Outsourcing industry ponders Satyam impact

US executives don’t expect enduring effect from scandal

Courtesy: http://www.indusbusinessjournal.com/

As the details of the Satyam Computer Services Ltd. fraud scandal – with $1 billion of falsified cash and assets reported – rocked India and the global IT and outsourcing world last month, US outsourcing executives and analysts weighed the impact on their business.

“In our business we are not seeing any slowdown,” said Kishore Mirchandani, president of Outsourcing Partners International Inc., a New York-based firm that provides financial and accounting outsourcing services. “I think business will be as usual. We don’t anticipate any changes. We will still have growth.”

Outsourcing Partners, which Mirchandani co-founded in 1998, has a handful of locations in India, including centers in Bangalore, Delhi and Kochi. The company has been on Inc. magazine’s annual list of fastest growing private companies for four years with growth of 128 percent over the last three years. It employs 2,400.

Mirchandani admits that, since Satyam focuses on IT, the impact of the fraud scandal might hit closer to home to US IT outsourcers, but overall he does not believe that it will slow business down. “I think it is an isolated situation and it is not reflective of the industry,” he said.

He does believe that it may tighten up the scrutiny and increase the level of governance with clients, but believes that the successful outsourcing firms already have appropriate practices in place and increased scrutiny will only serve to highlight this.

“We have [a high level of governance] with every client of ours. We have total transparency and that is why we are as successful as we are today,” Mirchandani said.

Rajini Poddar, president of Artech Information Systems LLC, a Cedar Knolls, NJ-based IT-services provider with revenues approaching $200 million, is a bit more concerned about ripples caused by the Satyam scandal.

“I think in the short term there will be some impact, because companies that do outsourcing will do more due diligence,” Poddar said. “But I don’t know in the long run if this thing is endemic to India.”

“I think it will kind of blow over at a certain period of time,” she added. “However, if it turns out not to be an isolated incident then there are bigger implications.”

Poddar, whose firm has a center in Noida, India, believes the fact that the Indian government is not taken the matter and has been swift to act will help to quell concerns from outsourcing clients.

Like Mirchandani, Poddar sees only benefits from an increased level of due diligence from clients and increased corporate governance practices.

At the end of the day, she feels the benefits of outsourcing to India will continue to make the practice popular and highly utilized. “[Outsourcing] is part of doing business. It is part of being competitive,” she said.

She also said that it is very telling for the outsourcing industry that, despite the accounting and bookkeeping malfeasance by Satyam, the company suffered no complaints about the service it delivered.

Looking at the Satyam scandal from an analyst perspective, Doug Brown, partner at the Brown-Wilson Group, and co-author of “The Black Book of Outsourcing,” anticipates larger industry response.

He predicts five issues that will shape the industry in 2009 as a result of the Satyam fraud case:

• Suspicions and scrutiny will rise of all offshore vendors, particularly family-led companies and Indian firms
• Geopolitical risks and threats force clients to bring offshore work back to United States and the United Kingdom
• US and UK clients establish outsourcing governance officers with offshore contingency planning a top priority
• President Barack Obama’s administration economic stimulus and infrastructure support plan could benefit US job creation/return in outsourcing sector
• Transparency in corporate governance, particularly among offshore outsourcers and firms with more than 50 percent of their workforce abroad will become part of customers' decision making process.

Brown is particularly staunch on an increased emphasis on bringing outsourcing jobs to the United States.

“The timing may be extremely fortuitous for US firms – and offshore companies with US operations – to create American jobs under the Obama Administration's new stimulus plan,” he said. “Reorganizing service delivery options to the US – for US clients – may be the only way to maintain those customers. Wipro and [Tata Consultancy Services] had recognized that trend and are well positioned to capitalize on the change in service locations. This also means more jobs for Americans.”

The Brown-Wilson Group conducts an annual survey – under The Black Book of Outsourcing name – of over 400,000 outsourcing users globally to evaluate senior leadership of the 5,000 global outsourcing vendors and, according to Brown, even before the Satyam scandal confidence was beginning to lag. “One hundred percent of outsourcing users within the Fortune 1000 participate in the Black Book’s annual customer experience surveys yet only 4.6 percent reported even mild lack of confidence in any of India’s biggest firms in 2008,” he said. “In 2009, preview surveys have indicated over 68.3 percent of offshore outsourcing users report mounting lack of confidence in their suppliers’ governance. Even if Satyam’s problems are Satyam’s only, the rest of the offshore industry is about to experience greatly elevated scrutiny.”

The Black Book of Outsourcing has already altered its 2009 survey to take a closer look at corporate financial governance.

“Black Book's annual client user survey maintained the same 26 key performance indicators on outsourcing firm’s senior management for six consecutive years in four main categories: C Level Commitment, Human Capital Performance, Corporate Direction, and Leadership Impact. Corporate direction scores, which included Accountability, had decreased from 2006 to 2008 but was comparable to all top Indian outsourcer firms,” Brown said. “In response, we’ve added a new (fifth) section specifically addressing Accountability to include indicators of Trust, Executive Confidence, Financial Stewardship, Avoidance of Illegal Activities, Mitigation of Geopolitical Risks, and Sustainability Leadership among others. We believe these results will greatly change the make-up of 2009's top 50 best-managed outsourcing vendors as compared to prior years’ rankings.”

Like Mirchandani and Poddar, Brown also believes increased corporate governance will benefit the industry overall. “The big winner will eventually be all offshore outsourcing users because transparency will be necessary to convey trust and tools to better scrutinize vendors will be vital to user decision making,” Brown said.