Satyam Scandal Could Hurt Offshoring's Image

Ann All

Outsourcing giant Satyam last week was dubbed "India's Enron" after powerful chairman Ramalinga Raju resigned in disgrace, admitting he had cooked the company's books for years.


Because of Satyam's prominent client roster, status in the outsourcing community, and close connections to the U.S. technology community, it didn't take long for folks to begin speculating about broader ramifications. After all, while there was no indication that Satyam's financial problems directly affected its clients, its troubles again raised questions about trustworthiness, an issue that offshore providers have worked hard to address, reports The scandal couldn't come at a worse time, when a tanking economy has heightened companies' sensitivity to financial and other types of risk.


Says Vivek Paul, former vice chairman of Satyam competitor Wipro Technologies and now a Silicon Valley investor:

The question everyone is asking is: Is this the classic cockroach? If you see one, are there more around?" History has proven they never come in ones.

It doesn't help that Wipro recently got its own sanction from the World Bank. It has been barred from contracting with the bank's corporate procurement program through 2011, thanks to a stock-purchase program it set up for family and friends of the bank's senior executives. In a statement, Wipro called the program a "goodwill gesture."


The Satyam scandal also is leading some folks to encourage boards of directors to take a more active role in companies' affairs. Vinod Dham, father of Intel's Pentium microprocessor, and Krishna Palepu, a Harvard Business School professor and a corporate governance expert, were among four Satyam directors who resigned as the scandal broke.


At the Indian government's behest, Satyam is working fast to address investor concerns, reports Bloomberg. Its stock price rose steeply on speculation that newly appointed director Deepak Parekh will waste no time coming up with a plan to reassure clients, and on word from the government that it may offer financial aid to Satyam to help it protect jobs. Auditors are reviewing all of the company's accounts, which means a likely delay in announcement of its third-quarter earnings.


Such actions may not be enough. The scandal will "severely handicap" Satyam's ability to win new clients, predicts Gartner. The consultancy is encouraging Satyam clients to keep a close eye on their service, to come up with contingency plans, and to consider offering financial incentives to keep talented Satyam employees working on their accounts, according to Clients like Nestle are evaluating alternatives, with a spokesman saying its internal IT staff could take over outsourced duties if necessary.


In retrospect, there were some early signs of trouble, reports the New York Times. (Of course, it's generally easy to see such signs after the fact.) Frances Karamouzis, a research vice president at Gartner, called Raju's management style "parochial." As the outsourcing business matured, the company was slower to embrace change than its competitors. Instead, it cut prices, which put pressure on its profit margins.

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