Could Indian outsourcing be in trouble?
Posted
Jan 07 2009, 01:40 PM
by
Kim Peterson
Rating:
One of the biggest outsourcing firms in India has been caught up in a huge accounting fraud -- and the scandal is big enough that American companies might think twice about who they outsource to in the future.
Executives at Satyam Computer Services (SAY) said the company has been cooking its books, grossly exaggerating profits and cash balances for years. In fact, $1 billion that the company says it had were nonexistent, according to The New York Times. Satyam has done work for a third of the Fortune 500, including General Electric (GE) and General Motors (GM).
The short-term impact? Customers will immediately switch to Satyam's competition. In the long term, U.S. companies may take a hard look at their outsourcing, particularly at the accounting practices and regulatory structure in other countries.
The scandal has “put a question mark on the entire corporate governance system in India,” one asset manager in New Delhi told Reuters.
Shares of Satyam fell nearly 80% in response to the news, and trading was halted on the New York Stock Exchange. The company's chairman and his brother, who was the managing director, have resigned.
Satyam had already been operating in shady territory. The company had planned to spend $1.6 billion on two construction firms -- both partly owned by the chairman and his family. Investors were incensed, and demanded that the sale be stopped.
And the World Bank said last month it would stop doing business with Satyam because of inappropriate business practices.
Here's what others are saying about Satyam's news:
ZDNet: "At this early stage, it is not possible to say exactly how Satyam engineered the fraud but regardless, it draws into question the general viability of the Indian outsourcing market."
Indian asset manager Jayesh Shroff: "“It’s a shocker. People will no longer be willing to take income statements at face value. This has also raised questions about cash holdings of other companies.”
Forrester executive Sudin Apte: "It's going to impact the Indian outsourcing industry. Customers are going to be concerned about offshoring firms in India."
The Wall Street Journal: "What (the chairman) failed to understand is the general intolerance for corporate opacity these days -- a byproduct of the global financial crisis. Still to be seen is just how well this degree of scrutiny sticks when Indian companies are back in a bull market."
