Indian outsourcers face scrutiny after Satyam debacle

The revelation on Wednesday by Indian outsourcer Satyam Computer Services that it had fiddled with its accounts will likely have an impact on other Indian outsourcers, according to analysts.

See story of Satyam chief quits, admits faking financial results.

Customers are going to do rigorous due diligence and risk management analysis of their offshore suppliers, said John C. McCarthy, vice president and principal analyst at Forrester Research. Companies that are likely to come under the closest scrutiny are family-run and midsized suppliers, McCarthy added.

B. Ramalinga Raju, chairman of Satyam Computer Services, India's fourth largest outsourcer, on Wednesday tendered his resignation to the company's board after admitting that the company inflated its profits for the last several years. His brother, B. Rama Raju, the managing director of the family-run company, also resigned.

The company ran into opposition from investors in December when it announced plans to acquire two construction companies in which Ramalinga Raju's family have a considerable stake.

Customers are going to be more careful in evaluating their suppliers, but this is not going to turn into a backlash against Indian outsourcers, said Kapil Dev Singh, country manager at IDC India. One case like Satyam will not make all Indian outsourcers lose the credibility that they have built over the years, he added.

IDC India, however, warned that the fast growth pace in the outsourcing industry may bring distortions that need to be checked. Companies have to balance growth with financial discipline, Singh added.

India's National Association of Software and Service Companies (Nasscom) was quick to distance itself from Satyam, although Ramalinga Raju was a former chairman of the association. "This is a stand-alone case of failure of corporate governance and it is critical that it be viewed in this light," Nasscom said in a statement on Wednesday.

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 added.

Satyam's troubles are likely to be an opportunity for other Indian outsourcers who will now make a pitch for Satyam's customers, said Forrester's McCarthy.

Customers will not switch business overnight, but they will start asking around, particularly as there are other vendors in India that can offer similar services, he added.

The key issue for Satyam's customers will be the real financial position of the company. "[Satyam] is running a lot of people's SAP systems, and customers can't watch and let them flop around until they die a slow death," McCarthy said.

In the run-up to Raju's disclosure of the tampering with the company's accounts, there were a number of reports that Satyam would be a takeover target. Forrester, for example, said last week that there would be management and governance changes and even potentially the outright sale of the company.

That could take time now, as any investor would be nervous about how much the company's books have been fiddled with, McCarthy said.

India's securities regulator, Securities and Exchange Board of India has ordered an investigation into the Satyam episode.

The IDG News Service is a Network World affiliate.