Cognizant Technology Solutions Corporation

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Cognizant Technology Solutions Corporation

500 Glenpointe Centre West
Teaneck, New Jersey 07666
U.S.A.
Telephone: (201) 801-0233
Toll Free: (888) 937-3277
Fax: (201) 801-0243
Web site: http://www.cognizant.com

Public Company
Incorporated: 1994 as Dun & Bradstreet Satyam Software
Employees: 6,165
Sales: $229.1 million (2002)
Stock Exchanges: NASDAQ
Ticker Symbol: CTSH
NAIC: 541511 Custom Computer Programming Services

Cognizant Technology Solutions Corporation is a Teaneck, New Jersey-based company that employs an onsite/offshore development model to provide application maintenance services and enterprise consulting solutions to major corporations, primarily in the United States. Cognizant is one of the few companies that has found a way to take advantage of the large pool of English-speaking IT professionals produced in India, where approximately 80,000 programmers graduate each year from universities. Because these software professionals typically make around $15,000 a year, compared with $75,000 in the United States, Cognizant is able to offer considerable savings to its customers. The onsite/offshore model also allows the company to work 24 hours a day on a project. During the U.S. work day, Cognizant's onsite team meets with the customer to review the work their Indian colleagues completed the night before. Feedback is then available for the Indian programmers when they begin their day. A further advantage is that system work is done at a time when there is little network congestion. Moreover, cultural differences between the United States and India work in Cognizant's favor. In India, the position of software engineer is more prestigious, meaning that scores of talented people enter the field. Indians are also less individualistic than their American counterparts and more willing to adhere to a process, which is an important factor in making the onsite/offshore approach run smoothly. To provide security, the company runs background checks on overseas employees; to prevent theft of data, it provides only diskless personal computers. Cognizant operates 11 software development centers in India, as well as centers in Limerick, Ireland, and in Phoenix, Arizona. Sales offices are located in Atlanta, Chicago, Dallas, Minneapolis, Los Angeles, San Francisco, Toronto, London, and Frankfurt. With a focus on North American and European Fortune 1000 companies in the healthcare, financial services, and information fields, Cognizant boasts such major customers as AC Nielsen Corporation, The Dun & Bradstreet Corporation, First Data Corporation, and Metropolitan Life Insurance Company.

Forming the Company in 1994

The man behind the founding of Cognizant was Wijeyaraj (Kumar) Mahadeva, the company's current chairman and CEO. He was born in Sri Lanka, where his father was the head of the country's civil service. Mahadeva traveled abroad for his education, earning a master's degree in electrical engineering from the University of Cambridge in 1973. He then worked as a researcher at the British Broadcasting Corporation for three years before coming to the United States to continue his education at Harvard Business School, where he caught the eye of the consulting firm McKinsey & Co. He joined McKinsey in 1978 and over the next seven years was instrumental in building up the firm's technology practice. Looking back on his days as a consultant, Mahadeva told Investor's Business Daily in 2002, "I learned a lot at McKinsey, with its focus on client relationships and setting high standards for recruitment and staff development." According to McKinsey colleague Rajat Dupta, "Kumar was an absolute star who could deftly think through problems and articulate solutions." In 1985 Mahadeva accepted a position with AT&T Corp., a client adjusting to the court-ordered breakup that resulted in the divestiture of local telephone service and the creation of the seven "Baby Bells." AT&T, eager for new opportunities, was looking to take on IBM in the computer field. But Mahadeva soon grew disenchanted with the corporate politics that prevailed at AT&T and after four years left to take a job with Dun & Bradstreet Corporation (D&B), tabbed to head its entry into Asia. According to Investor's Business Daily, "Demand was weak for the business research firm's service in the Asia Pacific region. Mahadeva, however, used the time there to watch and learn. What did he find? Low-cost software factories in India, where developers wrote computer code at a fraction of the cost in America. He recognized an opportunity. … The timing was ideal. Concerns were mounting at D&B about how to solve the pending Y2K computer crisis. At the same time, costs were coming way down for satellite bandwidth, making shared computer networks more cost-effective." He was able in 1994 to convince D&B to invest $2 million in a joint venture with Satyam, an Indian software outsourcing operation, which held a 24 percent interest in the start-up. The business was called Dun & Bradstreet Satyam Software, Cognizant's forefather.

