Sunday, March 1, 2009

We Talk with Some Renowned Attorneys about the Satyam Scandal, India and the Future of Outsourcing

We have discussed our thoughts about the outsourcing business and its viability over the last few months and had a real opportunity to have two highly regarded attorneys discuss their point of view about the global outsourcing business in general and the impact of the Satyam financial scandal in particular.

Larry and I had a wide ranging discussion 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 is a very large and well respected law firm with over 1,000 attorneys in nineteen offices worldwide. The Black Book of Outsourcing ( ) 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 first of three blogs from this interview.

We asked Randy’s and Jim’s about their impressions of the Satyam affair. Interestingly, Randy started by saying that he was disappointed by Satyam's behavior. Satyam had been a fantastic story, from nothing to a star in the globalization outsourcing market in ten to fifteen years and now to have to take a big black eye over this. He continued by saying that many Indian firms get higher customer satisfaction scores than firms based in the U.S. and emphasized that one bad apple doesn’t spoil the whole industry-he specifically pointed out that Enron was a single company disaster that did not permeate the entire energy industry.

We next moved onto what the warning signs were at Satyam, if any. First and foremost from our discussion was their reply that it would have been very difficult for a client to detect the fraud that was occurring-so we infer that best defense is a good offense-see their recommendations below. Jim stated that on a chronological time line (retrospectively) there were signs at a corporate level that some things were amiss. First, there had been rumors of a data breach at the World Bank, later found to be baseless, followed by the attempted sham real estate transaction. Randy also asked how they managed to keep $700 million in a bank without earning any interest and noted that the CFO deflected a reporter's query on this matter.

They explained to us that it wasn’t reasonable to expect customers to have the visibility to an outsourcer’s business to permit the type of transparency necessary to detect a fraud such as Satyam’s. Further, additional protection costs a significant amount of money and effort, and, then, would they work?

Randy and Jim agreed that developing a theoretical business model to protect against this type of situation would be an interesting intellectual exercise but wouldn’t be practical.

The next topic that we discussed was the lessons learned from the Satyam affair. Randy and Jim stressed operational execution of contract terms with outsourcers was and is the key to protecting a client from such issues, and even these are not entirely fool proof. They gave five recommendations that would be of use to our readers:

• Diversify the vendor pool-have a minimum of 3 suppliers.
• Take care of the data by offsite backups, assume catastrophic failure.
• Have source code drops.
• Manage the vendor relationships-enforce and exercise the contract terms.
• Take possession of dedicated machines.

Now, the caveat with these approaches is that they lower the anticipated savings expected from outsourcing deals. For example, the last point talks about dedicated machines which would cost more than shared machines. Randy and Jim noted that many contracts have these terms included but customers don’t exercise them. (I was polite and didn’t point out that such customers lose a second time because they’ve also paid their attorneys to draft such contracts and don’t use them properly.)


As always, we welcome your feedback. Please contact us at We look forward to hearing from you.

Contributed by Guy de Lastin

1 comment:

Anonymous said...


At least someone is thinking in the right direction. The media, especially in India has been spewing venom on the company. I am sure not many people in the company had an idea on what Raju was doing. Hence blaming the company for his misendeavors is not correct accornding to me. No one could have seen it coming. It happened in Enron and then again in Satyam. I wish our lawmakers take a good hard look at the current goverence practices and bring in new rules to make it more robust.