It’s always more fun to be the disruptor than the disrupted in markets where innovation is the key differentiator and commoditization the curse. The world of technology is a constant challenge as programming languages become commonplace, processes increasingly standardized and automated, and global service delivery efficiency a bread-and-butter offering. How can you continue to grow at a double-digit clip, while maintaining profit margins of 20%+ amidst cut-throat competition and clients forever eager to batter down their costs?
Fortunately, the entire role technology plays is changing at a pace that is faster than most industries that can barely tolerate, which keeps driving new opportunities for smart firms with a disruptive appetite at their core and a willingness to live outside of their comfort zones. Today, enterprises are asking for business problems to be addressed and simply expect their service partners to get the job done. It’s no longer “Provide me with 50 developers for this amount of time to perform these tasks”, it’s more, “We need to redefine our healthcare insurance business to be more competitive in the market to survive – come help us do that”, or “These new banking regulations are crippling our ability to remain viable – what can we do to get ahead of these and operate effectively in this environment, faster than our competitors?”
Hence, it’s up to the ambitious service providers to pivot how they address their clients’ needs by redesigning business operations through smarter automation, process design and a much more proficient understanding and orchestration of their critical data sets. This is what digital is really all about – and this is where Cognizant CEO, Francisco “Frank” D’Souza is determinedly taking his organization. Cognizant has been Wall Street’s golden child of IT services growth over the past decade, the firm ballooning from $2bn in 2007 to $13.5bn exactly a decade later, and last week announced 11% year-on-year revenue growth and a 26% increase in year-on-year net profits to $557m. Cognizant continues to outperform the market with relentless growth and appears to be on a new upward growth trajectory after a challenging 2016, which saw the whole IT services industry tackle this new secular shift, which Frank believes if the most pivotal transition since the onset of the Internet itself.
I caught up with Frank this week in London to get a little deeper into this pivotal industry shift and learn more about how he intends to keep disrupting his market.
Phil Fersht, CEO and Chief Analyst, HfS Research: Frank – great to see you again. Was good for the whole industry to see you guys announce strong results last week – is the gloomy cloud that’s been hovering over our industry lifting, from Cognizant’s vantage point?
Francisco D’Souza, CEO Cognizant: Phil, last year was an important foundational year in our pivot to digital. I think we were ahead on some of the digital thinking, code halos and SMAC (social, media, analytics and cloud), we have been talking about those for many years. I think last year was the year that picture, at least in our minds, and our clients’ minds, crystallized around what are the specific opportunities around digital. Prior to last year, digital was the typical catch-all term used for lots of different things.
I think it’s become very clear, Phil, with every day that goes by, is the notion that if you think about a company’s enterprise model (what is the business model, what’s the operating model and what’s the technology model) it’s now become clear what is the implication of digital technology at each layer in that stack and by industry. What does that mean for financial services, what does that mean for healthcare, what does it mean for insurance?
Last year was about crystallizing around that – we reorganised the business we took all our capabilities, we grouped them into three big practice areas: digital business, digital operations, digital systems and technology. Within that we really focused and emphasized the key digital themes and trends in each of those areas. If you think about the technology space we built and emphasized the cyber security aspects, we built and emphasized performance and scalability, we built and emphasized complex engineering, agile, DevOps, so really focused on what is the technology enterprise of the future and what it will look like. Enterprises are going to be increasingly asked, and need, to deliver technology with ‘Amazon-like’ scale and agility, speed and so forth. So that’s Cognizant digital systems and technology.
Turning to digital operations, there are two big thrusts and areas of focus, which are related. Number one is continuing to scale-out platforms. We’ve had great success with the acquisition of the TriZetto platform. It was two years ago that we did that acquisition and it has scaled really well for us. Every day that goes by, the pipeline of opportunities for TriZetto enabled operations, increases. It has convinced us that the model works, we can pull our capabilities together to build and operate these industry platforms. We have continued to look at software assets that we want to own or that we want to operate to create these utilities, that’s number one. And number two is that RPA and IPA is a major disruptor. We are focused on disrupting ourselves, disrupting industries, using RPA and IPA – that’s the focus of Cognizant digital operations.
