"Firms that can re-invent themselves are not constrained by demand"

Francisco DSouza, CEO of IT services major Cognizant, still writes code. There is a reason.
 Goutam Das   New Delhi     Print Edition: December 3, 2017

Q: We are in an era of deglobalisation. How is Cognizant, and the IT industry, coping?

A: It is much more critical to make sure that you balance two things. We work with governments around the world to balance our activities - on the one hand, it has to be good for local workers, and on the other hand, it has to be good for local businesses. What does that mean? It means you have to be committed to hiring, training and developing the local workforce as actively as you can. We have to be committed to training that expands the supply. The fact is that there is a shortage of talent in many parts of the world. The second part is that while this transition is taking place, governments cannot lose sight of the fact that there is a shortage of talent. To starve businesses of technology talent at a time when digital technology is changing the rules of the game for most companies is a bad idea. Not just the U.S. government, we have had these conversations with governments around the world on how to balance these in thoughtful ways.

Q: What is the current U.S. thinking on this balance?

A: I think there is a growing recognition. As the current administration proposed various alternatives related to immigration, there is a strong voice from Silicon Valley companies on what that means for their businesses and their clients' businesses.

Q: Business demand seems to be muted for the IT industry. Is it becoming a demand-constrained industry now?

A: It is not a demand-constrained industry. The global services industry is close to a trillion dollars annually. Even if you exclude parts of it saying those are not addressable, you still have a significant market opportunity. Having said that, technology is going through a period of disruption. And it is different from prior periods of disruption. This period of disruption is longer than most traditional periods of disruption. If you think about digital, we have been talking about cloud, social, mobile, analytics for the past five years. Even today, there are big things happening in AI, robotics, Blockchain, Internet of Things, additive manufacturing. These are in early stages. The industry has to re-invent; services firms have to aggressively invest in re-inventing themselves. Firms that do it - we have done that - are not constrained by demand. The best example is the health-care business. Many competitors talked about a slowdown in health care. Health care is doing great for us. It grew 9.5 per cent year-on-year in the second quarter and we continue to have a positive outlook because we made significant investments. We have a good digital backbone.

Q: Is it digital that is driving demand?

A: It is digital and two things below digital. Before 2016, clients did smaller projects, pilot projects, market tests with digital. In 2016 and 2017, we have seen them move to digital at scale. Most of our clients are 'digital immigrants'. So, they have to change their business model because the rules of the competition are changing; they have to change the operating model because most of the time their operating processes were built for the physical world; then they have to change the underlying technology. Besides, technology is pervading all parts of an organisation. A decade ago, my client was a CIO, and my market opportunity was the IT budget. Today, my client is the CIO but also the Chief Marketing Officer, the CEO, the business heads. I am selling to many more stakeholders and that gives me access to many more budget dollars.

Q: The narrative that we hear from IT companies is identical - automation, AI, etc. How do you position yourself distinctly in such a scenario?

A: The real differentiation is that we are able to work with clients to do digital at scale. The idea that we can help re-engineer the business model, the operating model and the technology model with real capabilities in these areas - consultants, designers, data scientists, good cybersecurity engineers - that is the differentiation. There are very few services companies in the world that have this end-to-end capability. We know our clients' legacy environment because of the work we have done in the past. Our ability to use that knowledge to help re-engineer the three models is the differentiator.

Q: You have announced that 25 per cent of your revenues come from digital. What services are clubbed in here?

A: We realigned the business last year. We have three big practice areas that cut across all our segments. These are: Cognizant Digital Business, Cognizant Digital Operations, and Cognizant Digital Systems and Technology. Not everything we do in these three areas is pure digital. We took a careful approach and carved out areas that we consider to be truly digital. For instance, in Digital Operations, we put things such as Robotic Process Automation, AI, etc. In Digital Systems and Technology, we carved out the work we do in cybersecurity, in Cloud, etc. That is what accounted for 25 per cent in the second quarter. We did this because investors were asking us to do so. My reluctance was there was no accepted definition of digital. Finally, we said we will come up with a definition that is relevant to us. The value of this number is to compare us over time to see our progress.

Q: Investors asked you for digital revenues. Of late, we have seen a trend in the industry where investors have started telling companies how they should run the business. It has happened to Cognizant as well - for years, your model was business at any cost. That seems to be changing now because you are talking about expanding margins.

A: I would clarify. Our strategy has never been to "go get the business and we will figure out how to make money later". The strategy was to be very disciplined on margins - 19-20 per cent non-GAAP operating margins. And we delivered industry-leading growth. When we started Cognizant in 1994, there were at least 700 companies in the Indian IT space. They all had the same idea as we did. In the last 20-plus years, we have overtaken a large number of them. As we go through this disruption, the management knew it was important to make the pivot from saying 'grow market share' to saying focus on 'high-quality sustainable growth'. That was the primary pivot we made. We have said publicly that our digital revenue is more than 25 per cent and it has higher margins than the rest of our business. Our approach was simple. We had to listen to all our shareholders. Our job is to do what is in the best interest in the long term.

Q: What is the future of jobs in the IT industry with automation and AI, with shareholders wanting better returns and companies like yours wanting to improve margins? Looks like jobs will be a casualty.

A: It's the best time to be a technologist and be in the services industry. Why am I incredibly optimistic? The world is becoming far more technology intensive than ever. When the world becomes technology intensive, there is no doubt that it will need smart technologists to deliver results. His role becomes more important. On the flip side, it is absolutely the case that we will automate things that we do manually today. I will tell you, though, that it is no different from what we have been doing for 24 years. Every year we automate - we use tools to do more in an automated way than the year before. Why is this any different? I don't see the demand for technologists will be outpaced by the rate of automation. Technology will solve some of the hardest problems in the world over the coming decades; technology will play a role in global health, financial inclusion, food and agriculture. We are already doing this work. Drones look at crop yields, saving water by irrigating only when there is a need. Why wouldnt you want to be in an industry that is in the middle of all this? So, you have a good demand environment, extremely interesting work that has to be done. The only question for companies is, are you making the investments to stay relevant?

Q: The technologists you are talking about don't come out of universities today. They need to be significantly up-skilled.

A: Whatever university you graduate from today, if you do nothing, five years from now your skills will be largely obsolete. The fact is we have to be life-long learners. The new model in technology is you spend the first 20 years of your life in deep learning - you learn concepts, and you learn how to learn. Then you spend the rest of your life upgrading and continue to be intellectually curious.



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