Scandal raises questions about Satyam's ability to retain U.S. customers

Accounting fraud revelation leaves offshore outsourcing vendor in 'very dire situation'

The revelation this week that the management of offshore outsourcing vendor Satyam Computer Services Ltd. had falsified accounting and overstated earnings brought to light a scandal with potentially deep implications for many U.S. companies.

Much of Satyam's growth into the fourth-largest provider of IT services in India is due to business from companies in the U.S., helped along by its heavy use of the federal government's H-1B visa program. Satyam, which claims that its customer base includes 185 members of the Fortune 500, may get more than half of its $2 billion in annual revenue from the U.S., according to analysts.

In a resignation letter sent to Satyam's board on Wednesday, B. Ramalinga Raju, the company's founder and chairman, admitted to inflating its cash balances and the credit amounts it was owed while understating its liabilities. His brother, B. Rama Raju, also resigned as Satyam's managing director.

As a result of Raju's disclosure, Satyam already faces two class-action lawsuits in the U.S. and an investigation by the Securities and Exchange Board of India, that country's securities regulator.

What it needs most of all now is to keep customers such as Nissan North America Inc. from defecting to other vendors. Nashville-based Nissan signed a five-year application services deal with Satyam in 2006, as part of a move to diversify its IT services providers via a multisourcing strategy. The automaker previously had relied on IBM for nearly all its IT functions.

Nissan spokeswoman Katherine Zachary said Thursday that the company is keeping an eye on the situation at Satyam. "We're taking appropriate steps to ensure the continuity of our systems and applications that are Satyam-supported, and we're going to continue to monitor the situation," Zachary said.

Caterpillar Inc. is another major Satyam customer. Last April, the Peoria, Ill.-based construction equipment maker sold its market research and customer analytics operations to Satyam for about $60 million, a deal that deepened the business process outsourcing ties between the two companies and gave Satyam the means to provide higher-level analytic services to other customers. "This acquisition further demonstrates the trust both organizations have in each other," Raju said in a statement at the time.

A Caterpillar spokesman declined to comment on Thursday about the current situation at Satyam.

When General Motors Corp. announced $7 billion worth of IT outsourcing contracts in early 2006, it was widely reported in India-based news outlets that Satyam had received about $150 million in work as a subcontractor — for example, from Capgemini, which had won a contract to handle application development and maintenance for three of GM's business units.

Asked about Satyam today, a GM spokesman said the automaker doesn't do business with the outsourcer. Satyam declined to comment about GM.

A Satyam executive who was appointed as interim CEO this week said at a press conference in India on Thursday that company officials have been reaching out to customers in an effort to reassure them that there will be no interruption in the services provided by Satyam. The company also issued a statement saying that 10 of its senior executives and 40 regional managers had pledged not to leave.

But Forrester Research Inc. analysts Sudin Apte and John McCarthy said in a report that Satyam's ability to continue "as an independent entity is in doubt." Apte and McCarthy predicted that customers and employees alike "will desert Satyam as a result of competitive wooing," and they advised IT managers who have contracts with Satyam to monitor the firm's performance against service-level agreements and analyze their options for shifting work to other outsourcing vendors or bringing it in-house.

"I think Satyam is in a very dire situation," said Peter Bendor-Samuel, CEO of Everest Group, a consulting firm in Dallas. "If they aren't running out of cash now, it's probable that they will be very shortly."

Bendor-Samuel added that it likely will be difficult for a white knight to step in and rescue Satyam. Under Indian law, he said, minority shareholders in companies are protected in such a way that their shares can only be bought out at the average weighted cost of a company's stock over the past six months. "There's no way that anyone is going to buy Satyam at that price point," Bendor-Samuel said.

Eugene Kublanov, CEO of San Ramon, Calif.-based outsourcing management consultancy NeoIT, said he is advising Satyam customers to consider three possible scenarios for the outsourcing vendor. The least likely one, he thinks, is a quick resumption of normal business operations with only minor service disruptions. At the other extreme, Satyam goes bankrupt, "and you get a catastrophic service disruption," Kublanov said.

But the most likely outcome, Kublanov believes, will be a new owner of Satyam, resulting in some disruptions and contract renegotiations for customers. He added that although Satyam faces serious financial issues, many of the customers he works with have been satisfied with the company's work.

Copyright © 2009 IDG Communications, Inc.

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