.3 per cent and 34.6 per cent, respectively. Attrition rate for the years ended December 31, 2022 and 2021, including both voluntary and involuntary, was 31.7 per cent and 30.8 per cent, respectively.
“We saw improvement in our annualised attrition rate for the three months ended December 31, 2022 and we expect our annualised attrition rate for the first quarter of 2023 to be lower than our full year 2022 rate. Attrition can be difficult to predict as it is impacted by both macroeconomic and internal factors,” the company said.
Business Outlook
Challenges attracting and retaining personnel have negatively impacted and may continue to adversely impact cost of delivery and the ability to satisfy client demand. Further, the ongoing and anticipated future efforts regarding recruitment, talent management and employee engagement may not be successful and may result in increased compensation costs. “While we strive to adjust pricing to reduce the impact of compensation increases on our operating margin, we may not be successful in fully recovering these increases, which could adversely affect our profitability,” Cognizant said.
“As a global professional services company, we compete on the basis of knowledge, experience, insights, skills and talent of our employees and the value they can provide to our clients. Our success is dependent, in large part, on our ability to keep our supply of skilled employees, in particular those with experience in key digital areas, in balance with client demand. Competition for skilled employees in the current labour market is intense, and in 2021 and 2022, we experienced significantly elevated voluntary attrition,” the company said.