Cognizant’s Ravi Kumar needs to hire seniors, stem attrition to see growth: Moshe Katri

Moshe Katri

Cognizant, once a barometer of growth for the Indian IT sector, has since ceded considerable ground to its peers, faced extremely high levels of attrition and has been unable to attract the right talent. In a move that can be seen to right the ship, the company appointed Infosys veteran Ravi Kumar S as chief executive officer and Stephen J Rohleder as chairman of the board.

Moshe Katri, Wedbush Securities managing director of equity research, has covered IT services for more than two decades. He had called out the Cognizant board in July 2022 over its inaction on the company’s underperformance.

When it was announced in October that Kumar would be joining Cognizant, Katri praised the move as a smart one as he brings knowhow in building growth. 

In an interview to Moneycontrol, Katri talks about why he thinks this is the right leadership push for Cognizant to make a turnaround and what Kumar should look at doing. Edited excerpts:

What do you make of Ravi Kumar’s appointment as CEO?

It's not only Ravi Kumar getting on board, but you're also promoting Steve Rohleder to be in charge of the board… You have Ravi, who has substantial operational experience. You have Rohleder, who I would categorise as a heavy hitter. In my view, both of them can really navigate this company. 

Steve has extensive industry expertise in M&A, in digital, and anything that has to do with any sort of growth initiatives. Typically, the board provides advice and support to the CEO, especially in terms of strategic matters. That's why I think it's kind of an interesting kind of dynamic between both.

Somebody asked me, ‘Hey, don't you think a Cognizant is just too broken to get fixed?’ There are two different ways to look at broken companies in the space: a broken company in terms of not having the right infrastructure, in terms of delivery, the right personnel, the right sales effort, etc.

Then there is another way of being broken by being exposed to what we call problem contracts. Probably the right company to look at here would be Computer Sciences Corp., which was renamed DXC. The latter example is a much more severe form of a broken company because if you have problem contracts, you'll live with these contracts for a long time until you fix them. 

The more relevant example here probably is Infosys, because Infy went through a very similar phase with peak attrition levels, departures of senior personnel, leadership changes, leadership turmoil, and market share losses, and they've been able to turn things around. I think this is kind of where we are right now. Since we came out with our note back in July of last year, criticising management and urging the board to take action, it seems that they have done that pretty swiftly.

Many people expected Ravi to take over as CEO but not in January. I think the expectation was that it would happen during the second half of calendar 2023.

Are there more changes the board needs to make?

Their hands are gonna be full in terms of what needs to get done. The first thing they can do is put the right leadership on board. You have two capable leaders – we need to see whether Ravi brings his own CFO on board, which is a possibility. Then, you have to do the work, you have to bring in senior talent, which has been a challenge during the past two to three years. You have to fix the delivery infrastructure, you have to fix sales. If you're able to do that, typically, you'll start attracting the right people on the bench, and you should be able to kind of catch up. That's been the formula at Infosys.

Is this the leadership push that Cognizant needs to make a turnaround, like in the case of Salil Parekh at Infosys?

I absolutely do. This is a company that still has its brand. It has a massive amount of bench. I think under the right leadership – and I think the new CEO is going to be a consensus-building, confidence-building CEO, which is something that the company really needed for a couple of years now.

I think people need stability and people need to operate in a peaceful environment. If you get that, you should be doing okay. If you listen to TCS and Infosys in the past few days, when they talk about their pipeline of deals, they'll tell you that there's a pivot more towards cost optimisation and vendor consolidation. This is kind of the sweet spot for many of the legacy vendors. It bodes well for a Cognizant as well.

You’ve said the board was likely to factor in a transition phase when Kumar was appointed president of Cognizant Americas. What’s changed for him to be appointed CEO even before his official joining date given earlier (January 16)?

First of all, we don't know exactly. That was the official story. We don't know if that was planned all along or not. But if I'm the board and if I knew that the change was urgent, why wait for another six months?

The question is whether he spent the past few months of 2022 going through that transition unofficially or not – who knows? If he spent a month talking to clients and if he spent another month going through mid-level executives trying to look at the infrastructure – it's not aerospace science. You should be able to get a good feel on where you are and what needs to get done.

What are the things he needs to do on priority to stanch attrition and win employee confidence? What does he need to do on the business side?

A couple of things: We need to see some senior hires, we need to see some stability on the attrition side of the business – and that's going to be really important – and we need to start seeing growth. 

The business has to close the gap between their growth rates versus their peers. The gap has been 4-5x in the past few years. These are all confidence-building measures and these will take time. Infosys took about 1-1.5 years to stabilise the business and I think this is where we're going to be at this point.

Cognizant has ceded market share in key verticals. What can Kumar do to change the company’s fortunes? Is this where his knowhow comes in?

I think it does. I think clients need to see that you're doing the right things. And that you have the right capability and capacity to do the work. If you're able to show that, I think you should be fine.

Cognizant’s Indian peers TCS, Infosys and HCL Tech have posted good numbers. What is expected from Cognizant for the December quarter?

Cognizant already took their numbers down. This is not unusual for a new management team that comes on board. So they took guidance down, they took a charge, I think they're clearing the deck. Typically, for any new management that comes on board, they'll probably come out with some pretty conservative guide and try to beat the guide in order for them to kind of build that credibility. I think this is what they're probably going to do. I'm not surprised that they took the guide down and I'm not surprised to see the charges. Typically, the investment community will give these guys a grace period of about six to 12 months to let them operate and show some positive signs of recovery.