Early January Satyam, “truth” in Sankrit, admitted that $1.4Bn had been siphoned away from the company. No one knows what Mr Raju, the soft spoken CEO, thought when he held the coveted Golden Peacock Award for Corporate Governance in his hands. It is easier to imagine the reaction of the former prime ministers of Canada and Sweden, who were leading the Jury. Obviously the Satyam Fraud raised many questions. How is it possible that there is such a gaping hole between the business process documentation and reality? Why didn't the Board and PwC, who are supposed to audit the books, smell a rat? Is this cooking of the books a regular phenomenon in India? What is the impact on offshoring?
That looks can deceive we all know. Fraud and mismanagement are not confined to India and whistleblowers have a better track record in uncovering corporate wrongdoings than highly paid accountants. Satyam is also listed on the New York Stock Exchange and exposed to US regulation (no comment). My experience as vice chairman of the Board of MphasiS is that corporate governance in India is not better or worse than in Western markets. Every quarter one can expect probing questions from both auditors and analysts. Companies like Infosys are known for squeaky clean books and robust management practices.
Though irregularities from time to time surface in companies that are majority owned by promotors (founders and their family), the Satyam case seems to be more of an exception than a rule. The company was managed in typical “George W. Bush style”. Raju and his tightly knit circle of family members and loyalists ran the company in a centralized manner. Frances Karamouzis of Gartner comments in the NY Times that “Satyam was slow to transform, in part perhaps because of Mr. Raju’s management style. He was very old school management, very parochial and didn’t embrace change or implement anything differently.” Customers had complaints. “We are tired of being required to call up the top guy in India to get things resolved,” one Satyam client told Gartner in 2005. The Times of India reports that “ The customer list of Satyam during Raju times was a top secret that even senior company executives had no access to.” Maybe Raju suffered from deluded views brought on by power. According to The Economic Times he owned 320 pair of shoes and thousand tailored suits in addition to houses in 63 countries (!). Whatever the cause of his behavior, it is clear that management style and company culture make a difference. As this is hard to measure it is an often downplayed part of the vendor selection process.
What happens to the clients who have their IT managed by Satyam? While Satyam's new board is highly respectable, continuity remains in jeopardy. The company will not stay in its current form and will most probably be acquired by another Indian company. As cash is running out there is no investment in client relationships and the best talent is busy packing their bags. Moving vendors may be as hard as moving banks (according to a survey in the US you are more likely to divorce your partner than move your bank account, but that may have changed recently). Still it is advised to approach Infosys, TCS, HP or IBM and start a transition plan. These companies have the processes and people in place to migrate the work currently performed by Satyam. “Outsourcing” and “offshoring” carry inherent risk and “continuity of business” plans apply to operations as well as vendors.
The truth was revealed at Satyam and we have become the wiser. Despite this drama and a business pause, India will remain the most important destination for offshore IT and BPO work. Nowhere on the globe can you find the combination of scale, skill, service innovation and cost advantage. Companies will continue to source work from this vibrant country, as the advantages far outweigh the risks.
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Thomas Friedman http://www.nytimes.com/2009/02/01/opinion/01friedman.html:
ReplyDelete"I’ve written a lot about the Indian outsourcing community, so I knew B. Ramalinga Raju, the Satyam chairman accused of embezzling $1 billion from his own company. What’s really sad is that I didn’t get to know him through his business but through an interest in his family’s charitable work. They created India’s first 911 emergency system in their home state and call centers in Indian villages, so young people there could get service jobs. Was all that a fake, too? Or was he just an embezzler with a good heart? Don’t know. When you can’t even trust a person’s charitable work, you’ve hit a new low. "
Salvaging the truth
ReplyDeleteApr 16th 2009 | DELHI
From The Economist print edition
Satyam, India’s disgraced technology firm, finds a buyer
GETTING paid in pounds is not what it was. Almost 70% of the revenues booked by Tech Mahindra, an Indian technology company, are in sterling. This is largely because BT, a British telecoms operator which owns a 31% stake in the firm, also accounts for 57% of its custom. This has left Vineet Nayyar, Tech Mahindra’s chief executive, bemoaning the “precipitous decline” in the pound.
