Leaked memo from CEO: 'Our platform is burning' What Nokia boss Stephen Elop told his staff Feb 11, 2011 1:41 AM | By Times LIVES There is a story about a man who was working on an oil platform in the North Sea. He woke up one night from a loud explosion, which suddenly set his entire oil platform on fire.

BOLD STEP: Nokia CEO Stephen Elop

Hello,

He barely made his way out of the chaos to the platform's edge. When he looked down over the edge, all he could see were the dark, cold, foreboding Atlantic waters.

The man had mere seconds to react. He could be consumed by the flames. Or, he could plunge 30m in to the freezing waters.

He decided to jump. After he was rescued, he noted that a "burning platform" caused a radical change in his behaviour.

We too, are standing on a "burning platform", and we must decide how we are going to change our behaviour.

And, we have more than one explosion - we have multiple points of scorching heat that are fuelling a blazing fire around us.

For example, there is intense heat coming from our competitors, more rapidly than we ever expected. Apple disrupted the market by redefining the smartphone and attracting developers to a closed, but very powerful ecosystem.

In 2008, Apple's market share in the $300+ price range was 25%; by 2010 it escalated to 61%. It is enjoying a tremendous growth trajectory with a 78% earnings growth year over year in Q4 2010. Apple demonstrated that if designed well, consumers would buy a high-priced phone with a great experience and developers would build applications

And then, there is Android

. They changed the game, and today, Apple owns the high-end range.

. In about two years, Android created a platform that attracts application developers, service providers and hardware manufacturers

Let's not forget about the low-end price range. In 2008, MediaTek supplied complete reference designs for phone chipsets, which enabled manufacturers in China to produce phones at an unbelievable pace. By some accounts, this ecosystem now produces more than one-third of phones sold globally - taking share from Nokia in emerging markets.

(Read Speed here…). Android came in at the high-end, it is now winning the mid-range, and quickly it is going downstream to phones under à100. Google has become a gravitational force, drawing much of the industry's innovation to its core.

While competitors poured flames on our market share, what happened at Nokia? We fell behind, we missed big trends, and we lost time. We thought we were making the right decisions; but we now find ourselves years behind.

The first iPhone shipped in 2007, and we still don't have a product that is close to their experience[3 years and still not done]. Android came on the scene just over two years ago, and this week it took our leadership position in smartphone volumes. Unbelievable.

We have some brilliant sources of innovation in Nokia, but we are not bringing it to market fast enough. We thought MeeGo would be a platform for winning high-end smartphones. However, at this rate, by the end of 2011, we might have only one MeeGo product in the market.

At the midrange, we have Symbian. It has proven to be non-competitive in leading markets like North America. Additionally, Symbian is proving to be an increasingly difficult environment in which to develop to meet the continuously expanding consumer requirements, leading to slowness in product development and also creating a disadvantage when we seek to take advantage of new hardware platforms. If we continue like before, we will fall even further behind.

At the lower-end price range, Chinese OEMs are cranking out a device much faster than, as one Nokia employee said only partially in jest, "the time that it takes us to polish a PowerPoint presentation". They are fast, they are cheap, and they are challenging us.

And the truly perplexing aspect is that we're not even fighting with the right weapons. We are still too often trying to approach each price range on a device-to-device basis.

The battle of devices has now become a war of ecosystems, where ecosystems include not only the hardware and software of the device, but developers, applications, ecommerce, advertising, search, social applications, location-based services, unified communications and many other things. Our competitors aren't taking our market share with devices; they are taking our market share with an entire ecosystem. We're going to have to decide how we either build, catalyse or join an ecosystem.

This is one of the decisions we need to make. In the meantime, we've lost market share, we've lost mind share and we've lost time

On Tuesday, Standard & Poor's informed that they will put our A long-term and A-1 short-term ratings on negative credit watch. This is a similar action to the one that Moody's took last week. During the next few weeks they will make an analysis of Nokia, and decide on a possible credit rating downgrade. Why? Because they are concerned about our competitiveness.

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Consumer preference for Nokia declined worldwide. In the UK, our brand preference has slipped to 20%, which is 8% lower than last year. That means only one in five people in the UK prefer Nokia to other brands. It's also down in traditional strongholds: Russia, Germany, Indonesia, UAE .

How did we get to this point?

At least some of it has been due to our attitude inside Nokia. We poured gasoline on our burning platform. We have lacked accountability and leadership to align and direct the company through these disruptive times. We had a series of misses. We haven't been delivering innovation fast enough. We're not collaborating internally.

Nokia, our platform is burning.

