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.

Moving Ahead
The swiftness with which the regulators have approached the Satyam case in the last few days underscores the significance attached to this far-reaching situation. It is very well known that the success of the software industry and exports in particular have been a catalyst in creating new jobs and the growth of the entire Indian economy in the last two decades. Hence, it is mandatory for the government and the regulators to maintain the transparency and swift action in the investigation of this case right through to conclusion. This is one way to instill confidence among global organizations currently outsourcing to Indian firms and among foreign investors, two groups who will be certainly be tracking the case very closely. It also is anticipated that PWC, the main auditors of Satyam, will be made answerable and possibly accountable either for negligence or collusion. We may recall that Arthur Andersen went down with Enron. Accordingly, it is expected that regulators and government will move on structural changes and in the Satyam reorganization with all appropriate haste.

In its strategy for pulling Satyam from this hole, the company's newly constituted board needs to balance carefully the interests of employees, customers, and investors. And while each of those groups' interests must be given all due consideration, the board must be sure not to short-change the Satyam employee base, a group of more than 50,000 who had absolutely no connection whatsoever to the financial scandal. The board must recognize clearly that the most important source of competence and knowledge in the software business is the people, and that for Satyam it is particularly critical to sustain current project teams so that they can avoid any major disruptions for the company's global customers.

In a historical context, Satyam follows other major cases of accounting fraud such as WorldCom, Parmalat, and Enron, indicating that this not about a specific industry or country. In the earlier cases, we did not adopt a global philosophy of questioning the performance of all telecom firms, food industry, or energy companies. While CIOs and their teams will need as noted above to re-evaluate governance policies toward outsourcing partners, we also should be very hesitant to question the validity of the entire industry because there is no evidence now telling us to do so. Indeed, what all these examples of accounting fraud have in common is that they came about for two reasons, one of which is personal -- greed -- while the other is institutional -- our capitalistic system's relentless focus on short-term quarterly financial performance.

Satyam serves in that regard as another reminder that while one can fool the system for some time, the problem will only intensify in the long term and the truth will be out eventually. This calls for more transparency in the system and processes, particularly as it relates to corporate boards. These examples expose how little boards of directors know about the actual details of their companies' operations. While no system can help guarantee integrity and values, perhaps corporate boards need to get closer to the reality of their businesses by looking at real-time system dashboards of company performance and cash balances, rather than being limited to static PowerPoint presentations decorated by management. While such steps might not eliminate such frauds, they will certainly leave an audit trail in systems and make investigations easier. It is clear that in infusing greater rigor into the systems, CIOs and IT have an important role to play in facilitating this much-needed increase in transparency and corporate governance. Should that come to pass, then perhaps Satyam's shameful experience will eventually lead to something good.

M. S. Krishnan is professor of business information technology at the Ross School of Business, University of Michigan. He also is co-director of the Center for Global Resource Leverage: India at the Ross School of Business. He is the co-author with C.K. Prahalad of The New Age Of Innovation (McGraw-Hill, 2008). He blogs about transforming business models on the New Age Of Innovation blog.

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.

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