Opinion: Why the Satyam scandal will force a step change in global outsourcing

It is somewhat ironic that in the Sanskrit language, Satyam means truth, given the recent accounting scandal to have hit the company. But what does this crisis mean to offshore and general outsourcing as a whole?

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?

Read the letter from B Ramalinga Raju to the chairman in full

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.

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