We are working on a path forward - a path to rebuild our market leadership. When we share the new strategy today, it will be a huge effort to transform our company.

The burning platform caused the man to shift his behaviour, and take a bold and brave step into an uncertain future. He was able to tell his story. Now, we have a great opportunity to do the same. - Stephen

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FOR Francisco D'Souza, 42, who joined Du~ &Bradstreet as a management associate nearly twcfdecades ago, rising through the ranks at CognizantTechnology Solutions has been a long and arduous

journey. D'Souza, who took over as the CEO ofCog·nizant in January 2007, now considers managing growth as hisbiggest challenge and says his company will continue to growbetter than rivals. Excerpts:

mIn the long run, he whohas the best customerrelationship will win.You need to have theright set of customerrelationships and theright set of services andcapabilities to keeplong-lasting customerrelationships. I alsothink the globaldelivery model amongthe top firms needs tobe a differentiator.There are some thingsthat we do ,differently whencompared to others

How sustainable is this growth at Cognizant?The answer to this question should be separated into twoparts. The first one is the business modeL As we alreadyrepeated in our earnings call because of our strategy ofreinvestment. That is the ability that we had in maintain-ing our operating margins, non-GAAP operating marginsin the 19-20% range rod then reinvesting everythingback into the business. What I think is we have an archi-tectural kind of growtli because we are able to mvest m~owth opporturuues ahead of where many of our com-petitors can. ,

We manage margins to a target level and then investfor growth. But again having the fundamental architec-ture isn't necessarily enough. What matters is are you in-vesting in the right kind of opportunities that are going todeliver that growth and where you elm get your returnon investments that you're making. This is the second

I part of the story at Cognizant and the industry overall,We are very much at a point of inflection -- both in our

minds as well as in our industry. Historically, if you lookback we think that economic recession has actually beena catalyst for reaching this point of inflection. You can goback to the recession of the 1990s, you can look at thedotcom recession which catalysed the industry further.

The recession thatwe are coming out of isanother catalystfor another point of inflection. Coming out of this recession,we see two ortbree big trends thatare going to drive growth.And we think that at Cognizant, we have made the rightkind of investments to capitalise on those growth opportu-nities going forward. So, overall we feel very optimistic.

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What measures that Cognizant would be taking inthe coming days to maintain, or even improve, mar-gins? With demand in the IT segment picking upcompanies are facing bumps like high attrition andwage inflation? How are you going to face this?We feel very comfortable with our ability to manage ourmargins in the 19-20%, non GAAP operating marginrange. As long as we run the business there are head-winds and tailwinds to the margins. Wage inflation is notsomething new. It is something that v.!ehave dealt in thepast. We have a series of levels that we thJDk we can use tooffset that including price increase which we have beenworking over the last few years, In 2010, during Mefourth quarter we had an upward bias in pricing. We willhave the same trend in 2011 as well.,

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Your rivals like Infosys and Wipro have witnessed ashift in leadership in the recent past Many othersare have been talking about management change.Is Cognizant looking at anything like that? Can wesee some structural changes at Cognizant?For us, it all starts with the client. First and focemost,you've got to understand what is going on with your

. dients, You got to be able to understand what's hauuen-ing in the marketplace and then translate that into a set at9fferings for the marketplace.

We fundamentally believe that our industry is goingthrough a point of inflection. This point of inflection is be-ing driven by three big trends that we collectively refer toas Future of Work. The three new trends are a whole newset of technologies that are available in the market likecloud computing, sodal computing, mobility and so on.

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Yourrivals like Infosys and Wipro have witnessed ashift in leadership in the recent past. Many othersare have been talking about management change.Is Cognizant looking at anything like that? can wesee some structural changes at Cognizant?For us, it all starts with the client. First and foremost,you've got to understand what is going on with yourclients. You got to be able to understand what's happen-ing in the marketplace and then translate that into a set at9fferings for the marketplace.

We fundamentally believe that our industry is goingthrough a point of inflection. This point of inflection is be-ing driven by three big trends that we collectively refer toas Future of Work. The three new trends are a whole newset of technologies that are available in the market likecloud computing, sodal computing, mobility and so on.

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As long as we are investing ahead of com etition and ifwe able to grow aster t an e mar et over it is sus-tainable. The market opportu'nity is vea large and underp'enetrated~ As far as there is market for growth we canw.ow faster than our competitors.

