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 (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 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.)

TO BE CONTINUED.

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

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