Company Part of 1996 Spinoff

At first, the Indian subsidiary focused on large-scale full lifecycle software projects for such D&B businesses as AC Nielsen Co. and IMS Health. In November 1996 D&B spun off the unit along with Erisco, Inc.; IMS International Inc.; Nielsen Media Research; Pilot Software, Inc.; Sales Technologies, Inc.; and other assets to form a company named Cognizant Corporation. This move was part of a major restructuring of the parent corporation, which split into three major divisions: Dun & Bradstreet, AC Nielsen Consumer Products, and Cognizant Corporation. Three months later, Dun & Bradstreet Satyam changed its name to Cognizant Technology Solutions and began to function as a division of the newly formed Cognizant Corporation. It would now look to service companies outside of the D&B family, offering Y2K solutions as well as web page development. In July 1997 the subsidiary became wholly owned when the parent corporation bought Satyam's minority interest for $3.4 million. Because Cognizant lacked a reputation outside of D&B, it had some difficulty in attracting clients. Mahadeva fell back on his McKinsey experience and concentrated on customer satisfaction and the building of long-term relationships. Major signings for Y2K solutions included Northwest Airlines and Aetna Life Insurance Co. of Canada.

Mahadeva also proved to be adept at keeping Cognizant ahead of trends. Early in 1998, at a time when the Y2K business accounted for almost half of the company's revenues, he began to pull back Cognizant's exposure to the practice so that by the first quarter of 1999 Y2K work represented just 26 percent of revenues. According to a 1999 Forbes profile, "Sensing that another consulting obsession was about to peak, Mahadeva kept clear of the $16.6 billion enterprise resource planning (ERP) software business—installing monolithic software packages that manage companies' backoffice functions. While other consultants were raking in fat fees, Mahadeva steered Cognizant toward the more pedestrian chores of maintaining corporate software systems—fixing kinks in the code or extending the life of existing applications by adding new functions." Moreover, applications management was a business that would "be around for as long as companies use computers."

The parent company, Cognizant Corporation, underwent some structural changes in early 1998, dividing into two separate public companies as a way to help each unit maximize growth. Certain assets, including Cognizant Technology Solutions, were spun off to form IMS Health Incorporated. Cognizant Corporation and its remaining entities were renamed Nielsen Media Research. Several months later, in June 1998, IMS partially spun off Cognizant Technology Solutions and conducted an initial public offering (IPO) of stock. The timing proved to be less than ideal, as market conditions were poor for IPOs. As a result, Cognizant was only able to sell shares at $10, instead of the $11 to $13 the company and its underwriters had hoped it would fetch. The money was earmarked to pay off debt and finance the upgrading of offices in India, but in the end most of it was simply banked.

Mahadeva was named Cognizant's chairman and CEO in March 1998. He continued to display a creative and forward-looking mindset. According to a profile in the Economic Times, "Another business model innovation the company came up with as early as 1998, when peers aligned themselves along geographies or technologies, Cognizant aligned itself along verticals. The results of early verticalisation is seen in the robust growth in each of the verticals that Cognizant focuses on—financial services, banking, insurance, healthcare, retail, manufacturing and logistics, and media and publishing. … The final distinction in strategy is in its listing destination. While its peers got listed in the geography they sourced from—that is India, Cognizant got listed in the geography they serviced, namely the US."

In 2000 Cognizant looked to become involved in e-business, introducing a suite of services and offering to help customers build IT systems that it could then maintain on an outsourcing basis. The company also expressed interest in funding Internet start-ups in both the United States and India. When the Internet bubble burst and the tech sector in general suffered from the effects of a recession, Cognizant was nimble enough to stay afloat and actually maintain its growth. The cost savings that Cognizant could provide its customers through offshore centers made the company's services more attractive during lean economic times. Even following the terrorist attacks of September 11, 2001, corporations remained willing to have their IT services handled offshore by Cognizant and others. India's large pool of inexpensive IT talent was no longer a secret, but Cognizant was one of the few companies able to make the complicated onsite/offshore model run smoothly. Tensions between India and Pakistan over the Kashmir region that might lead to a military conflict between the two nuclear powers dampened investor enthusiasm and adversely impacted the price of the company's stock, but customers still did not pull back.

