Satyam scandal a blight on India's outsourcing reputation

A dark cloud has been thrown over India’s burgeoning outsourcing industry by Ramalinga Raju, the founder and chairman of India’s fourth-largest IT outsourcing company, Satyam: he had, he confessed, been systematically inflating profits for years, with almost all of the company’s stated cash balances ­ amounting to more than $1bn ­ being fictitious.

Six years ago, Enron’s auditor, Arthur Andersen, was killed off not by the weight of its liabilities, but by the fact that spooked clients could no longer bring themselves to reappoint the firm. Could the same fate await Satyam ­ or even other players in the Indian outsourcing industry?

Outsourcing is particularly vulnerable to this kind of concern since, by definition, in a large business processing outsourcing (BPO) deal, the client is wholly at the mercy of the integrity of the supplier. Even before the blow-up of Satyam, there were already concerns on the part of clients building up in the industry.

Nigel Walder, CEO of financial services systems house BCS, says he is aware of some chief information officers at major banks who have resigned because they feel they were being railroaded into outsourcing chunks of their organisation’s operations faster than they were comfortable with, while still trying to retain a proper degree of control.

Any doubt over the integrity of Indian outsourcers ­ and it is ironic that, as a US-listed company, Satyam should be subject to Sarbanes-Oxley so Raju, now languishing in jail, could find himself facing the US court process ­ may have a very bad effect on the sector. “Banks and life companies have been under tremendous competitive pressure over the past decade. This has driven them to look for efficiencies wherever possible and has pushed the move to outsourcing and offshoring faster than is reasonable,” says Walder, a former CIO at NatWest Global Financial Markets.

Damage limitation
The Indian government moved swiftly to contain the damage, appointing an i nterim board to run Satyam, which has some 40,000 staff (Raju inflated that figure by 13,000 as well, prosecutors say), development and delivery centres all over the globe, from India to Australia, the Middle East and the Americas.

The National Association of Software Services Companies (NASSCom), India’s IT watchdog, tried to emphasise that Satyam’s case is a “one-off”. “While the law will take its course, this incident is particularly unfortunate as the Indian IT-BPO industry had set very high standards of ethics and corporate governance,” Nasscom said in a statement. “We are sure that all the stakeholders would also treat this as an isolated issue. This is not in any manner a reflection on the industry or corporate India,” it added, clearly trying to prevent the reputational damage from Satyam’s failings from becoming a national contagion.

Madhav Mehra, president of the UK-based World Council for Corporate Governance, was less sanguine when he addressed a press conference in New Delhi.“We must recognise it is a systemic failure and not of an individual. Mr Raju is certainly not a chartered accountant and was incapable of hiding a fraud of this magnitude from the company’s balance sheets for 10 years on his own,” he commented.

A spokesperson for Capgemini, which grew its Indian outsourcing capacity from 350 people in 2003 to more than 20,000 today, and aims to double that by the end of 2010, says the company remains completely confident there is a great future for outsourcing in India. It can but hope its clients agree.