Contract Cancellations Add to Infosys' U.S. Problems

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Union Bank of California's cancellation last week of a high-profile, multi-million-dollar contract with Infosys begs the question of the extent to which civil allegations of visa and tax fraud, and the U.S. government's subsequent criminal investigation of Infosys, may have been factors in the cancellation.


It's especially interesting that it was a client in the financial services sector that dropped last week's bombshell. It was another client in that sector that canceled a contract with Infosys not long after Infosys employee and whistleblower Jay Palmer filed his now-famous lawsuit against the company in late February. That client was Axis Capital in Alpharetta, Ga., and that's where Palmer was working when he blew the whistle and went public by filing the lawsuit.


According to Kenny Mendelsohn, Palmer's attorney, when Palmer went into work on April 4, an Axis executive told him that the contract had been canceled, and directed him to inform Infosys and his staff accordingly. Mendelsohn made it clear that there is no way to prove that Palmer's allegations were the cause of the cancellation. What we do know, according to Mendelsohn, is that after Palmer filed the lawsuit against Infosys alleging visa and tax fraud, Axis' CEO and CIO contacted Infosys for an explanation. The cancellation came shortly after that, and is estimated to have cost Infosys $2.5 million. According to a knowledgeable source who spoke on condition of anonymity, Axis remains a customer of Infosys, and is using Infosys Business Process Outsourcing (BPO) services, having replaced some American Axis employees with workers on H-1B visas.


The Union Bank of California (UBC) cancellation was apparently much costlier for Infosys, at least in dollar terms. According to a report in India's Financial Express, it was a $20 million contract to implement Infosys' Finacle banking platform, which would have made it Infosys' first Finacle customer in the United States. The cancellation has been reported extensively in the Indian press, and all the reports I've seen refer to Infosys and UBC statements that the cancellation was due to UBC's "changed business priorities." That appears to be the language that the two parties agreed upon. Whether one of those changed priorities was to avoid betting its banking technology infrastructure on a company that's under criminal investigation by the U.S government is a matter of conjecture. But it would be awfully difficult to argue that it's not a legitimate question to raise. In any case, here's an excerpt from the Financial Express article:

Infosys said that the bank's priorities had changed. "We were in the first stage of implementation. The value of the contract was close to $20 million and could have become bigger. The bank was Finacle's first client in the U.S. And to that extent, it is a loss," CFO of the firm V. Balakrishnan told FE. Finacle is one of the rare success stories in Indian software products globally. The product runs 47,000 branches worldwide and raked in $295 million in FY11, growing 42% over the previous year. While the product has been widely deployed in India and the Middle East, the firm had started to market it in the U.S. About 30 banks run on Finacle in India.