Following Cognizant’s announcement late last week that it had launched an internal investigation into possible anti-corruption violations, there have been more questions than answers about what may have occurred at the Teaneck, N.J.-headquartered provider of offshore IT services. Particularly perplexing to some was the attendant news that the company’s long-time president Gordon Coburn was stepping down.
Cognizant gave no reason for the departure of Coburn, who has been replaced by head of IT services Rajeev Mehta. However, the company did say in a regulatory filing that it was looking into whether it had violated the U.S. Foreign Corrupt Practices Act (FCPA) withina small number of company-owned facilities. Cognizant owns 12 of the 45 delivery centers it operates in India, where 75 percent of its employees work.
“I do not believe this is anything more than the usual greasing of palms to get basic business done in Indian facilities,” says Phil Fersht, CEO of global sourcing research and advisory firm HfS Research, noting that a number of companies have paid fines for similar FCPA violations just this year, including SAP, Akamai Technologies and Qualcomm. “[It’s] surprising [that] such a senior executive would take the fall for a relatively minor misdemeanor.” FCPA violations typically result in a fine, and Cognizant has significant cash available.
Nonetheless, Cognizant’s stock price took a tumble last Friday, ultimately gaining some ground back this week. And Cognizant customers may wonder about the company’s next moves.
Has illegal activity affected service?
“While this is clearly unlawful and morally reprehensible if determined to be true, there is no evidence at this point that this is in any way an issue of substandard service, industry risk, confidentiality or data breach, or other such systemic factors that would directly impact the provision of services to Cognizant customers,” says David Rutchik, executive managing director of outsourcing consultancy Pace Harmon, who says it seems to be a matter or someone or some group within Cognizant providing some sort of payoff in order to obtain or retain business.
The U.S. Department of Justice has taken a more active role in policing the FCPA in recent years to send a message that it will not tolerate bribery in business dealings, Rutchik says. “In and of itself, this [Cognizant revelation] shouldn’t have any significant direct impacts to the marketplace, unless this is determined to be a way of doing business for the outsourcing industry or the Indian providers on a broader scale.”
The fact that Coburn resigned so abruptly may suggest a more widespread problem. “If this is determined to be true, the more indirect implications to the industry could be quite material,” says Rutchik. “These may include greater political pressure to further restrict work visas for foreign nationals providing onshore support and greater scrutiny and lower equity and debt ratings of Cognizant and its peers. In turn, these could drive higher costs of capital, which would in turn impact profitability, the ability to invest and innovate, and the ability to maintain the same level of price competitiveness from which outsourcing buyers are benefitting today.”
Until the situation becomes more clear, Cognizant customers can take a number of steps to mitigate potential negative effects on their own businesses:
Conduct an IT services risk assessment. Although customers are unlikely to feel any service delivery impact unless the issue turns out to be more far reaching, now is a good time to determine what their exposure is. Should the issues grow, that could lead to loss of talent, focus, or financial instability resulting in suboptimal delivery and additional service risk, says Rutchik.
Get assurances in writing. FCPA violations get the attention of business executives, boards, and stakeholders. They’ll want to know what’s going on at Cognizant. IT leaders should obtain the “adequate assurances” from Congizant that this is not a systemic issue, Rutchik says.
Insist on better communication. Cognizant customers should ask that account and company leader provide greater transparency into the scope and scale of the probe. In particular, they should ask why Coburn left the organization, says Fersht.
Know your rights. “A well-constructed outsourcing agreement should provide for representations and warranties to comply with laws or [may] have specific requirements to be and remain in compliance with the FCPA,” says Rutchik. “This situation may enable customers to terminate for cause if they so choose, or to demand specific remediation on the part of Cognizant.”
Customers should also look at any “flow-down” or “flow-through” provisions where any breach by Cognizant as a back-end provider may create compliance or breach issues for those in their end-customer agreements, their debt or equity covenants, their codes of conduct, or other related areas, says Rutchik.