At the start of this year, India was rocked by revelations that the huge software and outsourcing group Satyam had overestimated its profits to the tune of around $US1 billion. Before his arrest, chairman and IT poster-boy Ramalinga Raju said he had been “riding a tiger, not knowing how to get off without being eaten”.
But while the massive fraud threw India’s name-brand outsourcing industry into disrepute, analysts say the industry’s fundamentals remain strong.
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Speakers: Jim Longwood, research vice president of Gartner’s Asia Pacific IT sourcing; Prem Chand Gupta, India’s Corporate Affairs Minister; Cesar Bacani, contributing editor to the Economist Group’s CFO magazines
CONNORS: It has been called “India’s Enron”, a huge corporate fraud which affects the livelihood of between 40,000 and 60,000 employees.
A non-existent $US1 billion of profits, added to the books by executives of Indian outsourcing company, Satyam, was revealed by chairman Ramalinga Raju in a fax to the corporate watchdog on January the 7th – leading to his immediate arrest.
But as the vice president of Gartner’s Asia Pacific IT sourcing research team Jim Longwood explains, there has been a bit of an overreaction.
LONGWOOD: I think it’s probably been a shock to their local psyche, but in terms of the real impact it’s not anything of the scale of an Enron or a Tyco scandal, it’s much more self-contained.
CONNORS: On face value though, the rort is astonishing.
With 750,000 jobs riding on India’s software and IT services industry in Bangalore alone, and world economies crashing, it was a cruel blow at a bad time.
Such bad timing, in fact, that for the first time ever, the Indian government stepped-in and sacked a private company’s entire board.
Prem Chand Gupta, India’s Corporate Affairs minister, spoke to the media just days after the revelation, making sure confidence in India’s multi-billion dollar outsourcing industry was not harmed by installing its own board members.
GUPTA: The government has decided to constitute the board of eminent persons having expertise in different fields like finance, information technology, law and administration. Such a board would provide the necessary reason, along with responsible and accountable leadership, to the complete in this hour of crisis.
CONNORS: A contributing editor to the Economist Group’s CFO magazines, Cesar Bacani, remembers meeting members of the former executive years ago, and being concerned even then.
BACANI: Satyam has always been the smallest of the outsources, and when I spoke to the CFO in 2005 my impression was that they were just desperate to be at the top rank, so they were doing everything, they were actually claiming very fast growth in revenues and so on. So my speculation is that maybe in their zeal to become a big player they may have cut corners. When you look at Satyam, Satyam would be a special case, it’s not as if everyone wants to, is following the same path that Satyam did. To begin with Infosys, TCS [Tata Consultancy Services], Wipro and so on, they’ve been very well established, they’ve been there for 30 years, 40 years. Because Satyam was that brash newcomer.
CONNORS: But Cesar Bacani says while India’s corporate reputation may have been damaged, the outsourcing model is still valid.
BACANI: I think we should understand that the outsourcing model, the fact that companies around the world are outsourcing to cheaper labour, that’s the valid business model that will not go away just because Satyam has collapsed. Especially now where everyone is trying to squeeze costs out of their operations. So this will continue. Now the question is will companies continue going to India, hoping to go into China, going to the Philippines? Yes they will, but perhaps they will do so by using the IBM, the Accentures, because these are really established brands that they know. And then IBM and Accenture will then be outsourcing their own outsourcing.
CONNORS: Gartner’s Jim Longwood agrees, saying the bigger outsourcing firms are more than capable to take up any slack if Satyam was eventually to fail.
LONGWOOD: IBM’s probably got over 60,000 people, Accenture’s got a substantial base, CSC. EDS have got HP, and they’re carrying on with business as usual. So it’s a short-term setback but one that they’ll come out of and given the way that the Indian government’s handling it with much more improved visibility and transparency.
CONNORS: With new claims by India’s Economic Times newspaper this week that Citigroup, Merrill Lynch, Novartis, and GlaxoSmithKline have cancelled $US200 million in contracts with Satyam, the impacts look grim for the moment.
But a greater scrutiny of the books by India’s corporate regulators can only improve the industry, says Jim Longwood.
LONGWOOD: Whilst it’s not a pleasant situation to be in it’s a normal part of the evolution of a services market like this.
