The Hindu Business Line : A clear roadmap

As an astute observer of trends in the software industry, Francisco D' Souza, Chief Operating Officer of Cognizant Technology Solutions, engaged in a freewheeling discussion with eWorld recently. Excerpts:

Do you think application development and maintenance is heavily penetrated for the industry as a whole and is likely to get commoditised faster than expected?

At this point, we think that it largely depends on how we classify these services. We have a healthy pipeline of services around testing, data warehousing or package implementation. We do not know whether it is classified by Nasscom-McKinsey as applications or systems integration. If we look at the study closely, systems integration and IT infrastructure are significantly under-penetrated and those are the new engines of growth.

By the way, speaking about commoditisation, I am not entirely sure if application development is something that becomes commoditised over time. There is no evidence of it in the past.

I think commoditisation occurs when the market essentially looks at everybody's services or products and says that they are virtually the same, whether I buy from producer A or B. That I do not think is likely to happen in application development.

In application development, there is capability; there is differentiation among firms and investments made by them. There is a difference between the way Cognizant does application development as compared to any of the global firms. You will see differentiation among the firms in those dimensions.

The employee utilisation rates of Cognizant are about 10 percentage points lower than the Tier-I Indian offshore firms. How do you explain this difference?

Simply in growth rates, since we are growing faster than them. We grew 51 per cent this year (2005) compared to the growth rates of any of the top-tier Indian firms. The differentiated model, the reinvestment that we do, is paying off at a higher growth rate.

Basically, we are making the case that our low utilisation allows us to ramp up faster. We keep a bigger (employee) bench, because it allows us to respond more quickly to clients and do the training that helps us to ramp up faster. So, it is related to growth rates. If the growth slows, you can run leaner. But if the growth is fast, you need a bigger bench to respond to that. That is the basic premise.

There are two phenomena going on at the same time. One is that we are diversifying our service offerings. As a result, we have to diversify our bench. That is the one-time thing that you have to go through. As you get more specialised offerings, our bench also has to be more specialised, say in SAP or Siebel. So the bench becomes more fragmented.

The other phenomenon is that you have to maintain a deeper bench when your growth rate is high. And it is also a question of our customer service model. Our view is that when our customer asks for a project team, we want to get them on the ground as fast as possible and react quickly.

Our utilisation rates, excluding trainees, has been in the high 60s, which is comparable to some of the peers. It is only including trainees that our rates are lower. Because we are training a lot more people as our growth is faster than the rest of the industry.

Second, for us the growth in application development has been outpacing the growth in application maintenance. So, it is not an apples-to-apples comparison because what we do in the area of complex application development is a lot more domain-intensive. This requires a different set of people and training procedures to prepare them to be deployed in projects. That is why we are carrying this kind of strategic buffer.

In 2005, you clocked 55 per cent year-on-year growth in application development, forming 50 per cent of your revenues. What do you think you are doing right in this area?

Large-scale application development expertise is an area that we have been investing in heavily for several years. It is not trivia in any sense, and on top of that if you add the global model, it brings in another level of complexity. For several years, we have been building out of a capability called the Advanced Solutions Group. This is a group entirely focussed at Cognizant on Internet or Web-based development. A lot of companies in retail or financial services are our customers. When we started ASG several years ago, we said that if we could work for these companies such as the large auction players, we could probably serve anybody else. Their needs are so complex, their technology is so sophisticated and velocity so high, that is the high-water mark. Everybody else is below that.

In the US, we set up a separate technology vertical and a market-facing organisation that was targeted at these groups. If you have done it for e-companies that live and die by the number of page views per hour or minute, then you can do it for anybody else.

It was a very conscious investment three years ago, when the market trend did not show any changes in discretionary spending. But based on certain fundamental changes in technology such as Service Oriented Architecture, we went ahead with our plans.

In its recent report on consulting, Forrester Research has indicated that Cognizant does not match up to the other top-tier Indian companies in consulting?

The consulting we do is very much embedded in our business units. Each industry vertical has the MBAs and most of these verticals also have a consulting leader.

The Fathom acquisition that we did was all consulting within telecom companies. What we don't have, which Forrester was looking at in its report, was a consulting-like business unit. We do not have a separate business unit, but our consulting unit sits within the industry verticals that we serve. It is a conscious strategy. We think we are doing consulting for being tightly with our core IT services business. We think it is less effective to set it up as a separate business unit and more effective to integrate it with business units. If somebody takes the time, and clients do to understand our consulting capability, it stacks up there with all of our pure-play competitors. I don't lose sleep about our capability in consulting.

maverick@thehindu.co.in