Online Extra: Info-Tech Outsourcing with a Wrinkle

Cognizant CEO Lakshmi Narayanan says we turned the model around by splitting resources between India and the U.S.

Cognizant Technology Solutions has grown at a torrid clip over the past three years, averaging an annual rise in profits of near 50%. It has been a rapid ascent for the former information-technology unit of Dun & Bradstreet (D&B), which was spun off in 1996 and started taking on outside clients. Granted, offshore sourcing of IT work has been an increasingly compelling trend for U.S. companies. But unique dedication to customer service and a deep, U.S.-savvy management team has enabled Cognizant to outperform its rival outsourcers and land at No. 13 on BusinessWeek's latest Hot Growth list.

Cognizant CEO Lakshmi Narayanan recently spoke with BusinessWeek's Brian Hindo about managing for fast growth, the company's long-term strategy, and the hullabaloo over outsourcing. Following are edited excerpts of their conversation:

Q: What have been the keys to the rapid growth Cognizant has experienced?


The key to it was the change that we went through. During the initial stages when we were working only for D&B, it was comfortable. But then the management team decided that we needed to go out and do this type of thing for external customers and also allow external competitors to come into D&B so we can learn.

The second one was, we turned around the model. [Before, everyone was in India.] But we put the executive-management leadership team closer to customers in the markets that we operate. We essentially converted what was a 100-person Indian company into a U.S.-based company so that we could be closer to customers and build a relationship. The third important thing is the sharp focus on the business and the customers that we continue to show.

Q: Cognizant has a relatively small customer base -- 193 clients as of the first quarter of 2004. What is the growth strategy?


Typically, our growth has come from some of the large customers that we work with. Any year, more than about 80% of our revenues come from customers who have been with us for one year or longer. That's the model: We build a relationship with a customer and keep selling more and more services. In addition, in order to sustain the long-term growth, we recruit more customers as well. We're very careful as to the type of customers we choose. They need to be strategic, they should provide long-term growth.

Q: You're adding 4,000 employees this year, for a total of 13,000 worldwide. Do you worry about expanding the business too fast?


Managing the growth is something that we think about constantly. But we believe we have the management [team] in place. The depth of management is something we're really proud of. In fact, the first 50 managers who came in during the initial stages of this company, during the formative years, are continuing to provide direction in this organization. The continuity of the management team and the depth that we've built over time enables us to manage the growth we're experiencing without too many hiccups.

Q: Cognizant plans to open a small, 50-person office by yearend in China, as part of a long-term strategic-growth plan. What are the challenges of entering that market?


There are some challenges. The industry isn't mature yet. Some of the good practices that you find in the U.S. and India are just not available there. Plus, security and intellectual-property protection are issues from a customer perspective.

To that extent, we believe the growth is going to be slow. However, the Chinese government is very keen on developing [the IT] industry. Given that, we believe the infrastructure that's required for sustainable development will be in place over the next three to five years. And we do want to be among the early players there.

Q: What companies do you view as appropriate comparisons? The India-based outsourcers like Infosys and Wipro, or bigger consulting firms such as Accenture (ACN )?


At this stage, we think we are uniquely positioned. If you look at a company like Accenture, they have great relationships with their customers, providing consulting services. However they do not have this type of an offshore model, where they are able to offer solutions faster and cheaper. We believe that we have both the capabilities, in terms of the relationships we enjoy with the customers as well as the great execution capability.

If you look at the India-centric companies like Infosys (INFY ) and Wipro (WIT ), I don't think they have as good a relationship with the customers as we have.

Q: Overseas sourcing has been a hot topic this election year. Have you experienced any negative repercussions from all of the rhetoric?


This is a topic that has been discussed in the media in the last three or four months far more vigorously than any other business topic. We haven't felt any impact of this in the business that we do with our customers. Nor have we seen any impact of this in the pipeline of opportunities. We believe that it makes economic sense for the industry.

We're keeping a close watch on the legislation [that would seek to limit offshore outsourcing]. We also believe that once the elections are over, then we'll have much more clarity. But the business drivers for offshoring remain strong, and we believe that will continue. It's speculative, but we don't believe it will have any impact. Because the proposition of outsourcing makes such economic sense, it's going to be so good for industry, eventually the economic view will prevail.

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