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

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 second of three blogs from this interview.

Randy and Jim both emphasized that “serious deals need to be done seriously.” They noted that in the early days of outsourcing/offshoring deals there was a great deal of anxiety and tension along with less care than now. Satyam is a good reminder of the need for attention to detail and care.

Since www.pharmservices.blogspot.com also serves the interests of the consulting community supporting the life sciences industry, Larry and I naturally asked about their involvement in outsourcing transactions. Randy and Jim replied that for sophisticated transactions there is a role for both professional advisors and law firms. Communications between them should be open. Their roles are complementary. They felt that consultants have superior research facilities to do the empirical analysis.

We returned to the Satyam affair and asked if they thought that might be other occurrences in the future. “Who knows?” , they replied. Human nature being what it is, sure, recurrences are possible. The hope is that regulatory changes that will inevitably arise from this will prove effective. Satyam is regrettable but shouldn’t be repeated.

Randy and Jim declined to speculate on what other outsourcers may have problems in the future and were unaware of any such circumstances.

Jim noted that there were no public events that rise to the extent of what happened at Satyam. He added that moving data overseas exposes it to the risk of theft. But where data theft has occurred, it has been in the developed world, not in India or the Philippines. Jim was reluctant to feed the fear because these incidents are isolated not systemic with what we know today. He cited Enron as an example. Just because Enron had problems doesn’t mean that every energy company is run that way. Enron was only one company with many lessons learned. Similarly, Satyam will cause India to look at the regulatory oversight of its companies. Information security laws have already moved quickly because of the Satyam incident.

Larry asked about Indian regulatory impacts. Jim suggested that the interlocking boards of directors across Indian companies would be looked at. He speculated that as with the Enron aftermath, the regulatory reaction will be strong, swift, severe, and, perhaps, overdone.

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