Industry enthusiasts keenly watched out for the December quarter results of Cognizant, announced on Monday, to see if it overtook peer Wipro in quarterly revenues. It did not, and, Cognizant's CEO Mr Francisco D'Souza says that that's not its focus. Excerpts:

Your revenue growth estimates for 2011 are 26 per cent, lower than the 40 per cent achieved in 2010. Why the caution?

Last year, there was a certain amount of pent-up demand in 2010 which we benefited from, disproportionately. I think we captured a larger share of that in 2010.

When we look to 2011 and beyond, the good news is that coming from 2010, the environment is substantially more favourable–budgets are towards the tail-end of finalisation, the budget cycle appears to be much more normal, the macro-economic factors with the exception of perhaps a couple of areas in the world, are generally more favourable than this time last year. Finally, discretionary spending within our client base is continuing at a reasonably good pace going into 2011. We view 2011 with a sense of optimism, and that's reflected in our `at least' 26 per cent guidance for the year.

We always have some conservatism built in our guidance as at the start of the year we don't always have good visibility of what projects clients are going to kick off and by when and importantly what our win-rate is going to be in the course of the year. As we go over the year, we tend to update our plans accordingly.

Your capital expenditure of $500 million over the next 4 years will accommodate about 55,000 additional people. What does this say for non-linearity? On the other hand, in both 2009 and 2010, your revenue growth outperformed headcount growth….

…I would… point out that over the last 2-4 years, for us, a portion of non-linearity or the head count growing slower than revenue is a result of increasing our utilisation levels. If you go back four years, we had a strategy of deliberately keeping our utilisation levels lower in order to be able to ramp up more quickly and that was necessary when we were a smaller company. We needed a bigger bench.

As you become bigger, you can be more efficient in how you manage your bench and your people. What we've done over the last 3-4 years, is consistently take utilisation up year over year. We are at a stage where I don't think utilisation can go up more significantly than that (82 per cent as at December-end). In fact, we ran the engine too hot over some quarters of the year and so we wanted to bring it back to Q4 levels of 2010. We have pulled the utilisation lever at Cognizant and we feel that further non-linear benefits will come from truly IP-based and other non-linear revenue sources.

Is an above 80 per cent for utilisation becoming the new normal. What's your comfort level?

We were at 82 per cent offshore excluding trainees and offshore including trainees at 73 per cent last quarter (Q42010). We think the trainees' number will bounce around the place because we bring trainees at different times over the course of the year. I think around 80 per cent (offshore) utilisation is not out of the realm of possibilities, given the size and scale of our business.

Is overtaking Wipro in the next few quarters a big milestone for you? (The revenue gap between Cognizant and Wipro narrowed down $33 million in the latest quarter, from $375 million in Sept 2008.)

We don't look at it this way. Our goal is to be number one in the minds of our customers. That's what is important. From there, in terms of company growth rate, in terms of how we grow or our relative positioning in the market is an outcome. But it's not our primary goal. We do good work for our clients and manage growth in a way in which we are not compromising on either customer satisfaction or employee satisfaction and making sure that more than scale, we build depth in the company. Because over time, what's going to really sustain and differentiate the company or for that matter, any services business is not scale, but depth.

Customers are coming to you for your knowledge and your judgment, and your ability to solve their business problems and be a partner to them. They are not coming to you for your size, because you are big. Scale has never been the main objective for us beyond a necessary scale. You have to have a certain minimum scale in the markets you operate in to be credible. Once you have reached that point then scale ceases to be an objective.

As a large company with over $5 billion in revenues next year, you would want a finger in all pies. In the telecom vertical, for instance, you are not that visible compared to your India competitors. With $2.2 billion in cash, any plans for more than just tuck-in acquisitions?

These are somewhat separate questions and let me answer them separately and then I'll bring it together.

As a company, it is extraordinarily important to be focused. Rather than spreading ourselves too thin, we have tried from the beginning to stay focused on serving a defined set of market opportunities, whether those are industry verticals, geographies or our service offerings.

We feel very comfortable with our current footprint; we are continuing to invest in geographies. Europe continues to be an area we are growing quickly in. And we are increasingly focusing on Asia and the Middle East and to some extent also looking at markets of Latin America– so all of these represent substantial market opportunities that are under penetrated right now. I don't feel the need to substantially increase my industry foot print into areas that I don't have a presence in today to capitalise on growth opportunities ahead of us.

Having said that let me make a couple of clarifying comments. We do have a good presence in the telecom industry. As you know some years ago we did the Fathom acquisition that continues to do very well for us. We are pleased with our presence in the communications industry, particularly in some of the newer service offerings like BPO, where we are making some good strides. As we continue to deepen our penetration in key industries, there are also some adjacencies that we continue to leverage.

For example, as we do a lot of work in health care, we have increasingly started to look at the health care provider market place, which is not historically where we operated. Similar is the case of work we do in healthcare and financial services starting to overlap with some work with governments around the world. So, you will see us working with governments in health care and financial services in the coming years.

