Who Wins from India's Satyam Scandal?

Posted by: Bruce Einhorn on January 8, 2009

Where’s Raju? That’s a question people in India are now asking. A day after his shocking confession of fraud at Satyam Computer Services, disgraced former chairman B. Ramalinga Raju’s whereabouts are unknown. The Indian media is reporting he might be in Dubai or Texas. According to the Economic Times, “Satyam management has said that it has no idea where Raju is.” Already, the company faces litigation in the U.S., with the firm Izard Nobel filing a class action in Federal court in New York. (Here’s the press release from the law firm announcing the move.) It’s probably only a matter of time before accounting firm PriceWaterhouseCoopers becomes a target of lawyers, too. Perhaps the only bit of good news for Corporate India is Raju timed his announcement on the eve of a public holiday: The Mumbai stock exchange was closed today, so companies got a short reprieve from the storm the fraud has unleashed.

One worry now is the fallout from the Satyam scandal will damage the rest of the Indian tech services industry. On his Globespotting blog, my BusinessWeek colleague Steve Hamm writes “this industry has spent 20 years building up credibility with Western clients, but this disaster will make many U.S. and European clients rethink their reliance on Indian outsourcing.”

Might that create an opportunity for India’s rivals in the outsourcing game? Smaller IT services companies in Asian countries like China and the Philippines have long argued that they are well positioned to grab outsourcing business from Western clients concerned about putting too much work into India. The Chinese and Philippine rivals also have said they have an edge because Indian wages were rising and Indian IT companies were losing their cost advantage. For years, though, these arguments seemed like wishful thinking. The Indians just kept getting bigger and more powerful. To get around the problem of rising wages at home, the Indian companies simply expanded elsewhere, opening operations throughout Asia; Satyam has a major presence in China and in November it bought a software center in Malaysia from Motorola.

Now, with Western clients likely wondering whether top-tier Indian companies like Infosys, TCS and Wipro might also be infected by the Satyam disease, the Indians’ Asian rivals might suddenly have an opening. It will be interesting to see how some of these companies try to market themselves in the days and weeks ahead. But, like the Lehman bankruptcy and the near-death of AIG, the Satyam affair may end up spooking companies and making them extremely risk averse. Following the shocking news about Raju’s exploits, Western companies might now be less willing to take the chance of doing business with Indian IT companies, but chances are they’ll be even less willing to take the risk of outsourcing instead to smaller, less established players in places like China or the Philippines that have plenty of problems of their own.

Sometimes we think of outsourcing as inevitable. But, as a fund manager who does business in India told me yesterday, in a company that is working with an Indian partner like Satyam, there might be 60% of the executives in favor of sending the work abroad but 40% opposed. The scandal could easily flip that balance and lead them to nix the outsourcing idea as too dangerous. Barack Obama during the campaign talked about the need to encourage companies to keep jobs at home. The Satyam scandal might be just the thing to prompt U.S. executives to give that idea some more thought.

Reader Comments

Enzo

January 8, 2009 11:50 AM

You mean, "This industry has been 20 years destroying American jobs".

brar

January 8, 2009 12:19 PM

Who wins? ... I guess truth. Late but it sure did emerge out. Just like Regulators here and AIG, Lehman and other now belly-up firms in USA, companies like Satyam and Indian regulators jumped on captilist bandwagon. Assuming un-checked market will police itself. as of who loses in this event, I see the employees and investors badly bruised. As a customer or client for BOP's, we will either move projects to other providers or simply not pay for un-finished work. Does this incidence paint whole India inc with same color? No. Not from my viewpoint.

india

January 8, 2009 12:22 PM

Wishfull thinking. If that is the case, US with so many corporate scandals, spooky credit crunch, bankrupcy, toxic assets etc. etc. are not fit to do business with any country.

PNW Trojan

January 8, 2009 12:23 PM

Do you remember the carrot and stick rule of govt? Huh? The people get beaten with the stick, and the Fortune 500/Wall Street, get the carrots. Mr OBAMA, please tell us all, how you are ANY different than bush or, with 1/2 of clinton's toadies, Slick Willie??? We're waiting.....

Ab

January 8, 2009 1:07 PM

Every country has its share of Enrons, Fannie Maes, Merril Lynchs, etc. I think it would be stupid to label the whole industry with the exceptions. It sure raises an eyebrow, but I am sure stringent measures by Indian government over accounting practices and audits can correct the problem.

