Satyam Crisis Puts Indian IT Industry--And Customers--On Edge

The Industry's Future

Still, the Satyam ordeal isn't likely to derail India's IT industry. Many companies have deep ties with their Indian partners and are loath to walk away from that investment. The scandal might jolt them out of a business-as-usual approach, but they're unlikely to pull out.

Even as Indian salaries rise, the cost savings are still too big to ignore, especially in a down economy. "They could start shooting in India--a small war--and enterprise clients would still have to look at India as an option," says Trowbridge. "It's that big of a savings."

That said, the Indian industry's biggest problem is still the recession, which has further battered financial services companies, the industry's most important sector. TCS last week reported slowing growth amid pressures to cut prices, with third-quarter revenue flat, at $1.48 billion, compared with a year ago. Infosys' third-quarter revenue rose 8%, to $1.17 billion, far below the 20% and higher growth these companies are used to.

Satyam and a U.S. unit lost more than 80% of their value on the Indian and U.S. stock exchanges in the week after the scandal broke on Jan. 7, amid worries Satyam wouldn't survive. The Indian government is unlikely to bail the company out; lenders or acquirers would have to fill any cash shortfall.

The influential National Association of Software and Services Companies (Nasscom) urged Satyam rivals not to poach Satyam customers, but IT service providers from all over the globe are knocking on doors. The financial services exec says his company has received aggressive pitches for the Satyam business. The energy exec says Indian competitors haven't called, but U.S. companies have. Another Fortune 500 CIO, an Infosys customer, says his company has heard from four or five IT services providers looking for business. "They're like vultures," he says.

Microland's Kar (who's on the board of InformationWeek's parent company, United Business Media) says no one in the Indian IT industry sees the Satyam scandal as good news. As the Indian industry's growth slows amid the global economic contraction, "our desire is that Satyam and the entire Indian IT industry succeed," he says.

Companies in other geographies--from Mexico to Eastern Europe to China--will try to capitalize on the crisis. But it's a hard sell that India's more prone to financial fraud than other developing countries. Jacob Hsu, CEO of Symbio, a $60 million-a-year Chinese outsourcer, paints a problem of Satyam's size as "systemic" but acknowledges, "I don't think China is any better."

As in the aftermath of the Enron and financial industry messes, there's an outcry in India for more oversight of public companies, à la Sarbanes-Oxley. Recent revelations that the World Bank, which had banned Satyam from contract work in 2008, had also banned Wipro in 2007 for offering IPO stock in 2000 to World Bank employees only fueled the concerns.

From the customer side, look for companies to take a closer look at their outsourcers, even if it's short lived. The Fortune 500 CIO doing business with Infosys says that, while he remains confident in Infosys, Satyam's problems "get you thinking about doing more due diligence."

During contract negotiations, HCL walks customers through the need for contingency planning, Khorana says. For almost three years, it has recommended that customers keep core competencies such as IT architecture closely tied to a business process in- house. And HCL began developing partnerships with other outsourcing companies, to help customers diversify. "But some clients are reluctant to participate in the relationship as actively as they should," Khorana says.

A hands-off relationship isn't a viable option. Outsourcing's never been easy. Companies that invested time in these relationships were always more likely to get real competitive advantage and cost savings from them.

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