Clock ticks for Satyam as customers eye exit

Clock ticks for Satyam as customers eye exit

Summary: Offshore outsourcing provider Satyam--now known as India's Enron--is looking for buyers, close to naming some new leadership and struggling to find its footing as a going concern. Meanwhile, customers are watching closely and readying plans to leap.

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Offshore outsourcing provider Satyam--now known as India's Enron--is looking for buyers, close to naming some new leadership and struggling to find its footing as a going concern. Meanwhile, customers are watching closely and readying plans to leap.

For instance, State Farm has said that it is leaving Satyam. Customers are predictably mum about their plans, but the anecdotes suggest that CIOs are planning to jump ship. Computerworld confirmed that State Farm is leaving Satyam, but did offer one ray of sunshine: General Electric is staying with Satyam for the time being. The operative words there are "time being."

Rest assured GE is pondering its options.

Satyam's rivals--Wipro for instance--say they aren't actively poaching Satyam customers, but will listen to potential clients that make inquiries. Yeah right. In fact, I talked to one CIO, who shall remain nameless, who is a Satyam customer. He says Wipro and others called him within minutes of the Satyam news.

He says that Satyam's fraud is worrisome to say the least. He's left with one question: If Satyam can't manage its internal processes and procedures how can it manage yours? (He's asking the same about his auditor, PriceWaterhouse, who happens to be the same as Satyam's).

Also see: Satyam: resignations, appointments and YouTube videos

So what is this CIO of a multinational company doing?

He's standing pat--for now. In a perfect world he would have bailed on Satyam already, but there are contracts, implementation roadmaps and plan Bs to be created. Satyam thus far is still meeting its obligations so he has some time. The best case is that Satyam gets acquired by another company that can service customers.

Although he hasn't looked at Satyam's legalese specifically, he was confident he could break the deal. A massive fraud can do that. The rub: He needs a plan B to move away from Satyam. Offshore outsourcing deals aren't like hot-swapping a Dell server for one from IBM or HP.

Simply put, there may be some pain involved with moving away from Satyam to another provider. And pain requires planning. The upshot: That contingency planning is happening as we speak. The Satyam exodus may have not started en masse just yet, but the months ahead are likely to be rocky for the outsourcing outfit.

Satyam obviously sees the train wreck ahead. That's why it is scrambling to hire new management, find a potential buyer and keep customers in the fold. Satyam's fraud caught customers by surprise, but the escape plans are being formulated. In other words, the clock is running out for Satyam.

Topics: CXO, Dell, Hewlett-Packard, IBM, Outsourcing, Servers, India

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  • Why customers might stay with Satyam

    Clearly, what has happened with Satyam has been a shock. A shock to Satyam's shareholders, customers and employees, as well as corporate India and beyond.

    What did happen? That might be some time coming, but it would appear from current information that Satyam funds have been illegally removed from the company. There are a number of effects of this. Firstly, the company loses possible liquidity because of a crunch in its cash-flow. This looks to have been averted as receivables and accruals should be enough to see the next payroll out and with Satyam being profitable (contrary to the statements by Mr. Raju), it should become self-sustaining, subject to retention of paying customers.

    The next effect of the scandale was clearly that the board lost credibility and had to be replaced. This happened. No doubt, over the fullness of time, we will find out whether the fraud was isolated to the board of Satyam or whether it included other agencies. The on-going investigations will arrive at conclusions here, though that should not impact the current day-to-day operation of Satyam as an outsourcing company.

    The damaging effect from the December and January revelations has been one of PR. "If Satyam can't manage their own affairs, how can they manage ours?" as a customer concern. To me, this is a knee-jerk comment. Clearly, were it to have been revealed that Satyam's loss had come from fundamental operating failures in the way it was servicing clients, legal challenges because of violation of data-protection, consequential loss issues, etc., this would be a cause for concern and the statement would make good sense.

    All of that is not the case. The bad apples (or let us try "thieves", or at least, in fairness to due legal process, "alleged thieves") have been removed, a sum of money that helped the company cash-flow has disappeared and adjustments to cash and management must be made and made quickly.

    In all other respects, Satyam can continue to operate, service clients and deliver the same quality as it always has. It has had a reputation for dynamism, innovation and flexibility in the way it does business as well as its own internal associate processes. This is how Satyam has held its own and won so many awards. None of this has changed.

    What will change Satyam is the panic rush to exit. It's not clear whether that will happen, or whether those cases so far are the actions of CIOs panicking and a few companies that were anyway planning to make a change or diversify. All of this happens as part of normal business.

    So where do the running companies go? Do they jump onto the passing pick-up truck of another India Inc outsourcer? Do they bring in-house? Do they near-shore the work? Or, do they use an outsourcer with a more established name at "home", such as an IBM, an HP, Accenture, etc.? After all, they'll all be able to pick up the work, keep the costs down, deliver the same quality and be able to insulate companies from any management sculdudgery, won't they? Of course they won't. Jumping ship at this point is a panic action and one that is likely to cost companies money, increase risk, lower quality (at least in the short-to-medium term) and give little guarantee other than rendering themselves free of Satyam.

    What the episode does suggest, perhaps, is that a more balanced and intelligent approach to risk management is required. Sensible options for supplier diversification are called for. Options including transfer-of-operations, Escrow of IP & knowledge, etc. All of these can be accommodated just as easily by a very determined and capable Satyam as by anyone else.

    Whether Satyam survives as a single unit of the same name, is acquired as a whole or is chunked up and sold in pieces is anyone's guess at the moment. Smart money seems to be looking at the acquisition as a whole, though the cost of doing that is rising as confidence (and management and liquidity) is returning. Even in that case, staying with Satyam is very likely to be the most cost-effective, secure and high-quality service option for companies in the short term, even if they have to change the "Satyam" name to another name on their invoice payments in due course. Satyam will very likely work together with customers to assess risk and develop appropriate coping strategies.

    An advantage is there to be had by those why stay firm.

    SRB
    S.R.Baker