How the Satyam fraud will affect Indian IT

Hyderabad / Bangalore: The Rs7,136 crore accounting scandal at Satyam Computer Services Ltd, dovetailing with a global recession that is likely to force companies to pare their technology budgets, has cast a cloud over corporate governance standards in India. To gauge the fallout of the scandal on the information technology (IT) industry, Mint polled eight experts. They were asked to address five questions:

a) What is the impact of the Satyam scam on the Indian IT sector?

b) Who stands to gain—other Indian IT firms or global companies such as International Business Machines Corp. (IBM) and Accenture Ltd, or competing geographies?

c) What will help remove the blot the Satyam scam has left on the Indian IT sector?

d) What is the outlook for IT services spending over the next 12 months?

e) Is the Barack Obama administration in the US likely to curb outsourcing and offshoring?

Here are the edited responses.

a) The impact is short-term and will pass quickly unless there is another scandal involving another IT services firm. We believe the negative publicity is largely media hype amid a political backlash against offshoring of US jobs in the current economic slump. International corporations will continue to make the right decisions for their business models to remain competitive.

We do not believe customers can easily sever their existing services relationships with Satyam without significant issues: Rebadging personnel, losing critical operational staff and the expense of transferring H1B visas.

b) I am more concerned regarding the governance of firms from countries, such as China and Russia, which have much less stringent regulatory procedures than India and the US/Europe.

c) Time. And Satyam being acquired. And other India IT services firms acting with sensitivity to Satyam’s situation.

d) Overall, it will remain flat. Spending on commodity offshore IT services will increase in the region of 5% as international corporations look at “low-hanging fruit” cost-reduction opportunities.

e) Obama will be incentivizing US firms to create onshore jobs but won’t be penalizing them for using global delivery services from locations such as India. We’ve now been sucked into a global employment war for sourcing services and from what I am hearing from Obama, he intends to give US firms tax breaks to source work onshore.

a) We cannot rationalize the situation and apply it to the entire IT industry in general. Clients do understand that this is a company-level debacle and the industry is not responsible for it.

b) The cost and scale of operations are important factors when thinking about who might (gain) leverage from this incident. While other geographies may use this to get India’s share of offshoring, the unique Indian advantages of talent and cost can withstand it. China is the only threat but they have very few companies with comparable scale and capabilities.

c) Concerted action from industry bodies, government and other IT services companies is important. Any future actions taken by the government and board should ensure business continuity to clients. Uninterrupted operations, smooth transition of client operations to other companies/captives will help a great deal to showcase the integrity and maturity of the industry.

d) In the US, we expect the IT spending growth to be anywhere in the range of 3.5% to 5%. While spending on mission critical IT services will continue, new implementation/contracts will be staggered over the next 18 months to better manage cash flow.

e) We have to watch out for policies/incentives which will be announced to encourage near-shoring in the US. However, it may be too early to speculate about the impact on offshoring due to a change in the government. India continues to offer cost arbitrage, talent capabilities and a huge market opportunity which is of interest to every enterprise in the world.

a) We see significant concerns from global clients in the near term—many of them re-evaluating existing and potential service providers with much more rigor. This can further delay decision-making on outsourcing of projects. However, we do not expect any systemic long-term impact.

b) Over the year 2009, there will be continuous movement of clients to competition unless an amicable and sustainable solution comes from Satyam.

On the one hand, Indian tier-I providers will gain from shared clients, while more risk-averse companies will prefer engaging with international service firms despite higher overall outlay. The need to diversify risk, access to niche talent, time zone alignment and cultural proximity are driving global companies to many alternative destinations. However, India is expected to be the most favoured outsourcing destination.

c) The key will be stringent governance and transparency. Indian firms need to ensure that their systems are fully operational and able to identify and address any fraudulent activities. Also, India should bring in faster and stringent legal resolutions to such fraudulent activities—justice should be seen (to be) delivered and fast!

d) We expect global IT spending in 2009 will witness a marginal decline over the previous year. The Indian IT outsourcing market should be able to register impressive growth in 2009 by adapting itself to clients’ changing needs. Overall, the sector would grow by 8% to 12% over 2008.

e) It is quite early to predict the specific policy impact on outsourcing with the new US administration. We believe outsourcing and global sourcing (offshoring) are an integral part of sustainable business growth against global competition. It is unlikely the new administration will take drastic measures against outsourcing, given the interdependencies of the global economy.

a) The damage is hopefully limited to Satyam. Indian IT companies will face a higher level of scrutiny and audits and verification processes. However, the value proposition of India is strong enough to ensure continued work flow to India.

b) Transitioning from one service provider to another is a complex and time-consuming exercise. Clients are unlikely to take such a decision in haste.