Matt

January 8, 2009 1:46 PM

The Author is going overboard. Satyam is one aberation in the Indian outsourcing. Just like Enron scandal was one flip in the American economy, There are many other Indian IT companies doing honest and good job. Satyam is just one Enron and nothing more should be read about it. Satyam as a company is strong in its workforce. It is the owners and senior management and PWC , the auditors are at fault with the fiasco. Why don't the author pull up PWC- their auditors?

HealthCheck

January 8, 2009 2:07 PM

Are you spreading rumours? Did you check his HYD residence before writing? He is communicating to media through his lawyer. Do some home work before writing.

BadmanJIt

January 8, 2009 2:14 PM

This entire notation that one guy can affect the entire India IT industry is total BS.

Perl Advocate

January 8, 2009 2:15 PM

You are not upto date with the latest news,, He is in Hyderabad, India and said he wont flee.

http://ibnlive.in.com/news/raju-in-hyderabad-wont-flee-lawyer--bse-to-drop-satyam/82266-7.html?from=incom

Jay

January 8, 2009 2:51 PM

There should be a limit to outsourcing, what would the people here be working on if every possible job is outsourced???!!!! This is coming from an Indian immigrant who is working in the United States. We made a move to this country to make a better lives for us and our families but if all the jobs are being oursourced to India, I wonder if we made a good decision?

Ana

January 8, 2009 3:16 PM

a fraud is a fraud, no matter how one says it and this one reminds me of the numerous times in the last couple of decades where fruad has been committed in high flying companies of repute and all the current melt down is nothing but fraud. Greed (of madoff and all the investment bankers who traded tainted securities to make big bucks) is another name of fraud. In all these cases, we have seen unprecedented govt intervention to either inject cash, buy or sell these assets in part or whole. In case of Satyam, Nasscom and India Inc should come forward with a similar plan to rescue the image of indian outsourcing. To even think of that the world can live without outsourcing is plain stupidity in my view, more especially where the US and the whole world economy is reeling under massive pressure to generate back profits, outsourcing is the only way they can lower costs because technology will take sometime to catchup. so if you though the tap was about to shut off or slow down, give it two quarters and you will see the flood coming to cheaper - focussed alternatives like India, Philippines, China and other emerging countries.

mks

January 8, 2009 3:33 PM

It will be a welcome break if jobs come back. US economy will recover and hopefully get balanced. Otherwise we will be seeing longer recession/depression.

Sam

January 8, 2009 3:42 PM

Deceitful CEOs - Compared to the financial collapse in US (AIG, Lehman, etc) and the false information given by so many CEOs right from Enron, the Satyam episode is very small. Looks like whole world is full of lying CEOs

bwReader

January 8, 2009 3:43 PM

I hope the president-elect Obama does something to keep the jobs at home. Indian IT industries will have a hard time rebuilding the credibility. There is always a cost associated with cheaper wages.

bwReader

January 8, 2009 3:45 PM

He had it planned very well. I hope outsourcing companies learned a lesson. President-elect Obama must do something to keep the jobs at home.

whatever

January 8, 2009 4:19 PM

whtaever dude...its all in the game...business as usual..who cares..

rohit

January 8, 2009 4:34 PM

Not sure if an accounting scandal at a tech company rises to the same level as the scandals referenced in the article that plagued the financial sector. The soundness of India's outsource industry remains more or less intact unless a further unraveling is reported. The author does make an interesting point of a complete cessation of outsourcing but far too many companies are too invested in outsourcing to pull the plug. They have developed relationships over years and to stop that and recruit new people in the US, train them is arguably cost ineffective. So, i think the article's claims are a little out of proportion.

WVM

January 8, 2009 4:37 PM

Raju might be hiding out at Thomas Friedman's house. "The Earth is Flat"
He might be posing as Friedman's cabana boy.

Abhi

January 8, 2009 4:40 PM

sid

January 8, 2009 4:55 PM

Whats the hue and cry about Satyam?
Atleast the man honestly admitted his follies. (for whatever reasons). How many scandals go unnoticed every year? Dozens! And what is the mortgage meltdown in any case? It is nothing but a conveniently vieled scam. It just depends on the perspective.Take a break media mongers and leave the poor company alone!