But on April 13th Tech Mahindra made a dramatic move into fresh industries, new countries and harder currencies. It did so by winning an auction to buy Satyam, a disgraced software-and-services company. Satyam, which means “truth” in Sanskrit, an ancient Indian language, once belonged to the highest ranks of India’s most celebrated industry. But it now stands as the country’s biggest corporate fraud. On January 7th its founder and chairman, B. Ramalinga Raju, confessed to falsifying the company’s accounts for years, inflating revenues and fabricating cash balances of about $1 billion that did not exist.
Tech Mahindra outbid two rival suitors, including the favourite, Larsen & Toubro (L&T), an Indian engineering giant which already held a 12% stake in its target. Having previously overpaid for some of Satyam’s shares (it bought 4% of the company before Mr Raju’s confession), L&T was reluctant to bid more than 49.50 rupees ($0.99) per share in the opening round. It assumed it would get a chance to raise its bid, as the auction rules allowed, as long as its first offer was within 10% of the highest bid. But Tech Mahindra opened with a price of 58 rupees, depriving L&T of any opportunity to make a counter-offer.
Tech Mahindra’s bid values Satyam at 56.65 billion rupees. This is less than a third of its stockmarket value before Mr Raju’s confession, but is it more than the firm is worth? It will be months before KPMG and Deloitte Touche Tohmatsu finish picking through Satyam’s books, separating fact from fiction. The company has lost about 5,000 of its 53,000 employees in the past two quarters, according to one of the six directors appointed by the government to salvage the company. In March the Economic Times, an Indian newspaper, reported that Satyam had also forfeited 46 customers, including Nissan and Sony. The United Nations Secretariat has cancelled its contract, as has State Farm Insurance, a longstanding customer.
But it could have been worse. In the midst of a global recession, most clients have other things on their minds. Few want to devote scarce time and energy to switching suppliers with all the rejigging of computer systems that entails. Tech Mahindra reckons Satyam’s annual revenues will amount to about $1.3 billion, and believes it can increase Satyam’s operating margins, which are thinner than its own.
Satyam still carries some legal baggage. Holders of its American Depository Receipts have filed a class-action suit in America. Upaid, a British mobile-payments firm, is seeking damages in an intellectual-property dispute that predates Mr Raju’s confession. Even members of Mr Raju’s own family claim Satyam owes them money. At one point all this was enough to deter Tech Mahindra. “It is mired in a huge amount of litigation and it is not something we are pursuing,” Mr Nayyar told analysts on January 23rd.
What changed his mind? Tech Mahindra belongs to the Mahindra group, a sprawling conglomerate that sells everything from sport-utility vehicles and tractors to housing loans and baby clothes. But its technology division has always been a hedgehog, not a fox: it knows a lot about one thing. An analyst describes it as a paralysed organisation, overly dependent on one industry (telecoms) and one client (BT). If Satyam can liberate its new buyer from this niche, even as Tech Mahindra frees Satyam from its stigma, it will be a happy result for both companies.
It would also be a relief for the industry. The board appointed by the government did a commendable job of shepherding Satyam through a potentially fatal period. Indeed, the Satyam episode arguably demonstrates the worst and the best of Indian management. Mr Raju’s pride jeopardised the careers of tens of thousands of bright, dedicated professionals. The six members of the government-appointed board, by contrast, carried out their duty, despite the upheaval in their personal lives and the risk to their reputations.
As for Mr Raju, he awaits trial in Chanchalguda Central Prison in Andhra Pradesh, his home state. It is still not clear whether his confession was as full and frank as he claimed. On April 20th India’s Central Bureau of Investigation will seek the court’s permission to subject Mr Raju to a lie-detector test, which will include mapping his brain. That may be the only place where a true and fair view of Satyam’s accounts can be found
Diversity whether in nature or life is key to survival and long term success. One area more Indian firms can do a better job at.
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