What the Satyam Fallout Means to Offshore Outsourcing

FRAMINGHAM (01/30/2009) – Corruption and fraud are not new to Indians, but few expected to find them in the IT-services industry. After all, this is an industry whose founders are professional entrepreneurs, whose principal customers are the world’s leading multinationals, whose shares are often listed on foreign stock exchanges (as is Satyam’s on NYSE), whose profit margins are still among the fattest anywhere, and whose firms were thought to be at the vanguard of good governance. Indeed “Brand India” was largely built on the back of the Indian IT sector’s reputation for quality, efficiency and integrity.

As the fourth largest Indian IT firm, Satyam helped create Brand India and also profited from it. Its founder, Ramalinga Raju, won international awards for leadership and corporate governance. Like other CEOs in his industry, Raju gave generously to charitable causes, even helping to launch a world-class 911-type emergency service in his home state of 80 million people. Raju also surrounded himself with blue-chip personalities: His boards, for instance, included the dean of India’s leading private business school, a professor of corporate governance at Harvard Business School, a former President of India, and the former worldwide managing partner of McKinsey & Co. To top it off, Raju’s company took its name from the Sanskrit word for “truth.”

Management experts will spend years trying to understand why Raju’s accounting fraud was not discovered sooner by auditors, directors, ratings agencies or regulators. Local investors seem to have been the first to get a whiff of foul play because for some time they undervalued Satyam’s shares compared to other Indian IT firms. Ironically, Satyam’s board and its auditors were among the last to suspect impropriety.

Financial investors have punished Satyam by dumping its shares and suing its directors and auditors. They will probably apply a higher risk premium to Indian stocks in the future, an unfortunate outcome for honest Indian companies. And they will diversify their portfolios and limit exposure to individual Indian companies. There’s not much else that they can or should do.