Home opinion-and-analysis Beer Files Has Satyam signalled end of Indian tech miracle?

Has Satyam signalled end of Indian tech miracle?

With the new year less than two weeks old, the question on the lips of many tech industry watchers is whether the Satyam fraud scandal means the party is over for offshore outsourcing. While Satyam is just one company, the extent and audacity of the financial fraud is such that gazes are turning toward other low cost outsourcers operating in poorly regulated markets.

While Satyam has been described as India's Enron, the comparison is really an understatement of the gravity of the situation for India as a nation. The damage that has been caused by this sordid affair has already tainted the Indian outsourcing industry — not just IT but also BPO — in the minds of many.

With its founding boss now in custody, there is little doubt that Satyam will cease to exist in its present form. The prevailing view is that it will be broken up and sold off to other Indian service providers. The company has many valuable contracts from first tier customers on its books. Those customers, however, will now face questions from their shareholders about the risks associated with the offshore model.

Satyam was a first tier offshore outsourcer – one of the big four on the subcontinent. If this thing could happen to such a big player in the nascent Indian global high tech corporate world, what about the other three even bigger players? What about the burgeoning number of smaller players in India?

Is the Satyam affair just a one-off corporate incident or is it an endemic problem, symptomatic of an immature and lax national corporate regulatory culture? In the current climate of a global economic downturn, the boards of large companies may have a hard time convincing shareholders and employees alike that the latter is not the case.

In most cases, one rogue corporate activity does not a disaster make. If that were the case, the home of corporate scandals, the US, with its Enrons, Worldcoms and sub-prime mortgage fiascos, would have been out of business long ago. However, India is not the US. It is a newly emerged economy — an economic miracle — fuelled by the economic activity created by companies in the exact mold of Satyam.

If the mould is found to be flawed and cracking, then so too may be the economic miracle.

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According to Jens Butler, principal analyst at tech market research firm Ovum, the question remains open as to whether the Satyam affair will simply mean a consolidation of the number of big players as has happened in the accounting market or something more serious.

Butler believes that all major customers of offshore service providers will now be tightening their due dilligence processes when dealing with any of the providers in low cost offshore markets.

"There is going to a be a huge focus on accountability and the governance associated with a lot of these players," he told iTWire.

"It's not going to be just Satyam. It's going to be the other Indian outsourcers. It's also going to be the IBMs and HPs and anyone else who have operations in India, China, the Philippines and so on."

The above prognosis therefore would not just spell bad news for the outsourcers based in India, China and other low-cost markets. It would also weigh heavily on the entire offshore outsourcing infrastructure built up over the past decade by multinational service providers.

And what of the major corporate customers left in the wake of Satyam's untimely demise?

Here in Australia, some of our largest corporations — Telstra, National Australia Bank, Qantas, among others — will now have to face some serious questions. They already faced considerable opposition from various quarters, not least unions, when they went the offshore outsourcing route. Can they afford to simply rollover their existing contracts to whoever takes over from a sold off Satyam?

What happens if another major corporate IT scandal in India breaks in coming weeks or months, revealing a systemic regulatory and corporate governance issue? The shockwaves reverberating across the subcontinent would be devastating and global corporations may inevitably be forced to rethink their entire IT global delivery models. It may end up being a case of companies no longer being able to justify sending their IT services delivery offshore.

No doubt such an eventuality would be welcomed by supporters of the philosophy that all IT jobs should be kept onshore. However, for corporations the de-globalisation of IT services may also mean that the cost of development and delivery would rise significantly.

Of course, it may not be as serious as all that. Satyam may simply be a one-off major corporate scandal. These scandals have happened and will continue to happen all over the world.

As Ovum's Butler says, in coming weeks we can expect the Indian Government to issue all sorts of soothing statements about tightening regulatory processes and corporate governance, designed to reassure the global market place. However, for the opponents of offshore outsourcing and many others such statements will do little to erase nagging doubts that Satyam may well be just the tip of the iceberg.

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Stan Beer

 

Stan Beer co-founded iTWire in 2005. With 30 plus years of experience working in IT and Australian technology media, Beer has published articles in most of the IT publications that have mattered, including the AFR, The Australian, SMH, The Age, as well as a multitude of trade publications.