Vulture capitalists threaten Cognizant's continued digital evolution

As a microcosm of the wrenches and stresses enterprise services are experiencing, Cognizant's week has been pretty fascinating.

Last weekend Elliott Management took an activist controlling role in Cognizant, one of the most strategic services firms, with an open public letter to Cognizant's management essentially chastising them for too much investment in the future and for not squeezing enough money out of the IT services world as Elliott understand it today.

The quarterly cadence of equity market pressures on large global services players is immense, and so are the stresses on their clients to evolve and stay relevant. Cognizant have been very active in driving digital business agendas. I attended their NYC digital advisor and analyst day in August where their then (now departed) US CEO Gordon Coburn was eloquent around how 'corporate strategy is bumping into technology' for clients. This is the new reality as the old IT services world shrinks to commodity status and the brave new world of co-innovation with clients creates modern digital business models relevant to succeed in our fast changing world.

Later this week Cognizant announced the purchase of Mirabeau BV, a design and experience agency based in Amsterdam, Holland. This augments their 2016 stake in Christian Madsbjerg's ReD Associates, a human science strategy company based in Copenhagen Denmark, and their purchase of Idea Couture, a San Francisco HQ'd strategic innovation and design firm.

Cognizant was one of the pioneers of the 2012 era ideas around augmenting legacy IT with 'SMAC' (Social, Mobile, Analytics and Cloud) as a core set of attributes to drive modern business. Their 2014 concept of 'code halos' ('...the data that accumulates around people, devices, and organizations...a halo of code..that's robust, powerful, and rich with meaning and insight') helped clients and prospects focus on their 'digital works' offerings and opportunities.

These are brave, innovative efforts by an IT enterprise services stalwart who is trying to reinvent itself and move upstream as a modern digital business partner to clients. Like many of their global competitors, Cognizant are behaving in a similar way to the 4 giant global 'integrated' advertising holding companies - WPP, Publicis, Omnicom and Interpublic - who have rolled up their large scale ad agency and marketing competition. The big 4 advertising holding companies routinely buy up innovative new agencies to ensure continued domination of the business landscape, and despite bureaucratic, elephantine scale are able to run the sort of huge global marketing media buys and execution required by big brands.

Unlike the big ad agencies, who dominate and control their global market, the legacy IT services players are in danger of becoming the media equivalent of newsprint: irrelevant. It's a difficult period as we transition from the bread and butter of C&SI (Consulting and Systems Integration) business, stitching together enterprise software partners offerings for clients, to an era when all businesses are having to reinvent themselves as digital first.

Even SAP, who are typically only interested in the huge enterprise market they have built, are are now again investing in evolving small and medium business efforts despite cost and business cannibalization challenges, recognizing market shifts. There's a whole other lengthy post about the history of Business by Design on that topic...

Vulture Capitalism

Paul Singer of Elliott Management is a notorious vulture capitalist, the sort of sniper who picks off meaty, slow movers at the back of the herd. Cognizant are a juicy target who have been very focused on investing in their evolution in order to be able to compete in the future. Elliot Management may kill that golden goose by squeezing greater short-term efficiencies and profits at the expense of future validity.

Morningstar has a good outline of the likely timetable of events at Cognizant as they come under financial pressures and noted that

Elliott has made a practice of finding older technology companies whose growth has slowed as they transition to middle age. Often, Elliott calls for more capital returns and reduced investment, arguing managers have gotten distracted trying to expand and should pay back investors instead.

At Cognizant, Elliott is giving a tempered version of that argument, careful not to call for actual employee or cost cuts, but instead a slower expansion and stricter margin targets that would free up capital to go back to investors.

Open source DevOps (development operations) and ALM (application lifecycle management) are essential to modern firms as they struggle to free themselves from the constraints of rigid and expensive enterprise software. Concepts like composable infrastructure are not mature yet, despite rapidly unfolding events such as this week's Amazon 'Reinvent' AWS announcements, but partners like Cognizant are very well positioned to execute on those ideas.

You can be sure the client side technologists are watching events such as Reinvent closely to identify their best paths forward, even if the bean counters at Elliot Management aren't. Sadly there is so much clueless marketing spin and resulting cynicism around modern digital business thinking that the people who actually help clients envision and execute digital models are getting buried amongst all the ' Flying cars are closer than you think' hype from another type of financial opportunists - valley VC's.

Digital Cliches getting in the way

All the cliches about digital - airBnB & Uber full stack 'green field' 'disruptive' outliers, design thinking by 'millenials' as the panacea to all business and innovation problems (the most recent 'think outside the box' fashion variant...), customer experience, journey and data collection obsessiveness - are now coming to a head as the services industry struggles to remain relevant and the financial markets ask hard questions.

Another old business cliche - the 'buggy whip' becoming irrelevant as gasoline powered cars took over from horses has been pointed out as wide of the mark plenty of times but still endures. Most carriage manufacturers successfully evolved to become automobile makers, as this 2010 NYT piece by Randall Stross describes, with buggy whips a minor, unimportant accessory business.

Henry Ford was one of 200 car manufacturers in Michigan but rose to dominance due to superior mass production techniques and design efficiency. I use a great Ford statement a lot from that early era during digital strategy sessions: 'Vision without execution is merely hallucination'. The 'dashboard' of your car evolved from the wooden structure on horse-drawn carriages that shielded the riders from being 'dashed' by stones from the horse's hooves. As the carriages became mechanized the gauges were attached to dashboards, a good example of practical execution which has evolved and endured over time.

As an analogy, Elliot Management could force Cognizant to squeeze more profits from the horse drawn carriage business and miss the opportunities of mechanization. Cognizant are going to have to up their game and this will be interesting to watch on multiple levels over the coming months, particularly Elliot's push for a new board next spring. Hopefully client evolution will help Cognizant to get over this potentially tricky bump in the road...