NelsonHall has recently completed a series of visits in India, addressing a number of topics including software testing, application management and digital transformation services.

NelsonHall met with software testing pure-play, Cigniti Technologies, now the largest of all India-based testing pure plays. The company has a headcount of 1,600, ahead of Maveric Systems (~1,200) and QA Infotech (~800). Its CY 2014 revenues were ~$54m, a growth of 46% (and a NelsonHall estimated organic growth of ~15%).

M&A, client development, and geographic expansion

Formerly known as Chakkilam Infotech, Cigniti Technologies came about with the acquisition of Cigniti Inc. This, and the further acquisition of Gallop Solutions, helped increase the company’s onshore presence. With its addition of onshore personnel, Cigniti has over time been able to expand onshore contracts into larger offshore-centric framework agreements.

The M&A strategy has also been instrumental in expanding Cigniti’s client base from technology vendors to enterprise clients, in particular in financial services sectors. Cigniti now has around 100 clients and focuses more and more on Fortune 2,000 companies (34 clients). The company intends to further verticalize its offerings, expanding from BFSI to travel & logistics, retail, and energy & utilities sectors. Examples of service verticalization include test case repositories around COTS (e.g. Cerner and Temenos). Guidewire is in the roadmap.

Geographical expansion is also on the agenda. Historically, Cigniti’s client base has largely been in the U.S. The company has opened (mostly sales) offices in the past 18 months in the U.K., Australia, and Canada. Next steps will include, in the mid-term, Continental Europe, and in particular DACH, Nordics and Netherlands. Further acquisitions in the region are likely, to increase its current 50-strong salesforce.

Portfolio development

The company has been enhancing its service portfolio and building IP; examples of new offerings include:

• Digital: big data testing (functional and non-functional); analytics (predictive QA) enterprise mobility (mobile ERP testing, security testing and mobile DevOps); IoT (privacy testing and embedded systems testing); and customer expertise (digital, mobile and content testing)
• Test support services: test data management, test environment provisioning, service virtualization
• Specialized offerings: network testing, medical device testing; and agile testing, DevOps, as well as QA consulting.

The company is promoting its IPs and accelerators under the umbrella of SMART Tools V3.0. Cigniti has leveraged IP from point solutions, test case repositories and the HP migration tools brought by Gallop along three broad themes:

• Automation/industrialization
• Reporting/insights (e.g. diagnostics tools, reporting in terms of coverage, data visualization tools)
• Intelligence, based on several emerging trends: AI expert systems, natural language processing and machine learning.

A recent unusual testing contract is one with a large toy manufacturer around its robot product line; the challenge is to test robots which can be assembled with a high number of combinations. Having hired a robotics specialist to help provide a systematic approach to testing robots, Cigniti is considering how it can apply the experience it has gained from this contract into newer offerings.

Growth strategy

Looking ahead, continuing its growth trajectory remains a priority for Cigniti: the company is targeting revenues of around $90m (depending on foreign exchange rates) in calendar year 2015 and $125m in 2016. The company has decided to remain debt-free and is therefore using funding by its major shareholders (“promoters”), which control 60% of its shares. In December 2014, Cigniti raised INR 650m (~$10.5m). As mentioned earlier, Continental Europe, and in particular Northern Europe, is likely to be a key growth region.

The company considers $100m in revenues as a threshold. Once it has reached it, Cigniti should be in a position to increase its operating margin (EBIT margin has ranged from 9% to 10% in the past two calendar years), through several levers: SG&A expenses decreasing in percentage terms (with revenues increasing and SG&A not growing as fast), and operational levels such as lower attrition (through Cigniti becoming a better-known brand in testing, for instance).

On the right lines

NelsonHall maintains that software testing is still a highly-labour intensive industry, and having a delivery network with a low cost structure is essential.

The testing industry also needs to further invest in automation (through its own IPs and accelerators) and in service industrialization, as well as in its service portfolio, to deepen its capabilities in a structured manner. To achieve this, testing services vendors need scale and healthy margins to fund those initiatives.

NelsonHall therefore believes that the two main pillars of a good testing value proposition are offshore and automation, expanding from test execution to all testing activities. We understand that this is the direction Cigniti is taking, and hence the company appears to be on the right lines.