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Satyam Scandal Fallout: Truth and Consequences

The Satyam scandal may be a unique case, but insurers nonetheless are likely to require greater transparency from their offshore partners, especially for business process outsourcing.

In the wake of the Satyam scandal, English speakers have been advised of the irony of the outsourcing provider's name, which is Sanskrit for "truth." Satyam CEO B. Ramalinga Raju was anything but truthful.

Among his fraudulent assertions was the claim of a $1 billion cash balance on Satyam's books that proved non-existent. Raju has since pleaded that his efforts to cast the company in a more favorable financial light led him to exaggerate assets and understate liabilities -- leaving him increasingly in a position where he felt as if he were "riding a tiger, not knowing how to get off without being eaten." Instead of identifying his company with veracity, however, he would have been better off bearing in mind the Indian national motto: Satyam eva jayate, which is Sanskrit for "truth alone triumphs."

Now that the truth has been revealed come the consequences: for Raju, that has meant arrest and will likely mean serious jail time. Questions remain regarding what it will mean for the Indian outsourcing industry more broadly.

Cultural Differences

Satyam's troubles call attention to potentially significant differences in corporate culture between Indian and Western companies, notes Jonathan Steiman, an analyst with Datamonitor (New York). "Many of the large Indian IT providers are publicly traded multinationals that look and feel like a U.S.- or European-based company, but the fact is that many are still very much family businesses," he says. "At the top you still see considerable power concentrated in the hands of family members."

Indian service providers' technical excellence also tends to mask potential weaknesses. These companies have typically achieved a level of standardized and measurable process that few U.S. firms have been able to duplicate, according to Celent (Boston) senior analyst Jeff Goldberg. However, he comments, "such IT and business process governance does not necessarily translate to corporate or financial governance, areas where the highly regulated U.S. insurance industry has much experience."

Goldberg adds that he doubts there will be any change in insurers' interest in using offshore companies in the wake of the Satyam scandal, but he believes that U.S. companies concerned about the longer-term viability of their partners will require increased oversight and transparency from them.

Such concerns are likely to have serious consequences for Satyam itself, according to Datamonitor's Steiman, who expects the company to suffer long-term effects relating to the loss of customers and the failure to attract new ones.

Satyam has already lost one of its top-10 clients, Bloomington, Ill.-based State Farm (more than $61 billion in annual revenue), which canceled its contract with Satyam as of Jan. 16. The carrier had a 10-year relationship with Satyam for project-related IT outsourcing work. "Uncertainties surrounding Satyam's future and the potential impact to State Farm were the reasons" for the termination, according to a spokesperson at the insurer.

Other Indian firms insist that Satyam's troubles are unique and represent an isolated incident. "Parmalat, Enron and WorlCom have demonstrated that accounting fraud is not specific to any industry or country," comments Lalit Dhingra, president of New Delhi-based NIIT Technologies, a global IT solutions provider. "Understandably there will be more scrutiny and due diligence from clients and prospects, and we are spending the extra time to explain our corporate governance practices."

TATA Consulting Services' (Mumbai) CFO Seturaman Mahalingamm calls the Satyam scandal a "one-off" case. "We provide critical services to our customers, and naturally a number of them have asked us questions on our corporate governance approach," he says. "We have communicated our approach, and they are satisfied that we have adopted sound practices."

Paying Attention

Satisfaction with outsourcing providers is evident in the comments of one CIO of a large U.S. P&C carrier, who spoke on the condition of anonymity. "While we're paying attention to issues coming from India, it hasn't altered our approach to sourcing," he says. "We remain very comfortable with the operations of the firms we do business with."

But smaller insurers may feel differently, according to Billy McCarter, president of Edison based MajescoMastek (Edison, N.J.). Unlike their larger counterparts, companies that can't afford to diversify their outsourcer relationships could find themselves scrambling to find a new partner to pick up work in the event the old one fails, he says. "Bigger firms have many captive [partners], and if not, they have diversified their services with multiple providers for just this reason," McCarter explains.

But while that diversification insulates big carriers from problems related to IT outsourcing relationships, it doesn't help when it comes to business process outsourcing (BPO), McCarter insists. "BPO is a different situation because you can suffer an immediate business impact," he asserts.

Anthony O'Donnell has covered technology in the insurance industry since 2000, when he joined the editorial staff of Insurance & Technology. As an editor and reporter for I&T and the InformationWeek Financial Services of TechWeb he has written on all areas of information ... View Full Bio

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