February 3, 2009

Outsourcing Company Faces Uncertain Future

Some of the world's biggest companies were burned when an outsourcing partner of some powerful American companies, let the world know it was inflating its books by $1 billion.

Satyam Computer Services Ltd. (SAY) counts a third of the Fortune 500 as its clients, some of which have handed Satyam their most critical technology chores.

Outsourcers like Satyam do it all now, from maintaining clients' databases to handling their payroll.

Three former top Satyam executives - founder and ex-Chairman B. Ramalinga Raju; his brother B. Rama Raju, Satyam's former chief executive; and Srinivas Vadlamani, former chief financial officer - have been arrested and face conspiracy, forgery and other charges in India.

The future of the company is uncertain due to a cash crunch.  Satyam recently had to press some customers to make early payments.

Despite the economic turmoil, Satyam says its biggest clients have promised to remain.

"Well over 90 percent of our clients have committed to staying with us, either formally or informally," spokesman Jim Swords said. "We're not experiencing any volume of attrition at this point."

Information-technology services are now a $748 billion business worldwide; outsourcers like Satyam, IBM Corp., Accenture Ltd., Infosys Technologies Ltd., and Wipro Ltd. are often as vital to a firm as its own internal divisions.

Experts say companies who want to cut their losses, and stop doing business with Satyam may have to wait weeks or months to pull the trigger.

A major challenge for companies is simply figuring out which Satyam workers handle which particular technological tasks for a customer.

"This isn't speed dating," said John McCarthy, a vice president with market-research firm Forrester Research. "You're not changing partners every three minutes. And that's because of the complexity."

Bloomington, Ill.-based State Farm Insurance Cos. ended its contract with Satyam fewer than 10 days after the accounting problems emerged. The companies had worked together for nearly a decade, with about 400 Satyam employees at State Farm offices in the U.S.

State Farm pulled the plug because "somebody came to the opinion (Satyam's) future was a little too uncertain for us," spokesman Jeff McCollum said.

Other Satyam customers have expressed their support, like General Electric Co. who said it has not left Satyam, but is monitoring the situation.

Cisco Systems Inc. said its "primary aim is to see the continued delivery of services from the Satyam team," but added that it is considering "appropriate risk mitigation strategies."

Satyam rival, Tata Consultancy Services, says several large Satyam customers have approached it, each worth potentially tens of millions of dollars in new contracts.

"Our business will grow, but at the same time this is not a hard-selling situation," said N. Chandrasekaran, Tata's chief operating officer. "It could turn people off, and it's just not appropriate."

Kevin Campbell, group chief executive of Accenture's outsourcing division, said switching providers has gotten easier as outsourcing has become more common.

"Switching isn't something that you're going to do every day," he said. But "if you've already outsourced, once you've already done the hard work, switching from one provider to another is much easier than trying to take something back in house."

Robert Kennedy, a professor at the University of Michigan's Ross School of Business and author of "The Services Shift," a book about outsourcing, believes it will be important to see whether more Satyam clients follow State Farm out the door. If that happens, he said, "It could become a stampede for the exits."

Kennedy says he expects Satyam will survive, but as part of another company.

He notes a Satyam competitor could snap up Satyam's assets at fire-sale prices "to pick up a whole bunch of capacity and customer contacts really cheap." That, he said, could "calm customers down."


On The Net:

Satyam Computer Services Ltd.

Forrester Research