It's rare to hear a software CEO say he had to let go of new business due to his company's inability to hire talent, especially when the demand for outsourcing is booming.
But that's the predicament Cognizant CEO Brian Humphries shared with analysts last quarter after the company's first quarter results.
As the war for talent intensifies in a market where Cognizant is already losing top leaders, it's likely to be a bugbear again, as the Nasdaq-listed company prepares to announce its second quarter results on July 28th, at 5 pm ET (July 29, 2:30 am IST).
Analysts and industry watchers Moneycontrol spoke to said the company's attrition is likely to spike sharply yet again, even though it has put in place measures such as quarterly promotions, salary hikes, training and job rotations to retain employees and also onboarded a record number of freshers in the month of May. Cognizant is in silent period ahead of results.
Humphries himself told analysts that the company anticipates a further sequential increase in attrition in Q2, before a gradual recovery in the second half.
Its quarterly annualised attrition was 21 percent for the quarter ended March 2021, of which 18 percent was voluntary attrition. For the same period, its Indian rivals TCS, Infosys, Wipro, and HCL Tech reported attrition rates of 7.2 percent, 10.9 percent, 12 percent, and 9.9 percent respectively.
Even though Cognizant is Nasdaq-listed and headquartered in the US, it has always been benchmarked with its Indian peers as it has a similar industry and client profile, with a majority of its nearly 3 lakh employees based here.
While attrition is going up for all IT companies as engineers are spoilt for choice in the current job market, Cognizant's attrition is likely to be at elevated levels compared to peers.
For the quarter ended June, TCS, Infosys, Wipro, and HCL Tech's attrition stood at 8.6 percent, 13.9 percent, 15.5 percent, and 11.8 percent respectively. Given its attrition was already at 21 percent in the previous quarter, it's likely to go up even further, by a few percentage points, if it uses the same formula to report this number.
It also continues to lose leaders who have been at the company for decades. Moneycontrol reported recently that two more senior executives Arun Baid and Dan Smith have left the company, the latest on the list of key executives who left the company since CEO Brian Humphries took charge in 2019.
Former Cognizant leaders who played key roles in building the company have now become the preferred choice of private equity firms and global IT/BPM services companies.
In the past two years alone, eight companies – Mindtree, Firstsource, Bristlecone (part of Mahindra & Mahindra), Collabera, Hitachi Vantara, Zensar, Qualitest and Virtusa – have handpicked ex-Cognizant leaders as their CEOs. Others have joined as managing directors or CEOs of large private equity firms and startups.
Executives Moneycontrol spoke to said this ends up having a multiplier effect on the number of executives who leave because a lot of leaders who quit to take up bigger roles in other organisations end up picking a lot of their hires from Cognizant. One senior executive will hire a few program managers/team leads, the team leads in turn hire engineers from their team and so on.
Cognizant's pace of growth is also lower than peers so it will have limitations in the number of promotions and quantum of hikes that it can potentially hand out. Cognizant for example gave a full-year revenue guidance of 7-9 percent for CY2021, compared to the double-digit growth projections by its peers.
According to a report by Kotak Institutional Equities published a couple of months ago, Cognizant has lost market share to peers due to insourcing, with a ransomware attack also impacting service delivery. So it may not benefit from vendor consolidation in financial services. It has also not announced large deals such as TCS, Infosys, or Wipro, missing out on large revenue opportunities.
At the same time, analysts at Susquehanna said in a note published last month that they believe Q2 margins may miss consensus, going even below Q1's disappointing level. "Suffering some of the worst attrition in the industry, Cognizant has been trying to meet wage increments and undertake increasingly expensive headcount. We are cutting our margin assumption to 14.9 percent and lowering EPS, and our price target goes to $91." the note said.
Since Humphries took over in April 2019, the company has seen exits across levels. He had indicated a deep surgery as part of an effort to restructure the company and make it more nimble.