Cognizant Cutting Workforce As Business Slows From COVID-19, Maze Attack

‘If you see that happening with Cognizant, then I would look at Tata, and I look at Infosys, and I would look at Accenture and everybody else. I mean, IBM just laid off thousands of people,’ says Martin Wolf, founder and president of president of martinwolf M&A Advisors.

Cognizant confirmed that it’s in the process of slashing its employee base as the company faces a business slowdown caused by the COVID-19 coronavirus pandemic and the continuing impact from the Maze ransomware attacks on its clients.

The solution provider, No. 6 on CRN’s 2019 Solution Provider 500 list, is planning to ask about 400 executives from the director to the senior vice president level to leave the company, and is offering a severance package of three months' salary plus one week of salary for every year of employment, the Times of India reported Wednesday.

Meanwhile, ETtech.com reported that it had received an internal memo sent to U.S.-based Cognizant employees offering a voluntary separation package to employees who currently do not have active projects due to a slowdown caused by the COVID-19 coronavirus pandemic.

[Related: Datto Layoffs: Sign Of Tough Coronavirus Times For MSPs]

Teaneck, N.J.-based Cognizant confirmed with CRN via email that the company is looking to reduce its employee base, but did not address the total number of reported planned executive layoffs or how many employees it hopes will take the voluntary separation packages.

"In a people-intensive business like ours, effectively managing our workforce is a key element of aligning our cost structure with revenue. We routinely manage supply and demand with a bench of unutilized employees. As we discussed on our recent earnings call, we are enhancing our bench policy by offering additional cash and extended health benefits to those who are or will become unutilized and for whom we unfortunately do not foresee future opportunities. As always, we will treat any employees exiting the business with fairness and dignity," a company spokesperson said.

Cognizant currently has about 290,000 employees around the world, the spokesperson said.

The slowdown in services projects because of the pandemic is not unique to Cognizant, said Martin Wolf, founder and president of president of martinwolf M&A Advisors of Scottsdale, Ariz., one of the top channel investment advisory deal-makers.

Large services organizations like Cognizant that do projects find it more difficult to thrive in the face of something like a pandemic than do companies with more of a product focus, Wolf told CRN.

"What happens in a project is clients can come out and cram down your margin, if it's a big customer," he said. "That's what [customers are] doing in this difficult period. They can come back and say they need a margin reduction. In an industry like retail or airlines or whatever, they can cram down your margins. That happens."

Furthermore, Wolf said, customers may delay projects.

"And that's really damaging because you've got the staff and you can't bill and you just have expenses," he said. "And the third thing [customers] do is reduce the scope of a project. So all those things are happening all the time all over, and it's not surprising that a large company would have issues around excess capacity. That's not unique to them at all."

Furthermore, in the solution provider business, companies looking for higher gross margins tend to move upwards in terms of the services they provide, Wolf said.

"In the VAR space, the companies that have more services which have historically been more valuable are the ones that are most impacted because the cost of product sales is very different than the cost of delivering services," he said.

This is an indication of a wider issue facing large services providers, Wolf said.

"If you see that happening with Cognizant, then I would look at Tata, and I look at Infosys, and I would look at Accenture and everybody else," he said. "I mean, IBM just laid off thousands of people."

While Cognizant has yet to publicly address the news of executive layoffs and voluntary employee separation, the company on May 7 during its first fiscal quarter 2020 financial analyst conference call hinted that such changes were on the way.

Karen Anne McLoughlin, Cognizant's chief financial officer, said during the call that the company early in the year knew it needed to address various possible scenarios related to uncertain revenue trajectories and increased costs related to the COVID-19 coronavirus pandemic and to Maze ransomware attacks on the company's customers.

The company is responding with several ways to ratchet down both personnel and non-personnel variable costs including reduced travel and entertainment, relocation, recruiting, and events and marketing costs as well as better managing its subcontractor mix and deferring certain annual wage increases and promotion cycles, McLoughlin said.

Furthermore, she said, the lower revenue trajectory, compounded by a recent significant decline in voluntary attrition and a reduction in demand is naturally leading to utilization levels lower than what Cognizant feels is necessary to support the business in the near term.

Cognizant will move to accelerate the further development of employees with skills aligned to our key digital imperatives which are in line with expected client demand when the economy recovers, but recognizes there will likely be employees who are or will become unutilized, McLoughlin said.

"As always, we are committed to treating these employees with fairness and dignity, which in the current environment will also include providing extended health and other financial benefits to ease their transition," she said. "Accordingly, between now and the end of the third quarter, we expect to incur additional realignment charges associated with these enhanced benefits. And we now expect net head count to decline in 2020 versus 2019."

It has been a tough 12 months for Cognizant.

Cognizant in the first half of 2020 has had to deal with the costs and negative publicity that stemmed from a Maze ransomware attack that impacted many of its customers.

The company last year also laid off thousands of employees after reports of difficult working conditions related to a project to offer content moderation services for Facebook in which employees were required to watch objectionable content to determine whether it should be taken down from Facebook feeds.