India is still important to outsourcing specialistCognizant
Technologies Solutions (
Most of its contracted work gets done there. A lot of that
work remains basic software coding and testing, which can be done
by Indian software engineers for about half the cost as in the
U.S., where most of its customers are based.
But Cognizant is not a one-trick pony. It has increasingly
been performing higher value work that's not sent to India at
all, such as consulting and business-process services.
For example, in a mid-year deal with retirement and insurance
firm ING, Cognizant agreed to take over ING's U.S.-based
business-process facilities in Iowa and North Dakota and hire
more than 1,000 ING employees working in them.
"ING didn't say, 'Take these jobs and relocate them to
India,'" said Citigroup analyst Ashwin Shirvaikar. "They required
Cognizant to build up their U.S. presence. It's outsourcing in
the U.S., but Cognizant can bring best practices to the table and
make it more efficient."
In a way, outsourcing has come full circle as Cognizant and
its peers have expanded in size and scope, Shirvaikar says.
"When outsourcing first started, you did it in the U.S., but
you did it cheaper. Then things started going to India," he said.
"Now clients are savvier. Sometimes, they send some types of work
to India and now they say it might be cheaper to do (other work)
in Iowa compared to New York, the West Coast or Chicago."
A Morningstar analyst says Cognizant hires more locals in
"client facing" involvements outside India than its peers, who
more typically bring people in from India.
"They follow a hybrid model of onsite and offshore," said the
analyst Swami Shanmugasundaram.
Unlike other outsourcers with largely India-based operations,
such asInfosys (
) and HCL, Cognizant isn't even based in India. It's
headquartered in Teaneck, N.J., closer to many of its customers
in financial services, health care and other verticals.
Almost 80% of its revenue is generated in North America, which
saw a 20% jump in sales in Q3 over the prior year, with financial
services accounting for the biggest slice of the pie.
Total revenue grew 18.2% over the earlier year to $1.8 billion
while earnings rose 25% to 91 cents a share.
Cognizant's second largest region is Europe, which accounts
for 16% of revenue. Cognizant was late to Europe and has a
smaller presence than other outsourcers, the Morningstar analyst
But Cognizant's revenue in Europe has been growing in
mid-to-high single digits as customers dealing with the region's
economic problems turn more to outsourcers such as Cognizant to
And a lot of Cognizant's work, such as consulting, is staying
in Europe. In late July, Dutch-basedRoyal Philips Electronics (
) hired Cognizant to provide a range of consulting and
application services to help consolidate and enhance its global
"Cognizant has to first provide consulting to change the
processes that Philips uses for some of its businesses,"
Shirvaikar said. Then it will help implement and run them, he
Though financial terms weren't disclosed, Shirvaikar estimates
the contract could mean more than $50 million to Cognizant over
three years. It could be a lot more if the contract is
Citigroup's recent quarterly surveys with chief information
officers of some 260 companies indicates that companies that do
business with Cognizant generally want to spend more money with
it in the future, Shirvaikar says.
"Cognizant easily has the best record," he said.
Cognizant intentionally keeps margins lower than peers, at 19%
or 20%, to keep prices flexible and low to win business and
market share. One result: it's been growing faster than its
But as it's gotten bigger, growth has been slowing due to what
analysts call "the law of large numbers." An uncertain economic
climate has also caused Cognizant and its peers to tamp down
their growth forecasts.
Cognizant's revenue forecast for 2012 went from 23% early in
the year to 20% later.
Last year, revenue rose 33% following a 40% gain in 2010 and
16% in 2009, the height of the economic downturn.
Many investors base their following year's revenue expectation
on an 8-K filing setting out future management compensation based
on certain performance milestones.
In a recent filing, the growth range for 2013 equated to 12%
on the low end to 25% at the high end. That compares to 18% to
32% for 2012 and 19% to 34% for 2011.
Citi's Shirvaikar pointed out to clients that 2013's "implied
deceleration" is similar to the 2010 level of 12% to 24%, which
was set in 2009. He thinks it reflects a higher revenue base (the
law of large numbers) but also uncertainty.
Analysts polled by Thomson Reuters expect both revenue and
profit growth of 20% this year and 17% next year.
Though that's a slowdown, it's still industry leading
"The overall IT services industry is expected to be flat in
2013," Shanmugasundaram said. "The offshore IT services industry
is expected to grow around 10% next year."