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India's Outsourcers Hit With Perfect Storm

First it was the Mumbai terror attacks. Now, India's outsourcing sector has been rocked with revelations of a massive, Enron-style accounting fraud. Can the industry, on which U.S. companies depend for everything from software development to call center operations, survive these twin shocks?

Fortune 500 corporations collectively spend billions of dollars annually on outsourced tech and business services from India, lured by the country's low-cost, computer-literate workforce. But recent events will surely have CIOs and other decision makers scrutinizing the practice more closely than ever.

November's terror attacks in Mumbai, in which more than 150 people were killed, raised questions about the physical security of offshore operations in India and employee safety. This week's news that Satyam chairman Ramalinga Raju falsified profits by as much as $1 billion conjures doubts about the integrity of India's business sector.

Even before Raju's admission, advisory firm Forrester Research warned clients that they may need to steer clear of Satyam in the wake of its bizarre attempt in December to diversify beyond IT services into real estate. The move, it turns out, was a failed attempt to mask the cooked books.

"Sourcing and vendor management executives will need to review their dependence on Satyam and ensure that they have strong contingency plans and change of ownership clauses in the event that Satyam is acquired or the fallout from this serious misstep affects the firm's ability to compete long term," Forrester analysts said.

For its part, India's outsourcing industry insists that the Satyam scandal is an isolated incident that shouldn't taint the country's other tech services vendors. "This is a standalone failure of corporate governance and it is critical that it be viewed in this light," said Nasscom, India's outsourcing trade group, in a statement. "This is not in any manner a reflection on the industry or corporate India," NASSCOM said.

That may be, but in the wake of the Mumbai attacks and Satyam's shenanigans, peer companies like Wipro, TCS, and Cognizant will surely have a tough time convincing CIOs to commit millions to India in the form of new outsourcing contracts. That may not be fair -- 9/11, Enron, and Bernie Madoff prove that the U.S. itself isn't immune to terror and massive fraud -- but it is reality.

India's outsourcing industry, on which the country is building its future, can now fairly be said to be in a state of crisis. It's a perfect storm of events from which recovery is far from assured.

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