Having interviewed both companies' chief executives months before their fall, I feel more qualified than most to evaluate that comparison.
"India's Enron" is how the country's commentators are (predictably) characterizing Satyam Computers following the resignation this week of its founder and chairman, B. Ramalinga Raju, amid revelations of widespread accounting fraud at the global IT service provider. Having had the opportunity to interview Raju in July, as well as former Enron CEO Jeffrey Skilling months before his company's fall from grace in 2001, I feel more qualified than most to comment on that comparison, which is right on and dead wrong for several reasons.
Of course, we don't know nearly as much about what went on at Satyam as we do now about Enron, but so far we know this: Raju, in a five-page resignation letter sent to Satyam's board, took responsibility for the fraud, saying the company had inflated its financials for several years, including profits by more than tenfold between July and September of last year. Raju apologized to shareholders, said he's prepared to face the legal consequences of his actions, and said none of Satyam's other board members had any knowledge of the fraud.
"What started as a marginal gap between actual operating profits and the one reflected in the books of accounts continued to grow over the years," Raju said in the letter. "It has attained unmanageable proportions as the size of the company operations grew significantly." Raju, who said he and his managing director didn't take "even one rupee/dollar from the company" and didn't benefit financially from the fraud, compared the situation to "riding a tiger, not knowing how to get off without being eaten."
I'm sure Skilling, as the convicted mastermind of Enron's multibillion-dollar fraud, rode that same tiger, but he never did apologize or admit wrongdoing, even as a federal appeals court this week upheld his conviction. And if the Enron and Satyam fiascos seem similar in scope -- Forrester Research analyst John McCarthy says "there's never been anything close in scale to this fraud in the IT services business" -- they're not entirely similar. For one thing, the Enron and Satyam chiefs come from different stock.
Skilling, the former McKinsey consultant, was all ego. During two interviews I did with him in 2000, the first at Enron's towering Houston headquarters and the second during an industry conference keynote, any question of the company's abilities to conquer new markets -- even if Enron had zero experience in those markets -- was met with a quick dismissal or condescending rebuttal. For example, Skilling insisted that Enron could take on established telecom carriers by buying and selling bandwidth and provisioning it to customers at a fraction of the cost in a fraction of the normal time, yet he treated those who questioned those lofty ambitions (me included) as less than astute. (Turns out that Enron Broadband was a house of cards.) The former traders put in charge of many of Enron's emerging commodity-arbitrage businesses were similarly cocky.
The soft-spoken Raju, in contrast, exuded paternal charisma during an interview with several InformationWeek editors at Satyam's headquarters in Hyderabad on July 14. Satyam was emerging as a leader in global IT services, Raju said, because of the company's staunch commitment to training and educating its people and understanding its customers, not because it had concocted a superior business model. While Skilling tried to erect the Enron empire by dragging it outside energy trading into telecom, metals, pulp and paper, and other alien markets, Satyam stuck close to its core. It continues to move beyond IT outsourcing and application development -- looking to help companies re-engineer their supply chain, design, manufacturing, distribution, customer service, and other operations -- but its underlying focus is still technology.
If Skilling, who was brought to Enron from the outside, was feared in his day, Raju, the Satyam founder, was almost revered, having not only built the $2 billion company, but also the Emergency Management and Research Institute, a national, not-for-profit 911-like emergency-response service seeded with $50 million of his and his family's own money. In my short experience with Raju, he wasn't boastful or even animated, but he had his own way of getting things done -- often at a much faster pace than his lieutenants were comfortable with. One top Satyam exec related how a "suggestion" from Raju to accelerate the timetable on an important project would immediately be understood as a command. Clearly, Raju was under even more pressure than we knew.
As with the aftermath of the Enron and more recent financial industry messes, there's likely to be an outcry in India for more oversight and regulation of public companies, a la Sarbanes-Oxley. Already there's fear in India that more financial skeletons are lurking in other IT companies' closets, though India's influential National Association of Software and Service Companies was quick to call Satyam "a standalone case of failure of corporate governance."
At a minimum, Satyam's U.S. customers must prepare for a disruption in service, as Satyam seeks to be merged or acquired, says Eugene Kublanov, CEO of outsourcing consulting firm neoIT. "Literally, in the next couple of days, the next week," he says, "be prepared with a risk-mitigation plan." But don't jump to too many conclusions too fast.
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Please join us for InformationWeek's Editorial Webcast: "Offshore In India: What's Next?" on Thursday, Jan. 22, at 11 a.m. EST. Editor In Chief Rob Preston and a panel of top executives from the Indian IT industry will discuss these and other issues. Go here to register.
. We've got a management crisis right now, and we've also got an engagement crisis. Could the two be linked? Tune in for the next installment of IT Life Radio, Wednesday May 20th at 3PM ET to find out.