The ramifications of the billion dollar fraud at Satyam in India are far-reaching indeed. Not only is the future of Satyam in jeopardy, but the ripples from this incident will spread over all IT outsourcing in India and, to some extent, all outsourcing in foreign countries.
The Satyam chairman’s confession that he falsely inflated the firm’s revenue is really India’s first scandal of global significance. But the financial service firms that relied upon Satyam for integral business operations have been burned badly.
And these lingering burns will cause additional hesitation when considering outsourcing to foreign countries. The country of India itself will have to work hard to maintain its clean image in light of this scandal of Enron-esque proportions. The enticing shimmer of inexpensive IT services overseas has lost some of its luster.
With 600 customers in over 60 countries, the global impact of the scandal is sure to be echoed throughout the world. Even the international football federation FIFA enlisted Satyam to develop an event management system for $200 million.
The future of Satyam does not look good. Usually when we see a breach in customer trust of this magnitude in American firms customers flock to competitors the first chance they get.
What better time to remind companies about the importance of performing due diligence on their outsourcing partners? I recently saw a study that said that fewer than 43% of financial services companies undertake any form of due diligence when considering outsourcing partners, even though 46% of them believe that outsourcing is a way to achieve business transformation and a competitive edge. I wonder how these numbers will change post-Satyam.
Often companies attempt to mitigate the risks of outsourcing by using larger vendors. The fall of Satyam, one of the largest vendors out there, should teach us that this is not an effective strategy. An effective due diligence procedure is the best way to mitigate the risks of outsourcing.
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