Cognizant's revised revenue guidance sends shivers through Indian IT

If this golden child of Indian IT is having the kind of trouble that it has had in posting revenue growth, many observers are beginning to wonder what hope there is for the rest of the sector.
Written by Rajiv Rao, Contributing Writer

A few weeks ago, the almost unheard of finally happened. The golden child of Indian IT, the one that surpassed all of its peers in most departments -- growth, revenue, and innovation -- the one that easily went toe-to-toe with foreign rivals, the one that had one of the youngest CEOs in the industry to further burnish its image as a youthful, forward-looking company of the future, finally stumbled in a way that sent palpable shivers through Indian IT.

It was bad enough that the company had reduced its revenue guidance at the end of the first quarter from a growth of between 9.9 and 14.3 percent at the beginning of the year to 9.9 to 12.7 percent. It then shocked everyone by doing it again -- lowering it further to between 8.45 and 9.5 percent (or between $13.47 billion and $13.60 billion in annual revenue).

This growth is not only below industry body Nasscom's estimate of 10-12 percent growth, it is almost half of Cognizant's 2015 topline growth of 21 percent (and 15 percent after adjusting for an acquisition). Possibly for the first time in its hallowed history, the US-based company is predicting a single digit growth figure for the year (around 9 percent) and has registered the slowest quarterly revenue growth in over a decade.

Naturally, this has shocked the IT community for several reasons. Cognizant, for some time now, has been India's poster child for IT Services, eclipsing its other peers in terms of consistent revenue growth, innovation, marketing, and thought leadership. In 2015, it was the clear leader in incremental business, crucial for IT services firms hoping to renew existing contracts -- it added over $2 billion of it compared to $1.5 billion by TCS and was easily more than twice that generated by Infosys and Wipro together.

So what could possibly be going wrong with this market leader? Cognizant, for its part, said that its banking and financial services segment as well as its healthcare unit has been the worst hit, largely because of a stretched out, low-interest rate environment and the Brexit situation.

While that is certainly true, the reality is that this is yet another omen showing the steady decline of Indian IT. Infosys, for instance, said a few days ago that it will put into place a "ramp down" of a project with The Royal Bank of Scotland subsidiary that would have contributed up to $90 million in revenues towards the June quarter, possibly pushing Infosys to, like Cognizant, revise its guidance from an industry beating 11.5-13.5 percent to 10.5-12 percent.

The decrease in demand for IT services has become a contagion and no one knows how to quite put the brakes on it. What makes this even worse is that this is the time of year Indian IT firms see their biggest gains in add-on business (aka incremental revenues) and the noticeable failure to see that happening could very well be the faint chimes of a death knell that will reach its crescendo in a few years.

As I recounted a few weeks ago, Indian IT is beleaguered by a bunch of different disruptions happening all at once and at light speed. One is by the cloud, with plug-and-play software easily available for managers from the supply chain division to marketing to avail. Goodbye legacy systems and armies of engineers; hello a more agile, responsive, and democratic technology world. In this new era, companies are looking for forms to be able to come up with more complete, higher-value digital services than commissioning them piecemeal.

Tack on increasing costs in India -- industry hands will tell you that even a junior person considered "experienced" enough is getting around 70 percent of a US salary -- IP issues such as the one filed by Epic software against Indian giant TCS, as well as the doubling of visa fees for H1s and L1s and the situation becomes even more bleak.

As long as Indian IT figures out a way to stay relevant, produces enough cost-competitive innovation that includes cloud integration, becomes a genuine force in IT consulting, plays in the more sought-after areas such as artificial intelligence and big data and does so with less manpower to manage, it could offer a genuine value proposition.

Failure to do so, and that too pretty quickly will inevitably see it go the way of computer hardware, call centers, or for that matter the smartphone business -- in other words, commoditized oblivion.

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