After Satyam, Is Wipro Next?

What’s going on in India? Specifically, with its outsourcing businesses. First, there was Satyam and their little bookkeeping problem. (What’s a billion dollars more or less among friends?) Now, Wipro is announcing (http://www.wipro.com/news/NewsDetails.aspx?id=1172 ) that it had been banned by the World Bank from bidding on business for four years because of inappropriate dealings with its employees. Since we are focused on the pharmaceutical and biotechnology businesses and its service suppliers, a question that immediately comes to mind is what is the impact of such seemingly unethical practices by key suppliers to the "ethical" pharmaceutical industry. Does this have the kind of collateral damage that makes the industry question this aspect of their "globalization" and/or "outsourcing/out-tasking" strategies. More to come on this as the situation unfolds.

In the meanwhile, a few questions about the WIPRO situation. First, why is the announcement made now? Compared to Satyam’s problems, this is the proverbial parking ticket. A cynic might say this was a great smoke screen for what otherwise might have been a serious ethical violation. Second, do these ethical violations indicate more substantial problems in the Indian outsourcing sector? Third, could these ethical lapses impact growth possibilities especially in the United States with its holier than thou attitude in these matters? Finally, could legislation like the Foreign Corrupt Practices Act (FCPA) or Sarbanes-Oxley preclude Wipro from actually bidding for work?

Back to the first question, why make the announcement now? OK, take advantage of the confusion, but could there be more? Either more transgressions or more firms? I don’t know, I’m just asking.

Second the question of fraud and questionable payments. While Bernie Madoff has proven that the Western world doesn’t have a lock on ethical behavior, India’s problems could be the tip of the iceberg. What other controls could be compromised? Information privacy is important to companies that outsource and offshore, especially the health care/pharmaceutical industry. How can anyone be sure that their information and their secrets are safe? Might there be HIPAA violation if such privacy concerns surface?

Third, growth for the outsourcers could be affected in several ways. One way is by potential customers staying away from the affected companies. Another could be new competitors arising, playing on the Indian companies’ weaknesses. Maybe Singapore is more expensive but has a much higher ethical rating. (Remember an American teenager getting caned for vandalism? Think what they’d do to Bernie.)

And, last but not least, what’s the potential for fines and liability in the United States? Or, look at it another way. How many government agencies and other quasi-government bodies might ban these companies from bidding on work? Could we see policy decisions preventing work from going offshore? Let’s not forget that the US government is slowly acquiring the US financial services industry while I’m writing this blog. The new administration might have an opinion about these Indian companies doing work there. Should such events occur, what is the spillover effect to the Pharmaceutical and allied businesses?

So, let’s summarize. I believe that the Indian outsourcing industry after a good run that began with the Y2K work of the Nineties is going to go through a period of consolidation. Unfortunately, combined with the recent tragic events in Mumbai, foreign companies may begin to have second thoughts about doing business there. The stronger Indian players could acquire the business of the faltering firms and be stronger than before. Proactive responses to the problems in the industry could provide opportunity. However, more spending may be required to put the controls and processes in place that large, multinational companies are expecting. There are still good reasons to outsource to India, but, India will have to work harder to keep what it has and gain new business.

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

Satyam: Are the Outsourcers Melting Down Next?

Lately, I’ve been a little frustrated that I couldn’t blog about the Bernie Madoff scandal. (Actually, I could have but Larry said I’d just have to find another blog to do it at. He’s a stickler for staying focused.) Of course, I can look at poor Mike Huckman over at CNBC standing outside Federal court houses in the cold and rain during the Holidays waiting for a glimpse of the accused and console myself with being inside warm and safe. But, now, I may have a fraud of my very own to blog about. Granted, Satyam is a not a life sciences company but it does service them and there may be implications here.
Let’s start with the fundamentals of outsourcing. Essentially, commodity functions that are considered to be non-core activities are transferred to an outside vendor. The idea is that a vendor can take advantage of economies of scale and through continual process improvements to become best in class or the next best thing and make its money by spending far less to perform these services than is coming in. The problem is that classic economic theory teaches us that unusually high profits bring in more competition driving down prices and profits. And, this is where the fun starts. (And, this is where the hedge funds got into trouble.) It becomes increasingly difficult to post those double digit profit gains year over year when there’s more competition. Also, there’s one other aspect that most commentators miss. The early outsourcers got the easy deals, simple processes, large volumes, and low capital investment required. Those salad days are long gone now. So, a firm which is trying to support its stock price either to maintain executive compensation or values for future acquisitions starts to look at questionable practices for what they justify will be a short time. But, once down that slippery slope as probably happened to Bernie Madoff, there’s no going back. It takes a lot to avoid this temptation. Unfortunately, for Satyam, B Ramalinga Raju couldn’t resist temptation. Apparently, Raju overstated Satyam’s to 20 per cent from 3 per cent. I’ll hazard that the latter is more the norm for outsourcers than not these days.
One writer has described this financial scandal cum crisis as “India’s Enron”. What will happen to all those customers who have outsourced those back offices to Satyam? Now, I don’t know if any significant percentage of Satyam’s business came from life sciences, but, I think this could put a chill on future outsourcing deals. Looking at their website (http://www.satyam.com/industries/life_sciences/index.asp ) they appear to offer a fairly broad array of services in the life sciences sector. Coming so soon after the Mumbai terror attacks back in November this won’t be good for the Indian outsourcers. I also suspect that life sciences companies who had been planning to outsource their operations and reduce their costs while they were at it will now be having some second thoughts.
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