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Outsourcing Contract Scrutiny Should Grow After Satyam Scandal

In the wake of the Satyam fraud, legal experts offer advice on how properly negotiated contracts can protect companies doing business with IT outsourcing vendors.
Fraud is one of the reasons lawyers often insist on "expansive" audit rights from outsourcing vendors, Shaalu Mehra, a partner in law firm Perkins Coie's licensing and technology group, said in an interview. It's been difficult to get vendors to agree to these clauses in the past, Mehra added, noting that no vendor typically wants its customers to be able to see its cost structures.

Even after a company gets out of a contract with Satyam, it isn't necessarily in the clear. Without contingency plans in place, companies will find it difficult to quickly transition work from Satyam to another outsourcing company, especially if Satyam were to go belly-up. In that scenario, there would be little legal recourse for customers other than suing company founders or taking out bankruptcy claims in the case of a bankruptcy, Mehra said.

"This underscores the extracontractual protections companies should have with vendors," Mehra said. "It's often necessary to redirect services to other parties or bring them in-house. My clients have often been well served by maintaining a portion of their operations in-house and not compromising institutional knowledge. I've always been a big proponent of multisourcing." In the last few years, Mehra's seen a marked trend toward shorter-term contracts and spreading work among multiple outsourcing vendors.

Satyam's problems also are provoking non-Satyam customers to seek legal advice, said Parks. "In the short term, customers are looking for additional assurances," he said. Parks said some of his firm's non-Satyam clients are seeking evaluation about adding new clauses to existing contracts, including "protections" related to a vendor's credit situation, financial reporting, and maintaining a minimum net worth.

Pradeep Kar, founder and chairman of Microland, a privately held, India-based IT infrastructure services provider, (and a board member of InformationWeek's parent company, United Business Media), said it's too early to tell whether the Indian IT services industry as a whole needs more governance. However, it's possible customers will have some of their fears assuaged by investigations already under way by organizations like the Institute of Chartered Accountants of India into how such fraud was missed for such a long time. "I think India will look at its system and governance very carefully in the same way we did after Enron," Harvey said.

Please join us for InformationWeek's Editorial Webcast: "Offshore In India: What's Next?" on Thursday, January 22, 2009 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. Register with this link.