Dumbiste

January 8, 2009 5:04 PM

Halelluiah, Brother!

techy81

January 8, 2009 5:17 PM

This tragedy might happen to even companies in China and Philippines..in that respect to any companies in the world. Its about an individual's manipulation than about the Indian IT industry itself. This is a tocsin to all US IT outsourcing strategy. Tough years to come!!

shane warne

January 8, 2009 7:04 PM

Where is Raju? Raju has become a gentleman

Outsourced

January 8, 2009 8:31 PM

Cant believe the writer has made so many strong conclusions about the strong IT sector in India. What happened when the Enron happened in the US? SOX? And everything was perfect. It will the same with Indian companies as well. Time will heal everything. And dont forget outsourcing is here to stay. India is and will be the forefront of it. Even if outsourcing deals do not go to Indian companies, it will go to bigger American firms that have set up shop in India. So, as far as India Inc. is considered, there will be no or minimal impact

Count Meout

January 8, 2009 9:53 PM

Globalisation is bad.
Outsourcing is worse.
Off-Shore Outsourcing is 'Devil's workshop'.
Wall Street listing is a horrible thing to do.
Credit card destroys lives and marriages. IT is Illusion Technology.
Fossil fuel is bad for environment.
Buying fuel from OPEC is making deal with Satan.

How do we go to the 'Stone age' from here, please?

Raj

January 8, 2009 9:59 PM

author,

have you forgotten the worldcom, enron and the recent siemens 1 billion fines for alleged bribery? so wud u stop doing business with german companies? or even ur own american companies?

Nav

January 8, 2009 10:32 PM

Hey Bruce! I mean this guy is such an India basher for a long time. Here is the juice, most of us don't give a darn on your opinions.
- Nav

Rank Shank

January 8, 2009 11:31 PM

The problem at Satyam is not such a difficult task to fix. It requires the 'Right Guy' to do it. Someone who has done it before. And that someone is Vivek Paul - who helped Wipro about 9 years back and is with TPG.

All that needs to be done are:
i) Restate the balance sheet - by writing down contracts which should not have been accounted for. Recognise revenue on conservative basis - perhaps when clients actually pay for services
ii) Close down Non-viable development centres
iii) Scale back manpower to about 30K from the current levels of 50K+
iv) Sell out investments in Maytas and other non-related subsidiaries
v) Review Project Accounting processes and HR processes
vi) Delist ADR from NYSE

prasadwt

January 8, 2009 11:41 PM

Hope the Fortune 500 still not worried about the big three of INDIA Inc.
TCS,Infosys,Wipro and continue to outsource work.
Since all these 3 are SARBOX compliant
and strict regulatory measures should be in place to a smoother & healthier corp.governance in INDIA Inc.

Samrat Kakkar

January 9, 2009 12:55 PM

There is no doubt that satyam case will dent the image of Indian IT industry. There will be repercussions for some time but other Indian IT companies are well prepared and infact some of them are regarded very highly. The post on zdnet by oliver marks does endorse HCL Tech for its transparent management.

rehan

January 9, 2009 1:43 PM

Do not treat Mr.Raju as a criminal, what he did was for the benefit of the company.Do not talk of ethics in India, every politician is accountable , see the oil staff and transporters strike which has costed the nation more than the satyam 7000 crore scam in 2 days, they ripped the common man of basic necessities, denying them the common basic necessity of reaching corporate India in time, no petrol,no diesel,no rickshaws,no taxis, nothing for common man transport. Is this justice. Arrest the ministers who ignored the striking oil officers demand, make him accountable for the innumerable suffering he caused to the general public instead of just harping on Mr.Raju.Please remember Mr.Raju gave away employment to scores of Indians in India and overseas, provided the much needed sponsorship for rural,semi urban Andhra Pradesh which all governements have ignored.He is a hero and I salute him for giving as many as 53000 Indians and their families a square meal a day in this otherwise starving nation where GDP, GNP does not work.Ask the finance ministry to refund the extra taxes collected by way of income tax and corporate taxes collected in such a inflated balance sheet. The answer will be, WE WILL DECIDE , their decisions will take years till all Indian nationals will die of Hunger.I have to say that Mr. Raju made Satyam and he will be the Raju of Satyam, no one will take away his place.Be honest and ask you conscious. Be Indian and be honest to a man who has provided food and shelter to thousands of satyamites and their families and to many of the various villagers who benefitted from his drinking water and other servises of his foundation.

