Larry and I recently had an opportunity to talk with Randy Parks and Jim Harvey, attorneys at Hunton & Williams LLP and co-chairs of its Global Technology and Outsourcing practice about the impact of the Satyam affair on global outsourcing. Hunton & Williams has 1,000 attorneys in nineteen offices worldwide. The Black Book of Outsourcing (http://theblackbookofoutsourcing.com/ ) ranks them as the number one outsourcing law firm in the world. Randy and Jim focus on the customer side of outsourcing deals although they have done some suppliers. This is the third and final of three blogs from this interview.
Jim said that there will be significant costs to add controls posing Indian outsourcers with a choice, either pass through the costs to their customers or reduce margins. A balance will have to be struck. I asked if the Indian outsourcers would be losing a key differentiator by adding these controls and their related costs. Jim reiterated that everything would be done with a balance. He didn’t feel that India would kill the golden goose.
With regard to immediate impact to Satyam, Jim pointed out that it has lost contracts with Caterpillar and State Farm. But, Satyam also wrote fifteen new outsourcing contracts during this past January. So, the jury may still be out on what their customers do. As Jim explained, the reasons for going to Indian outsourcers, labor arbitrage, expertise, and fantastic COE’s are still there.
We then asked Randy and Jim what a company should do if presented with a Satyam situation with its outsourcer. First, the customer should pull every operational risk mitigation lever in the contract. (Which assumes the customer had their attorneys include them in the first place.) Next, pay more attention to the deal in the early stages, send in a security team to review all key components of the contract. Do a triage, a risk adjusted decision process and identify what can be left, taken away, and what would it all cost. If there is no other way, then the customer should just buy its way out of the contract and move to existing providers.
Note that Randy’s and Jim’s advice is based on work that is done before. Another example of preparing in advance for outsourcer problems is the inclusion of financial covenants in outsourcing contracts. Examples of such provisions are change of control and deterioration in financial ratios covenants, the latter should be treated like high yield debt covenants. They indicated that vendors have been careful to avoid such covenants. Also, customers should build ongoing monitoring into future contracts.
As we wrapped up our interview with them, they summarized by saying that the Satyam affair would increase anxiety for sourcing relationships in the short term. There would be a broad brush taken temporarily and unfortunate conclusions drawn about geography and outsourcing in general. There are extremely talented resources at fairly competitive rates available in India. The value proposition is still in place. Specifically, Satyam could benefit from the economic timing. Business decision making is in paralysis right now. This matter could be finished for Satyam right now. A data point for when the markets recover. (Although, Satyam’s board of directors has announced a solicitation of bids for the company in the near future.) And, don’t forget those very high customer satisfaction scores that Satyam has consistently had.
Larry and I would like to thank Randy and Jim for taking the time to speak with us and appreciate their candid comments about the impact of Satyam on the outsourcing markets.
As always, we welcome your feedback. Please contact us at larryrothmansblog@gmail.com. We look forward to hearing from you.
Contributed by Guy de Lastin
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