January 8, 2009
Implications: Satyam’s Enron-like revelation is probably the single worst thing that could have happened to the entire Indian outsourcing market. Satyam itself has no viable future. This latest bombshell has sealed their fate. Existing clients will focus on escaping contracts as quickly as possible and it’s highly improbable any new clients will sign up. The revelation of fraud on this scale raises questions about the state of corporate governance in all Indian outsourcing companies.Analysis: The recent news about questionable activities by the chairman and founder of Satyam raised questions about his business judgment and the state of Satyam’s corporate governance, but were not catastrophic. Satyam could have been expected to go through several months of scrutiny and have some difficulties with client relationships, but the company’s survival was never really in question. The current revelation that these questionable activities were an attempt to cover up massive fraud changes the game entirely.
It’s difficult to see any future for Satyam as a corporate entity. The company has massive resources and large, long-term contracts, so much of the business will continue for quite some time. However, many (if not most) of their current clients are now going to be focused on moving their contracts to another company. Getting any new contracts is a laughable prospect. The net worth of the company has been revealed to be almost non-existent, so its future must be measured in days or weeks.
The most likely scenario is Satyam will be broken up and sold piecemeal to other outsourcing companies at bargain prices. This is likely to occur in days or weeks, not months or years. It must be done quickly to preserve the viability of the contracts and retain both clients and staff.
While in some ways this will represent a bonanza for other Indian IT outsourcing companies as Satyam’s staff and contracts suddenly become available, overall it will represent an issue for all Indian outsourcing companies. The revelation of such massive fraud in a company that has been public since 1991 and was considered one of the three or four top Indian outsourcing companies is inevitably going to raise questions about all the other Indian outsourcing companies.
Clients and potential clients are going to be asking the question, “If this could happen at Satyam, why not at Wipro/Infosys/TCS/Cognizant?” All Indian outsourcing companies should now be prepared to face months or years of questions and justifications around corporate governance. The real benefactors of this are likely to be the big USA-based outsourcing firms such as IBM Global Services, EDS, Accenture and others. All of these firms have large Indian staffs, so they can offer low-cost outsourcing. At the same time, they can play the corporate governance card, which is going to be a compelling story for the next few years.
This is very unfortunate timing for the Indian outsourcing business. For many years Indian outsourcers were considered only as low-cost alternatives and were not able to compete for the higher-margin types of outsourcing. In the last 2-3 years that has been changing, allowing the Indian companies to compete more effectively with Accenture and others for the higher-margin outsourcing. This scandal is going to be a major setback in that progress. http://www.glgroup.com/News/Disaster-for-Indian-Outsourcing-Companies-31283.html
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