Cognizant learns an HR lesson as people shortage impacts business momentum

A challenging strategy to accelerate growth has ironically dragged the former IT racehorse into bigger troubles over people management

On May 11, Wipro overtook Cognizant in terms of market cap on the New York Stock Exchange. This was an event to note because Cognizant’s revenues are almost double Wipro’s. In fact, the New Jersey, US-headquartered tech company had overtaken the Bengaluru-based Wipro a decade ago.

To be sure, the gap wasn’t huge initially. On May 11, the market cap of Wipro’s American Depositary Receipt — the instrument that represents the securit­ies of a foreign company — stood at $39.3 billion, just a tad ahead of Cognizant at $39 billion.

By May 28, Wipro’s ADR rose almost 4 per cent to $7.9 comp­a­red to $7.6 on May 11, taking its market cap to $40.7 billion, now significantly ahead of Cogni­zant’s market cap at $37.7 billion.

Wipro taking over Cognizant says a lot about the latter and the way it has been left behind by competing peers TCS, Infosys and Wipro. A look at Cognizant’s recent quarterly numbers also highlight the mismatch in grow­th trajectory compared to Indian peers (see chart).

Take Cognizant’s CY2020 per­formance (the company follows a January-December financial calendar). Revenue fell 0.7 per cent year-on-year, and profits dropped 24 per cent. Even as the company announced its first quarter (Jan-March) CY21 numbers, they were no match to the Indian IT players. Revenue guidance was muted compared to Infosys and HCL Tech and Wipro, which all spoke of double-digit growth rates.

This performance reflects a slow-burn crisis, five years in the making. In November 2016, act­ivist investors Elliott Manage­ment, which owned 4 per cent of Cognizant at the time, wrote the management a letter citing loss of investor confidence and setting out a course-correction via a Value Enhancement Plan that basically entailed ramping up its profitability by significantly accelerating its digital offeri­ngs. This was where the industry was headed, of course, but Elliott set the Cognizant management a challengingly short timetable — of about three months to implement and it had its impact.

A company that had managed a scorching pace of growth even when the industry was str­u­ggling in the aftermath of the 2008 global financial crisis, Cog­nizant’s growth rate started to come down. For instance, for FY18 the company had guided for a full year revenue in the ran­ge of $16 billion to $16.3 billion, it however mana­ged to meet the lo­wer end of the gui­d­ance. Elliott Ma­n­a­gement’s letter appeared to have some effect on the profit marg­ins that moved from 16.1 per cent to 18.3 per cent from January to March 2017. Things started to look up in 2018, when the company grew by 8.9 per cent. But in 2019 its iconic co-founder Francisco D’Souza stepped down as the CEO after 12 years in charge and Brian Humphries took over.

With growth already tapered, Humphries took on the task of restructuring the company. Insiders applaud him for the foresight he showed in trimming the flab but the method and execut­ion, not least because of the neg­a­tive impact this HR purge crea­ted in the market. “He bro­ught agility to the organisation, clarity in de­cision-making and reduced the ov­e­rlaps that happens in most com­p­anies, but the cas­u­alty to this was ch­a­­nge managem­ent. It is very rare that you hear the CEO of the company describing the sacking of employees as a ‘spring cleaning’ exercise,” said a senior executive, who worked with Cognizant for over a de­c­a­de, on condition of anonymity.

During the third quarter (July-September) of CY2019, Hu­m­phries talked about the 2020 Fit to Growth plan, which ent­ai­led sacking 10,000 to 12,000 mid- to senior-level associates. This, according to Humphries, was a cost reduction plan that would self-fund the firm’s grow­th plans. Analyst call transcripts record Karen McLoughlin, CFO, Cognizant, as saying that this exercise of sacking employees and optimising its real-estate portfolio would result in an annualised savings of $500-550 million in 2021. The company also decided to exit the content marketing business.

All this was done for business growth but the results are yet to show. For instance, the company said it has spent about $1.2 bill­ion in acquisitions, but its imp­act on organic growth is negligible. According to a Nomura Re­s­earch report following its Q1CY2021 results, the company’s organic growth would be just 3-4 per cent for CY21, compared to low double-digit growth at both Infosys and TCS.

The sackings under the 2020 Fit for Growth plan has left Cog­nizant struggling to retain talent with attrition at its highest at 21 per cent compared with 7.2 per cent for TCS, 13 per cent of Info­sys and 12 per cent for Wipro.

Ray Wang, principal analyst and founder, Constellation Rese­arch, made a valid point: “Lead­ership is in transition. There are great people like Anil Cheriyan, the COO, and Ben Pring in the Future of Work. However, in the services business, you work for people, not the company and when your leaders and the people you respect leave en masse, it’s hard to retain talent.” This is a very fluid market and you go work for the people you like.”

With people shortage seriou­sly impacting its business mom­entum, the company is trying to change tack. Although it expects attrition to inch up in May follo­w­ing the appraisal cycle, it hopes to stabilise in the second half of the year owing to several initiat­ives. One of them is investing in talent; it has increased its initial target of hiring 24,000 from cam­puses to 28,000. It is also increasing engagement efforts, shifting to quarterly promotion cycles for associates; and is emphasising performance-related appraisals.

Will this be enough? As Ray Wang pointed out, Cognizant’s real challenge is to rapidly recruit leaders who attract other leaders. As he said, “A players attract A players. But B players only att­r­act C players. Once you stop re­c­ruiting for the best, you end up in a situation where the top talent no longer wants to work for you and the clients notice. Cog­nizant has a 12-month period to rectify this scenario.”