c) Most executives realize that these scandals are not unique to India. The effects of the sudden instability of Satyam are being addressed through government intervention, but the concerns around risks to business operations remain. On a positive note, this development provides an opportunity for the regulatory agencies and corporate boards to strengthen their systems of checks and balances.

d) Looking forward, we anticipate that new contract awards in 1H09 will continue to be shaped by the recession together with lingering effects of the Indian market challenges. The transactions may be more piecemeal in nature than big, transformational, multibillion dollar deals. As a result, we expect outsourcing in 1H09 to be softer than last year and more in line with the trajectory we saw in the 2H08.

e) Most US administrations have been supporters of free trade. That said, the new administration...is likely to encourage job creation or prevention of job loss in the US. However, economics does prevail over politics in the medium term and hence such actions, we believe, will only have an impact on a limited scale and for a short period of time.

a) There will definitely be higher concern among clients in the short term about corporate governance practices in the Indian IT industry, but in the long run, I don’t see it being a problem. We will see the impact of this in the next six-nine months.

b) Other Indian firms will benefit to some extent. Cost will still remain a factor but (I) don’t see newer geographies or players benefiting substantially. Yes, the due diligence will be greater before awarding big projects or multi-year deals.

c) Strong consequence management by the government will send a positive message. All involved need to be prosecuted... That would also serve as a deterrent for any future scandals.

d) Stronger self-regulation. Nasscom code of conduct.

e) Democrats traditionally have been more protectionist. However, President Obama did not fight elections on that plank. We will have to wait and see how the new administration pans out.

a) For years, clients have praised Indian firms as transparent and forthcoming. The recent Satyam events bring that well-cultivated image into question and will drive further focus on formal risk management reviews and assessments from the clients’ end. Overall, we see it as an isolated case and (one that) wouldn’t have any impact, but if a trend of fraud continues, then there’s a good enough reason to be concerned.

b) Offshore providers that are either family-owned or part of large industry conglomerates will face more financial scrutiny. With such smaller firms facing the brunt of this extra checking, top Indian providers such as Infosys will continue to take market share. Other geographies don’t offer the scale of the talent pool and skills available in India.

c) We see it as an isolated case. But vendors can improve further through greater transparency into accounting practices and financial health indicators.

d) Global IT services and outsourcing will decline. Governments and businesses will buy $484 billion (Rs236,6760 crore) of IT consulting, systems integration and outsourcing services in 2009, 3% less than in 2008.

e) We don’t think so (that the Obama administration will be protectionist about outsourcing).

a) The model of Indian IT service providers has been replicated by the IBMs and Accentures and that we see in their huge development centres (in India). They came here because Indian firms proved that service delivery could be done effectively out of India. I think, in the short term, questions will be asked. Indian companies should look at this as an opportunity and not as a threat.

b) This country offers a strategic advantage which is large scale, competitive and better quality. You can’t build a 100,000 capacity centre in Hungary and China; you can reach scale but quality is an issue. China will always be a competitor but it would be wrong to say that they would overwhelm India.

c) The Indian IT sector should be more open for questioning. Don’t withhold information, be transparent.

d) (Gartner does not have the data ready).

e) The first thing for Obama is to get the economy on track. If he can sort out problems in the US economy, the IT industry would anyway get business. Obama made those comments of keeping jobs during the elections; now he hasn’t talked about keeping the jobs in the US.

a) Clients who consider the Satyam saga a stand-alone event would continue to show faith in the India-based outsourcing vendors and we expect a few clients to migrate work from Satyam’s kitty to its peers. Further, as Satyam would not be favourably considered for new contracts, competitors may benefit. Indian players will have to be more convincing about their corporate governance standards. Credit from banks could become difficult, especially under current market conditions.

b) Large multinationals such as IBMs and Accentures, as well as US-headquartered firms with India-based delivery such as Cognizant, will benefit the most. Clients who have become apprehensive about Indian corporate governance standards, and do not isolate the Satyam episode from the larger Indian industry will move towards non-Indian MNCs... Indian vendors will gain where they have client overlaps with Satyam.

c) It would be wrong to take it as a “blot” on the Indian IT sector. The Indian IT sector, on the aggregate, has demonstrated high standards of corporate governance. Satyam was more of an aberration.

d) IT services spending for the financial services sector has stabilized following the turbulence triggered by the Lehman Brothers’ fall. The overall new revenue growth in IT would most likely remain negative over the next quarter and flattish for the quarters ending June and September, before picking up by the end of December.

e) Protectionist steps may discourage offshoring of government work. For the rest, curbing any tool for optimization of costs...may push some struggling firms over the edge. In our view, a strong protectionist policy will be counterproductive at this stage, hence very improbable.

lison.j@livemint.com