HFS Highlight: Cognizant magnifies its cloud muscles with its 6th acquisition: 10th Magnitude

Cloud-related outsourcing deals accounted for approximately 60% of digital deals in Q2 2020, significantly greater than any at point in recent years ( exhibit 1.)

While enterprises have been strictly evaluating other investments to help them achieve rapid pivots to be effective and competitive in today’s pandemic economy, cloud-related investments stand as an exception as current times are driving heavy reliance on the cloud and remotely accessed applications like never before. This has been discussed briefly in our recently published quarterly report.

Exhibit 1: Number of digital service contracts (percentage)

Source: HFS Contract Database

Cloud adoption will continue to accelerate across industries in the coming months. To accommodate the strong cloud demand, service providers are expanding their cloud capabilities, either organically or inorganically.

Acquisitive moves with niche cloud providers are the preferred route to dominance from the Tier 1 services firms

We have witnessed several firms that went by the inorganic approach. Since January 2020, numerous service providers have acquired cloud-focused firms, mostly from tier-1 players. For example, Accenture acquired cloud-focused Gekko and Organize Cloud Labs; on the other hand, Wipro acquired 4C, a leading salesforce multi-cloud partner. Further to that list, Cognizant imprinted its acquisition move with five cloud-focused companies (Code Zero, EI Technologies, Lev+, Collaborative Solutions, and New Signature). However, the firm unveiled its sixth acquisition as well, 10^th Magnitude, a specialist on the Microsoft Azure cloud computing platform. Service providers are continuously investing and expanding their cloud capabilities to address recurring cloud needs.

Cognizant continue to strengthen their cloud capabilities, heavily focused on AWS and Azure cloud platforms

Around 36% of Cognizant’s cloud clients consume Azure; these latest acquisitions (New Signature and 10^th Magnitude) only bolster it’s Azure cloud platform capabilities and place them as a leader in the cloud front. The Chicago based 10^th Magnitude will help Cognizant to expand Azure capabilities, adding development and managed services hubs across the US. 10^th Magnitude is specialized in application modernization, and data intelligence with AI-driven analytics and insights, and this will be a great strength for Cognizant’s portfolio. Through 10^th Magnitude and New Signature acquisitions alone, Cognizant added another 600+ cloud professionals to its family. These firms are already serving Fortune 500 clients across industries ranging from Communication, Media, Government, Healthcare & Life Science and Financial Services to Consumer Goods and Aerospace, and much more. These acquisitions added further depth to Cognizant’s existing industry expertise. Greg Hyttenrauch has stated that:

“Modernizing business platforms by shifting to the cloud is a key priority for our clients. The acquisition of 10th Magnitude underscores our commitment to Microsoft, one of our leading strategic partners, and will further strengthen our ability to provide Azure expertise to our clients as they embrace the cloud. We are excited to unlock the power of this acquisition and to welcome 10th Magnitude’s outstanding team to Cognizant.”

-Greg Hyttenrauch, President, Cognizant Digital Systems and Technology.

Since the acquisition of KBACE Technologies in 2016, Cognizant was in the big hunt for the right cloud-based firm, which can help it scale up its cloud capabilities and close the gap with key competitors such as TCS and HCL. In 2019, Cognizant acquired a UK based assertive cloud consulting firm, Contino in a competitive bidding process. It was a strong value-add for Cognizant in the cloud-native development approach, DevOps methodologies, and Advance Data platform space. Cognizant is one of the early adopters which identified demand for cloud after the impact of the COVID crisis; the firm started acquiring cloud-focused companies since early 2020, and till now, Cognizant has six cloud-based firms in its bag. We must wait and watch how much more feathers Cognizant is planning to add on their cloud hat.

The Bottom Line:  Serious investments in cloud services are a must for services giants seeking to remain relevant. “Buy” is a much viable option than “Build”.

These six cloud-focused acquisitions further bolstered Cognizant’s cloud portfolio. Moreover, it brings additional cloud talents and a new client portfolio that helps the firm remain as one of the global leaders in hyper-scale cloud services. The Inorganic move is inevitable to manage the enterprise cloud rising demand and the growing inclination for local or nearshore talents to support their clients. As the firm’s majority (75%) of the cloud client base is in North America, these acquisitions are a smart and a bold investment for Cognizant. Identifying the demand and deliver them is a key to thrive in any business, which we believe Cognizant wisely articulated for their cloud business. Like we mentioned in our previous report, it’s highly likely we see more cloud acquisitions from various providers in the coming months to be on the edge of the highly competitive cloud space.