There is no doubt the biggest and most mind-boggling news in information technology circles was reflected in reports that the chairman of Satyam Computer Services, the fourth largest IT services outsourcing firm had resigned, after revealing that he had systematically falsified the company’s financial results for many years.  In a shocking admission, chairmen Ramalinga Raju stated that the $1.04 billion reported as balance sheet cash and bank loans may be nonexistent, and that revenue results for the firm had been routinely falsified, perhaps for multiple years.

This scandal raises not only serious questions over the survival of Satyam, but also accounting standards in India and Asia as a whole. The obvious question is whether similar problems may lie in other outsourcing and IT companies in the region.  According to an article in SiliconValley.com penned by John Boudreau,  this incident of fraud has sent tremors across Silicon Valley, which has long been the other home of partners and investors in South Asia’s rising tech industry, to the tune of more than $2 billion over the past four years.  The current concern is the backlash effect on the more significant India based IT services providers such as Infosys, TCS and Wipro.  These firms will either benefit from this crisis, or be impacted themselves if newly launched investigations uncover widespread fraud practices, or if serious questions begin to be raised on the overall objectivity of India’s financial and industry regulatory agencies.  In the Boudreau article, Vivek Paul, former vice chairmen of Wipro provided a rather thought provoking quote.  “The question everyone is asking is: Is this the classic cockroach?  If you see one, are more around?  History has proven they never come in ones.” 

Let us sincerely hope, for the sake of India and China’s emerging IT services sector that this is not the case.  

The implications of this scandal on current or future supply chain services are yet to play out.  Although not a prime player, Satyam was an emerging player in supply chain services such as procurement, and did specialize in certain niche manufacturing specialty services.  In the light of this crisis, it’s highly unlikely that the firm will be landing any new customers, and there seems to be a growing consensus that this firm will ultimately have to be acquired to insure long-term credibility for India’s outsourcing industry as a whole.  The government of India has now taken control of the managing board of Satyam.  Existing clients are obviously reviewing their contracts to ascertain their options as future events unfold.  North America and European manufacturers will need to be much more diligent in negotiating and monitoring future outsourcing arrangements, especially any services that are considered to be in any form, mission-critical.

 Bob Ferrari