With Cognizant In The Spotlight, Solution Providers Talk About Evolving Wisely And Not 'Riding A Dinosaur'

The push by activist investor Elliott Management to shake up solution provider powerhouse Cognizant Technology Solutions underscores a clear lesson for other solution providers: Winning in the technology business means you have to change, evolve and stay ahead of the curve.

In a letter Monday to Cognizant's board of directors, Elliott Management called for a board shakeup and for the company to buy back $2.5 billion in stock over the first half of 2017, funded with $1 billion of domestic cash and an incremental $1.5 billion of new debt.

The letter said Cognizant – No. 7 on the 2016 CRN Solution Provider 500 list -- continues to practice "and swear by" a business strategy "that is nearly two decades old," dating back to when its revenue was more than 200 times smaller, and has stuck with its original plan to maintain operating margins in the 19 percent to 20 percent range. Elliott Management contends that Cognizant has "never deviated" from that range, despite a 140-fold annual revenue increase since 1999, Cognizant's first year as a public company.

[RELATED: Cognizant Welcomes Discussions With Elliott Management]

"We all swim in the same ocean," said Mont Phelps, CEO of solution provider NWN, Waltham, Mass. "If you don’t evolve and change, you're going to be left behind."

"It's not survival of the fittest; it's survival of the most adaptable," Phelps told CRN.

Elliott Management said its suggested stock buyback can be funded with $1 billlion of domestic cash and an incremental $1.5 billion of new debt. That, the letter said, could drive up company stock 50 percent to 69 percent. Elliott Management said in the letter that it believes the share price can soar to between $80 and $90 by the end of 2017.

Cognizant released a statement Monday afternoon that said it "welcomes open communications" with all its shareholders "and values their input." The statement also said that the company had an "introductory discussion" with representatives of Elliott Management after it received the letter to the board. "The company intends to review the letter carefully and will respond in due course," the statement read.

The letter from Elliott Management "really shouldn’t be surprising," said Jason Rook, vice president of alliances for Chicago-based solution provider 10th Magnitude. "The ecosystem is changing very rapidly, and these large service providers are being left behind" by more innovative – and maybe smaller -- solution providers "that don’t have the legacy footprint that these guys have."

10th Magnitude, a Microsoft Gold Cloud Platform Partner, was founded in 2010 and doesn't play in some of the legacy outsourcing models that bigger companies such as Cognizant have relied on for at least 15 years, according to Rook.

Solution providers such as his are more focused on being a strategic solution provider, "delivering technology-based solutions as opposed to a staffing solution," Rook said.

One thing Michael Hadley, president and CEO of iCorps Technologies, Charlestown, Mass., has learned from attending technology shows is businesses need to "change or die," he told CRN. "And don't get caught riding a dinosaur."

Hadley says every business must evolve, "but you need to do it wisely," based on the direction of the market.

"I think a lot of people evolve just to evolve. We make it part of our business fundamentals," Hadley said. "It's not 'Ready. Fire. Aim."

iCorps, founded in 1994, is rooted in technology outsourcing, but has broadened its offerings to encompass cloud-based solutions and managed services, among other offerings. Hadley calls that a "smart evolution."

"Everybody has to change," added NWN's Phelps, and that includes public companies such as Cognizant that are always looking to increase shareholder value.

He added: "The highway of business is littered with companies that didn’t make the change."