Satyam: It was like riding a tiger, not knowing how to get off without being eaten


Tiger A great quote to cap a sad story for Satyam’s Ramalinga Raju, who resigned as Chairman today.

Following the recent issues regarding Satyam’s financial irregularities, India’s IT-BPO services industry finds itself under increased financial scrutiny from Wall St analysts and corporate clients. However, while Satyam has a major challenge ahead to maintain its market position and is a likely takeover target, we do not believe this fiasco will have longer-term ramifications for the Indian services sector as long as Satyam’s creative accounting turns out to be an isolated incident and not a more pervasive problem across the sector.

Satyam’s existing customers will ask questions but are unlikely to switch suppliers unless Satyam loses a large number of crucial operational staff in the coming weeks. However, Satyam is now at a disadvantage in winning new business in the short-term as it struggles to shake off the current controversy. Plus, some customers renewing existing agreements will be evaluating alternative service provider options, in the wake of the uncertainty surrounding Satyam’s future. Its new leadership needs to move fast to right the ship and placate corporate accounts, and likely prepare the firm for an imminent takeover – the firm’s stock just hit a new all-time low. With Satyam’s strength across software service areas, particularly high-margin enterprise application services – we believe potential suitors include

HP, Wipro, IBM, and possibly Genpact, whose major investor, general Atlantic Partners, may want to marry Satyam’s IT services strength with genpact’s BPO offerings. etc. Satyam also has a growing BPO competency, largely centered on procurement and supply chain support functions, which increases its potential attraction to some acquisitive competitors, as few large service providers today have a strong supply chain outsourcing portfolio.

Regarding India’s outsourcing scene, while customers from the US and Europe will (and should!) ask questions about the health of specific IT-BPO service providers headquartered in India, this current predicament is Satyam’s alone. While other Indian-HQed suppliers need to be prepared to answer tough questions from clients and Wall Street as scrutiny on the sector hots up, we do not expect this to be a sustained issue in the medium-long term.

Thanks Dana for contributing to this commentary

Posted in : Business Process Outsourcing (BPO), IT Outsourcing / IT Services, kpo-analytics



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  1. Another big question here is what this will mean for governance among the large Indian providers. Something was getting by the relevant officers at Satyam, apparently, and will this not raise issues about compliance issues across the board?

  2. This is just an indication of the bursting of the Sensex bubble in India.

    India’s market cap overtook its GDP in May 2007. By January 2008, it had reached 180% of GDP. Compare this to 131% for the U.S. during the dot-com boom and 150% for Japan at its market peak.
    If history is any guide, we should expect to see similar cases of fraud in the future.

    Ramesh has a point. It was so extraordinary for Mr Raju to confess that perhaps it would be prudent to hold judgement against Mr Raju himself.

    Clark O’Brien

  3. Whatever happened can’t be undone, but only a swift, fair, example-setting and far-reaching response from law-enforcement agencies will alone determine whether customers, investors and employees still have trust in the company anymore.

  4. Phil…. guess it’s really too early to comment or generalize but wouldn’t be really surprised if this happens again. Let’s look at whats happened in the US historically despite having the SEC who supposedly is responsible for regulating the health of the financial markets we’ve had enough and more instances of frauds and to really be honest the scale of Satyam’s failure (if thats what it may or may not end up to be) is pretty minute. The Enron comparison has been taken many a times and we all know how it happened.The so called Arthur Andersen still exists under a different name and is frankly one of the biggest services brand names despite many other numerous mess ups :).

    Though I think there may be a strong co relation between Enron and Satyam including the fact that Jeffrey Skilling and Raju are both HBS alumni that really does not give us the flexibility of assuming that this is more or less the case with the rest.

    On the point of financial health I think its only safe for parties on both sides of the table to look at the financial health of the other there have also been cases where recovery from the buyer for services have failed following bankruptcies. For that matter I really don’t still see the accountability from any of the banks who begged for every penny of the bail out.