Company Perspectives:

We provide application outsourcing services and enterprise consulting solutions to Fortune 500 and Blue Chip companies in the US and Europe. Leveraging a streamlined on-site/offshore development model, we can help your organization achieve a world-class level of technical excellence for less than half the cost of having the same work done by other e-business and outsourcing leaders.

Rising Stock Prices in 2002

Because of its onsite/offshore arrangement, Cognizant was able to realize significant tax savings that also helped to improve profits during lean times. Wholly owned subsidiaries such as Cognizant's India operation were only obligated to pay taxes if they brought back profits to the United States. Instead the company invested the money to expand its overseas operations, initiating a $40 million project to build three development centers in India, large enough altogether to accommodate 6,000 employees. From October 2001 to October 2002, at a time when the stock market in general fared poorly, Cognizant saw the price of its stock increase by 170 percent. Nevertheless, some concerns began to creep in, as investors worried that most of Cognizant's business came from a handful of its pool of 105 customers and feared that Cognizant would face stiff new competition from both Indian service firms including Infosys Technologies and such industry giants as IBM and Accenture who were expanding their Indian operations. On the positive side, Cognizant had no debt and more than $100 million in the bank.

Cognizant posted revenues of $178 million in 2001 and $229 million in 2002. Estimates for 2003 topped $350 million. The company had always been accorded a great deal of latitude in how it conducted its business by parent corporation IMS, which opted to act more as a shareholder than an owner, and finally in 2003 Cognizant gained its complete independence following a split-off. To ensure its long-term freedom, Cognizant's board immediately instituted a poison pill provision to prevent unwanted takeover attempts.

Prospects appeared bright for the company, despite the threat of IBM and Accenture, which were clearly intent on aggressively challenging Cognizant. As a result, Cognizant was expected to maintain its business by lowering the price for its basic outsourcing work by some 5 percent over the next few years. As a counter, Cognizant looked to encroach on some of the territory of its large rivals and move into higher-end technology consulting. In this way, Cognizant would advise customers about how to improve their computer systems, which they would then maintain. Mahadeva told the Economic Times in June 2003, "We are looking at expanding our development centres outside of India. We see strong demand for package implementation in areas such as SAP and PeopleSoft and we are looking at acquisitions in those areas. We are also looking for acquisitions in Europe." The company already had three acquisitions under its belt, all providing a positive effect. The June 2002 purchase of United Healthcare Ireland Limited assets added some 70 software professionals while increasing its international presences. Cognizant added another 300 software personnel when it acquired the American Express Travel-related Services account from Silverline Technologies, in the process bolstering its leading position in the financial services industry. It was through this transaction that Cognizant picked up its Phoenix development center. In 2003 Cognizant acquired Aces International Inc., a CRM company with a strong presence in healthcare, financial services, and telecommunications. According to the Economic Times, Cognizant believed that CRM capabilities would be the next wave of packaged software opportunity. Far from retreating, Cognizant was charging into the future, hoping to hire nearly 1,900 professionals in 2003, with perhaps as many as 400 in the United States. The global outsourcing business was by now a $550 billion industry and highly fragmented, with the largest five companies controlling less than 20 percent of the market. There was every reason to believe that ample opportunity existed for Cognizant to continue its impressive pattern of growth.

Key Dates:

1994:: The company is formed as a Dun & Bradstreet (D&B) in-house unit.
1996:: D&B spins off the business as part of Cognizant Corporation.
1998:: Parent Cognizant Corporation restructures, with Cognizant Technology now a public subsidiary of new parent IMS Health Incorporated.
2003:: The company gains complete independence from IMS Health.