World Bank's IT windows closed to Wipro as well as Satyam

Bank says it barred offshore outsourcer Wipro Technologies from new contracts in 2007

In 2000, IT services firm Wipro Technologies offered senior IT staffers at The World Bank Group the chance to buy stock in parent company Wipro Ltd. under a family and friends program, as part of an initial public offering of share equivalents in the U.S. Some 1,750 shares were purchased at a total cost of $72,000.

Jump ahead nine years. The Washington-based World Bank disclosed Sunday that Bangalore, India-based Wipro is on its blacklist of companies that have been barred from receiving direct contracts from the financial institution. The reason? "Providing improper benefits to bank staff," the bank said tersely in its announcement.

In its own statement today, Wipro acknowledged the four-year contract ban but said that it did nothing wrong in making the stock-purchase offer to World Bank employees. Wipro asserted that the type of share purchase program it used is approved by the U.S. Securities and Exchange Commission, and it said that all participants signed a statement attesting that their purchases "did not violate any ethics or conflict of interest policies" set by their employers. Separately, Girish S. Paranjpe, one of the two joint CEOs of Wipro Technologies, described the purchase offer as "a goodwill gesture."

The curious part of the World Bank's announcement is this: The ban against Wipro was imposed in June 2007, without any public disclosure. So why announce it now — especially when the Indian IT outsourcing industry has been rocked by an accounting scandal at Satyam Computer Services Ltd., after its chairman admitted to cooking the company's books.

Satyam, whose board of directors has been taken over by India's government, is also on the World Bank's vendor-exclusion list. The bank announced late last year that in September, it had barred Satyam from competing for business for eight years for providing improper benefits to bank employees and failing to maintain documentation to support fees charged by subcontractors.

Another Indian company, Hyderabad-based Megasoft Consultants Ltd., is on the World Bank's contract blacklist as well. Megasoft was given a four-year ban in December 2007 for "participating in a joint venture with bank staff while also conducting business with the bank," the World Bank said in its announcement on Sunday.

A World Bank spokesman said today that the bank publicly announced the Satyam ban because an official at the offshore outsourcing vendor had been quoted, in reported remarks, "explicitly denying that they had been debarred" — the term used by the bank in such cases. The bank subsequently decided to identify all of the companies that currently are debarred "in the interest of fairness and transparency," according to today's announcement. Future debarments will also be publicly disclosed, the bank added.

The events at the World Bank raise another question: How broadly was the stock-purchase program made available to workers at other Wipro customers? "It's very clear that they offered this to a lot of clients," said Fran Karamouzis, an analyst at Gartner Inc.

The latest disclosures also come at a time when the business practices of India-based outsourcers are almost certain to get a closer look from existing and potential customers because of the situation at Satyam, which is looking to raise more cash that is needed to help it survive as an independent entity.

But Karamouzis doesn't see India's offshore IT industry unraveling in the wake of these disclosures, and she doesn't think that the explosive growth of the outsourcing firms over the past 10 years is connected to client incentive offers such as the one made by Wipro. She said Gartner's customer satisfaction surveys, especially ones conducted between 2000 and 2005, back up the view that the business growth seen in India wasn't "vaporware" or produced by anything other than legitimate means.

Indeed, Karamouzis thinks the Indian outsourcing and IT services industry will be aided in coping with the scandal at Satyam by the presence of companies such as IBM and Accenture Ltd., which each have workforces of more than 50,000 employees in India. Their presence in that country helped establish the legitimacy of the offshoring model, she said.

Peter Brudenall, an outsourcing and IT attorney at Hunton & Williams LLP in London, said that as a result of the problems at Satyam, companies need to increase the amount of due diligence that they're doing on vendors to which they're outsourcing business-critical services.

"But I don't think any level of due diligence would necessarily reveal any of this sort of information," Brudenall said, referring in particular to the events at Satyam. "The auditors didn't seem to know what was going on, so how on Earth would any customer?"

Brudenall added that the cases of Satyam and Wipro are likely isolated examples and not an indication that there's something fundamentally wrong with India's outsourcing industry. Nonetheless, he thinks the Indian government needs to find out why auditors missed Satyam's fraudulent accounting. "I think they need to beef up the level of transparency of information coming out of Indian companies," he said.

Copyright © 2009 IDG Communications, Inc.

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