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Cognizant Doubles Down On Customer Digital Transformation Focus

CEO Brian Humphries says Cognizant recognizes that customers want to take advantage of digital transformation to be more flexible and cut costs, and said the global solution provider needs to make that a major focus of its business going forward.

Cognizant Technology Solutions CEO is preparing the global solution provider to be a major part of clients' digital transformation.  

Humphries, talking Wednesday to analysts during the Teaneck, N.J.-based company's second fiscal quarter 2019 financial conference call, took time during his prepared remarks to outline his plan to make Cognizant, ranked No. 6 on the CRN 2019 Solution Provider 500 list, a leader in digital engineering.

Humphries said that he has met with over 100 clients and partners across three continents and conducted over 60 deep-dive strategic and operational reviews of the company, and actively solicited client input on the company's strategy.

[Related: Cognizant Getting $200M From Facebook To Moderate Violent Content Amid Allegations Of ‘Filthy’ Work Conditions: Report]

"I've also spent a great deal of time considering customer needs and buying behavior, our brand position, our business strategy, the effectiveness of our organizational structure, our operating discipline, our portfolio of solutions and indeed, our talent and culture," he said. "It is clear to me that Cognizant has a proud heritage, significant customer loyalty, a broad portfolio of offerings, and engaged and talented associates throughout the world."

Cognizant's customers regardless of industry are faced with an unprecedented pace of change and risk of disruption, and are seeing the need to modernize their environments, extract value from data, better understand their own customers, and accelerate innovation and cloud migration to increase their competitiveness, security, and agility, Humphries said. That, he said, also impacts the budgets needed by those customers for legacy technology.

Cognizant has responded with short-term fixes in part with changes in mid-management, increased automation, and helping consolidate the work of other vendors, Humphries said.

"While these strategies may be effective in the short term, we need to significantly accelerate our shift to digital as we consider our intermediate and longer-term future," he said.

Cognizant is responding with a shift towards a digital engineering strategy to address new customer requirements, Humphries said. However, he said, it will not be an easy shift.

"The pivot to digital requires us to rethink many aspects of our company, including our brands, skills, processes, systems, and tools," he said. "Client engagements will become more project-oriented, meaning more contracts with lower TCV (total contract value). Our account teams will need to build relationships with the broader C-suite as budget owners, decision-makers, and influencers extend well beyond the CIO."

Cognizant will also need more consultative selling skills, more digital talent, more targeted sales compensation programs, and more intellectual property and thought leadership aligned by industry vertical, with delivery, Humphries said.

"The skills of our associates and our leadership team must further evolve," he said. "This is a multi-year transition that is essential to our future."

Digital engineering as a market is very attractive, with 20-plus-percent growth rates, Humphries said. To accelerate its move into that market, Cognizant recently decided to combine its digital engineering capabilities with Cognizant's Softvision business, which it acquired in October of 2018, rather than keep those assets distributed across the company in a more fragmented way.

"This combined practice, with over 11,000 associates and revenue of approximately $800 million, would provide a powerful combination of software product development and application modernization services to clients across the globe," he said.

Cognizant is also counting on its June 2018 acquisition of Zenith Technologies, a privately-held life sciences manufacturing technology services company, which Humphries said expands Cognizant's IoT portfolio and extends its life sciences domain expertise to make it a single-source provider of end-to-end smart factory capabilities.

Cognizant is bringing together current and emerging technologies, scaling cross-functional teams, and innovating its talent and delivery methods into a single product-centric operating model, and will finalize its strategic positioning in the coming weeks, Humphries said.

"As we enable our customers to disrupt and innovate via modern, scalable, agile, data-enabled, and future-proof architectures, it is clear that we should further accelerate our investments in digital engineering, cloud, and IoT," he said. "And we must strengthen our partnerships with industry leaders to buttress our own capabilities. That being said, this is not a strategic overhaul but rather a refinement of the strategic positioning, our capital allocation, and the enablers critical to execute our strategy."

As part of this move, Cognizant has established a transformation office with members of its executive team leading specific initiatives focusing on where to make strategic bets to meet growth opportunities, building the right organizational structure, attracting and developing the right talent, transforming its global delivery model, transforming its sales force, and ensuring it has the structure needed to facilitate growth, Humphries said.

Cognizant also recently separated its Digital Systems & Technology, one of its three service lines, from its delivery organization to increase focus on that service line; established an end-to-end delivery organization under a single leader to reduce costs; and started to hire 500-plus revenue-generating employees in the next few quarters, Humphries said.

Cognizant also plans to overhaul its sales commission plans for the new fiscal year with a greater mix of variable compensation to better align its overall incentives with the company's strategic direction, he said.

"We have more work to do in the weeks ahead, including internal change management and communications to maximize associate engagement," he said. "We expect to outline the details of this program, including the execution plan and associated restructuring charges, on the third quarter earnings call."

Cognizant on Wednesday reported revenue of $4.14 billion for its second fiscal quarter 2019, which ended June 30. That was up 3.2 percent over the $4.01 billion the company reported for its second fiscal quarter 2018.

The company reported net income on a GAAP basis for the quarter of $509 million, or 90 cents per share, up from last year's $456 million, or 78 cents per share. On a non-GAAP basis, Cognizant reported net income of 94 cents per share, down from last year's $1.05 per share.

Cognizant is happy that it met its revenue guidance, but is not satisfied with its overall level of performance, Humphries said. "Our second quarter results do not reflect what Cognizant is capable of achieving in this market environment, neither on revenue growth or margin rates," he said.

A slowdown in Cognizant's banking sector business impacted overall growth, Humphries said. "While certain market dynamics have impacted our results, I believe that much of our weakness in banking and in the non-life sciences portion of healthcare is attributable to Cognizant-specific issues," he said.

To improve its banking practice, Cognizant recently implemented a new operating model with separate teams focused developing new customers, improving deals with its platinum accounts, and developing thought leadership and improved partner relationships, Humphries said

Cognizant's healthcare practice was impacted by insourcing by one large healthcare payer client and a spending pullback by clients in the midst of merger integrations. "Fundamental market changes are reshaping health care requiring our clients to do more with less and get ahead of regulatory compliance and complexity while dealing with cyber threats and privacy concerns," he said.

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