How Will the Scandal that Shook India’s Services Industry Affect Other Honest Businesses?
Columnist Jagdish Dalal tackles tough questions submitted by our readers. Have a question for Jag’s bag? Submit it to info@meltingspot.com.
Q. Jag, the Satyam accounting scandal exposed huge fraud at one of the largest Indian outsourcing firms. Will this cause a permanent loss of faith in other Indian services companies?
A. Dear Reader,
In January, the chairman of Satyam, once one of India’s proudest services firms, admitted to “cooking” the company’s books by inflating its earnings and assets for years.
The now disgraced chairman, Ramalinga Raju, resigned after revealing that he had listed nonexistent loans totaling more than 50 billion rupees, or $1.04 billion, as assets for the company the previous quarter, and had also massively inflated the company’s revenues.
This revelation came as a shock to many observers. Satyam is a titan of industry. The company’s very name means “truth.” Its clients include many of the biggest companies in the world.
Many of us believed Satyam - and India - were immune to the corporate scandal and greed plaguing the rest of the world.
I believe Satyam’s downfall will be remembered as the end of the era of innocence - the first industry quake to deeply rattle investors’ confidence in India. Overnight Satyam became a blot on corporate landscape, raising cautionary flags about all business-doings with India. The stain of ‘India’s Enron’ certainly won’t fade away overnight.
However, like Enron, Satyam will provide an impetus for much needed reforms throughout India’s private sector. Indian business leaders are calling urgently on their government to address the loopholes in regulation, accounting, audit and governance that allowed Satyam’s lapses in the first place. These efforts are long overdue, and are bound to result in significant improvements that will benefit other businesses in the long run.
Clients may want to do more due diligence before choosing their outsourcing vendors, but this too could prove to be good for vendors, if it encourages vendors to provide greater transparency in their business practices (for example by empowering stronger boards of directors).
There has been a loss of trust after Satyam, but I don’t believe Satyam will permanently damper outsourcing business in India, especially if businesses understand how to assuage their clients’ fears today. First of all, try to keep it in perspective: the Satyam affair was by all accounts an isolated incident perpetrated by one man, not an indictment of the entire outsourcing industry. There is no reason it should cast suspicion upon other Indian services firms whose ethics have not been called into question.
This is a good time for Indian service providers to be more open about their finances and make public their compliance with accounting rules and practices. Companies that are not already listed on an American stock exchange should convert their financial statements to American Generally Accepted Accounting Principles (GAAP) and make them available to customers and investors.
History has shown that whenever there is an opportunity for personal gain, fraud tends to occur alongside honest competition. The heady growth of the Indian offshore industry is no exception. This may not be completely the end of scandal for India. If there can be one Satyam, there can potentially be more. Satyam’s fate may already be sealed; rumors already abound about its imminent sale. But companies that compete honestly on the quality of their talent can keep their flags flying high.
Jagdish Dalal is a regular columnist for MeltingSpot. He is the Managing Director of Thought Leadership for IAOP (International Association of Outsourcing Professionals) as well as Founder and President of JDalal Associates, a consulting firm. As a thought leader in the field of outsourcing, Jagdish has more than three decades of experience in outsourcing (as a CIO of large multinationals such as Xerox, Carrier, Unisys as well as a Partner at PricewaterhouseCoopers). He came to United States from India more than four decades ago and is proud to be an American-East Indian (as Jane, his wife, says, he has a Western mind and an Eastern soul). He is passionate about outsourcing, offshoring and how it can and has changed the world. As an evangelist for outsourcing, he is proud to be an active leader through IAOP - a true global organization promoting outsourcing as a profession.
