Outsourcing Hasn't Hit Its Peak
Not even close, says Lakshmi Narayanan, CEO of Cognizant, who explains how Western companies can benefit from the growing trend
Cognizant Technology Solutions (CTSH) is on a tear. On Feb. 9 the company surprised investors with fourth-quarter 2005 earnings of $57.7 million, a year-over-year increase of 89%. Even without the benefit of a one-time tax gain, earnings were still 50% higher than in the comparable period of 2004. The 12-year-old former Dun & Bradstreet (DNB) unit, based in Teaneck, N.J., had fourth-quarter sales of $257 million and a market cap of $7.6 billion. Its shares are trading around $55, up 31% from a 52-week low of $42. No wonder the company ranks on BusinessWeek's IT 100.
Cognizant's powerful growth comes from its exposure to two inexorable global trends. As an information-technology services outfit, it can help corporate clients meet their technology needs without taking risky bets on which hardware or software will dominate the volatile market. And as an outsourcing company that helps Western businesses farm out tasks to high-quality, low-cost workers in India, Cognizant is in a market where clients are racing to spend money. Analysts like the company. Goldman Sachs rates it "attractive" (see BW Online, 10/10/03, "Cognizant: Riding the Outsourcing Wave").
Cognizant Chief Executive Lakshmi Narayanan, 53, oversees the growing empire, which is focused on clients in 14 areas, ranging from financial services and insurance to health care and technology. Services include custom-software development, integration, application design, and maintenance. BusinessWeek Online Senior Writer Steve Rosenbush spoke to Narayanan about the company's prospects and the future of outsourcing. Here are edited highlights of their conversation:
Why are Western companies like General Motors (GM) shifting work to India and other countries at such a fast pace (see BW Online, 2/2/06, "GM's Landmark in IT Outsourcing")?
Outsourcing started as a way for companies to realize the benefits of lower costs. Later, they realized they could improve the quality of much of their work by taking advantage of excellent workforces. Now they are coming to understand that companies like Cognizant can help them assemble teams and projects much faster than they could in the U.S. That's the real value, time to market. It can take six months to assemble a team in the U.S. We can have a problem solved in six months.
Is the trend toward outsourcing anywhere near its peak?
No. The amount of IT outsourcing is small right now. The global IT spend is $400 billion to $500 billion a year. Some of that can't be outsourced. The addressable market is about $200 billion. But the current value of IT outsourcing is about $20 billion a year.
How will outsourcing affect economies such as the U.S.? Will they suffer?
An insurance company's IT system typically handles millions of members and transactions. A good IT system can process those transactions much faster, allowing the company to grow quickly. And the company also benefits as outsourcing develops a larger global market for its services.
That may be good at the company level, but how will this play out for countries and the people who live in them?
When it comes to areas such as innovation and development, the U.S. still is unchallenged. As other countries develop, the demand for higher-end U.S. services will grow. The U.S. needs to make sure its workforce is trained to meet that demand.
How quickly is India growing right now?
The rate of growth in India is rapid, about 7% to 8%. It is likely to grow in the 6% to 8% range for the next four to five years.
Which industries account for the bulk of outsourcing?
It's mostly IT. But companies such as Goldman Sachs (GS) and McKinsey are starting to outsource some financial analysis to MBAs in India.
Why has outsourcing taken off in India?
Education has improved. The literacy rate in India was 20% in the '80s. Today it's 70%. That's because of government mandates and reforms |
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