    I think a take over or atleast a few bids will do its rounds considering the valuation has dipped significantly but having said that as a stand alone I’m sure with a strong team in place and a few heads rolled they could still come back – will definitely take time to rebuild credibility though. Raju owning up was inevitable if you think about it… he was more or less on his way out after the failed acquisition of Maytas the family owned business by Satyam and considering he had only roughly 4% left in Satyam any new head in charge of the business would have clearly found this manipulation out at some point or the other.

    I would be surprised if there is a dip in FDI purely from this reason alone and considering Satyam’s business is more or less a commodity in the services space transferring those accounts would be more off a consolidation at the discretion of the client depending on the outsourcing strategy.


  5. Satyam inflated its own assets and got loans against these inflated assets that showed overbooked revenues,this will result in a lot of withdrwal of rolling cash by its bankers and reducing available credit. The stock value has plumeted due to lack of investor confidence, no organization wants to put itself into acquisition mode due to fear of unseen liabilities and reputation tarnish.The company is all set to implode due to its inability to operate under normal parameters and affected people morale.

    Satyam was provider of commodity type services from offshore and plenty of people can deliver this including other commodity service providers like Wipro, TCS,Infosys,HCL or Cognizant. Any of the above who has stronger prescece in the clients that Satyam served is likely to get more business. The transfer of business will occur on a client to client basis.

    There have been bigger scams in the world like Enron and MCI, this will also pass like all the others and India will be back to normal very shortly. As a result there will be push to tighten regulation and corporate governance in India, which is a good thing.

    I do not see a significant drop in FDI in India over the long term as India is thought to be one of the countries that can lead the economic recovery for the world. Short term, there is going to be that ripple effect felt for sure.

    Nitin Kumar

  6. Satyam goes down
    Published January 7, 2009 Bank Stocks , Financial Markets , GDOW , India 0 Comments Edit
    Tags: Amitonomics, Citi, Credit Crisis, DealBook, Depression, Financial Markets, Global investing, India, Liquidity Crisis, M&A, MER, Mergers, Outsourcing
    Well, first the data you need. Rs 7136 crores addded to books with no accompanying transactions. Just extra revenues and extra profits from these non existent revenues; a non existent personal loan of Rs 1236 crores and non existent cash of Rs 5000 crores on assets. Added revenues of 588 cr in Sep Qtr which could not withstand preliminary due diligence. And to quote the Ramu Raju of the piece, no one knew about it. A plain shame.

    None the less, though industry experts come out with Satyam is not representative of India, that is just not true. This is happening everywhere, just a blind eye to the Financials that compromises the best of analysts and market-makers. Criminal concerted planned breakdown of a global systemic disease that is keeping our hopes live for the next corner. Reform that is inordinately delayed and hanging a damocles sword over working professionals.

    Satyam’s cash value would now be more like $250 m for just the real estate and the employee roster. And $255m in secured loans. and the liabilities are not going to be transferred to the client roster. At least I would not recommend it. CLSA’s valuation of post diligence breakdown at 600 m seems way off the mark. JPM and Credit Suisse reactions are better. The markets have reacted worse than expected. For stocks outside Satyam, huge falls raise questionsof faith that are representative of the lack of faith that pulls India down.

    And when the totem poles of reform like ICICI Bank or institutions like Fidelity cannot do even a semblance of due diligence before investing it is really a question mark on corporate governance at these institutions. And KPMGs and E&Ys and the other Top 20 auditors who have failed once in 2000 and once again in 2008. A shame!

    An undue prolongation of the shame that is evident at Enron, GM Ford and now Satyam and a few more. Atleast we have the processes and the structure to discover them and withstand them. I doubt a China and a Russia have even a remote modicum of the process and the regulation. I doubt if the servicing It companies and the users that are even Whistleblowers are doing even remotely enough to make this world a livable one. Nonetheless, one step at a time we will get there.

    BAC and Citi also have agreed to cut executive bonuses. It’s a good start to 2009.

  7. and my take- almost everyone at Satyam and in Cyberabad knew this was happening at Satyam for the last 10 years, in fact the general population still believes this is de rigeur. even the general population with citi bank accounts in new york. now- what will happen next!

  8. This is a fickle world. “India and China were yesterday’s flavor”, they say while running now to the Ukraine or Costa Rica. It was only a few years ago that enterprise CIO’s were considered backward if they didn’t have some operations in India. Now, with recent events in India, they might seem backward if they did.