In Cognizant digital business it’s about the front end, about how we work with clients redesigning business models around the new opportunities that digital is creating and enabling. There our focus has been largely acquisitions and investments that we have done. We invested in ReD Associates a year ago. ReD Associate’s core skill is that they are anthropologists and sociologists and they think about products and services from a human factors standpoint. They are based in Denmark. If you think about the traditional Cognizant model, ReD Associates are far upstream from our traditional engagement with a client. This is why we chose to invest in them as opposed to acquire them. We own a percentage of the company and have a very tight partnership with them. We then bought Mirabeau, Brilliant Service, Idea Couture, etc., firms that bridge the design, tech, business, and re-imagination gap. We are scaling up that capability through spaces that we call ‘Collabatories’, which are client co-innovation spaces. The last piece is data, data sits across all of that – we have always had a very strong foundational capability, going back to the Dun & Bradstreet days, and that’s serving us well. Underpinning everything is this notion of big data and what analytics can enable at all layers of the stack. That architecture for our business has proven to be quite powerful because it lines up with where our clients are taking their businesses. That was the big pivot for 2016.
Phil: That’s interesting, because most of the computer science grads, today, aren’t thinking the way we were thinking 5-10 years ago. They aren’t thinking about programming languages, they are thinking about data sets and business logic, which is why it’s so interesting to hear about the partnerships that you are getting into, and the acquisitions you are making. We believe you can’t truly be a digital provider unless you are true digital organization yourself. I notice you are making investments in globalizing the company more, but also trying to become smaller, but with higher growth and higher profitability at the same time. That sounds like a tremendous challenge, can you share a bit about the big plan and how you think the company is going to evolve?
Francisco: Firstly, Phil, the implications for Cognizant and for our clients, as we go through the shift on breadth of skills and capabilities that you need to enable digital transformation, is very interesting. For example, we are now, and always have been big employers of data scientists — so that has been a core capability for some time. Design talent is increasingly becoming a bigger part of the company. Industry domain expertise has always been an important capability, but now we are looking to deepen this knowledge. Consulting is incredibly important and technology is always the core.
Our view is that to create digital solutions you must bring together multi-disciplinary teams around data science, design, industry, domain expertise, consulting and technology – all coming together. That talent is dispersed around the world. Just as a decade ago India was and continues to be a concentration of technology talent. You are starting to see concentrations of data science talent in Eastern Europe, design in certain hubs in Europe and the US, and so on. That requires us to be more dispersed than we have been in the past.
Secondly, the type of work we are doing now is co-creation/co-innovation that requires us to be more proximate to clients in those practice areas. That is also creating the phenomenon that you described which is that we are closer to the customers and therefore getting a little bit more distributed as an organization.
In terms of how we think about the company, one of the pivots that we recently announced in Q4 as part of our roadmap for accelerating our shift to digital, we talked about moving away from our historical approach of industry leading growth at a constant margin. We had this 19-20% non-GAAP operating margin target for a long time. What we have said now is we will continue to drive high quality, durable growth, and will gradually increasing margins. As we look at our opportunity set, we think that we can pivot the business to higher value digital work and we are going to drive that. We think that’s the long-term direction of our clients and therefore that’s where we want to be and we are pivoting more towards that kind of work and taking the company in that direction. We are also taking the opportunity to simplify and streamline the business in places where that’s appropriate. That’s all part of this broad approach that we call, accelerating our shift to digital, as we make digital a more foundational and important part of the overall mix of the company.