Santosh

January 9, 2009 3:48 PM

Again the root cause is EXCESS GREED.
The same root cause which resulted in to US economic crisis.
The only good thing is at least he reliazed at last, that this can't continue and dislosed it (Or may be forced to disclose it) before the world knew.

pramod gupta

January 10, 2009 3:15 AM

It's not an isolated incident, has strong precedents, and emahates from the denying of the obvious, that small is beautiful and faithful. The Growth of capital intensive industry, obsessed with disruptive business models have paved the way for imbalanced growth and globalisations ills are visible and posing a threat to the Sovereignty of the Nations as they become subservient and mean and aid to satisfy their greed, at the cost of Humanity , environment ,and a condemnable License..

AV

January 10, 2009 2:14 PM

American should be grateful what Indians have contributed to American scientific and technological supremacy. As the biggest democracy, India is the American’s nature ally. In addition, Millions of Indian engineers, scientists and doctors play vital roles in American economy. Some examples are:
36% of NASA scientists Indians,
48% PHD are Indians,
38% of Microsoft engineers are Indians
33% Silicon Valley hi-tech companies are started by Indians
Computer Pentium CPU is invented by Indian
Microsoft Window is written by Indians
Oracle is written by Indians
Indians are by far the richest and most highly educated ethnic group
Without Indian contribution, American is no longer a science/technology superpower.

jack

January 10, 2009 6:24 PM

These outsourcing companies have destroyed jobs for American IT engineers or at least brought down their salaries and standard of living closer to those in India. Shame on Fortune 500 CEOs, CIOs and paid-off politicians for destroying jobs and technical competence of America.

Worse yet, these companies are pushing to masquerade as 'experts' in regulatory compliance in providing Sarbanes-Oxley, GLBA and other regulatory compliance services to US companies. It is about time that CEOS and CIOs wake up to non-existent total-cost 'advantage' and incompetence of these companies.

Sri

January 12, 2009 12:28 AM

The first thing Obama should do to create jobs in US is stop issuing L1 and B1 visas. Nobody can stop outsourcing projects. But atleast he can create a law that all onsite jobs should be filled with Citizens/Permanent Residents. Indian companies are exploiting L1/B1 visas. They need to be encouraged for not bringing offshore guys to onsite.

Vijay

January 12, 2009 6:39 AM

The author needs to do some homework. The comments are novice and shows lack of understnading of business. Better luck next time :)

Sameer

January 12, 2009 3:02 PM

The problem is Satyam is not an exception, most of the companies which started due to their attraction to easy dollars from US have this risk - examples Visualsoft(Used to run ship business in Vizag), Wipro (used to sell oil before outsourcing became the big thing), Megasoft, HCl.....but do you think CIO's in companies outsourcing to them dont know about these issues....you have got to be kidding.

Rohit

January 12, 2009 3:21 PM

I think the competition & hunger to post profits year on year JUST to please the investors and avoid any hostile take-overs & ofcourse "GREED" has played role in this downfall. Any company is vunerable to this kind of trend & I think every IT company should be put under the scanner and strict regulations need to be in place going forward.

I think the World bank has sent the right message by banning Satyam, Wipro for any projects.

If Raju had even thought about the Clients, employees & all the business that survive on Satyam, I think this would not have happened

BUT WHO IS GOING TO FIX THIS MESS!!!

George John

January 14, 2009 5:49 AM

Imagine if the satyam Maya Properties deal had went through well .none of this would have happened . The so called 1.6 B$ Fictitious Cash would have been written off in the name of the deal .and it would add real value to the organsization .And may be Satyam could have done wonders with the new company and Satyam will remain as the fourth largest IT company of India. This was the plan of Mr Raju . He is a thoughtful man . but we spoiled everything . we are the losers .

Immigrant

January 17, 2009 2:24 PM

It is the globalization NOT outsourcing. We can see only direct jobs that are transferred from one country to another. These jobs are only very small portion of real jobs that are moved across continents. Developed world had been pushing for globalization for a long time and was against the protectionist policies by countries by east. I remember India was not allowing coca cola as its presence in india could have caused loss of thousands of traditional jobs in india. Coca Cola finally entered into India and many traditional jobs (not many people are interested in lemon juice sold by local stalls).Globalization is not a one-side game. In the long run, protectionist policies have never worked. As Madoff scandal won't stop people investing in stocks, satyam scandal won't stop IT success in India. Both US and India will come out stronger after the current economic troubles. No government is stupid ( at least not the developed countries) who will allow outsourcing without seeing long term benefits.

Post a comment

 

About

Bloomberg Businessweek’s team of Asia reporters brings you the latest insights on business, politics, technology and culture from some of the world’s biggest and fastest-growing economies.

BW Mall - Sponsored Links

Buy a link now!