Satyam: the only two things a service firm has
Sunday 18 January 2009 - Filed under Life Outside Work
Since the revelation of the biggest accounting scandal in history that involves a global IT outsourcing service provider, I have been trying to read up on it simply because the news and the implications have a lot to do with my own field of profession. And I must say I have been puzzled by a general lack of coverage on this matter by the mainstream sources of technology and business news on the Internet. Although The Wall Street Journal published an opinion titled Satyam: Sanskrit for ‘Enron’, there is indeed not much one can google (or ‘yahoo’ or ‘live-search’) when it comes to articles that present both fact and analysis. But today I finally came across Satyam scandal – the fallout by The Guardian:
The disaster that is Satyam has sent shockwaves around the outsourcing world… These revelations have led to a crisis of confidence about whether the company will continue, placing question marks over India as a premier destination for outsourcing IT services.
Prior to the revelations that emerged last week, Satyam counted 185 of the Fortune 500 companies among its portfolio of around 600 clients, which includes international brands such as General Electric and Nestlé. In the UK, companies such as Birds Eye Iglo and BP are affected.
Satyam undertakes a variety of IT jobs, which include project-based programming through to running business-critical systems such as those offered by SAP and Oracle. Right now, though, it almost certainly requires a government bail-out.
“There are only two things a service firm has, its people and reputation. People can be replaced but reputation is far more difficult to re-establish.”
“Global customers of Indian IT suppliers are questioning the transparency of their suppliers following last week’s scandal.”
Francine McKenna, an ex-PWC director and a fierce critic of the “big four” accounting firms (PricewaterhouseCoopers, KPMG, Deloitte and Ernst & Young), believes the Satyam issue raises fundamental questions of oversight. She says: “It’s hard to know the extent to which there was complicity between the auditors and senior management or whether it was plain incompetence. PWC (Satyam’s auditors) doesn’t have the enforcement capability. It’s left with little choice other than to cut off the gangrenous arm and throw some of its Indian partners under the bus.”
If India chooses to pretend that this didn’t happen, or sweep the whole matter under the rug, it will severely damage its ability to attract new business to the country. If people can perpetrate such frauds with little or no consequence, then what responsible firm would risk its capital in such a place?
What I think is particularly remarkable is that this is a case of a lack of transparency coupled with a dysfunctional monitoring mechanism wiping out confidence and credibility, which coincides with the timing and the root cause of the rest of the global crisis that’s crippling the economy. Sure, the rival outsourcing service providers in India and the U.S. will pick up the scraps, but they will have to remember: The Enron scandal reduced the global accounting/auditing Big 5 down to Big 4; and the recent credit crunch disintegrated an entire industry called investment banking.
Somebody said you can make technology that’s fast, cheap, or reliable, but you can’t have all three. I’d say providers of technology services, on the other hand, must have all three in order to survive: keep and grow their assets (people and reputation); maintain profitability, and; be transparent in their practices. Not easy, apparently.
2009-01-18 » JK