    Here’s a better approach: Keep the mission critical stuff internal and find a vendor partner that provides staff augmentation, is fun to work with, treats people with respect, and they like to party (in a healthy way of course). This way, it doesn’t matter much what country you work in, but the company you work with.

    Oversimplified? Yeah. But smarter people than myself did big deals with Satyam and didn’t see the cliff they drove off. So we should all refocus on relationships that we can trust.

    Michael Barrett

  9. This will all pass like everything else and hopefully we will have better regulation and corporate governance. A one of incident cannot determine the fate of India Inc and what is the guarentee that this will not occure anywhere else. lets look at things practically.

    India’s largest issue is quality of people and thats what they need to fix if they have to survive in the outsourcing world.

  10. To be candid, I am welcoming this development. It shows the maturation of the Indian business environment. With the explosion of the IT Services sector in India, the oversight mechanism seems to have been neglected. This should spur the development of that mechanism. That in turn will enhance confidence in Indian businesses in the future.

    I’d be very surprised if this wasn’t the reason for a re-audit of tons of “public” Indian companies. I expect a “SOx” for India and also should see initiatives to drive internationalized standards for managing audit and compliance.

    Divya Sundaram

  11. Satyam’s “contretemps” is the icing on the cake. Further difficulties will soon be surfacing for the company as well as for the entire outsourcing industry in India, and that will be the cake under the icing that will severely impact all aspects of the operations of Indian outsourcing companies.

    European and North American companies will start to be more stringent in their expectations of outsourcers’ viability due to this episode, and that will cause some nasty financial and operational gaps to be revealed.

    Michael A. Keane

  12. My suspicion is that R. Raju did not cook Satyam’s books, but siphoned off cash after the global meltdown in Sep 2008. He was highly leveraged in real estate transactions and this was his idea of deleveraging!

    I expect the impact of this on India outsourcing to be minimal. Wall Street firms have numbed global sentiments by the sheer size of the their trillion dollar incompetence. How does another $1.4B fraud from India matter?

    This Satyam episode will be more noticed within India than in the rest of the world. Some family owned / promoter-controlled companies (HCL, Patni, Birlasoft, Hinduja TMT) will be scrutinized closely by their customers. But, I cannot see India outsourcing taking a beating because of this.

    In India, the software sector is the cleanest (the rest of the industry considers corruption an unavoidable aspect of doing business) and R. Raju has dirtied even that.

  13. I like Michael Barrett’s idea of focusing on companies that have the right value systems in place. It actually shouldn’t matter which country or region the people are operating from.

    Another approach might be to pick companies with sound people management philosophies and ‘partner’ with them for managing the local workforce. Over time, the quality of the workforce will improve at least for the specific customer. This is one part of the smartsourcing approach.

  14. Satyam may just be the tip of the iceberg!

    While not in every company with a professional management does the entire management team resonate and collude to pertetrate a fraud, however the risks with Indian companies like Satyam are more systematic and wide spread due to a very corrupt and unethical corporate governance environment rife with nepotism and collusion. The Satyam MD/CEO was the devout sibling of its Chairman. If you follow the disclosures of their CFO, he was kept completely in the dark since even though Satyam is a NYSE traded company, due to the cultural traits of the Indian corporate environment, no officer of the company questioned the motives of the Chairman who was the “owner” of the company. Also even though Satyam was a publicly traded company the sibling of teh Cairman was made the MD/CEO irrespective of whether he was qualified for the job to simply retain control in the family and enable them to perpetrate this massive scale of fraud for years.

    Many of the other Indian firms may have similar risks due to collusion and nepotism – e.g. the HCL BPO CEO is a relative of their Chairman or the Chairman of Wipro owns over 80% of the company and US professionals like Vivek Paul couldn’t survive in their stifling culture without becoming a coterie of the owner (incidentally like Satyam, Wipro was also banned by the World Bank on bribery charges – I think that is more than a coincidence!). Many of the more brick and mortar businesses is India – the Goenkas, Birlas, Ambanis etc are all family owned where even though they claim to have independent boards they are incapable of appointing professional management rather than succumbing to nepotism and appointing family members and their coterie from generation to generation thereby exposing investors and employees to risks of fraud from collusion. Also since insider trading is rampant with Independent Auditors in India, there is a chronic conflict of interest for them to expose financial discrepancies within the companies they audit.

