Robert Morgan, director of consultancy Hamilton Bailey
outlines the likely impact of the
Satyam scandal.
It is somewhat ironic that in the Sanskrit language, "Satyam"
means "truth". This will ring a hollow note in the minds of local
investors and global customers alike. How could a successful
company, quoted on three global stock exchanges, have got away with
false accounts for so long? Who is liable – the PWC auditors, the
powerful non-executives, the whole executive board or one man, B
Ramalinga Raju?
This and other pressing questions will unfold over time. But the
key question right now, as far as I am concerned, is what
does it mean to offshore and general outsourcing? The
whole of India is quaking as it awaits events - is this the end of
the Indian Dream?
Offshoring to India has always been a difficult decision. Forget
the cost savings for one moment and think about some of the other
factors at play: the political realities of terrorist activities,
until recently grossly under-reported by the Western press; the
posturing of two nuclear nations in India and Pakistan; the
hyper-inflation in Indian technical salaries; soaring real estate
prices; the lack of protective legislation such as a Data
Protection Act (vetoed many times in parliament); the extra cost
involved with positioning senior management in situ, etc. All these
factors gave rise to so called 'near-shore' alternatives.
As a consultant advising on how to contract with outsourcing
service providers, I have seen the danger signs of undue
competition between Indian offshore providers and have regularly
queried the commercial viability (and naivety) of winning bids.
Will this scandal now change the thinking of first world clients to
the point where they will query the economic viability for the
supplier, seek greater assurances, or assess risk differently? The
fate of the Indian IT service industry hangs in the balance.
Let's remember that the shareholding of such companies consists
of tens of thousands of private individual stockholders who might
have their entire life savings invested. They have never seen a
real recession and have been well rewarded in terms of growth and
healthy dividends. Losing the faith of the local small investor
will have a magnified effect on stock values.
Trust and the truth in the Indian tech world have been severely
damaged by Mr Raju. Satyam, I believe, will not survive as an
independent company.
If Indian offshoring is to be securely underpinned their
government must move fast with invasive legislation; highly
successful family-run companies must accept that the executive
board should be free to query and resist the deferential attitude
towards powerful people for which India is famous; service
providers need to change their sales approaches and ready
themselves to counter open mistrust from buyers (this will be hard
for them); and the "buy" decision will need to factor in greater
client risk and governance controls (and expenses).
The biggest question faced by global outsourcing is: "are any
auditors capable of understanding and validating any outsourcer's
figures?" Having audited large-scale deal constructions for many
years I have found that the basic deal parameters changed so
dramatically that often it is impossible to determine 'allocated as
opposed to shared' assets; ditto actual staff usage; how asset
values are currently being accounted for (e.g. sweating them. or
continuing to use written-off equipment); the 'black box' costings
for creaking applications; the charging for server sizes versus
definitions of what constitutes a 'large server', etc. Black art or
an opportunity to hide profits / losses? The scope is there. Now
multiply this by 250 deals and how could any auditor swear to truly
certify the books?
As Satyam was also quoted in New York, precedent allows for PWC
to be sued by shareholders under US law. The Satyam story will run
and run.
Robert Morgan is Director at
Hamilton Bailey, a consultancy advising
outsourcing providers on strategy, new markets and
differentiation.