The Hindu Business Line : On the innovation climb

The first part of this interview with Francisco D'Souza, Chief Operating Officer, Cognizant Technology Solutions, appeared in eWorld dated November 20.

So, as you said, it's going to be specialised talent aggregation, and depending on the work it will get parcelled. But the only thing is that it looks like a book on "Long Tail" where you can find the best album that you want from the Web. You can reach out to any customer with a rare edition of a record with just 10 prints. The question really is, are we applying a retail phenomenon to the corporate context. Would you apply these energies rather for consulting or specialised R&D than call centres and use the talent pool for `the thousand board room consultants? Is the specialised talent better utilised for the consulting domain, or the R&D domain or something more specialised, such as business intelligence, where there's clearly a shortage of talent, rather than atomising it?

I don't think the two ideas are mutually exclusive. When you think of atomisation, clients have to look at their services value chain and say, "Where in the world do I want to source particular pieces of that from?" It is similar to manufacturing today.

Recently in Forbes magazine, there was a picture of the new Boeing 787 Dreamliner aircraft, with each part labelled with the location it was designed and manufactured. Although Boeing is an American company, they looked at each piece of the plane — such as the tail, wings, engine, and so on — and decided where in the world they would most efficiently design or build that component.

By aggregating that together, and by taking the best available in the world, they have a world-class plane; more importantly, an optimally designed and manufactured plane.

Similarly, if you dissect the services value chain and go to each place in the world that is most efficient for that component, the client will end up with a service that is optimal for each of the components.

I would contend today that for most things it doesn't make sense to have call centres in the US as it's not the most optimal place. If clients were to set up a brand new call centre today, they would most likely not do it in the US, unless there are specific regulatory or other reasons to do it. They would probably go to the Philippines or somewhere else where such work is highly specialised. The Philippines as a country seems to be emerging as the English Voice Capital of the world, even rivalling India. That is the concept of dissecting the services value chain and being atomically global.

It's supportive of the idea that specialisation is key. Companies like us need to focus on key areas and be very good and be world class. That's the way we will be able to differentiate. It won't be enough to say any more that my value proposition is low cost labour in different parts of the world.

So, on an aggregate, countries will start specialising. In the manufacturing era, Detroit was known for automobiles. Likewise, Milan was known for fashion, and now India is known for IT. In the coming years, it will be narrower than that. For example, India would be seen as specialising in business applications, China in engineering services, or Brazil for something else.

From a Cognizant perspective, we are not looking at this atomisation to say would we do call centre work or not. We continue to focus on traditional IT services, knowledge process outsourcing, and are building out our IT infrastructure services capability. We are talking to our clients in the context of their entire services value chain, and where it makes sense for Cognizant to help them, and what they themselves need to do in different parts of the world. That's one way of looking at it.

The other way of looking at it is "these are the things you do today, let's optimise them. What are the things you haven't even thought about today." These are the two broad concepts.

I wouldn't tell that there are lots of clients that we can point to where we have done these things from an intellectual arbitrage standpoint.

This is very much young and emerging at this stage. But we are seeing interest in our clients when we talk to them. Intellectual arbitrage creates a different way of conceptualising products and services for a client that they hadn't thought about.

The whole idea of remote infrastructure management wasn't thought about four or five years ago. It's a great example of being atomically global. In the next step of the value chain, what kind of other services can be moved our way and innovation made?

If you think of services, much of it has been talked about before-technology driven ones such as SOA (Service Oriented Architecture), high-end BPO, and so on.

But I think the bigger opportunity that overrides all of these is in the aggregation of the services together into a larger service that clients themselves hadn't thought about and it's all about intellectual arbitrage again. The traditional way of thinking is, "I do IT infrastructure services, I do application outsourcing services, I do application development, I do consulting and the next big

technology wave is SOA or KPO. But these are the building blocks. They do not help clients build much stronger and effective businesses; it's business outcomes that helps clients build stronger businesses which is what we are doing for our clients and our client's clients."

When you are wearing that lens, then the value in aggregation and the potential business outcome that can be achieved emerges. That's the next step of value in my mind. When you talk about moving up the value chain, ultimately the range of services is finite, and that's well understood. Only technology breakthroughs can create new ones that we can't anticipate or envision now. But ultimately the real value is aggregating these atomic services in a way that will help the client create stronger business outcomes for themselves, which I believe is the ultimate goal.

