Satyam scandal shifts local focus to contract transparency

On 12 January Indian outsourcer, Satyam faced a scandal as big as Enron.

Former CEO and founder of Satyam Computer Services, Ramalinga Raju, was taken into custody along with his brother and co-founder, B. Rama Raju, two days after admitting to inflating the profits at his Indian outsourcing IT firm.

The former CEO allegedly inflated Satyam's cash and bank balances by $1 billion.

Analysts have noted that this may be the beginning of the end for the IT firm, and the revelation is likely to impact not only Satyam's vendors and customers, but also will send shockwaves throughout the IT service-providers around the world.

Australian buyers of ICT from Satyam, such as NAB, Telstra and Qantas have all be affected in one way or another, by the scandal.

According to Jens Butler, principal analyst at Ovum, there will be a big focus on reviewing their contracts, assessing the continually daily changing situation and considering the contingency plans.

He said, expect noise from a lot of the larger clients (Qantas, NAB, Telstra, etc) stating that they are “assessing the situation” and may consider alternative providers.

“However it all depends upon the contractual situation of those clients,” he said.

“If they are newly entered into a longer-term five year deal, for example, assessment of contingency plans and alternatives will be undertaken, but expect the majority of clients to wait and see what happens (will Satyam be bought out, broken up, taken over, liquidated?).

“It could be too expensive to break such a long-term contract immediately.”

Butler claimed, more important than the breaking of contracts will be Satyam’s ability to service those accounts in accordance with its contractual obligations – and ability to hang-on to keep delivery and operational staff.

While newly appointed CEO, Deepak Parekh, claimed the top priority of the board was to restore confidence of customers, employees, suppliers and investors.

Butler believes the new Board’s focus will be on governance and communication.

“However, this crisis is about credibility, and will only really show its impact when chasing new contracts over the next three to six months – the buying process for major services contracts has a lot of qualitative factors involved, not just the quantitative drivers,” he said.

“It will not only be just the Board, but also the Indian Government’s ability to manage this situation and the speed and level of activity coming from that quarter.

“It will take an awful lot of governance, accountability controls, and direction and investment by the Indian Government, State Governments and the Board."

He claimed this will be a critical test for the Indian Government and how it
reacts and manages the crisis, giving it impacts such a large export component of the Indian economy.

For local IT service providers, this could generate new customer opportunities, especially mid-tier players like SMS, UXC and Data #3.

“Forty to to 45 per cent of Satyam’s business is pure consulting, and local players should start looking at these short-term contracts,” said Butler.

“Playing on the perceived risk associated with moving operations away from more regulated markets may have an influence, in the short-term.”

However local IT providers will have to operate on an open communications basis.

They will also have to look long hard at issues like governance, accountability and stability.

“[These] issues not only play a key role in the buying decision, but the ongoing relationship,” said Butler.

“Price isn’t everything, it is all part of a complex set of decision criteria and understanding the interplay of these is critical.”

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