    What is unfortunate is that there is a concerted effort on the part of NASSCOM and other industry associations to paint Satyam as an anomaly when it may be more of a norm
    than exception (the exception may be the fact that Raju came forth and volunteered information unlike others!). If one speaks to the common people in India everyone will acknowledge that most companies maintain multiple books of accounts, pay executives under the table, bank officials can be bribed to issue false deposit statements etc. yet no industry body in India has had the courage to acknowledge these well known maladies and call for a wide scale reform when so much is at stake in terms of the GDP growth of India that is fueled heavily by the western revenue stream in its service sectors.

    What is even more disappointing is that analysts and industry watchers are not willing to ask these hard questions either. I have asked these questions of Gartner, InformationWeek etc but my voice was drowned in the din of the chorus of praise about the greatness of the Indian ITES/BPO industry and cow towing to the information fed by the Indian firms who are eager to win global business but unwilling to truly open up their top management ranks to global professional standards rather than hoarding those positions to Indians, family
    members of owners or their coterie.

  15. Yes, this Satyam episode is a serious fraud & Raju & his clan certainly require further investigation. But only conspiracy theorists would read anything more on ethics of Indian business or BPO industry , from this incident.

    Indian citizens constitute more than a sixth of world population. We are likely to have the same sinners & saints (!!) ratio, as the rest of the world. This Satyam episode is hardly an event to cause a sourcing manager to revisit the geopolitical metric score of India, in his partner evaluation process.

    The only observable Indian cultural trait from all this, is our love to create – heroes & zeroes, Tigers & Turkeys, Gods & Dogs etc etc

    The other note-worthy outcome from the recent Satyam saga, for all of us in this line of business, (we agreed to disagree, to call- outsourcing), pertains to audit practices(not just corporate governance, as is being intrepreted by media). The auditors of a BPO provider firm have a pretty tough task of validating a huge range (nature of services) of client contracts from all over the world & also confirming cash balances, in bank accounts scattered all over. Most audit firms feel comfortable getting a direct fax or email from the customer or the bank, & rarely authenticate their source document. If the chairman/ceo, CFO & 2 clerks decide to bribe a small bank clerk somewhere, its pretty easy to do this nature of white-collared crime, from most places in the world. Like Maddoff & various other scandals, eventually there is a simplicity in most white-collar crime too. In the final analysis of the WW2 final solution, the Eichmann trials had lead to the development of a surprising phrase – the banality of evil. Look back at the big banking sector scams in India ( Harshad Mehta / HomeTrade etc), eventually one didn’t need much forensic auditing – banality of evil has several parallels in accounting scams too.

    Its good to see this blog take a righteous stance & not support any opportunistic efforts to break satyam during its dire straits. The new board constituted (surprisingly fast by the Indian government) at Satyam, is in an excellent position to hold the entity together.

  16. What was in the books in 2005 ( became a reality on April 22 2009. The Indian regulator for the banking industry, RBI, will ask banks to submit an annual compliance certificate of all service providers to whom they have outsourced contracts.

    With the increasing move in outsourcing business from international organisations to domestic banks in India, RBI has considered the impact of the Satyam scandal on the banking industry and thought is wise to build in additional securityies. The growing dependency for back office operations on BPO firms, following the implementation of core-banking IT solution by the large IT BPO’s in India makes domestic banks increasingly vulnerable.

    It remains to be seen whether this will really help or be the Indian version of the ‘Sarbanes Oxley Act’, with all its accocated cost and its shown incapability to protect us from other bigger harm.

  17. Event Alert: Mahindra Satyam faces the global services industry – the bleeding has stopped, but can it regain its Tier 1 India p says:

    […] itself from the biggest scandal in Indian outsourcing history, a renamed Mahindra Satyam has quietly been going about its business to rebuild trust and […]

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