Satyam Accounting Scandal - My Take

by demtron on Thursday, January 08, 2009 11:22 AM
I found this article titled Accounting Scandal Rocks Indian Outsourcer Satyam over at InformationWeek.  It’s likely that a number of companies do not have contingency plans for this kind of problem.   According to this article, some of the work done by Satyam may not be easily transferable to other IT consulting companies. What does this mean for the state of IT offshoring to foreign companies?

First, there will likely be greater scrutiny of outsourcing firms and increased financial disclosure requirements.  Do outsourcing clients understand how to analyze the financials of foreign companies and find indications of fraud or other problems that can happen in that country but not domestically?  Would increased scrutiny have identified this?  I can’t answer these questions, but I’ll bet they’ll be raised really quickly.

Second, the article mentions the lack of vendor diversity for specific lines of IT work.  A one-vendor strategy for each line makes a lot of sense for economics, communication, project management and whole range of other reasons.  With the Satyam scenario, the disruption of service appears to be very likely for most clients.  What would happen to your business if, for example, you Internet marketing consultants were suddenly unavailable to continue working with you?  How difficult would it be to find a replacement to pick up the pieces and how much would that cost?

Third, while it might be unfair, I feel this will cast a long shadow on the outsourcing and offshoring industry.  I disagree with the statement that this will not cause U.S. customers to shun outsourcing.  The fraud that exists in this case is of a magnitude that should give pause to creating future offshoring relationships.  Fraud at this level likely means that fraud exists at lower levels in the organization.  The inflation of financial figures likely affected the negotiations of contracts and swayed the confidence of prospective clients.  If I were a client, I would run (not walk) away as quickly as possible and probably bring my IT operations back to the U.S., if not long term, I would at least until I could make a thorough assessment of what this means for potential relationships with other offshoring vendors.

This problem will not go away.  With the kind of gaudy numbers that have circulated about the volume and values of offshoring contracts in recent years, it’s hard to imagine that Satyam is the only problem.

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