Massive Attrition At Cognizant, Genpact

According to Gartner’s latest IT spending report, worldwide enterprise IT spending across all industry verticals is projected to grow 2.9% in 2010 and at 3.5% in 2011. As IT budgets grow, discretionary spend will rise. Revenues at U.S.-headquartered Cognizant Technologies (NASDAQ:CTSH) have already grown as a result of such demand.

Q2 revenues grew 42% over the year $1.11 billion, and the company registered its first ever billion-dollar quarter. Application development segment revenue, which is a good indicator of discretionary spending, grew 22% sequentially and 52% annually. The market was expecting of $1.02 billion. EPS of $0.56 grew 19% over the year and exceeded the market’s projected $0.52.

Cognizant attributes its increasing revenues to its strategy of investing even during the recession and being able to sustain high customer service levels. In a recently concluded customer satisfaction study, the company were ranked the leader among twenty-five India-based and global service providers and was the only firm with no dissatisfied clients.

Cognizant follows a strategy of maintaining stable margins, which are lower than the industry’s, and investing surplus in revenue growth. Its margins of 19% are thus much lower than Indian IT giants’ 30% levels. Meanwhile, Cognizant has been steadily investing in building stronger and more customer-focused teams. For instance, it are trying to differentiate itself by developing the Cognizant Business Consulting (CBC) team of more than 1,800 resources which offer vertical-specific business consulting and through which, Cognizant now claims, it is able to compete with the likes of Accenture and IBM instead of traditional off-shorers.

Cognizant continued to expand its global footprint through acquisitions and recently acquired Galileo, a boutique firm focused on testing services in the French market. Galileo’s services help French customers to optimize and extend business performance through IT system measurement, management, and testing. Outsourced testing services have great potential in the coming years, as by IDC’s report forecasts the industry to grow 19% annually over the next five years to reach $17.7 billion by 2013. With over 12,000 professionals, Cognizant can accurately claim to be the world’s biggest testing service provider.

Like other players, Cognizant is facing higher attrition. During the quarter, attrition increased to 20.7% compared with 16.4% reported a quarter ago. Despite higher attrition, utilization continued to grow; off-shore utilization excluding trainees was 82% compared with 76% a quarter ago, and on-site utilization was 93% compared with 89% last quarter.

The company projects Q3 revenues to be at least $1.175 billion with EPS of $0.63. It increased its projections for the year and now expects annual revenues of at least $4.46 billion with EPS of $2.42.

The stock is trading at $59.98 with a market capitalization of $18 billion. Earlier this month, it touched 52-week high of $63.94.

Genpact’s (NYSE:G) Q2 revenues grew 12.7% to $307.6 million with EPS falling to $0.15 compared with $0.18 earned a year ago. Like others, Genpact is worried by attrition. For the six- month period ended June 2010, attrition was 26% compared to 22% a year ago.

Driven by the concern of growing attrition and associated costs, Genpact is looking at moving work to the United States and may triple its existing U.S. workforce of 1,500 employees over the next two years. As I mentioned earlier, given the falling costs and high unemployment in the United States, moving work to America is a step that the off-shoring industry needs to take to remain competitive.

Further, the industry needs to expand in other regions such as China and Latin America. Genpact has delivery centers in the Chinese cities of Changchun, Dalian, and Shanghai and is working on expanding operations there. The company recently expanded its leadership in the region by hiring a CEO, Charles Hunting, to focus on Asia business. China is encouraging the growth of its outsourcing industry, which had $26 billion in revenues last year. The Chinese government recently announced the removal of taxes on offshore contracts until 2014 for outsourcing operations in twenty-one cities.

Genpact’s stock is trading at $13.96 with a market capitalization of $3 billion. It touched a 52-week high of $18.30 in April of this year.