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Elliott episode was in the best interests of Cognizant: CEO Francisco D’souza

LiveMint logoLiveMint 29-08-2017 Varun Sood

Bengaluru: For a man who has been in the hot seat of a rapidly-growing information technology (IT) services firm—which has grown faster than India-based rivals Infosys Ltd and Wipro Ltd—for over a decade, Francisco D’Souza still retains the boyish charm that he possessed when he first took over in 2006 as chief executive of Teaneck, New Jersey-based Cognizant Technology Solutions Corp. at the age of 38. In a rare media interview (his first non-earnings interview with Mint after over four years), D’Souza spoke about a number of issues, including the disruption that is confronting most large IT services firms, the company’s strategic shift in terms of chasing growth and whether activist shareholders pose a risk to the company. Edited excerpts:

It’s now been a little over 10 years that you have been CEO of Cognizant. What keeps you motivated to keep going?

It’s actually 11 years. I love the sort of innovation and change. Doing things which are different. This industry has given me that and more over 11 years. So, I wake up in the morning and very little is the same, say a year before or two years before or three years before. So every day is a new day.

Do you feel like you can continue as CEO for another 11 years? If not, how is the succession planning issue being dealt with?

I’m incredibly optimistic. I genuinely believe that for this company, the best days are ahead. The way we are positioned in the market and the scale of the opportunity is like nothing that I’ve experienced over 24 years. Beyond that, I would say that succession planning is in the hands of the board. We run a thoughtful, disciplined process and it will take its own turns.

Would it be fair to say that the growth in your digital business will be fast enough to offset the decline in your traditional outsourcing business?

See, the way we see it is that digital as of June this year is more than 25% of total business and it grew more than 30% in the quarter. So the company overall grew at 8.9%. These are year-over-year numbers. So if you do the math, the rest of the business is growing in lower single digits.

Was Cognizant under investor pressure to spell out digital revenue?

I don’t think that will be fair interpretation. We always felt that it’s important to provide good transparency to all our stakeholders. Not just investors but to our employees, to our business partners.

What about the impact of automation on headcount addition? Will Cognizant be able to end this year with a higher workforce than last year?

I cannot tell you about the headcount at the end of the year but we will continue to hire. On automation, there is no doubt that parts of what we have done in the past have been automated and will be done with fewer hours of people. Having said that, I should also say that the world is becoming more technology-intensive.

Did your strategic shift last year—when you changed your goals of chasing growth—have anything to do with the letter that activist investor Elliott Management Corp. sent to the board?

At the end of the summer of 2016, we started to work on a plan to accelerate certain portions of the Cognizant 2020 plan. As that happened in November 2016, the Elliot guys published the letter on their thesis on Cognizant. And much of what Elliott had outlined in their letter—things that we had been thinking about as we did the reset of the Cognizant 2020 plan. And so we engaged with Elliott, we talked to them, we also used that time to re-engage with many shareholders, not just Elliott, and we took the input from all of these guys, and that’s why from the time Elliott published the letter, which was late November 2016, to the time we announced the accelerated shift to digital, which was February 2017, in a relatively short period of time, we were able to get it done because we had been doing the foundational work for much of the second half of 2016. So, that’s how the Elliott thing played out.

Going forward, would you classify activist shareholders (like Elliott) a risk factor in your annual report?

In regulatory filings we may disclose things about the business that we are required to disclose based on regulatory requirements. If I were to answer it from a “learnings from Elliott” standpoint, we had a constructive conversation with a shareholder that had ideas about how we should run the business and we arrived at a conclusion point that I think was good for all of our shareholders and were in the best interests of the company in the long run. So, that’s not my definition of a risk.

Would you ever call any of your shareholders a risk factor?

Our shareholders are our owners.

How is your Cognizant Accelerator programme coming along? Will you be doing more start-up investments in the future?

Much of what we’ve done in the accelerator till date has been organic innovation. I think what you’ll now see us doing more is make minority investments (in start-ups) very selectively as another source of innovation into the company.

Has Cognizant effectively given up the strategy of chasing growth at all costs, like you did for much of your first two decades?

I wouldn’t characterize the first 22 years of the growth journey at Cognizant as ‘growth at all costs’. I think we were very clear in those days that we would maintain operating margins and grow market share and we did that in a thoughtful way and it was absolutely the right approach. At that phase of the industry, the market opportunity was significant. We need to catch market share—when we started the company and when we took the company public, we were small. It was the right thing to do—to capture market share. As we transition, it was really important to say to investors that you should now expect us to be focused on growth that is high-quality and sustainable...and as part of that, we said we would slowly take margins up. That’s a reasonable quid pro quo and we’ve executed that.

What happened with Gordon Coburn? Could you throw some light on his abrupt departure?

I would just say what we’ve said publicly. Gordon resigned, he resigned voluntarily. And as we’re required to do when he resigned, we disclosed it. That’s what we’ve said publicly and that’s what I can say.

Cognizant is becoming more complex as a company, dealing with newer technologies and business models. How do you ensure that your board keeps up with those changes?

We have evolved the board in a very deliberate way. It’s not been by accident. We’ve evolved it very deliberately over the past 5-6 years. Firstly, because up until 5-6 years ago, much of our board was the board that we had when we took Cognizant public. For a variety of reasons, we knew that we would need to take the board through a transition. At the same time, there were a number of things and capabilities that we felt we needed on the board. Some of those things were technology-oriented, but equally they were capability-oriented. For example, we looked at the size and scale of Cognizant’s business today. Going forward, we felt we needed to add people who had experience running a large global, distributed organization across multiple companies. So, Zein Abdalla brings that from Pepsi.

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