What measures that Cognizant would be taking inthe coming days to maintain, or even improve, mar-gins? With demand in the IT segment picking upcompanies are facing bumps like high attrition andwage inflation? How are you going to face this?We feel very comfortable with our ability to manage ourmargins in the 19-20% non GAAP operating marginrange. As long as we run the business there are head-winds and tailwinds to the margins. 'Yage inflation is notsomething new. It is something that.,Je have demt in thepast. We have a series of levels that we thiIiJ( we can use toOffset that including price increase which we have beenworking over the last few years. In 2010, during tIfefourth quarter we had an upward bias in pridng. We willhave the same trend in 20 11 as well.

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mWe fundamentally believe that our industry isgoing through a point of inflection. ThiS pointof inflection is being driven by three big trendsthat we collectively refer to as Future of WorkFRANCISCO D'SOUZA

called the millennial generation that has grown up withtechnology and use technology as a very natural part oftheir life. And then you have a new generation of busi-ness models that are increasingly globalised and increas-ingly virtual. So, you have got these three big trends com-ing together and we call these the Future of Work. It's re-markable to watch the role that technology has played.We are at the cusp of a point of inflection and, we thinkthat this change is going to be as big as the shift that wesaw when the internet first came out.

At Cognizant, we are looking for people, and we havepeople, who are deeply connected with the customers.And that has been a fundamental thing for Cognizant. Bevery close to the customers. Our consulting team toproactively go to clients and understands how to deploythings more effectively. Start with leaders who are deeplyinvolved with the customers. And leaders who would!mow how to putthemselves in the customer's shoes andwalk a mile. This translates into the ability to executeagainst these new opportunities. We are looking for lead-ers who caD. stay connected with customers and at thesame time make good changes.

,There is a lot of concern over macro-economicwoes in Europe. How are you coping with this?It's very interesting. If you look within Europe and at ourrevenues, 20% ofitcomes from Europe. Itis 50:50betweenthe UK and the Continent. And within Continent, our pri-

And when we spoke to our clients in those coun- Itries, we realised that the challenges in the euro zonedon't appear to be having any impact on their ded-sion making. There was no major shift in their IT Ibudgets or their plans for 2011. But certainly it is aconcern. I was at the World Economic Forum twoweeks ago and spent time with business leaders from IEurope and other parts of the world., Certainly is it a concern but I don't see clients tight-

ening or slowing down their IT budgets and spending Ipattern as a result of what's unfolding in Europe rightnow. This is something that we want to keep an eyeon but at this point of time we don't see clients pullingback or slowing down.

You have been on the right side of re~overy - es-pecially in the banking and financial verticals.And since you are focused on a select few verti-cals with over 70% business coming from the US,is that a good balance to have? .We have to look at this in two pieces - when we thinkabout the vertical strategy we are very comfortablewith our current footprint of verticals. There is still atremendous amount of growth still left in deepeningour penetration in these verticals that we serve today.

So, I don't think we are going to significantly see anexpansion in our footprint when it comes to verticals.But we will explore areas that are adjacent to our currentverticals. For example, in healthcare we have not reallyserved the provider market. We have started looking at itnow as a source of growth. We feel good that our invest-ment cycle in Europe is coming to tail end and we haveestablished a good footprint in Europe at this. point oftime.

Around 18 to 24 months ago, we turned our attentionto Asia, the Middle East and Latin America as the newgrowth geographies for the company. And I'm quite hap-py that ill a relatively short period of time these new ge'-ographies are contributing to the company's growth.During the quarter, 77.2 % of revenues came from clientsin North America, Europe was 19.2% of total revenuewhile 3.6% came from the Asia-Pacific, Middle Easternand Latin American markets.

The way companies are changing models and re-structuring operations, it looks like a 'make orbreak' year. What will decide who wins?Ip the long run, he who has the best customer relation-ship Will win. You need to have the right set of customerrelationships and the right set of services and capabilities I _to keep long-lasting customer relationships. I also thinkthe global delivery model amongst the top firms needs tobe a differentiator. There are some things that we do dif-ferently when compared to others.

Our Cognizant 2.0 platform is a significant differentia-tor. The global delivery model is necessary but no longer Isufficient. In terms of building customer relationships, doyou have the ability to continue to invest to stay relevantto your customers and bring in new services to market, toinnovate with new products and services and consulting,programme management that are necessary to compete

. on a global scale. If you can do these things then you candrive a degree of customer intimacy which is necessary tosucceed in the long run.

What,keeps you awake as a leader? ~Growth continues to be a key challenge that we are al-ways managing. One thing that makes me proud is thatin 2010 we made significant growth, flawlessly. Growthcame back much faster than we had antidpated. ~we came into the year we antidpated a growth of 20%year-on-year. Butat the end of the year. we did 40% yearon year growth. Iwill never take my eye off the growthand managing the growth. Cognizant is well positioned':to capitalise any opportunity that comes our way.