Ripples in outsourcing country

Ripples in outsourcing country

Indian outsourcing companies have long been the darling of employees,investors and even the customers they serve around the world...

Indian outsourcing companies have long been the darling of employees,investors and even the customers they serve around the world. But the $50 billion industry,the pride of post-liberalisation India,is beginning to feel the heat as a gigantic fraud surfaced in the country’s fourth largest outsourcing firm,Satyam Computer Services.

The consequences of the scam are just beginning to unravel for Satyam’s peers. Shareholders and clients,who suspect that other companies too may hide dark secrets,are posing hard-hitting questions.

The outsourcing industry body Nasscom said it was stepping in to safeguard the impeccable reputation built around the technology and services industry. “We are asking our members to stick with high corporate governance principles and reassure investors and customers,” Nasscom president Ganesh Natarajan said. The body would support Satyam to maintain business continuity for its customers.

Earlier this week,Satyam’s chairman Ramalinga Raju first confessed that he had been inflating company profits and embellishing assets for many years to the tune of billions of rupees,and then resigned. Raju had jolted investors last month when he announced that Satyam proposed to acquire his two sons’ construction companies for a consideration of Rs 8,000 crore.

“After the Satyam shocker,investors have begun


to pose tough questions such as,does Wipro have an unhealthy culture where the management finds itself in a position of having to please a demanding taskmaster with 80 per cent company ownership?” Ashish R. Thadani,senior vice president of research at New York-based Gilford Securities told The Indian Express.

Some of the biggest outsourcing firms such as Wipro and HCL Technologies,besides Satyam Computer,indeed,started off as family-run businesses. But many including Wipro,where its chairman Azim Premji controls about 80 per cent stake and whose son Rishad Premji was recently inducted as an employee,pride themselves as professionally-run. Premji was not available for comment.

Now,investors are demanding that outsourcing firms demonstrate tighter governance by hiring known auditors and a credible board of directors. “Investors are asking whether,in this environment,Infosys can afford to have a relatively-obscure firm perform the critical confidence-building function of the independent auditor,” asked Thadani of Gilford Securities,“Or,could Cognizant Technologies’ remarkable track record also prove too good to be true?”

Outsourcing is a high-growth sector in India’s until-recently buoyant economy,not just bringing in much-needed foreign earnings but also employing millions. Satyam,for instance,has close to 60,000 employees while its larger rivals are closing in on the 100,000 employee mark.

Indian outsourcing companies perform a complexity of tasks for the biggest global corporations from mundane payroll,accounting and supply chain management,to the more visible customer service and even highly sensitive services such as R&D and design. India is the indisputable number one outsourcing destination for Western multinationals looking to offshore their operations.

Such customers,virtually a list of the top global corporations,will feel a heightened level of concern and “ask more and more questions and demand more and more due diligence,” said Infosys chairman and chief mentor N R Narayana Murthy.

“Clients will ask for certificates of financial compliance and reaffirmation of the credibility of companies’ financial statements,” predicted Partha Iyengar,head of research at Gartner India.

The Satyam fiasco will undermine the credibility of the India’s outsourcing firms,especially where customer relationships are new and not very strong,said Bangalore-based Anand Lavi,a partner at Virginia-based advisory firm,Tholons.

The beleaguered Satyam,with clients such as Coca-Cola,General Electric and Nissan Motor,is meanwhile being sued in several US class-action lawsuits. A class action lawsuit is filed on behalf of a large group of people collectively bringing a claim to court.

Workers in the outsourcing industry,already hit by pink slips after the Wall Street meltdown and an economic slowdown,are now faced with a further crisis. Many are asking whether Satyam can afford to pay salaries after Raju confessed that he had inflated the balance sheet showing non-existent company cash reserves of Rs 50.4 billion.

Meanwhile,leading outsourcing companies are busy reassuring their customers that they can be trusted to deliver. HCL Technologies which is now the fourth-largest outsourcing firm after Satyam’s debacle,said its chief executive Vineet Nayar had been communicating with key customers and employees to reinforce HCL’s commitment to sound corporate governance practices.


As outsourcing companies realise,it is not just their own credibility that is at stake but also that of Indian outsourcing as a brand.