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Cognizant Analyst Day: Focusing on Digital Transformation, Vertical Expansion and New Business Models

At Cognizant’s European analyst event in Berlin, the topic of digital transformation and in particular its Horizon 3 services dominated discussions. Horizon 3 services now represent a NelsonHall estimated 10% of revenues (~$1.0bn in 2014). Horizon 3 includes new services such as digital services as well as new business models and new sectors/new geographies.

Digital Transformation

Cognizant has created Digital Works to focus and grow its digital services. The practice has taken several personnel from Cognizant Business Consulting (CBC), and also from the relevant delivery organizations in mobile, web sites, social, analytics and Cognizant Cloud. The involvement of CBC in particular has helped filling a gap in the company’s traditional digital offering from the execution layer to business and technology consulting. Meanwhile, Cognizant is being selective on its digital offerings approach in terms of verticals and focusing on its traditional sectors: financial services, U.S. healthcare, and worldwide life science. Expanding its focus from short-point execution services to a more consultative approach is a priority (see below comment on CBC) to understand the business intents of the client, and also provide more back-end system integration. Like a number of peers, Cognizant is finding that most projects tend to be small in scope and small in TCV (although the company mentioned several large digital programs): differentiation from digital agencies will come from consulting and IT capabilities. Also, small independent digital agencies have a cost structure that Cognizant needs to have for digital projects such as mobile apps.

In digital in particular, Cognizant is promoting its “Fail Fast” approach, something it has learnt from its Horizon 3 initiatives. The basic concept is simple, in digital as in Horizon 3, accepting lack of success in several offerings and quickly moving on to a different offering. In order to accept failure, clients need however to limit spending and go through short development times.

Tuck-in acquisitions are also part of the strategy: three recent ones were itaas (digital video engineering), Cadient (digital marketing agency servicing pharmaceutical firms in the U.S.) and Odecee in Australia (mobility).

Market Expansion

Expansion into new geographies and new verticals is also a priority. Cognizant has mostly focused on expanding in APAC and highlights development  in its delivery networks (e.g. 1k personnel in its Singapore and 4k in the Philippines) as well as presence in China, Malaysia ANZ, Japan and India. The company is also increasing its sales focus in those countries: Cognizant referred several times to a contract with Narayana Health in India (a mobile app project to increase productivity of nurses and doctors), and a recent similar in an hospital in the Cayman Islands.

Cognizant is developing its public or para-public sector business, largely to date in the U.K. and in the U.S. Client references included Network Rail and Financial Conduct Authority in the U.K. Clearly, adoption, at least in the U.K. of Indian offshore by public sector has been increasing in past years and Cognizant is also taking its share of success.

New Business Models

Non-linear growth was also on the agenda, relying on Cognizant’s largest vertical, healthcare and life science. Several examples were explicated. First and foremost, Cognizant’s 7-year $2.7bn contract with Health Net Inc. in the U.S. The company has acquired a set of applications created by Health Net around member enrollment, compliance and regulation and other back-office feature. Pricing will be outcome-based (i.e. per member and per month). Cognizant is then planning to sell a service based on a productized set of applications. Another example is the 2014 TriZetto acquisition. On the payer-side, Cognizant wants to develop a platform based service, whether IT service or BPS targeting U.S. SMBs. Of course non-linear model remains a journey for Cognizant with client adoption for TriZetto BPO services likely to take several years.

Another interesting development is TransCelerate, a shared multi-tenant SaaS project for the pharmaceutical industry on drug investigation processes and reporting to the U.S. FDA. TransCelerate already has several big names in the industry as members (AstraZeneca, Bristol-Myers Squibb, Eli Lilly and Company, GlaxoSmithKline, Johnson & Johnson, Pfizer, the Roche Group, and Sanofi). The regulator, the FDA, seems to be in favor of TransCelerate as it may simplify its activities for drug reporting purpose. Again, TransCelerate is part of a journey.

Several years ago, Gordon Coburn stated in a discussion with NelsonHall that one of Cognizant's main objectives was to avoid becoming complacent, in spite of its huge success. The investments in TriZetto and Health Net are bold, both in terms of size, but even more in terms of their long-term return on investment. It is also interesting to note the co-existence within Horizon Three of digital, largely short-term small-scale contracts with new business models, probably as part of an effort to mitigate risk.

Meanwhile, Cognizant continues to invest in its other services lines, whether Horizon Two (BPS, the recently-renamed Cognizant Infrastructure Services (CIS), and CBC) or One (AD, application management and software testing, as well COTS systems integration). Horizon Two offerings have gained scale: BPS now has a headcount of 28k, CIS: 27k, and CBC: 5k). CIS has realigned its service portfolio and repackaged it by business objective e.g. digital IT infrastructure in order to make the offering less of a technical discussion and make it more relevant to business needs. The story is largely repackaging of existing service portfolio and remains a journey, we think. Meanwhile, CBC, with its 3k personnel across U.S. and Europe, is increasing its share of Indian national consultants to develop its presence in Continental Europe.

Finally, within the traditional Horizon One services, Cognizant continues to invest in its testing/QA service portfolio (now 28k personnel, located in various delivery organizations), also application management (“application value management”), around its service portfolio development and automation. Cognizant has expanded from its service catalog approach and is developing IPs, and domain knowledge in testing, and promoting business process-led AM (BLAs in terms of Cognizant). The company is clearly taking industrialization and service portfolio management seriously. 

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