How Cognizant overtook Infosys

For those who track the IT services sector, the big news that emerged out of Cognizant’s results yesterday came as no surprise. Cognizant ran past Infosys in the quarter ended June 2012, and going by the guidance of the two companies we are unlikely to see any change in the rankings in the next few quarters.

Yet, in some ways, this feat should surprise us. Cognizant came late to the race. Infosys was founded in 1981, and Cognizant in 1994. Cognizant was incubated by Satyam (remember that company?) and Dun & Bradstreet. Around that time, Cognizant looked up to Infosys. Venetia Kontogouris, who was with Cognizant since its inception, and was on its board till 2006, once told us that she visited Infosys campus in the 90s, and felt nothing but admiration. After all, Cognizant was merely a captive centre of Dun & Bradstreet then, struggling to get business from outside customers. Infosys was a master of that game already.

Now, how did an upstart like Cognizant overtake an established player like Infosys?

The traditional answer to that question attributed the reason to Cognizant’s reinvestment strategy. Cognizant made only 19-20% in operating margins, a good 8 to 9 percent lower than Infosys, and reinvested that on the front-end. The lower operating margins shows up in higher sales expenses, and to the chagrin of Infosys, Cognizant’s faster growth.

The only problem with that explanation is that it doesn’t explain how Infosys could manage both high margins and industry leading growth till a few years back, and it does not explain how TCS, without the benefit of that strategy, seems to be doing well too.

In fact, reinvestment alone doesn’t explain how Cognizant went past Infosys. For that, we have to look at the engines of growth. Cognizant has three of them running. One, getting into new areas, and putting the full force of organisation behind it. Two, using acquisitions in key spaces to achieve scale or to access customers faster. And three, being clear in the fact that it’s a market-share game. Infosys, on the other hand, relied mostly on a single engine – the robustness of its underlying market.