The Indian offshore industry faces a new challenge to its pre-eminent position as the IT outsourcing destination as the ramifications of the $1bn fraud at Satyam unfold.
The IT services provider is fighting to restore confidence among users following its chairman's confession that he falsely inflated the firm's revenues. The fall out from the fraud could damage confidence in the Indian outsourcing market as a whole, industry observers fear.
The demise of Satyam is a real possibility. According to its Interim CEO, Ram Mynampati, the firm needs cash to pay the bills. "We need some assistance as far as liquidity is concerned to pay [suppliers]."
Financial stability is an important consideration when choosing an outsourcing partner to control often mission-critical IT.
Satyam has more than 600 customers in 66 countries receiving services such as software development, business process outsourcing, as well as support for suppliers such as Oracle and SAP. Customers include Unilever, Sony, Tesco, Boots, Nestle and Fifa. They will be keeping their IT contracts with Satyam under close review as the implications of the fraud become clear.
Chemicals company Ciba, which uses Satyam for application support, said it was reviewing its options. "We are doing a risk assessment right now and are preparing further measures pending on the evolving situation," a spokesman said.
Mike McNamara, director of operations and IT at Tesco Global told India's Economic Times, "Trust is a critical factor in all our outsourcing decisions, and all I can say is there is tremendous competition among companies such as Infosys, Wipro, TCS and Satyam."
And international football federation Fifa, which signed a seven-year deal with Satyam in 2007 worth $200m to develop an event management system and intranet, says it is monitoring the situation.
Mynampati says the first thing Satyam did after news of the scandal broke was to "reach out to customers to assure them that the business support will continue."
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But this reassurance may not be enough to retain customers, or for that matter to prevent Satyam's collapse, according to Mark Kobayashi-Hillary, director at the National Outsourcing Association.
He says incidents that create customer mistrust often spell the end for businesses. "When we have seen this kind of massive breach of trust case in US firms there has been a huge flight of customers," he added. "If I was a CIO and a competitor of Satyam called me I would definitely talk to them."
Fall-out in India
It is not just Satyam that could suffer, says Robert Morgan, consultant at Hamilton Bailey. "India is quaking as it awaits events [to unfold]."
Deciding to offshore to India has always been difficult and nearshore alternatives to India for outsourcing IT, such as Eastern Europe, could now look more attractive. This could affect other major Indian suppliers such as Infosys, TCS and Wipro.
Jacob Jegher, senior analyst at Celent, which focuses on the financial services sector - the biggest user of Indian service providers - says external services spending in the US is slowing down. "Financial services firms that are considering outsourcing in foreign countries will now have an additional reason to hesitate. The risk of scandal and fraud will be the nail in the coffin," he said.
"The Indian technology market had already been weakened by a tough 2008, and the badly dented broader market sentiment is sure to impact on other Indian IT services providers," said analyst firm Ovum.
John McCarthy, analyst at Forrester Research, said, "If a similar trend of fraud continues in the Indian IT supplier space, then there is a good enough reason [for Indian outsourcing] to be concerned."
India has had its first corporate scandal of global significance and, regardless of the challenges facing Satyam, the Indian IT outsourcing industry will need to fight hard to retain its clean image