Satyam Could Go Bust, Gartner Warns

The Indian outsourcer may be unable to retain business in wake of accounting scandal.
IT advisory firm Gartner has warned Satyam customers to prepare for the possibility of the disgraced outsourcer's demise and related service disruptions. "IT services are unlike hardware or software in that they focus on a relationship with a 'trusted partner,' rather than on a product. We believe Satyam's difficulties have considerably diminished its ability to retain and inspire this trust," Gartner said in a new research note.

Gartner said it believes that Satyam's accounting scandal, which has been dubbed India's Enron, will make it difficult for the firm to compete going forward.

"In the current economic environment, enterprises consider financial indiscretions by any business intolerable; we believe this will severely handicap Satyam when prospective customers are evaluating potential partners," Gartner said in the report, which was published last week.

On Jan. 7, Satyam chairman Ramalinga Raju admitted falsifying the company's cash position by as much as $1 billion while overstating quarterly earnings and revenue by as much as 28%. Raju tendered his resignation and has since been arrested.

Gartner is warning that Satyam may not survive the scandal and, even if it does, may not be able to retain staff or invest in customer engagements. As a result, Gartner is advising Satyam customers, which include American and international heavyweights like Citigroup, Nissan, Applied Materials, and Caterpillar, to eye alternatives.

"Closely monitor ongoing engagements and prepare contingency measures for potential service disruptions in the short to medium term while Satyam's position is clarified and potential management changes or staff turnover ensue," Gartner warned.

It also advised Satyam customers to "create a scenario plan with key action steps."

"Scenarios include staff or management disruption, shorter-term contract renegotiation, potential switching costs and vendor options, exit-clause terms, and long-term engagement and vendor viability," said Gartner.

Satyam is also facing lawsuits from investors who claim they were misled about the company's financial situation.

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 Satyam and other issues. Register with this link.