But it cannot be one pattern of aggregation for all industries. Services need to be aggregated in a certain way for a health plan, for a retailer or for a manufacturer. For each of these industries, we need to package our set of services that allow them to offer a new offering that they couldn't offer before. That, I think, is the ultimate engine for value creation.

So, the next step is all about business outcomes. What forms can it take? Will it be a risk-reward share equation? Will it be outcome-based pricing? Because, in some industries the customer derives all the values in terms of margins that they generate, whereas in other industries, strangely in India, if you look at the Power sector, it is the transmission companies that make all the money. Neither the customer nor the power generation company gains. How will this translate into? Will a customer enjoy a far higher bargaining leverage than a vendor?

If you think about the traditional industry model, there are many forces in play right now, which have all been documented and I cannot particularly add any unique thinking.

On the one hand, you do have a situation where many of our competitors who have recently announced their quarterly earnings have said that they are managing to take the price up, indicating that they have some pricing leverage.

On the other hand, clients are getting bigger and there are some early signs of supply constraints in the market. Typically, in a supply-constrained environment, one can take pricing up because there is scarce supply and excess demand and market economics indicate that prices will go up. So there are lots of factors. Again it's all transactional.

Seen from the perspective of intellectual arbitrage, if I can use these capabilities to create new service offerings, new products or new capabilities that I don't have, then one becomes far less interested in unit cost of the input and far more interested in the price that one can charge the client, and charge on the basis of the output.

There has been a lot of talk about the shift from input-based pricing to output-based pricing. I think once that shift starts to happen — I don't know if everybody will make that shift correctly — the focus will shift from the focus on hourly rates to thinking how the vendor is enabling me to generate more revenue. In such situations, the basis of pricing will not be on the input but on the value that's added.

Once we have that basis, then we can deploy value-based pricing, do risk-reward pricing, shared incentives and other such innovative pricing modalities. But that can only happen when there is a common basis for value creation. It can only happen when we become so fundamental to our clients' revenue such that clients are willing to have that type of a conversation with us. If we can get to the point where we can aggregate our services and provide a numerator impact than a denominator impact, a different model is bound to emerge.

Who is driving these initiatives? Do you think vendors need to proactively take this position or will this be directed by the clients? What kind of a tussle do you see? At the end of the day, vendors don't seem to be in a position to make these choices. When the demand seems to be so good, why would you want to upset the applecart at this point? What kind of forces will drive the industry to the next change? And should it be proactive at all in the first place?

I think it's very much a matter of individual company's choice. There will be a set of companies that will choose to capitalise on the current demand, grow volumes and not particularly add the value service demand. They may make a determination in their strategy that it's the right strategy, and in the long run it's a sustainable strategy.

There will be another set of companies that will understand that in the long run, survival will depend on not just the ability to meet demand because ultimately demand will be cyclical. If we are seeing strong demand now, at some point that will slow, and when that happens, we need to ask ourselves what is the basis for the value that we are providing to the client. I firmly believe the value proposition to clients cannot simply be lower labour cost. That's not a sustainable value proposition. That may have been the value proposition of our industry in the first five, 10 or 15 years.

So we continue to think, examine and explore ways to add value to what we provide to our clients. From our perspective we are being pro-active. If we simply wanted to capitalise on demand, we would have said why do any of these innovators and why try and push up the value chain. The reality is, from a Cognizant strategy perspective, it's the right thing to do.

A key part of what we think about our strategy has been a strategy of `customer intimacy.' We have a very small number of clients and we want to serve them very deeply. Our entire business model relies upon being able to take new products and services, new thinking and fresh perspectives to our clients, year over year, so that we continue to stay relevant and continue to innovate at the client interface. Our strategy is thus based on continuous innovation for the client.

maverick@thehindu.co.in

Concluded

More Stories on : Interview | Insight | Software

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page

Stories in this Section
From Arawali mines to Juhu supermarket

As pretty as an airport

All about blogs

Blend of best practices

The India connection

On the innovation climb

Quiz

Lessons from Wipro

Cartoon