Barely three weeks ago, a defiant Satyam Computer Services was demanding apologies from and threatening legal action against the World Bank for its 8-year ban on the IT services provider due to alleged inappropriate behavior. While that high drama was, of course, totally upstaged by this week's news of financial misstatements, the World Bank situation deserves a closer look.With the shocking revelation this week that Satyam founder and CEO Ramalinga Raju had been inflating revenue and profits for several years, the company's stock price has plummeted and big-company customers have been scrambling to determine just how severely Satyam's internal turmoil will affect its ability to serve them.

Beyond the big impact on Satyam itself, the scandal also has raised questions about the viability of the entire offshore IT-services model. And while many observers believe such broad-brush fears are misplaced, and that Satyam's problems are a unique product of its founder's misdeeds and are not symptomatic of the Indian IT services in general, there's no question that the scandal has made many outsourcing customers more than a little nervous. My colleague Paul McDougall offers an insightful analysis of this dilemma in his recent post, "India's Outsourcers Hit With Perfect Storm."

Indeed, Satyam's experience with the World Bank provides a cautionary tale for CIOs involved in or evaluating outsourcing deals of any kind, and not just because the work was being done in another country. All of the issues that have made outsourcing such an emotional issue for many executives -- lack of direct control, security concerns, questions about financial viability -- have hit home with the Satyam situation, and its roller-coaster relationship with World Bank demonstrates how challenging such deals can still be.

In 2003, the World Bank awarded Satyam a 5-year, sole-source contract to develop and maintain a wide range of information systems. That deal's first-year value was said to be about $10 million, and by 2007 had increased to $100 million, according to a number of press reports.

But sometime in mid-2007 -- the last year of its 5-year contract with Satyam -- World Bank began to experience a series of significant IT problems, particularly a string of data breaches some consider among the worst ever suffered by a financial-services organization. And while World Bank eventually said it did not blame Satyam for those breaches, the scrutiny applied to the financial agency's IT systems, processes, and governance surely played a role in the eventual decision by World Bank to prohibit Satyam from doing any business with it for a minimum of 8 years.

World Bank announced that ban last month, saying in part, "Satyam was declared ineligible for contracts for providing improper benefits to Bank staff and for failing to maintain documentation to support fees charged for its subcontractors."

The announcement of that ban triggered a quick public-relations retort from Satyam as the company late last month called on World Bank to withdraw its "inappropriate" statements and apologize for having made those statements. In addition, Satyam told its long-time former client that Satyam would "evaluate all possible options" with regard to the 8-year-ban.

Additional perspectives on this complex breakup from India-based Web sites can be found here and here.

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