Acquisitions, is the second part of the question. We will continue to do our strategy of tuck-in acquisitions. But, what constitutes ‘tuck-in' gets bigger as we as a company become bigger. My comfort with doing bigger acquisitions also increases. Generally speaking, I would be comfortable doing an acquisition at this point of $100 million to $200 million but our sweet spot really is anywhere between the $50 million and $100 million range.

You have done well in Europe, with over 40 per cent growth for the year. But you have said that macro-economics in Europe and in the Middle East are concerns. What would be in the impact on US IT spending if something happens in Europe?

I wish I had such a crystal ball. The reality is at this point the issues in Europe are relatively confined to some parts and if you look in markets that we operate in the UK, Switzerland, Germany, Nordics, Benelux markets, we have not seen the current situation impact our clients' IT spending plans for 2011. I don't see impact at this point. As I see it, 2011 appears to be a reasonably normal year even in Europe. In the Continent, we are benefitting from the offshore share shift. I think a lot more clients have started to look at offshoring more seriously than in the past. Though there are some doubts raised from parts of Europe and also the situation unfolding as we speak in the Middle East, we have not seen these have any real impact on markets we operate in or in our clients' business decision making.

We are into February, yet your industry says that client IT budgets are still getting ‘finalised'. Do we read anything from this?

This is very normal. There's nothing special. Some clients finalise their budgets in Dec/ Jan timeframe and others are lingering on and that's always the case. Not all clients finalise IT budgets at the same time. Some take through February to finalise. I do not read anything in this.

You talked of scale expansion into geographies and scope expansion in service offerings amounting to more than what core Application Development and Maintenance (ADM) gives as revenues. Could you elaborate?

If you look at the opportunity of a traditional ADM typically in North America and Europe, the core of what the market is, as defined historically, and juxtapose it with IT infrastructure services, BPO, engineering manufacturing services, in North America, in Europe and other parts of the world, the aggregate of these opportunities is larger than the traditional opportunities. The opportunities that are opening up to us as a result of the scale and geographic expansion are larger opportunities and less penetrated than the traditional ADM opportunities.

There has been a significant slump in DSOs (debtor days) because of focused attention. Does that have anything to do with the psyche of the client, now that the slowdown is past us?

I don't think much of the DSO numbers has to do with the psyche of the client. Through 2010, particularly in Q3, we had DSO that went high. We had strong growth in 2010 and as a result, our client-facing team (frontline with customers) focused on winning business and took the eye off the ball on collections. In 2010 (Q3), DSO had gone to 80.5 days which we considered unacceptably high in the company. We have been more in the 70s range. What we did was to put more focus in Q4 to get it down and told clients that we would like to collect. So it's come down quite dramatically to 71.2 days. It has nothing to do with the clients, it's more to do with our focus on it.

Is succession planning in your ken? You are a young CEO and it was only in 2007 you were anointed. But are looking 15 years ahead and handpicking potential leaders?

At Cognizant, we view succession planning as one part of a much broader leadership development effort. Our goal is to continually cultivate a strong pipeline of leaders at all levels in the organisation in order to support our ongoing growth. As such, we regularly assess our talent pool to identify our key talent and to develop them as necessary.

For the senior-most leaders in the organisation, this process is conducted with a committee of our Board so that our Board has visibility to our talent pipeline. Through this process we identify potential successors or succession gaps for many key positions in the company (not just the CEO). This is an ongoing process which, as you know, has worked well through two CEO transitions since 2003 (Mr Kumar Mahadeva to Mr Lakshmi Narayanan and Mr Lakshmi Narayanan to me).

We use a number of techniques to actively develop leaders including executive coaching and executive development programs. However, we place a significant emphasis on rotating our leaders into new areas of the business as a development tool.

Offshoring has been disruptive over time. IBM and Accenture were taken by surprise and have started taking notice. MNCs have woken up on making acquisitions in India, particularly in cloud computing. Do you agree to that? Do you think you are more active than competitors in alliances and acquisitions than competitors?

I think we are at a point of inflection in our industry. This inflection point is being driven not just by new technologies as by two or three trends that we call the future of work. I think we've really got a position and perspective and we have made significant investments on capitalising on that opportunity, and, I think, others are as well. But I do think, as in any point of inflection, there will be winners and losers, as we navigate this point of inflection. I am confident we are making the right sets of moves to benefit from those trends, and I think we will watch the moves by others in the industry.

Are the tax demands on your competitors' top of mind at this stage?

We certainly are watching the situation and seeking advice on it. We don't have a view on it yet as it is unfolding as we speak.

Will the IT services industry ever reach a level of nonchalance about attrition even if it reaches 25-35 per cent? As long as you can attract talent, a revolving door is only incidental.

I think a certain amount of attrition is not only very manageable but it's also healthy. There are times when we find there are people who are not a good fit for the industry or the company, and that kind of attrition is healthy.

Having said that attrition levels that we saw in 2010 go well beyond that (21.8 per cent in the September quarter, declining to 16 per cent in the December quarter). In the end, we are in the services business and our core asset is our people. And our people tend to build knowledge in their minds about our client, client systems, and so on. While much of that you can supplement with process and methodology, but high levels of turnover do hurt, and hurt client experience as well. It's a balance.

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