American-Style Scandals Hit Indian IT

Photo:Ramalinga Raju, Founder and Chairman, Satyam Computer Services, India

From a competitive economic perspective, one underlying issues is the outsourcing of American jobs. The IT sector, one of the long-term growth industries in the US, has certainly suffered as a result of outsourcing to places like India. However, it turns our, India itself is not immune to the type of economic scandal that has so frequently impacted the US economy in recent years.

The mea culpa from the founder of one of India's so called top IT outsourcing service provider Satyam Computer Services last week, and the World Bank ban on two other prominent IT companies that followed a few days later, may not yet have shaken the confidence of most US-based clients of Indian IT. But these developments may make many American companies turn to home-based companies or at least near-shoring for IT outsourcing; so feel experts.

"Although events starting with the Mumbai terror attacks to Satyam scandal recently, followed by the World Bank ban have come as bad news for the Indian IT sector, they haven't changed their [US clients'] confidence and long term strategy of outsourcing from India," said Robert Haas, Partner and Leader of Strategic IT Practice, in consulting firm A.T. Kearney, North America. "But I would say that these will make some changes in how they perceive outsourcing in terms of more vigorous intelligence and signing contracts with more options and escape clauses. There will also be a flight to safety and that would benefit US -based outsourcers such as IBM, HP, etc. over Indian companies."

Indeed, the startling confession to fraud and resignation of B. Ramalinga Raju founder of Satyam Computer Services, considered -- at least theoretically -- as India's fourth-largest computer software firm, is emerging as the biggest corporate scandal the country has witnessed.

In a letter last Wednesday Raju confessed to the Securities & Exchange Board of India (SEBI) that he has been cooking up the company's books and padding profits for "several years" which have resulted into a fraud of over $1.45 billion. Not just that; Raju also admitted that that he had falsified Satyam's books by boosting its cash and bank balances, and padding profits by inflating incomes and fudging liabilities and assets.
This magnitude and audacity of the financial fraud -- touted as India's Enron -- has undoubtedly come as big blow to global outsourcing that sends a bulk- over US$40 billion annually to India, almost 70% of which emanates from the US alone.

But even as the world of outsourcing was trying to recover from the shock that Raju cleverly managed to hide his misdeeds for as long as seven years 7 years, and were turning their gazes toward other low cost out-sourcers in emerging IT services provider markets, Indian IT industry's reputation took another knock on Tuesday.

The World Bank revealed in its website that it had barred Wipro Technologies and Megasoft Consultants -- two very prominent Indian IT outsourcing service providers from receiving direct contracts for four years from the bank under its corporate procurement program. The Bank said that it was forced to impose these restrictions on account of "improper benefits to bank staff" where Wipro offered Bank employees its shares, while Megasoft tried to set up a joint venture in China with a former Bank employee.

"Trust and the truth in the Indian tech world have been severely damaged," says Robert Morgan, director, Hamilton Bailey -- a consulting firm that advises outsourcing service providers- in his comments on the Satyam incident. "The biggest question faced by global outsourcing is, are any auditors capable of understanding and validating any outsourcer's figures?"

Morgan adds offshoring to India "has always been a difficult decision". For, although cost savings is the biggest factor that drives global outsourcing service seekers to India, there are many other factors that often become significant in offshoring decision making.  Consider the terrorist activities, for instance. Until the revelation of the Satyam fiasco, the November [2008] terror attacks in Mumbai was the biggest concern of the global outsourcing service seekers. 'That had really shaken US client's confidence," says Hass.

Besides, "the hyper-inflation in Indian technical salaries; soaring real estate prices; the lack of protective legislation such as a Data Protection Act, and the extra cost involved with positioning senior management in site," are some of the other deterring factors that are at play currently says Morgan. [And] "all these factors give rise to so called near-shore alternatives," he adds.

Nevertheless, there also exists an interesting dichotomy. "The cost pressure [that US clients are facing due to the global recession] is also actually making them to look at outsourcing more intensely," says Haas.

And that is making optimists believe that once the dust settles, the cost pressure may even force global outsourcing to turn to India with more businesses. "There are after all still lots of very professional IT services companies in India," says Timothy Bond, a UK/India-based IT consultant. "With the current downturn, once things have settled down, there will be conscious effort to offshoring more work to India."