Phil: The concept of globalization of talent is a good one, bringing together different skills across different parts of the world is such a fascinating dynamic. One of the things we are seeing more of is – 5 years ago – clients would call you up and tell you what they wanted, now clients don’t quite know what they want and want partners to work with them to get more out of the business model to figure it out. It’s less about solving problems and more about finding them. One of the things that has always differentiated Cognizant, Frank, is that you take a portfolio view of clients and I have seen you win deals more because you look at the whole solution, you didn’t just look at apps, storage, BPO etc, within the stack. I believe it’s the sum of the parts rather than the parts themselves, and this is where it’s all shifting, really bringing it all together as a more integrated model.
Francisco: This notion that we want to serve a small number of clients and we want to serve them deeply has been a core tenet for us from day one and that continues. The way we implement that is that our industry verticals and geographies are the primary channel to market. If you think about the capabilities in our three big practice areas, it’s really the verticals that aggregate those capabilities, that integrate them and create the solutions for the client. What we are talking to clients about is the solution to some industry problem that aggregates our capabilities in some way, to delivers a compelling industry solution. If I am with a healthcare client I am not talking about digital business or digital operations or digital systems and technology. I talk to them about patient experience or getting better at how they manage claims or how they keep patients well. Behind the scenes we aggregate our capabilities together to deliver that business result.
Industry by industry we have got strong digital solutions at all layers of the stack and that helps us get out there and have a business relevant conversation with our client.
Phil: So is this as much fun as it used to be 10 years ago when you were the new kid on the block?
Francisco: It’s more fun. We are going to look back at this period of time, 10 years from now, and we are going to say technology literally changed everything. We are right in the middle of that. Compared to 10 years ago, we have the big shift in technology which is one part of what makes it exciting. The other part that makes it exciting is where we are as a company. We have an incredible position in the marketplace. We have got great clients in the industries that we serve. We serve the biggest most significant, most substantial clients in those industries and we serve them in big meaningful ways so it gives us the platform to have a substantial dialogue with them. That wasn’t the case 10 years ago. We have great market position today and we are in the middle of an incredible shift in technology. I wake up every morning and think I have the best job in the world. It’s breath-taking how fast technology has moved and I don’t think we are even in the first inning. It’s really early days.
Phil: I think we are leaving our comfort zone, I think it is getting more challenging for people, their careers, we are talking more to clients about how to manage their careers and their growth paths, more now than ever. They are worried, thinking “where do I go, how do I think differently, how do I behave differently?”.
Francisco: 3 or 4 years ago my narrative was that once in a decade you have these big shifts in technology and we were living through one of periods. I don’t think that was untrue, but what is interesting about this shift, is that it’s not a once in a decade thing. The innovation seems to be happening continuously and faster than it ever has before. If you go back to the last time we had a big shift it was probably the Internet. There was a period of very rapid innovation over a short period of time and then there was a decade or so when all of that was implemented and became pervasive throughout the economy.
I thought that would be the case with digital. 5 years ago when we started talking about SMAC, which are very profound technologies, I thought it would have the same adoption cycle as the Internet – very rapid innovation over a short period of time and then we would see that stabilise throughout the economy. What actually happened is we are in a second wave of disruptive technology. SMAC is still there and I would argue in many cases it is still in the early phases of adoption, especially when you look at cloud and analytics. But then you look at whole new generation or second wave of disruptive technologies, whether it’s Blockchain or Additive Manufacturing or AI, the list goes on, and you can look at any of those and each one is fundamentally disruptive in its own right, potentially as disruptive as SMAC was and this is a phenomenon that has been going on for several years now. That’s what is foundationally different along with the pace of innovation. Maybe it’s coincidence or structural, I don’t know. History will judge that, but we are living through a time when the ground is shifting faster than I have ever seen it and that’s challenging, but it also creates opportunity for those who learn and react fast.
Phil: Terrific catching up again, Frank. The ship still sails, even though waters continue to get choppier!
Francisco: A pleasure Phil, and all the best with HfS.