Profit Margins: Are they getting global?
In the late 90s when Cognizant, then a captive arm of Dun & Bradstreet, decided to go for its IPO, they had to compete with hundreds of small IT companies, whose business models were pretty much the same: claim a share of growing technology outsourcing pie, and keep the costs low by off-shoring work to India. The margins of the leading players were high – in the 30s. But, the Cognizant managers also noticed one more thing – the operating margins of big technology companies, which did more complex, high end work, were much lower. In fact they were in single digits.
The driving force behind Cognizant at that time was Kumar Mahadeva, an ex-McKinsey consultant with a reputation for strategic thinking and cold logic. He saw that the offshore players, who were then mostly doing low-end work, would eventually have to move up the value chain, go global and start competing with the big firms. The nature of their work will change, and their margins will come down.
Cognizant set for itself a margins that was somewhere in between – 19-20%, and decided to reinvest the cushion on sales and marketing to gain market share.
The idea seemed to make sense for another reason. In any industry, high margins are difficult to sustain – as players start competing on prices and the efficiency improvements start hitting the wall.
The big question for Indian IT sector is whether they are getting close to that point. Numbers, as a recent graph from a report by Angel Research shows, don’t say much.
However, some analysts seem to think so. Economic Times today quotes Sid Pai, of ISG Information Services Group: “Over the next five years, profit margins of Indian IT firms could be 11-15%, similar to their global counterparts.” The downward pressure will start building up as the companies try to go global, and make investments to expand their operations abroad.
The trouble with acquisitions
Newjersey.com reports that Cognizant has sued one of his former executives for breaking a non-compete agreement. In 2011, Cognizant bought Zaffera a retail focused technology firm co-founded by Robert Kreft. Kreft joined Cognizant as a part of the deal, and worked at Cognizant for three years. Then, he founded a company called Vibrao. In its suit Cognizant said this violated non-compete clauses in the deal. Kreft’s linkedin profile says he worked as Vibrao CEO for 9 months – till January 2013, and that he is now looking for opportunities as CIO/CEO in retail space, which seems to suggest that things might go in Cognizant’s favor. Even so, the case highlights one of the key risks in acquisitions – managing people.
Mailbox by Orchestra
Reuters explains why Mailbox, a new iPhone app from Orchestra has become such a big deal
The ability to “snooze” an email, which is to defer it to another time, whether later in the day, on the weekend, or until the following week, is one of the main features of the app.
“We want to decide ‘do I need to reply now’, ‘can I deal with this later’, or ‘should I get it out of the way and never deal with it again?’” he said.
The other strong point is its use of gestural swipes for quickly archiving, deleting and filing messages, or adding them to lists, such as “to read”, or “to buy”.
Over 8 lakh people are on the waiting list, and I am not even half way in the queue.
Also of interest
- Tech Predictions for 2013: It’s All About Mobile | New York Times
- Rumors claim Google will launch its own retail stores, maybe by the holidays Mobile | Engadget
- LOL+WTF=$: An App that shows why videos go viral | Fast CoCreate