Strategic CIO // IT Strategy
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1/13/2009
10:54 AM
M.S. Krishnan
M.S. Krishnan
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Global CIO: Satyam Scandal Isn't The End Of Indian Outsourcing

The company's misdeeds should be a wake-up call to CIOs, but not an indictment of the Indian outsourcing industry as a whole.

The recent confession about inflated revenue, profits, and accounting fraud exceeding $1.5 billion by Satyam Computer Services chairman and CEO Mr. Ramalinga Raju has put everyone linked to the Indian software industry in total disbelief and frustration. Only a few weeks back, Satyam was considered as one of the four pillars of the success story of the Indian software industry in the global economy. Along with Infosys, Tata Consultancy Services, and Wipro, Satyam was known for its coveted Fortune 500 clients, innovative software projects, capacity to train thousands of software engineers, and best-in-class certification of software engineering practices.

The irony is that last year Satyam won the "Golden Peacock" corporate governance award from the London-based World Council for Corporate Governance (although that award was revoked late last week). It is understandable that this major accounting fraud in the background of such accolades and credence has formed a cloud of uncertainty and doubts about credibility in the entire Indian software industry. There is no doubt that the fraud committed by the management at Satyam under the certification of internationally reputed audit firms is unforgivable and has created a black mark on corporate governance in India.

In that context, the disclosure of the misdeeds at Satyam is certainly an alert call for any CIOs who have exposure to Indian software firms as partners in their global resource network. However, I believe it would be shortsighted -- and probably harmful -- to taint the entire Indian software industry based on the Satyam fiasco.

Not Every Mole Is A Cancer
We do not conclude that every big mole that bleeds is a skin cancer; obviously, we collect data and investigate further before drawing our conclusion. In a similar way, I believe for several reasons that this major failure of corporate governance at Satyam is not a structural problem with the capabilities of the Indian software industry as a whole, or with that of software talent in India. And I would thereby urge global customers engaged with outsourcers in India or elsewhere to not act too hastily based solely on the malfeasance of Satyam's founder.

First, despite the corporate governance problems at Satyam, none of their global customers had raised any concerns related to the quality of operational delivery and performance in their projects. In fact, there has been an increase in the size and scope of projects delivered to global customers by the major Indian software firms over the last few years. Hence if it had been a problem related to inability to execute large projects, we would have heard this from the market loud and clear.

Second, it may be interesting to note that of all the major software groups in India, only at Satyam had the top management shifted its attention away from its core software business in the last few years. The real-estate business controlled by Satyam owners had expanded substantially with projects worth nearly $10 billion last year. As in other developing economies, the real estate sector in India is known for structural problems related to transparency, accountability, and ownership rights. While the answers to the questions on how Mr. Raju managed this fraud and why he did it will be known only when the regulators and government complete their investigations, it is not a surprise that some media reports are claiming that the accounting fraud at Satyam may be linked to the real-estate business of its owners/promoters.

Finally, the operational implementation team at Satyam has recently won several accolades from global IT vendors such as the Pinnacle award from SAP in June 2008 for excellence in customer experience and accelerating innovation. Similarly, Satyam received two prestigious shared-services excellence awards last year from the International Quality and Productivity Council. Unlike the corporate-governance awards cited above that are based on subjective judgment, these operational delivery awards are based on actual customer experience. In addition, anyone who has visited the EMRI (Emergency Management and Research Institute) facilities in Hyderabad set up by Mr. Raju can vouch for the excellence in operational process discipline and delivery metrics followed.

These collective reasons indicate that Satyam's failure in corporate governance is not a structural issue about any significant delivery risk from Indian software houses. In saying that, I do not mean to diminish in any way the fraud committed at Satyam, or to try to portray it as any smaller sin. It is one of the biggest corporate governance scandals for India and it leaves lessons to be learned for all. It certainly calls for, at a minimum, a new layer of due diligence and checks by CIOs within their IT strategy for dealing with governance of their global resource partners.

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