We have always been in awe of Cognizant’s growth, especially in its business of IT consulting. (Cognizant uses an onsite/offshore model in which local consultants work on premises at customer facilities to determine need and coordinate a team of engineers in India to do the needed work.) Since there are only so many billable hours in the day, in order to increase revenue consulting firms need to increase the number of consultants. And between March 31, 2005 and March 31, 2006 Cognizant added 9,700 employees to end the latest quarter with a total of 26,750.
Think about it. A company that already had a large number of employees (17,050 at March 31, 2005) grew its employee base by 57 per cent in one year. Plus, if the 11 per cent annualized turnover the company experienced in the latest quarter is typical (by our recollection it seems on the low side) that means they would have lost 2,400 employees to attrition during the time (11 per cent of the average number of employees during the year.)
So to add 9,700 employees the company had to hire 12,000. Almost 50 new hires every working day. Even if they hire a quarter of all applicants that means interviewing 200 per day. And if they want to grow another 50 per cent next year they will have to hire 75 new employees each workday this year. By all accounts there are plenty of graduating software engineers in India to hire. But that is still one heck of a logistical exercise. And someday it will be too much to handle and the company will trip up.
If we had to point to one specific risk factor as being Cognizant’s greatest, it would be managing all of that growth. We don’t think it will happen this year, but it could. Or, just as likely, they could continue to coast for several more years. And in the meantime, it is a nice problem to have.
CTSH 1-yr chart:
Electronic Data Systems (NASDAQ:EDS) has announced an alliance with Cognizant Technology Solutions in which Cognizant will provide EDS clients and prospects with application development and support services. According to EDS, Cognizant was selected for this role because of its deep legacy modernization and portfolio analysis competency, its offshore capability, and its healthcare and financial services expertise. Despite the fact that EDS has several development facilities in India and around the globe, the company is clearly struggling to compete in the very hot Indian global applications outsourcing market. This alliance is a boon to EDS customers, who will now have access to Cognizant’s very mature offshore outsourcing and applications capability, and to EDS, which will now have a more credible offshore application capability to bring to large bundled outsourcing deals. However, both EDS and Cognizant face risks that could easily negate the benefits of this alliance.
To market insiders, Cognizant Technology Solutions’ rapid rise to the top has been somewhat mystifying. Once firmly planted in the midtier vendor category, Cognizant has been able to break into the tier one vendor space and has soundly beat its tier one brethren in many competitive situations — despite the fact that it lags behind its competitors in terms of breadth of services offered and global footprint. To be sure, Cognizant manages Western customers very well, has a dynamo marketing and branding organization, and still subscribes to the “customer is always right” rule. But there is more to Cognizant’s success than just these factors. Cognizant’s “secret sauce” is its team of high-value resources — consultants internally labeled as “MBAs” who are dedicated to knowing Cognizant customers and prospects and who architect solutions specifically for each client.
Sounds like good stuff, and serious investors may want to consider their reports before jumping in.