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.
