IT Customers Closely Monitor Satyam ScandalIT Customers Closely Monitor Satyam Scandal

They're keeping a close eye on it for now, because by Monday, the situation for Satyam customers could be vastly different.

Many companies rely on the outsourcer from India for vital technology operations like supply chain management and business intelligence. It's too early to tell how their relationships with the embattled Indian outsourcing firm -- and with outsourcers in general -- may change as a result of a major accounting scandal at Satyam, but with the future of Satyam up in the air, customers risk significant disruption of their IT processes.

Those companies that had contingency plans in place -- by multisourcing, keeping some redundant expertise in-house, or instituting processes to help quickly redirect services in the case of an emergency situation -- should have an easier time recovering if Satyam should fail. For example, one Satyam customer, an IT executive at a major financial services company, said in an interview that his company uses Indian outsourcers primarily for extra IT capacity and also has a relationship with competitor TCS, so it's a bit buffered from Satyam's problems.

A Ford spokesman said the company also has a number of existing relationships with other Indian outsourcing companies. It's unclear whether Ford can or will ditch Satyam as a vendor. "We are currently evaluating the situation and are not prepared to make any comments at this time," he said. Still, those additional relationships could prove critical.

The fallout could be big. On Friday, Satyam chairman Ramalinga Raju -- who revealed earlier this week that his company had, for years, manufactured revenue and profit margins -- was arrested. Meanwhile, the Indian government's Company Law Board fired Satyam's remaining board members and said it would replace them with a new slate of directors. Those moves come on the heels of a growing number of analyst reports suggesting Satyam is insolvent and could soon go out of business without help, putting 53,000 employees out of their jobs and exposing customers already smarting from a down economy.

Other than suing Satyam's leadership individually, there could be little redress for companies caught without contingency plans, according to licensing and technology attorney Shaalu Mehra. "Companies can look to their contracts regarding termination clauses, but those are going to be of little comfort if Satyam goes out of business," Mehra, a partner at Perkins Coie and chair of the firm's outsourcing and India practices, said in an interview. "Customers should treat this as a priority-one disaster and put in plans to switch as quickly as possible."

The financial services executive said his company is "very, very concerned" about Satyam and has a team in India closely monitoring the situation there. So far, the company is taking a wait-and-see approach and isn't cutting its business, but may still change course, and when the dust settles there will likely be a full review of what happened. It's clear Satyam experienced an unexpected fall from grace. "People are a little shocked in the sense there was no indication of a problem," he said. "They generally did good work."

Though he believes his company only has minimal exposure to risk, he expects few of his colleagues in other companies have planned for problems like this. "Everybody's kicking themselves now," he says. "I think a lot of people are going to get caught short because they didn't think about contingencies, especially skills." Many American companies use outsourcers as a cheaper source of skilled labor than would be available in the United States.

Nissan North America, which signed a multimillion-dollar contract in 2006 to outsource most of its IT systems and application support to Satyam, isn't taking any chances. A spokeswoman said Nissan is busy "taking appropriate steps to ensure the continuity of Satyam-supported systems and applications." It's unclear how much exposure Nissan has to risk, though with U.S. sales dropping by more than 30% in December, the last thing Nissan needs is to have critical IT operations on the fritz.

Airplane manufacturer Cessna, which has a small relationship with Satyam, said it's watching the situation with interest. Frozen foods company Bird's Eye Iglo Group said it had no comment to make "beyond business as usual." Caterpillar said it's in a quiet period and would have no comment for now.

A larger question is what Satyam's downfall means for the Indian outsourcing industry and even outsourcers in general. On one hand, after years of boom, Satyam's fraud raises larger questions about institutional governance and business practices in India. "I really believe that this event is a blow to Indian outsourcers," the financial services executive said. "This could be the bellwether of something much worse."

Please join us for information's Editorial Webcast: "Offshore In India: What's Next?" on Thursday, January 22, 2009 at 11 a.m. EST. Editor-In-Chief Rob Preston and a panel of top executives from the Indian IT industry will discuss Satyam and other issues. Register with this link. Customers and investors will dig deeper into the financial health of all their Indian service providers, questioning whether this industry is as strong as it has seemed. On the other hand, Indian firms likely see this as somewhat of an opportunity -- TCS is aggressively pursuing Satyam's business at the financial firm.

According to attorney Mehra, it's possible that the Securities and Exchange Commission could even get involved by revising some compliance regulations. For example, under the current regime, an outsourcer or software-as-a-service company can receive what's known as SAS 70 compliance (basically, a document certifying compliance with Sarbanes-Oxley regulations) after an auditor performs a test of compliance controls.

That may change going forward, he said, especially since PricewaterhouseCoopers, Satyam's own auditor, wasn't able to uncover what was happening there.